##### 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 30, 2002

OR



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

Commission File No. 000-27221



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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 [   ]

The number of shares outstanding of the Registrants common stock, $.0015
par value, as of July 31, 2002 was 24,339,442.





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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. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK.                           
|PART II. OTHER INFORMATION   
|                              | ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS                                            
|                              | ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                  
|                              | ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                   
|EXHIBIT INDEX                
|EXHIBIT 99.1                 



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##### Table of Contents



VIXEL CORPORATION

INDEX TO FORM 10-Q FOR QUARTER
ENDED JUNE 30, 2002

|                                |                                                                                                 |                                                                                                            |    |      |   | 
|------------------------------- | ----------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -- | ---- | - | 
|                                |                                                                                                 |                                                                                                            |    | Page
|                                |                                                                                                 |                                                                                                            |    |     
|Part I.   FINANCIAL INFORMATION |                                                                                                 |                                                                                                            |    |     
|                                | Item 1.   Financial Statements (unaudited)                                                      |                                                                                                            |    |      |  
|                                |                                                                                                 | Condensed Balance Sheet as of June 30, 2002 and December 30, 2001                                          |    |      | 3 | 
|                                |                                                                                                 | Condensed Statement of Operations for the three and six month periods ended
June 30, 2002 and July 1, 2001 |    |      | 4 | 
|                                |                                                                                                 | Condensed Statement of Cash Flows for the six-month periods ended
June 30, 2002 and July 1, 2001           |    |      | 5 | 
|                                |                                                                                                 | Notes to Condensed Financial Statements                                                                    |    |      | 6 | 
|                                | Item 2.   Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                            |    | 9    |  
|                                | Item 3.   Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                            |    | 23   |  
|Part II.   OTHER INFORMATION    |                                                                                                 |                                                                                                            |    |     
|                                | Item 2.   Changes in Securities and Use of Proceeds                                             |                                                                                                            |    | 23   |  
|                                | Item 4.   Submission of Matters to a Vote of Security Holders                                   |                                                                                                            |    | 23   |  
|                                | Item 6.   Exhibits and Reports on Form 8-K                                                      |                                                                                                            |    | 24   |  
|Signatures                      |                                                                                                 |                                                                                                            | 25 |     

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 30, |        | December 30,
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       | 2002     |        | 2001        
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |             
|Assets                               |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     | Current assets                                                                |                                                                                                                                                                                                          |                                            |       |          |        |              |       |         
|                                     |                                                                               | Cash and cash equivalents                                                                                                                                                                                |                                            | $     | 7,791    |        |              | $     | 5,036    |       
|                                     |                                                                               | Short-term investments                                                                                                                                                                                   |                                            |       | 13,180   |        |              |       | 20,942   |       
|                                     |                                                                               | Accounts receivable, net of allowance for doubtful
accounts of $245 and $389, respectively                                                                                                               |                                            |       | 3,412    |        |              |       | 2,995    |       
|                                     |                                                                               | Inventories                                                                                                                                                                                              |                                            |       | 1,580    |        |              |       | 2,951    |       
|                                     |                                                                               | Note receivable                                                                                                                                                                                          |                                            |       | 2,500    |        |              |       |         |       
|                                     |                                                                               | Prepaid expenses and other current assets                                                                                                                                                                |                                            |       | 731      |        |              |       | 1,271    |       
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total current assets                       |       |          | 29,194 |              |       |          | 33,195 | 
|                                     | Property and equipment, net of accumulated
depreciation of $7,263 and $10,396 |                                                                                                                                                                                                          |                                            | 2,654 |          |        |              | 4,299 |         
|                                     | Goodwill and identifiable intangibles, net                                    |                                                                                                                                                                                                          |                                            | 642   |          |        |              | 948   |         
|                                     | Other assets                                                                  |                                                                                                                                                                                                          |                                            | 231   |          |        |              | 323   |         
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total assets                               |       | $        | 32,721 |              |       | $        | 38,765 | 
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|Liabilities and stockholders equity |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     | Current liabilities                                                           |                                                                                                                                                                                                          |                                            |       |          |        |              |       |         
|                                     |                                                                               | Capital lease obligations, current portion                                                                                                                                                               |                                            | $     | 460      |        |              | $     | 1,340    |       
|                                     |                                                                               | Accounts payable                                                                                                                                                                                         |                                            |       | 2,866    |        |              |       | 4,046    |       
|                                     |                                                                               | Accrued liabilities                                                                                                                                                                                      |                                            |       | 3,546    |        |              |       | 4,022    |       
|                                     |                                                                               | Deferred revenue                                                                                                                                                                                         |                                            |       | 695      |        |              |       | 1,147    |       
|                                     |                                                                               | Accrued restructuring costs                                                                                                                                                                              |                                            |       | 437      |        |              |       |         |       
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total current liabilities                  |       |          | 8,004  |              |       |          | 10,555 | 
|                                     | Capital lease obligations, net of current portion                             |                                                                                                                                                                                                          |                                            | 22    |          |        |              | 184   |         
|                                     | Accrued restructuring costs, net of current portion                           |                                                                                                                                                                                                          |                                            | 506   |          |        |              |      |         
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total liabilities                          |       |          | 8,532  |              |       |          | 10,739 | 
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     | Commitments and contingencies                                                 |                                                                                                                                                                                                          |                                            |       |          |        |              |       |         
|                                     | Stockholders equity                                                          |                                                                                                                                                                                                          |                                            |       |          |        |              |       |         
|                                     |                                                                               | Common stock, $.0015 par value; 60,000,000 shares
authorized; 24,540,763 and 24,272,229 shares issued;
24,318,863 and 24,050,329 shares outstanding at
June 30, 2002 and December 30, 2001, respectively |                                            |       | 36       |        |              |       | 36       |       
|                                     |                                                                               | Additional paid-in capital                                                                                                                                                                               |                                            |       | 157,226  |        |              |       | 156,922  |       
|                                     |                                                                               | Stock-based compensation                                                                                                                                                                                 |                                            |       | (354     | )      |              |       | (765     | )     
|                                     |                                                                               | Notes receivable from stockholders                                                                                                                                                                       |                                            |       | (3,745   | )      |              |       | (3,745   | )     
|                                     |                                                                               | Treasury stock, at cost; 288,566 shares                                                                                                                                                                  |                                            |       | (348     | )      |              |       | (348     | )     
|                                     |                                                                               | Accumulated deficit                                                                                                                                                                                      |                                            |       | (128,626 | )      |              |       | (124,074 | )     
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total stockholders equity                 |       |          | 24,189 |              |       |          | 28,026 | 
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      
|                                     |                                                                               |                                                                                                                                                                                                          | Total liabilities and stockholders equity |       | $        | 32,721 |              |       | $        | 38,765 | 
|                                     |                                                                               |                                                                                                                                                                                                          |                                            |       |          |        |              |      

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

3



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##### Table of Contents






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

|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |       |        | 
|----------------------------------------------------- | ----------------------------------------------------------------- | ------------- | ------ | ------------------ | ----- | ---------------- | ------ | -------- | ----- | ------- | ------ | ------ | ----- | - | ------- | ----- | ------ | 
|                                                      |                                                                   |               |        | THREE MONTHS ENDED |       | SIX MONTHS ENDED
|                                                      |                                                                   |               |        |                    |       |                 
|                                                      |                                                                   |               |        | June 30,           |       | July 1,          |        | June 30, |       | July 1,
|                                                      |                                                                   |               |        | 2002               |       | 2001             |        | 2002     |       | 2001   
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |        
|Revenue                                               |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|                                                      | Systems                                                           |               | $      | 4,810              |       |                  | $      | 3,971    |       |         | $      | 9,530  |       |   | $       | 7,511 |       
|                                                      | Components                                                        |               |        |                   |       |                  |        | 2,520    |       |         |        |       |       |   |         | 5,034 |       
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|                                                      |                                                                   | Total revenue |        |                    | 4,810 |                  |        |          | 6,491 |         |        |        | 9,530 |   |         |       | 12,545 | 
|Cost of revenue (1)                                   |                                                                   |               | 2,502  |                    |       |                  | 3,997  |          |       |         | 5,104  |        |       |   | 7,836   |      
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Gross profit                                          |                                                                   |               | 2,308  |                    |       |                  | 2,494  |          |       |         | 4,426  |        |       |   | 4,709   |      
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Operating expenses                                    |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|                                                      | Research and development (2)                                      |               |        | 2,389              |       |                  |        | 3,676    |       |         |        | 5,969  |       |   |         | 7,669 |       
|                                                      | Selling, general and administrative (3)                           |               |        | 2,788              |       |                  |        | 3,940    |       |         |        | 5,445  |       |   |         | 8,757 |       
|                                                      | Amortization of goodwill (2001 only) and
identifiable intangibles |               |        | 109                |       |                  |        | 191      |       |         |        | 218    |       |   |         | 438   |       
|                                                      | Amortization of stock-based compensation                          |               |        | 118                |       |                  |        | 282      |       |         |        | 393    |       |   |         | 798   |       
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|                                                      |                                                                   |               | 5,404  |                    |       |                  | 8,089  |          |       |         | 12,025 |        |       |   | 17,662  |      
|                                                      | Restructuring costs                                               |               |        | 1,775              |       |                  |        |         |       |         |        | 1,775  |       |   |         |      |       
|                                                      | Gain on sale of assets                                            |               |        | (4,479             | )     |                  |        |         |       |         |        | (4,454 | )     |   |         |      |       
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|                                                      |                                                                   |               | 2,700  |                    |       |                  | 8,089  |          |       |         | 9,346  |        |       |   | 17,662  |      
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Loss from operations                                  |                                                                   |               | (392   | )                  |       |                  | (5,595 | )        |       |         | (4,920 | )      |       |   | (12,953 | )    
|Other income, net                                     |                                                                   |               | 177    |                    |       |                  | 451    |          |       |         | 368    |        |       |   | 1,019   |      
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Net loss                                              |                                                                   | $             | (215   | )                  |       | $                | (5,144 | )        |       | $       | (4,552 | )      |       | $ | (11,934 | )    
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Basic and diluted net loss per share                  |                                                                   | $             | (0.01  | )                  |       | $                | (0.22  | )        |       | $       | (0.19  | )      |       | $ | (0.51   | )    
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      
|Weighted-average shares outstanding
basic and diluted |                                                                   |               | 23,957 |                    |       |                  | 23,502 |          |       |         | 23,845 |        |       |   | 23,383  |      
|                                                      |                                                                   |               |        |                    |       |                  |        |          |       |         |        |        |       |   |         |      



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|(1) |  | Includes amortization of stock-based compensation of $2 and $7 for the
three months ended June 30, 2002 and July 1, 2001, respectively, and $6 and
$18 for the six months ended June 30, 2002 and July 1, 2001, respectively       
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Excludes amortization of stock-based compensation of $2 and $8 for the
three months ended June 30, 2002 and July 1, 2001, respectively, and $8 and
$18 for the six months ended June 30, 2002 and July 1, 2001, respectively       
|   
|   
|   
|   
|(3) |  | Excludes amortization of stock-based compensation of $116 and $274 for the
three months ended June 30, 2002 and July 1, 2001, respectively, and $385
and $780 for the six months ended June 30, 2002 and July 1, 2001,
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 MONTHS ENDED
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                 
|                                                         |                                                                            |                                                                   |                                          |                                                     |        | June 30,         |        | July 1,
|                                                         |                                                                            |                                                                   |                                          |                                                     |        | 2002             |        | 2001   
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Cash flows from operating activities                     |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         | Net loss                                                                   |                                                                   | $                                        | (4,552                                              | )      |                  | $      | (11,934 | )    
|                                                         | Adjustments to reconcile net loss to net cash used in
operating activities |                                                                   |                                          |                                                     |        |                  |        |         |      
|                                                         |                                                                            | Depreciation                                                      |                                          |                                                     | 1,526  |                  |        |         | 2,066 |      
|                                                         |                                                                            | Amortization of goodwill (2001 only) and identifiable intangibles |                                          |                                                     | 227    |                  |        |         | 332   |      
|                                                         |                                                                            | Stock-based compensation                                          |                                          |                                                     | 399    |                  |        |         | 816   |      
|                                                         |                                                                            | Non-cash restructuring costs                                      |                                          |                                                     | 400    |                  |        |         |      |      
|                                                         |                                                                            | Gain on sale of assets                                            |                                          |                                                     | (4,454 | )                |        |         |      |      
|                                                         |                                                                            | Changes in                                                        |                                          |                                                     |        |                  |        |         |       |      
|                                                         |                                                                            |                                                                   | Accounts receivable, net                 |                                                     |        | (417             | )      |         |       | 4,608 |       
|                                                         |                                                                            |                                                                   | Inventories                              |                                                     |        | 1,371            |        |         |       | (903  | )     
|                                                         |                                                                            |                                                                   | Prepaid expenses and other assets        |                                                     |        | 511              |        |         |       | 728   |       
|                                                         |                                                                            |                                                                   | Accounts payable and accrued liabilities |                                                     |        | (2,009           | )      |         |       | (498  | )     
|                                                         |                                                                            |                                                                   | Deferred revenue                         |                                                     |        | (452             | )      |         |       | 640   |       
|                                                         |                                                                            |                                                                   | Accrued restructuring costs              |                                                     |        | 943              |        |         |       |      |       
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         |                                                                            |                                                                   |                                          | Net cash used in operating activities               |        |                  | (6,507 | )       |       |       | (4,145 | )
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Cash flows from investing activities                     |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         | Purchase of short-term investments                                         |                                                                   |                                          | (8,053                                              | )      |                  |        | (19,481 | )    
|                                                         | Maturities of short-term investments                                       |                                                                   |                                          | 15,815                                              |        |                  |        | 27,513  |      
|                                                         | Purchase of property and equipment                                         |                                                                   |                                          | (388                                                | )      |                  |        | (866    | )    
|                                                         | Proceeds from sale of assets                                               |                                                                   |                                          | 2,500                                               |        |                  |        |        |      
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         |                                                                            |                                                                   |                                          | Net cash provided by investing activities           |        |                  | 9,874  |         |       |       | 7,166  |  
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Cash flows from financing activities                     |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         | Receipt of payment on stockholder note receivable                          |                                                                   |                                          |                                                    |        |                  |        | 1,377   |      
|                                                         | Proceeds from issuance of note payable                                     |                                                                   |                                          | 319                                                 |        |                  |        |        |      
|                                                         | Principal payments on note payable                                         |                                                                   |                                          | (319                                                | )      |                  |        |        |      
|                                                         | Principal payments on capital lease obligations                            |                                                                   |                                          | (928                                                | )      |                  |        | (1,481  | )    
|                                                         | Amortization of debt issuance costs                                        |                                                                   |                                          |                                                    |        |                  |        | 1       |      
|                                                         | Proceeds from exercise of stock options                                    |                                                                   |                                          | 316                                                 |        |                  |        | 307     |      
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|                                                         |                                                                            |                                                                   |                                          | Net cash (used in) provided by financing activities |        |                  | (612   | )       |       |       | 204    |  
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Net increase in cash and cash equivalents                |                                                                            |                                                                   | 2,755                                    |                                                     |        |                  | 3,225  |        
|Cash and cash equivalents, beginning of period           |                                                                            |                                                                   | 5,036                                    |                                                     |        |                  | 17,066 |        
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Cash and cash equivalents, end of period                 |                                                                            | $                                                                 | 7,791                                    |                                                     |        | $                | 20,291 |        
|                                                         |                                                                            |                                                                   |                                          |                                                     |        |                  |        |        
|Cash paid for interest                                   |                                                                            | $                                                                 | 46                                       |                                                     |        | $                | 178    |        
|Equipment purchased under capital leases                 |                                                                            | $                                                                 |                                         |                                                     |        | $                | 35     |        
|Use of prepaid expense to acquire property and equipment |                                                                            | $                                                                 | 100                                      |                                                     |        | $                |       |        
|Note receivable for sale of assets                       |                                                                            | $                                                                 | 2,500                                    |                                                     |        | $                |       |        

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

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VIXEL CORPORATION

Notes to Condensed Financial Statements
(Information for the three and six months ended
June 30, 2002 and July 1, 2001)
(In Thousands, Except Share Amounts)
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed financial statements as of June 30, 2002 and
for the three and six month periods ended June 30, 2002 and July 1, 2001 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 for the three- and
six-month periods ended June 30, 2002 are not necessarily indicative of future
financial results.

Investors should read these interim statements in conjunction with
Managements Discussion and Analysis of Financial Condition and Results of
Operations and the audited financial statements and notes thereto for the
fiscal year ended December 30, 2001 included in our Annual Report on Form 10-K,
as amended, filed with the Securities and Exchange Commission on April 1, 2002.

Certain prior year amounts have been reclassified to conform to the 2002
presentation.

NOTE 2. INVENTORIES

Inventories consist of the following:

|                                              |  |          |        |              |  |   |        |  
|--------------------------------------------- |  | -------- | ------ | ------------ |  | - | ------ | -
|                                              |  | June 30, |        | December 30,
|                                              |  | 2002     |        | 2001        
|                                              |  |          |        |             
|Raw materials                                 |  | $        | 4,012  |              |  | $ | 4,781  |  
|Finished goods                                |  |          | 1,739  |              |  |   | 2,232  |  
|Less: write-down to expected
realizable value |  |          | (4,171 | )            |  |   | (4,062 | )
|                                              |  |          |        |              |  |   |        |  
|                                              |  | $        | 1,580  |              |  | $ | 2,951  |  
|                                              |  |          |        |              |  |   |        |  

NOTE 3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board, or FASB, issued
FAS No. 142, Goodwill and Other Intangible Assets which requires the company
to discontinue amortization of goodwill as of December 31, 2001. We adopted FAS
142 during the first quarter of 2002 and ceased amortizing goodwill with a net
book value of $369 as of the beginning of fiscal 2002. The adoption of FAS 142
resulted in reducing our net loss by $82 and $164 for the three and six months
ended June 30, 2002; and reducing our basic and diluted net loss per share by
$.01 for the six months ended June 30, 2002.

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The following table presents net loss and net loss per share for the three
and six months ended July 1, 2001 on a pro forma basis as if FAS 142 had been
adopted on January 1, 2001:

|                                                   |  |               |        |               |  |   |         |  
|-------------------------------------------------- |  | ------------- | ------ | ------------- |  | - | ------- | -
|                                                   |  | Three months  |        | Six months   
|                                                   |  | ended July 1, |        | ended July 1,
|                                                   |  | 2001          |        | 2001         
|                                                   |  |               |        |              
|Net
loss  as reported                             |  | $             | (5,144 | )             |  | $ | (11,934 | )
|Amortization of goodwill                           |  |               | 82     |               |  |   | 164     |  
|                                                   |  |               |        |               |  |   |         |  
|Net loss  as adjusted                             |  | $             | (5,062 | )             |  | $ | (11,770 | )
|                                                   |  |               |        |               |  |   |         |  
|Basic
and diluted net loss per share 
as reported |  | $             | (0.22  | )             |  | $ | (0.51   | )
|                                                   |  |               |        |               |  |   |         |  
|Basic
and diluted net loss per share 
as adjusted |  | $             | (0.22  | )             |  | $ | (0.50   | )
|                                                   |  |               |        |               |  |   |         |  

Under the requirements of FAS 142, identifiable intangible assets will
continue to be amortized over their useful lives. Current estimated
amortization expense for the identifiable intangible assets is expected to be
$436 and $55 for fiscal years 2002 and 2003, respectively. In conjunction with
the sale of our storage area networking management software, SAN InSite, and
related assets and resources, the net book value of the identifiable intangible
assets relating to capitalized software costs was expensed.

Goodwill and identifiable intangible assets as of June 30, 2002 and
December 30, 2001 consist of the following:

|                     |       |   |               |       |                   |   |       |     |          |   |       |       |  |   |     |     | 
|-------------------- | ----- | - | ------------- | ----- | ----------------- | - | ----- | --- | -------- | - | ----- | ----- |  | - | --- | --- | 
|                     |       |   | June 30, 2002 |       | December 30, 2001
|                     |       |   |               |       |                  
|                     |       |   | Gross         |       |                   |   |       |     | Gross    |   |       |       | 
|                     |       |   | Book          |       | Net Book          |   | Book  |     | Net Book
|                     |       |   | Value         |       | Value             |   | Value |     | Value   
|                     |       |   |               |       |                   |   |       |     |         
|Core Technology      |       | $ | 2,183         |       |                   | $ | 273   |     |          | $ | 2,183 |       |  | $ | 491 |    
|Capitalized Software |       |   | 106           |       |                   |   |      |     |          |   | 106   |       |  |   | 88  |    
|Goodwill             |       |   | 3,555         |       |                   |   | 369   |     |          |   | 3,555 |       |  |   | 369 |    
|                     |       |   |               |       |                   |   |       |     |          |   |       |       |  |   |     |    
|                     | Total |   | $             | 5,844 |                   |   | $     | 642 |          |   | $     | 5,844 |  |   | $   | 948 | 
|                     |       |   |               |       |                   |   |       |     |          |   |       |       |  |   |     |    

We are required to perform goodwill impairment tests on an annual basis
and between annual tests in certain circumstances. Consistent with the
requirements of FAS 142, we performed an impairment test of goodwill as of
December 31, 2001. As of June 30, 2002, no impairment of goodwill has been
recognized. There can be no assurance that future goodwill impairment tests
will not result in a charge to earnings.

NOTE 4. RESTRUCTURING COSTS

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 $1.8
million.

The restructuring plan included a reduction of approximately 22% of our
workforce across all departments. The workforce reduction resulted in a charge
of $393 relating primarily to severance.

The restructuring plan included the write-off of property and equipment
that was disposed or removed from operations and resulted in a charge of $400.
The property and equipment consisted primarily of

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computer equipment and related software, production and engineering
equipment, and office equipment, furniture, and fixtures. We also recorded
other restructuring costs of $83 relating primarily to impairment of operating
lease agreements for equipment and professional fees incurred in connection
with the restructuring activities.

The restructuring plan included a charge of $899 for the consolidation of
space within our Bothell, Washington corporate headquarters and our engineering
facility in Irvine, California. This charge includes the cost associated with
the idle facility space at these locations for the remainder of the lease
terms.

The restructuring charges are summarized as follows:

|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 
|------------------------------------------------- |  | ------------ | ----- | ------- |  | ------------- | ---- | ------------- |  | - | ---- | ----------- |  | ------------- | --- | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  | Accrued      
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  | Restructuring
|                                                  |  |              |       |         |  | Noncash       |      |               |  |   |      | Costs as of
|Category                                          |  | Total Charge |       | Charges |  | Cash Payments |      | June 30, 2002
|                                                  |  |              |       |         |  |               |      |              
|Workforce reduction                               |  | $            | 393   |         |  | $             |     |               |  | $ | (272 | )           |  | $             | 121 | 
|Consolidation of excess facilities                |  |              | 899   |         |  |               |     |               |  |   | (101 | )           |  |               | 798 | 
|Impairment of long-lived assets and other charges |  |              | 483   |         |  |               | (400 | )             |  |   | (59  | )           |  |               | 24  | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 
|Total                                             |  | $            | 1,775 |         |  | $             | (400 | )             |  | $ | (432 | )           |  | $             | 943 | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 

Remaining cash expenditures relating to workforce reductions and operating
lease agreements for equipment will be paid through the fourth quarter of
fiscal 2002. Amounts related to excess facilities space will be paid over the
respective lease terms through the first quarter of fiscal 2005.

NOTE 5. 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 is due and payable 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 $4.5 million.

NOTE 6. NET LOSS PER SHARE

Basic net loss per share represents the net loss divided by the
weighted-average number of common shares outstanding during the period,
excluding shares of restricted stock subject to repurchase. Diluted net loss
per share represents net loss divided by the weighted-average number of common
shares outstanding including the potentially dilutive impact of common stock
options and warrants and shares of restricted stock subject to repurchase.
Common stock options and warrants are converted using the treasury stock
method. Basic and diluted net loss per share are equal for the periods
presented because the impact of common stock equivalents is anti-dilutive.
Potentially dilutive securities totaling 5,973,309 and 5,448,744 shares for the
quarters ended June 30, 2002 and July 1, 2001, respectively, were excluded from
diluted net loss per share due to their anti-dilutive effect.

NOTE 7. COMMITMENTS AND CONTINGENCIES

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. We
believe this suit is without merit and we intend to defend ourselves vigorously
in this matter. Accordingly, we have not recognized any liability related to
this claim.

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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 Quarterly Report and with
Managements Discussion and Analysis of Financial Condition and Results of
Operations contained in our December 30, 2001 Annual Report on Form 10-K, as
amended, filed with the Securities and Exchange Commission on April 1, 2002.

This document contains forward-looking statements that involve risk and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. 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.

References to dollar amounts are in thousands unless otherwise specified.

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 switch and hub products that connect computers to data
storage devices in a network configuration and a switch-on-a-chip Application
Specific Integrated Circuit, or ASIC, which 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 storage networking interconnect products are
sold primarily as fully integrated switches and hubs through OEMs, integrators
and value-added resellers.

During 2001, we used our expertise in Fibre Channel switching technologies
to develop a switch-on-a-chip ASIC. This ASIC incorporates our InSpeed
technology, which is an advanced switching architecture that results in a
single chip capable of handling multiple Fibre Channel devices. This ASIC 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
availability and reliability. We are also using this ASIC in Fibre Channel
switches and blades that can be embedded by OEMs in their storage solutions.
As part of our embedded storage switch strategy, we have licensed the
manufacturing and selling of our Fibre Channel switch ASICs. This technology
can also be used to offer high performance, low cost switches for entry level
SANs.

We derive substantially all of our revenue from the sale of Fibre Channel
products, including SAN switches, hubs and embedded storage switch products. We
also license certain technologies and receive royalty revenue and provide
engineering services and receive service revenue. Systems revenue consists of
revenue generated from our Fibre Channel products, embedded storage switch
products, royalties and services. Component revenue consists primarily of
revenue generated from the sale of our transceiver products to OEMs for use in
their products. During the second quarter of 2001, we discontinued the
manufacturing and selling of our transceiver products.

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We sell our products primarily to a limited number of customers. Avid
Technology and Hewlett-Packard Company represented 21.1% and 19.3% of revenue,
respectively, for the three months ended June 30, 2002. Sun Microsystems,
Hewlett-Packard Company, formerly Compaq Computer Corporation, and Avid
Technology represented 45.9%, 23.0% and 11.0% of revenue, respectively for the
three months ended July 1, 2001. No other individual customer represented more
than 10.0% of our total revenue in those periods. While we are seeking to
diversify our customer base and expand the portion of our revenue that is
derived from sales through various distribution channels, we anticipate that
our operating results will continue to depend on volume sales to a relatively
small number of OEMs. We may not be successful in our efforts to diversify our
customer base and the loss of one of our key customers could significantly
reduce our total revenue. During the three months ended June 30, 2002 and July
1, 2001, 13.2% and 8.3%, respectively, of our total revenue was derived from
sales to distribution channel customers.

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

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 MONTHS ENDED |       | SIX MONTHS ENDED
|                     |                                                                   |               |       |                    |       |                 
|                     |                                                                   |               |       | June 30,           |       | July 1,          |       | June 30, |       | July 1,
|                     |                                                                   |               |       | 2002               |       | 2001             |       | 2002     |       | 2001   
|                     |                                                                   |               |       |                    |       |                  |       |          |       |        
|Revenue              |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|                     | Systems                                                           |               |       | 100.0              | %     |                  |       | 61.2     | %     |         |       | 100.0 | %     |  |        | 59.9 | %    
|                     | Components                                                        |               |       |                   |       |                  |       | 38.8     |       |         |       |      |       |  |        | 40.1 |      
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|                     |                                                                   | Total revenue |       |                    | 100.0 |                  |       |          | 100.0 |         |       |       | 100.0 |  |        |      | 100.0 | 
|Cost of revenue      |                                                                   |               | 52.0  |                    |       |                  | 61.6  |          |       |         | 53.6  |       |       |  | 62.5   |     
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|Gross profit         |                                                                   |               | 48.0  |                    |       |                  | 38.4  |          |       |         | 46.4  |       |       |  | 37.5   |     
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|Operating expenses   |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|                     | Research and development                                          |               |       | 49.7               |       |                  |       | 56.6     |       |         |       | 62.6  |       |  |        | 61.1 |      
|                     | Selling, general and administrative                               |               |       | 58.0               |       |                  |       | 60.8     |       |         |       | 57.2  |       |  |        | 69.8 |      
|                     | Amortization of goodwill (2001 only) and
identifiable intangibles |               |       | 2.3                |       |                  |       | 2.9      |       |         |       | 2.3   |       |  |        | 3.5  |      
|                     | Amortization of stock-based compensation                          |               |       | 2.4                |       |                  |       | 4.3      |       |         |       | 4.1   |       |  |        | 6.4  |      
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|                     |                                                                   |               | 112.4 |                    |       |                  | 124.6 |          |       |         | 126.2 |       |       |  | 140.8  |     
|                     | Restructuring costs                                               |               |       | 36.9               |       |                  |       |         |       |         |       | 18.7  |       |  |        |     |      
|                     | Sale of assets                                                    |               |       | (93.2              | )     |                  |       |         |       |         |       | (46.8 | )     |  |        |     |      
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|                     |                                                                   |               | 56.1  |                    |       |                  | 124.6 |          |       |         | 98.1  |       |       |  | 140.8  |     
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|Loss from operations |                                                                   |               | (8.1  | )                  |       |                  | (86.2 | )        |       |         | (51.7 | )     |       |  | (103.3 | )   
|Other income, net    |                                                                   |               | 3.7   |                    |       |                  | 6.9   |          |       |         | 3.9   |       |       |  | 8.1    |     
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     
|Net loss             |                                                                   |               | (4.4  | )%                 |       |                  | (79.2 | )%       |       |         | (47.8 | )%    |       |  | (95.1  | )%  
|                     |                                                                   |               |       |                    |       |                  |       |          |       |         |       |       |       |  |        |     

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THREE AND SIX MONTHS ENDED JUNE 30, 2002 COMPARED WITH THREE AND SIX MONTHS
ENDED JULY 1, 2001

Revenue.Our Systems revenue in the second quarter of fiscal 2002
increased 21.1% from the second quarter of fiscal 2001 to $4.8 million. Our
Systems revenue in the first six months of fiscal 2002 increased 26.9% from the
first six months of fiscal 2001 to $9.5 million. The increase in Systems
revenue for the second quarter and first six months of fiscal 2002 compared
with the same periods last year was primarily a result of increased royalty
revenue and the recognition of deferred revenue relating to our OEM
Software License and Distribution agreement with Fujitsu Softek. Total revenue in the second quarter of fiscal 2002 decreased by 25.9%
from the second quarter of fiscal 2001 to $4.8 million. Total revenue in the
first six months of fiscal 2002 decreased by 24.0% from the first six months of
fiscal 2001 to $9.5 million. The decrease in total revenue for the fiscal 2002
periods is the result of discontinuing the manufacture and sale of our
transceiver products during the second quarter of fiscal 2001. We did not
recognize any Components revenue for the first six months of fiscal 2002.

During the second quarter of fiscal 2002, in conjunction with the sale of
our SAN management software assets, our OEM Software License and Distribution
agreement with Fujitsu Softek terminated. As a result, we recognized $466 of
revenue from deferred revenue related to the agreement. We will
not recognize revenue relating to this agreement in the future. In addition, during the second quarter and
first six months of fiscal 2002 we recognized royalty revenue of $423 and $488,
respectively, related to other license agreements.

Gross profit. Cost of revenue includes the cost to acquire finished
products from a third party manufacturer of our products, costs we incur
related to engineering services we provide, expenses we incur related to
inventory management, product quality testing, customer order fulfillment, and
provisions for warranty expenses and inventory obsolescence. The gross profit
percentage in the second quarter of fiscal 2002 was 48.0% compared with 38.4%
in the second quarter of fiscal 2001. The gross profit percentage in the first
six months of fiscal 2002 was 46.4% compared with 37.5% in the first six months
of fiscal 2001. The increase in gross profit as a percentage of revenue during
the second quarter and first six months of fiscal 2002 as compared with the
same periods last year is primarily due to increased royalty revenue,
higher-margin revenue resulting from sales of our Inspeed-based products and a
decrease in expense relating to provisions for obsolete inventory.

Included in cost of revenue for the second quarter of fiscal 2001 were
provisions for excess and obsolete inventory and purchase commitments totaling
approximately $3.1 million, reduced by $800 resulting from the settlement of a
patent infringement claim related to our GBIC transceivers for less than
previously estimated. These provisions resulted primarily from transitioning
out of the GBIC and gigabaud link modules, or GLM, transceiver products and a
reduction in future revenue forecasts. Inventory purchases and commitments
are based upon future sales forecasts. To mitigate the component supply
constraints that have existed in the past, our contract manufacturer built
inventory levels for certain components with long lead times and entered into
certain longer-term commitments for certain components. Due to the sudden and
significant decrease in demand for certain of our products, inventory levels
exceeded our requirements based on sales forecasts through the end of fiscal
2001. This excess inventory charge was calculated based on the inventory levels
in excess of demand for each specific product. We do not anticipate that the
excess inventory subject to this charge will be used at a later date.

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 in the second quarter of fiscal 2002
decreased 35% from the second quarter of fiscal 2001 to $2.4 million. As a
percentage of revenue, research and development expenses decreased in the
second quarter of fiscal 2002 compared with the second quarter of fiscal 2001
to 49.7%. Research and development expenses in the first six months of fiscal
2002 decreased by 22.2% from the first six months of fiscal 2001 to $6.0
million. As a percentage of revenue, research and development expenses
increased in the first six months of fiscal 2002 compared with the first six
months of fiscal 2001 to 62.6%.

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The decrease in research and development expenses in absolute dollars and
as a percentage of revenue for the second quarter of fiscal 2002 and in
absolute dollars for the first six months of fiscal 2002 compared with the same
periods in fiscal 2001 is due to a reduction in salaries and related expenses,
a reduction in depreciation expense and the re-classification of engineering
costs related to engineering service as cost of revenue. The sale of the SAN
management software assets combined with the April 2002 restructuring plan
resulted in a decrease in headcount in the research and development department
and the write-off of research and development related assets. The slight
increase in research and development expenses as a percentage of revenue in the
first six months of fiscal 2002 compared with the first six months of fiscal
2001 is primarily due to the decline in total revenue resulting from the
discontinuance of our tranceiver product sales.

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.

Selling, general and administrative expenses.Selling, general and
administrative expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and information
technology support functions, as well as professional fees, allowance for
doubtful accounts receivable, trade shows and other marketing activities.
Selling, general and administrative expenses in the second quarter of fiscal
2002 decreased by 29.2% from the second quarter of fiscal 2001 to $2.8 million.
As a percentage of revenue, selling, general and administrative expenses
decreased in the second quarter of fiscal 2002 compared with the second
quarter of fiscal 2001 to 58.0%. Selling, general and administrative expenses
in the first six months of fiscal 2002 decreased by 37.8% from the first six
months of fiscal 2001 to $5.5 million. As a percentage of revenue, selling,
general and administrative expenses decreased in the first six months of
fiscal 2002 compared with the first six months of fiscal 2001 to 57.1%.

The decrease in selling, general and administrative expenses in absolute
dollars and as a percentage of revenue for the second quarter and first six
months of fiscal 2002 compared with the same periods in fiscal 2001 is
primarily due to a reduction in salaries and related expenses as a result of a
reduction in the number of personnel engaged in sales, finance and information
technology support functions combined with reduced levels of related expenses.
We anticipate that selling, general and administrative expenses will continue
at a lower level in fiscal 2002 as compared with fiscal 2001 as we continue to
manage costs, maximize operating efficiencies and leverage our current
infrastructure.

Amortization of goodwill (2001 only) and identifiable intangibles.
Amortization of goodwill (2001 only) and identifiable intangibles in the second
quarter of fiscal 2002 decreased by 42.9% from the second quarter of fiscal
2001 to $109. As a percentage of revenue, amortization of goodwill (2001 only)
and identifiable intangibles decreased in the second quarter of fiscal 2002
compared with the second quarter of 2001 to 2.3%. Amortization of goodwill
(2001 only) and identifiable intangibles in the first six months of fiscal 2002
decreased by 50.2% from the first six months of fiscal 2001 to $218. As a
percentage of revenue, amortization of goodwill (2001 only) and other
identifiable intangibles decreased in the first six months of fiscal 2002
compared to the first six months of fiscal 2001 to 2.3%.

In accordance with FAS 142 we ceased amortizing goodwill, beginning in
fiscal year 2002. The amortization expense in the second quarter and first six
months of fiscal 2002 represents the amortization expense related to
capitalized core technology resulting from the acquisition of Arcxel
Technologies in 1998.

We are required to perform goodwill impairment tests on an annual basis
and between annual tests in certain circumstances. We performed an impairment
test of goodwill as of December 31, 2001 and concluded that goodwill was not
impaired.

Amortization of stock-based compensation.Total amortization of
stock-based compensation was $120 and $290 for the second quarter of fiscal
2002 and fiscal 2001, respectively. Of these amounts, $2 and $7, respectively,
were included in cost of revenue. Total amortization of stock-based
compensation was $400 and $816 for the first six months of fiscal 2002 and
fiscal 2001, respectively. Of these amounts $7 and $18,

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respectively, were included in the cost of revenue. At June 30, 2002,
unamortized stock-based compensation was approximately $354.

Restructuring costs.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 $1.8 million.

The restructuring plan included a reduction of approximately 22% of our
workforce across all departments. The workforce reduction resulted in a charge
of $393 relating primarily to severance.

The restructuring plan included the write-off of property and equipment
that was disposed or removed from operations and resulted in a charge of $400.
The property and equipment consisted primarily of computer equipment and
related software, production and engineering equipment, and office equipment,
furniture, and fixtures. We also recorded other restructuring costs of $83
relating primarily to impairment of operating lease agreements for equipment
and professional fees incurred in connection with the restructuring activities.

The restructuring plan included a charge of $899 for the consolidation of
space within our Bothell, Washington corporate headquarters and our engineering
facility in Irvine, California. This charge includes the cost associated with
the idle facility space at these locations for the remainder of the lease
terms.

The restructuring charges are summarized as follows:

|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 
|------------------------------------------------- |  | ------------ | ----- | ------- |  | ------------- | ---- | ------------- |  | - | ---- | ----------- |  | ------------- | --- | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  | Accrued      
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  | Restructuring
|                                                  |  |              |       |         |  | Noncash       |      |               |  |   |      | Costs as of
|Category                                          |  | Total Charge |       | Charges |  | Cash Payments |      | June 30, 2002
|                                                  |  |              |       |         |  |               |      |              
|Workforce reduction                               |  | $            | 393   |         |  | $             |     |               |  | $ | (272 | )           |  | $             | 121 | 
|Consolidation of excess facilities                |  |              | 899   |         |  |               |     |               |  |   | (101 | )           |  |               | 798 | 
|Impairment of long-lived assets and other charges |  |              | 483   |         |  |               | (400 | )             |  |   | (59  | )           |  |               | 24  | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 
|Total                                             |  | $            | 1,775 |         |  | $             | (400 | )             |  | $ | (432 | )           |  | $             | 943 | 
|                                                  |  |              |       |         |  |               |      |               |  |   |      |             |  |               |     | 

Remaining cash expenditures relating to workforce reductions and operating
lease agreements for equipment will be paid through the fourth quarter of
fiscal 2002. Amounts related to excess facilities space will be paid over the
respective lease terms through the first quarter of fiscal 2005. The
restructuring plan has reduced costs in all areas of our operations, favorably
impacting cost of sales, selling, general and administrative expenses and
research and development expenses.

Sale of assets.On April 15, 2002, we closed a transaction with
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 is due and payable 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 $4.5 million.

Other income, net.Other income, net consists of interest income,
interest expense and other miscellaneous income or expense. Other income, net
was $177 and $451 for the second quarter of fiscal 2002 and fiscal 2001,
respectively. Other income, net was $368 and $1.0 million for the first six
months of fiscal 2002 and fiscal 2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of common stock and preferred stock with aggregate proceeds of
approximately $114.8 million. Additionally, we have financed our operations
through capital equipment lease lines, working capital credit facilities, notes
payable, $6.9

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million in net cash received from the sale of our laser diode fabrication
facility and gigabit Ethernet product line and $2.0 million in net cash
received from the sale of our SAN management software assets. Our principal
sources of liquidity at June 30, 2002 consisted of $7.8 million in cash and
cash equivalents and $13.2 million in short-term investments. As a result of
the sale of our SAN management software assets, we received a promissory note
for $2.5 million, and expect to receive the cash proceeds during January 2003.
In addition, we may receive future proceeds of up to an additional $5.0 million
based on the sale by Fujitsu Softek of SAN InSite-based products. However, we
cannot be certain we will receive any future payments based on Fujitsu Softek
sales.

Cash utilized by operating activities was $6.5 million for the six months
ended June 30, 2002, and was due primarily to our operating loss, net of
non-cash expenses, offset by a reduction in working capital required to fund
our operations. Cash provided by investing activities was $9.9 million and was
related to maturities of short-term investments and $2.5 million received in
conjunction with the sale of SAN management software assets offset by purchases
of short-term investments and capital expenditures of $388. Cash used in
financing activities was $612 and was primarily due to payments on our capital
leases offset by proceeds from the exercise of stock options.

As of June 30, 2002, we had an accumulated deficit of $128.6 million and
have never been profitable. We reduced our work force during fiscal 2001 and
did so again during the second quarter of fiscal 2002 through the sale of our
SAN management software assets and by further aligning our resources to execute our
strategies. We plan to grow our revenue base and to continue to control our
expenses in order to achieve profitability. However, we cannot be certain that
we will ever realize sufficient revenue to achieve profitability. Even if we do
achieve profitability, we may not be able to sustain or increase profitability.

We believe that our existing cash, cash equivalent and short-term
investment balances will be sufficient to meet our cash requirements at least
through the next twelve to 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.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued FAS No. 143 Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. The provisions of FAS
143 apply to all entities that incur obligations associated with the retirement
of tangible long-lived assets. FAS 143 is effective for financial statements
issued for fiscal years beginning after June 15, 2002 and will become effective
for us commencing with fiscal year 2003. We do not expect this accounting
pronouncement to have a significant impact on our financial position or results
of operations.

In August 2001, the FASB issued FAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. The objectives of FAS 144 are to
address issues relating to the implementation of FAS No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of, and to develop a model for long-lived assets to be disposed of by sale,
whether previously held and used or newly acquired. Our adoption of FAS 144,
effective December 31, 2001, has not materially impacted our financial
position, results of operations or cash flows.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

We have incurred significant losses since inception, most recently a net
loss of $215 for the three months ended June 30, 2002, which included a gain on
sale of assets of $4.5 million, and we expect to incur losses in the future.
As of June 30, 2002, we had an accumulated deficit of $128.6 million. We
expect to

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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 are difficult to forecast, may fluctuate on a quarterly
basis and may be adversely affected by many factors, which may result in
volatility in our stock price.

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



| |  | the size, terms and fluctuations of customer orders, particularly orders from a limited number of 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 timing of customer orders, a large percentage of which are generated in the last month of each quarter;                                                                                         
| 
| |  | 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;                                                                                                                                          
| 
| |  | the mix of products sold and the mix of distribution channels through which our products are sold; and                                                                                              
| 
| |  | the ability of our contract manufacturer to produce and distribute our products in a timely fashion.                                                                                                

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

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

Our OEMs tend to order sporadically, and their purchases can vary
significantly from quarter to quarter. Our OEMs generally forecast expected
purchases in advance, but frequently do not order as expected and tend to place
purchase orders only shortly before the scheduled delivery date. We plan our
operating expenses based in part on revenue projections derived from our OEMs
forecasts. Because most of our expenses are fixed in the short term or
incurred in advance of anticipated revenue, we may not be able to decrease our
expenses in a timely manner to offset any unexpected shortfall in revenue.
These typical ordering practices cause our backlog to fluctuate significantly.
Moreover, our backlog is not necessarily indicative of actual sales for any
succeeding period, as orders are subject to cancellation or delay by our OEMs
with limited or no penalty.

The loss of one or more key customers could significantly reduce our revenue.

Our success will depend on our continued ability to develop and manage
relationships with significant OEMs, resellers and integrators, as well as on
the sales efforts and success of these customers. Revenue from Avid Technology
and Hewlett-Packard represented 21.1% and 19.3% of revenue, respectively, for
the three months ended June 30, 2002. Although we are attempting to expand our
base of OEMs and resellers, most of our future revenue may come from a small
number of customers.

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



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

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| |  | 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.

Our success is dependent upon acceptance of our Fibre Channel technology and
the growth of the storage market.

Our products are used exclusively in storage devices and SANs.
Accordingly, widespread adoption of remote storage and SANs is critical to our
future success. These markets are evolving rapidly, and it is difficult to
predict their potential size or future growth rate. Our success in generating
revenue in the markets will depend on, among other things, our ability to:



| |  | demonstrate the benefits of SANs and our SAN switch and hub products and embedded switch products to OEMs, resellers and
end-users;                
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | enhance our existing 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 OEMs and resellers; and                                                                     
| 
| |  | accurately predict the direction of industry standards and base our products on those industry standards.                                          

Our failure to do any of these activities would adversely affect our ability to
successfully compete in these markets.

Competing technologies may emerge and we may fail to adopt new technologies on
a timely basis. Failure to utilize new technologies may decrease the demand
for our products.

Emerging technologies, such as Ethernet IP, SCSI (Small Computer System
Interface) over IP 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 SAN interconnect switch products, our InSpeed technology-based products,
and royalties from technology development agreements with customers, and our
success will depend on widespread acceptance of these products and technologies
and our ability to manage transition from older product inventories.

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

Because a significant portion of our revenue is derived from sales of
entry-level hubs, we are dependent on continued widespread market acceptance of
these products.

We currently derive a significant portion of our revenue from sales of our
entry-level hubs. Although we anticipate our revenue from sales of entry-level
hubs to decline, as management of SAN products becomes more important in
larger, more complex SAN implementations, we expect that revenue from our
entry-level hubs will continue to account for a substantial portion of our
total revenue for the foreseeable

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future. If the market does not continue to accept our entry-level hubs,
or if our revenue from entry-level hubs decreases more rapidly than we
anticipate, our total revenue may not grow or may decline significantly.

Competition in our markets may lead to reduced prices and sales of our
products, increased losses and reduced market share.

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

For SAN interconnect switch sales, we compete primarily with Brocade
Communications, McDATA, Qlogic Corporation and Gadzoox Networks. For hub
sales, we compete primarily with Emulex Corporation and Gadzoox Networks. Our
competitors continue to introduce improved 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.

Our embedded switches are targeted at a new and evolving market. As yet,
no Fibre Channel switch providers have introduced similar technology to our
InSpeed range of products. As this market grows we may face competition from
legacy switch providers, or OEMs may choose to develop competing technology
themselves.

Our failure to enhance our existing products and introduce new products on a
timely basis could cause our revenue to fall.

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



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

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

OEMs and resellers typically conduct significant evaluation, testing,
implementation and acceptance procedures before they begin to market and sell
new solutions that include our products. This evaluation process is lengthy
and may range from six months to one year or more. This process is complex and
may require significant sales, marketing and management efforts on our part.
The complexity increases as we simultaneously qualify our products with
multiple customers. As a result, we may expend significant

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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.

Failure to manage our OEM and reseller relationships and expand our
distribution channels could significantly reduce our revenue.

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

Any failure by us to successfully execute our distribution strategy will
negatively impact our revenue.

Our distribution strategy focuses primarily on developing and expanding
indirect distribution channels through OEMs and resellers. Our failure to
execute this strategy successfully could limit our ability to grow or sustain
revenue. Many of our resellers also sell products that compete with our
products. We cannot assure you that our resellers will market our products
effectively or continue to devote the resources necessary to provide us with
effective sales, marketing and technical support.

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

We rely on Suntron Corporation, formerly K*Tec Electronics Corporation, an
outside contract-manufacturing firm, to manufacture, store and ship our
products. We share Suntrons manufacturing and assembly capacity with numerous
companies whose needs may conflict with ours. If Suntron is unable or unwilling
to complete production runs for us in the future, or experiences any
significant delays in completing production runs or shipping our products, the
manufacturing, assembly and sale of our products could be temporarily
suspended. We have in the past experienced delivery problems based on capacity
constraints for production, test and material supply. If our product volume
requirements increase, we may find it necessary to augment our manufacturing
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. While most of the
materials used in our products are standard products, some are proprietary 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 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.

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

We currently purchase several key components from single sources. We
depend on single sources for our card guides, ASICs and our microprocessors. In
addition, we license software from a third party that is incorporated into our
switches and hubs. If we cannot supply products due to a lack of components, or
if we 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 could increase our costs and reduce our
revenue.

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

A component in a discontinued product line experienced an abnormally high
failure rate, which adversely affected our sales and could in the future affect
our operating results.

We observed, and some customers confirmed, that in certain applications
our gigabit interface converters and gigabaud link modules transceivers
manufactured prior to March 1998 that incorporated a third party CD laser
experienced an abnormally high failure rate. As a result of this problem, we
recorded a warranty reserve of $3.6 million in the fourth quarter of fiscal
1998. Although we have settled claims by customers that purchased the majority
of these products, there is a risk that additional claims could occur and that
the total amount reserved may be inadequate to cover all potential claims.
Claims against us in excess of the amount of our reserves could have a material
adverse effect on our business and financial condition. We discontinued the
manufacturing and selling of our transceiver products during the second quarter
of 2001.

If we fail to successfully develop and maintain the Vixel brand, our revenue
may not grow and our stock price may fall.

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

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

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

We believe our future success will depend in large part upon our ability
to attract and retain highly skilled managerial, technical, sales and
marketing, finance and operations personnel. The loss of services of any of our
key personnel could have a negative impact on our business. Some of our
employees, including our Vice President of Worldwide Sales, have only recently
joined us. If we are unable to integrate new employees in a timely and
cost-effective manner, our operating results may suffer. We also need to
increase the number of technical staff members with experience in high-speed
networking applications and ASIC design as we further develop our product line.
Competition for these highly skilled employees in our industry is intense. Our
failure to attract and retain these key employees could have a material adverse
effect on our business, results of operations and financial condition.

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

We plan to increase our international sales, which will subject us to
additional business risks.

Our revenue from international sales represented 42.4% of our total
revenue for the three months ended June 30, 2002. We plan to expand our
international sales, especially in Europe and Asia. Our international sales
growth will be limited if we are unable to establish relationships with
international distributors, establish foreign operations, effectively manage
international sales channels 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 protection of intellectual property rights; and                 
| 
| |  | political and economic instability.                                                

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

Our 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

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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 products must comply with evolving industry standards and government
regulations, and if we cannot develop products that are compatible with these
evolving standards, our business will suffer.

The market for 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 SAN must
utilize the same standards in order to operate together. Our products comprise
only a part of an entire SAN and we depend on the companies that provide other
components, many of which are significantly larger than we are, to support
industry standards as they evolve. We also depend on our competitors to
support these same industry standards. The failure of these providers or our
competitors to support these industry standards could negatively impact market
acceptance of our products.

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

Our intellectual property protection may prove to be inadequate which could
negatively affect our ability to compete.

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

Third-party claims of infringement of their intellectual property rights could
adversely affect our business.

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

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Our stock price has been and may continue to be volatile.

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



| |  | actual or anticipated fluctuations in our operating results;                                                                                                           
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | losses of our key OEMs or reductions in their purchases of our products;                                                                                               
| 
| |  | changes in financial estimates by securities analysts;                                                                                                                 
| 
| |  | changes in market valuations of other technology companies;                                                                                                            
| 
| |  | announcements by us or by our competitors of significant technical
innovations, contracts, acquisitions, strategic partnerships, joint
ventures or capital commitments;
| 
| |  | additions or departures of key personnel; and                                                                                                                          
| 
| |  | future sales of capital stock.                                                                                                                                         

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

We may not be able to meet our future capital requirements, limiting our
ability to grow.

We believe that our existing cash, cash equivalents and short-term
investment balances will be sufficient to meet our capital requirements at
least through the next twelve to eighteen months. However, we may need, or
could elect, to seek additional funding prior to that time. If we need to
raise additional funds, we may not be able to do so on favorable terms, or at
all. If we cannot raise funds on acceptable terms, we may not be able to
develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated funding requirements.

We may engage in future acquisitions that may dilute our stockholders and cause
us to incur debt or assume contingent liabilities.

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

These purchases also may involve numerous risks, including:



| |  | problems assimilating the purchased operations, technologies or products;                     
|- |  | ----------------------------------------------------------------------------------------------
| 
| |  | unanticipated costs associated with the acquisition;                                          
| 
| |  | diversion of managements attention from our core business;                                   
| 
| |  | adverse effects on existing business relationships with suppliers and customers;              
| 
| |  | incorrect estimates made in the accounting for acquisitions;                                  
| 
| |  | risks associated with entering markets in which we have limited, if any, prior experience; and
| 
| |  | potential loss of key employees of purchased organizations.                                   

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 our 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.

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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. QUALITATIVE AND QUANTITATIVE 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 $13.2 million as of June
30, 2002, is invested in commercial paper, government securities and corporate
indebtedness that could experience an adverse decline in fair value should an
increase in interest rates occur. In addition, declines in interest rates
could have an adverse impact on interest earnings for our investment portfolio.
We do not currently hedge against this interest rate exposure.

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




PART II. OTHER INFORMATION




ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our Registration Statement on Form S-1 (No. 333-81347) for the initial
public offering of our common stock became effective September 30, 1999. The
initial public offering resulted in net proceeds to us of $82.8 million.
Expenses related to the offering totaled approximately $1.4 million. Through
June 30, 2002, the proceeds were applied to repay $12.3 million in debt, $6.2
million in capital lease obligations, $4.7 million was used to purchase
property and equipment, $432,000 was used to pay expenses relating to our
restructuring plan and $46.5 million was used for working capital and general
purposes.




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

The Companys Annual Meeting of Stockholders was held on May 22, 2002 in
Bothell, Washington. Of the 23,983,663 shares outstanding as of the record
date, 21,066,223 were present or represented by proxy at the meeting. The
results of the voting on the matters submitted to the stockholders are as
follows.



|1. |  | To elect two (2) Class Three Directors to serve until the 2005 Annual
Meeting of Stockholders and until a successor is duly elected and
qualified.
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------

|                  |  |     |            |          |  |  |         | 
|----------------- |  | --- | ---------- | -------- |  |  | ------- | 
|Name              |  | For |            | Withheld
|                  |  |     |            |         
|James M. McCluney |  |     | 20,834,115 |          |  |  | 232,108 | 
|Timothy M. Spicer |  |     | 20,907,967 |          |  |  | 158,256 | 

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|2. |  | Appointment of PricewaterhouseCoopers LLP as independent auditors of the
Company for its fiscal year ending December 29, 2002.
|-- |  | ------------------------------------------------------------------------------------------------------------------------------

|               |  |  |            | 
|-------------- |  |  | ---------- | 
|Votes For:     |  |  | 20,973,646 | 
|Votes Against: |  |  | 43,964     | 

Directors continuing in office until the 2003 Annual Meeting of Stockholders
are Robert Q. Cordell II, Charles A. Haggerty and Werner F. Wolfen.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K



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

|        |  |                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                               
|NUMBER  |  | DESCRIPTION                                                                                                                                   
|        |  |                                                                                                                                               
|2.1 (1) |  | Asset Purchase Agreement between Registrant and Fujitsu
Software Technology Corporation, dated April 4, 2002 (Exhibit 2.1)                    
|2.2 (1) |  | First Amendment to Asset Purchase Agreement between
Registrant and Fujitsu Software Technology Corporation, dated April
15, 2002 (Exhibit 2.2)
|3.1 (2) |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                                                                 
|3.2 (3) |  | Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)                                                     
|3.3 (2) |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                        
|4.1 (2) |  | Specimen Stock Certificate (Exhibit 4.1)                                                                                                      
|4.2 (2) |  | Amended and Restated Investors Rights Agreement dated
February 17, 1998 (Exhibit 4.2)                                                        
|4.3 (2) |  | First Amendment to Amended and Restated Investors Rights
Agreement dated February 17, 1998 (Exhibit 4.3)                                     
|4.4 (3) |  | Rights Agreement dated November 15, 2000, between the
Registrant and Computer Share Trust Company, Inc. (Exhibit 4.1)                         
|4.5 (3) |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                      
|99.1    |  | Certification of James M. McCluney, Chief Executive Officer and
Kurtis L. Adams, Chief Financial Officer                                      



---

|(1) |  | Incorporated by reference to designated exhibits to the Registrants
current report on Form 8-K filed with the Securities and Exchange
Commission on April 30, 2002.       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 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.
|   
|   
|   
|   
|(3) |  | 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.        



|(b) |  | Reports on Form 8-K:                                                                                                         
|--- |  | -----------------------------------------------------------------------------------------------------------------------------
|   
|    |  | We filed the following reports on Form 8-K during the second quarter
of 2002 and through the filing of this Quarterly Report:



| | (i) |  | Form 8-K dated April 30, 2002 announcing the sale
of certain assets to Fujitsu Software Technology Corporation.
| | --- |  | ---------------------------------------------------------------------------------------------------------------

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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 9, 2002 | 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)
|--------------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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EXHIBIT INDEX

|        |  |                                                                                                                                               
|------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                               
|NUMBER  |  | DESCRIPTION                                                                                                                                   
|        |  |                                                                                                                                               
|2.1 (1) |  | Asset Purchase Agreement between Registrant and Fujitsu
Software Technology Corporation, dated April 4, 2002 (Exhibit 2.1)                    
|2.2 (1) |  | First Amendment to Asset Purchase Agreement between
Registrant and Fujitsu Software Technology Corporation, dated April
15, 2002 (Exhibit 2.2)
|3.1 (2) |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                                                                 
|3.2 (3) |  | Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)                                                     
|3.3 (2) |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                        
|4.1 (2) |  | Specimen Stock Certificate (Exhibit 4.1)                                                                                                      
|4.2 (2) |  | Amended and Restated Investors Rights Agreement dated
February 17, 1998 (Exhibit 4.2)                                                        
|4.3 (2) |  | First Amendment to Amended and Restated Investors Rights
Agreement dated February 17, 1998 (Exhibit 4.3)                                     
|4.4 (3) |  | Rights Agreement dated November 15, 2000, between the
Registrant and Computer Share Trust Company, Inc. (Exhibit 4.1)                         
|4.5 (3) |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                      
|99.1    |  | Certification of James M. McCluney, Chief Executive Officer and
Kurtis L. Adams, Chief Financial Officer                                      



---

|(1) |  | Incorporated by reference to designated exhibits to the Registrants
current report on Form 8-K filed with the Securities and Exchange
Commission on April 30, 2002.       
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | 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.
|   
|   
|   
|   
|(3) |  | 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.        

26