##### 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 September 28, 2003

OR

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

Commission File No. 000-27221

VIXEL CORPORATION

(Exact name of registrant as specified in its charter)


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

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

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



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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o

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

The number of shares outstanding of the Registrants common stock, $.0015
par value, as of October 24, 2003 was 24,919,606.





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TABLE OF CONTENTS



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



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##### Table of Contents



VIXEL CORPORATION

INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 28, 2003

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

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)

|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |          |        |  | 
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------- | ------ | -------- | ------------- |  | ------------ | -------- | ------ |  | 
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          | September 28, |  | December 29,
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          | 2003          |  | 2002        
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |             
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           | ASSETS |          |               |  |              |          |        |  | 
|Current assets                                                                                                                                                                                |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              | Cash and cash equivalents                                                                                                                                                                                         |                           | $      | 12,962   |               |  | $            | 4,347    |       
|                                                                                                                                                                                              | Investments                                                                                                                                                                                                       |                           |        | 9,174    |               |  |              | 12,054   |       
|                                                                                                                                                                                              | Accounts receivable, net of allowance for doubtful accounts
of $229 and $186, respectively                                                                                                                        |                           |        | 3,377    |               |  |              | 2,782    |       
|                                                                                                                                                                                              | Inventories                                                                                                                                                                                                       |                           |        | 1,420    |               |  |              | 1,503    |       
|                                                                                                                                                                                              | Note receivable                                                                                                                                                                                                   |                           |        |         |               |  |              | 2,500    |       
|                                                                                                                                                                                              | Prepaid expenses and other current assets                                                                                                                                                                         |                           |        | 551      |               |  |              | 1,488    |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              |                                                                                                                                                                                                                   | Total current assets      |        |          | 27,484        |  |              |          | 24,674 | 
|                                                                                                                                                                                              | Property and equipment, net                                                                                                                                                                                       |                           |        | 2,269    |               |  |              | 2,243    |       
|                                                                                                                                                                                              | Goodwill and other intangibles, net                                                                                                                                                                               |                           |        | 369      |               |  |              | 423      |       
|                                                                                                                                                                                              | Other assets                                                                                                                                                                                                      |                           |        | 142      |               |  |              | 145      |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              |                                                                                                                                                                                                                   | Total assets              |        | $        | 30,264        |  |              | $        | 27,485 | 
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |          |       
|                                                                                                                                                                                              | LIABILITIES, PREFERRED STOCK, AND STOCKHOLDERS EQUITY                                                                                                                                                            |                           |        |          |               |  |              |          |       
|Current liabilities                                                                                                                                                                           |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              | Current portion of note payable and capital leases                                                                                                                                                                |                           | $      | 465      |               |  | $            | 178      |       
|                                                                                                                                                                                              | Accounts payable                                                                                                                                                                                                  |                           |        | 2,479    |               |  |              | 2,900    |       
|                                                                                                                                                                                              | Accrued liabilities                                                                                                                                                                                               |                           |        | 4,091    |               |  |              | 3,507    |       
|                                                                                                                                                                                              | Deferred revenue                                                                                                                                                                                                  |                           |        | 216      |               |  |              | 735      |       
|                                                                                                                                                                                              | Accrued restructuring costs, current portion                                                                                                                                                                      |                           |        | 291      |               |  |              | 307      |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              |                                                                                                                                                                                                                   | Total current liabilities |        |          | 7,542         |  |              |          | 7,627  | 
|                                                                                                                                                                                              | Note payable and capital leases, net of current portion                                                                                                                                                           |                           |        | 942      |               |  |              | 44       |       
|                                                                                                                                                                                              | Accrued restructuring costs, net of current portion                                                                                                                                                               |                           |        | 104      |               |  |              | 306      |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              |                                                                                                                                                                                                                   | Total liabilities         |        |          | 8,588         |  |              |          | 7,977  | 
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|Commitments and contingencies                                                                                                                                                                 |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|Series B convertible preferred stock, $0.001 par value,
4,400,000 shares designated, 2,863,524 and no shares issued and
outstanding at September 28, 2003 and December 29, 2002,
respectively |                                                                                                                                                                                                                   |                           | 3,622  |          |               |  |             |         
|Stockholders equity                                                                                                                                                                          |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              | Common stock, $0.0015 par value; 60,000,000 shares
authorized; 26,592,117 and 25,115,782 shares issued and
24,696,691 and 24,579,516 shares outstanding at September
28, 2003 and December 29, 2002, respectively |                           |        | 40       |               |  |              | 38       |       
|                                                                                                                                                                                              | Additional paid-in capital                                                                                                                                                                                        |                           |        | 163,812  |               |  |              | 157,925  |       
|                                                                                                                                                                                              | Stock-based compensation                                                                                                                                                                                          |                           |        |         |               |  |              | (117     | )     
|                                                                                                                                                                                              | Notes receivable from stockholders                                                                                                                                                                                |                           |        |         |               |  |              | (3,745   | )     
|                                                                                                                                                                                              | Treasury stock, at cost; 1,895,426 and 536,266 shares at
September 28, 2003 and December 29, 2002, respectively                                                                                                   |                           |        | (4,188   | )             |  |              | (831     | )     
|                                                                                                                                                                                              | Accumulated deficit                                                                                                                                                                                               |                           |        | (141,610 | )             |  |              | (133,762 | )     
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              | Total stockholders equity                                                                                                                                                                                        |                           |        | 18,054   |               |  |              | 19,508   |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |         
|                                                                                                                                                                                              | Total liabilities, preferred stock, and stockholders equity                                                                                                                                                      |                           | $      | 30,264   |               |  | $            | 27,485   |       
|                                                                                                                                                                                              |                                                                                                                                                                                                                   |                           |        |          |               |  |              |          |       

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

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

|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |        |        | 
|------------------------------------------ | ---------------------------------------- | ------------------------ | ------ | ------------------------ | ----- | ----------------------- | ------ | ------------- | ----- | ------------- | ------ | ----- | ------ | - | ------ | ------ | ------ | 
|                                           |                                          |                          |        | Three-month Period Ended |       | Nine-month Period Ended
|                                           |                                          |                          |        |                          |       |                        
|                                           |                                          |                          |        | September 28,            |       | September 29,           |        | September 28, |       | September 29,
|                                           |                                          |                          |        | 2003                     |       | 2002                    |        | 2003          |       | 2002         
|                                           |                                          |                          |        |                          |       |                         |        |               |       |              
|Revenue                                    |                                          | $                        | 6,365  |                          |       | $                       | 5,014  |               |       | $             | 17,944 |       |        | $ | 14,544 |       
|Cost of revenue (1)                        |                                          |                          | 3,181  |                          |       |                         | 2,543  |               |       |               | 9,058  |       |        |   | 7,647  |       
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Gross profit                               |                                          |                          | 3,184  |                          |       |                         | 2,471  |               |       |               | 8,886  |       |        |   | 6,897  |       
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Operating expenses:                        |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|                                           | Research and development (2)             |                          |        | 3,001                    |       |                         |        | 2,271         |       |               |        | 8,467 |        |   |        | 8,240  |       
|                                           | Selling, general and administrative (3)  |                          |        | 2,633                    |       |                         |        | 2,842         |       |               |        | 8,312 |        |   |        | 8,287  |       
|                                           | Amortization of intangible assets        |                          |        |                         |       |                         |        | 109           |       |               |        | 54    |        |   |        | 327    |       
|                                           | Amortization of stock-based compensation |                          |        |                         |       |                         |        | 117           |       |               |        | 115   |        |   |        | 510    |       
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|                                           |                                          |                          | 5,634  |                          |       |                         | 5,339  |               |       |               | 16,948 |       |        |   | 17,364 |       
|                                           | Restructuring costs and adjustments      |                          |        |                         |       |                         |        | (33           | )     |               |        |      |        |   |        | 1,742  |       
|                                           | Loss (Gain) on sale of assets, net       |                          |        | (16                      | )     |                         |        | 10            |       |               |        | (25   | )      |   |        | (4,444 | )     
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|                                           |                                          | Total operating expenses |        |                          | 5,618 |                         |        |               | 5,316 |               |        |       | 16,923 |   |        |        | 14,662 | 
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Loss from operations                       |                                          |                          | (2,434 | )                        |       |                         | (2,845 | )             |       |               | (8,037 | )     |        |   | (7,765 | )     
|                                           | Other income, net                        |                          |        | 24                       |       |                         |        | 196           |       |               |        | 189   |        |   |        | 564    |       
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Net loss                                   |                                          | $                        | (2,410 | )                        |       | $                       | (2,649 | )             |       | $             | (7,848 | )     |        | $ | (7,201 | )     
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Net loss applicable to common stockholders |                                          | $                        | (3,969 | )                        |       | $                       | (2,649 | )             |       | $             | (9,753 | )     |        | $ | (7,201 | )     
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Basic and diluted net loss per share       |                                          | $                        | (0.16  | )                        |       | $                       | (0.11  | )             |       | $             | (0.41  | )     |        | $ | (0.30  | )     
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       
|Weighted-average shares outstanding        |                                          |                          | 24,137 |                          |       |                         | 24,161 |               |       |               | 23,736 |       |        |   | 23,951 |       
|                                           |                                          |                          |        |                          |       |                         |        |               |       |               |        |       |        |   |        |       



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|(1) |  | Includes amortization of stock-based compensation of $0 and $2 for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively, and $2 and $8 for the nine-month periods ended September 28,
2003 and September 29, 2002, respectively.      
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Excludes amortization of stock-based compensation of $0 and $3 for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively, and $1 and $11 for the nine-month periods ended September
28, 2003 and September 29, 2002, respectively.     
|   
|(3) |  | Excludes amortization of stock-based compensation of $0 and $114 for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively, and $114 and $499 for the nine-month periods ended September
28, 2003 and September 29, 2002, respectively.

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

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##### Table of Contents






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

|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |               |        |       |        |  
|----------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------- | ---------------------------------------- | --------------------------------------------------- | ----- | ----------------------- | ------ | ------------- | ------ | ----- | ------ | -
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | Nine-month Period Ended
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                        
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | September 28,           |        | September 29,
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       | 2003                    |        | 2002         
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Cash flows from operating activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          | Net loss                                                                                                        |                                                                        | $                                        | (7,848                                              | )     |                         | $      | (7,201        | )     
|                                                                                          | Adjustments to reconcile net loss to net cash used in operating activities                                      |                                                                        |                                          |                                                     |       |                         |        |               |       
|                                                                                          |                                                                                                                 | Depreciation                                                           |                                          |                                                     | 1,502 |                         |        |               | 2,088  |      
|                                                                                          |                                                                                                                 | Amortization of other intangibles                                      |                                          |                                                     | 54    |                         |        |               | 327    |      
|                                                                                          |                                                                                                                 | Stock-based compensation                                               |                                          |                                                     | 681   |                         |        |               | 518    |      
|                                                                                          |                                                                                                                 | Non-cash restructuring costs                                           |                                          |                                                     |      |                         |        |               | 400    |      
|                                                                                          |                                                                                                                 | Gain on disposal of assets, net                                        |                                          |                                                     | (25   | )                       |        |               | (4,444 | )    
|                                                                                          |                                                                                                                 | Provisions for doubtful accounts, inventory obsolescence, and warranty |                                          |                                                     | 618   |                         |        |               | (415   | )    
|                                                                                          |                                                                                                                 | Changes in:                                                            |                                          |                                                     |       |                         |        |               |        |      
|                                                                                          |                                                                                                                 |                                                                        | Accounts receivable                      |                                                     |       | (387                    | )      |               |        | (682  | )     
|                                                                                          |                                                                                                                 |                                                                        | Inventories                              |                                                     |       | 147                     |        |               |        | 1,255 |       
|                                                                                          |                                                                                                                 |                                                                        | Prepaid expenses and other assets        |                                                     |       | 940                     |        |               |        | 478   |       
|                                                                                          |                                                                                                                 |                                                                        | Accounts payable and accrued liabilities |                                                     |       | (727                    | )      |               |        | (322  | )     
|                                                                                          |                                                                                                                 |                                                                        | Deferred revenue                         |                                                     |       | (519                    | )      |               |        | (325  | )     
|                                                                                          |                                                                                                                 |                                                                        | Accrued restructuring costs              |                                                     |       | (218                    | )      |               |        | 731   |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash used in operating activities               |       |                         | (5,782 | )             |        |       | (7,592 | )
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Cash flows from investing activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          | Purchase of short-term investments                                                                              |                                                                        |                                          | (10,596                                             | )     |                         |        | (11,683       | )     
|                                                                                          | Maturities of investments                                                                                       |                                                                        |                                          | 13,476                                              |       |                         |        | 18,314        |       
|                                                                                          | Collection of note receivable                                                                                   |                                                                        |                                          | 2,500                                               |       |                         |        |              |       
|                                                                                          | Purchases of property and equipment                                                                             |                                                                        |                                          | (1,544                                              | )     |                         |        | (660          | )     
|                                                                                          | Proceeds from sales of assets                                                                                   |                                                                        |                                          | 41                                                  |       |                         |        | 2,155         |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash provided by investing activities           |       |                         | 3,877  |               |        |       | 8,126  |  
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Cash flows from financing activities                                                      |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          | Proceeds from the sale of Series B Convertible Preferred Stock and common
stock warrants, net of offering costs |                                                                        |                                          | 7,750                                               |       |                         |        |              |       
|                                                                                          | Receipts of payments on stockholder notes receivable                                                            |                                                                        |                                          | 388                                                 |       |                         |        |              |       
|                                                                                          | Proceeds from note payable                                                                                      |                                                                        |                                          | 1,350                                               |       |                         |        | 319           |       
|                                                                                          | Principal payments on note payable and capital lease obligations                                                |                                                                        |                                          | (165                                                | )     |                         |        | (1,471        | )     
|                                                                                          | Proceeds from ESPP stock purchase                                                                               |                                                                        |                                          | 233                                                 |       |                         |        | 198           |       
|                                                                                          | Proceeds from exercise of stock options                                                                         |                                                                        |                                          | 964                                                 |       |                         |        | 332           |       
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|                                                                                          |                                                                                                                 |                                                                        |                                          | Net cash provided by (used in) financing activities |       |                         | 10,520 |               |        |       | (622   | )
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Net increase in cash and cash equivalents                                                 |                                                                                                                 |                                                                        | 8,615                                    |                                                     |       |                         | (88    | )            
|Cash and cash equivalents, beginning of period                                            |                                                                                                                 |                                                                        | 4,347                                    |                                                     |       |                         | 5,036  |              
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Cash and cash equivalents, end of period                                                  |                                                                                                                 | $                                                                      | 12,962                                   |                                                     |       | $                       | 4,948  |              
|                                                                                          |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Cash paid for interest                                                                    |                                                                                                                 | $                                                                      | 13                                       |                                                     |       | $                       | 52     |              
|Use of prepaid expense to acquire property and equipment                                  |                                                                                                                 | $                                                                      |                                         |                                                     |       | $                       | 120    |              
|Sale of SAN InSite assets in exchange for note receivable                                 |                                                                                                                 | $                                                                      |                                         |                                                     |       | $                       | 2,500  |              
|Equipment purchased under capital leases                                                  |                                                                                                                 | $                                                                      |                                         |                                                     |       | $                       | 53     |              
|Treasury stock acquired in satisfaction of officer notes receivable                       |                                                                                                                 | $                                                                      | 3,357                                    |                                                     |       | $                       |       |              
|Accretion of Series B Convertible Preferred Stock deemed dividend                         |                                                                                                                 | $                                                                      | 778                                      |                                                     |       | $                       |       |              
|Beneficial conversion amount recognized upon conversion of Series B                       |                                                                                                                 |                                                                        |                                          |                                                     |       |                         |        |              
|Convertible Preferred Stock into common stock                                             |                                                                                                                 | $                                                                      | 1,127                                    |                                                     |       | $                       |       |              
|Portion of Series B Convertible Preferred Stock allocated to common warrants              |                                                                                                                 | $                                                                      | 1,108                                    |                                                     |       | $                       |       |              
|Deemed dividend for beneficial conversion feature on Series B Convertible
Preferred Stock |                                                                                                                 | $                                                                      | 3,246                                    |                                                     |       | $                       |       |              

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

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VIXEL CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed financial statements as of September 28, 2003
and for the three- and nine-month periods ended September 28, 2003 and
September 29, 2002 are unaudited; however, in the opinion of management, the
interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial position,
results of operations, and cash flows for the interim periods. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to the rules
and regulations of the Securities and Exchange Commission. Results of
operations and cash flows for the interim periods are not necessarily
indicative of future financial results. You should read these interim financial
statements in conjunction with Managements Discussion and Analysis of
Financial Condition and Results of Operations and the audited financial
statements and notes thereto included in our Annual Report on Form 10-K, as
amended, for the fiscal year ended December 29, 2002.

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

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

NOTE 2. NET LOSS PER SHARE

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

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

|                                                                                                                   |  |   |                          |   |                         |   |               |   |               |   |        |   |  |   |        |   | 
|------------------------------------------------------------------------------------------------------------------ |  | - | ------------------------ | - | ----------------------- | - | ------------- | - | ------------- | - | ------ | - |  | - | ------ | - | 
|                                                                                                                   |  |   | Three-month Period Ended |   | Nine-month Period Ended
|                                                                                                                   |  |   |                          |   |                        
|                                                                                                                   |  |   | September 28,            |   | September 29,           |   | September 28, |   | September 29,
|                                                                                                                   |  |   | 2003                     |   | 2002                    |   | 2003          |   | 2002         
|                                                                                                                   |  |   |                          |   |                         |   |               |   |              
|Net loss                                                                                                           |  | $ | (2,410                   | ) |                         | $ | (2,649        | ) |               | $ | (7,848 | ) |  | $ | (7,201 | )
|Periodic accretion
of the Series B Convertible
Preferred Stock to
the mandatory
redemption amount                  |  |   | (432                     | ) |                         |   |              |   |               |   | (778   | ) |  |   |       |  
|Recognition of
Series B Convertible
Preferred Stock
beneficial
conversion amount
upon conversion
into common stock |  |   | (1,127                   | ) |                         |   |              |   |               |   | (1,127 | ) |  |   |       |  
|                                                                                                                   |  |   |                          |   |                         |   |               |   |               |   |        |   |  |   |        |  
|Net loss applicable
to common stockholders                                                                         |  | $ | (3,969                   | ) |                         | $ | (2,649        | ) |               | $ | (9,753 | ) |  | $ | (7,201 | )
|                                                                                                                   |  |   |                          |   |                         |   |               |   |               |   |        |   |  |   |        |  

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The following table sets forth the antidilutive securities excluded from
the diluted net loss per share calculation for the three- and nine-month
periods ended September 28, 2003 and September 29, 2002 (in thousands of
shares):

|                                   |  |               |        |               |  |  |       | 
|---------------------------------- |  | ------------- | ------ | ------------- |  |  | ----- | 
|                                   |  | September 28, |        | September 29,
|                                   |  | 2003          |        | 2002         
|                                   |  |               |        |              
|Convertible preferred stock        |  |               | 2,863  |               |  |  |      | 
|Options to purchase common stock   |  |               | 7,185  |               |  |  | 5,750 | 
|Warrants to purchase common stock  |  |               | 1,277  |               |  |  | 284   | 
|Common stock subject to repurchase |  |               |       |               |  |  | 145   | 
|                                   |  |               |        |               |  |  |       | 
|Total                              |  |               | 11,325 |               |  |  | 6,179 | 
|                                   |  |               |        |               |  |  |       | 

NOTE 3. STOCK OPTIONS

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

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

|                                                                   |  |                          |        |                         |  |               |        |               |  |   |         |   |  |   |        |  
|------------------------------------------------------------------ |  | ------------------------ | ------ | ----------------------- |  | ------------- | ------ | ------------- |  | - | ------- | - |  | - | ------ | -
|                                                                   |  | Three-month Period Ended |        | Nine-month Period Ended
|                                                                   |  |                          |        |                        
|                                                                   |  | September 28,            |        | September 29,           |  | September 28, |        | September 29,
|                                                                   |  | 2003                     |        | 2002                    |  | 2003          |        | 2002         
|                                                                   |  |                          |        |                         |  |               |        |              
|Net loss applicable to common
stockholders as reported             |  | $                        | (3,969 | )                       |  | $             | (2,649 | )             |  | $ | (9,753  | ) |  | $ | (7,201 | )
|Employee stock based compensation
included in net loss as reported |  |                          |       |                         |  |               | 119    |               |  |   | 117     |   |  |   | 518    |  
|Stock based compensation pursuant
to fair value accounting         |  |                          | (1,001 | )                       |  |               | (54    | )             |  |   | (3,541  | ) |  |   | (2,043 | )
|                                                                   |  |                          |        |                         |  |               |        |               |  |   |         |   |  |   |        |  
|Pro forma net loss applicable to
common stockholders               |  | $                        | (4,970 | )                       |  | $             | (2,584 | )             |  | $ | (13,177 | ) |  | $ | (8,726 | )
|                                                                   |  |                          |        |                         |  |               |        |               |  |   |         |   |  |   |        |  
|Basic and diluted net loss per share                               |  | $                        | (0.16  | )                       |  | $             | (0.11  | )             |  | $ | (0.41   | ) |  | $ | (0.30  | )
|                                                                   |  |                          |        |                         |  |               |        |               |  |   |         |   |  |   |        |  
|Pro forma net loss per share                                       |  | $                        | (0.21  | )                       |  | $             | (0.11  | )             |  | $ | (0.56   | ) |  | $ | (0.36  | )
|                                                                   |  |                          |        |                         |  |               |        |               |  |   |         |   |  |   |        |  

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

|                        |  |                                  |      |                    |  |  |      |  
|----------------------- |  | -------------------------------- | ---- | ------------------ |  |  | ---- | -
|                        |  | For the
three-month period ended
|                        |  |                                 
|                        |  | September 28, 2003               |      | September 29, 2002
|                        |  |                                  |      |                   
|Expected term           |  | 5 years                          |      | 5 years           
|Risk-free interest rate |  |                                  | 3.42 | %                  |  |  | 2.79 | %
|Dividend yield          |  |                                  | 0    | %                  |  |  | 0    | %
|Volatility              |  |                                  | 100  | %                  |  |  | 100  | %

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NOTE 4. INVENTORIES

Inventories consist of the following:

|                                              |  |               |        |              |  |   |        |  
|--------------------------------------------- |  | ------------- | ------ | ------------ |  | - | ------ | -
|                                              |  | September 28, |        | December 29,
|                                              |  | 2003          |        | 2002        
|                                              |  |               |        |             
|Raw materials                                 |  | $             | 2,827  |              |  | $ | 3,244  |  
|Finished goods                                |  |               | 1,002  |              |  |   | 1,843  |  
|Less: write-down to expected realizable value |  |               | (2,409 | )            |  |   | (3,584 | )
|                                              |  |               |        |              |  |   |        |  
|                                              |  | $             | 1,420  |              |  | $ | 1,503  |  
|                                              |  |               |        |              |  |   |        |  

NOTE 5. WARRANTY

We offer product warranties of one to five years. Warranty coverages
provide for the repair or replacement of defective products, at our option.
Estimated future warranty obligations related to certain products are provided
by charges to operations in the period in which the related revenue is
recognized and reported on the balance sheet as a component of accrued
liabilities. These estimates are based on historical warranty experience and
other relevant information of which we are aware. Costs associated with
warranty coverage may include replacement product, parts, labor and other
costs. The following table sets forth the amount of warranty accrued, expensed
and utilized or adjusted during the nine-month period ended September 28, 2003.

|                                           |  |            |       |            |  |              |     |           |  |                |        |   |  |   |       | 
|------------------------------------------ |  | ---------- | ----- | ---------- |  | ------------ | --- | --------- |  | -------------- | ------ | - |  | - | ----- | 
|                                           |  |            |       |            |  | Amounts      |     |           |  |                |        |   |  |  
|                                           |  | Balance at |       | Charged to |  |              |     |           |  |                |        |  
|                                           |  | Beginning  |       | Costs and  |  |              |     |           |  | Balance at End
|                                           |  | of Period  |       | Expenses   |  | (Deductions) |     | of Period
|                                           |  |            |       |            |  |              |     |          
|Accrued warranty costs                     |  |            |       |            |  |              |     |           |  |                |        |   |  |   |       | 
|Nine-month period ended September 28, 2003 |  | $          | 1,749 |            |  | $            | 890 |           |  | $              | (1,302 | ) |  | $ | 1,337 | 
|                                           |  |            |       |            |  |              |     |           |  |                |        |   |  |   |       | 
|Nine-month
period ended September 29, 2002 |  | $          | 2,135 |            |  | $            | 259 |           |  | $              | (722   | ) |  | $ | 1,672 | 
|                                           |  |            |       |            |  |              |     |           |  |                |        |   |  |   |       | 

NOTE 6. SERIES B CONVERTIBLE PREFERRED STOCK

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

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

In the event of our liquidation, dissolution or winding up, the holders of
Series B Convertible Preferred Stock, are generally entitled to receive a
liquidation preference over the holders of Common Stock equal to the greater of
(i) $2.10 per share of Series B Convertible Preferred Stock held and any
declared but unpaid dividends, and (ii) the

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amount that would have been paid to the holders of Series B Convertible
Preferred Stock had such preferred shares been converted to Common Stock
immediately prior to such liquidation, dissolution or winding up.

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

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

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

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

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

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During July 2003, we registered, on behalf of certain stockholders,
1,286,560 shares of common stock underlying the conversion of 946,000 of the
3,809,524 shares of Series B Convertible Preferred Stock issued, 283,800 of
the 1,142,856 shares of common stock that may be issued upon the exercise of
warrants, and 56,760 shares of common stock that may be issued upon conversion
of shares of Series B Convertible Preferred Stock issued as dividends. During
August 2003, the stockholders for whom the shares of common stock were
registered converted their shares of Series B Convertible Preferred Stock into
shares of our common stock. As previously noted, the conversion of the
preferred stock into common stock prior to the stated redemption date results
in the immediate recognition of the remaining beneficial conversion amounts for
the shares converted. During the quarter ended September 28, 2003, certain
stockholders converted 960,495 shares of Series B Convertible Preferred Stock
into shares of common stock. This transaction resulted in the recognition of
a deemed dividend of $1.1 million due to unaccreted beneficial conversion
amounts relating to the converted shares. The deemed dividend was recorded to
additional paid in capital and as a component of net loss applicable to common
stockholders

NOTE 7. NOTES RECEIVABLE FROM STOCKHOLDERS

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

As of September 28, 2003, all notes receivable from stockholders had been
settled in full.

NOTE 8. Note Payable

On September 23, 2003 Vixel entered into a loan and security agreement
with a lending institution for a $5.0 million credit facility that provides
$2.5 million of capital equipment financing and up to $2.5 million of financing
for general corporate use. The facility includes customary covenants and is
collateralized by all of our tangible and intellectual property
assets. Due to the loan agreement being entered into less than three
business days from our quarter end, the lending institution agreed to
defer the effective date of certain loan covenants, through the
issuance of a waiver of those covenants, to provide for the
administrative implementation of the agreement. The
$2.5 million capital equipment portion of the facility is available to borrow
from for twelve months after signing with each borrowing maturing 36 months
from the date of borrowing with monthly payments of principal and interest
calculated at a variable rate of up to Prime plus 1.50%. Approximately $1.4 million was borrowed from
the equipment facility during the quarter. The $2.5 million general use
facility bears interest of Prime plus 0.75% and is available until and matures on September 23, 2004 and includes
borrowing limits based on receivables. As of September 28, 2003 no amounts have
been borrowed from this facility and approximately $2.1 million was available
for borrowing based on the borrowing base calculation set-forth in the loan and
security agreement.

NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS

During June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143). The provisions of FAS 143 apply to all entities
that incur obligations associated with the retirement of tangible long-lived
assets. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Under SFAS 143, a liability for an asset
retirement obligation (i.e. liability) is recognized at fair value during the
period in which it is incurred. The offset to the liability is capitalized as a
component of the carrying amount of the asset bringing rise to the future
retirement obligation. We adopted SFAS 143 effective December 30, 2002, the
beginning of our 2003 fiscal year. Our adoption of SFAS 143 did not impact our
financial position, results of operations or cash flows for the three- or
nine-month periods ended September 28, 2003.

During December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends the guidance set forth in Statement of
Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation
(SFAS 123) and

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provides guidance for companies that elect to change their accounting for
employee stock based compensation to the fair value method of accounting. The
statement also expands and increases the frequency of the existing disclosure
requirements to require more prominent and quarterly disclosure of the effects
of stock based compensation pursuant to the provisions of SFAS 123. We adopted
SFAS 148 effective December 30, 2002 and have included the expanded interim
disclosures in the footnotes to our condensed financial statements contained
herein. Our adoption of SFAS 148 did not impact our financial position, results
of operations or cash flows for the three- or nine-month periods ended
September 28, 2003.

During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that such financial instruments that are within its scope be
classified as a liability or an asset. SFAS 150 is effective for us for
financial instruments entered into or modified after May 31, 2003 and for
fiscal periods beginning after June 15, 2003 for existing financial
instruments. During October 2003, the FASB voted to defer the provisions of
paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable
noncontrolling interests. We will evaluate the applicability of any changes to
these provisions upon their reissuance. As we have not issued financial
instruments that fall within the scope of SFAS 150, in its current form, there
was no impact to our financial position, results of operations or cash-flows
as a result of the issuance of this pronouncement.

NOTE 10. SUBSEQUENT EVENT

On October 8, 2003, we announced the signing of a definitive agreement for
Emulex Corporation to acquire us. Under the terms of the agreement, Emulex will
acquire all of our outstanding shares of preferred and common stock for $10 per
share in cash, through a cash tender offer. Shares not acquired by Emulex in
the tender offer will be acquired in a second step merger in which our
remaining stockholders will receive the same cash price per share as that paid
in the tender offer. In addition, Emulex will assume all of our existing vested
and unvested stock options. Our board of directors has unanimously approved the
acquisition and has voted to recommend that our stockholders accept the tender
offer and tender their shares. In addition, a principal stockholder has agreed
to tender shares representing approximately 11% of the fully diluted shares in
support of the transaction. The tender offer is expected to be completed during
November 2003, subject to regulatory approvals and certain closing conditions,
including the tender of a majority of our shares of capital stock on a
fully-diluted basis.




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 report and with Managements
Discussion and Analysis of Financial Condition and Results of Operations and
the audited financial statements and notes thereto included in our Annual
Report on Form 10-K, as amended, for the fiscal year ended December 29, 2002.

This document contains forward-looking statements that involve risks and
uncertainties. The statements contained in this report that are not purely
historical are forward-looking statements within the meaning of Section 21E of
the Securities Exchange Act of 1934, as amended. In some cases, you can
identify forward-looking statements by terminology such as may, will,
should, expect, plan, anticipate, believe, estimate, predict,
potential or continue, the negative of such terms or other comparable
terminology. These statements are only predictions and actual events or results
may differ materially. Some of the risks and uncertainties that may affect
future results are discussed under the caption Factors That May Affect Results
of Operations and Financial Condition in Item 7 of our Annual Report on From
10-K, as amended, for the fiscal year ended December 29, 2002.

Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of the
forward-looking statements. We are under no duty to update any of the
forward-looking statements after the date hereof to conform such statements to
actual results or to changes in our expectations.

OVERVIEW

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

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Our SOC
incorporates our InSpeedTM technology, which is our patents
pending advanced switching architecture that results in a single chip capable
of handling multiple Fibre Channel devices. The InSpeed SOC can be embedded
into storage enclosure devices such as redundant array of independent disks, or
RAID, enclosures, tape libraries, network attached storage environments and
next generation storage systems to enhance the performance and scaling of these
solutions as well as improve device reliability, availability and
serviceability. We are also using the InSpeed SOC in Fibre Channel switches and
blades that can be embedded by OEMs in their storage solutions. This technology
can also be used to offer high performance, low cost switches for entry level
SANs. Revenue from InSpeed-based products represented approximately 76% of our
revenue for the first nine-months of fiscal 2003 and 77% of our revenue for the
three-month period ended September 28, 2003.

We derive substantially all of our revenue from the sale of Fibre Channel
products, including embedded storage switch products, and SAN switches and hubs
to a limited number of OEMs. During the third fiscal quarter of 2003 HP
Corporation represented 55.1% of revenue, compared with the same period of 2002
during which HP and Avid Technology represented 60.4% and 12.4% of revenue,
respectively. During the first nine-months of 2003 HP represented 54.4% of
revenue, compared with the same period of 2002 during which HP and Avid
represented 34.5% and 14.7% of revenue, respectively. No other customers
represented greater than 10% of revenue during the periods noted. While we are
seeking to diversify our customer base and expand the portion of our revenue
that is derived from sales through various distribution channels, we anticipate
that our operating results will continue to depend on volume sales to a
relatively small number of OEMs.

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

Pending Acquisition of Vixel

On October 8, 2003, we announced the signing of a definitive agreement for
Emulex Corporation to acquire us. Under the terms of the agreement, Emulex will
acquire all of our outstanding shares of preferred and common stock for $10 per
share in cash, through a cash tender offer. Shares not acquired by Emulex in
the tender offer will be acquired in a second step merger in which our
remaining stockholders will receive the same cash price per share as that paid
in the tender offer. In addition, Emulex will assume all of our existing vested
and unvested stock options. Our board of directors has unanimously approved the
acquisition and has voted to recommend that our stockholders accept the tender
offer and tender their shares. In addition, a principal stockholder has agreed
to tender shares representing approximately 11% of the fully diluted shares in
support of the transaction. The tender offer is expected to be completed during
November 2003, subject to regulatory approvals and certain closing conditions,
including the tender of a majority of our shares of capital stock on a
fully-diluted basis.

Critical Accounting Policies

General

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

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Revenue Recognition

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

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

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

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

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

Allowance for Doubtful Accounts

We evaluate the collectibility of our trade receivables based on a
combination of factors. We regularly analyze our significant customer accounts,
and, should we become aware of a specific customers inability to meet its
obligations to us, we record a specific reserve for bad debt to reduce the
related receivable to the amount we reasonably believe is collectible. We also
record reserves for bad debt for all other customers based on a variety of
factors including the length of time the receivables are past due, the
financial health of the customer, macroeconomic considerations and historical
experience. If circumstances related to specific customers change, our
estimates of the recoverability of receivables could be further adjusted,
possibly adversely and materially, and adjustments, whether favorable or
unfavorable, would be recorded during the period in which the change in
circumstances is identified.

Warranty Provision

We provide for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs
and processes, including actively monitoring and evaluating the quality of our
contract manufacturer and other suppliers, our estimated warranty obligation is
affected by product failure rates, product failures outside of our historical
experience, and other costs incurred in correcting a product failure. We

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believe that our current warranty reserve is appropriate. However,
projected product failure rates or costs could differ adversely and materially
from our estimates, and revisions to the estimated warranty reserve would be
required during the period in which changes in estimates are identified.

Inventory

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

RESULTS OF OPERATIONS

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

|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |       |       | 
|-------------------- | ---------------------------------------- | ------------------------ | ----- | ------------------------ | ---- | ----------------------- | ----- | ------------- | ----- | ------------- | ----- | ---- | ---- |  | ----- | ----- | ----- | 
|                     |                                          |                          |       | Three-month Period Ended |      | Nine-month Period Ended
|                     |                                          |                          |       |                          |      |                        
|                     |                                          |                          |       | September 28,            |      | September 29,           |       | September 28, |       | September 29,
|                     |                                          |                          |       | 2003                     |      | 2002                    |       | 2003          |       | 2002         
|                     |                                          |                          |       |                          |      |                         |       |               |       |              
|Revenue              |                                          |                          | 100.0 | %                        |      |                         | 100.0 | %             |       |               | 100.0 | %    |      |  | 100.0 | %    
|Cost of revenue      |                                          |                          | 50.0  |                          |      |                         | 50.7  |               |       |               | 50.5  |      |      |  | 52.6  |      
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|Gross profit         |                                          |                          | 50.0  |                          |      |                         | 49.3  |               |       |               | 49.5  |      |      |  | 47.4  |      
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|Operating expenses   |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|                     | Research and development                 |                          |       | 47.1                     |      |                         |       | 45.3          |       |               |       | 47.2 |      |  |       | 56.7  |      
|                     | Selling, general and administrative      |                          |       | 41.4                     |      |                         |       | 56.7          |       |               |       | 46.3 |      |  |       | 57.0  |      
|                     | Amortization of intangible assets        |                          |       | 0.0                      |      |                         |       | 2.2           |       |               |       | 0.3  |      |  |       | 2.2   |      
|                     | Amortization of stock-based compensation |                          |       | 0.0                      |      |                         |       | 2.3           |       |               |       | 0.6  |      |  |       | 3.5   |      
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|                     |                                          |                          | 88.5  |                          |      |                         | 106.5 |               |       |               | 94.4  |      |      |  | 119.4 |      
|                     | Restructuring costs and adjustments      |                          |       | 0.0                      |      |                         |       | (0.7          | )     |               |       | 0.0  |      |  |       | 12.0  |      
|                     | Gain on sale of assets, net              |                          |       | (0.3                     | )    |                         |       | 0.2           |       |               |       | (0.1 | )    |  |       | (30.6 | )    
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|                     |                                          | Total operating expenses |       |                          | 88.2 |                         |       |               | 106.0 |               |       |      | 94.3 |  |       |       | 100.8 | 
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|Loss from operations |                                          |                          | (38.2 | )                        |      |                         | (56.7 | )             |       |               | (44.8 | )    |      |  | (53.4 | )    
|Other income, net    |                                          |                          | 0.3   |                          |      |                         | 3.9   |               |       |               | 1.1   |      |      |  | 3.9   |      
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      
|Net loss             |                                          |                          | (37.9 | )%                       |      |                         | (52.8 | )%            |       |               | (43.7 | )%   |      |  | (49.5 | )%   
|                     |                                          |                          |       |                          |      |                         |       |               |       |               |       |      |      |  |       |      

RESTRUCTURING

During April 2002, we adopted and implemented a restructuring plan to
reduce our cost structure and focus on our InSpeed-based product development
and sales. As a result of the plan, we recorded restructuring charges of $1.7
million, net of adjustments. The restructuring plan included, among other
charges, a charge of $0.9 million for the consolidation of space within our
Bothell, Washington corporate headquarters and our engineering facility in
Irvine, California. This charge included the costs associated with the idle
facility space at these locations for the remainder of the lease terms. At
December 29, 2002 the $0.6 million of accrued restructuring liability remaining
was related solely to excess facilities at our Bothell, Washington location
through the first quarter of fiscal 2005. During the nine-month period ended
September 28, 2003 the restructuring liability was reduced to $0.4 million due
to lease payments made on our Bothell facility.

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SALE OF ASSETS

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

THREE-MONTH PERIOD ENDED SEPTEMBER 28, 2003 COMPARED WITH THE THREE-MONTH
PERIOD ENDED SEPTEMBER 29, 2002

Revenue.Revenue during the three-month periods ended September 28, 2003
and September 29, 2002 was derived from our InSpeed, hub and switch products.
Revenue increased 28% to $6.4 million from $5.0 million for the three-month
periods ended September 28, 2003 and September 29, 2002, respectively. The $1.4
million increase was due to a $2.3 million increase in revenue from our InSpeed
family of products offset by declines in our hub and non-InSpeed switch
products. InSpeed products represented 77% of revenue for the three-month
period ended September 28, 2003 compared with 53% for the three-month period
ended September 29, 2002. Revenue generated by our non-InSpeed products
declined an aggregate of 38% to $1.5 million from $2.4 million for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively.

Cost of revenue. Cost of revenue includes the cost to acquire finished
products from a third party manufacturer of our products, expenses we incur
related to inventory management, product quality testing, customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Cost of revenue increased 28% to $3.2 million from $2.5 million for the
three-month periods ended September 28, 2003 and September 29, 2002,
respectively. This $0.7 million increase was due primarily to the 28% increase
in revenue. Margins on sales increased to 50.0% of revenue in the current
period compared with 49.3% during the same period in the prior year. The
improvement in margins is due to higher-margin InSpeed products comprising a
larger percentage of total revenue during the three-month period ended
September 28, 2003 compared with the three-month period ended September 29,
2002.

Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancement of our products.
Research and development expenses increased 32% to $3.0 million from $2.3
million for the three-month periods ended September 28, 2003 and September 29,
2002, respectively. This increase is primarily due to $0.4 million increase in
compensation related costs, $0.1 million increase in design engineering and
prototype expenses, and $0.1 million increase in facility costs. The increase
in compensation costs reflects increased staffing and use of temporary contract
personnel.

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

Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and information
technology support functions, as well as professional fees, allowance for
doubtful accounts receivable, and expenses related to various marketing
activities. Selling, general and administrative expenses decreased 7% to $2.6
million from $2.8 million for the three-month periods ended September 28, 2003
and September 29, 2002, respectively. This $0.2 million decrease is primarily
due to a $0.5 million decrease in compensation related costs offset by $0.2

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million in increased professional services and $0.1 million in increased
travel costs. As a percentage of revenue, selling, general and administrative
expenses decreased to 41% from 57% for the three-month periods ended September
28, 2003 and September 29, 2002, respectively, due to increased revenues and
decreased expenses during the third quarter of 2003.

Amortization of intangible assets. No amortization of intangible assets
was recorded for the three-month period ended September 28, 2003 as all
intangible assets became fully amortized during previous periods. This compares
to amortization of $0.1 million recorded during the three-month period ended
September 29, 2002. Goodwill is not amortized, but is subject to periodic
impairment testing. No impairment of goodwill was noted during the periods
presented.

Amortization of stock-based compensation. No amortization of stock based
compensation was recorded for the three-month period ended September 28, 2003
as all deferred stock compensation had been fully amortized during previous
periods. This compares to amortization of $0.1 million recorded during the
three-month period ended September 29, 2002.

NINE-MONTH PERIOD ENDED SEPTEMBER 28, 2003 COMPARED WITH THE NINE-MONTH PERIOD
ENDED SEPTEMBER 29, 2002

Revenue.Revenue during the nine-month periods ended September 28, 2003
and September 29, 2002 was derived from our InSpeed, hub and switch products.
Revenue increased 23% to $17.9 million from $14.5 million for the nine-month
periods ended September 28, 2003 and September 29, 2002, respectively. This
$3.4 million increase was due to a $9.0 million increase in revenue from our
InSpeed family of products offset by declines in our hub and non-InSpeed switch
products of $4.6 million and a decline in engineering and service revenue of
$1.0 million. InSpeed products represented 76% of revenue for the nine-month
period ended September 28, 2003 compared with 32% for the nine-month period
ended September 29, 2002.

Cost of revenue. Cost of revenue includes the cost to acquire finished
products from a third party manufacturer of our products, expenses we incur
related to inventory management, product quality testing, customer order
fulfillment, and provisions for warranty expenses and inventory obsolescence.
Cost of revenue increased 20% to $9.1 million from $7.6 million for the
nine-month periods ended September 28, 2003 and September 29, 2002,
respectively. This $1.5 million increase was due primarily to the 23% increase
in revenue partially offset by improved margins. Margins on sales increased to
49.5% of revenue during the current period compared with 47.4% during the same
period in the prior year. The improvement in margins is due to higher-margin
InSpeed products comprising a larger percentage of total revenue during the
nine-month period ended September 28, 2003 compared with the nine-month period
ended September 29, 2002.

Research and development expenses. Research and development expenses
consist primarily of salaries and related expenses for personnel engaged in the
design, development and sustaining engineering of our products, consulting and
outside service fees, costs for prototype and test units and other expenses
related to the design, development, testing and enhancement of our products.
Research and development expenses increased 4% to $8.5 million from $8.2
million for the nine-month periods ended September 28, 2003 and September 29,
2002, respectively. This $0.3 million increase is primarily due to a $0.5
million increase in engineering design, software and prototype expenses and
$0.1 million increase in facility costs offset by $0.3 million in compensation
related expense reductions primarily due to the sale of our SAN management
software assets combined with implementation of our restructuring plan, both of
which occurred during the second quarter of 2002.

Selling, general and administrative expenses. Selling, general and
administrative expenses consist primarily of salaries, commissions and related
expenses for personnel engaged in marketing, sales, finance and information
technology support functions, as well as professional fees, allowance for
doubtful accounts receivable, and expenses related to various marketing
activities. Selling, general and administrative expenses remained steady at
$8.3 million for the nine-month periods ended September 28, 2003 and September
29, 2002. As a percentage of revenue, selling, general and administrative
expenses decreased to 47% from 57% for the nine-month periods ended September
28, 2003 and September 29, 2002, respectively, due to increased revenues during
fiscal 2003.

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Amortization of intangible assets. Amortization of intangible assets
recorded for the nine-month period ended September 28, 2003 was $54,000
compared with $0.3 million recorded during the nine-month period ended September
29, 2002. This decrease is due to all intangibles becoming fully amortized
during early 2003. Goodwill is not amortized, but is subject to periodic
impairment testing. No impairment of goodwill was noted during the periods
presented.

Amortization of stock-based compensation. Amortization of stock based
compensation decreased 80% to $0.1 million from $0.5 million for the nine-month
periods ended September 28, 2003 and September 29, 2002, respectively. During
2003 all remaining deferred stock compensation was fully amortized.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the
sale of common and preferred stock with aggregate proceeds of approximately
$124.3 million. Additionally, we have financed our operations through bank
financing, capital equipment lease lines, working capital credit facilities,
notes payable, $6.9 million in net cash received from the sale of our laser
diode fabrication facility and gigabit Ethernet product line and $4.7 million
in net cash received from the sale of our SAN management software assets. Our
principal sources of liquidity at September 28, 2003 consisted of $13.0 million
in cash and cash equivalents, $9.2 million in liquid investments, and $3.2
million of available borrowing on our credit facility.

Cash utilized by operating activities was $5.8 million for the nine-month
period ended September 28, 2003, and was due primarily to our operating loss,
net of non-cash expenses. Cash provided by investing activities was $3.9
million and resulted from maturities of short-term investments of $13.5
million, proceeds from the collection of a $2.5 million note receivable
received in conjunction with the sale of our SAN management software assets,
offset by $10.6 million of purchases of short-term investments and capital
expenditures of $1.5 million. Cash provided by financing activities reflects
the $7.8 million raised in conjunction with our sale of Series B Convertible
Preferred Stock combined with $1.4 million of proceeds borrowed against our
capital equipment credit facility, $1.2 million in sales of our common stock
through our employee stock purchase plan and upon stock option exercises, and
the collection of $0.4 million of stockholder notes receivable.

As of September 28, 2003, we had an accumulated deficit of $141.6 million
and have never been profitable. We plan to grow our revenue base and continue
to control our expenses in order to achieve profitability. However, we cannot
be certain that we will ever realize sufficient revenue to achieve
profitability. Even if we do achieve profitability, we may not be able to
sustain or increase profitability.

We believe that our existing cash, cash equivalent and short-term
investment balances will be sufficient to meet our cash requirements as a
standalone entity for at least 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 as a standalone entity will depend on many
factors, including our future revenue, the timing and extent of spending to
support product development efforts and sales, general and administrative
activities, the timing of introductions of new products, and market acceptance
of our products. We cannot assure you that additional equity or debt financing,
if required, will be available on acceptable terms or at all.

RELATED PARTY TRANSACTIONS

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

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As of September 28, 2003, all notes receivable from stockholders had been
settled in full.

RECENT ACCOUNTING PRONOUNCEMENTS

During June 2001, the FASB issued Statement of Financial Accounting
Standards No. 143 Accounting for Obligations Associated with the Retirement of
Long-Lived Assets (SFAS 143). The provisions of FAS 143 apply to all entities
that incur obligations associated with the retirement of tangible long-lived
assets. SFAS 143 is effective for financial statements issued for fiscal years
beginning after June 15, 2002. Under SFAS 143, a liability for an asset
retirement obligation (i.e. liability) is recognized at fair value during the
period in which it is incurred. The offset to the liability is capitalized as a
component of the carrying amount of the asset bringing rise to the future
retirement obligation. We adopted SFAS 143 effective December 30, 2002, the
beginning of our 2003 fiscal year. Our adoption of SFAS 143 did not impact our
financial position, results of operations or cash flows for the three- or
nine-month periods ending September 28, 2003.

During December 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, Accounting for Stock-Based Compensation-Transition and
Disclosure (SFAS 148). SFAS 148 amends the guidance set forth in Statement of
Financial Accounting Standard No. 123 Accounting for Stock-Based Compensation
(SFAS 123 and provides guidance for companies that elect to change their
accounting for employee stock based compensation to the fair value method of
accounting. The statement also expands and increases the frequency of the
existing disclosure requirements to require more prominent and quarterly
disclosure of the effects of stock based compensation pursuant to the
provisions of SFAS 123. We adopted SFAS 148 effective December 30, 2002 and
have included the expanded interim disclosures in the footnotes to our
condensed financial statements contained herein. Our adoption of SFAS 148 did
not impact our financial position, results of operations or cash flows for the
three- or nine-month periods ending September 28, 2003.

During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that such financial instruments that are within its scope be
classified as a liability or an asset. SFAS 150 is effective for us for
financial instruments entered into or modified after May 31, 2003 and for
fiscal periods beginning after June 15, 2003 for existing financial
instruments. During October 2003, the FASB voted to defer the provisions of
paragraphs 9 and 10 of SFAS 150 as they apply to mandatorily redeemable
noncontrolling interests. We will evaluate the applicability of any changes to
these provisions upon their reissuance. As we have not issued financial
instruments that fall within the scope of SFAS 150, in its current form, there
was no impact to our financial position, results of operations or cash-flows
as a result of the issuance of this pronouncement.




ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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

Our investment portfolio, with a fair value of $9.2 million as of
September 28, 2003, is invested in commercial paper, government securities and
corporate indebtedness that could experience an adverse decline in fair value
should an increase in interest rates occur. Future declines in interest rates
could have an adverse impact on interest earnings for our investment portfolio.
In addition, we have borrowed $1.4 million that bears interest at a variable
rate up to Prime plus 1.50%. Future increases in interest rates could have an adverse impact on
interest expense incurred on our borrowings. We do not currently hedge against
interest rate exposures.

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




ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

Evaluation
of Disclosure Controls and Procedures. We conducted an
evaluation of our controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act) as of the end of the period covered by this report. Based on this
evaluation, our principal executive officer and principal financial officer
concluded that, as of the date of the evaluation, our disclosure controls were
effective in providing reasonable assurance that the material information
required to be included in our reports filed with the Securities and Exchange
Commission (the SEC) is properly recorded, processed, summarized, and
reported within the time specified periods pursuant to SEC rules. It should be
noted that the design of any system of control is based

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in part upon certain assumptions, and there can be no assurance that any design will succeed in
achieving its stated objectives.




PART II. OTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS

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

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

On October 9, 2003, a purported class action lawsuit was filed in King
County Superior Court of the State of Washington against Vixel and each of
Vixels directors, entitled Russell Fink v. Vixel Corporation, et al., Case No.
03-2-37226-9JD. The complaint makes general allegations that, among other
things, Vixels directors breached their fiduciary duties to Vixel stockholders
in connection with the approval of the merger and seeks to enjoin the
tender offer and
have the merger agreement with Emulex Corporation, and its
acquisition subsidiary, declared unlawful, among other forms of relief. Vixel
believes that the plaintiffs claims are without merit and has retained counsel
with instructions to vigorously defend it. A copy of the complaint is
filed as Exhibit(e)(22) to the Schedule 14D-9 filed by us with the
SEC on October 15, 2003.




ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)  Exhibits:

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|        |  |                                                                                                                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                               
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.1 (4) |  | Agreement and Plan of Merger, dated as of October 8, 2003, by and among Emulex
Corporation, Aviary Acquisition Corp., and Registrant.                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.2 (4) |  | Purchaser Option Agreement, dated October 8, 2003, by and among Emulex Corporation,
Aviary Acquisition Corp., and Registrant.                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.3 (4) |  | Stockholders Agreement, dated October 8, 2003, by and among Emulex Corporation, Aviary
Acquisition Corp., and certain stockholders of Registrant.                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.1 (1) |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.2 (2) |  | Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.3 (3) |  | Certificate of Designation of Series B Convertible Preferred Stock                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.4 (1) |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.1 (1) |  | Specimen Stock Certificate (Exhibit 4.1)                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.2 (1) |  | Amended and Restated Investors Rights Agreement dated February 17, 1998 (Exhibit 4.2)                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.3 (1) |  | First Amendment to Amended and Restated Investors Rights Agreement dated February 17,
1998 (Exhibit 4.3)                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.4 (2) |  | Rights Agreement dated November 15, 2000, between the Registrant and Computer Share
Trust Company, Inc. (Exhibit 4.1)                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.5 (2) |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.6 (3) |  | Form of Warrant to Purchase Common Stock of Registrant                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.7 (3) |  | Registration Rights Agreement dated as of February 14, 2003, by and between Registrant
and the investor signatory thereto.                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                               
|10.1    |  | Loan and Security Agreement between Registrant and Silicon Valley Bank dated September
23, 2003. (Pursuant to Item 601(b)(2) of Regulation S-K
the exhibits to the Agreement are not filed herewith. The Registrant
agrees to furnish supplementally a copy of any omitted
exhibits/schedules to the Commission upon request.)
|        |  |                                                                                                                                                                                                                                                                                                                               
|31.1    |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                               
|31.2    |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                               
|32.1    |  | Certification of Chief Financial Officer and Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                



---



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

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|(2) |  | Incorporated by reference to designated exhibits to Registrants current
report on Form 8-K filed on November 17, 2000.
|--- |  | -----------------------------------------------------------------------------------------------------------------------
|   
|(3) |  | Incorporated by reference to Registrants current report on Form 8-K
filed on February 20, 2003.                       
|   
|(4) |  | Incorporated by reference to Registrants current report on Form 8-K
filed on October 8, 2003.                         

(b)  Reports on Form 8-K:

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



|(i)   |  | On July 22, 2003 Vixel filed a report on Form 8-K, which reported under
Item 9 the press release entitled Vixel Corporation Announces Second
Quarter 2003 Financial Results relating to the financial results of the
quarter ended June 29, 2003.                                            
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     
|(ii)  |  | On October 8, 2003 Vixel filed a report on Form 8-K, which reported under
Item 5 that it entered into an Agreement and Plan of Merger, with Emulex
Corporation, a Delaware corporation, and Aviary Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Emulex Corporation.
|     
|(iii) |  | On October 21, 2003 Vixel filed a report on Form 8-K, which reported
under Item 9 the press release entitled Vixel Corporation Announces Third
Quarter 2003 Financial Results relating to the financial results of the
quarter ended September 28, 2003.                                     




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: November 6, 2003 |  | VIXEL CORPORATION                                                  
|                        |  |                                                                    
|                        |  | /s/ Kurtis L. Adams                                                
|                        |  |                                                                    
|                        |  | Kurtis L. Adams
Chief Financial Officer, Vice President of Finance,
|                        |  | Secretary and Treasurer (Authorized Officer and                    
|                        |  | Principal Financial and Accounting Officer)                        

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                                                                                               
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|EXHIBIT |  |                                                                                                                                                                                                                                                                                                                               
|NUMBER  |  | DESCRIPTION                                                                                                                                                                                                                                                                                                                   
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.1 (4) |  | Agreement and Plan of Merger, dated as of October 8, 2003, by and among Emulex
Corporation, Aviary Acquisition Corp., and Registrant.                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.2 (4) |  | Purchaser Option Agreement, dated October 8, 2003, by and among Emulex Corporation,
Aviary Acquisition Corp., and Registrant.                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                               
|2.3 (4) |  | Stockholders Agreement, dated October 8, 2003, by and among Emulex Corporation, Aviary
Acquisition Corp., and certain stockholders of Registrant.                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.1 (1) |  | Amended and Restated Certificate of Incorporation of Registrant (Exhibit 3.2)                                                                                                                                                                                                                                                 
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.2 (2) |  | Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)                                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.3 (3) |  | Certificate of Designation of Series B Convertible Preferred Stock                                                                                                                                                                                                                                                            
|        |  |                                                                                                                                                                                                                                                                                                                               
|3.4 (1) |  | Bylaws of the Registrant (Exhibit 3.4)                                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.1 (1) |  | Specimen Stock Certificate (Exhibit 4.1)                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.2 (1) |  | Amended and Restated Investors Rights Agreement dated February 17, 1998 (Exhibit 4.2)                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.3 (1) |  | First Amendment to Amended and Restated Investors Rights Agreement dated February 17,
1998 (Exhibit 4.3)                                                                                                                                                                                                                     
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.4 (2) |  | Rights Agreement dated November 15, 2000, between the Registrant and Computer Share
Trust Company, Inc. (Exhibit 4.1)                                                                                                                                                                                                         
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.5 (2) |  | Form of Rights Certificate (Exhibit 4.2)                                                                                                                                                                                                                                                                                      
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.6 (3) |  | Form of Warrant to Purchase Common Stock of Registrant                                                                                                                                                                                                                                                                        
|        |  |                                                                                                                                                                                                                                                                                                                               
|4.7 (3) |  | Registration Rights Agreement dated as of February 14, 2003, by and between Registrant
and the investor signatory thereto.                                                                                                                                                                                                    
|        |  |                                                                                                                                                                                                                                                                                                                               
|10.1    |  | Loan and Security Agreement between Registrant and Silicon Valley Bank dated September
23, 2003. (Pursuant to Item 601(b)(2) of Regulation S-K
the exhibits to the Agreement are not filed herewith. The Registrant
agrees to furnish supplementally a copy of any omitted
exhibits/schedules to the Commission upon request.)
|        |  |                                                                                                                                                                                                                                                                                                                               
|31.1    |  | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                               
|31.2    |  | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a) under
the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.                                                                                                                           
|        |  |                                                                                                                                                                                                                                                                                                                               
|32.1    |  | Certification of Chief Financial Officer and Chief Executive Officer Pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.                                                                                                                                                

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|(1) |  | Incorporated by reference to designated exhibits to the Registrants
Registration Statement on Form S-1 (SEC File No. 333-81347), declared
effective on September 30, 1999.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Incorporated by reference to designated exhibits to Registrants current
report on Form 8-K filed on November 17, 2000.                                                    
|   
|(3) |  | Incorporated by reference to Registrants current report on Form 8-K
filed on February 20, 2003.                                                                           
|   
|(4) |  | Incorporated by reference to Registrants current report on Form 8-K
filed on October 8, 2003.                                                                             

23