VIXEL CORP - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 29, 2002

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

Commission File No. 000-27221

VIXEL CORPORATION

(Exact name of registrant as specified in its charter)

Delaware 84-1176506

(State or other jurisdiction (I.R.S. Employer

of incorporation or organization) Identification No.)

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

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

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

The number of shares outstanding of the Registrant’s common stock, $.0015 par value, as of October 27, 2002 was 24,787,229.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONDENSED BALANCE SHEET
		CONDENSED STATEMENT OF OPERATIONS
		CONDENSED STATEMENT OF CASH FLOWS
		NOTES TO CONDENSED FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK
	ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
PART II. OTHER INFORMATION
	ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
	ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
SIGNATURES
EXHIBIT INDEX
EXHIBIT 99.1

VIXEL CORPORATION

INDEX TO FORM 10-Q FOR QUARTER ENDED SEPTEMBER 29, 2002

Page

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements (unaudited)

Condensed Balance Sheet as of September 29, 2002 and December 30, 2001
3

Condensed Statement of Operations for the three and nine months ended September 29, 2002 and September 30, 2001
4

Condensed Statement of Cash Flows for the nine months ended September 29, 2002 and September 30, 2001
5

Notes to Condensed Financial Statements
6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
9

Item 3. Quantitative and Qualitative Disclosures about Market Risk
23

Item 4. Disclosure Controls and Procedures
24

Part II. OTHER INFORMATION

Item 2. Changes in Securities and Use of Proceeds
24

Item 6. Exhibits and Reports on Form 8-K
24

Signatures
26

Certifications
27

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

September 29,
2002 December 30,
2001

Assets

Current assets

Cash and cash equivalents
$ 4,948 $ 5,036

Short-term investments
14,311 20,942

Accounts receivable, net of allowance for doubtful accounts of $215 and $389, respectively
3,864 2,995

Inventories
1,855 2,951

Note receivable
2,500 —

Prepaid expenses and other current assets
769 1,271

Total current assets
28,247 33,195

Property and equipment, net of accumulated depreciation of $6,765 and $10,396
2,401 4,299

Goodwill and identifiable intangibles, net
533 948

Other assets
227 323

Total assets
$ 31,408 $ 38,765

Liabilities and stockholders’ equity

Current liabilities

Capital lease obligations, current portion
$ 266 $ 1,340

Accounts payable
3,389 4,046

Accrued liabilities
4,486 4,022

Deferred revenue
822 1,147

Accrued restructuring costs
334 —

Total current liabilities
9,297 10,555

Capital lease obligations, net of current portion
39 184

Accrued restructuring costs, net of current portion
397 —

Total liabilities
9,733 10,739

Commitments and contingencies

Stockholders’ equity

Common stock, $.0015 par value; 60,000,000 shares authorized; 24,569,546 and 24,272,229 shares issued; 24,347,646 and 24,050,329 shares outstanding at September 29, 2002 and December 30, 2001, respectively
36 36

Additional paid-in capital
157,242 156,922

Stock-based compensation
(235 ) (765 )

Notes receivable from stockholders
(3,745 ) (3,745 )

Treasury stock, at cost; 288,566 shares
(348 ) (348 )

Accumulated deficit
(131,275 ) (124,074 )

Total stockholders’ equity
21,675 28,026

Total liabilities and stockholders’ equity
$ 31,408 $ 38,765

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

3

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

Three Months Ended Nine Months Ended

September 29,
2002 September 30,
2001 September 29,
2002 September 30,
2001

Revenue:

Systems
$ 5,014 $ 4,607 $ 14,544 $ 12,117

Components
— — — 5,034

Total revenue
5,014 4,607 14,544 17,151

Cost of revenue (1)
2,543 3,439 7,647 11,275

Gross profit
2,471 1,168 6,897 5,876

Operating expenses:

Research and development (2)
2,271 3,700 8,240 11,369

Selling, general and administrative (3)
2,842 2,943 8,287 11,700

Amortization of goodwill ( 2001 only) and other intangibles
109 191 327 629

Amortization of stock-based compensation
117 278 510 1,075

5,339 7,112 17,364 24,773

Restructuring costs and adjustments
(33 ) — 1,742 —

Loss (gain) on sale of assets
10 — (4,444 ) —

Total operating expenses
5,316 7,112 14,662 24,773

Loss from operations
(2,845 ) (5,944 ) (7,765 ) (18,897 )

Other income, net
196 346 564 1,365

Net loss
$ (2,649 ) $ (5,598 ) $ (7,201 ) $ (17,532 )

Basic and diluted net loss per share
$ (0.11 ) $ (0.24 ) $ (0.30 ) $ (0.75 )

Weighted-average shares outstanding
24,161 23,627 23,951 23,464

(1) Includes amortization of stock-based compensation of $2 and $5 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $8 and $23 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

(2) Excludes amortization of stock-based compensation of $3 and $6 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $11 and $25 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

(3) Excludes amortization of stock-based compensation of $114 and $272 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $499 and $1,050 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

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

4

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

NINE MONTHS ENDED

September 29,
2002 September 30,
2001

Cash flows from operating activities

Net loss
$ (7,201 ) $ (17,532 )

Adjustments to reconcile net loss to net cash used in operating activities

Depreciation
2,088 3,104

Amortization of goodwill (2001 only) and identifiable intangibles
327 532

Stock-based compensation
518 1,098

Non-cash restructuring costs
400 —

Gain on sale of assets
(4,444 ) —

Changes in

Accounts receivable, net
(869 ) 4,829

Inventories
1,096 (2,629 )

Prepaid expenses and other assets
478 1,375

Accounts payable and accrued liabilities
(193 ) (675 )

Deferred revenue
(325 ) (200 )

Accrued restructuring costs
731 —

Net cash used in operating activities
(7,394 ) (10,098 )

Cash flows from investing activities

Purchase of short-term investments
(11,683 ) (25,878 )

Maturities of short-term investments
18,314 29,519

Purchase of property and equipment
(660 ) (950 )

Proceeds from sales of assets, net of transaction costs
2,155 —

Net cash provided by investing activities
8,126 2,691

Cash flows from financing activities

Receipt of payment on stockholder note receivable
— 1,377

Proceeds from issuance of note payable
319 —

Principal payments on note payable
(319 ) —

Principal payments on capital lease obligations
(1,152 ) (1,955 )

Amortization of debt issuance costs
— 1

Purchase of Treasury Stock
— (167 )

Proceeds from exercise of stock options
332 314

Net cash used in financing activities
(820 ) (430 )

Net decrease in cash and cash equivalents
(88 ) (7,837 )

Cash and cash equivalents, beginning of period
5,036 17,066

Cash and cash equivalents, end of period
$ 4,948 $ 9,229

Cash paid for interest
$ 52 $ 234

Equipment purchased under capital leases
$ 53 $ 35

Use of prepaid expense in satisfaction of capital lease obligations
$ 120 $ —

Note receivable for sale of assets
$ 2,500 $ —

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

5

VIXEL CORPORATION

NOTES TO CONDENSED FINANCIAL STATEMENTS
(Information for the three and nine months ended
September 29, 2002 and September 30, 2001)
(In Thousands, Except Share Amounts)
(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed financial statements as of September 29, 2002 and for the three and nine month periods ended September 29, 2002 and September 30, 2001 are unaudited; however, in the opinion of management, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations, financial position and cash flows for the interim periods. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission. Results of operations for the three and nine month periods ended September 29, 2002 are not necessarily indicative of future financial results.

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

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

NOTE 2. INVENTORIES

Inventories consist of the following:

September 29,
2002 December 30,
2001

Raw materials
$ 3,932 $ 4,781

Finished goods
1,693 2,232

Less: write-down to expected realizable value
(3,770 ) (4,062 )

$ 1,855 $ 2,951

NOTE 3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS

In June 2001, the Financial Accounting Standards Board, or FASB, issued FAS No. 142, “Goodwill and Other Intangible Assets” which requires the company to discontinue amortization of goodwill as of December 31, 2001. We adopted FAS 142 during the first quarter of 2002 and ceased amortizing goodwill with a net book value of $369 as of the beginning of fiscal 2002. The adoption of FAS 142 resulted in reducing our net loss by $82 and $246 for the three and nine months ended September 29, 2002; and reducing our basic and diluted net loss per share by $.01 for the nine months ended September 29, 2002.

The following table presents net loss and net loss per share for the three and nine months ended September 30, 2001 on a pro forma basis as if FAS 142 had been adopted on January 1, 2001:

Three months
ended
September 30,
2001 Nine months
ended
September 30,
2001

Net loss - as reported
$ (5,598 ) $ (17,532 )

Amortization of goodwill
82 246

Net loss - as adjusted
$ (5,516 ) $ (17,286 )

Basic and diluted net loss per share - as adjusted
$ (0.23 ) $ (0.74 )

Weighted-average shares outstanding
23,627 23,464

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

Goodwill and identifiable intangible assets as of September 29, 2002 and December 30, 2001 consist of the following:

September 29, 2002 December 30, 2001

Gross
Book
Value Net Book
Value Gross
Book
Value Net Book
Value

Core Technology
$ 2,183 $ 164 $ 2,183 $ 491

Capitalized Software
— — 106 88

Goodwill
3,555 369 3,555 369

Total
$ 5,738 $ 533 $ 5,844 $ 948

We are required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances. Consistent with the requirements of FAS 142, we performed an impairment test of goodwill as of December 31, 2001. As of September 29, 2002, no impairment of goodwill has been recognized. There can be no assurance that future goodwill impairment tests will not result in a charge to earnings.

NOTE 4. RESTRUCTURING COSTS

During April 2002, we adopted and implemented a restructuring plan to reduce our cost structure and focus on our InSpeed-based product development and sales. As a result of the plan, we recorded restructuring charges of $1.7 million.

The restructuring plan included a reduction of approximately 22% of our workforce across all departments. During the second quarter of fiscal 2002, the workforce reduction resulted in a charge of $393

relating primarily to severance. During the third quarter of fiscal 2002, this amount was adjusted by $33 resulting in a net charge of $360 relating primarily to severance.

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

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

The restructuring charges are summarized as follows:

Category
Total Charge Noncash
Charges Cash
Payments Accrued
Restructuring Costs
as of September 29,
2002

Workforce reduction
$ 360 $ — $ (342 ) $ 18

Consolidation of excess facilities
899 — (202 ) 697

Impairment of long-lived assets and other charges
483 (400 ) (67 ) 16

Total
$ 1,742 $ (400 ) $ (611 ) $ 731

NOTE 5. SALE OF ASSETS

On April 15, 2002, we closed a transaction with Fujitsu Software Technology Corporation, d/b/a Fujitsu Softek, involving the acquisition by Fujitsu Softek of our SAN management software assets, including our SAN management software, SAN InSite^™, associated intellectual property and key development team resources. Upon closing of the transaction we received $2.5 million and a note for $2.5 million, which is due and payable January 15, 2003. In addition, we have the right to receive up to an additional $5.0 million from sales of Fujitsu Softek products based on SAN InSite during the four-year period after the closing. Net of associated costs and expenses, we recorded a gain on sale from this transaction of $4.5 million.

NOTE 6. NET LOSS PER SHARE

Basic net loss per share represents the net loss divided by the weighted-average number of common shares outstanding during the period, excluding shares of restricted stock subject to repurchase. Diluted net loss per share represents net loss divided by the weighted-average number of common shares outstanding including the potentially dilutive impact of common stock options and warrants and shares of restricted stock subject to repurchase. Common stock options and warrants are converted using the treasury stock method. Basic and diluted net loss per share are equal for the periods presented because the impact of common stock equivalents is anti-dilutive. Potentially dilutive securities totaling 5,980,587 and 5,470,980 shares for the quarters ended September 29, 2002 and September 30, 2001, respectively, were excluded from diluted net loss per share due to their anti-dilutive effect.

NOTE 7. COMMITMENTS AND CONTINGENCIES

On November 15, 2001, a securities class action was filed in the United States District Court in the Southern District of New York against the company, 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. On October 9, 2002, our officers and directors were dismissed from the suit without prejudice, pursuant to an agreement extending the statute of limitations until September 30, 2003. We believe this suit is without merit and we intend to defend ourselves vigorously in this matter. Accordingly, we have not recognized any liability related to this claim.

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

The following discussion should be read in conjunction with the unaudited condensed financial statements in Item 1 of this Quarterly Report and with Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our December 30, 2001 Annual Report on Form 10-K, as amended, filed with the Securities and Exchange Commission on April 1, 2002.

This document contains forward-looking statements that involve risks and uncertainties. The statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” the negative of such terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially.

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

References to dollar amounts are in thousands unless otherwise specified.

OVERVIEW

We provide comprehensive Fibre Channel-based technologies and products for data storage solutions and storage networking applications. Our offering consists of a variety of switch and hub products that connect computers to data storage devices in a network configuration and a “switch-on-a-chip” Application Specific Integrated Circuit, or ASIC, which can be embedded in a variety of data storage devices to enhance performance, improve availability, and increase the reliability of these devices. This new embedded switching technology can be sold in chip, blade or box form to original equipment manufacturers, or OEMs, for inclusion in their solutions. Our storage networking interconnect products are sold primarily as fully integrated switches and hubs through OEMs, integrators and value-added resellers.

During 2001, we used our expertise in Fibre Channel switching technologies to develop a “switch-on-a-chip” ASIC, or SOC. This SOC incorporates our InSpeed^TM technology, which is an advanced switching architecture that results in a single chip capable of handling multiple Fibre Channel devices. This SOC can be embedded into storage enclosure devices such as redundant array of independent disks enclosures, tape libraries, network-attached storage environments and next generation storage systems to enhance the performance and scaling of these solutions as well as improve device availability and reliability. We are also using this SOC in Fibre Channel switches and blades that can be embedded by OEMs in their storage solutions. As part of our embedded storage switch strategy, we have licensed the manufacturing of our

Fibre Channel switch SOCs and sell SOCs both direct to OEMs and through distribution partners. This technology can also be used to offer high performance, low cost switches for entry-level storage area networks, or SANs.

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

We sell our products primarily to a limited number of customers. Hewlett-Packard Company and Avid Technology represented 60.4% and 12.4% of revenue, respectively, for the three months ended September 29, 2002. Sun Microsystems, Hewlett-Packard Company, formerly Compaq Computer, Avid Technology and Xyratex Technology Ltd, a contract manufacturer for Network Appliance, represented 21.2%, 19.5%, 11.1% and 10.8% of revenue, respectively, for the three months ended September 30, 2001. No other individual customer represented more than 10.0% of our total revenue in those periods. While we are seeking to diversify our customer base, we anticipate that our operating results will continue to depend on volume sales to a relatively small number of OEMs. We may not be successful in our efforts to diversify our customer base and the loss of one of our key customers could significantly reduce our total revenue. During the three months ended September 29, 2002 and September 30, 2001, 15.3% and 19.1%, respectively, of our total revenue was derived from sales to distribution channel customers.

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

RESULTS OF OPERATIONS

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

THREE MONTHS ENDED NINE MONTHS ENDED

September 29,
2002 September 30,
2001 September 29,
2002 September 30,
2001

Revenue

Systems
100.0 % 100.0 % 100.0 % 70.6 %

Components
— — — 29.4

Total revenue
100.0 100.0 100.0 100.0

Cost of revenue
50.7 74.6 52.6 65.7

Gross profit
49.3 25.4 47.4 34.3

Operating expenses

Research and development
45.3 80.3 56.7 66.3

Selling, general and administrative
56.7 63.9 57.0 68.2

Amortization of goodwill (2001 only) and identifiable intangibles
2.2 4.1 2.2 3.7

Amortization of stock-based compensation
2.3 6.0 3.5 6.3

106.5 154.4 119.4 144.4

Restructuring costs
(0.7 ) — 12.0 —

Sale of assets
0.2 — (30.6 ) —

106.0 154.4 100.8 144.4

Loss from operations
(56.7 ) (129.0 ) (53.4 ) (110.2 )

Other income, net
3.9 7.5 3.9 8.0

Net loss
(52.8 )% (121.5 )% (49.5 )% (102.2 )%

THREE AND NINE MONTHS ENDED SEPTEMBER 29, 2002 COMPARED WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001

Revenue . Our Systems revenue and total revenue in the third quarter of fiscal 2002 was $5.0 million, an 8.8% increase compared with Systems revenue and total revenue of $4.6 million in the third quarter of fiscal 2001. Our Systems revenue in the first nine months of fiscal 2002 was $14.5 million, an increase of 20.0% compared with $12.1 million in the first nine months of fiscal 2001. The increase in Systems revenue for the third quarter of fiscal 2002 compared with the third quarter of fiscal 2001 and for the first nine months of fiscal 2002 compared with the first nine months of fiscal 2001 was primarily a result of increased sales of our InSpeed-based products and our 2 gigabit-per-second, or gb/s, fabric switches. In the third quarter of fiscal 2002, these products represented approximately 74.2% of total revenue compared with approximately 17.5% of total revenue in the third quarter of fiscal 2001. Total revenue in the first nine months of fiscal 2002 was $14.5 million, a decrease of 15.2% from $17.2 million of total revenue in the first nine months of fiscal 2001. This decrease in total revenue is primarily the result of discontinuing the manufacture and sale of our transceiver products during the second quarter of fiscal 2001. We have not recognized any Components revenue since that time.

Gross profit . Cost of revenue includes the cost to acquire finished products from a third party manufacturer of our products, costs we incur related to engineering services we provide, expenses we incur related to inventory management, product quality testing, customer order fulfillment, and provisions for warranty expenses and inventory obsolescence. The gross profit percentage in

the first nine months of fiscal 2002 was 47.4% compared with 34.3% in the first nine months of fiscal 2001. The increase in gross profit as a percentage of revenue during the third quarter and first nine months of fiscal 2002 compared with the same periods last year is primarily due to increased higher-margin revenue resulting from sales of our Inspeed-based products, increased royalty revenue and a decrease in expense relating to provisions for obsolete inventory.

Included in cost of revenue for the first nine months of fiscal 2001 were provisions for excess and obsolete inventory and purchase commitments totaling approximately $3.1 million. These provisions resulted primarily from transitioning out of the manufacturing and sales of transceiver products and a reduction in future revenue forecasts. Inventory purchases and commitments are based upon future sales forecasts. To mitigate component supply constraints that have existed in the past, our contract manufacturer built inventory levels for certain components with long lead times and entered into certain longer-term commitments for certain components. Due to a sudden and significant decrease in demand for certain of our products, inventory levels exceeded our requirements based on sales forecasts through the end of fiscal 2001. The excess inventory charge was calculated based on the inventory levels in excess of demand for each specific product. Cost of revenue in the first nine months of fiscal 2001 was reduced by $800 as a result of the settlement of a patent infringement claim related to our GBIC transceivers for less than previously estimated.

Research and development expenses. Research and development expenses consist primarily of salaries and related expenses for personnel engaged in the design, development and sustaining engineering of our products, consulting and outside service fees, costs for prototype and test units and other expenses related to the design, development, testing and enhancement of our products. Research and development expenses were $2.3 million in the third quarter of fiscal 2002, a decrease of 38.6% compared with $3.7 million in the third quarter of fiscal 2001. As a percentage of revenue, research and development expenses decreased in the third quarter of fiscal 2002 to 45.3% compared with 80.3% in the third quarter of fiscal 2001. Research and development expenses in the first nine months of fiscal 2002 were $8.2 million, a decrease of 27.5% compared with $11.4 million in the first nine months of fiscal 2001. As a percentage of revenue, research and development expenses decreased in the first nine months of fiscal 2002 to 56.7% compared with 66.3% in the first nine months of fiscal 2001.

The decrease in research and development expenses both in absolute dollars and as a percentage of revenue for the third quarter of fiscal 2002 and the first nine months of fiscal 2002 compared with the same periods in fiscal 2001 is due primarily to a reduction in salaries and related expenses, and a reduction in depreciation expense. The sale of our SAN management software assets combined with the April 2002 restructuring plan resulted in a decrease in headcount devoted to research and development and the write-off of certain research and development related assets.

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 and to increase in the fourth quarter of fiscal 2002 as compared with the third quarter of fiscal 2002 as a result of non-recurring engineering charges incurred in the development of our next generation ASIC products.

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 in the third quarter of fiscal 2002 were $2.8 million, a decrease of 3.4% compared with $2.9 million in the third quarter of fiscal 2001. As a percentage of revenue, selling, general and administrative expenses decreased in the third quarter of fiscal 2002 to 56.7% compared with 63.9% in the third quarter of fiscal 2001. Selling, general and administrative expenses in the first nine months of fiscal 2002 were $8.3 million, a decrease of 29.2% compared with $11.7 million in the first nine months of fiscal 2001. As a percentage of revenue, selling, general and administrative expenses decreased in the first nine months of fiscal 2002 to 57.0% compared with 68.2% in the first nine months of fiscal 2001.

The decrease in selling, general and administrative expenses in both absolute dollars and as a percentage of revenue for the third quarter and first nine months of fiscal 2002 compared with the same periods in fiscal 2001 is primarily due to a reduction in salaries and related expenses as a result of a reduction in the number of personnel engaged in sales, finance and information technology support functions combined with reduced levels of related expenses.

Amortization of goodwill (2001 only) and identifiable intangibles. Amortization of goodwill (2001 only) and identifiable intangibles in the third quarter of fiscal 2002 was $109, a decrease of 42.9% compared with $191 in the third quarter of fiscal 2001. Amortization of goodwill (2001 only) and identifiable intangibles in the first nine months of fiscal 2002 was $327, a decrease of 48.0% compared with $629 in the first nine months of fiscal 2001.

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

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

Amortization of stock-based compensation. Total amortization of stock-based compensation was $119 and $283 for the third quarter of fiscal 2002 and fiscal 2001, respectively. Of these amounts, $2 and $5, respectively, were included in cost of revenue. Total amortization of stock-based compensation was $518 and $1.1 million for the first nine months of fiscal 2002 and fiscal 2001, respectively. Of these amounts $8 and $23, respectively, were included in the cost of revenue. At September 29, 2002, unamortized stock-based compensation was approximately $235.

Restructuring costs. During April 2002, we adopted and implemented a restructuring plan to reduce our cost structure and focus on our InSpeed-based product development and sales. As a result of the plan, we recorded restructuring charges in the first nine months of fiscal 2002 of $1.7 million.

The restructuring plan included a reduction of approximately 22% of our workforce across all functions. The workforce reduction resulted in a charge of $360, net of adjustments, relating primarily to severance.

The restructuring charges are summarized as follows (in thousands):

Category Total Charge Noncash
Charges Cash
Payments Accrued
Restructuring Costs
as of September 29,
2002

Workforce reduction $ 360 $ — $ (342 ) $ 18

Consolidation of excess facilities 899 — (202 ) 697

Impairment of long-lived assets and other charges 483 (400 ) (67 ) 16

Total $ 1,742 $ (400 ) $ (611 ) $ 731

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

Gain on sale of assets. On April 15, 2002, we closed a transaction with Fujitsu Softek, involving the acquisition by Fujitsu Softek of our SAN management software assets, including our SAN management software, SAN InSite^™, associated intellectual property and key development team resources. Upon closing of the transaction we received $2.5 million and a note for $2.5 million, which is due and payable January 15, 2003. In addition, we have the right to receive up to an additional $5.0 million from sales of Fujitsu Softek products based on SAN InSite during the four-year period after the closing. Net of associated costs and expenses, we recorded a gain on sale from this transaction of $4.5 million.

Other income, net. Other income, net consists of interest income, interest expense and other miscellaneous income or expense. Other income, net was $196 and $346 for the third quarter of fiscal 2002 and fiscal 2001, respectively. Other income, net was $564 and $1.4 million for the first nine months of fiscal 2002 and fiscal 2001, respectively.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, we have financed our operations primarily through the sale of common stock and preferred stock with aggregate proceeds of approximately $115.1 million. Additionally, we have financed our operations through capital equipment lease lines, working capital credit facilities, notes payable, $6.9 million in net cash received from the sale of our laser diode fabrication facility and gigabit Ethernet product line and $2.2 million in net cash received from the sale of our SAN management software assets. Our principal sources of liquidity at September 29, 2002 consisted of $5.0 million in cash and cash equivalents and $14.3 million in short-term investments. As a result of the sale of our SAN management software assets in April 2002, we received a promissory note for $2.5 million, and expect to receive the cash proceeds during January 2003. In addition, we may receive future proceeds of up to an additional $5.0 million based on the sale by Fujitsu Softek of SAN InSite-based products. However, we cannot be certain we will receive any future payments based on Fujitsu Softek sales.

Cash utilized by operating activities was $7.4 million for the nine months ended September 29, 2002, and was due primarily to our operating loss, net of non-cash expenses. Cash provided by investing activities was $8.1 million and resulted from maturities of short-term investments of $18.3 million, $2.2 million received in conjunction with the sale of SAN management software assets, net of transaction costs, offset by $11.7 million of purchases of short-term investments and capital expenditures of $660. Cash used in financing activities was $820 and was primarily due to payments on capital leases, offset by proceeds from the exercise of stock options.

As of September 29, 2002, we had an accumulated deficit of $131.3 million and have never been profitable. We reduced our work force during fiscal 2001 and did so again during the second quarter of fiscal 2002 through the sale of our SAN InSite software assets and by further aligning our resources to execute our strategies. We plan to grow our revenue base and to continue to control our expenses in order to achieve profitability. However, we cannot be certain that we will ever realize sufficient revenue to achieve profitability. Even if we do achieve profitability, we may not be able to sustain or increase profitability.

We believe that our existing cash, cash equivalent and short-term investment balances will be sufficient to meet our cash requirements at least through the next twelve to eighteen months. However, we may be required, or could elect, to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including our future revenue, the timing and extent of spending to support product development efforts and sales, general and administrative activities, the timing of

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

Effective May 15, 2002, we adopted FAS No. 145 “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections,” which is effective for all transactions occurring after May 15, 2002. FAS No. 145 requires gains and losses on extinguishments of debt to be classified as income or loss from continuing operations rather than as extraordinary items as previously required under FAS No. 4 “Reporting Gains and Losses from the Extinguishment of Debt.” Extraordinary treatment will be required for certain extinguishments as provided in APB No. 30 “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” FAS 145 also amends FAS 13 “Accounting for Leases” to require certain modifications to capital leases be treated as sale-leaseback and modifies the accounting for sub-leases when the original lessee remains a secondary obligor (or guarantor). Our adoption of FAS 145 did not materially impact our financial position, results of operations or cash flows.

In June 2002, the FASB issued FAS No. 146 “Accounting for Costs Associated with Exit or Disposal Activities.” FAS 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3,“Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” FAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized and measured at fair value when the liability is incurred versus on the date of the entity’s commitment to an exit plan as required under ETIF 94-3. FAS 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

FACTORS THAT MAY AFFECT RESULTS OF OPERATIONS AND FINANCIAL CONDITION

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

We have incurred significant losses since inception, most recently a net loss of $2.6 million for the three months ended September 29, 2002. As of September 29, 2002, we had an accumulated deficit of $131.3 million. We expect to incur significant product development, sales and marketing and administrative expenses, and we will need to generate significant revenue to achieve and maintain profitability. We cannot be certain that we ever will realize sufficient revenue to achieve profitability and even if we do achieve profitability, we may not be able to sustain or increase profitability.

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

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

• the size, terms and fluctuations of customer orders, particularly orders from a limited number of OEMs;

• changes in general economic conditions and specific economic conditions in the computer storage and networking industries, including changes in spending levels for information technology products;

• the timing of customer orders, a large percentage of which are generated in the last month of each quarter;

• our ability to attain and maintain sufficient reliability levels for our products;

• our ability to develop and market new products;

• the timing of the introduction or enhancement of products by us, our OEMs and our competitors;

• decreases in the prices at which we can sell our products;

• the mix of products sold and the mix of distribution channels through which our products are sold;

• the ability of our contract manufacturer to produce and distribute our products in a timely fashion; and

• disruptions or downturn in general economic conditions as a result of a terrorist activity, military actions or other armed conflict.

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

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

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

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

Our success will depend on our continued ability to develop and manage relationships with significant OEMs, resellers and integrators, as well as on the sales efforts and success of these customers. Revenue from Hewlett-Packard and Avid Technology represented 60.4% and 12.4% of revenue, respectively, for the three months ended September 29, 2002. Although we are attempting to expand our base of OEMs and resellers, most of our future revenue may come from a small number of customers.

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

• our OEM and reseller agreements are not exclusive and contain no renewal obligation;

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

• our OEM and reseller agreements do not require minimum purchases.

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

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

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

• demonstrate the benefits of our embedded switch products and SAN switch and hub products to OEMs, resellers and end-users;

• enhance our existing products and introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards;

• develop, maintain and build relationships with leading OEMs and resellers; and

• accurately predict the direction of industry standards and base our products on those industry standards.

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

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

Emerging technologies, such as Serial Attached Small Computer System Interface, or SAS, and Serial Advanced Technology Attachment, or SATA, are potential competing alternatives to Fibre Channel in the embedded storage market. If we are unable to identify new technologies in a timely manner and efficiently utilize such new technologies in our product development efforts, the demand for our current products may decrease significantly and rapidly, which would harm our business.

We expect that a growing percentage of our future revenue will be derived from our InSpeed technology-based products, our SAN interconnect switch products, and royalties from technology development agreements with customers, and our success will depend on widespread acceptance of these products and technologies and our ability to manage transition from older product inventories.

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

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

Our embedded switches are targeted at a new and evolving market. As this market grows, we believe that other Fibre Channel switch providers may introduce products that compete with our InSpeed range of products. In addition, ASIC manufacturers and OEMs may choose to develop competing technology.

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

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

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

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

• changing OEM product specifications;

• difficulties in hiring and retaining necessary personnel;

• difficulties in reallocating engineering resources and overcoming resource limitations;

• difficulties with independent contractors or development partners;

• changing market or competitive product requirements; and

• unanticipated engineering complexities.

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

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

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

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

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

Our distribution strategy focuses primarily on developing and expanding indirect distribution channels through OEMs and resellers. Our failure to execute this strategy successfully could limit our ability to grow or sustain revenue. Many of our OEMs and resellers also sell products that compete with our products. We

cannot assure you that our resellers will market our products effectively or continue to devote the resources necessary to provide us with effective sales, marketing and technical support.

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

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

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

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

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

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

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

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

Undetected software or hardware defects could increase our costs and reduce our revenue.

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

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

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

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

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

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

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

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

In addition, employees may leave our company and subsequently compete against us. Moreover, companies in our industry whose employees accept positions with competitors frequently claim that their

competitors have engaged in unfair hiring practices. We may be subject to claims of this type in the future as we seek to hire qualified personnel and some of these claims may result in material litigation. We could incur substantial costs in defending ourselves against these claims, regardless of their merits. The loss of the services of any of our key employees, the inability to retain qualified personnel or delays in or disputes related to hiring required personnel could hinder the development and introduction of and negatively impact our ability to sell our products.

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

Our revenue from international sales represented 42.4% of our total revenue for the three months ended September 29, 2002. We plan to expand our international sales, especially in Europe and Asia. Our international sales growth will be limited if we are unable to establish relationships with international OEMs, establish foreign operations, effectively manage international sales channels and develop relationships with service organizations. We cannot be certain that we will be able to establish, generate and build market demand for our products internationally. Our international operations will be subject to a number of risks, including:

• increased complexity and costs of managing international operations;

• multiple protectionist, conflicting and changing governmental laws and regulations;

• longer sales cycles;

• difficulties in collecting accounts receivables;

• reduced or limited protection of intellectual property rights; and

• political and economic instability.

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

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

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

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

In addition, in the United States, our products must comply with various regulations and standards defined by the Federal Communications Commission and Underwriters Laboratories. Internationally,

products that we develop also will be required to comply with standards established by authorities in various countries. Failure to comply with existing or evolving industry standards or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business.

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

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

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

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

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

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

• actual or anticipated fluctuations in our operating results;

• losses of our key OEMs or reductions in their purchases of our products;

• changes in financial estimates by securities analysts;

• changes in market valuations of other technology companies;

• announcements by us or by our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

• additions or departures of key personnel; and

• future sales of capital stock.

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

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

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

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

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

These purchases also may involve numerous risks, including:

• problems assimilating the purchased operations, technologies or products;

• unanticipated costs associated with the acquisition;

• diversion of management’s attention from our core business;

• adverse effects on existing business relationships with suppliers and customers;

• incorrect estimates made in the accounting for acquisitions;

• risks associated with entering markets in which we have limited, if any, prior experience; and

• potential loss of key employees of purchased organizations.

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

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

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

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

ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

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

Our investment portfolio, with a fair value of $14.3 million as of September 29, 2002, is invested in commercial paper, government securities and corporate indebtedness that could experience an adverse decline in fair value should an increase in interest rates occur. In addition, future declines in interest rates could have an adverse impact on interest earnings for our investment portfolio. We do not currently hedge against this interest rate exposure.

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

ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES

(a) Within 90 days prior to the date of this report, Vixel carried out an evaluation, under the supervision and with the participation of Vixel’s management, including Vixel’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Vixel’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Vixel’s Chief Executive Officer and Chief Financial Officer have concluded that Vixel’s disclosure controls and procedures are effective.

(b) There have been no significant changes in Vixel’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Our Registration Statement on Form S-1 (No. 333-81347) for the initial public offering of our common stock became effective September 30, 1999. The initial public offering resulted in net proceeds to us of $82.8 million. Expenses related to the offering totaled approximately $1.4 million. Through September 29, 2002, the proceeds were applied to repay $12.3 million in debt, $6.4 million in capital lease obligations, $5.0 million was used to purchase property and equipment, $0.6 million was used to pay expenses relating to our restructuring plan and $47.5 million was used for working capital and general purposes.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

EXHIBIT

NUMBER DESCRIPTION

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

3.2 (2) Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)

3.3 (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)

99.1 Certification of James M. McCluney, Chief Executive Officer and Kurtis L. Adams, Chief Financial Officer

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

(2) Incorporated by reference to designated exhibits to Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on November 17, 2000.

(b) Reports on Form 8-K:

We filed the following reports on Form 8-K during the third quarter of 2002 and through the filing of this Quarterly Report:

(i) Form 8-K dated November 1, 2002 announcing the commencement of a stock repurchase program by Vixel.

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 13, 2002 VIXEL CORPORATION

/s/ Kurtis L. Adams

Kurtis L. Adams

Chief Financial Officer, Vice President of Finance, Secretary and Treasurer (Authorized Officer and Principal Financial and Accounting Officer)

I, James M. McCluney, certify that:

1) I have reviewed this quarterly report on Form 10-Q of Vixel Corporation;

2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4) The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5) The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6) The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

/s/ James M. McCluney

James M. McCluney

President and Chief Executive Officer

I, Kurtis L. Adams, certify that:

/s/ Kurtis L. Adams

Kurtis L. Adams

Chief Financial Officer

EXHIBIT INDEX

EXHIBIT

NUMBER DESCRIPTION

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

3.2 (2) Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)

3.3 (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)

99.1 Certification of James M. McCluney, Chief Executive Officer and Kurtis L. Adams, Chief Financial Officer

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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)

	Page

Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed Balance Sheet as of September 29, 2002 and December 30, 2001	3
Condensed Statement of Operations for the three and nine months ended September 29, 2002 and September 30, 2001	4
Condensed Statement of Cash Flows for the nine months ended September 29, 2002 and September 30, 2001	5
Notes to Condensed Financial Statements	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3. Quantitative and Qualitative Disclosures about Market Risk	23
Item 4. Disclosure Controls and Procedures	24
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds	24
Item 6. Exhibits and Reports on Form 8-K	24
Signatures	26
Certifications	27

	September 29, 2002			December 30, 2001

Assets
Current assets
Cash and cash equivalents	$	4,948		$	5,036
Short-term investments		14,311			20,942
Accounts receivable, net of allowance for doubtful accounts of $215 and $389, respectively		3,864			2,995
Inventories		1,855			2,951
Note receivable		2,500			—
Prepaid expenses and other current assets		769			1,271

Total current assets		28,247			33,195
Property and equipment, net of accumulated depreciation of $6,765 and $10,396		2,401			4,299
Goodwill and identifiable intangibles, net		533			948
Other assets		227			323

Total assets	$	31,408		$	38,765

Liabilities and stockholders’ equity
Current liabilities
Capital lease obligations, current portion	$	266		$	1,340
Accounts payable		3,389			4,046
Accrued liabilities		4,486			4,022
Deferred revenue		822			1,147
Accrued restructuring costs		334			—

Total current liabilities		9,297			10,555
Capital lease obligations, net of current portion		39			184
Accrued restructuring costs, net of current portion		397			—

Total liabilities		9,733			10,739

Commitments and contingencies
Stockholders’ equity
Common stock, $.0015 par value; 60,000,000 shares authorized; 24,569,546 and 24,272,229 shares issued; 24,347,646 and 24,050,329 shares outstanding at September 29, 2002 and December 30, 2001, respectively		36			36
Additional paid-in capital		157,242			156,922
Stock-based compensation		(235	)		(765	)
Notes receivable from stockholders		(3,745	)		(3,745	)
Treasury stock, at cost; 288,566 shares		(348	)		(348	)
Accumulated deficit		(131,275	)		(124,074	)

Total stockholders’ equity		21,675			28,026

Total liabilities and stockholders’ equity	$	31,408		$	38,765

	Three Months Ended						Nine Months Ended

	September 29, 2002			September 30, 2001			September 29, 2002			September 30, 2001

Revenue:
Systems	$	5,014		$	4,607		$	14,544		$	12,117
Components		—			—			—			5,034

Total revenue		5,014			4,607			14,544			17,151
Cost of revenue (1)		2,543			3,439			7,647			11,275

Gross profit		2,471			1,168			6,897			5,876

Operating expenses:
Research and development (2)		2,271			3,700			8,240			11,369
Selling, general and administrative (3)		2,842			2,943			8,287			11,700
Amortization of goodwill ( 2001 only) and other intangibles		109			191			327			629
Amortization of stock-based compensation		117			278			510			1,075

		5,339			7,112			17,364			24,773
Restructuring costs and adjustments		(33	)		—			1,742			—
Loss (gain) on sale of assets		10			—			(4,444	)		—

Total operating expenses		5,316			7,112			14,662			24,773

Loss from operations		(2,845	)		(5,944	)		(7,765	)		(18,897	)
Other income, net		196			346			564			1,365

Net loss	$	(2,649	)	$	(5,598	)	$	(7,201	)	$	(17,532	)

Basic and diluted net loss per share	$	(0.11	)	$	(0.24	)	$	(0.30	)	$	(0.75	)

Weighted-average shares outstanding		24,161			23,627			23,951			23,464

(1)	Includes amortization of stock-based compensation of $2 and $5 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $8 and $23 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

(2)	Excludes amortization of stock-based compensation of $3 and $6 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $11 and $25 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

(3)	Excludes amortization of stock-based compensation of $114 and $272 for the three months ended September 29, 2002 and September 30, 2001, respectively, and $499 and $1,050 for the nine months ended September 29, 2002 and September 30, 2001, respectively.

	September 29, 2002			December 30, 2001

Raw materials	$	3,932		$	4,781
Finished goods		1,693			2,232
Less: write-down to expected realizable value		(3,770	)		(4,062	)

	$	1,855		$	2,951

	Three months ended September 30, 2001			Nine months ended September 30, 2001

Net loss - as reported	$	(5,598	)	$	(17,532	)
Amortization of goodwill		82			246

Net loss - as adjusted	$	(5,516	)	$	(17,286	)

Basic and diluted net loss per share - as adjusted	$	(0.23	)	$	(0.74	)

Weighted-average shares outstanding		23,627			23,464

	September 29, 2002				December 30, 2001

	Gross Book Value		Net Book Value		Gross Book Value		Net Book Value

Core Technology	$	2,183	$	164	$	2,183	$	491
Capitalized Software		—		—		106		88
Goodwill		3,555		369		3,555		369

Total	$	5,738	$	533	$	5,844	$	948

Category	Total Charge		Noncash Charges			Cash Payments			Accrued Restructuring Costs as of September 29, 2002

Workforce reduction	$	360	$	—		$	(342	)	$	18
Consolidation of excess facilities		899		—			(202	)		697
Impairment of long-lived assets and other charges		483		(400	)		(67	)		16

Total	$	1,742	$	(400	)	$	(611	)	$	731

•	the size, terms and fluctuations of customer orders, particularly orders from a limited number of OEMs;

•	changes in general economic conditions and specific economic conditions in the computer storage and networking industries, including changes in spending levels for information technology products;

•	the timing of customer orders, a large percentage of which are generated in the last month of each quarter;

•	our ability to attain and maintain sufficient reliability levels for our products;

•	our ability to develop and market new products;

•	the timing of the introduction or enhancement of products by us, our OEMs and our competitors;

•	decreases in the prices at which we can sell our products;

•	the mix of products sold and the mix of distribution channels through which our products are sold;

•	the ability of our contract manufacturer to produce and distribute our products in a timely fashion; and

•	disruptions or downturn in general economic conditions as a result of a terrorist activity, military actions or other armed conflict.

•	our OEM and reseller agreements are not exclusive and contain no renewal obligation;

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

•	our OEM and reseller agreements do not require minimum purchases.

•	demonstrate the benefits of our embedded switch products and SAN switch and hub products to OEMs, resellers and end-users;

•	enhance our existing products and introduce new products on a timely basis to meet changes in customer preferences and evolving industry standards;

•	develop, maintain and build relationships with leading OEMs and resellers; and

•	accurately predict the direction of industry standards and base our products on those industry standards.

•	changing OEM product specifications;

•	difficulties in hiring and retaining necessary personnel;

•	difficulties in reallocating engineering resources and overcoming resource limitations;

•	difficulties with independent contractors or development partners;

•	changing market or competitive product requirements; and

•	unanticipated engineering complexities.

•	increased complexity and costs of managing international operations;

•	multiple protectionist, conflicting and changing governmental laws and regulations;

•	longer sales cycles;

•	difficulties in collecting accounts receivables;

•	reduced or limited protection of intellectual property rights; and

•	political and economic instability.

•	actual or anticipated fluctuations in our operating results;

•	losses of our key OEMs or reductions in their purchases of our products;

•	changes in financial estimates by securities analysts;

•	changes in market valuations of other technology companies;

•	announcements by us or by our competitors of significant technical innovations, contracts, acquisitions, strategic partnerships, joint ventures or capital commitments;

•	additions or departures of key personnel; and

•	future sales of capital stock.

•	problems assimilating the purchased operations, technologies or products;

•	unanticipated costs associated with the acquisition;

•	diversion of management’s attention from our core business;

•	adverse effects on existing business relationships with suppliers and customers;

•	incorrect estimates made in the accounting for acquisitions;

•	risks associated with entering markets in which we have limited, if any, prior experience; and

•	potential loss of key employees of purchased organizations.

(a)	Within 90 days prior to the date of this report, Vixel carried out an evaluation, under the supervision and with the participation of Vixel’s management, including Vixel’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of Vixel’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, Vixel’s Chief Executive Officer and Chief Financial Officer have concluded that Vixel’s disclosure controls and procedures are effective.

(b)	There have been no significant changes in Vixel’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

(a)	Exhibits:
	EXHIBIT
	NUMBER	DESCRIPTION

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

	3.2 (2)	Certificate of Designation of Series A Junior Participating Preferred Stock (Exhibit 3.1)

	3.3 (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)

	99.1	Certification of James M. McCluney, Chief Executive Officer and Kurtis L. Adams, Chief Financial Officer

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

(2)	Incorporated by reference to designated exhibits to Registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on November 17, 2000.

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

	(i)	Form 8-K dated November 1, 2002 announcing the commencement of a stock repurchase program by Vixel.

Dated: November 13, 2002	VIXEL CORPORATION

	/s/ Kurtis L. Adams

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

1)	I have reviewed this quarterly report on Form 10-Q of Vixel Corporation;

2)	Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3)	Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4)	The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant is made known to us by others, particularly during the period in which this quarterly report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

	c)	presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5)	The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent function):

	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6)	The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

	/s/ James M. McCluney

	James M. McCluney
	President and Chief Executive Officer