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 June 30, 2003

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number 0-27755

JNI CORPORATION

(Exact name of registrant as specified in its charter)

Delaware		33-0740004
(State or other jurisdiction of incorporation or organization)		(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

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

As of July 31, 2003, there were 27,079,930 shares of the registrant’s common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS

*Part I*	FINANCIAL INFORMATION

Item 1:	*Financial Statements*

	Balance Sheets (unaudited) at June 30, 2003 and December 31, 2002

	Statements of Operations (unaudited) for the three and six months ended June 30, 2003 and 2002

	Statements of Cash Flows (unaudited) for the six months ended June 30, 2003 and 2002

	Notes to Financial Statements (unaudited)

Item 2:	*Management’s Discussion and Analysis of Financial Condition and Results of Operations*

Item 3:	*Quantitative and Qualitative Disclosures about Market Risk*

Item 4:	*Controls and Procedures*

*Part II*	OTHER INFORMATION

Item 1:	*Legal Proceedings*

Item 2:	*Changes in Securities and Use of Proceeds*

Item 3:	*Defaults upon Senior Securities*

Item 4:	*Submission of Matters to Vote of Security Holders*

Item 5:	*Other Information*

Item 6:	*Exhibits and Reports on Form 8-K*

Signatures

Exhibit Index

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

JNI Corporation

BALANCE SHEETS

(In thousands, except share and per share data)

(unaudited)

	June 30, 2003			December 31, 2002
ASSETS
Current assets:
Cash and cash equivalents	$	4,429		$	3,809
Marketable securities available for sale	69,818			83,558
Accounts receivable, net	2,949			3,715
Inventories	3,554			3,874
Other current assets	1,760			1,255
Total current assets	82,510			96,211
Marketable securities available for sale	15,816			15,313
Property and equipment, net	7,955			8,980
Licensed technology, net	525			600
Equity investments	900			600
Other assets	236			377
	$	107,942		$	122,081

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	4,231		$	3,188
Accrued liabilities	6,760			10,697
Deferred revenue	1,150			1,709
Total current liabilities	12,141			15,594
Other liabilities	237			368
Total liabilities	12,378			15,962

Contingencies (Note 8)

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; 26,942,182 and 26,590,864 shares issued and outstanding	27			27
Additional paid-in capital	147,503			146,580
Accumulated other comprehensive income	147			246
Accumulated deficit	(46,050		)	(34,680		)
Common stock in treasury, at cost – 1,102,500 and 1,100,000 shares	(6,063		)	(6,054		)
Total stockholders’ equity	95,564			106,119
	$	107,942		$	122,081

See accompanying notes to financial statements.

JNI Corporation

STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Net revenues	$	5,806		$	10,923		$	13,937		$	22,837
Cost of revenues	2,370			5,847			5,899			11,853
Gross profit	3,436			5,076			8,038			10,984

Operating expenses:
Research and development	5,747			5,625			10,800			11,147
Selling and marketing	2,548			3,232			5,208			6,563
General and administrative	2,128			2,212			4,198			4,223
Loss on lease commitment	—			3,172			—			3,172
Amortization of stock-based compensation	—			41			—			92
Total operating expenses	10,423			14,282			20,206			25,197

Operating income (loss)	(6,987		)	(9,206		)	(12,168		)	(14,213		)

Interest income	344			824			801			1,698
Other income (expense), net	4			(336		)	(3		)	(336		)
Income (loss) before income taxes	(6,639		)	(8,718		)	(11,370		)	(12,851		)
Income tax provision	—			—			—			—
Net income (loss)	$	(6,639	)	$	(8,718	)	$	(11,370	)	$	(12,851	)

Earnings (loss) per share:
Basic	$	(0.25	)	$	(0.33	)	$	(0.43	)	$	(0.48	)
Diluted	$	(0.25	)	$	(0.33	)	$	(0.43	)	$	(0.48	)

Number of shares used in per share computations:

Basic	26,756,000			26,590,000			26,674,000			26,586,000
Diluted	26,756,000			26,590,000			26,674,000			26,586,000

See accompanying notes to financial statements.

JNI Corporation

STATEMENTS OF CASH FLOWS

(In thousands)

(unaudited)

	Six Months Ended June 30,
	2003			2002
Cash flows from operating activities:
Net income (loss)	$	(11,370	)	$	(12,851	)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
Depreciation and amortization	2,766			2,873
Loss on write-off of property and equipment	582			—
Amortization of licensed technology	75			447
Amortization of stock-based compensation	—			91
Non-cash revenue consideration	(300		)	—
Non-cash expense and charges	—			580
Changes in assets and liabilities:
Accounts receivable	766			2,127
Inventories	320			3,305
Other assets	(364		)	(2		)
Accounts payable	1,043			2,173
Accrued liabilities	(3,814		)	1,028
Deferred revenue	(559		)	(339		)
Other liabilities	(131		)	1,332
Net cash (used in) provided by operating activities	(10,986		)	764

Cash flows from investing activities:
Purchases of marketable securities available for sale	(862		)	(1,729		)
Proceeds from sales of marketable securities available for sale	14,000			9,500
Capital expenditures	(2,323		)	(783		)
Purchase of licensed technology and services	—			(7,500		)
Purchase of equity investment	—			(2,000		)
Net cash provided by (used in) investing activities	10,815			(2,512		)

Cash flows from financing activities:
Net proceeds from the issuance of common stock	923			531
Purchase of treasury stock	(9		)	—
Payment of capital leases	(123		)	—
Net cash provided by financing activities	791			531
Net change in cash and cash equivalents	620			(1,217		)
Cash and cash equivalents, beginning of period	3,809			4,490
Cash and cash equivalents, end of period	$	4,429		$	3,273

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 and per share data)

(unaudited)

Note 1 — General

The accompanying unaudited financial statements of JNI Corporation (the “Company”) for the three and six month periods ended June 30, 2003 and 2002 have been prepared on the same basis as the audited financial statements for the year ended December 31, 2002 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 for the fiscal year ended December 31, 2002 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 — Inventory

Components of inventories are as follows:

	As of
	June 30, 2003		December 31, 2002
Inventories:
Raw materials	$	1,598	$	1,615
Work in process	73		204
Finished goods	1,883		2,055
Total	$	3,554	$	3,874

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 six months ended June 30, 2003 and 2002 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 806,000 and 399,000 for the three and six months ended June 30, 2003, respectively, and 169,000 and 239,000 for the three and six months ended June 30, 2002, respectively.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002

Numerator:
Net income (loss)	$	(6,639	)	$	(8,718	)	$	(11,370	)	$	(12,851	)
Denominator:
Denominator for basic earnings (loss) per share Weighted average shares outstanding	26,756,000			26,590,000			26,674,000			26,586,000
Effect of dilutive securities:
Dilutive options outstanding	—			—			—			—
Employee stock purchase plan shares	—			—			—			—

Denominator for diluted earnings (loss) per share – adjusted weighted average shares	26,756,000			26,590,000			26,674,000			26,586,000

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 June 30, 2003 and 2002, total comprehensive income (loss) was $(6,627) and $(8,794), respectively. During the six months ended June 30, 2003 and 2002, total comprehensive income (loss) was $(11,469) and $(13,189), 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 $12 and an unrealized loss of $76 during the three months ended June 30, 2003 and 2002, respectively, and an unrealized loss of $99 and $338 during the six months ended June 30, 2003 and 2002, respectively.

Note 5 - Stock-based Compensation

The Company measures compensation costs related to stock option plans using the intrinsic value method and provides pro forma disclosures of net income (loss) and earnings (loss) per common share as if the fair value based method had been applied in measuring compensation costs. Accordingly, compensation cost for stock options is measured as the excess, if any, of the fair value of the Company’s common stock at the date of grant over the amount an employee must pay to acquire the stock and is amortized over the vesting period, generally four years.

Had compensation cost for the Company’s stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans, the Company’s net income (loss) and basic and diluted earnings (loss) per common share would have been as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
Net income (loss):
As reported	(6,639	)	(8,718	)	(11,370	)	(12,851	)
Stock based compensation included in net income (loss)	—		41		—		92
Stock based employee compensation expense under fair value based method	(353	)	(2,662	)	(1,565	)	(4,607	)
Pro forma net income (loss)	(6,992	)	(11,339	)	(12,935	)	(17,366	)
Basic earnings (loss) per common share:
As reported	(0.25	)	(0.33	)	(0.43	)	(0.48	)
Pro forma	(0.26	)	(0.43	)	(0.48	)	(0.65	)
Diluted earnings (loss) per common share:
As reported	(0.25	)	(0.33	)	(0.43	)	(0.48	)
Pro forma	(0.26	)	(0.43	)	(0.48	)	(0.65	)

Note 6 – Product Warranty

The Company’s current practice is generally to warranty its adapter products against defects in materials and workmanship for a one to five-year period from the date of shipment and its Application Specific Integrated Circuits (“ASICs”) products for a one-year period from the date of shipment. The estimated cost of warranty obligations is accrued at the time revenue is recognized. In estimating its warranty obligations, the Company considers various relevant factors, including the Company’s stated warranty policies and practices, historical product returns and failure rates and the estimated cost to replace or repair its products under warranty. The following table reflects the change in the Company’s warranty accrual during the six months ended June 30, 2003 and June 30, 2002.

	For the six months ended June 30, 2003			For the six months ended June 30, 2002
Balance, beginning of period	$	206		$	100
Accruals for warranties issued during the period	187			110
Settlements made during the period	(73		)	(46		)
Balance, end of period	$	320		$	164

Note 7 — Income Taxes

The effective tax rate for 2003 and 2002 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 8 — Contingencies

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 the 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. On March 25, 2003, the Court executed an order granting with leave to amend the Company’s motion to dismiss and giving plaintiffs until May 27 to file an amended complaint. On May 27, 2003, plaintiffs filed a second amended consolidated complaint for violation of federal securities laws. On June 13, 2003, the Company filed a motion to dismiss and a motion to strike the second amended consolidated complaint for violation of federal securities laws. On July 21, 2003, the court took the Company’s motions under submission.

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 February 11, 2003, the special litigation committee issued a report of its investigation which concluded that it is not in the best interests of JNI to pursue the Grosset action, and that the best interests of JNI require that this action be dismissed in its entirety. On February 19, 2003, counsel for the special litigation committee filed a motion to dismiss this action. The hearing on the motion to dismiss was rescheduled, and it is now scheduled for telephonic ruling on August 22, 2003, with a further hearing scheduled for August 29, 2003.

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 February 11, 2003, the special litigation committee issued a report of its investigation which concluded that it is not in the best interests of JNI to pursue the Bemanian action, and that the best interests of JNI require that this action be dismissed in its entirety. On February 19, 2003, counsel for the special litigation committee filed a motion to dismiss this action. The hearing on the motion to dismiss was rescheduled, and it is now scheduled for telephonic ruling on August 22, 2003, with a further hearing scheduled for August 29, 2003.

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 the 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. On February 19, 2003, the Court issued an order on the motion to dismiss the IPO laddering cases. As to the Company, the motion was denied and as to its present and former officers and directors who were also named as defendants, the motion was denied in part and granted in part with two former officers being dismissed from the case. On June 26, 2003, a proposed partial global settlement was announced between the securities issuers and their directors and officers and the plaintiffs that has been structured in the IPO laddering cases which would guarantee at least $1 billion dollars to investors who are class members from the insurers of the issuers. The proposed settlement, if approved by the court and by the securities issuers, would be funded by insurers of the issuers. On July 25, 2003, the board of directors of the Company voted to approve the proposed settlement. The proposed settlement is subject to acceptance by the other securities issuers and court approval. The Company believes that the allegations in these lawsuits are without merit and intends to defend against the lawsuits vigorously. The Company cannot predict the likely outcome of these lawsuits, and an adverse result in any of these lawsuits could have a material adverse effect on the Company.

In addition to the above matters, the Company is involved in certain other legal proceedings, including various employee related lawsuits, which are generally incidental to its normal business activities. The Company cannot make an estimate of the potential loss from these legal proceedings. However, the Company believes that these cases lack merit and intends to defend the cases vigorously.

Note 9 – 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 six months ended June 30, 2003, Network Appliance accounted for 14% of our net revenues, Hitachi Data Systems accounted for 11% and Info X, Inc. accounted for 10% of our net revenues. For the six months ended June 30, 2002, Hitachi Data Systems accounted for 24% of our net revenues and Acal Electronics accounted for 13% of our net revenues. A significant portion of the products sold to the distributors were utilized by the Company’s OEM customers. 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 10 – 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 was the fair market value of the Company’s common stock on the date of grant (March 31, 2003). Cancelled options totaled 2,984,352 with an average exercise price of $13.48 per share. On March 31, 2003, the Company granted a total of 2,391,852 options to purchase its common stock with an exercise price of $2.79 in exchange for the options cancelled.

Note 11 – Stock Repurchase Plan

On March 20, 2003, the board of directors authorized the Company to repurchase up to $10,000 of its outstanding common stock in open market and private transactions over a twelve-month period ending March 21, 2004. The timing and price of stock purchases are being made at the discretion of management. As of June 30, 2003, the Company repurchased 2,500 shares of its outstanding common stock at a total cost of approximately nine thousand dollars under the plan approved on March 20, 2003.

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 in general 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 that may be made 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 Fibre Channel enterprise storage connectivity products that connect servers and data storage devices. We currently design, 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. Our Fibre Channel products operate with most major server operating systems and network configurations used in SANs. Our Fibre Channel host bus adapters incorporate our proprietary ASIC technology and can be used both with Unix-based and PC-based server platforms and their associated interfaces. Our software drivers enable the integration of our host bus adapters into heterogeneous environments and ensure interoperability between different sets of platforms and servers. We also offer a line of InfiniBand products for server-to-server connectivity that are designed to operate with Windows and Linux operating systems. As of June 30, 2003, we had a total of 150 employees compared to 194 employees as of June 30, 2002.

Revenues are comprised principally of sales of our host bus adapter products and host channel adapter module products. To a lesser extent, revenues also include sales of our ASICs and fees received from ASIC development agreements.

Cost of revenues is comprised principally of payments to our contract manufacturers, costs of components, final assembly costs, manufacturing and quality-related costs, inventory management costs, warranty and support costs and material expediting charges. Cost of revenues also includes amortization of licensed technology acquired in connection with the purchase of the exclusive license to Troika Networks’ Fibre Channel software and hardware products. 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, insurance, information technology, administrative activities and legal and accounting fees.

Amortization of stock-based compensation relates to unearned stock-based 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. The amortization of stock-based compensation was completed during the year ended December 31, 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 of America. 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, commitments, 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;

• inventory valuation and related reserves;

• valuation of licensed technology;

• accounting for the estimated loss on our lease commitments;

• valuation of investments;

• allowance for doubtful accounts;

• litigation; and

• accounting for income taxes.

You should refer to our Annual Report on Form 10-K filed on March 28, 2003 for a discussion of our policies above.

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 June 30, 2003 and 2002

Net revenues. Net revenues decreased $5.1 million, or 46.9%, to $5.8 million in the three months ended June 30, 2003 from $10.9 million in the three months ended June 30, 2002. The decrease was due to a decline in sales of our PCI and SBus host bus adapter products partially offset by an increase in sales of our InfiniBand host channel adapter products and ASICs and fees received under ASIC related agreements. Total host bus adapter revenues decreased $5.9 million from the second quarter of 2002 to the second quarter of 2003 primarily as a result of a decrease in overall unit sales. This decrease in host bus adapter revenues was partially offset by a $734,000 increase in sales of our InfiniBand host channel adapter products and an $85,000 increase in revenue from ASICs and ASIC related agreements.

As our customers migrate from one-gigabit to two-gigabit Fibre Channel host bus adapter products, we have experienced an increase in revenues from our two-gigabit products for the three months ended June 30, 2003 compared to the same period in the prior year that has partially offset the significant decline in revenues from our one-gigabit products. Sales of our two-gigabit products increased by $364,000 for the three months ended June 30, 2003 compared to the three months ended June 30, 2002. Revenues from the sale of our two-gigabit products represented 65.6% and 31.5% of total net revenues for the three months ended June 30, 2003 and 2002, respectively. Sales to customers outside of the United States accounted for 28% and 22% of net revenues for the three months ended June 30, 2003 and 2002, respectively.

Gross profit. Gross profit decreased $1.6 million, or 32.3%, to $3.4 million in the three months ended June 30, 2003 from $5.1 million in the three months ended June 30, 2002. Gross margin as a percentage of net revenues

increased to 59.2% during the three months ended June 30, 2003 from 46.5% during the three months ended June 30, 2002. The increase was primarily due to a reduction in material costs for our host bus adapter products and changes in product mix. The cost of components for our host bus adapters has decreased from a year ago due to our continued focus on cost reductions and alternate sources of supply. Additionally, the increase in revenue from our ASIC and ASIC related agreements, which carry higher margins, also contributed to the increase in gross margin.

Gross margins for the three months ended June 30, 2002 were also affected unfavorably by amortization costs associated with our licensed technology and additional costs incurred on an ASIC development agreement in comparison to gross margins for the three months ended June 30, 2003. Amortization costs associated with our licensed technology totaled $38,000 in the three months ended June 30, 2003 compared to $378,000 in the three months ended June 30, 2002. This decrease is a result of the impairment charge we recorded in the fourth quarter of 2002 to write down the carrying value of our licensed technology. In addition, during the second quarter of 2002, we revised our estimated costs at completion for an ASIC development agreement which resulted in reduced margins on the project, and a cumulative catch-up adjustment to increase cost of revenues by $277,000 was recorded.

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 $159,000 during the three months ended June 30, 2003 compared to $459,000 during the three months ended June 30, 2002, which had a favorable impact on margins during the three months ended June 30, 2003 and 2002.

Research and development. Research and development expenses increased $122,000, or 2.2%, to $5.7 million for the three months ended June 30, 2003 from $5.6 million for the three months ended June 30, 2002. The increase in research and development expenses was due primarily to an increase in consulting expenses and non-recurring engineering expenses associated with our ASIC development efforts. Additionally, an increase in recruiting costs due to the hiring of additional engineers in the second quarter of 2003 also contributed to the increase in research and development expenses. These increases were partially offset by a decrease in occupancy expense, resulting from a lower allocation of corporate facility costs due to the Company vacating one of the floors at its corporate headquarters in the fourth quarter of 2002. Research and development expenses as a percentage of net revenues increased for the three months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

Selling and marketing. Selling and marketing expenses decreased $684,000, or 21.2%, to $2.5 million for the three months ended June 30, 2003 from $3.2 million for the three months ended June 30, 2002. The decrease in selling and marketing expense was due primarily to lower personnel costs, resulting from a reduction in headcount from the second quarter of 2002 to the second quarter of 2003. Additionally, the decrease was due to a reduction in occupancy expense as a result of lower allocation of corporate facility costs due to the Company vacating one of the floors at its corporate headquarters in the fourth quarter of 2002 and a decrease in travel expenses, partially offset by an increase in consulting expenses. Selling and marketing expenses as a percentage of net revenues increased for the three months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

General and administrative. General and administrative expenses decreased $84,000, or 3.8%, to $2.1 million for the three months ended June 30, 2003 from $2.2 million for the three months ended June 30, 2002. The decrease was primarily due to a decrease in personnel costs as a result of a reduction in headcount from the second quarter of 2002 to the second quarter of 2003 as well as a decrease in legal fees. These decreases were partially offset by an increase in consulting expenses related to the evaluation of our ASIC operations. General and administrative expenses as a percentage of net revenues increased for the three months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

Loss on lease commitment. We recorded a loss on our lease commitment totaling $3.2 million in the quarter ended June 30, 2002 on a lease for a building adjacent to our current headquarters in San Diego, California. In February 2003, the Company entered into various agreements with its landlord and a third party who agreed to lease the building adjacent to our current corporate headquarters whereby the Company terminated its lease for this building and is completely absolved of any further liability.

Interest income. Interest income decreased $480,000, or 58.3%, to $344,000 for the three months ended June 30, 2003 from $824,000 for the three months ended June 30, 2002. The decrease in interest income is primarily due to the decrease in interest rates over the past year as well as a decrease in the cash and marketable securities balance in the second quarter of 2003 compared to 2002.

Other expenses. 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 2003, our estimated effective tax rate for fiscal year 2003 is 0%. Accordingly, we recognized an income tax provision of $0 during the three months ended June 30, 2003. Our estimated effective tax rate for fiscal year 2002 was 0%. Accordingly, we recognized an income tax provision of $0 during the three months ended June 30, 2002.

Comparison of Six Months Ended June 30, 2003 and 2002

Net revenues. Net revenues decreased $8.9 million, or 39.0%, to $13.9 million in the six months ended June 30, 2003 from $22.8 million in the six months ended June 30, 2002. The decrease was due to a decline in sales of our PCI and SBus host bus adapter products partially offset by an increase in sales of our InfiniBand host channel adapter products and ASICs and fees received under ASIC related agreements. Total host bus adapter revenues decreased $11.9 million from the six months ended 2002 to the six months ended 2003 primarily as a result of a decrease in overall unit sales. This decrease in host bus adapter revenues was partially offset by a $2.0 million increase in sales of our InfiniBand host channel adapter products and a $870,000 increase in revenue from ASICs and ASIC related agreements. Revenue from our ASIC related agreements during the six months ended June, 30 2003 includes $350,000 of revenue recognized from a perpetual software license fee to a third party for which the Company has no further significant obligations. The $350,000 in consideration consisted of $50,000 in cash which has been received and $300,000 in preferred stock of the third party, a privately held technology company. The value of the preferred stock was determined by reference to the latest round of financing obtained by the third party.

As our customers 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 six months ended June 30, 2003 compared to the same period in the prior year that has partially offset the significant decline in revenues from our one-gigabit products. Sales of our two-gigabit products increased by $2.1 million for the six months ended June 30, 2003 compared to the six months ended June 30, 2002. Revenues from the sale of our two-gigabit products represented 57.2% and 25.7% of total net revenues for the six months ended June 30, 2003 and 2002, respectively. Sales to customers outside of the United States accounted for 24% of net revenues for the six months ended June 30, 2003 and 2002.

Gross profit. Gross profit decreased $2.9 million, or 26.8%, to $8.0 million in the six months ended June 30, 2003 from $11.0 million in the six months ended June 30, 2002. Gross margin as a percentage of net revenues increased to 57.7% during the six months ended June 30, 2003 from 48.1% during the six months ended June 30, 2002. The increase was primarily due to a reduction in material costs for our host bus adapter products and changes in product mix. The cost of components for our host bus adapters has decreased from a year ago due to our continued focus on cost reductions and alternate sources of supply. Additionally, the increase in revenue from our ASIC and ASIC related agreements, which carry higher margins, also contributed to the increase in gross margin.

Gross margins for the six months ended June 30, 2002 were also affected unfavorably by amortization costs associated with our licensed technology and additional costs incurred on an ASIC development agreement in comparison to gross margins for the six months ended June 30, 2003. Amortization costs associated with our licensed technology totaled $75,000 in the six months ended June 30, 2003 compared to $447,000 in the six months ended June 30, 2002. This decrease is a result of the impairment charge we recorded in the fourth quarter of 2002 to write down the carrying value of our licensed technology. In addition, during the second quarter of 2002, we revised our estimated costs at completion for an ASIC development agreement which resulted in reduced margins on the project, and a cumulative catch-up adjustment to increase cost of revenues by $277,000 was recorded.

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 $571,000 during the six months ended June 30, 2003 compared to $736,000 during the six months ended June 30, 2002, which had a favorable impact on margins during the six months ended June 30, 2003 and 2002.

Research and development. Research and development expenses decreased $347,000, or 3.1%, to $10.8 million for the six months ended June 30, 2003 from $11.1 million for the six months ended June 30, 2002. The decrease in research and development expenses was due primarily to lower personnel costs, resulting from a reduction in headcount from the six months ended June 30, 2002 to the six months ended June 30, 2003. Additionally, the decrease was due to a lower allocation of corporate facility costs due to the Company vacating one of the floors at its corporate headquarters in the fourth quarter of 2002 and a decrease in depreciation expense partially offset by an increase in non-recurring engineering expenses. Research and development expenses as a percentage of net revenues increased for the six months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

Selling and marketing. Selling and marketing expenses decreased $1.4 million, or 20.7%, to $5.2 million for the six months ended June 30, 2003 from $6.6 million for the six months ended June 30, 2002. The decrease in selling and marketing expense was due primarily to lower personnel costs, resulting from a reduction in headcount from the six months ended June 30, 2002 to the six months ended June 30, 2003. Additionally, the decrease was due to a lower allocation of corporate facility costs due to the Company vacating one of the floors at its corporate headquarters in the fourth quarter of 2002, a decrease in travel expenses and reduced promotional costs partially offset by an increase in consulting expenses and the cost of boards provided to one of our significant customers for interoperability testing for new products. Selling and marketing expenses as a percentage of net revenues increased for the six months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

General and administrative. General and administrative expenses decreased $25,000, or 1.0%, to $4.2 million for the six months ended June 30, 2003 from $4.2 million for the six months ended June 30, 2002. The decrease was primarily due to a decrease in personnel costs due to a reduction in headcount from the six months ended June 30, 2002 to the six months ended June 30, 2003, partially offset by an increase in consulting and insurance expenses. General and administrative expenses as a percentage of net revenues increased for the six months ended June 30, 2003 from the comparable period in 2002 primarily due to the decrease in revenues.

Interest income. Interest income decreased $897,000, or 52.8%, to $801,000 for the six months ended June 30, 2003 from $1.7 million for the six months ended June 30, 2002. The decrease in interest income is primarily due to the decrease in interest rates over the past year as well as a decrease in the cash and marketable securities balance in the first and second quarters of 2003 compared to 2002.

Income tax provision. As a result of our tax projections for fiscal year 2003, our estimated effective tax rate for fiscal year 2003 is 0%. Accordingly, we recognized an income tax provision of $0 during the six months ended June 30, 2003. Our estimated effective tax rate for fiscal year 2002 was 0%. Accordingly, we recognized an income tax provision of $0 during the six months ended June 30, 2002.

Liquidity and Capital Resources

During the six months ended June 30, 2003, cash used in operating activities was $11.0 million, compared to $764,000 of cash provided by operating activities during the six months ended June 30, 2002. The cash used in operations during the six months ended June 30, 2003 reflects a net loss before depreciation, amortization, a write-off of property and equipment and other non-cash items of approximately $8.2 million and a $4.9 million decrease in accrued liabilities primarily due to payments associated with the termination of a facilities lease, deferred revenue,

other liabilities and other assets partially offset by $2.1 million of cash provided by other working capital items such as accounts receivable, inventory and accounts payable.

Net cash provided by investing activities was $10.8 million in the six months ended June 30, 2003 and consisted of proceeds from the sale of marketable securities partially offset by capital expenditures and purchases of marketable securities available for sale. Net cash used in investing activities was $2.5 million in the six months ended June 30, 2002 and consisted of proceeds from the sale of marketable securities of $9.5 million for the purchase of licensed technology and services from Troika for $7.5 million and $2.0 million for the purchase of an equity investment in a privately held InfiniBand semiconductor developer offset by capital expenditures and purchases of marketable securities available for sale. The increase in capital expenditures during the six months ended June 30, 2003 was primarily due to the purchase of equipment for our system integration lab.

Net cash provided by financing activities in the six months ended June 30, 2003 was $791,000 which resulted from net proceeds from the issuance of common stock, consisting of proceeds from the exercise of stock options and purchases of shares made under our employee stock purchase plan, partially offset by the purchase of treasury stock and payments on capital leases. Net cash provided by financing activities was $531,000 in the six months ended June 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.

We had $90.1 million of cash and cash equivalents and investments and $70.4 million of working capital at June 30, 2003. We believe that our cash and investments position will be sufficient to meet our working capital needs at least through the next 12 months.

At June 30, 2003, our outstanding commitments included (in thousands):

	Payments due by period
Contractual Obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Operating leases	$	22,867	$	3,371	$	5,890	$	5,500	$	8,106
Capital leases	524		280		244		—		—
Purchase commitments for inventory	2,489		2,489		—		—		—
Total	$	25,880	$	6,140	$	6,134	$	5,500	$	8,106

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.

In January 2003, we announced that we are investigating strategic options to optimize the value and market responsiveness of our ASIC assets. As of June 30, 2003, we have not concluded our investigation.

On March 20, 2003, the board of directors authorized the Company to repurchase up to $10 million of its outstanding common stock in open market and private transactions over a twelve-month period ending March 21, 2004. The timing and price of stock purchases are being made at the discretion of management. As of June 30, 2003, the Company repurchased 2,500 shares of its outstanding common stock at a cost of nine thousand dollars under the plan approved on March 20, 2003.

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. 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 June 30, 2003.

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

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on their evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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 the 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. On March 25, 2003, the Court executed an order granting with leave to amend the Company’s motion to dismiss and giving plaintiffs until May 27 to file an amended complaint. On May 27, 2003, plaintiffs filed a second amended consolidated complaint for violation of federal securities laws. On June 13, 2003, the Company filed a motion to dismiss and a motion to strike the second amended consolidated complaint for violation of federal securities laws. On July 21, 2003, the court took the Company’s motions under submission.

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 February 11, 2003, the special litigation committee issued a report of its investigation which concluded that it is not in the best interests of JNI to pursue the Bemanian action, and that the best interests of JNI require that this action be dismissed in its entirety. On February 19, 2003, counsel for the special litigation committee filed a motion to dismiss this action. The hearing on the motion to dismiss was rescheduled, and it is now scheduled for telephonic ruling on August 22, 2003, with a further hearing scheduled for August 29, 2003.

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

On June 17, 2003, JNI held an Annual Meeting of Stockholders at which the following proposals were voted on by the stockholders:

1. To elect eight directors for a one-year term to expire at the 2004 Annual Meeting of Stockholders.

Nominee	For	Withheld

John Bolger	18,501,996	852,050

Sylvia Summers-Dubrevil	18,870,416	483,630

John C. Stiska	18,473,820	880,226

Tom St. Dennis	18,987,818	366,228

Leon (Bud) Edney	19,175,392	178,654

Russell Stern	19,168,784	185,262

Peter van Cuylenburg	18,965,659	388,387

Howard Wiener	19,171,842	182,204

2. To ratify PricewaterhouseCoopers LLP as the Company’s independent public auditor for the fiscal year ending December 31, 2003.

For approval		17,919,381

Against approval		1,419,375

Abstained		15,290

Broker Non-Votes		0

Item 5. Other Information

Factors That May Affect Future Performance

Risks relating to our business

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

We have experienced net losses for several consecutive quarters, and we are likely to continue to experience net losses during 2003 and at least the first three fiscal quarters of 2004. If we are not able to penetrate new market segments, we will likely not realize sufficient 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, achieving and sustaining profitability may be extremely challenging.

We intend to make changes to our business to respond to adverse market developments, and those changes may not positively affect our revenues or operating results.

We are in a process of continuing business transition necessitated by changes in our markets. The market for Fibre Channel products has reached a relatively mature state in which the rate of adoption of new technologies has slowed. As a result, we believe there will be fewer opportunities for us to increase market share through introduction of new generations of Fibre Channel products. To respond to this transition in our markets, we are evaluating various approaches to improving our operating results and market position. As part of this evaluation, we are investigating our options to maximize the strategic value of our assets, personnel and intellectual property in our ASICs operations. This evaluation may result in a material change in the operation of our ASICs business, and we cannot assure you that such a change will have a positive effect on our business. The financial cost of implementing any such changes may outweigh the benefits we achieve, and we may not be able to obtain a desirable level of value in return for any transfer of these assets. Moreover, actions related to our ASICs operations or otherwise that management undertakes to reverse our declining market share and to improve our operations could cause disruption in our personnel, customer or supplier relationships or result in charges or expenses that could have adverse effects on our operating results or financial condition.

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 six months ended June 30, 2003, Network Appliance accounted for 14% of our net revenues, Hitachi Data Systems accounted for 11% of our net revenues and Info X accounted for 10% 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. In particular, we anticipate that an increasing portion of our revenues will be derived from sales of our products directly to Sun Microsystems, and if we are unable to achieve increased levels of revenues from this relationship, our revenues may not grow as we anticipate.

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 operating results would be adversely affected. 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, contain no minimum purchase requirements and often may be terminated by either party with limited or no notice and 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 suffer. 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.

If we do not develop, market and sell host bus adapters that interoperate with operating systems other than the Sun Solaris operating system, we may not be able to achieve profitability.

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, and it will be challenging to displace incumbent suppliers such as Emulex and QLogic to expand our market share. To achieve increased market share, it may be necessary for us to reduce our product prices in these new markets. This strategy may not be successful in increasing our market share, and it could affect pricing in our existing markets. 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 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 servers, and particularly its high-end servers, does not expand, our revenues and operating results may suffer.

Because a significant portion of our host bus adapters is integrated with storage devices manufactured by a limited number of storage companies, 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 products are used to form connections to storage arrays manufactured by EMC, Hitachi Data Systems, Network Appliance, Storagetek or Sun Microsystems. 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 EMC, Hitachi Data Systems, Network Appliance, Storagetek or Sun Microsystems, our revenues may suffer.

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.

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., Hewlett-Packard and LSI Logic. To the extent that commoditization leads to significant pricing declines, whether initiated by us or by an existing or new competitor, we will be required to increase our product volumes and reduce our costs of goods sold to avoid resulting pressure on our profitability, and we cannot assure you that we will be successful in responding to these competitive pricing pressures. These companies all have substantially greater financial, marketing and distribution resources than we have. Our primary competitors, Emulex and QLogic, 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. To the extent that we develop products based on other standards, such as our InfiniBand products, we will face competition in the markets for such products that may come from larger technology companies such as Emulex, IBM, QLogic and Sun. If we are not successful, for competitive or other reasons, in achieving market penetration with our InfiniBand or other potential products, we may not be able to recover our investment in pursuing new markets.

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.

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. 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 Fibre Channel 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 at the rate we anticipate, our revenues and operating results will suffer.

Our operating results may suffer if we do not receive an appropriate level of return on our investments in new products based upon new technologies.

In addition to our Fibre Channel-based products, we offer host channel adapter 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 and Network Appliance’s success with its InfiniBand product will have a material effect on our ability to expand our InfiniBand business. We are currently evaluating whether to continue to make research and development investments to developing InfiniBand products. In recent periods, several key industry participants have withdrawn support for InfiniBand or terminated their efforts to support InfiniBand, which increases the risks associated with our investment in InfiniBand technology. In addition, Mellanox is currently the only significant supplier of integrated circuits that implement InfiniBand technology, and we cannot assure you that they will continue to supply such integrated circuits to us on reasonable terms or at all. The absence of multiple integrated circuit suppliers for the InfiniBand market may deter customers from deploying InfiniBand technology due to concerns over the long-term viability of the market. InfiniBand will compete with 10 Gigabit Ethernet, which is a standard that has considerably more industry support than InfiniBand. There is no assurance that InfiniBand will ever achieve greater acceptance in the market, and if the market for InfiniBand does not materialize as anticipated, our investment in InfiniBand may not result in any material benefits to our business. Moreover, in light of the challenges facing the adoption of InfiniBand and the other risks described above, we cannot assure you that we or Network Appliance will continue to make further investments in products based on this technology. In the event that we or Network Appliance were to determine to discontinue investing in InfiniBand, our revenues from these products would decline rapidly, and we could suffer related charges, both of which events would have an adverse effect on our operating results.

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;

• charges and expenses associated with restructuring our operations;

• 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.

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, introductions of competing technological solutions or other factors, including, potentially, strategic price reductions that we may initiate to gain market share and increase product shipment volumes. 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. 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. We may not realize the expected benefits of any acquisition we complete, which could result in impairment or other charges similar to those we incurred as a result of our acquisition of products and technology from Troika Networks in January 2002.

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.

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 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. Any interruption in our supply of key components, whether due to shortage or financial difficulties faced by our suppliers, could render us unable to sell and deliver our products due to a lack of components and potentially require us to redesign products to incorporate alternative components, which 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. For each version of our host channel adapter product, we have a sole supplier that provides us with the ASIC, and we do not believe that a comparable ASIC is available. 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.

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 ASIC wafers. Sanmina-SCI Corporation in Rapid City, South Dakota, and Varian, Inc. in Poway, California perform substantially all assembly operations for our host bus adapters and host channel adapter modules. The contract electronics manufacturing industry, which includes Sanmina-SCI and Varian, has experienced substantial disruption as a result of the current economic downturn, which increases the risks associated with our reliance on these manufacturers. 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 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 assembly 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 to address either our changing needs or the changing circumstances of our current contract manufacturers. 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 has inherent risks. If we are required or elect to change contract manufacturers, we may lose revenues, quality may be negatively impacted 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 intend to 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; however, we have begun the process of investing resources to gain patent protection for some of our intellectual property. While we are hopeful that our patent program will produce overall benefits to the Company, there is no guarantee that the benefit we derive from any of these patents, if and when issued, will necessarily equal or exceed the costs of obtaining them. 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 24% of our net revenues during the six months ended June 30, 2003, 24% of our net revenues in 2002, 30% of our net revenues in 2001 and 23% of our net revenues in 2000. 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.

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 of 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 and cash flows;

• 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(2)	Fourth Amended and Restated Certificate of Incorporation of the Company
3.2(3)	Certificate of Designation, Preferences and Rights
3.2(4)	Bylaws of the Company
4.1(3)	Form of Rights Agreement between the Company and U.S. Stock Transfer Corporation
31.1(1)	Certification of Chief Executive Officer pursuant Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act
31.2(1)	Certification of Chief Financial Officer pursuant Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act
32.1(1)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

Current Report on Form 8-K filed by JNI Corporation on April 29, 2003 (File No. 000-27755).

(1) Filed herewith.

(2) Incorporated by reference to the Registration Statement on Form S-1 filed by JNI on October 12, 1999 (File No. 333-86501).

(3) Incorporated by reference to the Current Report on Form 8-K filed by JNI on February 9, 2001 (File No. 000-27755).

(4) Incorporated by reference to the Annual Report on Form 10-K filed by JNI on March 28, 2003 (File No. 000-27755).

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: August 12, 2003	By:	/s/ RUSSELL STERN
		Russell Stern
		President, Chief Executive Officer and Director (Principal Executive Officer)

Date: August 12, 2003		/s/ PAUL KIM
		Paul Kim
		Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX

(a) Exhibits

3.1(2)	Fourth Amended and Restated Certificate of Incorporation of the Company
3.2(3)	Certificate of Designation, Preferences and Rights
3.2(4)	Bylaws of the Company
4.1(3)	Form of Rights Agreement between the Company and U.S. Stock Transfer Corporation
31.1(1)	Certification of Chief Executive Officer pursuant Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act
31.2(1)	Certification of Chief Financial Officer pursuant Rules 13a-14(a) and 15d-14(a) promulgated under the Exchange Act
32.1(1)	Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2(1)	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

Current Report on Form 8-K filed by JNI Corporation on April 29, 2003 (File No. 000-27755).

(1) Filed herewith.

(2) Incorporated by reference to the Registration Statement on Form S-1 filed by JNI on October 12, 1999 (File No. 333-86501).

(3) Incorporated by reference to the Current Report on Form 8-K filed by JNI on February 9, 2001 (File No. 000-27755).

(4) Incorporated by reference to the Annual Report on Form 10-K filed by JNI on March 28, 2003 (File No. 000-27755).

JNI CORP 10-Q