##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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FORM 10-Q



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(Mark
One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 29, 2003

OR

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

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

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



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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 o

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

The number of shares outstanding of the Registrants common stock, $.0015
par value, as of August 11, 2003 was 24,292,445.





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TABLE OF CONTENTS



|                              |                                                                                               |                                         |  |  |  |  |  | 
|----------------------------- | --------------------------------------------------------------------------------------------- | --------------------------------------- |  |  |  |  |  | 
|PART I. FINANCIAL INFORMATION
|                              | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                              |                                                                                               | CONDENSED BALANCE SHEET                
|                              |                                                                                               | CONDENSED STATEMENT OF OPERATIONS      
|                              |                                                                                               | CONDENSED STATEMENT OF CASH FLOWS      
|                              |                                                                                               | NOTES TO CONDENSED FINANCIAL STATEMENTS
|                              | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                              | ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                              | ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES                                                   
|PART II. OTHER INFORMATION   
|                              | ITEM 1. LEGAL PROCEEDINGS                                                                    
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 10.1                 
|EXHIBIT 31.1                 
|EXHIBIT 31.2                 
|EXHIBIT 32.1                 



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##### Table of Contents



VIXEL CORPORATION

INDEX TO FORM 10-Q FOR QUARTER ENDED JUNE 29, 2003

|                              |                                                                                               |                                                                                                              |    |      |   | 
|----------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------ | -- | ---- | - | 
|                              |                                                                                               |                                                                                                              |    | Page
|                              |                                                                                               |                                                                                                              |    |     
|Part I. FINANCIAL INFORMATION |                                                                                               |                                                                                                              |    |     
|                              | Item 1. Financial Statements (unaudited)                                                      |                                                                                                              |    | 3    |  
|                              |                                                                                               | Condensed Balance Sheet as of June 29, 2003 and December 29, 2002                                            |    |      | 3 | 
|                              |                                                                                               | Condensed Statement of Operations for the three- and six-month periods ended June 29, 2003 and
June 30, 2002 |    |      | 4 | 
|                              |                                                                                               | Condensed Statement of Cash Flows for the six-month periods ended June 29, 2003 and June 30, 2002            |    |      | 5 | 
|                              |                                                                                               | Notes to Condensed Financial Statements                                                                      |    |      | 6 | 
|                              | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                              |    | 10   |  
|                              | Item 3. Quantitative and Qualitative Disclosure about Market Risk                             |                                                                                                              |    | 23   |  
|                              | Item 4. Disclosure Controls and Procedures                                                    |                                                                                                              |    | 23   |  
|Part II. OTHER INFORMATION    |                                                                                               |                                                                                                              |    |     
|                              | Item 1. Legal Proceedings                                                                     |                                                                                                              |    | 23   |  
|                              | Item 4.
Submission of Matters to a Vote of Security Holders                                   |                                                                                                              |    | 24   |  
|                              | Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                              |    | 24   |  
|Signatures                    |                                                                                               |                                                                                                              | 26 |     
|Certifications                |                                                                                               |                                                                                                              | 28 |     

2



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##### Table of Contents






PART I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




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

|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |          |        | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------------------------------ | ----- | -------- | ------ | ------------ | - | -------- | ------ | 
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       | June 29, |        | December 29,
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       | 2003     |        | 2002        
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |             
|ASSETS                                                                                                                                                                                   |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|Current assets                                                                                                                                                                           |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         | Cash and cash equivalents                                                                                                                                                                                    |                                                              | $     | 11,889   |        |              | $ | 4,347    |       
|                                                                                                                                                                                         | Investments                                                                                                                                                                                                  |                                                              |       | 9,577    |        |              |   | 12,054   |       
|                                                                                                                                                                                         | Accounts receivable, net of allowance for doubtful accounts of $197 and $186, respectively                                                                                                                   |                                                              |       | 3,779    |        |              |   | 2,782    |       
|                                                                                                                                                                                         | Inventories                                                                                                                                                                                                  |                                                              |       | 1,446    |        |              |   | 1,503    |       
|                                                                                                                                                                                         | Note receivable                                                                                                                                                                                              |                                                              |       |         |        |              |   | 2,500    |       
|                                                                                                                                                                                         | Prepaid expenses and other current assets                                                                                                                                                                    |                                                              |       | 1,001    |        |              |   | 1,488    |       
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total current assets                                         |       |          | 27,692 |              |   |          | 24,674 | 
|                                                                                                                                                                                         | Property and equipment, net                                                                                                                                                                                  |                                                              |       | 2,358    |        |              |   | 2,243    |       
|                                                                                                                                                                                         | Goodwill and other intangibles, net                                                                                                                                                                          |                                                              |       | 369      |        |              |   | 423      |       
|                                                                                                                                                                                         | Other assets                                                                                                                                                                                                 |                                                              |       | 142      |        |              |   | 145      |       
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total assets                                                 |       | $        | 30,561 |              |   | $        | 27,485 | 
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                     |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|Current liabilities                                                                                                                                                                      |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         | Current portion of capital leases                                                                                                                                                                            |                                                              | $     | 46       |        |              | $ | 178      |       
|                                                                                                                                                                                         | Accounts payable                                                                                                                                                                                             |                                                              |       | 2,927    |        |              |   | 2,900    |       
|                                                                                                                                                                                         | Accrued liabilities                                                                                                                                                                                          |                                                              |       | 3,419    |        |              |   | 3,507    |       
|                                                                                                                                                                                         | Deferred revenue                                                                                                                                                                                             |                                                              |       | 233      |        |              |   | 735      |       
|                                                                                                                                                                                         | Accrued restructuring costs, current portion                                                                                                                                                                 |                                                              |       | 291      |        |              |   | 307      |       
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total current liabilities                                    |       |          | 6,916  |              |   |          | 7,627  | 
|                                                                                                                                                                                         | Capital leases, net of current portion                                                                                                                                                                       |                                                              |       | 23       |        |              |   | 44       |       
|                                                                                                                                                                                         | Accrued restructuring costs, net of current portion                                                                                                                                                          |                                                              |       | 177      |        |              |   | 306      |       
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total liabilities                                            |       |          | 7,116  |              |   |          | 7,977  | 
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|Commitments and contingencies                                                                                                                                                            |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|Series B convertible preferred stock, $0.001 par value, 4,400,000 shares designated, 3,809,524
and no shares issued and outstanding at June 29, 2003 and December 29, 2002, respectively |                                                                                                                                                                                                              |                                                              | 3,742 |          |        |              |  |         
|Stockholders equity                                                                                                                                                                     |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         | Common stock, $0.0015 par value; 60,000,000 shares authorized; 25,400,024 and 25,115,782
shares issued and 23,504,598 and 24,579,516 shares outstanding at June 29, 2003 and
December 29, 2002, respectively |                                                              |       | 38       |        |              |   | 38       |       
|                                                                                                                                                                                         | Additional paid-in capital                                                                                                                                                                                   |                                                              |       | 163,053  |        |              |   | 157,925  |       
|                                                                                                                                                                                         | Stock-based compensation                                                                                                                                                                                     |                                                              |       |         |        |              |   | (117     | )     
|                                                                                                                                                                                         | Notes receivable from stockholders                                                                                                                                                                           |                                                              |       |         |        |              |   | (3,745   | )     
|                                                                                                                                                                                         | Treasury stock, at cost; 1,895,426 and 536,266 shares at June 29, 2003 and December 29,
2002, respectively                                                                                                   |                                                              |       | (4,188   | )      |              |   | (831     | )     
|                                                                                                                                                                                         | Accumulated deficit                                                                                                                                                                                          |                                                              |       | (139,200 | )      |              |   | (133,762 | )     
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total stockholders equity                                   |       |          | 19,703 |              |   |          | 19,508 | 
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         
|                                                                                                                                                                                         |                                                                                                                                                                                                              | Total liabilities, preferred stock, and stockholders equity |       | $        | 30,561 |              |   | $        | 27,485 | 
|                                                                                                                                                                                         |                                                                                                                                                                                                              |                                                              |       |          |        |              |   |         

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

3



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

|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |        |       | 
|------------------------------------------ | ---------------------------------------- | ------------------------ | ------ | ------------------------ | ----- | ---------------------- | ------ | -------- | ----- | -------- | ------ | ----- | ------ | - | ------ | ------ | ----- | 
|                                           |                                          |                          |        | Three-month Period Ended |       | Six-month Period Ended
|                                           |                                          |                          |        |                          |       |                       
|                                           |                                          |                          |        | June 29,                 |       | June 30,               |        | June 29, |       | June 30,
|                                           |                                          |                          |        | 2003                     |       | 2002                   |        | 2003     |       | 2002    
|                                           |                                          |                          |        |                          |       |                        |        |          |       |         
|Revenue                                    |                                          | $                        | 6,073  |                          |       | $                      | 4,810  |          |       | $        | 11,579 |       |        | $ | 9,530  |       
|Cost of revenue (1)                        |                                          |                          | 3,092  |                          |       |                        | 2,502  |          |       |          | 5,875  |       |        |   | 5,104  |       
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Gross profit                               |                                          |                          | 2,981  |                          |       |                        | 2,308  |          |       |          | 5,704  |       |        |   | 4,426  |       
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Operating expenses:                        |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|                                           | Research and development (2)             |                          |        | 2,916                    |       |                        |        | 2,389    |       |          |        | 5,466 |        |   |        | 5,969  |      
|                                           | Selling, general and administrative (3)  |                          |        | 2,774                    |       |                        |        | 2,788    |       |          |        | 5,679 |        |   |        | 5,445  |      
|                                           | Amortization of intangible assets        |                          |        |                         |       |                        |        | 109      |       |          |        | 54    |        |   |        | 218    |      
|                                           | Amortization of stock-based compensation |                          |        |                         |       |                        |        | 118      |       |          |        | 115   |        |   |        | 393    |      
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|                                           |                                          |                          | 5,690  |                          |       |                        | 5,404  |          |       |          | 11,314 |       |        |   | 12,025 |       
|                                           | Restructuring costs and adjustments      |                          |        |                         |       |                        |        | 1,775    |       |          |        |      |        |   |        | 1,775  |      
|                                           | Gain on sale of assets, net              |                          |        | (14                      | )     |                        |        | (4,479   | )     |          |        | (9    | )      |   |        | (4,454 | )    
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|                                           |                                          | Total operating expenses |        |                          | 5,676 |                        |        |          | 2,700 |          |        |       | 11,305 |   |        |        | 9,346 | 
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Loss from operations                       |                                          |                          | (2,695 | )                        |       |                        | (392   | )        |       |          | (5,601 | )     |        |   | (4,920 | )     
|                                           | Other income, net                        |                          |        | 68                       |       |                        |        | 177      |       |          |        | 163   |        |   |        | 368    |      
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Net loss                                   |                                          | $                        | (2,627 | )                        |       | $                      | (215   | )        |       | $        | (5,438 | )     |        | $ | (4,552 | )     
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Net loss applicable to common stockholders |                                          | $                        | (2,844 | )                        |       | $                      | (215   | )        |       | $        | (5,784 | )     |        | $ | (4,552 | )     
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Basic and diluted net loss per share       |                                          | $                        | (0.12  | )                        |       | $                      | (0.01  | )        |       | $        | (0.25  | )     |        | $ | (0.19  | )     
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       
|Weighted-average shares outstanding        |                                          |                          | 23,388 |                          |       |                        | 23,957 |          |       |          | 23,535 |       |        |   | 23,845 |       
|                                           |                                          |                          |        |                          |       |                        |        |          |       |          |        |       |        |   |        |       



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|(1) |  | Includes amortization of stock-based compensation of $0 and $2 for the
three-month periods ended June 29, 2003 and June 30, 2002, respectively,
and $2 and $6 for the six-month periods ended June 29, 2003 and June 30,
2002, respectively.      
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes amortization of stock-based compensation of $0 and $2 for the
three-month periods ended June 29, 2003 and June 30, 2002, respectively,
and $1 and $8 for the six-month periods ended June 29, 2003 and June 30,
2002, respectively.      
|   
|(3) |  | Excludes amortization of stock-based compensation of $0 and $116 for the
three-month periods ended June 29, 2003 and June 30, 2002, respectively,
and $114 and $385 for the six-month periods ended June 29, 2003 and June
30, 2002, respectively.

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

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##### Table of Contents






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

|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |          |        |        |        |  
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ----- | ---------------------- | ------ | -------- | ------ | ------ | ------ | -
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | Six-month Period Ended
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | June 29,               |        | June 30,
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | 2003                   |        | 2002    
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Cash flows from operating activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          | Net loss                                                                                                        |                                                                        | $                                        | (5,438                                              | )     |                        | $      | (4,552   | )     
|                                                                                          | Adjustments to reconcile net loss to net cash used in operating activities                                      |                                                                        |                                          |                                                     |       |                        |        |          |       
|                                                                                          |                                                                                                                 | Depreciation                                                           |                                          |                                                     | 1,050 |                        |        |          | 1,526  |       
|                                                                                          |                                                                                                                 | Amortization of other intangibles                                      |                                          |                                                     | 54    |                        |        |          | 227    |       
|                                                                                          |                                                                                                                 | Stock-based compensation                                               |                                          |                                                     | 681   |                        |        |          | 399    |       
|                                                                                          |                                                                                                                 | Non-cash restructuring costs                                           |                                          |                                                     |      |                        |        |          | 400    |       
|                                                                                          |                                                                                                                 | Gain
on disposal of assets, net                                        |                                          |                                                     | (9    | )                      |        |          | (4,454 | )     
|                                                                                          |                                                                                                                 | Provisions for doubtful accounts, inventory obsolescence, and warranty |                                          |                                                     | 548   |                        |        |          | (276   | )     
|                                                                                          |                                                                                                                 | Changes in:                                                            |                                          |                                                     |       |                        |        |          |        |       
|                                                                                          |                                                                                                                 |                                                                        | Accounts receivable                      |                                                     |       | (1,174                 | )      |          |        | (259   | )     
|                                                                                          |                                                                                                                 |                                                                        | Inventories                              |                                                     |       | (249                   | )      |          |        | 1,431  |       
|                                                                                          |                                                                                                                 |                                                                        | Prepaid expenses and other assets        |                                                     |       | 535                    |        |          |        | 511    |       
|                                                                                          |                                                                                                                 |                                                                        | Accounts payable and accrued liabilities |                                                     |       | (171                   | )      |          |        | (2,149 | )     
|                                                                                          |                                                                                                                 |                                                                        | Deferred revenue                         |                                                     |       | (502                   | )      |          |        | (452   | )     
|                                                                                          |                                                                                                                 |                                                                        | Accrued restructuring costs              |                                                     |       | (145                   | )      |          |        | 943    |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash used in operating activities               |       |                        | (4,820 | )        |        |        | (6,705 | )
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Cash flows from investing activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          | Purchase of short-term investments                                                                              |                                                                        |                                          | (7,537                                              | )     |                        |        | (8,053   | )     
|                                                                                          | Maturities of investments                                                                                       |                                                                        |                                          | 10,014                                              |       |                        |        | 15,815   |       
|                                                                                          | Collection of note receivable                                                                                   |                                                                        |                                          | 2,500                                               |       |                        |        |         |       
|                                                                                          | Purchases of property and equipment                                                                             |                                                                        |                                          | (1,178                                              | )     |                        |        | (388     | )     
|                                                                                          | Proceeds from sales of assets                                                                                   |                                                                        |                                          | 22                                                  |       |                        |        | 2,500    |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash provided by investing activities           |       |                        | 3,821  |          |        |        | 9,874  |  
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Cash flows from financing activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          | Proceeds from the sale of Series B Convertible Preferred Stock and common stock
warrants, net
of offering costs |                                                                        |                                          | 7,750                                               |       |                        |        |         |       
|                                                                                          | Receipts of payments on stockholder notes receivable                                                            |                                                                        |                                          | 388                                                 |       |                        |        |         |       
|                                                                                          | Proceeds from issuance of short-term debt                                                                       |                                                                        |                                          |                                                    |       |                        |        | 319      |       
|                                                                                          | Principal payments on debt and capital lease obligations                                                        |                                                                        |                                          | (153                                                | )     |                        |        | (1,247   | )     
|                                                                                          | Proceeds from ESPP stock purchase                                                                               |                                                                        |                                          | 233                                                 |       |                        |        | 198      |       
|                                                                                          | Proceeds from exercise of stock options                                                                         |                                                                        |                                          | 323                                                 |       |                        |        | 316      |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash provided by (used in) financing activities |       |                        | 8,541  |          |        |        | (414   | )
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Net increase in cash and cash equivalents                                                 |                                                                                                                 |                                                                        | 7,542                                    |                                                     |       |                        | 2,755  |         
|Cash and cash equivalents, beginning of period                                            |                                                                                                                 |                                                                        | 4,347                                    |                                                     |       |                        | 5,036  |         
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Cash and cash equivalents, end of period                                                  |                                                                                                                 | $                                                                      | 11,889                                   |                                                     |       | $                      | 7,791  |         
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        |        |         
|Cash paid for interest                                                                    |                                                                                                                 | $                                                                      | 6                                        |                                                     |       | $                      | 46     |         
|Use of prepaid expense to acquire property and equipment                                  |                                                                                                                 | $                                                                      |                                         |                                                     |       | $                      | 100    |         
|Sale of SAN InSite assets in exchange for note receivable                                 |                                                                                                                 | $                                                                      |                                         |                                                     |       | $                      | 2,500  |         
|Treasury stock acquired in satisfaction of officer notes receivable                       |                                                                                                                 | $                                                                      | 3,357                                    |                                                     |       | $                      |       |         
|Accretion of Series B Convertible Preferred Stock deemed dividend                         |                                                                                                                 | $                                                                      | 346                                      |                                                     |       | $                      |       |         
|Portion of Series B Convertible Preferred Stock allocated to common stock warrants        |                                                                                                                 | $                                                                      | 1,108                                    |                                                     |       | $                      |       |         
|Deemed dividend for beneficial conversion feature on Series B Convertible Preferred Stock |                                                                                                                 | $                                                                      | 3,246                                    |                                                     |       | $                      |       |         

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

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VIXEL CORPORATION




NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed financial statements as of June 29, 2003 and
for the three- and six-month periods ended June 29, 2003 and June 30, 2002 are
unaudited; however, in the opinion of management, the interim data includes all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of operations, financial position and cash
flows for the interim periods. Certain information and footnote disclosures
normally included in annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of America have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. Results of operations and cash flows for
the interim periods are not necessarily indicative of future financial results.
You should read these interim financial statements in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the audited financial statements and notes thereto included in
our Annual Report on Form 10-K, as amended, for the fiscal year ended December
29, 2002.

The preparation of condensed financial statements in accordance with
accounting principles generally accepted in the United States of America and
pursuant to the rules and regulations of the Securities and Exchange Commission
requires management to make estimates and assumptions that affect the amounts
reported in the condensed financial statements and accompanying notes. Actual
results could differ materially from those estimates.

Certain prior year amounts have been reclassified to conform to current
period presentation. Reclassifications have not impacted our financial
position, net loss or cash flows of the prior periods.

NOTE 2. NET LOSS PER SHARE

Basic and diluted net loss per share represents the net loss applicable to
common stockholders divided by the weighted-average number of common shares
outstanding during the period presented. We have excluded outstanding
convertible preferred stock, options to purchase common stock, stock subject to
repurchase rights, and warrants to purchase common stock, as these securities
are antidilutive for all periods presented.

The following table sets forth the adjustments to net income resulting in
net loss applicable to common stockholders (in thousands):

|                                                                                                  |  |                          |        |                        |  |          |      |          |  |   |        |   |  |   |        |  
|------------------------------------------------------------------------------------------------- |  | ------------------------ | ------ | ---------------------- |  | -------- | ---- | -------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                  |  | Three-month Period Ended |        | Six-month Period Ended
|                                                                                                  |  |                          |        |                       
|                                                                                                  |  | June 29,                 |        | June 30,               |  | June 29, |      | June 30,
|                                                                                                  |  | 2003                     |        | 2002                   |  | 2003     |      | 2002    
|                                                                                                  |  |                          |        |                        |  |          |      |         
|Net loss                                                                                          |  | $                        | (2,627 | )                      |  | $        | (215 | )        |  | $ | (5,438 | ) |  | $ | (4,552 | )
|Periodic accretion of the Series B Convertible Preferred Stock
to the mandatory redemption amount |  |                          | (217   | )                      |  |          |     |          |  |   | (346   | ) |  |   |       |  
|                                                                                                  |  |                          |        |                        |  |          |      |          |  |   |        |   |  |   |        |  
|Net loss applicable to common stockholders                                                        |  | $                        | (2,844 | )                      |  | $        | (215 | )        |  | $ | (5,784 | ) |  | $ | (4,552 | )
|                                                                                                  |  |                          |        |                        |  |          |      |          |  |   |        |   |  |   |        |  

The following table sets forth the antidiliutive securities excluded from
the diluted net loss per share calculation for the three- and six-month periods
ended June 29, 2003 and June 30, 2002 (in thousands of shares):

|                                   |  |          |        |          |  |  |       | 
|---------------------------------- |  | -------- | ------ | -------- |  |  | ----- | 
|                                   |  | June 29, |        | June 30,
|                                   |  | 2003     |        | 2002    
|                                   |  |          |        |         
|Convertible preferred stock        |  |          | 3,809  |          |  |  |      | 
|Options to purchase common stock   |  |          | 7,234  |          |  |  | 5,750 | 
|Warrants to purchase common stock  |  |          | 1,277  |          |  |  | 284   | 
|Common stock subject to repurchase |  |          |       |          |  |  | 208   | 
|                                   |  |          |        |          |  |  |       | 
|Total                              |  |          | 12,320 |          |  |  | 6,242 | 
|                                   |  |          |        |          |  |  |       | 

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NOTE 3. STOCK OPTIONS

We account for stock option grants pursuant to the provisions of Statement
of Financial Accounting Standard No. 123 Accounting for Stock-Based
Compensation (SFAS 123).Under the provisions of SFAS 123, employee
stock-based compensation expense is measured using either the intrinsic-value
method as prescribed by Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees (APB 25), or the fair value method described in
SFAS 123. Companies choosing the intrinsic-value method are required to
disclose the pro forma impact of the fair value method on net income. We have
elected to continue accounting for our employee and director stock-based awards
under the provisions of APB 25. We account for equity grants to other than
employees and directors pursuant to the fair value provisions of SFAS 123.

Had we determined compensation expense based on the fair value of the
option at the grant date for all stock options issued to employees and for
shares issued to employees at a discount pursuant to the Employee Stock
Purchase Plan, our net loss applicable to common stockholders and net loss per share would have been increased to
the pro forma amounts indicated below (in thousands, except per share amounts):

|                                                                   |  |                          |        |                        |  |          |        |          |  |   |        |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------ | ------ | ---------------------- |  | -------- | ------ | -------- |  | - | ------ | - |  | - | ------ | -
|                                                                   |  | Three-month Period Ended |        | Six-month Period Ended
|                                                                   |  |                          |        |                       
|                                                                   |  | June 29,                 |        | June 30,               |  | June 29, |        | June 30,
|                                                                   |  | 2003                     |        | 2002                   |  | 2003     |        | 2002    
|                                                                   |  |                          |        |                        |  |          |        |         
|Net loss applicable to common stockholders as reported             |  | $                        | (2,844 | )                      |  | $        | (215   | )        |  | $ | (5,784 | ) |  | $ | (4,552 | )
|Employee stock based compensation included in net loss as reported |  |                          |       |                        |  |          | 120    |          |  |   | 117    |   |  |   | 399    |  
|Stock based compensation pursuant to fair value accounting         |  |                          | (1,450 | )                      |  |          | (1,606 | )        |  |   | (3,318 | ) |  |   | (3,055 | )
|                                                                   |  |                          |        |                        |  |          |        |          |  |   |        |   |  |   |        |  
|Pro forma net loss applicable to common stockholders               |  | $                        | (4,294 | )                      |  | $        | (1,701 | )        |  | $ | (8,985 | ) |  | $ | (7,208 | )
|                                                                   |  |                          |        |                        |  |          |        |          |  |   |        |   |  |   |        |  
|Basic and diluted net loss per share                               |  | $                        | (0.12  | )                      |  | $        | (0.01  | )        |  | $ | (0.25  | ) |  | $ | (0.19  | )
|Pro forma net loss per share                                       |  | $                        | (0.18  | )                      |  | $        | (0.07  | )        |  | $ | (0.38  | ) |  | $ | (0.30  | )

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

|                        |  |               |      |               |  |  |      |  
|----------------------- |  | ------------- | ---- | ------------- |  |  | ---- | -
|                        |  | June 29, 2003 |      | June 30, 2002
|                        |  |               |      |              
|Expected term           |  | 5 years       |      | 5 years      
|Risk-free interest rate |  |               | 2.52 | %             |  |  | 2.79 | %
|Dividend yield          |  |               | 0    | %             |  |  | 0    | %
|Volatility              |  |               | 100  | %             |  |  | 100  | %

NOTE 4. INVENTORIES

Inventories consist of the following:

|                                              |  |          |        |              |  |   |        |  
|--------------------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                              |  | June 29, |        | December 29,
|                                              |  | 2003     |        | 2002        
|                                              |  |          |        |             
|Raw materials                                 |  | $        | 2,879  |              |  | $ | 3,244  |  
|Finished goods                                |  |          | 1,562  |              |  |   | 1,843  |  
|Less: write-down to expected realizable value |  |          | (2,995 | )            |  |   | (3,584 | )
|                                              |  |          |        |              |  |   |        |  
|                                              |  | $        | 1,446  |              |  | $ | 1,503  |  
|                                              |  |          |        |              |  |   |        |  

NOTE 5. WARRANTY

We offer product warranties of one to five years. Warranty coverages
provide for the repair or replacement of defective products, at our option.
Estimated future warranty obligations related to certain products are provided
by charges to operations in the period in which the related revenue is
recognized and reported on the balance sheet as a component of accrued
liabilities. These estimates are based on historical warranty experience and
other relevant information of which we are aware. Costs associated with
warranty coverage may include replacement product, parts, labor and other
costs. The following table sets forth the amount of warranty accrued, expensed
and utilized or adjusted during the six-month period ended June 29, 2003.

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|                                     |  |            |       |            |  |              |     |           |  |                |      |   |  |   |       | 
|------------------------------------ |  | ---------- | ----- | ---------- |  | ------------ | --- | --------- |  | -------------- | ---- | - |  | - | ----- | 
|                                     |  |            |       |            |  | Amounts      |     |           |  |                |      |   |  |  
|                                     |  | Balance at |       | Charged to |  |              |     |           |  |                |      |  
|                                     |  | Beginning  |       | Costs and  |  |              |     |           |  | Balance at End
|                                     |  | of Period  |       | Expenses   |  | (Deductions) |     | of Period
|                                     |  |            |       |            |  |              |     |          
|Accrued warranty costs               |  |            |       |            |  |              |     |           |  |                |      |   |  |   |       | 
|Six-month period ended June 29, 2003 |  | $          | 1,749 |            |  | $            | 323 |           |  | $              | (739 | ) |  | $ | 1,333 | 

NOTE 6. SERIES B CONVERTIBLE PREFERRED STOCK

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

Each share of Series B Convertible Preferred Stock is currently
convertible into one share of common stock, subject to adjustment for certain
dilutive events. Except as limited by law or the Certificate of Designation for
the Series B Convertible Preferred Stock, the holders of Series B Convertible
Preferred Stock are entitled to vote with holders of common stock at a rate of
0.8936 vote per share until holders shares are converted into
shares of common
stock. Shares of Series B Convertible Preferred Stock are convertible by the
holder at any time. However, the Series B Convertible Preferred Stock automatically
converts into common stock, if, at anytime after three years from the original
issue date, the common stock has been traded with a volume weighted average
price in excess of $7.00 per share for twenty of the previous thirty trading
days with a minimum average trading volume of 200,000 shares per day. In
addition, holders of Series B Convertible Preferred Stock are entitled to
receive cumulative dividends at the rate of 6% per annum, payable on a
quarterly basis on May 15, August 15, November 15 and February 15 of each year.
Dividends on the preferred stock will be paid in shares of Series B Convertible
Preferred Stock during the first year after closing and then, at our
discretion, in either shares of Series B Convertible Preferred Stock or cash.

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

On or after the date occurring seven years from the original issue date,
the holders of a majority of the then outstanding shares of Series B
Convertible Preferred Stock may require us to redeem the outstanding shares of
Series B Preferred Stock at the original issuance price of $2.10 per share plus
any accrued but unpaid dividends. As a result of the holders right to demand
redemption, the Series B Convertible Preferred Stock has been classified
outside of stockholders equity on the balance sheet on the mezzanine between
total liabilities and stockholders equity.

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

In accordance with the provisions of EITF 98-5 Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios and EITF 00-27 Application of Issue No. 98-5 to Certain
Convertible Instruments, we separately valued the in-the-money conversion
feature embedded in the Series B Convertible Preferred Stock and allocated $3.2
million of the proceeds allocated to the preferred stock to this embedded
beneficial conversion. The allocation further reduced the carrying value of
the Series B preferred stock and increased additional paid-in capital by a
corresponding amount. The beneficial conversion feature will be amortized as a
deemed dividend with a corresponding increase in the carrying value of the
Series B Convertible Preferred Stock over the period to stated redemption as
described in EITF 00-27. In light of our retained deficit, the deemed dividend
is currently recorded to additional paid in capital. The following table sets
forth the calculation used in determining the amount of the beneficial
conversion feature (in thousands, except per share amounts):

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|                                                                                                                                              |  |   |        | 
|--------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------ | 
|Gross proceeds allocated to the Series B Convertible Preferred Stock based on
relative fair value (prior to the allocation of issuance costs) |  | $ | 6,856  | 
|Shares of common stock into which the Series B Convertible Preferred Stock is
convertible                                                     |  |   | 3,810  | 
|                                                                                                                                              |  |   |        | 
|Effective conversion price per common share                                                                                                   |  | $ | 1.7996 | 
|Weighted average closing price of common stock on transaction dates                                                                           |  | $ | 2.6517 | 
|                                                                                                                                              |  |   |        | 
|Intrinsic spread representing the value of beneficial conversion feature per share                                                            |  | $ | 0.8521 | 
|Shares of common stock into which the Series B Convertible Preferred Stock is
convertible                                                     |  |   | 3,810  | 
|                                                                                                                                              |  |   |        | 
|Aggregate value of the beneficial conversion feature                                                                                          |  | $ | 3,246  | 
|                                                                                                                                              |  |   |        | 

The aggregate of $1.1 million of proceeds allocated to the common stock
warrants issued in conjunction with the offering, the $3.2 million value
assigned to the embedded beneficial conversion and the $0.2 million of
allocated transaction costs, was recorded as additional paid in capital
resulting in an initial net carrying amount of the Series B Convertible
Preferred Stock of $3.5 million. The $3.5 million carrying amount reflects a
discount of $4.5 million from the $8.0 million to be paid to holders of the
Series B Convertible Preferred Stock upon mandatory redemption that may occur
anytime after February 14, 2010. This $4.5 million discount from the $8.0
million redemption amount plus any accrued but unpaid dividends which increase
the redemption amount will be accreted on an effective yield method, up to the
earlier of the stated redemption date or conversion of the preferred shares
into common. In the event that the preferred stock is converted into common
stock prior to the stated redemption date, any unaccreted beneficial conversion
amounts will be recorded immediately as a lump-sum deemed dividend and
reflected in net loss applicable to common stockholders.

During July 2003, we registered, on behalf of certain stockholders,
1,229,800 shares of common stock underlying the conversion of 946,000 of the
3,809,524 shares of Series B Convertible Preferred Stock issued and 283,800 of
the 1,142,856 shares of common stock that may be issued upon the exercise of
warrants. During August 2003, the stockholders for whom the shares of common
stock where registered commenced the conversion of their shares of preferred
stock into shares of our common stock. As previously noted, the conversion of
the preferred stock into common stock prior to the stated redemption date
results in the immediate accretion of the remaining beneficial conversion
amounts for the shares converted. As of August 12, 2003 certificates representing 874,000
shares of Series B Convertible Preferred Stock have been surrendered for
conversion into an equal number of shares of our common stock. Upon
conversion, approximately $1.0 million of the remaining beneficial conversion
amounts relating to those shares were recorded as a deemed dividend to
additional paid in capital and will be reflected in net loss applicable to
common stockholders for the three-month period ending September 28, 2003.
Should the stockholders for whom the shares where registered convert the
remaining 72,000 shares of preferred stock during our third fiscal
quarter, we
would recognize approximately $100,000 of additional unaccreted
beneficial conversion as a deemed dividend during the three-month period
ending September 28, 2003.

NOTE 7. NOTES RECEIVABLE FROM STOCKHOLDERS

During January 2003, we repurchased 1,359,160 shares of common stock at
$2.47 per share from two of our officers in a non-cash transaction and
collected cash of approximately $236,000 from the officers in full satisfaction
of the principal and unpaid interest balances of the officers notes totaling
$3.6 million. Of the 1,359,160 shares repurchased by the company, 300,592
shares were granted to an officer within six months of the repurchase. In
accordance with the provisions of EITF 00-23 Issues Related to the Accounting
for Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44
the repurchase of the 300,592 shares resulted in a non-cash compensation charge
to earnings during the first quarter of 2003 of $364,000.

As of June 29, 2003, all notes receivable from stockholders had been
settled in full.

NOTE 8. RECENT ACCOUNTING PRONOUNCEMENTS

During June 2001, the FASB issued Statement of Financial Accounting
Standard No. 143 Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143). The provisions of FAS 143 apply to all entities
that incur obligations associated with the retirement of tangible long-lived
assets. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Under SFAS 143, a liability for an asset
retirement obligation (i.e. liability) is recognized at fair value during the
period in which it is incurred. The offset to the liability is capitalized as a
component of the carrying amount of the asset bringing rise to the future
retirement obligation. We adopted SFAS 143 effective December 30, 2002, the
beginning of our 2003 fiscal year. Our adoption of SFAS 143 did not impact our
financial position, results of operations or cash flows for the three- or
six-month periods ended June 29, 2003.

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During December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends the guidance set forth in Statement of
Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation
(SFAS 123) and provides guidance for companies that elect to change their
accounting for employee stock based compensation to the fair value method of
accounting. The statement also expands and increases the frequency of the
existing disclosure requirements to require more prominent and quarterly
disclosure of the effects of stock based compensation pursuant to the
provisions of SFAS 123. We adopted SFAS 148 effective December 30, 2002 and
have included the expanded interim disclosures in the footnotes to our
condensed financial statements contained herein. Our adoption of SFAS 148 did
not impact our financial position, results of operations or cash flows for the
three- or six-month periods ended June 29, 2003.




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

The following discussion should be read in conjunction with the unaudited
condensed financial statements in Item 1 of this Periodic Report and with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the audited financial statements and notes thereto included in
our Annual Report on Form 10-K, as amended, for the fiscal year ended December
29, 2002.

This document contains forward-looking statements that involve risks 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 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 duty 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.

OVERVIEW

We provide comprehensive Fibre Channel-based technologies and products for
data storage solutions and storage networking applications. Our offering
consists of a variety of new embedded storage switch products as well as our
SAN interconnect switch and hub products that connect computers to data storage
devices in a network configuration. Our new embedded storage switch products
are based on a switch-on-a-chip, or SOC. This SOC can be embedded in a variety
of data storage devices to enhance performance, improve availability, and
increase the reliability of these devices. This new switching technology can be
sold in chip, blade or box form to original equipment manufacturers, or OEMs,
for inclusion in their solutions.

Our SOC
incorporates our InSpeedTM technology, which is our
patents pending advanced
switching architecture that results in a single chip capable of handling
multiple Fibre Channel devices. The InSpeed SOC can be embedded into storage
enclosure devices such as redundant array of independent disks, or RAID,
enclosures, tape libraries, network attached storage environments and next
generation storage systems to enhance the performance and scaling of these
solutions as well as improve device reliability, availability and
serviceability. We are also using the InSpeed SOC in Fibre Channel switches and
blades that can be embedded by OEMs in their storage solutions. This technology
can also be used to offer high performance, low cost switches for entry level
SANs. Revenue from InSpeed-based products represented approximately 75% of our
revenue for the first six-months of fiscal 2003 and 76% of our revenue for the
three-month period ended June 29, 2003.

We derive substantially all of our revenue from the sale of Fibre Channel
products, including embedded storage switch products, and SAN switches and hubs
to a limited number of OEMs. During the second fiscal quarter of 2003 HP
Corporation and Fujitsu Limited represented 55.7% and 10.2% of revenue,
respectively, compared with the same period of 2002 during which Avid
Technology and HP represented 21.1% and 19.3% of revenue respectively. During
the first six-months of 2003 HP represented 54.0% of revenue for the period
compared with the same period of 2002 during which HP, Avid and Xyratex
Technology Ltd., a contract manufacturer for Network Appliance, Inc.,
represented 20.7%, 16.0% and 14.0%, respectively. No other customers
represented greater than 10% of revenue during the periods noted. 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.

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We have outsourced our switch and hub box product manufacturing,
fulfillment and repair operations and most of our materials management to
Suntron Corporation (Suntron). We purchase certain components directly from
suppliers and resell them to Suntron at our cost and recognize no revenue from
these transactions. We also outsource the manufacturing of our SOCs to
third-party manufacturers that provide these components for
inclusion in our product assemblies.

Critical Accounting Policies

General

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses for
the reporting periods presented. Management reviews the estimates and
assumptions used for financial reporting each period and has discussed the
development, selection and disclosure of these estimates and assumptions with
the Audit Committee of the Board of Directors. Actual results could differ
materially from those estimates and future changes to such estimates or
assumptions used could materially and adversely affect the financial
statements. Amounts in the financial statements, which are particularly
susceptible to changes in estimates in the near term, include the
recoverability of goodwill, the allowance for doubtful
accounts, warranty reserves and inventory valuation.

Revenue Recognition

We recognize revenue when it is realized or realizable and earned. We
consider revenue realized or realizable and earned when there is persuasive
evidence of an arrangement, the product has been delivered to the customer, the
sales price is fixed or determinable and collectibility is reasonably assured.

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

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

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

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

Allowance for Doubtful Accounts

We evaluate the collectibility of our trade receivables based on a
combination of factors. We regularly analyze our significant customer accounts,
and, should we become aware of a specific customers inability to meet its
obligations to us, we record a specific

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reserve for bad debt to reduce the related receivable to the amount we
reasonably believe is collectible. We also record reserves for bad debt for all
other customers based on a variety of factors including the length of time the
receivables are past due, the financial health of the customer, macroeconomic
considerations and historical experience. If circumstances related to specific
customers change, our estimates of the recoverability of receivables could be
further adjusted, possibly adversely and materially, and adjustments, whether
favorable or unfavorable, would be recorded during the period in which the
change in circumstances is identified.

Warranty Provision

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

Inventory

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

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.

|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |     |    | 
|------------------------------------------- | ---------------------------------------- | ------------------------ | --- | ------------------------ | -- | ---------------------- | --- | -------- | -- | -------- | --- | -- | -- |  | --- | --- | -- | 
|                                            |                                          |                          |     | Three-month Period Ended |    | Six-month Period Ended
|                                            |                                          |                          |     |                          |    |                       
|                                            |                                          |                          |     | June 29,                 |    | June 30,               |     | June 29, |    | June 30,
|                                            |                                          |                          |     | 2003                     |    | 2002                   |     | 2003     |    | 2002    
|                                            |                                          |                          |     |                          |    |                        |     |          |    |         
|Revenue                                     |                                          |                          | 100 | %                        |    |                        | 100 | %        |    |          | 100 | %  |    |  | 100 | %  
|Cost of revenue                             |                                          |                          | 51  |                          |    |                        | 52  |          |    |          | 51  |    |    |  | 54  |    
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|Gross profit                                |                                          |                          | 49  |                          |    |                        | 48  |          |    |          | 49  |    |    |  | 46  |    
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|Operating expenses
Research and development |                                          |                          | 48  |                          |    |                        | 50  |          |    |          | 47  |    |    |  | 63  |    
|                                            | Selling, general and administrative      |                          |     | 45                       |    |                        |     | 58       |    |          |     | 49 |    |  |     | 57  |   
|                                            | Amortization of intangible assets        |                          |     | 0                        |    |                        |     | 2        |    |          |     | 0  |    |  |     | 2   |   
|                                            | Amortization of stock-based compensation |                          |     | 0                        |    |                        |     | 2        |    |          |     | 1  |    |  |     | 4   |   
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|                                            |                                          |                          | 93  |                          |    |                        | 112 |          |    |          | 97  |    |    |  | 126 |    
|                                            | Restructuring costs and adjustments      |                          |     | 0                        |    |                        |     | 37       |    |          |     | 0  |    |  |     | 19  |   
|                                            | Gain on sale of assets, net              |                          |     | 0                        |    |                        |     | (93      | )  |          |     | 0  |    |  |     | (47 | ) 
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|                                            |                                          | Total operating expenses |     |                          | 93 |                        |     |          | 56 |          |     |    | 97 |  |     |     | 98 | 
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|Loss from operations                        |                                          |                          | (44 | )                        |    |                        | (8  | )        |    |          | (48 | )  |    |  | (52 | )  
|Other income, net                           |                                          |                          | 1   |                          |    |                        | 4   |          |    |          | 1   |    |    |  | 4   |    
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    
|Net loss                                    |                                          |                          | (43 | )%                       |    |                        | (4  | )%       |    |          | (47 | )% |    |  | (48 | )% 
|                                            |                                          |                          |     |                          |    |                        |     |          |    |          |     |    |    |  |     |    

RESTRUCTURING

During April 2002, we adopted and implemented a restructuring plan to
reduce our cost structure and focus on our InSpeed-based product development
and sales. As a result of the plan, we recorded restructuring charges of $1.7
million, net of adjustments. The restructuring plan included, among other
charges, a charge of $0.9 million for the consolidation of space within our
Bothell, Washington corporate headquarters and our engineering facility in
Irvine, California. This charge included the costs associated with the idle
facility space at these locations for the remainder of the lease terms. At
December 29, 2002 the $0.6 million of accrued restructuring liability

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remaining was related solely to excess facilities at our Bothell,
Washington location through the first quarter of fiscal 2005. During the
six-month period ended June 29, 2003 the restructuring liability was reduced to
$0.5 million due to lease payments made on our Bothell facility.

SALE OF ASSETS

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

THREE-MONTH PERIOD ENDED JUNE 29, 2003 COMPARED WITH THE THREE-MONTH PERIOD
ENDED JUNE 30, 2002

Revenue.Revenue during the three-month periods ended June 29, 2003 and
June 30, 2002 was derived from our InSpeed, hub and switch products. Revenue
increased 27% to $6.1 million from $4.8 million for the three-month periods
ended June 29, 2003 and June 30, 2002, respectively. This $1.3 million increase
was due to a $4.1 million increase in revenue from our InSpeed family of
products offset by declines in our hub and non-InSpeed switch products. InSpeed
products represented 76% of revenue for the three-month period ended June 29,
2003 compared with 10% for the three-month period ended June 30, 2002. Revenue
generated by our non-InSpeed products declined an aggregate of 65% to $1.5
million from $4.3 million for the three-month periods ended June 29, 2003 and
June 30, 2002, respectively.

Cost of revenue. Cost of revenue includes the cost to acquire finished
products from a third party manufacturer of our products, expenses we incur
related to inventory management, product quality testing, customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Cost of revenue increased 24% to $3.1 million from $2.5 million for the
three-month periods ended June 29, 2003 and June 30, 2002, respectively. This
$0.6 million increase was due primarily to the 27% increase in revenue
partially offset by improved margins. Margins on sales increased to 49.1% of
revenue in the current period compared with 48.0% during the same period in the
prior year. The improvement in margins is due to higher-margin InSpeed products
comprising a larger percentage of total revenue during the three-month periods
ended June 29, 2003 compared with the three-month period ended June 30, 2002.

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 increased 22% to $2.9 million from $2.4
million for the three-month periods ended June 29, 2003 and June 30, 2002,
respectively. This increase is primarily due to a $0.2 million increase in
non-recurring engineering costs for new products and a $0.2 million increase in
compensation related costs. The increase in compensation costs reflects
increased staffing and use of temporary contract personnel.

We believe that continued investment in research and development is an
essential element of our strategic objectives to design quality products while
reducing costs. We expect research and development expenses to continue to
represent a significant portion of our overall operating expenses during the
remainder of 2003 as a result of expenses incurred in the development of
enhancements to existing products and development of future product offerings.

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, and expenses related to various marketing
activities. Selling, general and administrative expenses was consistent year
over year at $2.8 million for the three-month periods ended June 29, 2003 and
June 30, 2002. The year over year consistency in the net expense reflects a
$0.5 million increase in compensation, primarily due to the accounting
treatment of officer and director stock based compensation. These increased
costs were offset by a $0.2 million decrease in provision for doubtful accounts
due to reduced credit exposures and collections, $0.1 million in reduced
professional fees and a $0.1 million reduction in depreciation expense. As a
percentage of revenue, selling, general and administrative expenses

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decreased to 45% from 58% for the three-month periods ended June 29, 2003
and June 30, 2002, respectively, due to increased revenues for the respective
periods.

Amortization of intangible assets. No amortization of intangible assets
was recorded for the three-month period ended June 29, 2003 as all intangible
assets became fully amortized during previous periods. This compares to
amortization of $0.1 million recorded during the three-month period ended June
30, 2002. Goodwill is not amortized, but is subject to periodic impairment
testing. No impairment of goodwill was noted during the periods presented.

Amortization of stock-based compensation. No amortization of stock based
compensation was recorded for the three-month period ended June 29, 2003 as all
deferred stock compensation had been fully amortized during previous periods.
This compares to amortization of $0.1 million recorded during the three-month
period ended June 30, 2002.

SIX-MONTH PERIOD ENDED JUNE 29, 2003 COMPARED WITH THE SIX-MONTH PERIOD ENDED
JUNE 30, 2002

Revenue.Revenue during the six-month periods ended June 29, 2003 and June
30, 2002 was derived from our InSpeed, hub and switch products. Revenue
increased 22% to $11.6 million from $9.5 million for the six-month periods
ended June 29, 2003 and June 30, 2002, respectively. This $2.1 million increase
was due to a $6.6 million increase in revenue from our InSpeed family of
products offset by declines in our hub and non-InSpeed switch products. InSpeed
products represented 75% of revenue for the six-month period ended June 29,
2003 compared with 22% for the six-month period ended June 30, 2002. Revenue
generated by our non-InSpeed products declined an aggregate of 61% to $2.9
million from $7.4 million for the six-month periods ended June 29, 2003 and
June 30, 2002, respectively.

Cost of revenue. Cost of revenue includes the cost to acquire finished
products from a third party manufacturer of our products, expenses we incur
related to inventory management, product quality testing, customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Cost of revenue increased 15% to $5.9 million from $5.1 million for the
six-month periods ended June 29, 2003 and June 30, 2002, respectively. This
$0.8 million increase was due primarily to the 22% increase in revenue
partially offset by improved margins. Margins on sales increased to 49.3% of
revenue in the current period compared with 46.4% during the same period in the
prior year. The improvement in margins is due to higher-margin InSpeed products
comprising a larger percentage of total revenue during the six-month period
ended June 29, 2003 compared with the six-month period ended June 30, 2002.

Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancement of our products.
Research and development expenses decreased 8% to $5.5 million from $6.0
million for the six-month periods ended June 29, 2003 and June 30, 2002,
respectively. This $0.5 million decrease is primarily due to a $0.7 million
decrease in compensation related costs due to the reduction of research and
development personnel as a result of the sale of our SAN management software
assets combined with implementation of our restructuring plan, both of which
occurred during the second quarter of 2002. The decrease in compensation costs
was partially offset by a $0.3 million increase in non-recurring engineering
costs.

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, and expenses related to various marketing
activities. Selling, general and administrative expenses increased 4% to $5.7
million from $5.4 million for the six-month periods ended June 29, 2003 and
June 30, 2002, respectively. This $0.3 million increase was primarily due to a
$0.7 million increase in compensation, primarily due to the accounting
treatment of officer and director stock based compensation offset by a $0.2
million decrease in professional fees, $0.1 million decrease in provision for
bad debts, and a $0.1 million decrease in relocation and recruiting costs. As
a percentage of revenue, selling, general and administrative expenses decreased
to 49% from 57% for the six-month periods ended June 29, 2003 and June 30,
2002, respectively, due to increased revenues for the respective periods.

Amortization of intangible assets. Amortization of intangible assets
recorded for the six-month period ended June 29, 2003 was negligible compared
to $0.2 million recorded during the six-month period ended June 30, 2002. This
decrease is due to all intangibles becoming fully amortized during 2003.
Goodwill is not amortized, but is subject to periodic impairment testing. No
impairment of goodwill was noted during the periods presented.

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Amortization of stock-based compensation. Amortization of stock based
compensation decreased 71% to $0.1 million from $0.4 million for the six-month
periods ended June 29, 2003 and June 30, 2002, respectively. During 2003 all
remaining deferred stock compensation was fully amortized.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of common and preferred stock with aggregate proceeds of approximately
$123.7 million, including $8.0 million received during February 2003 upon
closing our Series B Convertible Preferred Stock financing. Additionally, we
have financed our operations through capital equipment lease lines, working
capital credit facilities, notes payable, $6.9 million in net cash received
from the sale of our laser diode fabrication facility and gigabit Ethernet
product line and $4.7 million in net cash received from the sale of our SAN
management software assets. Our principal sources of liquidity at June 29, 2003
consisted of $11.9 million in cash and cash equivalents and $9.6 million in
liquid investments.

Cash utilized by operating activities was $4.8 million for the six-month
period ended June 29, 2003, and was due primarily to our operating loss, net of
non-cash expenses. Cash provided by investing activities was $3.8 million and
resulted from maturities of short-term investments of $10.0 million, proceeds
from the collection of a $2.5 million note receivable received in conjunction
with the sale of our SAN management software assets, offset by $7.5 million of
purchases of short-term investments and capital expenditures of $1.2 million.
Cash provided by financing activities reflects the $7.8 million raised in
conjunction with our sale of Series B Convertible Preferred Stock combined with
$0.9 million provided by stockholder note collections, employee stock purchase
plan stock sales and the exercises of employee stock options.

As of June 29, 2003, we had an accumulated deficit of $139.2 million and
have never been profitable. We plan to grow our revenue base and continue to
control our expenses in order to achieve profitability. However, we cannot be
certain that we will ever realize sufficient revenue to achieve profitability.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability.

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 eighteen months. However, we may be required, or could elect,
to seek additional funding prior to that time. Our future capital requirements
will depend on many factors, including our future revenue, the timing and
extent of spending to support product development efforts and sales, general
and administrative activities, the timing of introductions of new products, and
market acceptance of our products. We cannot assure you that additional equity
or debt financing, if required, will be available on acceptable terms or at
all.

RELATED PARTY TRANSACTIONS

During January 2003, we repurchased 1,359,160 shares of common stock at
$2.47 per share from two officers in a non-cash transaction and collected cash
of approximately $236,000 from the officers in full satisfaction of the
principal and unpaid interest balances of the officers notes totaling $3.6
million. The note receivable arrangements were originally entered into during
April and May of 1999 in connection with the exercise of stock options. Of the
1,359,160 shares 300,592 shares repurchased by the company were granted to an
officer within six months of the repurchase. Therefore, these shares are
subject to the provisions of EITF 00-23 Issues Related to the Accounting for
Stock Compensation under APB Opinion No. 25 and FASB Interpretation No. 44 and
resulted in a non-cash compensation charge to earnings during the first quarter
of 2003 of $364,000.

As of June 29, 2003, all notes receivable from stockholders had been
settled in full.

RECENT ACCOUNTING PRONOUNCEMENTS

During June 2001, the FASB issued Statement of Financial Accounting
Standard No. 143 Accounting for Obligations Associated with the Retirement of
Long-Lived Assets" (SFAS 143). The provisions of FAS 143 apply to all entities
that incur obligations associated with the retirement of tangible long-lived
assets. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Under SFAS 143, a liability for an asset
retirement obligation (i.e. liability) is recognized at fair value during the
period in which it is incurred. The offset to the liability is capitalized as a
component of the carrying amount of the asset bringing rise to the future
retirement obligation. We adopted SFAS 143 effective December 30, 2002, the
beginning of our 2003 fiscal year. Our adoption of SFAS 143 did not impact our
financial position, results of operations or cash flows for the three- or
six-month periods ending June 29, 2003.

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During December 2002, the FASB issued Statement of Financial Accounting
Standard No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends the guidance set forth in Statement of
Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation
(SFAS 123 and provides guidance for companies that elect to change their
accounting for employee stock based compensation to the fair value method of
accounting. The statement also expands and increases the frequency of the
existing disclosure requirements to require more prominent and quarterly
disclosure of the effects of stock based compensation pursuant to the
provisions of SFAS 123. We adopted SFAS 148 effective December 30, 2002 and
have included the expanded interim disclosures in the footnotes to our
condensed financial statements contained herein. Our adoption of SFAS 148 did
not impact our financial position, results of operations or cash flows for the
three- or six-month periods ending June 29, 2003.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

We have incurred significant losses since our inception, we expect future
losses, and we may not become profitable.

We have incurred significant losses since inception, most recently a net
loss of $5.4 million for the six-month period ended June 29, 2003, and expect
to incur losses in the future. As of June 29, 2003, we had an accumulated
deficit of $139.2 million. We expect to incur significant product development,
sales and marketing and administrative expenses, and we will need to generate
significant revenue to achieve and maintain profitability. We cannot be certain
that we ever will realize sufficient revenue to achieve profitability and even
if we do achieve profitability, we may not be able to sustain or increase
profitability.

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

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



| |  |  | the size, terms, timing and fluctuations of customer orders,
particularly orders from a limited number of OEMs;                                                                                     
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | changes in general economic conditions and specific economic
conditions in the computer storage and networking industries, including
changes in spending levels for information technology products;
|
| |  |  | the gain or loss of significant OEMs or other customers;                                                                                                                                            
|
| |  |  | the rate of market acceptance of our InSpeed technology;                                                                                                                                            
|
| |  |  | the length of time needed by customers for the evaluation and integration of our products;                                                                                                          
|
| |  |  | delays in or longer than expected design cycles for new products;                                                                                                                                   
|
| |  |  | our ability to attain and maintain sufficient reliability levels for our products;                                                                                                                  
|
| |  |  | our ability to develop and market new products;                                                                                                                                                     
|
| |  |  | the timing of the introduction or enhancement of products by us, our OEMs and our competitors;                                                                                                      
|
| |  |  | decreases in the prices at which we can sell our products;                                                                                                                                          
|
| |  |  | changes in the mix of products sold or the mix of sales channels; and                                                                                                                               
|
| |  |  | the ability of our contract manufacturer to produce and distribute our products in a timely fashion.                                                                                                

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

Our OEMs have unpredictable order patterns, which may cause our revenue to vary
significantly from period to period.

Our OEMs tend to order sporadically, and their purchases can vary
significantly from quarter to quarter. Our OEMs generally forecast expected
purchases in advance, but frequently do not order as expected and tend to place
purchase orders only shortly before the scheduled delivery date. We plan our
operating expenses based in part on revenue projections derived from our OEMs
forecasts.

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Because most of our expenses are fixed in the short term or incurred in advance
of anticipated revenue, we may not be able to decrease our expenses in a timely
manner to offset any unexpected shortfall in revenue. These typical ordering
practices cause our backlog to fluctuate significantly. Moreover, our backlog
is not necessarily indicative of actual sales for any succeeding period, as
orders are subject to cancellation or delay by our OEMs with limited or no
penalty.

Our largest customer accounted for 54% of our revenue during the first
six-months of fiscal 2003. The loss of this or other of our major customers
could significantly reduce our revenue and harm our operating results.

Our success will depend on our continued ability to develop and manage
relationships with significant OEMs, resellers and integrators, as well as on
the sales efforts and success of these customers. Revenue from HP (including
Compaq Computer Corporation) represented 54.0% of total revenue for the
six-month period ended June 29, 2003. Although we are attempting to expand our
base of OEMs and resellers, most of our future revenue may come from a small
number of customers.

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



| |  |  | our OEM and reseller agreements are not exclusive and contain no renewal obligation;  
| | - |  | --------------------------------------------------------------------------------------
|
| |  |  | our OEMs and resellers can stop purchasing and marketing our products at any time; and
|
| |  |  | our OEM and reseller agreements do not require minimum purchases.                     

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

We are focusing the majority of our development, sales and marketing resources
on the new embedded storage switch market. Our success is dependent upon the
market acceptance of our embedded storage switch products and growth of the
storage market.

We are focusing the majority of our development, sales and marketing
resources on the new embedded storage switch market. Our InSpeed based products
incorporate a relatively new technology we developed for this market. Our
success in generating revenue in this market will depend on, among other
things, our ability to:



| |  |  | demonstrate the benefits of embedded switch products to OEMs;                                                                                                              
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | enhance our existing embedded storage switch products and introduce
new products on a timely basis to meet changes in customer preferences
and evolving industry standards;
|
| |  |  | develop, maintain and build relationships with leading storage OEMs; and                                                                                                   
|
| |  |  | accurately predict the direction of industry standards and base our products on those industry standards.                                                                  

If the acceptance of our InSpeed technology and InSpeed based products by
large OEMs does not materialize, or the market for back-end embedded storage
switches does not grow, our results of operations and financial condition could
be harmed significantly.

The sales cycle for our products are long and we may incur substantial
non-recoverable expenses and devote significant resources to sales that do not
occur when anticipated or at all.

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

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Competing technologies to Fibre Channel may emerge and we may fail to adopt new
technologies on a timely basis, which may decrease the demand for our products.

Emerging technologies, such as Ethernet IP, SCSI (Small Computer System
Interface) over IP, SATA (Serial Advanced Technology Attachment) and Infiniband
are potential competing alternatives to Fibre Channel. If we are unable to
identify new technologies in a timely manner and efficiently utilize such new
technologies in our product development efforts, the demand for our current
products may decrease significantly and rapidly, which would harm our business.

We expect that a growing percentage of our future revenue will be derived from
our InSpeed technology-based products and our success will depend on widespread
acceptance of these products and technologies and our ability to manage
transition from older products.

Our future revenue growth will depend on the success of our new InSpeed
products and product launches by customers that incorporate our InSpeed SOCs
and switches. In addition, as we introduce new or enhanced InSpeed products, we
will have to manage successfully the transition from older releases in order to
minimize disruption in our customers ordering patterns, avoid excessive levels
of older product inventories and ensure that enough supplies of new products
can be delivered to meet our customers demands. To the extent customers defer
or cancel orders in expectation of new product releases, any delay in
development or introduction of new products could cause our operating results
to suffer.

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

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

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

For SAN interconnect sales, we compete primarily with Brocade
Communications Systems, Inc., QLogic Corporation and PMC-Sierra, Inc. Our competitors continue
to introduce improved SAN products with lower prices, and we will have to do
the same to remain competitive. Furthermore, our customers or larger companies
in other related industries may develop or acquire technologies and apply their
significant resources, including their distribution channels and brand
recognition, to capture significant SAN market share.

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

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



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

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| |  |  | changing market or competitive product requirements; and
| | - |  | --------------------------------------------------------
|
| |  |  | unanticipated engineering complexities.                 

The loss of Suntron, our outside contract manufacturer, or the failure to
accurately forecast demand for our products or manage successfully our
relationship with Suntron could negatively affect our business.

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

Suntron is not obligated to supply products for us, except as may be
provided in a particular purchase order that Suntron has accepted. We place
purchase orders with Suntron based on periodic forecasts. Most of the materials
used in our products are standard products, however, some materials are
proprietary and/or sole-source and require extended lead times. Our business
will be adversely affected if we are unable to accurately forecast demand for
our products and manufacturing capacity or if materials are not available at
Suntron to meet the demand. Lead times for materials and components vary
significantly and depend on the specific supplier, contract terms and demand
for a component at a given time. We also may experience shortages of components
from time to time, which could delay the manufacture of our products.

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

We may lose sales if our sole source suppliers fail to meet our needs.

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

If we fail to forecast accurately the demand for our products, it will
negatively affect our business.

We use rolling forecasts based on anticipated product orders to determine
our component requirements. Lead times for materials and components that we
order vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for particular
components. As a result, our component requirement forecasts may not be
accurate. If we overestimate our component requirements, we may have excess
inventory, which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory, which could interrupt our
manufacturing and delay delivery of our products to our customers. Either of
these occurrences would negatively impact our business and operating results.

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

Fibre Channel products, including InSpeed based products, frequently
contain undetected software or hardware defects when first introduced or as new
versions are released. Our products are complex and problems may be found from
time to time in our existing, new or enhanced products. Our products
incorporate components manufactured by third parties. We have in the past
experienced difficulties with quality and reliability of components obtained
from third parties, and we could experience similar

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problems in the future. In addition, our products are integrated with products
from other vendors. As a result, when problems occur, it may be difficult to
identify the source of the problem. These problems may cause us to incur
significant warranty and repair costs, divert the attention of our engineering
personnel from our product development efforts, cause significant customer
relations problems, and damage our reputation.

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

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

If we lose key senior management or are unable to hire qualified personnel, we
may not be successful.

Our success depends to a significant degree upon the continued joint
contributions of our senior management, including James M. McCluney, President
and Chief Executive Officer, Kurtis L. Adams, Chief Financial Officer, Stuart
B. Berman, Chief Technology Officer, Thomas Hughes, Vice President, Product
Development, Kelsey L. Britz, Vice President, Operations and Customer Service,
and Reza Norouzian, Vice President, Worldwide Sales. We believe our future
success will depend in large part upon our ability to attract and retain highly
skilled managerial, technical, sales and marketing, finance and operations
personnel. The loss of services of any of our key personnel could have a
negative impact on our business. We also need to increase the number of
technical staff members with experience in ASIC design as we further develop
our product line. Competition for these highly skilled employees in our
industry is intense.

In addition, employees may leave our company and subsequently compete
against us. Moreover, companies in our industry whose employees accept
positions with competitors frequently claim that their competitors have engaged
in unfair hiring practices. We may be subject to claims of this type in the
future as we seek to hire qualified personnel and some of these claims may
result in material litigation. We could incur substantial costs in defending
ourselves against these claims, regardless of their merits.

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

Our revenue from sales to international locations represented 34% of our
total revenue for the six-month period ended June 29, 2003. We plan to expand
our international sales, especially in Japan and Asia. Our international sales
growth will be limited if we are unable to establish relationships with
international OEMs and distributors, establish foreign operations, effectively
manage international sales channels and develop relationships with service
organizations. We cannot be certain that we will be able to establish, generate
and build market demand for our products internationally. Our international
operations will be subject to a number of risks, including:



| |  |  | increased complexity and costs of managing international operations;               
| | - |  | -----------------------------------------------------------------------------------
|
| |  |  | multiple protectionist, conflicting and changing governmental laws and regulations;
|
| |  |  | longer sales cycles;                                                               
|
| |  |  | difficulties in collecting accounts receivables;                                   
|
| |  |  | reduced or limited protections of intellectual property rights; and                
|
| |  |  | political and economic instability.                                                

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

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

Our Fibre Channel products must comply with evolving industry standards in the
storage markets and government regulations, and if we cannot develop products
that are compatible with these evolving standards, our business will suffer.

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

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

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

We believe that our continued success depends on protecting our
proprietary technology, including InSpeed. We currently rely on a combination
of patents, copyrights, trademarks, trade secrets and contractual provisions to
establish and protect our intellectual property rights. In addition, we also
enter into confidentiality or license agreements with our employees,
consultants and corporate partners, and control access to and distribution of
our documentation and other proprietary information. Our failure to protect our
intellectual property rights could have a material adverse effect on our
business, results of operations and financial condition. Efforts to protect our
intellectual property could be time consuming and expensive and could have a
material adverse effect on results of operations and financial condition.

On March 3, 2003 we filed a patent infringement action against QLogic
Corporation in the United States District Court for the District of Delaware.
The complaint states that QLogic is infringing U.S. Patent No. 6,118,776,
entitled Methods and Apparatus for Fiber Channel Interconnection of Private
Loop Devices, through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products, including QLogics
SANBox2 product. On May 23, 2003 we filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District Court for
the Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for Fiber
Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching products,
including Brocades Silkworm switch products, which include its QuickLoop and
Fabric Assist product features. QLogic and Brocade have
challenged the validity of the patents referenced, and Brocade has
also challenged the enforceability of those patents. In both of these suits, we are seeking
unspecified past damages, potential future royalties, or, alternatively,
injunctive relief. We have entered the discovery phase in both of
these actions and we remain committed to protecting our intellectual
property.

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
affect our ability to market our products, require us to seek licenses from
third parties, and adversely affect our business.

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

Our stock price may continue to be volatile. Accordingly, you may not be able
to resell your shares of common stock at or above the price you paid for them.

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

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

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

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

Sales of a substantial number of shares of our common stock in the public
market, or the appearance that such shares are available for sale, could
adversely affect the market price for our common stock. In connection with our
private placement of preferred stock during February 2003, we agreed to file
registration statements with the SEC covering the resale by those investors of
3,809,524 shares of common stock underlying the conversion of the Series B
Convertible Preferred Stock and 1,142,856 shares of common stock that may be
issued upon the exercise of the warrants issued in that private placement. Once
registered for resale these shares become freely tradeable, subject only to
prospectus delivery requirements and possible restrictions under Rule 144.
During July 2003, we registered, on behalf of certain stockholders, 946,000
shares of common stock underlying the conversion of the Series B Convertible
Preferred Stock and 283,800 shares of common stock that may be issued upon the
exercise of warrants. The registration of the remainder of these shares, or
the sale of a substantial number of these shares, may cause our stock price to
decline regardless of our performance.

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

Including the proceeds from the sale of preferred stock and the collection
of the note from the sale of SAN InSite during early 2003, we believe that our
existing cash, cash equivalent and investment balances will be sufficient to
meet our cash requirements at least through the next eighteen months. However,
we may require, or could elect to pursue, additional financing to fund our
operations in the future. If we need to raise additional capital, we may not be
able to do so on favorable terms, or at all, especially if we experience
disappointing operating results. If we cannot raise funds on acceptable terms,
we may not be able to develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures or unanticipated funding
requirements.

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

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

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

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




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Our investment portfolio, with a fair value of $9.6 million as of June 29,
2003, is invested in commercial paper, government securities and corporate
indebtedness that could experience an adverse decline in fair value should an
increase in interest rates occur. In addition, future declines in interest
rates could have an adverse impact on interest earnings for our investment
portfolio. We do not currently hedge against this interest rate exposure.

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




ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

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

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




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

On November 15, 2001, a
securities class action was filed in the United States District Court in the
Southern District of New York against two of our officers and directors and
certain underwriters who participated in our initial public offering in late
1999. The complaint alleges violations under Section 10(b) of the Securities
Exchange Act of 1934 and Section 11 of the Securities Act of 1933 and seeks
unspecified damages on behalf of persons who purchased our stock during the
period October 1, 1999 through December 6, 2000. Subsequent to the filing, the
Court issued a summary judgment releasing our officers and directors from the
action. During June 2003, we and the other issuer defendants in the
action reached a tentative settlement with the plaintiffs that would,
among other things, result in the dismissal with prejudice of all
claims against the defendants and their officers and directors.
Although we have approved this settlement proposal in principle, it
remains subject to a number of procedural conditions, as well as
formal approval by the Court.

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On March 3, 2003 we filed a patent infringement action against QLogic
Corporation in the United States District Court for the District of Delaware.
The complaint states that QLogic is infringing U.S. Patent No. 6,118,776,
entitled Methods and Apparatus for Fiber Channel Interconnection of Private
Loop Devices, through the unauthorized manufacture, use, sale and offering for
sale of various storage area network switching products, including QLogics
SANBox2 product. On May 23, 2003 we filed a patent infringement action against
Brocade Communications Systems, Inc. in the United States District Court for
the Northern District of California. The complaint states that Brocade is
infringing U.S. Patent No. 6,185,203, entitled Fibre Channel Switching
Fabric, U.S. Patent No. 6,118,776, entitled Methods and Apparatus for Fiber
Channel Interconnection of Private Loop Devices, and U.S. Patent No.
6,470,007, entitled Interconnect System for Fibre Channel Arbitrated Loop
Including Private Loop Devices, through the unauthorized manufacture, use,
sale and offering for sale of various storage area network switching products,
including Brocades Silkworm switch products, which include its QuickLoop and
Fabric Assist product features. QLogic and Brocade have
challenged the validity of the patents referenced, and Brocade has
also challenged the enforceability of those patents. In both of these suits, we are seeking
unspecified past damages, potential future royalties, or, alternatively,
injunctive relief. We have entered the discovery phase in both of
these actions and we remain committed to protecting our intellectual
property.




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

We held our Annual Stockholders Meeting on May 20, 2003 in Bothell,
Washington. Of the 27,040,724 shares of Common Stock and Preferred Stock
outstanding as of the record date, 24,863,192 shares were represented in person
or by proxy at the meeting. The results of the voting on the maters submitted
to the stockholders were as follows:

1.     To elect two Class I directors to serve until the 2006 Annual Meeting
and until their successors are elected and qualified.

|                     |  |     |            |          |  |  |         | 
|-------------------- |  | --- | ---------- | -------- |  |  | ------- | 
|Name                 |  | For |            | Withheld
|                     |  |     |            |         
|Robert Q. Cordell II |  |     | 24,407,635 |          |  |  | 111,505 | 
|Jami K. Nachtsheim   |  |     | 24,407,735 |          |  |  | 111,405 | 

2.     To ratify the selection by the Audit Committee of the Companys Board
of Directors of PricewaterhouseCoopers LLP as independent auditors for the
fiscal year ending December 28, 2003.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 24,496,514 | 
|Against: |  |  | 17,364     | 
|Abstain: |  |  | 5,262      | 

The directors continuing in office until the 2004 Annual Meeting are
Charles A. Haggerty and Robert S. Messina. Directors continuing in office
until the 2005 Annual Meeting are James M. McCluney, Peter J. Perrone and
Timothy M. Spicer.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | Exhibits:
|--- |  | ---------

|        |  |                                                                                                          
|------- |  | ---------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                          
|NUMBER  |  | DESCRIPTION                                                                                              
|        |  |                                                                                                          
|3.1 (1) |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                            
|        |  |                                                                                                          
|3.2 (2) |  | Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)                
|        |  |                                                                                                          
|3.3 (3) |  | Certificate of Designation of Series B Convertible Preferred Stock                                       
|        |  |                                                                                                          
|3.4 (1) |  | Bylaws of the Registrant (Exhibit 3.4)                                                                   
|        |  |                                                                                                          
|4.1 (1) |  | Specimen Stock Certificate (Exhibit 4.1)                                                                 
|        |  |                                                                                                          
|4.2 (1) |  | Amended and Restated Investors Rights Agreement dated February 17, 1998
(Exhibit 4.2)                   
|        |  |                                                                                                          
|4.3 (1) |  | First Amendment to Amended and Restated Investors Rights Agreement dated February
17, 1998 (Exhibit 4.3)

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|         |  |                                                                                                                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT  |  |                                                                                                                                                                                                    
|NUMBER   |  | DESCRIPTION                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                    
|4.4 (2)  |  | Rights Agreement dated November 15, 2000, between the Registrant and Computer Share
Trust Company, Inc. (Exhibit 4.1)                                                                              
|         |  |                                                                                                                                                                                                    
|4.5 (2)  |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                                                           
|         |  |                                                                                                                                                                                                    
|4.6 (3)  |  | Form of Warrant to Purchase Common Stock of Registrant                                                                                                                                             
|         |  |                                                                                                                                                                                                    
|4.7 (3)  |  | Registration Rights Agreement dated as of February 14, 2003, by and between
Registrantand the investor signatory thereto.                                                                          
|         |  |                                                                                                                                                                                                    
|10.1 (4) |  | Corporate Purchase Agreement between Registrant and Hewlett-Packard Corporation dated
May 9, 2003.                                                                                                 
|         |  |                                                                                                                                                                                                    
|31.1     |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|         |  |                                                                                                                                                                                                    
|31.2     |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
|         |  |                                                                                                                                                                                                    
|32.1     |  | Certification of Chief Financial Officer and Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                     



---

|(1) |  | Incorporated by reference to designated exhibits to the Registrants
Registration Statement on Form S-1 (SEC File No. 333-81347), declared
effective on September 30, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to designated exhibits to Registrants current
report on Form 8-K filed with the Securities and Exchange Commission on
November 17, 2000.        
|   
|(3) |  | Incorporated by reference to Registrants current report on Form 8-K
filed with the Securities and Exchange Commission on February 20, 2003.                               
|   
|(4) |  | Confidential treatment requested as to portions of this exhibit.                                                                                                           



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

We filed the following reports on Form 8-K during the second fiscal
quarter of 2003 and through the filing of this Quarterly Report:



|(i)  |  | On April 22, 2003 Vixel filed a report on Form 8-K, which reported under
Item 9 the press release entitled Vixel Corporation Announces First
Quarter 2003 Financial Results relating to the financial results of the
quarter ended March 30, 2003.
|---- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(ii) |  | On July 22, 2003 Vixel filed a report on Form 8-K, which reported under
Item 9 the press release entitled Vixel Corporation Announces Second
Quarter 2003 Financial Results relating to the financial results of the
quarter ended June 29, 2003. 

25



---



##### Table of Contents






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 13, 2003 |  | VIXEL CORPORATION                                  
|                       |  |                                                    
|                       |  | /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)        

26



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##### Table of Contents






EXHIBIT INDEX

|         |  |                                                                                                                                                                                                    
|-------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT  |  |                                                                                                                                                                                                    
|NUMBER   |  | DESCRIPTION                                                                                                                                                                                        
|         |  |                                                                                                                                                                                                    
|3.1 (1)  |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                                                                                                                      
|         |  |                                                                                                                                                                                                    
|3.2 (2)  |  | Certificate of Designation of Series A Junior Participating Preferred Stock
(Exhibit 3.1)                                                                                                          
|         |  |                                                                                                                                                                                                    
|3.3 (3)  |  | Certificate of Designation of Series B Convertible Preferred Stock                                                                                                                                 
|         |  |                                                                                                                                                                                                    
|3.4 (1)  |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                                                                             
|         |  |                                                                                                                                                                                                    
|4.1 (1)  |  | Specimen Stock Certificate (Exhibit 4.1)                                                                                                                                                           
|         |  |                                                                                                                                                                                                    
|4.2 (1)  |  | Amended and Restated Investors Rights Agreement dated February 17, 1998
(Exhibit 4.2)                                                                                                             
|         |  |                                                                                                                                                                                                    
|4.3 (1)  |  | First Amendment to Amended and Restated Investors Rights Agreement dated
February 17, 1998 (Exhibit 4.3)                                                                                          
|         |  |                                                                                                                                                                                                    
|4.4 (2)  |  | Rights Agreement dated November 15, 2000, between the Registrant and Computer
Share Trust Company, Inc. (Exhibit 4.1)                                                                              
|         |  |                                                                                                                                                                                                    
|4.5 (2)  |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                                                           
|         |  |                                                                                                                                                                                                    
|4.6 (3)  |  | Form of Warrant to Purchase Common Stock of Vixel Corporation                                                                                                                                      
|         |  |                                                                                                                                                                                                    
|4.7 (3)  |  | Registration Rights Agreement dated as of February 14, 2003, by and between Vixel
Corporation and the investor signatory thereto.                                                                  
|         |  |                                                                                                                                                                                                    
|10.1 (4) |  | Corporate Purchase
Agreement between
Registrant and
Hewlett-Packard
Corporation dated
May 9, 2003.                                                                                                 
|         |  |                                                                                                                                                                                                    
|31.1     |  | Certification of Chief Financial Officer
pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of
1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|         |  |                                                                                                                                                                                                    
|31.2     |  | Certification of Chief Executive Officer
pursuant to Rules 13a-14(a) and 15d-14(a)
under the Securities Exchange Act of
1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
|         |  |                                                                                                                                                                                                    
|32.1     |  | Certification of Chief Financial Officer
and Chief Executive Officer Pursuant to
18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.                     



---

|(1) |  | Incorporated by reference to designated exhibits to the Registrants
Registration Statement on Form S-1 (SEC File No. 333-81347), declared
effective on September 30, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to designated exhibits to Registrants current
report on Form 8-K filed with the Securities and Exchange Commission on
November 17, 2000.        
|   
|(3) |  | Incorporated by reference to Registrants current report on Form 8-K filed
with the Securities and Exchange Commission on February 20, 2003.                               
|   
|(4) |  | Confidential treatment requested as to portions of this exhibit.                                                                                                           

27