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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to to .

Commission File Number 0-27755

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

Delaware
(State or other jurisdiction of
incorporation or organization)

33-0740004
(I.R.S. Employer
Identification No.)

10945 Vista Sorrento Parkway
San Diego, CA 92130
(Address of principal executive offices, including zip code)

(858) 523-7000
(Registrant's 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 ý No o

As of October 31, 2002, there were 26,590,864 shares of the registrant's common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS

		Page Number
*Part I*	FINANCIAL INFORMATION
Item 1:	*Financial Statements*
	Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001	2
	Statements of Operations (unaudited) for the three and nine months ended September 30, 2002 and 2001	3
	Statements of Cash Flows (unaudited) for the nine months ended September 30, 2002 and 2001	4
	Notes to Financial Statements (unaudited)	5
Item 2:	*Management's Discussion and Analysis of Financial Condition and Results of Operations*	10
Item 3:	*Quantitative and Qualitative Disclosures about Market Risk*	17
Item 4:	*Controls and Procedures*	17
*Part II*	OTHER INFORMATION
Item 1:	Legal Proceedings	19
Item 2:	Changes in Securities and Use of Proceeds	20
Item 3:	Defaults upon Senior Securities	20
Item 4:	Submission of Matters to Vote of Security Holders	20
Item 5:	Other Information	20
Item 6:	Exhibits and Report on Form 8-K	32
Signatures		33
Certifications		34
Exhibit Index		36

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

JNI Corporation

BALANCE SHEETS
(In thousands, except share and per share data)

			September 30, 2002			December 31, 2001
			(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents		$	3,994		$	4,490
	Marketable securities available for sale			87,006			82,974
	Accounts receivable, net			3,829			8,605
	Inventories			5,577			9,545
	Other current assets			638			1,968

		Total current assets		101,044			107,582
Marketable securities available for sale				15,274			30,558
Property and equipment, net				10,129			13,371
Licensed technology, net				6,430			—
Preferred stock investment				2,000			—
Other assets				377			636

			$	135,254		$	152,147

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable		$	3,048		$	2,769
	Accrued liabilities			6,693			5,446
	Deferred revenue			2,497			2,397

		Total current liabilities		12,238			10,612
Other liabilities				1,292			531

Total liabilities				13,530			11,143

Commitments and Contingencies (Notes 6 and 7)
Stockholders' equity:
	Preferred stock, undesignated series, 5,000,000 shares authorized; none issued			—			—
	Common stock, par value $.001 per share; 100,000,000 shares authorized; 26,516,530 and 26,574,873 shares issued and outstanding			27			27
	Additional paid-in capital			146,415			145,854
	Unearned stock-based compensation			(34	)		(166	)
	Accumulated other comprehensive income			219			455
	Retained earnings (deficit)			(18,849	)		(36	)
	Common stock in treasury, at cost—1,100,000 and 900,000 shares			(6,054	)		(5,130	)

		Total stockholders' equity		121,724			141,004

			$	135,254		$	152,147

See accompanying notes to financial statements.

JNI Corporation

STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(unaudited)

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
Net revenues			$	7,107		$	18,080		$	29,944		$	62,279
Cost of revenues				3,951			7,581			15,804			33,240

	Gross margin			3,156			10,499			14,140			29,039

Operating expenses:
	Research and development			4,938			6,329			16,085			18,945
	Selling and marketing			2,854			3,612			9,417			12,105
	General and administrative			2,017			2,371			6,240			7,204
	Loss on lease commitment			—			—			3,172			—
	Amortization of intangible assets			—			1,339			—			4,018
	Amortization of stock-based compensation			41			107			133			335

		Total operating expenses		9,850			13,758			35,047			42,607

Operating income (loss)				(6,694	)		(3,259	)		(20,907	)		(13,568	)
Interest income				734			1,264			2,272			4,055
Other income (expense), net				(2	)		6			(178	)		(29	)

Income (loss) before income taxes				(5,962	)		(1,989	)		(18,813	)		(9,542	)
Income tax provision				—			—			—			—

		Net income (loss)	$	(5,962	)	$	(1,989	)	$	(18,813	)	$	(9,542	)

Earnings (loss) per share:
	Basic		$	(0.22	)	$	(0.07	)	$	(0.71	)	$	(0.35	)

	Diluted		$	(0.22	)	$	(0.07	)	$	(0.71	)	$	(0.35	)

Number of shares used in per share computations:
	Basic			26,513,000			27,149,000			26,561,000			27,088,000

	Diluted			26,513,000			27,149,000			26,561,000			27,088,000

See accompanying notes to financial statements.

JNI Corporation

STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)

			Nine Months Ended September 30,
			2002			2001
Cash flows from operating activities:
	Net income (loss)		$	(18,813	)	$	(9,542	)
	Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
		Depreciation and amortization		4,328			3,611
		Amortization of intangible assets		—			4,018
		Amortization of licensed technology		826			—
		Amortization of stock-based compensation		132			334
		Non-cash expenses and charges		580			—
	Changes in assets and liabilities:
		Accounts receivable, net		4,776			10,627
		Inventories		3,968			7,253
		Other assets		329			1,330
		Accounts payable		279			(4,670	)
		Accrued liabilities		1,247			(1,081	)
		Deferred revenue		100			(3,098	)
		Other liabilities		761			—

	Net cash (used in) provided by operating activities			(1,487	)		8,782

Cash flows from investing activities:
	Purchases of marketable securities available for sale			(2,484	)		(3,853	)
	Proceeds from sale of marketable securities available for sale			13,500			9,130
	Purchase of licensed technology and services			(7,500	)		—
	Purchase of equity investment			(2,000	)		—
	Capital expenditures			(1,086	)		(7,727	)

	Net cash provided by (used in) investing activities			430			(2,450	)

Cash flows from financing activities:
	Net proceeds from issuance of common stock			561			1,064
	Purchase of treasury stock			—			(5,130	)

	Net cash provided by (used in) financing activities			561			(4,066	)

	Net change in cash and cash equivalents			(496	)		2,266
	Cash and cash equivalents, beginning of period			4,490			4,095

	Cash and cash equivalents, end of period		$	3,994		$	6,361
Supplemental non-cash activity:
	Settlement of a note receivable in the form of common stock received into treasury stock		$	1,260		$	—

See accompanying notes to financial statements.

JNI Corporation

NOTES TO FINANCIAL STATEMENTS
(In thousands, except share data)

Note 1—General

The accompanying unaudited financial statements of JNI Corporation (the "Company") for the three and nine month periods ended September 30, 2002 and 2001 have been prepared on the same basis as the audited financial statements for the year ended December 31, 2001 and, in the opinion of management, include all adjustments (consisting only of normal recurring items) that the Company considers necessary for a fair presentation of its financial position, results of operations, and cash flows for such periods. However, the accompanying financial statements do not contain all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The interim financial statements and notes are presented as permitted by the requirements of Form 10-Q and do not contain certain information included in the Company's annual financial statements and notes thereto. These financial statements should be read in conjunction with the Company's audited financial statements and notes thereto presented in its Annual Report on Form 10-K/A for the fiscal year ended December 31, 2001 as filed with the Securities and Exchange Commission. The interim financial information contained in this Quarterly Report is not necessarily indicative of the results to be expected for any other interim period or for the entire year.

Note 2—Inventories

Components of inventories are as follows:

			As of
			September 30, 2002		December 31, 2001
Inventories:
	Raw materials		$	2,501	$	6,566
	Work in process			380		1,299
	Finished goods			2,696		1,680

		Total	$	5,577	$	9,545

Note 3—Reconciliation of Net Income (Loss) and Shares Used in Per Share Computations

Earnings (loss) per share is computed using the weighted average number of shares of common stock outstanding and is presented for basic and diluted earnings (loss) per share. Basic earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period increased to include, if dilutive, the number of additional common shares that would have been outstanding if the potential common shares had been issued. The dilutive effect of outstanding stock options is reflected in diluted earnings (loss) per share by application of the treasury stock method. The Company has excluded all outstanding stock options from the calculation of diluted loss per share for the three and nine months ended September 30, 2002 and 2001 because such securities are antidilutive for these periods. The total number of potential common shares excluded from the calculations of diluted loss per common share was 227,000 and 244,000 for the three and nine months ended September 30, 2002, respectively, and 341,000 and 453,000 for the three and nine months ended September 30, 2001, respectively.

The following table sets forth the computation of basic and diluted shares outstanding:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
Numerator:
Net income (loss)		$	(5,962	)	$	(1,989	)	$	(18,813	)	$	(9,542	)
Denominator:
Denominator for basic earnings (loss) per share
	Weighted average shares outstanding		26,513,000			27,149,000			26,561,000			27,088,000
Effect of dilutive securities:
	Dilutive options outstanding		—			—			—			—
	Employee stock purchase plan shares		—			—			—			—

Denominator for diluted earnings (loss) per share—adjusted weighted average shares			26,513,000			27,149,000			26,561,000			27,088,000

Note 4—Comprehensive Income (Loss)

The Company presents unrealized gains and losses on the Company's available-for-sale securities in its statement of stockholders' equity and comprehensive income (loss) on an annual basis and in a footnote in its quarterly reports. During the three months ended September 30, 2002 and 2001, total comprehensive income (loss) was $(5,860) and $(1,792), respectively. During the nine months ended September 30, 2002 and 2001, total comprehensive income (loss) was $(19,049) and $(9,312), respectively. Other comprehensive income or loss consists of unrealized gains or losses on the Company's marketable securities available for sale and included an unrealized gain of $102 and $197 during the three months ended September 30, 2002 and 2001, respectively, and an unrealized loss of $236 and an unrealized gain of $230 during the nine months ended September 30, 2002 and 2001, respectively.

Note 5—Income Taxes

The effective tax rate for 2002 and 2001 is zero percent because no tax benefit has been recognized for the current and previous year operating losses and other benefits. The Company has recorded a full valuation allowance against its deferred tax assets because it does not consider the realizability of such related tax benefits to be more likely than not.

Note 6—Loss on Lease Commitment

The Company is committed to a five year lease for a building adjacent to its current headquarters in San Diego, California which is for 57,323 square feet. This new lease commenced in June 2002 with a total commitment of approximately $8,770. The Company's monthly rental obligation before consideration of any potential sublease income is $146. The Company does not intend to occupy this space and is actively seeking tenants to sub-lease or assume the lease obligation. As of the date of this report, the Company has been unable to secure a tenant to sub-lease this space. The Company recorded a loss on its lease commitment totaling $3,172 in the quarter ended June 30, 2002. In determining the estimated loss for its lease commitment, the Company has been required to make

various assumptions, including occupancy dates for new tenants, sub-lease rental rates, tenant improvement allowances and commission payments, that involve estimates and judgments. In formulating its assumptions, the Company took into account current and projected real estate market conditions. If the Company's estimates and related assumptions change in the future, the Company may be required to revise the estimated loss on its lease commitment. If any revisions to its estimated loss are necessary, then an additional loss or a benefit will be recorded. During the quarter ended September 30, 2002, no changes to the estimated loss on the Company's lease commitment were deemed necessary. As of September 30, 2002, the current portion of the accrued loss for the Company's lease commitment totaling $1,677 is included in accrued liabilities, and the long-term portion totaling $910 is included in other liabilities on the balance sheet.

Note 7—Contingencies

In April 2001, an alleged stockholder of the Company filed an alleged class action complaint against the Company and certain of its officers and directors in the United States District Court for the Southern District of California on behalf of purchasers of the Company's common stock during the period between October 16, 2000 and January 24, 2001. Thereafter, five additional and virtually identical lawsuits have been filed. The most recent of these lawsuits allege claims on behalf of purchasers of the Company's common stock during the period between October 16, 2000 and March 28, 2001 (the "Class Period"). The cases allege that during the Class Period, the Company made false statements about its business and results causing its stock to trade at artificially inflated levels. Based on these allegations, the cases allege that the Company and the others named in the cases violated the Securities Exchange Act of 1934. The Company has retained counsel to defend these cases. On February 8, 2002, the Court appointed a lead plaintiff and lead counsel and ordered the consolidation of the cases. The court gave the plaintiffs until March 25, 2002 to file a consolidated amended complaint. On March 25, 2002, plaintiffs filed a first consolidated and amended complaint. The first consolidated and amended complaint alleges a new class period of July 13, 2000 through March 28, 2001 and adds alleged claims under Securities Act of 1933 arising from the Company's secondary public offering in October 2000. On April 29, 2002, the Company filed a motion to dismiss and a motion to strike the first consolidated and amended complaint. Since July 1, 2002, the motions have been under submission with the Court for decision. The Company believes that these cases are without merit and intends to defend the cases vigorously.

In October 2001, an alleged stockholder of the Company, Richard Grosset, filed an alleged stockholder derivative lawsuit against the Company and certain present and former members of the Company's board of directors in the San Diego County Superior Court. The lawsuit alleges that during the Class Period, the present and former members of the Company's board failed to adequately oversee the activities of management and, as a result, the Company allegedly made false statements about its business and results causing its stock to trade at artificially inflated levels. Based on these allegations, the plaintiff alleges that the present and former members of the Company's board breached their fiduciary duties to the Company. The alleged stockholder filed the lawsuit without first making a demand upon the board of directors. The Company has retained counsel to defend this case. On February 1, 2002, the Court sustained the Company's demurrer to the plaintiff's complaint with leave to amend. On March 8, 2002, the plaintiff filed a first amended complaint. On March 22, 2002, the Company filed a demurrer to the first amended complaint and the hearing on the demurrer was set for April 12, 2002. On April 12, 2002, the Court entered an order sustaining the demurrer and giving the plaintiff leave to file another amended complaint. On April 29, 2002, the plaintiff filed a second amended complaint. On May 31, 2002, the Company filed a demurrer to the second amended complaint. On the same day, Sik-Lin Huang, an alleged stockholder of the Company, filed a motion to intervene in the case as a plaintiff. On June 21, 2002, the Court sustained the Company's demurrer and dismissed Grosset as a plaintiff because he is no longer a stockholder of the Company. The Court, however, granted Huang's motion to intervene and ordered Huang to file a complaint in intervention.

Huang filed a complaint in intervention on July 5, 2002. On September 16, 2002, the Board of Directors of the Company appointed a special litigation committee to investigate the allegations in this case and to determine whether it is in the best interest of the Company to allow this case to proceed.

On May 30, 2002, an alleged stockholder of the Company, Ali Bemanian, filed a purported stockholder derivative suit against the Company and certain present and former members of the Company's board of directors in the San Diego County Superior Court. The lawsuit repeats the allegations of the derivative lawsuit filed by Grosset. The lawsuit also adds allegations that the defendants caused or allowed the Company to falsely report its results for the fourth quarter of fiscal 2001. These additional allegations relate to the Company's May 20, 2002 announcement that it would restate its financial statements and file an amended report on Form 10-K. On September 16, 2002, the Board of Directors of the Company appointed a special litigation committee to investigate the allegations in this case and to determine whether it is in the best interest of the Company to allow this case to proceed.

On November 29, 2001, an alleged stockholder of the Company filed a class action lawsuit in the United States District Court for the Southern District of New York. The lawsuit also names as defendants the underwriters on the Company's initial public offering and secondary offering. The plaintiff alleges that defendants violated Securities Act of 1933 and the Securities Exchange Act of 1934 in connection with the Company's public offerings. This case is among the over 300 class action lawsuits pending in the United States District Court for the Southern District of New York that have come to be known as the IPO laddering cases. The complaint in this case was served on the Company on June 20, 2002. On November 1, 2002, the court heard argument on motions to dismiss all of the IPO laddering cases. The Company believes that this case lacks merit and intends to defend the case vigorously.

The Company is involved in certain legal proceedings, including various employee related lawsuits, generally incidental to its normal business activities. While the outcome of any such proceedings cannot be accurately predicted, at this time, the Company does not believe the ultimate resolution of any such existing matters should have a material effect on its financial position, results of operations or cash flows.

Note 8—Concentrations of Risk

Historically, a limited number of OEMs and distribution channel customers has accounted for a significant majority of the Company's total net revenues. The loss of any of the Company's key customers, or a significant reduction in sales to those customers, could significantly reduce the Company's net revenues. For the nine months ended September 30, 2002, Hitachi Data Systems accounted for 24% of net revenues, Acal Electronics accounted for 11% of net revenues and Info X, Inc. accounted for 11% of net revenues. For the nine months ended September 30, 2001, Info X, Inc. accounted for 20% of net revenues and Acal Electronics accounted for 16% of net revenues. A significant portion of the products sold to the distributors was utilized by the Company's OEMs. The Company anticipates that its operating results in any given period will continue to depend, to a significant extent, upon revenues from a small number of customers.

Note 9—Preferred Stock Investment

In January 2002, the Company invested $2,000 in Mellanox Technologies Ltd, a privately held InfiniBand semiconductor developer. This investment is being accounted for under the cost method of accounting. The Company's ownership in Mellanox is insignificant relative to the total ownership.

Note 10—Loan Due from Former Chief Executive Officer

On May 19, 2002, the Company's chief executive officer resigned from the Company. At the time of his resignation, the Company's former chief executive officer had a loan outstanding of $349 which consisted of $99 in payroll taxes due and $250 for the remaining portion of the loan which was entered into upon the hiring of the former chief executive officer, plus accrued interest. Upon his resignation from the Company, the outstanding loan became due and payable. In September 2002, the former chief executive officer paid in full the $99 in payroll taxes due and $154 toward the remaining portion of the loan. The $96 loan balance was deemed earned under California law based on the services provided by the former chief executive officer through his date of termination. As of September 30, 2002, no amounts remain outstanding from the former chief executive officer.

Note 11—Reduction in Force

In August 2002, the Company conducted a reduction in force that resulted in the layoff of approximately 13% of its current workforce. The total expense, which was recorded in the third quarter of 2002, associated with this reduction in force was $488 and consisted solely of severance benefits. As of September 30, 2002, accrued severance benefits totaled $198, all of which will be paid by the end of the first quarter in 2003.

Note 12—Stock Option Exchange Program

In August 2002, the Company's compensation committee of its Board of Directors approved a voluntary stock option exchange program for the Company's employees, excluding executive officers and directors.

Under the program, the Company's employees, excluding executive officers and directors, were given the opportunity to cancel stock options granted to them between March 10, 1999 and August 29, 2002 in exchange for a number of new options based on each individual option holder's position and performance at the Company to be granted in the future, on a date more than six months after the date of cancellation of the original options. The exercise price of the new options will be the fair market value of the Company's common stock on that date. Cancelled options total 2,984,352 with an average exercise price of $13.48 per share. The Company expects to grant a total of 2,707,479 options to purchase its common stock in exchange for the options cancelled.

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

Forward Looking Statements

In addition to the historical information contained herein, the discussions in this Report on Form 10-Q may contain certain forward-looking statements. In addition, when used in this Form 10-Q, the words "anticipates," "in the opinion," "believes," "intends," "expects" and similar expressions are intended to identify forward-looking statements. Actual future results could differ materially from those described in the forward-looking statements as a result of factors discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations set forth below, as well as in "Risk Factors" set forth herein. The Company expressly disclaims any obligation or undertaking to release publicly any updates or changes to these forward-looking statements to reflect any future events or circumstances. References contained herein to "JNI," the "Company," "we," "our" and "us" refer to JNI Corporation.

Overview

We are a leading designer and supplier of enterprise storage connectivity products that connect servers and data storage devices through Fibre Channel and I/O connectivity products, which includes our InfiniBand initiative. We currently market and sell a broad range of Fibre Channel host bus adapters that connect servers to storage subsystems to facilitate the integration and management of devices used in storage area networks, or SANs. We also design and market high-performance application specific integrated circuits, or ASICs, based on our proprietary Fibre Channel technology. We released our first InfiniBand products in the first quarter of 2002, called host channel adapter modules, that allow stand-alone servers to cluster with InfiniBand connectivity operating at 2.5 Gb or 10 Gb per port. We are currently developing or designing products that will bridge I/O connectivity to other storage and server protocols, such as Fibre Channel and iSCSI. We have secured customer and partner relationships with some of the leading storage OEMs including EMC, Hewlett-Packard, Hitachi Data Systems, IBM, LSI Logic, McDATA, StorageTek and Sun Microsystems. We maintain strategic relationships with key network storage vendors, such as Brocade, Chaparral, Cisco Systems, Crossroads, Legato and VERITAS Software, as well with key InfiniBand companies, such as IBM, Lane 15, Mellanox Technologies and Paceline Systems. As of September 30, 2002, we had a total of 164 employees compared to 209 employees as of September 30, 2001.

Revenues are comprised principally of sales of our host bus adapter products. Revenues also include sales of our ASICs and fees received from our ASIC development agreements as well as sales of our InfiniBand host channel adapter products which were released in the first quarter of 2002.

Cost of revenues is comprised principally of payments to our contract manufacturers, costs of components, material expediting charges, final assembly costs, manufacturing and quality-related costs, inventory management costs, warranty and support costs. Also included in cost of revenues is the amortization of licensed technology acquired in connection with the purchase of the exclusive license to Troika Networks' Fibre Channel software and hardware products. As a result of an independent valuation completed on the Troika transaction, we recorded $7.3 million in licensed technology, which is being amortized in cost of revenues over an estimated useful life of five years. We amortized $826,000 of licensed technology during the nine months ended September 30, 2002. We expect our gross margin to be affected by many factors, including changes in average unit selling price, fluctuations in demand for our products, the mix of products sold, the mix of sales channels through which our products are sold, the timing and size of customer orders, fluctuations in manufacturing volumes, changes in costs of components, and new product introductions both by us and our competitors. We reserve for warranty claims at the time of sale based on historical experience.

Research and development expenses consist primarily of salaries and related expenses for engineering personnel, fees paid to consultants and outside service providers, depreciation of

development and test equipment, prototyping expenses related to the design, development, testing and enhancements of our products, and the cost of computer support services. We expense all research and development costs as incurred.

Selling and marketing expenses consist primarily of salaries, commissions and related expenses for personnel engaged in marketing, sales and customer support functions, public relations, advertising, promotional and trade show costs and travel expenses.

General and administrative expenses include salaries and related expenses for personnel engaged in finance, human resources, information technology, administrative activities and legal and accounting fees.

Amortization of intangible assets is attributed to the amortization of intangible assets acquired in connection with the purchase of products and technology from Adaptec in November 1998. As a result of the consideration paid to Adaptec, we recorded $11.6 million in intangible assets related to the core technology acquired, which was amortized over an estimated useful life of three years. We amortized $4.0 million of intangible assets during the nine months ended September 30, 2001. Amortization of this amount was completed during the year ended December 31, 2001.

Amortization of stock-based compensation relates to deferred compensation recorded in connection with the grant of stock options to employees in all operating expense categories where the option exercise price was less than the fair value of the underlying shares of common stock as determined for financial reporting purposes. We have recorded $2.2 million of unearned stock-based compensation within stockholders' equity, which is being amortized over the vesting period of the related stock options, generally four years. The amortization of stock-based compensation will be completed in 2002.

Application of Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate these estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, investments, intangible assets, income taxes, warranty obligations, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We consider the following accounting policies to be both those most important to the portrayal of our financial condition and those that require the most subjective judgment:

•: Revenue recognition;
•: accounting for marketable securities;
•: inventory valuation and related reserves;
•: accounting for income taxes;
•: valuation of licensed technology; and
•: accounting for the estimated loss on our lease commitment.

You should refer to our Annual Report on Form 10-K/A filed on May 20, 2002 for a discussion of our policies on revenue recognition, accounting for marketable securities, inventory valuation and related reserves, and accounting for income taxes.

Valuation of licensed technology. Acquisitions of intangible assets require us to make determinations about the value and recoverability of those assets that involve estimates and judgments. In connection with our purchase of an exclusive license from Troika, we recorded a long-term intangible asset of $7.3 million for the licensed technology we acquired. We based our determination of valuation on a report provided by an independent third-party valuation firm. We concluded that the timing of the projected revenue stream associated with the licensed technology is uncertain and therefore we are recording the amortization on a straight-line basis over the asset's remaining useful life of 57 months. Accordingly, in the second and third quarter of 2002, we amortized the licensed technology on a straight-line basis. In assessing the recoverability of our licensed technology, we must make assumptions regarding estimated future cash flows, estimated future revenues and other factors. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for our licensed technology not previously recorded. Additionally, we assess the impairment of our long-lived assets when events or changes in circumstances indicate that an asset's carrying value may not be recoverable. An impairment loss is recognized when the sum of the expected future undiscounted net cash flows is less than the carrying value of the asset. An impairment loss would be measured by comparing the amount by which the carrying value exceeds the fair value of the asset being evaluated for impairment. Any resulting impairment loss could have an adverse impact on our results of operations.

Accounting for the estimated loss on our lease commitment. We are committed to a five year lease for a building adjacent to our current headquarters in San Diego, California which is for 57,323 square feet. This new lease commenced in June 2002 with a total commitment of approximately $8.8 million. We do not intend to occupy this space and are actively seeking tenants to sub-lease or assume the lease obligation. As of September 30, 2002, we were unable to secure a tenant to sub-lease this space. We recorded an estimated loss on our lease commitment of $3.2 million in the second quarter of 2002. In determining the estimated loss for our lease commitment, we have been required to make various assumptions, including occupancy dates for new tenants, sub-lease rental rates, tenant improvement allowances and commission payments, that involve estimates and judgments. In formulating our assumptions, we took into account current and projected real estate market conditions. If our estimates and related assumptions change in the future, we may be required to revise the estimated loss on our lease commitment. If any revisions to our estimated loss are necessary, then an additional loss or benefit will be recorded.

Results of Operations

The following discussion should be read in conjunction with the financial statements and the related notes contained elsewhere in this report.

Comparison of Three Months Ended September 30, 2002 and 2001

Net revenues. Net revenues decreased $11.0 million, or 60.7%, to $7.1 million in the three months ended September 30, 2002 from $18.1 million in the three months ended September 30, 2001. The decrease was due to a decline in sales of both our SBus and PCI host bus adapter products as well as a decrease in sales of our ASICs and fees received under ASIC development agreements partially offset by an increase in sales of our InfiniBand host channel adapter products. The overall decrease in net revenues for the three months ended September 30, 2002 is primarily the result of a decrease in overall unit sales of PCI and SBus products. Additionally, the shift in demand from our SBus products to our PCI products which have lower average selling prices than SBus products also contributed to the decrease in net revenues. The demand for our SBus products has continued to decline as Sun

Microsystems has released new midrange and high-end server products that do not include the SBus interface.

As our customers are beginning to migrate from one-gigabit to two-gigabit Fibre Channel host bus adapter products, we have experienced a significant increase in revenues from our two-gigabit products for the three months ended September 30, 2002 compared to the same period in the prior year even though our total net revenues decreased from 2001 to 2002. Sales of our two-gigabit products increased by $3.1 million for the three months ended September 30, 2002 compared to the three months ended September 30, 2001. Revenues from the sale of our two-gigabit products represented 47.8% and 1.8% of total net revenues for the three months ended September 30, 2002 and 2001, respectively. Sales to customers outside of the United States accounted for 26% and 34% of net revenues for the three months ended September 30, 2002 and 2001, respectively.

Gross margin. Gross margin decreased $7.3 million, or 69.9%, to $3.2 million in the three months ended September 30, 2002 from $10.5 million in the three months ended September 30, 2001. Gross margin as a percentage of net revenues decreased to 44.4% during the three months ended September 30, 2002 from 58.1% during the three months ended September 30, 2001.

The decrease in gross margin percentage is primarily due to increased sales of our PCI host bus adapter products which have lower gross margins than our SBus host bus adapter products coupled with a decrease in the average selling price for our SBus host bus adapter products and the allocation of fixed manufacturing costs over a lower revenue base. Gross margins for the three months ended September 30, 2002 were also affected unfavorably by $379,000 of amortization costs associated with our licensed technology; as discussed in the following paragraph, the impact of this amortization was partially offset by the favorable impact from the sale of boards for which we previously recorded a charge for excess inventory.

In the first quarter of 2002, we determined that simple modifications to host bus adapters previously considered excess inventory would make them saleable product. The value of converted boards sold with a zero cost basis totaled $354,000 during the three months ended September 30, 2002, favorably impacting margins. Also, as a result, our inventory levels have continued to decrease due to our ability to sell modified host bus adapter products rather than purchasing new products from our contract manufacturers. We expect to continue to benefit from the sale of a portion of the remaining quantity of the converted boards with a zero cost basis.

Research and development. Research and development expenses decreased $1.4 million, or 22.0%, to $4.9 million for the three months ended September 30, 2002 from $6.3 million for the three months ended September 30, 2001. The decrease in research and development expenses was due primarily to lower personnel costs, resulting from headcount reductions in the first and third quarters of 2002 and decreased consulting expenses. Additionally, the decrease was due to a decline in non-recurring engineering expenses partially offset by increased equipment leasing costs. Research and development expenses as a percentage of net revenues increased significantly for the three months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

Selling and marketing. Selling and marketing expenses decreased $758,000, or 21.0%, to $2.9 million for the three months ended September 30, 2002 from $3.6 million for the three months ended September 30, 2001. The decrease in selling and marketing expense was due primarily to lower personnel costs, resulting from headcount reductions in the first and third quarters of 2002. Additionally, a decrease in various discretionary expenses such as public relations, advertising, and sales and marketing incentives also contributed to the decrease in selling and marketing expenses. Selling and marketing expenses as a percentage of net revenues increased significantly for the three months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

General and administrative. General and administrative expenses decreased $354,000, or 14.9%, to $2.0 million for the three months ended September 30, 2002 from $2.4 million for the three months ended September 30, 2001. The decrease was primarily due to lower personnel costs due to headcount reductions in the first and third quarters of 2002 and an insurance refund partially offset by an increase in recruiting expenses incurred in connection with the hiring of our chief executive officer. General and administrative expenses as a percentage of net revenues increased significantly for the three months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

Interest income. Interest income decreased $530,000, or 41.9%, to $734,000 for the three months ended September 30, 2002 from $1.3 million for the three months ended September 30, 2001. The decrease in interest income is primarily due to the decrease in interest rates over the past year and to a lesser extent due to a decrease in the average cash and marketable securities balance in the third quarter of 2002 compared to 2001.

Income tax provision. As a result of our tax projections for fiscal year 2002, our estimated effective tax rate for fiscal year 2002 is 0%. Accordingly, we recognized an income tax provision of $0 during the three months ended September 30, 2002. Our estimated effective tax rate for fiscal year 2001 was 0%. Accordingly, we recognized an income tax provision of $0 during the three months ended September 30, 2001.

Comparison of Nine Months Ended September 30, 2002 and 2001

Net revenues. Net revenues decreased $32.3 million, or 51.9%, to $29.9 million in the nine months ended September 30, 2002 from $62.3 million in the nine months ended September 30, 2001. The decrease was due to a decline in sales of our SBus host bus adapter products and a decrease in sales of our ASICs and fees received under ASIC development agreements partially offset by an increase in sales of our PCI host bus adapter products and our InfiniBand host channel adapter products. The overall decrease in net revenues for the nine months ended September 30, 2002 is primarily the result of a decrease in overall unit sales of our SBus products. Additionally, the shift in demand from our SBus products to our PCI products which have lower average selling prices than SBus products also contributed to the decrease in net revenues. The demand for our SBus products has continued to decline as Sun Microsystems has released new midrange and high-end server products that do not include the SBus interface.

As our customers are beginning to migrate from one-gigabit to two-gigabit Fibre Channel host bus adapter products, we have experienced a significant increase in revenues from our two-gigabit products for the nine months ended September 30, 2002 compared to the same period in the prior year even though our total net revenues decreased from 2001 to 2002. Sales of our two-gigabit products increased by $8.6 million for the nine months ended September 30, 2002 compared to the nine months ended September 30, 2001. Revenues from the sale of our two-gigabit products represented 30.9% and 1.0% of total net revenues for the nine months ended September 30, 2002 and 2001, respectively. Sales to customers outside of the United States accounted for 25% and 32% of net revenues for the nine months ended September 30, 2002 and 2001, respectively.

Gross margin. Gross margin decreased $14.9 million, or 51.3%, to $14.1 million in the nine months ended September 30, 2002 from $29.0 million in the nine months ended September 30, 2001. Gross margin as a percentage of net revenues increased to 47.2% during the nine months ended September 30, 2002 from 46.6% during the nine months ended September 30, 2001. The increase is primarily attributed to a $7.7 million charge recorded for excess inventory in the second quarter of 2001. Excluding the $7.7 million excess inventory charge, gross margin as a percentage of net revenues decreased to 47.2% during the nine months ended September 30, 2002 from 59.0% during the nine months ended September 30, 2001.

Excluding the $7.7 million excess inventory charge, the decrease in gross margin percentage is primarily due to increased sales of our PCI host bus adapter products which have lower gross margins than our SBus host bus adapter products coupled with a decrease in the average selling price for our SBus host bus adapter products and the allocation of fixed manufacturing costs over a lower revenue base. Gross margins for the nine months ended September 30, 2002 were also affected unfavorably by amortization costs associated with our licensed technology and additional costs incurred on an ASIC development agreement partially offset by the favorable impact from the sale of boards for which we previously recorded a charge for excess inventory. Total amortization costs related to our licensed technology recorded to cost of sales in the nine months ended September 30, 2002 totaled $826,000. During the second quarter of 2002, we revised our estimated costs at completion for an ASIC development agreement which will result in reduced margins on the project. The change in estimate was recorded as a cumulative catch-up adjustment in the second quarter of 2002 amounting to a $277,000 charge to cost of sales.

In the second quarter of 2001, we recorded a charge of $7.7 million to write down excess inventories based on the determination that inventory levels were in excess of projected future demand. The write down principally affected one-gigabit products because we were expecting our customers to begin to migrate to two-gigabit products during 2001 with increased adoption of two-gigabit products in 2002. The migration from one gigabit to two-gigabit products has been much slower than we initially anticipated. However, demand for our one-gigabit products continued in 2002, and we determined in the first quarter of 2002 that simple modifications to the host bus adapters previously considered excess inventory would make them saleable product. In the nine months ended September 30, 2002, the value of the converted boards sold with a zero cost basis totaled $1.1 million, favorably impacting margins.

Research and development. Research and development expenses decreased $2.9 million, or 15.1%, to $16.1 million for the nine months ended September 30, 2002 from $18.9 million for the nine months ended September 30, 2001. The decrease in research and development expenses was due primarily to lower personnel costs, resulting from headcount reductions in the first and third quarters of 2002, decreased consulting expenses, and a decline in non-recurring engineering expenses partially offset by increased depreciation expense and equipment leasing costs. Additionally, the decrease was due to lower recruiting costs and lower lab supply costs. Research and development expenses as a percentage of net revenues increased significantly for the nine months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

Selling and marketing. Selling and marketing expenses decreased $2.7 million, or 22.2%, to $9.4 million for the nine months ended September 30, 2002 from $12.1 million for the nine months ended September 30, 2001. The decrease in selling and marketing expense was due primarily to lower personnel costs, resulting from headcount reductions in the first and third quarters of 2002, as well as a decrease in travel expenses, a decrease in expenses associated with sales and marketing incentives, decreased public relations expenses, and lower recruiting costs. Additionally, a decrease in various discretionary expenses such as consulting, advertising, and sales conferences also contributed to the decrease in selling and marketing expenses. Selling and marketing expenses as a percentage of net revenues increased significantly for the nine months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

General and administrative. General and administrative expenses decreased $964,000, or 13.4%, to $6.2 million for the nine months ended September 30, 2002 from $7.2 million for the nine months ended September 30, 2001. The decrease was primarily due to lower personnel costs due to headcount reductions in the first and third quarters of 2002 and an insurance refund partially offset by an increase in legal and accounting expenses incurred in connection with the resignation of our chief executive officer in the second quarter of 2002. Additionally, a decrease in consulting costs and internal technology spending also contributed to the decrease in general and administrative expenses. General

and administrative expenses as a percentage of net revenues increased significantly for the nine months ended September 30, 2002 from the comparable period in 2001 primarily due to the decrease in revenues.

Loss on lease commitment. We are committed to a five-year lease which commenced in June 2002 for a building adjacent to our current headquarters in San Diego, California which is for 57,323 square feet. Although we have been working aggressively to sub-lease this space, we were unable to secure a tenant to sub-lease this space as of September 30, 2002. We recorded a loss on our lease commitment totaling $3.2 million in the quarter ended June 30, 2002, taking into account current and projected real estate market conditions and various other assumptions. To the extent market conditions change and the assumptions used do not materialize, the estimated loss on our lease commitment may need to be revised, which will result in an additional loss or a benefit.

Interest income. Interest income decreased $1.8 million, or 44.0%, to $2.3 million for the nine months ended September 30, 2002 from $4.1 million for the nine months ended September 30, 2001. The decrease in interest income is primarily due to the decrease in interest rates over the past year and to a lesser extent due to a decrease in the average cash and marketable securities balance during the nine months ended September 30, 2002 compared to the same period in 2001.

Other income (expense). Other income (expense) was an expense of $178,000 for the nine months ended September 30, 2002. The expense was primarily due to a $336,000 loss on the settlement of a loan partially offset by $204,000 in net realized gains on investments. In the second quarter of 2002, we incurred a $336,000 loss related to the settlement of a dispute with a former executive of the Company. Pursuant to the settlement, we received 200,000 common shares of Company stock previously pledged by the former executive as security for an outstanding loan and accrued interest in the amount of $1.26 million. We recorded the 200,000 common shares into treasury stock at their fair market value of $924,000 and the loan was deemed repaid.

Income tax provision. As a result of our tax projections for fiscal year 2002, our estimated effective tax rate for fiscal year 2002 is 0%. Accordingly, we recognized an income tax provision of $0 during the nine months ended September 30, 2002. Our estimated effective tax rate for fiscal year 2001 was 0%. Accordingly, we recognized an income tax provision of $0 during the nine months ended September 30, 2001.

Liquidity and Capital Resources

During the nine months ended September 30, 2002, cash used in operating activities was $1.5 million, compared to $8.8 million of cash provided by operating activities during the nine months ended September 30, 2001. The cash used in operations during the nine months ended September 30, 2002 reflects a net loss before depreciation and amortization and other non-cash charges of approximately $12.9 million partially offset by a $4.8 million decrease in accounts receivable, a $4.0 million decrease in inventories, and $2.7 million of cash provided from other working capital items such as accounts payable, accrued liabilities, deferred revenue, other assets, and other liabilities.

Net cash provided by investing activities was $430,000 in the nine months ended September 30, 2002 and consisted of proceeds from the sale of marketable securities of $13.5 million for the purchase of licensed technology and services from Troika for $7.5 million, $2.0 million for the purchase of an equity investment in Mellanox Technologies and $4.0 million for the transfer of funds from our investment account to our operating account offset by capital expenditures and purchases of marketable securities available for sale. Net cash used in investing activities was $2.5 million in the nine months ended September 30, 2001 and consisted of capital expenditures of $7.7 million and purchases of marketable securities available for sale of $3.9 million partially offset by the proceeds from the sale of marketable securities of $9.1 million. The capital expenditures primarily reflect our investment in

computer and lab equipment to build out our system integration lab as well as investment in software development tools and equipment for our engineering operations and the development of testing stations. Capital expenditures decreased $6.6 million, or 85.9%, to $1.1 million for the nine months ended September 30, 2002 from $7.7 million for the nine months ended September 30, 2001. This decrease is primarily due to costs associated with our corporate headquarters and completion of our engineering and systems integration labs in 2001.

Net cash provided by financing activities was $561,000 in the nine months ended September 30, 2002, which resulted from net proceeds from the issuance of common stock, consisting of proceeds from the exercise of stock options and purchases of shares under our employee stock purchase plan. Net cash used in financing activities was $4.1 million in the nine months ended September 30, 2001, which consisted of a treasury stock repurchase of $5.1 million or 900,000 shares of our common shares partially offset by the net proceeds from the issuance of common stock consisting of proceeds from the exercise of stock options and purchases of shares under our employee stock purchase plan.

We had $106.3 million of cash and cash equivalents and investments and $88.8 million of working capital at September 30, 2002.

We believe that our cash and investments position will be sufficient to meet our working capital needs at least through the next 12 months. Our future capital requirements will depend on many factors, including the potential acquisition of or investment in complementary businesses, products, services and technologies, the rate of revenue growth, the timing and extent of spending to support product development efforts, the timing of introductions of new products and enhancements to existing products, and market acceptance of our products. There can be no assurance that additional equity or debt financing, if required, will be available on acceptable terms, or at all.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our exposure to market risk for changes in interest rates relates primarily to changes in the fair market value of our investments and the amount of interest income earned on our investment portfolio. In the normal course of business, we employ established policies and procedures to manage our exposure to changes in the fair market value of our investments. However, the fair market value of our investments in marketable securities may be adversely affected by a rise in interest rates, and we may suffer losses in principal if forced to sell securities that have declined in market value due to changes in interest rates.

Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We ensure the safety and preservation of our invested principal funds by limiting default risks, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. Based on our guidelines, our investments generally consist of fixed and variable A or higher graded U.S. government, state and local, and corporate debt obligations with maturities ranging from one to twenty-four months. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments at September 30, 2002.

Currently, all of our sales are denominated in U.S. dollars, so we are not exposed to foreign currency related risks.

Item 4. Controls and Procedures

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), within 90 days of the filing date of this

report. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

restate its financial statements and file an amended report on Form 10-K. On September 16, 2002, the Board of Directors of the Company appointed a special litigation committee to investigate the allegations in this case and to determine whether it is in the best interest of the Company to allow this case to proceed.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to Vote of Security Holders

None.

Item 5. Other Information

Factors That May Affect Future Performance

Risks relating to our business

The long lasting downturn in information technology spending has negatively affected our revenues and operating results.

Since late 2000, large enterprises throughout the global economy have significantly reduced their spending on information technology products, which has had a continuing negative effect on our revenues and operating results. We cannot predict the depth or duration of this downturn in spending, and if it grows more severe or continues for a long period of time, our ability to increase or maintain our revenues and operating results may be impaired. In addition, because we intend to continue to make significant investments in research and development and to maintain our customer service and support capabilities, any resulting decline in our revenues will have a significant adverse impact on our operating results.

We may not be able to achieve and maintain profitability on a consistent basis.

You should consider the risks and difficulties frequently encountered by companies such as ours in new and rapidly evolving markets. We have failed to achieve profitability in each of the last six completed fiscal quarters. We may not realize sufficient net revenues in future periods to achieve and maintain profitability. In addition, because of the competition in and the evolving nature of the enterprise data connectivity markets, as well as the early stage of our other target markets, achieving and sustaining profitability may be extremely challenging.

Our failure to attract and retain key managerial, technical, selling and marketing personnel could adversely affect our business.

Our success depends upon our retention of key managerial, technical, selling and marketing personnel. The loss of the services of key personnel might significantly delay or prevent the achievement of our development and strategic objectives. We do not maintain key person life insurance on any of our employees, and none of our employees is under any obligation to continue providing services to JNI.

We must continue to attract, train and retain managerial, technical, selling and marketing personnel. In particular, we are currently seeking to hire additional skilled development engineers who are currently in limited supply. Competition for such highly skilled employees in our industry is high, and we cannot be certain that we will be successful in recruiting or retaining such personnel. We also believe that our success depends to a significant extent on the ability of our key personnel to operate effectively, both individually and as a group. If we are unable to identify, hire and integrate new employees in a timely and cost-effective manner, our operating results may suffer.

We are in the process of reviewing our capabilities and market position, and we may make changes to our business that do not positively affect our revenues or operating results.

We recently hired a new Chief Executive Officer, Russell Stern, and are in a process of continuing business transition necessitated by changes in our markets and the unexpected resignation of our former CEO in May 2002. Mr. Stern has initiated a comprehensive review of our capabilities, market position and strategy. Moreover, as part of this transition, we are continuing to evaluate our cost structure. Actions that management undertakes to reverse our declining market share and revenues could cause disruption in our business that could have an adverse effect on our operating results or financial condition, at least in the short term. Each of our target markets presents challenges that may be difficult to overcome and that could require the expenditure of resources that may not result in a favorable return. As a result, we cannot assure you that actions we take as a result of our review will positively impact our revenues, operating results or market share.

Our quarterly operating results are volatile and may cause our stock price to fluctuate.

Our future revenues and operating results are likely to vary significantly from quarter to quarter due to a number of factors, many of which are outside of our control. Accordingly, you should not rely on quarter-to-quarter comparisons of our operating results as an indication of future performance. It is possible that in some future periods our operating results will be below the expectations of public market analysts and investors. In this event, the price of our common stock will likely decline. Factors that may cause our revenues, gross margins and operating results to fluctuate include the following:

•: the size, timing, terms and fluctuations of customer orders, particularly large orders from our significant OEM or reseller customers;
•: changes in customer buying patterns;
•: declining average selling prices of our products;

•: fluctuations in sales levels of Sun servers;
•: the timing of the introduction or enhancement of products by us, our significant OEM or reseller customers or our competitors;
•: delays in obtaining OEM certifications for our products;
•: our ability to obtain sufficient supplies of single- or limited-source components of our products;
•: fluctuations in costs of goods sold and potential write-offs of obsolete inventory as we transition to new products;
•: changes in accounting standards or principles;
•: operating expenses, particularly in connection with our strategies to increase brand awareness or to invest in accelerated research and development;
•: the costs and other effects of potential acquisitions or strategic investments; and
•: general economic conditions.

Because our revenues in a given quarter depend substantially on orders booked in that quarter, a decrease in the number of orders we receive is likely to adversely and disproportionately affect our quarterly operating results. This is because our expense levels are partially based on our expectations of future sales, and we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. As a result, our expenses may be disproportionately large as compared to sales in a quarter with reduced orders. Any shortfall in sales in relation to our quarterly expectations or any delay of customer orders would likely have an immediate and adverse impact on our quarterly operating results.

Because we depend on a small number of OEM and distribution channel customers for a significant portion of our revenues in each period, the loss of any of these customers, the failure to obtain certifications or any cancellation or delay of a large purchase by any of these customers could significantly reduce our net revenues.

Historically, a limited number of OEMs and distribution channel customers has accounted for a significant majority of our total net revenues. The loss of any of our key customers, or a significant reduction in sales to those customers, could significantly reduce our net revenues. For the nine months ended September 30, 2002, Hitachi Data Systems accounted for 24% of our net revenues, Acal Electronics accounted for 11% of our net revenues and Info X, Inc. accounted for 11% of our net revenues. A significant portion of the products sold to the distributors was utilized by our OEM customers. We anticipate that our operating results in any given period will continue to depend to a significant extent upon revenues from a small number of customers.

Before we can sell our products to an OEM, either directly or through its associated distribution channel, that OEM must certify our products. The certification process can take up to 12 months. This process requires the commitment of OEM personnel and test equipment, and we compete with other suppliers for these resources. Any delays in obtaining these certifications or any failure to obtain these certifications would adversely affect our ability to sell our products. In addition, because none of our customers is contractually obligated to purchase any fixed amount of products from us in the future, they may stop placing orders with us at any time, regardless of any forecast they may have previously provided. If any of our large customers stops or delays purchases, our revenues and profitability would be adversely affected, which could cause our stock price to decline. We cannot be certain that we will retain our current OEM or distribution channel customers or that we will be able to recruit additional or replacement customers. As is common in the technology industry, our agreements with OEMs and distribution channel customers typically are non-exclusive and often may be terminated by either party

without cause. Moreover, many of our OEM and distribution channel customers utilize or carry competing product lines. If we were to suddenly lose one or more important OEM or distribution channel customers to a competitor, our business, operating results or financial condition could be materially adversely affected. Furthermore, some of our OEM customers could develop products internally that would replace our products. The resulting reduction in sales of our products to any such OEM customers, in addition to the increased competition presented by these customers, could have a material adverse effect on our business.

Because a significant portion of our products is designed to work with servers from Sun Microsystems, Inc., our business could suffer if demand for Sun servers does not increase or if we are unable to adapt quickly to changes in the market for such equipment.

Our host bus adapters have achieved their greatest market acceptance in computing environments built with high-end servers from Sun Microsystems due to our products' interoperability with the Sun Solaris operating system. If the demand for Sun's high-end servers does not expand, our revenue growth may suffer.

If we do not develop, market and sell host bus adapters that interoperate with operating systems other than the Sun Solaris operating system our business will suffer.

We have derived a substantial majority of our historical revenues from sales of host bus adapters that include software designed to work with the Sun Microsystems Solaris operating system. To increase our revenues and grow our business we must maintain our leading position in Solaris environments and build market share with our newer products that interoperate with other operating systems. These products have not obtained market penetration comparable to what we have achieved in the Solaris environment, and our ability to increase market share is subject to the risks inherent in the commercialization of new products. In particular, competition in the market for non-Solaris Fibre Channel host bus adapters is fierce. We may not be successful in marketing and selling the new products we develop, and we cannot assure you that our intended customers will purchase our products instead of competing products. Our failure to obtain a significant share of the market for host bus adapters compatible with operating systems other than the Solaris operating system would impair our growth and harm our operating results.

Because a significant portion of our host bus adapters is designed for integration with storage devices manufactured by Hitachi Data Systems, EMC and Storagetek, our future revenue growth depends on our ability to obtain OEM certifications for the new and existing products of these manufacturers and on the increased demand for such products.

We believe that the majority of our host bus adapters are used to form connections to storage arrays manufactured by Hitachi Data Systems, EMC or Storagetek. To a material extent, our future revenue growth depends upon the continued acceptance of and increased demand for the storage products offered by these vendors. To maintain and expand our position with these vendors, we must continue to provide high quality, early-to-market, high performance host bus adapters at competitive prices. Even if we are able to meet the demands of these vendors, it is possible that they will develop or acquire products or technologies that make our products uncompetitive. Further, these vendors may form alliances with other industry participants or competitive suppliers of host bus adapters that could adversely impact the demand for our products. In addition, if we are unable to timely obtain OEM certifications for new storage products offered by these vendors, they could make arrangements with competing host bus adapter manufacturers that would make our products less competitive for both existing and new storage arrays. If we are unable to maintain or expand our relationships with Hitachi Data Systems, EMC or Storagetek, our revenues may suffer.

Because we depend on sole source and limited source suppliers for key components, we are susceptible to supply shortages and quality problems that could adversely affect our operating results.

We rely on third-party suppliers for components that are used in our products, and we have experienced delays and difficulty in securing components in the past. In times of shortage, we have been required to pay, and may in the future be required to pay, substantial premiums for components, which could adversely affect our gross margins. Key components that we use in our products may, from time to time, only be available from single sources with which we do not have long-term contracts. Any inability to supply products due to a lack of components or to redesign products to incorporate alternative components in a timely manner could materially adversely affect our business. The components we use for our products are based on advanced technology and may not be available with the performance characteristics or in the quantities that we require. In addition, because the third party components we use for our products are complex, they may contain errors or defects that are not discovered until after our products are installed in end-user SANs. Any such errors or defects discovered by our customers could harm our reputation and cause us to lose customers.

Our future success will depend to a certain extent upon our ability to develop new products as well as receive a return on our current investment in new products based upon new technologies such as InfiniBand.

In the first quarter of 2002, we announced the InfiniStar line of host channel adaptor modules based on the InfiniBand Architecture standard. The InfiniBand standard, like all new standards, is subject to market and research and development transitions with major OEM customers. To date, we have announced one OEM design win for InfiniBand with Network Appliance, and the success or failure of this relationship will have a material effect on our ability to expand our InfiniBand business. We currently intend to continue to make research and development investments to developing InfiniBand products. There is no assurance that InifinBand will ever achieve greater acceptance in the market, and if the market for InfiniBand does not materialize as anticipated, our business will suffer.

Our operating results may suffer because of increasing competition.

The markets in which we compete are intensely competitive. As a result, we will face a variety of significant challenges, including rapid technological advances, price erosion, changing customer preferences and evolving industry standards. Our competitors continue to introduce products with improved price/performance characteristics, and we will have to do the same to remain competitive. Increased competition could result in significant price competition, reduced revenues, lower profit margins or loss of market share, any of which would have a material adverse effect on our business. We cannot be certain that we will be able to compete successfully in the future.

As the Fibre Channel market continues to mature, the commoditization of the Fibre Channel market favors larger organizations such as our current and potential competitors in the Fibre Channel market, including Emulex Corporation, QLogic Corporation, Agilent Technologies, Inc. and LSI Logic. These companies all have substantially greater financial, marketing and distribution resources than we have. Our primary competitors, Emulex and Q-Logic, have entered the Sun Solaris segment of the Fibre Channel market, which is the primary market for our Fibre Channel products. We may also face competition from new entrants to the Fibre Channel market, including larger technology companies that may develop or acquire differentiating technology and then apply their resources to our detriment. Our Fibre Channel products may also compete at the end-user level with other current or future technology alternatives. Further, businesses that implement SANs may select fully-integrated SAN systems that are offered by large product solution companies. Because such systems typically do not interoperate with our products, customers that invest in these systems will be less likely to purchase our products. Because most of our current products are based on Fibre Channel, unless we are able to develop products based on other emerging connectivity technologies, our business could suffer if the

market for Fibre Channel products grows more slowly than we anticipate as a result of competition from such technologies.

Because the market for InfiniBand products is in the early stages of development, we expect that competition in this market will increase significantly. We also expect that a number of larger technology companies, such as Sun, Adaptec, Brocade, Cicso, IBM, Intel and McData could enter this market with competitive InfiniBand products. If we are not successful, for competitive or other reasons, in achieving market penetration with our InfiniBand products, we may not be able to recover our investment in pursuing this market.

Delays in product development could adversely affect our market position or customer relationships.

We have experienced delays in product development in the past and may experience similar delays in the future. Given the short product life cycles in the markets for our products, any delay or unanticipated difficulty associated with new product introductions or product enhancements could cause us to lose customers and damage our competitive position. Further, we are devoting significant resources to developing InfiniBand and other products in order to achieve an early-mover advantage in the evolving multi-protocol connectivity market. Delays in development of our products could result in a failure to achieve such an advantage. Delays may result from numerous factors, such as:

•: changing OEM product specifications;
•: evolving standards;
•: undetected errors or failures in software or hardware;
•: changing market requirements;
•: competitive product introductions;
•: difficulties in hiring and retaining necessary personnel;
•: difficulties in allocating engineering resources and other resource limitations;
•: difficulties with independent contractors;
•: unanticipated engineering complexity; and
•: delays in the acceptance or shipment of products by OEM customers.

In our industry, technology and other standards change rapidly, and we must keep pace with the changes to compete successfully.

The market for our products is characterized by rapidly changing technology, evolving industry standards and the frequent introduction of new products and enhancements. Our future success depends in large part on our ability to enhance our existing products and to introduce new products and technologies on a timely basis to meet changes in customer preferences and evolving industry standards. Additionally, changes in technology and customer preferences could potentially render our current products uncompetitive or obsolete. We cannot be certain that we will be successful in designing, supplying and marketing new products or product enhancements that respond to such changes in a timely manner and achieve market acceptance. We also cannot be certain that we will be able to develop the underlying core technologies necessary to create new products and enhancements, or that we will be able to license the core technologies from third parties. In addition, because our products are designed to work with software produced by third parties, our operating results could be adversely affected if such third parties delay introduction of new versions of their software for which we have designed new products or if they make unanticipated modifications to such software. If we are unable, for technological or other reasons, to develop new products or enhance existing products in a

timely manner in response to technological and market changes, our business, operating results and financial condition would be materially adversely affected.

If the market for Fibre Channel-based SANs does not expand as we anticipate, our business will suffer.

The growth of the market for our current products depends upon the continued deployment of Fibre Channel technology in SANs. Accordingly, increasing rates of deployment of Fibre Channel-based SANs is crucial to our future revenue growth. If this market does not expand as rapidly as we anticipate, our operating results may be below the expectations of public market analysts and investors, which would likely cause our stock price to decline.

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

Our sales cycle, particularly to OEMs, typically involves a lengthy certification process during which we generally invest significant resources in addressing customer specifications. The purchase of our products or solutions that incorporate our products typically involves significant internal procedures associated with the evaluation, testing, implementation and acceptance of new technologies. This evaluation process frequently results in a lengthy sales process, typically ranging from three months to longer than a year, and is subject to a number of significant risks, including budgetary constraints and internal acceptance reviews. The length of our sales cycle also varies substantially from customer to customer. Because of the length of the sales cycle, we may experience a delay between increasing expenses for research and development and selling and marketing efforts and the generation of higher revenues, if any, from such expenditures.

The failure of our OEM customers to keep pace with rapid technological change and to successfully develop and introduce new products could adversely affect our revenues.

Our ability to generate increased revenues depends significantly upon the ability and willingness of our OEM customers to develop and promote products on a timely basis that incorporate our technology. OEMs must commit significant resources each time they develop a product that incorporates one of our new products. If our OEM customers do not invest in the development and marketing of solutions that incorporate our products and successfully market these solutions, then sales of our products to the OEM customers will be adversely affected. The ability and willingness of OEM customers to develop and promote such products is based upon a number of factors beyond our control.

We expect that the average selling prices of each of our products will decrease over time, which may reduce our gross margins or revenues.

We expect that we will continue to experience downward pricing pressure on our products. We anticipate that the average selling prices of each of our products will decrease over time in response to competitive pricing pressures, increased sales discounts, new product introductions by us or our competitors or other factors. Therefore, to maintain our gross margins, we must develop and introduce on a timely basis new products and product enhancements and continually reduce our product costs. Our failure to do so would cause our revenue and gross margins to decline, which could materially adversely affect our operating results and cause the price of our common stock to decline.

Our product cycles may be short, and from time to time we may need to write off excess and obsolete inventory.

In the rapidly changing technology environment in which we operate, product cycles tend to be short. However, we must have sufficient quantities of our products available to satisfy our customers'

demands. Accordingly, we order significant quantities of our products from our manufacturers prior to receiving customer orders. Although we expect to sell the inventory within a short period of time, products may remain in inventory for extended periods and may become obsolete because of the passage of time and the introduction of new products. For example, as we introduce successive generations of ASICs, we may experience excess inventory of host bus adapters that incorporate the prior generation of ASICs. In these situations, we would be required to write off obsolete inventory, which could have a material adverse effect on our results of operations.

We may engage in future acquisitions of complementary businesses, products or technologies that dilute our stockholders' equity or cause us to incur debt or assume contingent liabilities.

We may pursue acquisitions that could provide new technologies or products. In January 2002, we completed a strategic transaction with Troika Networks pursuant to which we acquired an exclusive license to Troika's Path Command Plus software and manufacturing and distribution rights to its Zentai family of Fibre Channel host bus adapters. We may not be able to achieve the anticipated benefits of this transaction if the technology and products we acquired do not achieve market acceptance or if Troika fails to complete its development obligations under the transaction agreements. Future acquisitions may involve the use of significant amounts of cash, potentially dilutive issuances of equity or equity-linked securities, the incurrence of debt, or amortization expenses related to intangible assets.

In addition, acquisitions involve numerous risks, including:

•: difficulties in the assimilation of the operations, technologies, products and personnel of the acquired company;
•: the diversion of management's attention from other business concerns;
•: risks of entering markets in which we have no or limited prior experience; and
•: the potential loss of key employees of the acquired company.

We currently have no commitments or agreements with respect to any such acquisition. In the event that such an acquisition does occur and we are unable to successfully integrate businesses, products, technologies or personnel that we acquire, our business, operating results or financial condition could be materially adversely affected.

Because we rely on third parties, and in some cases, a sole manufacturer, for substantially all of our manufacturing and assembly, failures by these third parties to provide products of sufficient quality and quantity could cause us to delay product shipments, which could result in delayed or lost revenues or customer dissatisfaction.

Taiwan Semiconductor Manufacturing Company, or TSMC, is currently our sole manufacturer for all of our Emerald ASIC wafers, and Siliconware USA Inc. performs assembly, packaging and testing of our ASICs so that we purchase and receive only finished product. Sanmina-SCI Corporation in Rapid City, South Dakota, SMS Technologies, Inc. in San Diego, California, and Corlund Electronics in Tustin, California perform substantially all assembly operations for our host bus adapters and host channel adapter modules. We currently have two versions of our host channel adapter product. For each version of our host channel adapter product, we have a sole manufacturer that provides us with the ASIC. We have no firm long-term commitments from any of these companies to supply products to us for any specific period, or in any specific quantity, except as may be provided in a particular purchase order.

Our reliance on TSMC for fabrication of our Emerald ASIC wafers involves particular risks. The semiconductor industry is highly cyclical and, in the past, foundry capacity has been very limited at times and may become limited in the future. Our dependence on TSMC increases our exposure to this

cyclicality and to possible shortages of key components, product performance shortfalls and reduced controls over delivery schedules, manufacturing capability, quality assurance, quantity and costs. If TSMC or any of our other third-party manufacturers experiences delays, disruptions, earthquakes, capacity constraints or quality control problems in its manufacturing operations, then product shipments to our customers could be delayed, which would negatively impact our net revenues, competitive position and reputation.

Further, our business would be harmed if we fail to effectively manage the manufacture of our products. Because we place orders with our manufacturers based on our forecasts of expected demand for our products, if we inaccurately forecast demand, we may be unable to obtain adequate manufacturing capacity or adequate quantities of components to meet our customers' delivery requirements, or we may accumulate excess inventories.

We may in the future need to find new contract manufacturers in order to increase our volumes or to reduce our costs. We may not be able to find contract manufacturers that meet our needs, and even if we do, qualifying a new contract manufacturer and commencing volume production is expensive and time consuming. If we are required or elect to change contract manufacturers, we may lose revenues, and our customer relationships may suffer.

Our reliance on manufacturers outside the U.S. subjects us to risks inherent in doing business on an international level that could harm our operating results.

Currently, our ASIC products are manufactured by TSMC which is located in Asia, and we may expand our manufacturing, assembly and testing activities abroad. Accordingly, we are subject to risks inherent in international operations, which include:

•: political, social and economic conditions, particularly those associated with current worldwide conflicts and events;
•: trade restrictions and tariffs;
•: the imposition of governmental controls;
•: exposure to different legal standards, particularly with respect to intellectual property;
•: import and export license requirements;
•: unexpected changes in regulatory requirements; and
•: potentially adverse tax consequences.

In particular, many Asian countries have in recent years experienced significant economic difficulties, including currency devaluation and instability, business failures and a generally depressed business climate, particularly in the semiconductor industry. In view of our reliance on Asian manufacturers, and our expanded international operations, any future economic downturns in the Asian economy may seriously harm our business.

Because our intellectual property is critical to the success of our business, our operating results would suffer if we were unable to adequately protect our intellectual property.

Our proprietary technologies are crucial to our success and ability to compete. We rely primarily on a combination of copyrights, trademarks, trade secret laws and contractual provisions to establish and protect our intellectual property rights in our proprietary technologies, including the source code for our software and the reference designs for our ASICs. We presently have no patents. We generally enter into confidentiality or license agreements with employees, consultants and customers and seek to control access to and distribution of our source code, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects

of our products or to obtain and use information that we regard as proprietary. Policing unauthorized use of our proprietary information is difficult. Other parties also may independently develop or otherwise acquire equivalent or superior technology. In addition, the laws of some of the countries in which our products are or may be developed, manufactured or sold may not protect our intellectual property rights to the same extent as the laws of the United States, or at all. Our failure to protect our intellectual property rights could have a material adverse effect on our business.

We may become involved in costly and lengthy patent infringement or intellectual property litigation which could seriously harm our business.

In recent years, there has been significant litigation in the United States and in foreign countries involving patents and other intellectual property rights. We may become party to litigation in the future as a result of an alleged infringement of others' intellectual property. From time to time, we receive inquiries from other companies concerning whether we used their proprietary information. Any claims that we improperly use another party's proprietary information or that we infringe another party's intellectual property, with or without merit, could adversely affect or delay sales of our products that use the technology in question, result in costly and time-consuming litigation, divert our technical and management personnel, or require us to develop non-infringing technology or enter into royalty or licensing arrangements, any of which would adversely affect our business. It also is possible that patent holders will assert patent rights which apply broadly to our industry, and that such patent rights, if valid, may apply to our products or technology. These or other claims may require us to stop using the challenged intellectual property or to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner or on reasonable terms, our business could be materially adversely affected.

Our export sales subject us to risks that could adversely affect our business.

Export sales accounted for 25% of our net revenues during the nine months ended September 30, 2002, 32% of our net revenues in 2001, 23% of our net revenues in 2000, and 17% of our net revenues in 1999. Accordingly, we encounter risks inherent in international operations. Because all of our sales are currently denominated in U.S. dollars, if the value of the U.S. dollar increases relative to foreign currencies, our products could become less competitive in international markets. Our export sales could also be limited or disrupted by any of the following factors:

•: restrictions on the export of technology;
•: longer accounts receivable payment cycles;
•: reduced and limited protections of intellectual property rights;
•: trade restrictions; and
•: changes in tariffs.

Failure to comply with governmental regulations by us or our OEM customers could reduce our sales or require design modifications.

Our products are subject to U.S. Department of Commerce and Federal Communications Commission regulations as well as various standards established by authorities in other countries. Failure to comply with existing or evolving U.S. or foreign governmental regulation or to obtain timely domestic or foreign regulatory approvals or certificates could materially harm our business by reducing our sales or requiring design modifications to our products or the products of our OEM customers. Neither we nor our customers may export such products without obtaining an export license. United States export laws also prohibit the export of our products to a number of countries deemed by the

U.S. to be hostile. These restrictions may make foreign competitors facing less stringent controls on their products more competitive in the global market than we or our customers are. 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.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs, reduce our net revenues or damage our reputation.

Products as complex as ours frequently contain undetected software or hardware errors when first introduced or as new versions are released. We have from time to time found errors in existing products, and we may from time to time find errors in our existing, new or enhanced products. The occurrence of hardware or software errors could adversely affect sales of our products, cause us to incur significant warranty and repair costs, divert the attention of our engineering personnel from our product development efforts and cause us to lose credibility with current or prospective customers.

We may need additional capital in the future to fund the growth of our business, and financing may not be available.

We currently anticipate that our available capital resources and expected interest income will be sufficient to meet our expected working capital and capital expenditure requirements for at least the next 12 months. However, we cannot assure you that such resources will be sufficient to fund the long-term growth of our business. We may raise additional funds through public or private debt or equity financings if such financings become available on favorable terms, but such financings would likely dilute our stockholders. We cannot assure you that any additional financing we may need will be available on terms favorable to us, or at all. If adequate funds are not available or are not available on acceptable terms, we may not be able to take advantage of unanticipated opportunities, develop new products or otherwise respond to competitive pressures. In any such case, our business, operating results or financial condition could be materially adversely affected.

Our stock price is volatile, which has and may result in lawsuits against us and our officers and directors.

The stock market in general, and the stock prices in technology-based companies in particular, have experienced extreme volatility that often has been unrelated to the operating performance of any specific public company. The market price of our common stock has fluctuated in the past and is likely to fluctuate in the future as well. Factors which could have a significant impact on the market price of our common stock include, but are not limited to, the following:

•: quarterly variations in operating results;
•: announcements of new products by us or our competitors;
•: changes in management;
•: the gain or loss of significant customers;
•: changes in analysts' earnings estimates;
•: rumors or dissemination of false information;
•: unauthorized disclosure of confidential information;
•: pricing pressures;
•: short selling of our common stock;

•: general conditions in the computer, storage or communications markets;
•: political and military events associated with current worldwide conflicts; or
•: events affecting other companies that investors deem to be comparable to us.

In the past, companies that have experienced volatility in the market price of their stock have been the object of securities class action litigation. In this regard, we and certain of our officers and directors have been named as defendants in securities class action lawsuits filed in the United States District Court for the Southern District of California and the United States District Court for the Southern District of New York. Such lawsuits allege that we and certain of our officers and directors made misrepresentations and omissions in violation of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and sections 11, 12(a)(2) and 15 of the Securities Act of 1933. As a result of the Southern District of California lawsuits, a derivative case has been filed in California alleging that certain of our officers and directors breached their fiduciary duties to the Company in connection with the events alleged in the class action lawsuits. The complaints generally seek compensatory damages, costs and attorney's fees in an unspecified amount. Such litigation could result in substantial costs to us and a diversion of our management's attention and resources. While we believe that the lawsuits are without legal merit and intend to defend them vigorously, because the lawsuits are at an early stage, it is not possible to predict whether we will incur any material liability in connection with such lawsuits.

Future changes in financial accounting standards may cause adverse unexpected revenue fluctuations and affect our reported results of operations.

A change in accounting standards can have a significant effect on our reported results and may even affect our reporting of transactions completed before a change is announced. New pronouncements and varying interpretations of pronouncements have occurred with frequency and are likely to occur in the future as a result of recent congressional action. Changes to existing rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business.

Our stockholder rights plan could adversely affect the performance of our stock.

We have distributed a dividend of one right for each outstanding share of our common stock pursuant to the terms of our preferred share purchase rights plan. These rights will cause substantial dilution to the ownership of a person or group that attempts to acquire us on terms not approved by our board of directors and may have the effect of deterring hostile takeover attempts. In addition, our board of directors has the authority to fix the rights and preferences of and issue shares of preferred stock. This right may have the effect of delaying or preventing a change in our control.

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

		3.1(1)		Fourth Amended and Restated Certificate of Incorporation of the Company
		3.2(1)		Bylaws of the Company
		10.29		Offer letter between Russell Stern and JNI Corporation dated September 6, 2002
		10.30		Severance and Change of Control Agreement between Russell Stern and JNI Corporation dated September 8, 2002
		99.1		Certification of Chief Executive Officer
		99.2		Certification of Chief Financial Officer

(b): Reports on Form 8-K

None.

(1): Incorporated by reference to the Registration Statement on Form S-1 filed by JNI Corporation (File No. 333-86501).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized.

	JNI CORPORATION
Date: November 12, 2002	By:	/s/ RUSSELL STERN Russell Stern President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 12, 2002		/s/ PAUL KIM Paul Kim Chief Financial Officer (Principal Financial and Accounting Officer)

CERTIFICATIONS

I, Russell Stern, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of JNI 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 have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, 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 registrant's board of directors (or persons performing the equivalent functions):

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 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.

Dated: November 12, 2002
/s/ RUSSELL STERN Russell Stern, Chief Executive Officer and President

I, Paul Kim, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of JNI Corporation;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, 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.

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 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.

Dated: November 12, 2002

/s/ PAUL KIM

Paul Kim,
Chief Financial Officer

EXHIBIT INDEX

(a): Exhibits

		3.1(1)		Fourth Amended and Restated Certificate of Incorporation of the Company
		3.2(1)		Bylaws of the Company
		10.29		Offer letter between Russell Stern and JNI Corporation dated September 6, 2002
		10.30		Severance and Change of Control Agreement between Russell Stern and JNI Corporation dated September 8, 2002
		99.1		Certification of Chief Executive Officer
		99.2		Certification of Chief Financial Officer