<PAGE>

================================================================================

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   ----------

                                    FORM 10-K

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

                   FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002


                        COMMISSION FILE NUMBER 000-30362

                            CROSSROADS SYSTEMS, INC.
             (Exact name of registrant as specified in its charter)



                   DELAWARE                                74-2846643
       (State or other jurisdiction of                  (I.R.S. Employer
        incorporation or organization)                 Identification No.)


                           8300 NORTH MOPAC EXPRESSWAY
                               AUSTIN, TEXAS 78759
    (Address of Registrant's principal executive offices, including Zip Code)

                                 (512) 349-0300
              (Registrant's telephone number, including area code)

        Securities registered pursuant to Section 12(b) of the Act: NONE

Securities registered pursuant to Section 12(g) of the Act:

<Table>

            Title of each class               Name of each exchange on which registered
            -------------------               -----------------------------------------
<S>                                           <C>
  Common Stock, par value $0.001 per share             Nasdaq National Market
</Table>


    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. [X] Yes [ ] No

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

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

    The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant, based upon the closing sale price of Common
Stock on April 30, 2002, as reported on the Nasdaq National Market, was
approximately $60.6 million (affiliates being, for these purposes, directors and
executive officers only).

    As of January 17, 2003, the Registrant had 24,859,408 outstanding shares of
Common Stock.

                      DOCUMENTS INCORPORATED BY REFERENCE:
  (Specific pages incorporated are indicated under the applicable Item herein)


<Table>
<Caption>

                                                                                                       INCORPORATED BY
                                                                                                    REFERENCE IN PART NO.
                                                                                                    ---------------------
<S>                                                                                                 <C>
Our proxy statement filed in connection with our 2003 Annual Meeting of Stockholders............             III
</Table>


================================================================================


<PAGE>

                            CROSSROADS SYSTEMS, INC.

                                    FORM 10-K

    Unless otherwise indicated, "we," "us," "our" and the "Company" mean
Crossroads Systems, Inc. We own the trademark "Crossroads." All other trademarks
or tradenames referred to in this document are the property of their respective
owners. References in this document to "$" or "dollars" are to United States of
America currency. Our fiscal year ends October 31.

                                TABLE OF CONTENTS
<Table>

<S>                                                                                                                    <C>
Table of Contents........................................................................................................i

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................................................................ii

PART I...................................................................................................................1

    Item 1.   Business...................................................................................................1

    Additional Factors That May Affect Future Results...................................................................14

    Item 2.   Properties................................................................................................24

    Item 3.   Legal Proceedings.........................................................................................25

    Item 4.   Submission of Matters to a Vote of Security Holders.......................................................25

PART II.................................................................................................................26

    Item 5.   Market for Registrant's Common Equity and Related Stockholder Matters.....................................26

    Item 6.   Selected Consolidated Financial Data......................................................................27

    Item 7.   Management's Discussion and Analysis of Financial Condition and Results of Operations.....................28

    Item 7A.  Quantitative and Qualitative Disclosures About Market Risk................................................39

    Item 8.   Financial Statements and Supplementary Data...............................................................40

    Item 9.   Changes and Disagreements with Accountants on Accounting and Financial Disclosure.........................40

PART III................................................................................................................41

    Item 10.  Directors and Executive Officers of the Registrant........................................................41

    Item 11.  Executive Compensation....................................................................................41

    Item 12.  Security Ownership of Certain Beneficial Owners and Management............................................41

    Item 13.  Certain Relationships and Related Transactions............................................................42

    Item 14.  Controls and Procedures...................................................................................42

PART IV.................................................................................................................43

    Item 15.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K..........................................43
</Table>

                       NOTE ON INCORPORATION BY REFERENCE

Throughout this report, various information and data are incorporated by
reference to portions of our 2003 Proxy Statement. Any reference in this report
to disclosures in our 2003 Proxy Statement shall constitute incorporation by
reference of that specific material into this Form 10-K.

                                       i

<PAGE>

               SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         This document contains forward-looking statements that involve
substantial risks and uncertainties, such as statements concerning:

              o    industry trends;

              o    customer demand for our products;

              o    growth and future operating results;

              o    developments in our markets and strategic focus;

              o    expansion of and enhancements to our manufacturing and
                   engineering facilities and product offerings;

              o    customer benefits attributable to our products;

              o    potential acquisitions and joint ventures and the integration
                   of acquired businesses;

              o    technologies and operations;

              o    strategic relationships with third parties; and

              o    future economic, business and regulatory conditions.

         You can identify these statements by forward-looking words such as
"may," "will," "expect," "intend," "anticipate," "believe," "estimate,"
"continue" and other similar words. You should read statements that contain
these words carefully because they discuss our future expectations, making
projections of our future results of operations of our financial condition or
state other "forward-looking" information. We believe that it is important to
communicate our future expectations to our investors. However, there may be
events in the future that we are not able to accurately predict or control. The
factors listed in the sections captioned "Additional Factors That May Affect
Future Results" in Item 1 of this report and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 of this
report, as well as any cautionary language in this annual report, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we described in our forward-looking
statements.


                                       ii

<PAGE>



PART I

ITEM 1. BUSINESS.

OVERVIEW

     We are a leading provider of enterprise data routing solutions for open
system storage area networks (SANs), based on our market share of storage
routers shipped. By using our storage routers to serve as the interconnect
between SANs and the other devices in a computer network, organizations are able
to more effectively and efficiently store, manage and ensure the integrity and
availability of their data. Specifically, when used in SANs our storage routers:

     o   decrease congestion in the transfer of data within a network;

     o   reduce the time required to back up and restore data;

     o   improve utilization of storage resources; and

     o   preserve and enhance existing server and storage system investments.

     Our mission is to be the company customers trust to link business with
information, regardless of technology or location. Our objective is to maintain
our position as the leading provider of storage routing solutions as storage,
server, and network technologies and markets continue to grow and evolve. The
key elements of our strategy are:

     o   to solve customer storage issues;

     o   to grow our current market position and expand into adjacent markets;
         and

     o   to increase our market leadership by continual investment in
         intellectual property.

     We have developed or acquired extensive expertise in several different
input-output (I/O) and networking protocols, including small computer system
interface (SCSI), fibre channel, Ethernet, Transmission Control
Protocol/Internet Protocol (TCP/IP), Internet-based SCSI protocol (iSCSI) and
InfiniBand. We provide our products in a variety of configurations including
both stand-alone box and library-embedded router form factors with varying port
counts. We have applied our expertise in these protocols to develop solutions
for leading server and storage system providers such as ACAL, ACS, Arrow, ATL,
Bell Micro, Cranel/Adexis, Datalink, Dell, Fujitsu-Siemens, Groupe Bull,
Hewlett-Packard (including Compaq), Hitachi Data Systems, IBM, Overland Storage,
StorageTek, Sun Microsystems, Tech Data, TidalWire and Unisys, which enable
customers to connect to the information that they require to run their
businesses, regardless of the technology or location.

     To date, we have sold our products primarily to original equipment
manufacturers, or OEMs, of storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their SANs. We also sell our storage routers through companies that distribute,
resell or integrate our storage routers as part of a complete SAN solution. A
few OEM customers historically have accounted for a substantial portion of our
revenue. During fiscal 2001, sales to Hewlett-Packard, Compaq and StorageTek
accounted for 26%, 2%, and 23% of our total revenue, respectively. During fiscal
2002, sales to Hewlett-Packard (including sales to Compaq and to the combined
company) and StorageTek accounted for 51% and 24% of our total revenue,
respectively. Fluctuations in revenue have resulted from, among other things,
product and customer transitions, OEM qualification and testing and reduced IT
spending rates.


     We were incorporated on September 26, 1996 as Crossroads Holding
Corporation and are the successor to operations of our predecessor Texas
corporation, Crossroads Systems (Texas), Inc. We are headquartered in Austin,
Texas, and operate satellite offices in other U.S. cities. The mailing address
for our headquarters is 8300 North MoPac Expressway, Austin, Texas, 78759,
telephone number: (512) 349-0300. We can also be reached at our Web site at
www.crossroads.com. We had 122 employees at October 31, 2002.


                                       1
<PAGE>


INDUSTRY BACKGROUND


     Information Growth and the Management Challenge

     The volume of data storage that companies utilize and process continues to
grow rapidly, along with the cost of administering that data. This challenge has
driven many organizations to reassess the way they manage their storage
environments. Companies need simple, cost-effective ways to scale and manage
their storage systems. Until the advent of SANs, the connection between data
storage capacity and servers had been facilitated by a direct connection to
SCSI. SANs have gained traction in the enterprise as an effective and efficient
way to manage an expanding storage infrastructure. Numerous enterprise customers
use SANs as the method of storage interconnection today.

     SANs Solve Data Growth Problems

     SANs provide a wide range of benefits and advantages for the storage
administrator. Many of these advantages relate to consolidated, and centralized
storage, improved manageability, reduction in local area network (LAN) traffic
and ease of incremental storage addition. Given that storage assets can be
consolidated with SANs, administrators can effectively utilize more of their
storage assets, reduce administrative workloads and increase flexibility in
server access of consolidated storage.

     One critical problem with data growth is the expanding backup and recovery
time needed to protect the data. These processes were accomplished by using the
LAN before SANs were available. By moving these processes to the SAN, LAN
congestion is reduced. With the added performance of SANs, the backup and
recovery time is shortened.

     Companies need simple, cost-effective ways to back up their data, scale for
growth and manage their storage systems. They have increasing demand for secured
ways to manage their data and provide for disaster recovery. Finally, as
organizations continue to add storage over time, SANs provide the most flexible
architecture to manage their infrastructure.

     Applications SANs Enable

     o   Consolidated and Shared Storage. In the direct-attach storage
         architecture, a significant portion of storage resources are
         underutilized because they are accessible only by a single server which
         may not efficiently use the resource. With SANs, multiple servers can
         access a common storage device, enabling more stored data to be
         available to more users, and reducing the need to add servers or
         storage devices to support greater storage requirements. With
         consolidated storage comes the requirement for data security and access
         control. The storage administrator must contend with the challenge of
         open access to the consolidated storage.

     o   LAN-free and Server-free Backup. Disruptions to a computer system can
         result in the loss or corruption of data. Therefore, most organizations
         regularly perform data backup by moving data from storage systems to
         separate on or off-site storage systems or data centers where the data
         can be safely stored. Because data backup can account for a significant
         portion of the data traffic over LANs, it is often a major contributor
         to bottlenecks at the input/output interconnect. LAN-free backup uses
         the SAN to move data from a storage system through one server then
         directly to a backup storage system. By moving the data backup function
         from the LAN to the SAN, LAN-free backup substantially reduces
         bottlenecks. Server-free backup further extends the benefits of
         LAN-free backup by removing the server from the backup process. This
         application enables automated data movement between storage systems
         directly across the SAN. By removing the backup server from the data
         path, the backup process is faster and more efficient.

     o   Data Security and Manageability. When making the transition from a
         traditional direct-attach storage environment to a SAN, the storage
         administrator has multiple servers potentially accessing each SAN
         attached storage device. In this scenario, control of data access,
         appropriate security provisions and manageability across all storage
         assets becomes critically important.


                                       2
<PAGE>


THE CROSSROADS SOLUTION

     Our router products help our customers improve and reduce their total cost
of information management. We develop solutions that enable customers to connect
to the information required to run their businesses, regardless of the
technology or location. Our routers are designed to operate in any SAN computing
environment. Crossroads routers undergo extensive testing in many SAN
configurations with a wide range of SAN hardware components and software
applications. Crossroads products are certified by leading independent software
vendors and independent hardware vendors, including Brocade, Computer
Associates, EMC, Legato and VERITAS Software.

     ServerAttach Product Line

     Our most recent announced product line, the Crossroads ServerAttach,
quickly enables customers' existing SCSI-based servers to access fibre channel
storage. The first product in this family is the ServerAttach SA40. Prior to the
ServerAttach product line, many customers who deployed servers did not have a
fibre channel option. Also, when running critical applications that cannot move
to newer servers, customers were unable to attach those server resources into
the SAN and therefore unable to capitalize on all the benefits of shared,
consolidated, and LAN-free storage. The ServerAttach product line also brings a
number of added benefits including:

     o   secured storage access;

     o   ease of manageability;

     o   simple installation with offline pre-configuration; and

     o   minimal impact to server uptime with no hardware or software
         modifications required to servers or applications.

     Storage Router Product Line

     Also, this year Crossroads announced the fifth generation storage router
products, the Crossroads 6000 and the Crossroads 10000. The storage router
product line delivers the ability to attach SCSI storage devices into a fibre
channel fabric. The product line delivers both an entry-level solution, the
6000, as well as a completely modular, enterprise-level solution, in the 10000.
The product line delivers a number of added benefits including:

     o   secured storage access;

     o   multi-protocol connectivity;

     o   ease of manageability;

     o   LAN-free and Server-free backup functionality in the SAN;

     o   controller in the SAN enabling Server-free commands to be executed; and

     o   quick setup and configuration.

OUR STRATEGY

     Our mission is to become the company customers trust to link business with
information regardless of technology or location. Our objective is to provide
customers with innovative solutions focused on solving the problems facing their
growing data storage infrastructure. The key elements of our strategy include
the following:

     Solve Customer Storage Issues


     Crossroads is focused on delivering solutions to our customers that enable
them to leverage their existing investments in servers and storage devices. Our
products deliver value by providing simple, easy to manage solutions that reduce
complexity and overhead for the storage administrator. This is fulfilled in our
easy to manage multi-protocol platform that provides connectivity to new and
existing storage architectures.


                                       3
<PAGE>


     Grow Our Current Market Position and Expand Into Adjacent Markets

     As storage networking evolves, new technologies and solutions are often
being introduced. In order to ensure that businesses can access information
regardless of technology, we will remain protocol agnostic to the type of
technology a customer chooses to implement.  We will continue:

     o   to introduce products that provide the connectivity to both existing
         and future servers, storage devices and networks;

     o   to provide a broader range of solutions to our existing customers;

     o   to secure new customers with innovative technology to meet their
         demands; and

     o   to introduce new solutions such as our ServerAttach product line and
         iSCSI related solutions.

     Increase Our Market Leadership by Continual Investment in Intellectual
Property

     As we develop our products, we continue to identify and develop
intellectual property that we believe will provide a competitive advantage and
expand our market opportunities. As of October 31, 2002, we had 14 issued
patents and over 80 pending worldwide. We vigorously defend our patent
portfolio, as evidenced in fiscal 2001, when we successfully defended one of our
patents (5,941,972), the'972 patent, in a $15.0 million settlement. In addition,
we have successfully launched our patent licensing campaign and have entered
into agreements with Adaptac and ADIC to license our technology. We continue to
believe it to be a critical component in our market share growth. In addition,
we utilize our intellectual property to set standards for the industry.


                                       4
<PAGE>


OUR PRODUCTS

     Storage Router Products

     The following table summarizes the key features and benefits of our
products:

<Table>
<Caption>

                                                                  DEVICE
            PRODUCT                    FIRST SHIPMENT          CONFIGURATION                       BENEFITS
            -------                    --------------          -------------                       --------
  TAPE ATTACH STORAGE ROUTERS
<S>                                    <C>                <C>                            <C>

              4x50                     May 1999           o  1 1Gb/s fibre channel       o Connects up to 30 SCSI devices
                                                             port                        o Enables server migration to SANs
                                                          o  1, 2, or4 SCSI LVD          o Transmits data over distances up
                                                             Ultra2 or HVD buses           to 10 km
                                                          o  1 Ethernet                  o Enables LAN-free Backup and recovery
                                                             management port             o Support for Server-free backup
                                                          o  Box and embedded            o Supports shared storage (disk,
                                                             product                       tape and optical) via Storage Area
                                                                                           Network (SAN) connectivity

              6000                     May 2002           o  1 2Gb/s fibre channel       o Provides same benefits as 4x50
                                                             port                        o Connection to 1 or 2 Gigabit per
                                                          o  2 SCSI LVD Ultra2 ports       second (Gb/s) fibre channel SANs
                                                          o  1 Ethernet management       o Provides Crossroads Visual Manager
                                                             port                          (CVM) for enhanced software for
                                                          o  Box and embedded              storage management
                                                             product                     o 'Access Controls' for added
                                                                                           security and device sharing
                                                                                           between multiple hosts
                                                                                         o Supports enhanced Server-free
                                                                                           Backup

              8000                     August 2001        o  2 1Gb/s fibre channel       o Provides same benefits as 4x50
                                                             ports                       o Provides modular software in
                                                          o  4 SCSI LVD Ultra2             Crossroads Router OS
                                                             and/or HVD ports            o Provides Crossroads Visual Manager
                                                          o  1 Ethernet                    (CVM) for enhanced software for
                                                             management port               storage management
                                                                                         o Redundant power supplies and fans
                                                                                           with dual storage network (fibre
                                                                                           channel) ports
                                                                                         o 'Access Controls' for added
                                                                                           security and device sharing
                                                                                           between multiple hosts
                                                                                         o Supports enhanced Server-free
                                                                                           Backup

              10000                    April 2002         o  2 or 4 2Gb/s fibre          o Same benefits as 8000
                                                             channel ports               o Field replaceable modular
                                                          o  4, 8, or 12 LVD               connectivity options
                                                             (Ultra3) and/or HVD         o Best-in-class performance
                                                             SCSI ports                  o Redundant, hot swappable fans and
                                                          o  1 Ethernet                    power supplies
                                                             management port             o Designed for enterprise
                                                          o  Expansion capability          environments
                                                             to iSCSI

  SERVERATTACH STORAGE ROUTERS

              SA20                     Not Yet            o  1 2Gb/s fibre channel       o Extends life of existing SCSI
                                       Shipped               port                          servers by bringing them into
                                                          o  2 SCSI HVD ports              fibre channel SAN architectures
                                                          o  1 Ethernet management       o Supports IBM eServer (AS/400,
                                                             port                          RS/6000), DEC Alpha, and
                                                                                           Hewlett-Packard mid-range servers
                                                                                           with future support planned for
                                                                                           other server environments

              SA40                     December 2002      o  2 2Gb/s fibre channel       o Extends life of existing SCSI
                                                             ports                         servers by bringing them into
                                                          o  4 SCSI LVD Ultra3 or          fibre channel SAN architectures
                                                             HVD ports                   o Supports IBM eServer pSeries
                                                          o  1 Ethernet management         (RS/6000) ), DEC Alpha, and
                                                             port                          Hewlett-Packard mid-range servers
                                                                                           with future support planned for
                                                                                           other server environments
                                                                                         o Redundant, hot-swappable fans and
                                                                                           power supplies
                                                                                         o Field replacement I/O modules
</Table>


                                       5
<PAGE>
     On a product basis, sales have shifted to our fourth and fifth generation
of products, the 6000, 8000 and 10000, and to our embedded line of products.
Sales of our older family of products, the 4100, 4200 and 4x50 lines, accounted
for approximately 90%, 70% and 41% of our product revenue during the years ended
October 31, 2000, 2001 and 2002, respectively. This decrease was partially
offset by increased sales of our fourth and fifth generation products, which
accounted for approximately 24% of our product revenue during the year ended
October 31, 2002. As storage networking continues to mature we have seen a trend
towards simplification of networking components and management. The impact of
this trend on our business has been the push for, and subsequent ramp up of,
embedded routers being shipped with tape libraries. Sales of our embedded
products accounted for approximately 2%, 15% and 27% of our product revenue
during the years ended October 31, 2000, 2001 and 2002, respectively.

     In August 2001, we expanded our product line with the launch of our fourth
generation product line -- the Crossroads 8000 storage router and management
software. The 8000 is the first in a new line of multi-protocol enabled routers
designed to connect storage devices into fibre channel and iSCSI storage
networks. One element of the 8000 is the Crossroads Visual Manager(TM) (CVM(TM))
software. This software increases the intelligence in the SAN and reduces the
cost of storage management.

     In conjunction with Compaq, Intel, Microsoft, StorageTek, and VERITAS, we
unveiled the Crossroads Internet SCSI - or iSCSI - for storage networking in
October 2001 at Storage Networking World (SNW). The demonstration utilized a
Crossroads iSCSI storage router performing data movement with an Intel PRO/1000
T IP Storage Adapter, StorageTek L40 tape library and a server running Microsoft
Windows.Net Server Beta and Windows 2000 Professional. The demonstration
showcased the combined technology and interoperability of these industry
leaders.

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 Multi-Protocol Storage Router
for enterprise environments. The Crossroads 10000 is a fully redundant, modular
storage router that increases the reliability, flexibility and performance of
tape backup in networked storage environments through technologies such as
LAN-free, Server-free backup and multi-protocol connectivity. One of the other
capabilities of the 10000 is 'Access Controls' which provides enhanced security
and prevent server conflicts so that multiple servers can share storage devices.
Advances LUN zoning capabilities allow an entire library (or even specific tape
drives) to be masked from selected servers while remaining visible to others.

     In April 2002, we began shipping the Crossroads 10000 for SAN data
protection to Compaq, now part of Hewlett-Packard. In October 2002, we also
began shipping the Crossroads 10000 to StorageTek. In April 2002 at the SNW
spring show we further demonstrated leading iSCSI interoperability with a
prototype of our Crossroads 10000 platform in a joint demonstration with
Adaptec, CommVault, Hewlett-Packard, and Microsoft.

     In May 2002, we launched the industry's first low-cost two-gigabit fibre
channel storage router, the Crossroads 6000. Targeted at the small to mid-sized
market, the Crossroads 6000 complements the Crossroads 10000, which is intended
for the enterprise market. In May 2002 we also began shipping the 6000 to
Compaq, now part of Hewlett-Packard. The 6000 provides customers an alternative
to purchasing newer equipment by enabling them to continue to leverage existing
equipment, such as SCSI tape libraries.

     Also in May 2002, at the NetWorld + Interop Conference, we demonstrated
broad interoperability with iSCSI storage routing in a joint demonstration with
Intel, IBM, and StorageTek. The demonstration combined the Crossroads 10000 with
an Intel PRO/1000 T IP Storage Adapter, StorageTek L40 tape library, IBM eServer
xSeries, and an IBM Total Storage IP Storage 200i system. The 10000 storage
router performed data movement and data backup over Gigabit Ethernet using the
emerging iSCSI protocol and forwarded the data to the StorageTek library. By
working with leading companies such as IBM, Intel and StorageTek, Crossroads
demonstrated expertise in developing next-generation industry-standard I/O
products and further supported its goal of positioning itself to deliver simple,
cost-effective and interoperable iSCSI solutions to customers.

     In December 2002, we launched the Crossroads ServerAttach SA40, the first
appliance to connect SCSI servers to networked storage. With ServerAttach,
Crossroads leveraged its existing tape attach technology but in a that allows
attachment of servers into fibre channel SANs . The ServerAttach SA40 is the
first offering in the company's new ServerAttach family of products that will be
sold through Crossroads' distribution channel, broadening the company's
potential customer base. With ServerAttach,


                                       6
<PAGE>


Crossroads has moved into an adjacent market that we believe will increase
beyond our existing tape attach opportunities, and which will allow our
customers to save both time and money by leveraging existing servers with access
to storage network resources.


DISTRIBUTION MODEL

     Our products are marketed, sold, and supported worldwide through a wide
range of distribution partners, including OEM partners, value-added
distributors, systems integrators, and value-added resellers. o

     o   Our OEM partners are leading storage systems and subsystems providers
         who offer our products under their own private label or as Crossroads
         branded solutions. Sales through OEM partners comprise the majority of
         our business.

     o   Other distribution partners include Crossroads-authorized value added
         distributors, systems integrators, and VARs. These partners are
         authorized by us to market, sell, and support our family of storage
         routers. Some also sell product education and other value-added
         services.

     We have OEM or distribution agreements with many of the companies that sell
the world's storage systems and subsystems. Prior to offering our products for
sale through OEMs, our OEM customers require that each of our products undergo
an extensive qualification process, which involves interoperability testing of
our product in the OEM's system as well as rigorous reliability testing. This
qualification process may continue for a year or longer. However, qualification
of a product by an OEM does not assure any sales of the product to the OEM.
Despite this uncertainty, we devote substantial resources, including sales,
marketing and management efforts, toward qualifying our products with OEMs in
anticipation of sales to them. If we are unsuccessful or delayed in qualifying
any products with an OEM, such failure or delay would preclude or delay sales of
that product to the OEM, which may impede our ability to grow our business.


OUR CUSTOMERS

     We provide our products in a variety of configurations, including both
stand-alone box and embedded router form factors with varying port counts. Our
products are in solutions from ACAL, ACS, Arrow, ATL, Bell Micro, Cranel/Adexis,
Datalink, Dell, Fujitsu-Siemens, Groupe Bull , Hewlett-Packard (including
Compaq), Hitachi Data Systems, IBM, Overland Storage, StorageTek, Sun
Microsystems, Tech Data, TidalWire and Unisys.

     During fiscal 2002, our revenue base consolidated significantly which
resulted in the number of our customers representing approximately 75% of our
total revenue decreasing from ten in fiscal 2001 to three in fiscal 2002. In
fiscal 2002, sales to our OEM customers accounted for approximately 82% of our
total revenue. For the year ended October 31, 2000, 2001 and 2002, our
distribution channel, which consists of distributors, VARs and systems
integrators, accounted for approximately 10%, 11% and 13% of our total revenue,
respectively.

     A significant portion of our revenue is concentrated among a relatively
small number of OEM customers and the merger of Hewlett-Packard and Compaq has
resulted in substantial additional concentration. During fiscal 2002, sales to
Hewlett-Packard (including Compaq) and StorageTek, accounted for 51% and 24% of
our total revenue, respectively. No other customer accounted for more than 10%
of our revenue during fiscal 2002. The level of sales to any single customer may
vary and the loss of any one significant customer, or a decrease in the level of
sales to any one significant customer, particularly Hewlett-Packard (including
Compaq), would seriously harm our financial condition and results of operations.
We expect that a significant portion of our future revenue will continue to come
from sales of products to a relatively small number of customers.

     In March 2002, we announced that we entered into an exclusive reseller
business relationship with Luminex Software, Inc. Under the terms of the
agreement, Luminex became the exclusive reseller of our mainframe products,
which we originally acquired from Polaris. The agreement expands an already
existing customer relationship and includes a license to the hardware, software
and firmware designs of our mainframe products. At the end of the agreement,
provided that Luminex meets specified minimum purchase thresholds, Luminex will
have the option to purchase the assets and intellectual property related to our
mainframe products, including the right to manufacture those products, for a
nominal amount. Luminex has a seven-year history of working with us as an OEM
and shares a similar customer and OEM base. Luminex hired the entire
Crossroads-Oregon engineering and marketing team, and operates the business from
its current location in Beaverton, Oregon. With our product line, Luminex will
now provide focused software and hardware development for the data center and
enterprise class customer. As a result, Luminex now supports all
Crossroads-Oregon customers. We expect that Luminex will meet specified minimum
purchase thresholds during the second fiscal quarter of 2003, and at that time,
we will consummate a transfer of assets to Luminex.

SALES AND MARKETING

     We base our sales and marketing strategy on an indirect sales model
executed through global OEMs and distributors, VARs and system integrators. Our
sales activity has focused principally on OEM adoption through extensive OEM
testing and product qualification. Because we sell most of our products today
though our OEMs, we have restructured our selling efforts to focus on growing
within those OEM accounts. We hope to expand our distribution channel by
qualifying new leads in a sales/marketing 'funnel' process. We have used an
email marketing campaign in conjunction with online marketing surveys which are
generating product interest with end-users. After qualification, the end-users
are referred to the appropriate sales representatives or channel partners.
End-users are also input into a database that is used for our email marketing
efforts. We also enable our channel


                                       7
<PAGE>


partners to better handle customer leads by providing them with access to online
product training, sales literature, and technical documentation as well as other
information via a partner website, which is intended to facilitate the sales
process.

     Our marketing organization primarily focuses on coordinating strategic
product planning and tactical adoption activities with our major OEM customers
and channel partners. This helps us to determine which market segments to
pursue, understand their size and growth characteristics, analyze competition,
define product features, construct business analyses to measure expected return
on investments, and finally to enhance the indirect distribution process for our
products by provisioning the sales and marketing tools needed. Our marketing
efforts are geared toward:

     o   developing key relationships with OEMs, distributors, VARs, system
         integrators, and independent software vendors;

     o   participating in tradeshows to promote and launch our products; and

     o   coordinating our involvement in various industry standards
         organizations, such as the Storage Networking Industry Association.

CUSTOMER SERVICE AND SUPPORT

     Our customer support organization provides comprehensive training programs
and telephone, e-mail and Web-based direct support to our customers and
end-users. These programs allow us to minimize the need for a large end-user
support organization by enabling our OEMs to provide installation, service and
primary technical support to their customers while we focus on high-level
secondary support. We actively assist our OEM customers, distributors and VARs
to solve end-user problems.

OUR COMPETITION

     The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ADIC through their acquisition of Pathlight
Technology in 2001, ATTO, and Chaparral Network Storage. We also expect to face
competition in the future from one or more of the following sources:

     o   other OEMs, including our customers and potential customers;

     o   native fibre channel vendors;

     o   LAN switch manufacturers;

     o   future iSCSI vendors;

     o   storage system industry suppliers, including manufacturers and vendors
         of other SAN products or entire SAN systems; and

     o   current and future start-up companies.

     As the market for SAN products grows, we also may face competition from
traditional networking companies and other manufacturers of networking products.
These networking companies may enter the storage router market by introducing
their own products or by entering into strategic relationships with or acquiring
other existing SAN product providers. Furthermore, we have licensed our 4200 and
4x50 storage router technology to Hewlett-Packard, one of our OEM customers.
Hewlett-Packard currently manufactures the 4200 product under its name and pays
us a royalty. Hewlett-Packard has vastly greater resources and distribution
capabilities than we do, and therefore, it could establish market acceptance in
a relatively short time frame for any competitive products that it may
introduce, which, in turn, would reduce demand for our products from
Hewlett-Packard and could reduce demand for our products from other customers.

     We believe the competitive factors in the storage router and ServerAttach
markets include the following:


                                       8
<PAGE>


     o   market share and position;

     o   OEM endorsement;

     o   product reliability and verified interoperability;

     o   customer service and technical support;

     o   product performance and features;

     o   brand awareness and credibility;

     o   ability to meet delivery schedules;

     o   strength of distribution channel;

     o   ease-of-use and manageability; and

     o   price.


TECHNOLOGY

     Our storage router products are based on an architecture that combines our
Crossroads OS and hardware designs using industry standard components. Our
proprietary packet routing software intelligently examines data packet traffic
to prioritize transmission and minimize network congestion in the flow of
transactions between servers and storage systems. This routing software also:

     o   manages delays in data transmissions that result from variances in
         speeds;

     o   provides accurate communication of transmission status to connected
         devices;

     o   provides critical interoperability between diverse protocols;

     o   enables sharing of storage resources by multiple servers; and

     o   can adapt to new protocols as they emerge.

     Additionally, our embedded software is configurable and can be quickly
adapted to varying customer requirements and computing environments. While our
software architecture serves as the foundation for our current products, it is
also designed to be able to accommodate several planned generations of new
designs. Our hardware is the "engine" that provides basic performance and
functionality such as operating speed, data movement, external device
connectivity, network management interfaces and the ability to operate in
extreme environmental conditions of temperature and humidity.

     We possess a high level of multi-disciplinary expertise encompassing
technologies, software design, operating systems, hardware and application
specific integrated circuit design and storage area network technologies. We
utilize these skills to design, develop, manufacture and deliver our products.
We believe that our combined expertise in each of these technologies provides us
with a competitive advantage in the ability to develop new products on a timely
basis, verify interoperability, expand our product features and integrate
additional interfaces and functions.

     I/O Technologies

     We believe that our routing expertise is a critical factor in our ability
to maintain our leadership position in storage routing. The key technologies in
use today are: SCSI and fibre channel in open systems (e.g., Windows NT and
Unix). As of October 31, 2002, we employed 66 research and development personnel
who have significant involvement in the evolution of these technologies. Based
on their expertise and our overall capabilities, we believe that we possess
insight and understanding into the capabilities and limits of each new
technology and the requirements for routing. As new standards are developed, we
expect to contribute to these developments and


                                       9
<PAGE>


leverage our software and technical expertise in developing additional routers.
Such additional areas of focus include:

     o   iSCSI over Gigabit Ethernet;

     o   SRP over InfiniBand;

     o   Serial Attached SCSI; and

     o   Serial ATA.

     Embedded Software Design

     We design, develop and test all of our own embedded software. As of October
31, 2002, our engineering staff included 24 software engineers with expertise in
embedded software, management tools, software applications and graphical user
interface development. We have considerable expertise in protocol standards,
error detection and recovery and support. The flexibility to modify our software
to varying system configurations has enhanced our ability to rapidly achieve
verified interoperability.

RESEARCH AND DEVELOPMENT

     The storage networking industry in which we compete is subject to rapid
technological developments, evolving industry standards, changes in customer
requirements, and new product introductions. As a result, we believe that our
research and development efforts are essential to our ability to successfully
deliver innovative products that address the needs of our customers as the
routing market evolves. Our research and development team works closely with our
marketing and sales team and OEMs to define product features and performance.
Development activities are conducted with extensive validation testing at both
our company and at our major customers.

     We have invested heavily in research and development to support current and
future product development. We continue to enhance and extend our products to
anticipate and meet customer requirements. We continue to increase the speed and
performance of our storage routing products and to deliver higher port density
and more cost-optimized solutions. Our products are designed to support current
industry standards and will continue to support emerging standards that are
consistent with our product strategy. Members of our senior engineering team
also are actively engaged in development of industry standards which allows us
to focus our product strategies in areas that are aligned with those standards.

     Research and development programs currently underway that focus on our
routing initiatives include:

     o   fibre channel-to-SCSI storage routing: Increased connectivity and port
         density, smaller form factors, improved manageability, broader
         interoperability, higher performance products and "intelligent" data
         management and data movement features.

     o   iSCSI-to-SCSI storage routing: To enable connectivity of SCSI storage
         devices to an Ethernet network using the iSCSI protocol.

     o   iSCSI-to-fibre channel storage routing: To enable connectivity of IP
         networks to fibre channel SANs for both data movement and management.

     o   InfiniBand Routing: Technology development focused on multi-protocol
         routing products for InfiniBand connecting to iSCSI, fibre channel and
         other protocols.

     Our research and development expenses, net of stock-based compensation of
$440,000 and $369,000 during fiscal 2001 and 2002, respectively, were $17.7
million and $16.2 million in fiscal 2001 and 2002, respectively. At October 31,
2002, we employed 66 research and development personnel. All expenditures for
research and development costs have been expensed as incurred. We expect to
continue to maintain our high level of investment in research and development.


                                       10
<PAGE>


MANUFACTURING

     In November 2002, we amended our existing licensing agreement with
Hewlett-Packard. Pursuant to this amendment, beginning in the second quarter of
2003, we will outsource the manufacturing of our embedded routers to
Hewlett-Packard. We believe this agreement will allow us to leverage the
strengths of both companies. We will use Hewlett-Packard's economies of scale in
manufacturing and systems integration expertise and combine that with our
software, value-added applications and intellectual property. Under the amended
agreement, Hewlett-Packard will manufacture the hardware and license the
software from us for its current line of embedded solutions. In addition, we
will be able to purchase from Hewlett-Packard embedded routers for sales to our
other customers. Further, we will continue to manufacture our box-based 4x50,
6000 and 10000 products for Hewlett-Packard, as well as for our other OEMs for
whom we will also continue to manufacture branded solutions. Together, we should
be able to drive efficiencies for both companies while delivering cost-effective
storage solutions to end-users.

     We use Solectron Corporation, a third-party contract manufacturer, to
assemble the printed circuit board for our current products, including our 4x50,
6000, 8000, 10000, and embedded router family of products (which we are in the
process of transitioning to Hewlett-Packard pursuant to the amended license
agreement, described above). Our manufactured products contain printed circuit
board assemblies which consist of the electronics that control the function of
our product. Solectron purchases the required components for our printed circuit
board to meet demand in accordance with our purchase orders and our forecast.
During product final assembly and test, the printed circuit board is assembled
with the remaining components (power supply, cables and enclosures) and tested
to create the final product.

     Solectron invoices us based on prices and payment terms mutually agreed
upon and set forth in purchase orders we issue to Solectron. The pricing takes
into account component costs, manufacturing costs, and margin requirements.
Although the purchase orders we place with Solectron are cancelable, the terms
of our manufacturing agreement with Solectron would require us to purchase all
excess or obsolete material not returnable or usable by other customers. As the
needs of our customers continue to evolve, we plan to reassess our manufacturing
requirements on a periodic basis and effect appropriate changes to our
manufacturing processes.

     Although we use standard parts and components for our products where
possible, we and Solectron currently purchase several key components used in the
manufacture of our products from single or limited sources. Solectron purchases
the components used in the printed circuit board assemblies, whereas we purchase
the remaining components used during final assembly including the power supply,
fan and chassis materials. We have an obligation to our contract manufacturers
for portions of excess inventory arising from a sudden reduction in purchase
orders by us to the extent it differs from the forecast which we supply to our
contract manufacturers. Our principal single-source components include
application specific integrated circuits, licensed software and chassis.

     During fiscal 2002, we have maintained our ISO 9002 registration.


PATENTS, INTELLECTUAL PROPERTY AND LICENSING


     We rely on a combination of patents, copyrights, trademarks, trade secrets,
confidentiality agreements, and other contractual restrictions with employees
and third parties to establish and protect our proprietary rights. Despite these
precautions, the measures we undertake may not prevent misappropriation or
infringement of our proprietary technology. These measures may not preclude
competitors from independently developing products with functionality or
features similar to our products.

     We maintain a program to identify and obtain patent protection for our
inventions. It is possible that we will not receive patents for every
application we file. Furthermore, our issued patents may not adequately protect
our technology from infringement or prevent others from claiming that our
products infringe the patents of those third parties. Failure to protect our
intellectual property could materially harm our business. In addition, our
competitors may independently develop similar or superior technology. It is
possible that litigation may be necessary in the future to enforce our
intellectual property rights, to protect our trade secrets, or to determine the
validity and scope of the proprietary rights of others. Litigation could result
in substantial costs and diversion of resources and could materially harm our
business.

     Some of our products are designed to include software or other intellectual
property licensed from third parties. While it may be necessary in the future to
seek or renew licenses relating to various aspects of our products, we believe
that such licenses generally could be obtained on commercially reasonable terms.


                                       11
<PAGE>

     In May 2002, Adaptec, Inc. became the first RAID company to license the
Crossroads '972 patent, which provides access controls vital to networked
storage systems. Adaptec will add this technology to RAID controllers that ship
with its DuraStor(TM) 7220SS, a fibre channel-to-SCSI storage subsystem.
Specifically, the technology enables Adaptec's RAID cards to protect data in
shared storage from unauthorized access and overwrites by multiple hosts. In
December 2002, Adaptec added the DuraStor(TM) 7320SS, a fibre channel-to-SCSI
storage subsystem to its license with Crossroads.

     We have 14 patents issued and 80 patents pending worldwide. 24 patent
applications are pending in the United States Patent and Trademark Office with
respect to our technology. We have 56 pending international patent applications
(11 in the European Patent Office, 10 in Canada, 10 in Japan, 7 in Australia, 5
in Hong Kong, 4 in Indonesia and 4 in China). We also have 5 international
patent applications pending under the Patent Cooperation Treaty.

     We have issued a license to Hewlett-Packard for our 4200 and 4x50 storage
router technology. This license allows Hewlett-Packard to create and incorporate
into its own products modifications and derivative works of this licensed
technology. This license expired in April 2001 but automatically renewed and
will continue to renew for successive one-year periods after that date, unless
it is terminated by either party. Hewlett-Packard currently manufactures the
4200 product under its name and pays us a royalty.

     During fiscal 2001, we succeeded in two important lawsuits that
demonstrated our ability to protect important aspects of our intellectual
property portfolio. In June 2001, Pathlight Technology, a wholly owned
subsidiary of Advanced Digital Information Corp., admitted both the validity and
infringement of one of our patents (5,941,972), the '972 patent, in a $15.0
million settlement. In September 2001, a jury and judge validated that same
patent against Chaparral Network Storage Corporation, while extending the
patent's application to all RAID and router products using Access Controls or
LUN zoning, awarding us damages and punitive damages. In fiscal 2002, Chaparral
appealed the judgment against it, contending that the '972 patent is invalid and
not infringed. Crossroads intends to vigorously defend the appeal. During fiscal
2002, we were awarded an additional patent, the '035 patent, which is an
extension of our '972 patent for access controls that are vital to network
storage environments.

     We have registered the trademark "CROSSROADS", "CROSSROADS SYSTEMS" and
"iBOD" in the United States. All other trademarks, service marks or trade names
referred to in this Annual Report on Form 10-K are the property of their
respective owners.

EMPLOYEES

     At October 31, 2002, we had 122 employees, with 66 engaged in research and
development, 26 in manufacturing, 13 in sales, marketing and customer support,
and 17 in administration, information technology, human resources and finance.
None of our employees are represented by a labor union. We have not experienced
any work stoppages and consider our relations with our employees to be good.
Competition for technical personnel in the computing industry continues to be
significant. We believe that our success depends in part on our ability to hire,
assimilate, and retain qualified personnel. We cannot assure you that we will
continue to be successful at hiring, assimilating, and retaining employees in
the future.


                                       12
<PAGE>


EXECUTIVE OFFICERS OF THE REGISTRANT

     The following table sets forth, as of January 17, 2002, certain information
concerning our executive officers:

<Table>
<Caption>

     NAME                             AGE             POSITION(s)
     ----                             ---             -----------
<S>                                   <C>     <C>
     Brian R. Smith...............     37     President, Chief Executive Officer, Chairman of the Board
     Robert C. Sims...............     35     Chief Operating Officer
     Andrea Wenholz...............     37     Vice President, Chief Financial Officer, Secretary and Treasurer
</Table>

     BRIAN R. SMITH is our Chairman of the Board, President and Chief Executive
Officer of Crossroads. Mr. Smith is a co-founder and has served as our Chairman
of the Board since our inception in April 1995, as our Chief Executive Officer
from our inception until October 31, 2001 and from May 2002 to the present, and
as our President from our inception until October 1997 and from May 2002 to the
present. From November 2001 to December 2002, Mr. Smith served as the managing
partner of Convergent Investors, a venture capital firm located in Austin,
Texas. From October 1994 to April 1995, Mr. Smith was President of a consulting
service company which successfully evolved into Crossroads. From January 1985 to
October 1994, he also held various development and management positions with
IBM. At IBM his accomplishments included leading the development of IBM's fibre
channel and FDDI products.  Mr. Smith holds a B.S.E.E from the University of
Cincinnati and an M.S.E.E. from Purdue University.

     ROBERT C. SIMS has served as our Chief Operating Officer since May 2002.
From April 2001 to May 2002, Mr. Sims served as our Vice President of
Engineering and Operations. From July 2000 to April 2001, Mr. Sims served as our
Vice President of Operations and Corporate Quality. From March 1999 to July
2000, Mr. Sims served as our Director of Operations. From January, 1998 to
March 1999, Mr. Sims managed the advanced manufacturing and product test
organizations at Kentek Corp., developing high-speed back office printers. From
1990 to 1998, Sims was with Exabyte where he last served as manager of the
manufacturing engineering and quality organizations for the high-end tape drive
division. Mr. Sims received a B.S. in electrical engineering from Colorado State
University.

     ANDREA WENHOLZ joined Crossroads as our Vice President, Chief Financial
Officer, Secretary and Treasurer in January 2003. From May 2001 to December
2002, Ms. Wenholz served as the Controller for U.S. Operations at Parthus
Technologies, plc, a leading provider of application-specific platform IP, which
eventually became ParthusCeva, following its merger with Ceva, the former
licensing division of DSP Group, Inc. Prior to that, from September 2000 to May
2001 Ms. Wenholz was Chief Financial Officer at Chicory Systems, Inc., a
semiconductor intellectual property company, which was acquired by Parthus. Ms.
Wenholz served as a Business Unit Controller at Cisco Systems, Inc. from April
1998 to September 2000, and prior to that as Controller at NetSpeed, Inc. from
August 1996 to April 1998, where she was involved in the implementation and
manufacturing transition of Cisco's acquisition of NetSpeed. Ms. Wehnolz is a
C.P.A and received a B.B.A. from Texas A&M University.

Further information required by this Item is incorporated by reference to our
Proxy Statement under the sections captioned "Election of Directors" and
"Compliance with Section 16(a) of the Securities Exchange Act of 1934."


                                       13
<PAGE>


FACTORS THAT MAY AFFECT FUTURE RESULTS

     In addition to the other information in this Annual Report on Form 10-K,
the following factors should be considered in evaluating Crossroads and our
business. These factors include, but are not limited to the potential for
significant losses to continue; our inability to accurately predict revenue and
budget for expenses for future periods; fluctuations in revenue and operating
results; class action securities litigation; overall market performance; limited
product lines; limited number of OEM customers; lengthy OEM product
qualification process; competition; delays in research and development;
inventory risks; the loss of our primary contract manufacturers; risks of delay
or poor execution from a variety of sources; inventory risks; limited resources;
pricing; dependence upon key personnel; product liability claims; the inability
to protect our intellectual property rights; concentration of ownership;
volatility of stock price; and the impact on our results or operations due to
changes in accounting standards, including the implementation of SAB NO. 101
with respect to revenue recognition. The discussion below addresses some of
these factors. Additional risks and uncertainties that we are unaware of or that
we currently deem immaterial also may become important factors that affect us.

WE HAVE INCURRED SIGNIFICANT LOSSES AND NEGATIVE CASH FLOW, WE EXPECT FUTURE
LOSSES AND NEGATIVE CASH FLOW, AND WE MAY NEVER BECOME PROFITABLE OR CASH FLOW
POSITIVE.

     We have incurred significant losses in every fiscal quarter since fiscal
1996 and expect to continue to incur losses in the future. As of October 31,
2002, we had an accumulated deficit of $141.0 million. We cannot be certain that
we will be able to generate sufficient revenue to achieve profitability or
become cash flow positive. Although we engaged in a restructuring plan in 2002
pursuant to which we significantly reduced our expense structure, we still
expect to incur significant sales and marketing, research and development and
general and administrative expenses and, as a result, we expect to continue to
incur losses. Moreover, even if we do achieve profitability, we may not be able
to sustain or increase profitability or cash flow.

DUE TO THE UNCERTAIN AND SHIFTING DEVELOPMENT OF THE STORAGE AREA NETWORK
MARKET, WE MAY HAVE DIFFICULTY ACCURATELY PREDICTING REVENUE FOR FUTURE PERIODS
AND APPROPRIATELY BUDGETING FOR EXPENSES.

     We have generated product revenue for approximately five years and, thus,
we have only a limited history from which to predict future revenue. This
limited operating experience, combined with the rapidly evolving nature of the
storage area network market in which we sell our products, the current weak
economic environment which has resulted in decreased corporate IT spending and
other factors that are beyond our control, reduces our ability to accurately
forecast our quarterly and annual revenue. Most of our expenses are fixed in the
short term or incurred in advance of anticipated revenue. As a result, we may
not be able to decrease our expenses in a timely manner to offset any shortfall
of revenue.

WE HAVE EXPERIENCED AND EXPECT TO CONTINUE TO EXPERIENCE SIGNIFICANT
PERIOD-TO-PERIOD FLUCTUATIONS IN OUR REVENUE AND OPERATING RESULTS, WHICH MAY
RESULT IN VOLATILITY IN OUR STOCK PRICE.

     We have experienced and expect to continue to experience significant
period-to-period fluctuations in our revenue and operating results due to a
number of factors, and any such variations and factors may cause our stock price
to fluctuate. Accordingly, you should not rely on the results of any past
quarterly or annual periods as an indication of our future performance.

     It is likely that in some future period our operating results will be below
the expectations of public market analysts or investors. If this occurs, our
stock price may drop, perhaps significantly.

      A number of factors may particularly contribute to fluctuations in our
revenue and operating results, including:

     o   changes in general economic conditions and specific economic conditions
         in the computer, storage, and networking industries. In particular,
         continuing economic uncertainty has resulted in a general reduction in
         IT spending. This reduction in IT spending has lead to a decline in our
         growth rates compared to historical trends;

     o   the timing of orders from, and product integration by, our customers,
         particularly our OEMs, and the tendency of these customers to change
         their order requirements frequently with little or no advance notice


                                       14
<PAGE>


         to us;

     o   the rate of adoption of SANs as an alternative to existing data storage
         and management systems;

     o   the ongoing need for storage routing products in storage area network
         architectures;

     o   the deferrals of customer orders in anticipation of new products,
         services or product enhancements from us or our competitors or from
         other providers of storage area network products;

     o   the rate at which new markets emerge for products we are currently
         developing;

     o   the successful launch and customer acceptance of our new ServerAttach
         family of products;

     o   disruptions or downturns in general economic activity resulting from
         terrorist activity and armed conflict;

     o   increases in prices of components used in the manufacture of our
         products; and

     o   variations in the mix of our products sold and the mix of distribution
         channels through which they are sold.

     In addition, potential and existing OEM customers often place initial
orders for our products for purposes of qualification and testing. As a result,
we may report an increase in sales or a commencement of sales of a product in a
quarter that will not be followed by similar sales in subsequent quarters as
OEMs conduct qualification and testing. This order pattern has in the past and
could in the future lead to fluctuations in quarterly revenue and gross profits.

GLOBAL ECONOMIC CONDITIONS MAY CONTINUE TO ERODE, WHICH MIGHT NEGATIVELY IMPACT
US, AND THE PRICE OF OUR COMMON STOCK.

     The macroeconomic environment and capital spending on information
technology have continued to erode, resulting in continued uncertainty in our
revenue expectations. The operating results of our business depend on the
overall demand for storage area network products. Because our sales are
primarily to major corporate customers whose businesses fluctuates with general
economic and business conditions, continued soft demand for storage area network
products caused by a weakening economy and budgetary constraints have resulted
in decreased revenue. We may be especially prone to this as a result of the
relatively high percentage of revenue we have historically derived from the
high-tech industry, which has been more adversely impacted by the current weak
economic environment. Customers may continue to defer or reconsider purchasing
products if they continue to experience a lack of growth in their business or if
the general economy fails to significantly improve, resulting in a continued
decrease in our product revenue.

THE STORAGE TECHNOLOGY MARKET IS CHARACTERIZED BY RAPID TECHNOLOGICAL EVOLUTION,
AND OUR SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP NEW PRODUCTS.

     The market for our products is characterized by rapidly changing technology
and evolving industry standards and is highly competitive with respect to timely
innovation. At this time, the storage technology market is particularly subject
to change with the emergence of fibre channel and iSCSI protocols and other new
storage technologies and solutions. The introduction of new products embodying
new or alternative technology or the emergence of new industry standards could
render our existing products obsolete or unmarketable. Our future success will
depend in part on our ability to anticipate changes in technology, to gain
access to such technology for incorporation into our products and to develop new
and enhanced products on a timely and cost-effective basis. Risks inherent in
the development and introduction of new products include:

     o   delay in our initial shipment of new products;

     o   the difficulty in forecasting customer demand accurately;

     o   our inability to expand production capacity fast enough to meet
         customer demand;


                                       15
<PAGE>


     o   the possibility that new products may cannibalize our current products;

     o   competitors' responses to our introduction of new products; and

     o   the desire by customers to evaluate new products for longer periods of
         time before making a purchase decision.

     In addition, we must be able to maintain the compatibility of our products
with future device technologies, and we must rely on producers of new device
technologies to achieve and sustain market acceptance of those technologies.
Development schedules for high-technology products are subject to uncertainty,
and we may not meet our product development schedules. If we are unable, for
technological or other reasons, to develop products in a timely manner or if the
products or product enhancements that we develop do not achieve market
acceptance, our business will be harmed.

FAILURE TO MANAGE OUR BUSINESS EFFECTIVELY COULD SERIOUSLY HARM OUR BUSINESS,
FINANCIAL CONDITION, AND PROSPECTS.

     Our ability to successfully implement our business plan, develop and offer
products, and manage our business in a rapidly evolving market requires a
comprehensive and effective planning and management process. We continue to
change the scope of our operations, including managing our headcount
appropriately. Changes in our business, headcount, organizational structure and
relationships with customers and other third parties has placed, and will
continue to place, a significant strain on our management systems and resources.
Our failure to continue to improve upon our operational, managerial, and
financial controls, reporting systems, and procedures, and our failure to
continue to train and manage our work force, could seriously harm our business
and financial results.

OUR COMMON STOCK IS CURRENTLY TRADING ABOVE $1.00 PER SHARE. HOWEVER, IF THE
CLOSING BID PRICE OF OUR COMMON STOCK WERE TO FALL BELOW $1.00 PER SHARE FOR
MORE THAN 30 CONSECUTIVE TRADING DAYS, OUR STOCK COULD AGAIN BE AT RISK OF BEING
DELISTED FROM THE NASDAQ NATIONAL MARKET.

     In December 2002, Nasdaq sent us a notice that we were to be delisted from
the Nasdaq National Market for failure to maintain the $1.00 minimum bid price
requirement for listing on the Nasdaq National Market. While we were awaiting
our hearing with Nasdaq to appeal our delisting, the closing bid price of our
common stock remained above $1.00 for twelve consecutive trading days and we
received a notice from Nasdaq that our hearing was cancelled and that we would
remain on the Nasdaq National Market.

     While we recently avoided the threat of delisting, in the event that the
closing bid price of our stock were to fall below $1.00 for 30 consecutive
trading days, we would again be in danger of having our stock delisted from the
Nasdaq National Market. Delisting could make our stock more difficult to trade,
reduce the trading volume of our stock and further depress our stock price. In
addition, delisting or the threat of delisting could impair our ability to raise
funds in the capital markets, which could materially impact our business,
results of operations and financial condition.

AN ADVERSE DECISION IN THE VARIOUS SECURITIES CLASS ACTION AND DERIVATIVE
LAWSUITS FILED AGAINST US MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND
FINANCIAL PERFORMANCE.

     We and several of our officers and directors were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. The court consolidated the actions and appointed a
lead plaintiff under the Private Securities Litigation Reform Act of 1995. The
amended consolidated complaint was filed in February 2001. On November 22, 2002,
the court granted our motion for summary judgment, concluding that the
plaintiffs failed to demonstrate an essential element to their claim of
securities fraud. We anticipate the plaintiffs will file an appeal to the Fifth
Circuit Court of Appeals. The litigation is at an early stage and it is not
possible at this time to predict whether we will incur any liability or to
estimate the damages, or the range of damages, that we might incur in connection
with such actions. An adverse judgment may have a material adverse effect on our
business and financial performance. See Note 5 to Notes to Condensed
Consolidated Financial Statements.

     On November 21, 2001, a derivative state action was filed in the 261st
District Court of Travis County, Texas on behalf of Crossroads by James Robke
and named several of our officers and directors as defendants. The derivative


                                       16
<PAGE>


state action is based upon the same general set of facts and circumstances
outlined above in connection with the purported securities class action
litigation. The derivative state action alleges that certain of the individual
defendants sold shares while in possession of material inside information in
purported breach of their fiduciary duties to Crossroads. The derivative state
action also alleges waste of corporate assets. On January 28, 2002, we filed an
answer and general denial to the derivative state action. We believe the
allegations in the derivative state action are without merit and intend to
defend ourselves vigorously. Our inability to prevail in this action could have
a material adverse effect on our future business, financial condition and
results of operations. See Note 5 to Notes to Condensed Consolidated Financial
Statements.

OUR BUSINESS IS DEPENDENT ON THE STORAGE AREA NETWORK MARKET WHICH IS NEW AND
UNPREDICTABLE, AND IF THIS MARKET DOES NOT DEVELOP AND EXPAND AS WE ANTICIPATE,
OUR BUSINESS WILL SUFFER.

     Fibre channel-based SANs, were first deployed in 1997. As a result, the
market for SANs and related storage router products has only recently begun to
develop and is rapidly evolving. Because this market is relatively new, it is
difficult to predict its potential size or future growth rate. Substantially all
of our products are used exclusively in SANs and, therefore, our business is
dependent on the SAN market. Accordingly, the widespread adoption of SANs for
use in organizations' computing systems is critical to our future success. Most
of the organizations that would be likely to purchase our products have invested
substantial resources in their existing computing and data storage systems and,
as a result, may be reluctant or slow to adopt a new approach like SANs,
particularly in the current economic environment. SANs are often implemented in
connection with the deployment of new storage systems and servers. Therefore,
our future success is also substantially dependent on the market for new storage
systems and servers. Furthermore, the ability of the different components used
in a SAN to function effectively, or interoperate, with each other when placed
in a computing system has not yet been achieved on a widespread basis. Until
greater interoperability is achieved, customers may be reluctant to deploy SANs.
Our success in generating revenue in the emerging SAN market will depend on,
among other things, our ability to:

     o   educate potential OEM customers, distributors, VARs, system
         integrators, storage service providers and end-user organizations about
         the benefits of SANs and storage router technology, including, in
         particular, the ability to use storage routers with SANs to improve
         system backup and recovery processes;

     o   maintain and enhance our relationships with OEM customers,
         distributors, VARs, system integrators, storage system providers and
         end-user organizations;

     o   predict and base our products on standards which ultimately become
         industry standards; and

     o   achieve interoperability between our products and other SAN components
         from diverse vendors.

WE HAVE LIMITED PRODUCT OFFERINGS AND OUR SUCCESS DEPENDS ON OUR ABILITY TO
DEVELOP IN A TIMELY MANNER NEW AND ENHANCED PRODUCTS THAT ACHIEVE MARKET
ACCEPTANCE.

     We currently have a limited number of principal products within our storage
router product family that we sell in commercial quantities. Our future growth
and competitiveness will depend greatly on the market acceptance of our newly
introduced product lines, including the 6000, 8000 and 10000 storage routers and
our ServerAttach family of products, which we released in December 2002. We have
just begun to receive revenue from the sale of our 6000, 8000 and 10000 storage
routers. However, their market acceptance remains uncertain. Sales of our 6000,
8000 and 10000 storage routers accounted for approximately 1% and 24% of our
product revenue during fiscal 2001 and 2002, respectively. If any of these four
product lines do not achieve sufficient market acceptance, our future growth
prospects could be seriously harmed. Moreover, even if we are able to develop
and commercially introduce new products and enhancements, these new products or
enhancements may not achieve market acceptance.


                                       17
<PAGE>


Factors that may affect the market acceptance of our products, some of which are
beyond our control, include the following:

     o   growth of the SAN market;

     o   changing requirements of customers within the SAN market;

     o   performance, quality, price and total cost of ownership of our
         products;

     o   availability, performance, quality and price of competing products and
         technologies;

     o   our customer service and support capabilities and responsiveness; and

     o   successful development of our relationships with existing and potential
         OEM, distributor, VAR, system integrator and storage system provider
         customers.

WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS FOR THE VAST MAJORITY OF OUR REVENUE.
THE LOSS OF OR SIGNIFICANT REDUCTION IN ORDERS FROM ANY KEY CUSTOMERS WOULD
SIGNIFICANTLY REDUCE OUR REVENUE AND WOULD SUBSTANTIALLY HARM OUR FUTURE RESULTS
OF OPERATIONS.

     In fiscal 2000, 2001 and 2002, approximately 77%, 70% and 78% of our total
revenue, respectively, was derived from six customers. In fiscal 2001,
Hewlett-Packard and StorageTek represented 26% and 23% of our total revenue,
respectively. In fiscal 2002, Hewlett-Packard (including sales to Company and to
the combined company) and StorageTek represented 51% and 24% of our total
revenue, respectively. In May 2002, the merger between Hewlett-Packard and
Compaq was consummated which significantly increased our customer concentration.
In fiscal 2002, sales to Hewlett-Packard and Compaq prior to the merger and to
the combined company following the merger represented approximately 51% of our
total revenue. If we experience any adverse effect of the acquisition of Compaq
by Hewlett-Packard, including the risks due to the increase in customer
concentration, any change in product focus or strategy which adversely affects
anticipated revenue or margins or our overall relationship with the newly
combined company our results of operations and future prospects will suffer. Our
operating results in the foreseeable future will continue to depend on sales to
a relatively small number of OEM customers. Therefore, the loss of any of our
key OEM customers, or a significant reduction in sales to any one of them, would
significantly reduce our revenue.

OUR OEM CUSTOMERS REQUIRE OUR PRODUCTS TO UNDERGO A LENGTHY AND EXPENSIVE
QUALIFICATION PROCESS THAT DOES NOT ASSURE PRODUCT SALES.

     Prior to offering our products for sale, our OEM customers require that
each of our products undergo an extensive qualification process, which involves
interoperability testing of our product in the OEM's system as well as rigorous
reliability testing. This qualification process may continue for a year or
longer. However, qualification of a product by an OEM does not assure any sales
of the product to the OEM. Despite this uncertainty, we devote substantial
resources, including sales, marketing and management efforts, toward qualifying
our products with OEMs in anticipation of sales to them. If we are unsuccessful
or delayed in qualifying any products with an OEM, such failure or delay would
preclude or delay sales of that product to the OEM, which may impede our ability
to grow our business.

DEMAND FOR OUR PRODUCTS DEPENDS SIGNIFICANTLY UPON THE NEED TO INTERCONNECT
SCSI-BASED TAPE STORAGE SYSTEMS WITH FIBRE CHANNEL SANS, AND WE EXPECT TO FACE
COMPETITION FROM MANUFACTURERS OF TAPE STORAGE SYSTEMS THAT INCORPORATE FIBRE
CHANNEL INTERFACES INTO THEIR PRODUCTS.

     In traditional computer networks, system backup is accomplished by
transferring data from applications and databases over the servers used in the
network to tape drives or other media where the data is safely stored. Tape
storage devices generally rely on a SCSI connection to interface with the
network in receiving and transmitting data. Our routers enable these SCSI-based
storage devices to interface with the fibre channel-based components of the SAN.
Because our routers allow communication between SCSI storage devices and a fibre
channel SAN, organizations are able to affect their backup processes over the
SAN rather than through the computer network, enabling the servers of the
network to remain available for other computing purposes. We currently derive
the majority of our revenue from sales of storage routers that are used to
connect SCSI-based tape storage systems with SANs. The introduction of tape
storage systems that incorporate fibre channel interfaces would enable tape
storage


                                       18
<PAGE>


devices to communicate directly with SANs, without using storage routers. We are
aware that a number of manufacturers of storage systems, including several of
our current customers, are developing tape storage systems with embedded fibre
channel interfaces, with products expected to be introduced to market in the
near future. If these or other manufacturers are successful in introducing fibre
channel-based storage systems, demand for our storage router products would be
materially reduced and our revenue would decline.

OUR RESEARCH AND DEVELOPMENT EFFORTS ARE FOCUSED ON UTILIZING EMERGING
TECHNOLOGIES AND STANDARDS AND ANY DELAY OR ABANDONMENT OF EFFORTS TO DEVELOP
THESE TECHNOLOGIES OR STANDARDS BY INDUSTRY PARTICIPANTS, OR FAILURE OF THESE
TECHNOLOGIES OR STANDARDS TO ACHIEVE MARKET ACCEPTANCE, COULD COMPROMISE OUR
COMPETITIVE POSITION.

     Our products are intended to complement other SAN products to improve the
performance of computer networks by addressing the I/O bottlenecks that have
emerged between the storage systems and the servers within a computing system.
We have devoted and expect to continue to devote significant resources to
developing products based on emerging technologies and standards that reduce I/O
bottlenecks, such as iSCSI. A number of large companies in the computer hardware
and software industries are actively involved in the development of new
technologies and standards that we expect to incorporate in our new products.
Should any of these companies delay or abandon their efforts to develop
commercially available products based on these new technologies and standards,
our research and development efforts with respect to such technologies and
standards likely would have no appreciable value. In addition, if we do not
correctly anticipate new technologies and standards, or if our products based on
these new technologies and standards fail to achieve market acceptance, our
competitors may be better able to address market demand than would we.
Furthermore, if markets for these new technologies and standards develop later
than we anticipate, or do not develop at all, demand for our products that are
currently in development would suffer, resulting in less revenue for these
products than we currently anticipate.

UNCERTAINTIES INVOLVING SALES AND DEMAND FORECASTS FOR OUR PRODUCTS COULD
NEGATIVELY AFFECT OUR BUSINESS.

     We have limited ability to forecast the demand for our products. In
preparing sales and demand forecasts, we rely largely on input from our
distribution partners. If our distribution partners are unable to accurately
forecast demand, or we fail to effectively communicate with our distribution
partners about end-user demand or other time sensitive information, sales and
demand forecasts may not reflect the most accurate, up-to-date information.
Because we make business decisions based on our sales and demand forecasts, if
these forecasts are inaccurate, our business and financial results could be
negatively impacted. Furthermore, we may not be able to identify these forecast
differences until late in our fiscal quarter. Consequently, we may not be able
to make adjustments to our business model without negatively impacting our
business and results of operations.

WE ARE SUBJECT TO INCREASED INVENTORY RISKS AND COSTS BECAUSE WE MANUFACTURE
PRODUCTS IN ADVANCE OF BINDING COMMITMENTS FROM OUR CUSTOMERS TO PURCHASE OUR
PRODUCTS.

     In order to assure availability of our products for some of our largest OEM
customers, we manufacture products in advance of purchase orders from these
customers based on forecasts provided by them. However, these forecasts do not
represent binding purchase commitments and we do not recognize revenue for such
products until the product is shipped and risk of loss has passed to the OEM. As
a result, we incur inventory and manufacturing costs in advance of anticipated
revenue. Because demand for our products may not materialize, this product
delivery method subjects us to increased risks of high inventory carrying costs
and increased obsolescence and may increase our operating costs.

THE LOSS OF OUR PRIMARY CONTRACT MANUFACTURER, OR THE FAILURE TO FORECAST DEMAND
ACCURATELY FOR OUR PRODUCTS OR TO MANAGE OUR RELATIONSHIP WITH OUR PRIMARY
CONTRACT MANUFACTURER SUCCESSFULLY, WOULD NEGATIVELY IMPACT OUR ABILITY TO
MANUFACTURE AND SELL OUR PRODUCTS.

     We rely on a limited number of contract manufacturers, primarily Solectron,
to assemble the printed circuit board for our current shipping programs,
including our 4x50, 6000, 8000 and 10000. We generally place orders for
products with Solectron approximately four months prior to the anticipated
delivery date, with order volumes based on forecasts of demand from our
customers. Accordingly, if we inaccurately forecast demand for our products, we
may be unable to obtain adequate manufacturing capacity from Solectron to meet
our customers' delivery requirements, or we may accumulate excess inventories.
We have on occasion in the past been unable to adequately respond to unexpected
increases in customer purchase orders, and therefore were unable to benefit from
this incremental demand. Solectron has not provided assurance to us that
adequate capacity will be available to us within


                                       19
<PAGE>


the time required to meet additional demand for our products.

WE HAVE ENGAGED IN RESTRUCTURING EFFORTS IN 2002 WHICH HAVE REDUCED OUR SALES
AND MARKETING ORGANIZATION FROM 37 EMPLOYEES TO 13 EMPLOYEES, A REDUCTION OF
65%. THIS REDUCTION IN OUR SALES AND MARKETING FORCE MAY DECREASE OUR ABILITY TO
AGGRESSIVELY TARGET NEW MARKETS.

     In May 2002, we had a reduction in force which impacted our sales and
marketing organization significantly. While we feel that our sales and marketing
organization is sufficient to support our current products and customer base,
the current size of our sales and marketing organization may prohibit us from
actively pursuing new markets or opportunities.

OUR PLANS TO INTRODUCE NEW PRODUCTS AND PRODUCT ENHANCEMENTS TO MARKET REQUIRE
COORDINATION ACROSS OUR SUPPLIERS AND MANUFACTURERS, WHICH EXPOSES US TO RISKS
OF DELAY OR POOR EXECUTION FROM A VARIETY OF SOURCES.

     We have recently introduced new products and product enhancements, which
requires that we coordinate our efforts with those of our component suppliers
and our contract manufacturers to rapidly achieve volume production. In
addition, we are in the process of transitioning the manufacture of our embedded
router products to Hewlett-Packard. If we should fail to effectively manage our
relationships with our component suppliers, our contract manufacturers and other
manufacturers of our products or if any of our suppliers or our manufacturers
experience delays, disruptions, capacity constraints or quality control problems
in their manufacturing operations, our ability to ship products to our customers
could be delayed, and our competitive position and reputation could be harmed.
Qualifying a new component supplier or contract manufacturer and commencing
volume production can be expensive and time consuming. If we are required to
change or choose to change suppliers, we may lose revenue and damage our
customer relationships.

WE DEPEND ON SOLE SOURCE AND LIMITED SOURCE SUPPLIERS FOR CERTAIN KEY
COMPONENTS, AND IF WE ARE UNABLE TO BUY THESE COMPONENTS ON A TIMELY BASIS, OUR
DELAYED ABILITY TO DELIVER OUR PRODUCTS TO OUR CUSTOMERS MAY RESULT IN REDUCED
REVENUE AND LOST SALES.

     We currently purchase fibre channel application specific integrated
circuits and other key components for our products from sole or limited sources.
To date, most of our component purchases have been made in relatively small
volumes. As a result, if our suppliers receive excess demand for their products,
we likely will receive a low priority for order fulfillment, as large volume
customers will use our suppliers' available capacity. If we are delayed in
acquiring components for our products, the manufacture and shipment of our
products will also be delayed, which will reduce our revenue and may result in
lost sales. We generally use a rolling six-month forecast of our future product
sales to determine our component requirements. Lead times for ordering materials
and components vary significantly and depend on factors such as specific
supplier requirements, contract terms and current market demand for such
components. If we overestimate our component requirements, we may have excess
inventory which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory that would delay our
manufacturing and render us unable to deliver products to customers on a
scheduled delivery date. We also may experience shortages of certain components
from time to time, which also could delay our manufacturing. Manufacturing
delays could negatively impact our ability to sell our products and damage our
customer relationships.

COMPETITION WITHIN OUR MARKETS MAY REDUCE SALES OF OUR PRODUCTS AND REDUCE OUR
MARKET SHARE.

     The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ADIC through their acquisition of Pathlight in
2001, ATTO and Chaparral Network Storage. In addition, other OEM customers could
develop products or technologies internally, or by entering into strategic
relationships with or acquiring other existing SAN product providers that would
replace their need for our products and would become a source of competition. We
expect to face competition in the future from OEMs, including our customers and
potential customers, LAN router manufacturers, storage system industry
suppliers, including manufacturers and vendors of other SAN products or entire
SAN systems, and innovative start-up companies. For example, manufacturers of
fibre channel hubs or switches could seek to include router functionality within
their SAN products that would obviate the need for our storage routers. As the
market for SAN products grows, we also may face competition from traditional
networking companies and other manufacturers of networking products. These
networking companies may enter the storage router market by introducing their
own products or by entering into strategic relationships with or acquiring other
existing SAN product providers. This


                                       20
<PAGE>


could introduce additional competition in our markets, especially, if one of our
OEMs begins to manufacture our higher end storage routers. While we do not
currently face significant competition for our ServerAttach products, we
anticipate we will see increased competition as this market develops.


WE ARE A RELATIVELY SMALL COMPANY WITH LIMITED RESOURCES COMPARED TO SOME OF OUR
CURRENT AND POTENTIAL COMPETITORS.

     Some of our current and potential competitors have longer operating
histories, significantly greater resources, broader name recognition and a
larger installed base of customers than Crossroads. As a result, these
competitors may have greater credibility with our existing and potential
customers. They also may be able to adopt more aggressive pricing policies and
devote greater resources to the development, promotion and sale of their
products than we can to ours, which would allow them to respond more quickly
than us to new or emerging technologies or changes in customer requirements. In
addition, some of our current and potential competitors have already established
supplier or joint development relationships with decision makers at our current
or potential customers. These competitors may be able to leverage their existing
relationships to discourage these customers from purchasing products from us or
to persuade them to replace our products with their products. Increased
competition could decrease our prices, reduce our sales, lower our margins, or
decrease our market share. These and other competitive pressures may prevent us
from competing successfully against current or future competitors, and may
materially harm our business.

WE HAVE LICENSED OUR 4200 AND 4X50 STORAGE ROUTER TECHNOLOGY TO A KEY CUSTOMER,
WHICH MAY ENABLE THIS CUSTOMER TO COMPETE WITH US.

     We have licensed our 4200 and 4x50 storage router technology to
Hewlett-Packard. Hewlett-Packard currently manufactures the 4200 product under
its name and pays us a royalty. Hewlett-Packard has vastly greater resources and
distribution capabilities than we do, and therefore, it could establish market
acceptance in a relatively short time frame for any competitive products that it
may introduce, which, in turn, would reduce demand for our products from
Hewlett-Packard and could reduce demand for our products from other customers.

WE EXPECT UNIT PRICES OF OUR PRODUCTS TO DECREASE OVER TIME, AND IF WE CANNOT
INCREASE OUR SALES VOLUMES, OUR REVENUE WILL DECLINE.

     As storage networking continues to mature as an industry, we have seen a
trend towards simplification of networking components and management. The impact
of this trend on our business has been the push for, and subsequent ramp of
embedded routers being shipped with tape libraries. These embedded routers are
lower cost than the stand-alone box routers and this lower cost is passed on to
our OEM customers. As our mix shifts from box routers to embedded routers, we
will see a reduction in average price per unit and revenue will decline if
volume does not increase. Additionally, many of our current agreements with our
OEM customers include provisions that require reductions in the sales price for
our products over time. We believe that this practice is common within our
industry. To date, our agreements with OEM customers, including our largest
customers, provide for quarterly reductions in pricing on a product-by-product
basis, with the actual discount determined according to the volume potential
expected from the customer, the OEM's customer base, the credibility the OEM may
bring to our solution, additional technology the OEM may help us incorporate
with our product, and other Crossroads products the OEM supports.
Notwithstanding, the decreases in our average selling prices of our older
products generally have been partially offset by higher average selling prices
for our newer products, as well as sales to distributors, VARs and system
integrators where price decreases are not generally required. Nonetheless, we
could experience declines in our average unit selling prices for our products in
the future, especially if our newer products do not receive broad market
acceptance. In addition, declines in our average selling prices may be more
pronounced should we encounter significant pricing pressures from increased
competition within the storage router market.

OUR PRODUCTS ARE COMPLEX AND MAY CONTAIN UNDETECTED SOFTWARE OR HARDWARE ERRORS
THAT COULD LEAD TO AN INCREASE IN OUR COSTS OR A REDUCTION IN OUR REVENUE.

     Networking products such as ours may contain undetected software or
hardware errors when first introduced or as new versions are released. Our
products are complex and errors have been found in the past and may be found
from time to time in the future. In addition, our products include components
from a number of third-party vendors. We rely on the quality testing of these
vendors to ensure the adequate operation of their products. Because our products
are manufactured with a number of components supplied by various third-party
sources, should problems occur in the operation or performance of our products,
it may be difficult to identify the source. In addition, our products are
deployed within SANs from a variety of vendors. Therefore, the occurrence of
hardware and software


                                       21
<PAGE>


errors, whether caused by our or another vendor's SAN products, could adversely
affect sales of our products. Furthermore, defects may not be discovered until
our products are already deployed in the SAN. These errors also could cause us
to incur significant warranty, diagnostic and repair costs, divert the attention
of our engineering personnel from our product development efforts and cause
significant customer relations and business reputation problems.

WE DEPEND ON OUR KEY PERSONNEL TO MANAGE OUR BUSINESS EFFECTIVELY IN A RAPIDLY
CHANGING MARKET, AND IF WE ARE UNABLE TO RETAIN OUR CURRENT PERSONNEL AND HIRE
ADDITIONAL PERSONNEL, OUR ABILITY TO SELL OUR PRODUCTS COULD BE HARMED.

     We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. The loss of the services of any of our key employees or key
management, particularly after we eliminated several management positions and
reallocated those responsibilities among the remaining management in connection
with our recent restructuring, would harm our business. Additionally, our
inability to attract or retain qualified personnel in the future or any delays
in hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of, and negatively impact our ability to
sell, our products.

WE MAY BE UNABLE TO PROTECT OUR INTELLECTUAL PROPERTY, WHICH WOULD NEGATIVELY
AFFECT OUR ABILITY TO COMPETE.

     Our products rely on our proprietary technology, and we expect that future
technological advancements made by us will be critical to sustain market
acceptance of our products. Therefore, we believe that the protection of our
intellectual property rights is and will continue to be important to the success
of our business. We rely on a combination of patent, copyright, trademark and
trade secret laws and restrictions on disclosure to protect our intellectual
property rights. We also enter into confidentiality or license agreements with
our employees, consultants and business partners, and control access to and
distribution of our software, documentation and other proprietary information.
Despite these efforts, unauthorized parties may attempt to copy or otherwise
obtain and use our products or technology. Monitoring unauthorized use of our
products is difficult, and we cannot be certain that the steps we have taken
will prevent unauthorized use of our technology, particularly in foreign
countries where applicable laws may not protect our proprietary rights as fully
as in the United States.

OUR EFFORTS TO PROTECT OUR INTELLECTUAL PROPERTY MAY CAUSE US TO BECOME INVOLVED
IN COSTLY AND LENGTHY LITIGATION WHICH COULD SERIOUSLY HARM OUR BUSINESS.

     In recent years, there has been significant litigation in the United States
involving patents, trademarks and other intellectual property rights. Legal
proceedings could subject us to significant liability for damages or invalidate
our intellectual property rights. Any litigation, regardless of its outcome,
would likely be time consuming and expensive to resolve and would divert
management's time and attention. Any potential intellectual property litigation
against us could force us to take specific actions, including:

     o   cease selling our products that use the challenged intellectual
         property;

     o   obtain from the owner of the infringed intellectual property right a
         license to sell or use the relevant technology or trademark, which
         license may not be available on reasonable terms, or at all; or

     o   redesign those products that use infringing intellectual property or
         cease to use an infringing trademark.

     As we have discussed elsewhere in this Annual Report, we have engaged in
lengthy and costly litigation regarding our '972 patent. While we have prevailed
to date in these cases, Chaparral has appealed the judgment against it and there
can be no assurance we will prevail in this appeal. Moreover, we cannot assure
you that we would prevail in any future effort to enforce our rights in the '972
patent.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND HARM OUR FINANCIAL
CONDITION.

     As part of our growth strategy, we intend to review opportunities to
acquire other businesses or technologies that would complement our current
products, expand the breadth of our markets or enhance our technical
capabilities. This would entail a number of risks that could materially and
adversely affect our business and operating results, including:


                                       22
<PAGE>


     o   problems integrating the acquired operations, technologies or products
         with our existing business and products;

     o   diversion of management's time and attention from our core business;

     o   difficulties in retaining business relationships with suppliers and
         customers of the acquired company;

     o   risks associated with entering markets in which we lack prior
         experience; and

     o   potential loss of key employees of the acquired company.

OUR PRODUCTS MUST CONFORM TO INDUSTRY STANDARDS IN ORDER TO BE ACCEPTED BY
CUSTOMERS IN OUR MARKET.

     Our products comprise only a part of a SAN. All components of a SAN must
uniformly comply with the same industry standards in order to operate
efficiently together. We depend on companies that provide other components of
the SAN to support prevailing industry standards. Many of these companies are
significantly larger and more influential in effecting industry standards than
we are. Some industry standards may not be widely adopted or implemented
uniformly, and competing standards may emerge that may be preferred by OEM
customers or end users. If larger companies do not support the same industry
standards that we do, or if competing standards emerge, our products may not
achieve market acceptance which would adversely affect our business.

INSIDERS WILL CONTINUE TO HAVE SUBSTANTIAL CONTROL OVER OUR COMPANY AND COULD
DELAY OR PREVENT A CHANGE IN CORPORATE CONTROL.

     Our executive officers and directors, and their affiliates, beneficially
own approximately 27% of the total voting power of our company. As a result,
these stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Our ongoing open market stock repurchase
program has also increased the control our affiliates have over us. This
concentration of voting power could delay or prevent an acquisition of us on
terms that other stockholders may desire.

PROVISIONS IN OUR CHARTER DOCUMENTS AND DELAWARE LAW COULD PREVENT, DELAY OR
IMPEDE A CHANGE IN CONTROL OF US AND MAY REDUCE THE MARKET PRICE OF OUR COMMON
STOCK.

     Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware that may discourage, delay or prevent someone from
acquiring or merging with us, which may adversely affect the market price of our
common stock.

     On August 21, 2002, our Board of Directors approved, adopted and entered
into a Stockholder Rights Plan. The plan is similar to plans adopted by many
other companies, and was not adopted in response to any attempt to acquire us,
nor were we aware of any such efforts at the time of adoption.

     The plan is designed to enable our stockholders to realize the full value
of their investment by providing for fair and equal treatment of all
stockholders in the event that an unsolicited attempt is made to acquire the
company. Adoption of the plan is intended to deter coercive takeover tactics
including the accumulation of shares in the open market or through private
transactions and to prevent an acquiror from gaining control of the company
without offering a fair price to all of our stockholders. The rights will expire
on September 3, 2012.

     Under the plan, we declared and paid a dividend of one right for each share
of common stock held by stockholders of record as of the close of business on
September 3, 2002. Each right initially entitles stockholders to purchase one
unit of a share of our preferred stock at $12 per share. However, the rights are
not immediately exercisable and will become exercisable only upon the occurrence
of certain events. If a person or group acquires or announces a tender or
exchange offer that would result in the acquisition of 15 percent or more of our
common stock while the stockholder rights plan remains in place, then, unless
the rights are redeemed by us for $0.01 per right, all rights holders except the
acquirer will be entitled to acquire our common stock at a significant discount.
The rights are intended to enable all stockholders to realize the long-term
value of their investment in the company. The rights will not prevent a takeover
attempt, but should encourage anyone seeking to acquire us to negotiate with the
board prior to attempting to takeover.


                                       23
<PAGE>


OUR STOCK PRICE MAY BE VOLATILE.

     The market price of our common stock has been volatile in the past and may
be volatile in the future. For example, during fiscal 2002, the market price of
our common stock as quoted on the NASDAQ National Market System has fluctuated
between $0.38 and $6.75. Although our stock price is currently over $1.00, our
stock price was recently below $1.00 for an extended period, which caused us
additional challenges, such as the risk of being delisted from the Nasdaq
National Market. In the event the price of our common stock were to fall below
$1.00 per share for an extended period, we would again face the challenge of
being delisted from the Nasdaq National Market. The market price of our common
stock may be significantly affected by the following factors:

     o   actual or anticipated fluctuations in our operating results;

     o   changes in financial estimates by securities analysts or our failure to
         perform in line with such estimates;

     o   changes in market valuations of other technology companies,
         particularly those that sell products used in SANs;

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

     o   introduction of technologies or product enhancements that reduce the
         need for storage routers;

     o   the loss of one or more key OEM customers; and

     o   departures of key personnel.

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

ITEM 2. PROPERTIES.

     Our corporate headquarters facility consists of approximately 63,548 square
feet in Austin, Texas. We lease our headquarters facility pursuant to a lease
agreement that expires in April 2006. The lease represents a commitment of $1.9
million per year through April 2006. In conjunction with entering into the lease
agreement, we signed an unconditional, irrevocable letter of credit with a bank
for $500,000, which is secured by a $3.0 million line of credit.

     On August 1, 2002, we abandoned 18,180 square feet of our headquarters
facility pursuant to the execution of our business restructuring plan. The site
consolidation resulted in a $2.1 million facility lease loss charge, of which
$1.8 million relates to the base rent and fixed operating expenses of the
vacated space through the end of the lease term on April 15, 2006.

     Our final assembly and test facility of approximately 11,250 square feet is
also located in Austin, Texas. The lease on this facility expires in June 2004.

     As of October 31, 2002, we also operate satellite sales offices in
Annapolis, Boston, Denver, Los Angeles and San Jose.


                                       24
<PAGE>


ITEM 3.

LEGAL PROCEEDINGS.

     Intellectual Property Litigation

     On March 31, 2000, we filed a lawsuit against Chaparral Network Storage,
Inc. ("Chaparral") alleging that Chaparral has infringed one of our patents
(5,941,972, hereinafter the "972 patent") with some of their products. In
September 2001, the jury found that the '972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning had infringed all
claims of the Crossroads '972 patent. The federal judge in this matter issued a
permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, we were awarded damages with a royalty amount of 5% for
Chaparral's router product line and 3% for their RAID product line. Chaparral
has appealed the judgment against it, contending that the '972 patent is invalid
and not infringed. We intend to vigorously defend the appeal.

     On April 14, 2000, we filed a lawsuit against Pathlight Technology, Inc.
alleging that Pathlight has infringed one of our patents with their SAN Data
Gateway Router. Pathlight was subsequently acquired by ADIC on May 11, 2001. In
June 2001, ADIC paid the Company $15.0 million in connection with the settlement
of this lawsuit, this payment was recognized as contra operating expense in the
statement of operations for the year ended October 31, 2001. In connection with
the settlement of the lawsuit, we granted ADIC a non-exclusive license under the
'972 patent.

     On May 19, 2000, Chaparral filed a counter-suit against us alleging
tortious interference with prospective business relations. We moved to have this
matter dismissed, which the judge ordered, with prejudice, in April 2001.

     Securities Class Action Litigation

     We and several of our officers and directors were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. The Court consolidated the actions and appointed a
lead plaintiff under the Private Securities Litigation Reform Act of 1995. The
amended consolidated complaint was filed in February 2001. On November 22, 2002,
the court granted our motion for summary judgment, concluding that the
plaintiffs failed to demonstrate an essential element to their claim of
securities fraud. We anticipate that the plaintiffs will appeal this judgment to
the Fifth Circuit Court of Appeals. The plaintiffs are seeking unspecified
amounts of compensatory damages, interests and costs, including legal fees. We
deny the allegations in the complaint and will continue to defend ourselves
vigorously. The class action lawsuit is still at an early stage. Consequently,
it is not possible at this time to predict whether we will incur any liability
or to estimate the damages, or the range of damages, if any, that we might incur
in connection with this lawsuit. Our inability to prevail in this action could
have a material adverse effect on our future business, financial condition and
results of operations.

     Derivative State Action

     On November 21, 2001, a derivative state action was filed in the 261st
District Court of Travis County, Texas on behalf of Crossroads by James Robke
and named several of our officers and directors as defendants. The derivative
state action is based upon the same general set of facts and circumstances
outlined above in connection with the purported securities class action
litigation. The derivative state action alleges that certain of the individual
defendants sold shares while in possession of material inside information in
purported breach of their fiduciary duties to Crossroads. The derivative state
action also alleges waste of corporate assets. On January 28, 2002, we filed an
answer and general denial to the derivative state action. We believe the
allegations in the derivative state action are without merit and intend to
defend ourselves vigorously. The derivative state action is still at an early
stage. Consequently, it is not possible at this time to predict whether we will
incur any liability or to estimate the damages, or the range of damages, if any,
that we might incur in connection with this action. Our inability to prevail in
this action could have a material adverse effect on our future business,
financial condition and results of operations.

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

     None.


                                       25
<PAGE>



PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

     Our common stock has been quoted on the Nasdaq National Market under the
symbol "CRDS" since our initial public offering on October 20, 1999. Prior to
the initial public offering, there had been no public market for our common
stock. The following table lists the high and low per share sales prices for our
common stock as reported by the Nasdaq National Market for the periods
indicated:

<Table>
<Caption>

                                                           HIGH           LOW
                                                           ----           ---
<S>                                                       <C>            <C>
    FISCAL YEAR ENDED OCTOBER 31, 2001
         First Quarter ................................. $11.438        $3.844
         Second Quarter ................................  10.750         3.406
         Third Quarter .................................   9.720         2.640
         Fourth Quarter ................................   3.470         1.870

    FISCAL YEAR ENDED OCTOBER 31, 2002
         First Quarter..................................   6.750         2.700
         Second Quarter.................................   6.070         2.850
         Third Quarter..................................   3.190         0.780
         Fourth Quarter.................................   0.850         0.380
</Table>

     As of January 27, 2003, there were 24,859,408 shares of our common stock
outstanding held by 294 stockholders of record.

     We have never declared or paid cash dividends on our capital stock. We
currently intend to retain any earnings for use in our business and do not
anticipate paying any cash dividends in the foreseeable future. Future
dividends, if any, will be determined by our board of directors.


                                       26
<PAGE>



ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

     The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," in Item 7 of this Annual Report and other financial
information appearing elsewhere in this Annual Report. The consolidated
statement of operations and balance sheet data set forth below for each of the
years in the three year period ended October 31, 2000, 2001 and 2002 are derived
from, and qualified by reference to, our audited consolidated financial
statements appearing elsewhere in this Annual Report. The consolidated statement
of operations and balance sheet data for the year ended October 31, 1998 and
1999 are derived from audited consolidated financial statements not included
herein.

<Table>
<Caption>

                                                                           FOR THE YEARS ENDED OCTOBER 31,
                                                       --------------------------------------------------------------------------
                                                         1998            1999             2000           2001            2002
                                                       ----------      ----------      ----------      ----------      ----------
                                                                                     (IN THOUSANDS)
<S>                                                    <C>             <C>             <C>             <C>             <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
    Product revenue ..............................     $    2,930      $   18,859      $   32,486      $   35,896      $   33,429
    Other revenue ................................            279              65             562           1,434             559
                                                       ----------      ----------      ----------      ----------      ----------
        Total revenue ............................          3,209          18,924          33,048          37,330          33,988
Cost of revenue(1) ...............................          1,913          11,079          19,104          22,013          22,661
                                                       ----------      ----------      ----------      ----------      ----------
Gross profit .....................................          1,296           7,845          13,944          15,317          11,327
                                                       ----------      ----------      ----------      ----------      ----------
Operating expenses(1):
    Sales and marketing ..........................          2,491           4,781          16,007          15,202           6,126
    Research and development .....................          2,342           5,551          13,143          18,118          16,520
    General and administrative ...................          1,899           3,017          31,242          16,043           9,158
    Amortization of intangibles ..................             --              --           8,808           9,680             278
    Impairment of intangibles and other
    assets .......................................             --              --              --          25,007           2,047
    Business restructuring expenses ..............             --              --              --              --           3,666
    Litigation settlement ........................             --              --              --         (15,000)             --
                                                       ----------      ----------      ----------      ----------      ----------
        Total operating expenses .................          6,732          13,349          69,200          69,050          37,795
                                                       ----------      ----------      ----------      ----------      ----------
Loss from operations .............................         (5,436)         (5,504)        (55,256)        (53,733)        (26,468)
Other income (expense), net ......................             82             319           4,228           2,776             979
                                                       ----------      ----------      ----------      ----------      ----------
Net loss before cumulative effect of
    accounting change ............................         (5,354)         (5,185)        (51,028)        (50,957)        (25,489)
Cumulative effect of accounting change ...........             --              --              --            (130)             --
                                                       ----------      ----------      ----------      ----------      ----------
Net loss .........................................     $   (5,354)     $   (5,185)     $  (51,028)     $  (51,087)     $  (25,489)
                                                       ----------      ----------      ----------      ----------      ----------
Accretion on redeemable convertible
    preferred stock ..............................           (196)           (247)             --              --              --
                                                       ----------      ----------      ----------      ----------      ----------
Net loss attributable to common stock ............     $   (5,550)     $   (5,432)     $  (51,028)     $  (51,087)     $  (25,489)
                                                       ==========      ==========      ==========      ==========      ==========
Basic and diluted net loss per share .............     $    (0.90)     $    (0.74)     $    (1.93)     $    (1.86)     $    (0.95)
                                                       ----------      ----------      ----------      ----------      ----------
Shares used in computing basic
    and diluted net loss per share ...............          6,146           7,378          26,467          27,414          26,878
                                                       ----------      ----------      ----------      ----------      ----------

(1) Stock-based compensation for the periods
    indicated was allocated as follows:
    Cost of revenue ..............................     $        2      $      133      $      288      $      123      $       84
    Sales and marketing ..........................             30             372           4,373             215             481
    Research and development .....................              6             280             528             440             369
    General and administrative ...................              3             420          22,501           6,283           3,640
                                                       ----------      ----------      ----------      ----------      ----------
        Total stock-based compensation ...........     $       41      $    1,205      $   27,690      $    7,061      $    4,574
                                                       ----------      ----------      ----------      ----------      ----------
</Table>



<Table>
<Caption>

                                                                           FOR THE YEARS ENDED OCTOBER 31,
                                                       -----------------------------------------------------------------------
                                                         1998            1999           2000            2001          2002
                                                       ----------      ----------     ----------     ----------     ----------
<S>                                                    <C>             <C>            <C>            <C>            <C>
CONSOLIDATED BALANCE SHEET DATA: .................                                   (IN THOUSANDS)
Cash, cash equivalents and short-term
   investments ...................................     $    3,934      $   80,820     $   60,038     $   53,686     $   34,311
Working capital ..................................          4,461          83,165         62,287         51,271         34,855
Total assets .....................................          7,187          91,730        118,048         75,403         50,459
Long-term debt, net of current portion ...........            591           1,325             --             --             --
Redeemable convertible preferred stock ...........         13,438              --             --             --             --
Total stockholders' equity (deficit) .............         (8,347)         84,885        108,752         64,246         41,559
</Table>


                                       27
<PAGE>


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

     The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the selected consolidated
financial data in Item 6 of this Annual Report and our consolidated financial
statements and notes thereto in Item 15 of this Annual Report.

     This Item 7 contains "forward looking" statements. Please see the
"Cautionary Statement" and "Factors That May Affect Future Results" under Item 1
for a discussion of the uncertainties, risks and assumptions associated with
these statements.

OVERVIEW

     We are a leading provider of enterprise data routing solutions for open
system storage area networks (SANs), based on our market share of storage
routers shipped. By using our storage routers to serve as the interconnect
between SANs and the other devices in a computer network, organizations are able
to more effectively and efficiently store, manage and ensure the integrity and
availability of their data. Specifically, when used in SANs our storage routers:

     o   decrease congestion in the transfer of data within a network;

     o   reduce the time required to back up and restore data;

     o   improve utilization of storage resources; and

     o   preserve and enhance existing server and storage system investments.

     Our mission is to be the company customers trust to link business with
information, regardless of technology or location. Our objective is to maintain
our position as the leading provider of storage routing solutions as storage,
server, and network technologies and markets continue to grow and evolve. The
key elements of our strategy are:

     o   to solve customer storage issues;

     o   to grow our current market position and expand into adjacent markets;
         and

     o   to increase our market leadership by continual investment in
         intellectual property.

     To date, we have sold our products primarily to original equipment
manufacturers, or OEMs, of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their SANs. We also sell our storage routers through companies that distribute,
resell or integrate our storage routers as part of a complete SAN solution.

     A significant portion of our revenue is concentrated among a relatively
small number of OEM customers, and the merger of Hewlett-Packard and Compaq in
May 2002 has resulted in substantial additional concentration. For the three
years ended October 31, 2000, 2001 and 2002, two customers (StorageTek and
Compaq), two customers (StorageTek and Hewlett-Packard) and two customers
(StorageTek and Hewlett-Packard including Compaq), each contributed greater than
10% of our total revenue for combined totals of 54%, 49% and 75% of our total
revenue, respectively. For the years ended October 31, 2000, 2001 and 2002, our
distribution channel, consisting of our distributors, VARs and Systems
Integrators, accounted for 10%, 11% and 13% of our total revenues, respectively.
The level of sales to any single customer may vary and the loss of any one
significant customer, or a decrease in the level of sales to any one significant
customer, particularly Hewlett-Packard (including Compaq), would seriously harm
our financial condition and results of operations. Fluctuations in revenue have
resulted from, among other things, product and customer transitions, OEM
qualification and testing and reduced IT spending rates. We expect that a
significant portion of our future revenue will continue to come from sales of
products to a relatively small number of customers.

     On a product basis, sales have shifted to our fourth and fifth generation
of products, the 6000, 8000 and 10000, and to our embedded line of products.
Sales of our older family of products, the 4100, 4200 and 4x50 lines, accounted
for approximately 90%, 70% and 41% of our product revenue during the years ended
October 31, 2000, 2001 and 2002, respectively. This decrease was partially
offset by increased sales of our fourth and fifth generation products, which
accounted for approximately 24% of our product revenue during the year ended
October 31, 2002.


                                       28
<PAGE>


We anticipate that sales of our older products will continue to decrease as we
successfully transition our customers to our newer product platforms.
Additionally, as storage networking continues to mature as an industry, we have
seen a trend towards simplification of networking components and management. The
impact of this trend on our business has been the push for, and subsequent ramp
up of, embedded routers being shipped with tape libraries. Sales of our embedded
products accounted for approximately 2%, 15% and 27% of our product revenue
during the years ended October 31, 2000, 2001 and 2002, respectively.

RECENT EVENTS

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 Multi-Protocol Storage Router
for enterprise environments. The 10000 is a fully redundant, modular storage
router that performs protocol and storage management functions between storage
devices and the network. It provides multi-protocol connectivity and management
of SCSI and fibre channel storage devices into fibre channel, with the
capability for future iSCSI application in storage networks. We have seen recent
price strength in the 10000 line because of its software capabilities and we
have also been able to realize manufacturing savings. We anticipate that both of
these factors should drive higher gross margins.

     In May 2002, we launched the industry's first low-cost two-gigabit fibre
channel storage router, the Crossroads 6000, which is targeted at the small to
mid-sized market. The 6000 provides customers an alternative to purchasing newer
equipment by enabling them to continue to leverage existing equipment, such as
SCSI tape libraries. During 2002, we successfully transitioned our major OEM
customers, including StorageTek and Hewlett-Packard (including Compaq) to the
10000 and 6000 product platforms.

     In May 2002, our board of directors approved, and we completed, a
restructuring plan to reduce our workforce by approximately 25%, or 40 people
(primarily in the sales, marketing and general and administrative areas), to
scale down our infrastructure and consolidate operations. In connection with the
restructuring, Brian R. Smith, our founder and chairman, returned as chief
executive officer and president, replacing Larry Sanders. Robert C. Sims,
formerly vice president of engineering and operations, was named chief operating
officer and also assumed management of sales and marketing. In fiscal 2002, we
recorded $3.7 million in business restructuring expenses and a $1.2 million
impairment of assets charge. We have completed our restructuring plan and are
not currently planning any further restructuring efforts; however, there can be
no assurance future restructuring efforts will not be necessary.

     In November 2002, we amended our existing licensing agreement with
Hewlett-Packard. We believe this agreement will allow us to leverage the
strengths of both companies. Under the agreement, Hewlett-Packard will
manufacture the hardware and license the software from us for its current line
of embedded solutions. Together, we should be able to drive efficiencies for
both companies while delivering cost-effective storage solutions to end-users.
We anticipate that the transition of the manufacturing of our embedded routers
will increase our gross margins due to HP's ability to manufacture the hardware
with greater economies of scale. We are currently working under the new
agreement and plans are to transition the manufacturing of our embedded
solutions by the beginning of our fiscal second quarter 2003.

     In December 2002, Crossroads launched the Crossroads ServerAttach SA40, the
first appliance to connect SCSI servers to networked storage. With ServerAttach,
Crossroads leveraged its existing tape attach technology but in a reversed
application to allow attachment of servers into fibre channel architectures or
SANs. Our ServerAttach products are a natural extension of our core technology
to a broader market and potential customer base while requiring only a modest
incremental investment. We believe this is an underserved market that offers
great value to our customers and higher gross margins for the company.


                                       29
<PAGE>


RESULTS OF OPERATIONS

     The following table sets forth our consolidated financial data for the
periods indicated expressed as a percentage of our total revenue, net of the
aforementioned allocation of stock-based compensation for all periods
presented--See Item 15. Financial Statements--Note 7 to Notes to Consolidated
Financial Statements.

<Table>
<Caption>


                                                           FISCAL YEAR ENDED OCTOBER 31,
                                                           ----------------------------
                                                         2000           2001            2002
                                                       --------       --------       --------
<S>                                                    <C>            <C>            <C>
Revenue:
  Product revenue ................................         98.3%          96.2%          98.4%
  Other revenue ..................................          1.7            3.8            1.6
                                                       --------       --------       --------
          Total revenue ..........................        100.0          100.0          100.0
Cost of revenue ..................................         56.9           58.6           66.4
                                                       --------       --------       --------
Gross margin .....................................         43.1           41.4           33.6
                                                       --------       --------       --------
Operating expenses:
  Sales and marketing ............................         35.2           40.1           16.6
  Research and development .......................         38.2           47.4           47.5
  General and administrative .....................         26.4           26.1           16.2
  Amortization of intangibles ....................         26.7           25.9            0.8
  Impairment of intangibles and other assets .....           --           67.0            6.1
  Business restructuring expense .................           --             --           10.8
  Litigation settlement ..........................           --          (40.2)            --
                                                       --------       --------       --------
          Total operating expenses ...............        126.5          166.3           98.0
                                                       --------       --------       --------
Loss from operations .............................        (83.4)        (124.9)         (64.4)
Other income (expense) ...........................         12.8            7.4            2.9
                                                       --------       --------       --------
Net loss .........................................        (70.6)%       (117.5)%        (61.5)%
                                                       ========       ========       ========
</Table>


COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 2000, 2001, AND 2002

     Revenue. Our total revenue increased 13.0% from $33.0 million in fiscal
2000 to $37.3 million in fiscal 2001, and decreased 9.0% to $34.0 million in
fiscal 2002.

     The level of sales to any single customer may vary and the loss of any one
significant customer, or a decrease in the level of sales to any one significant
customer, could seriously harm our financial condition and results of
operations. We expect to continue to experience significant customer
concentration in sales to key OEM accounts for the foreseeable future. During
fiscal 2002, this concentration was evidenced by volume from our top three
customers representing 74.6% of our total revenue, all of which individually
accounted for 10.0% or more of our revenue. In addition, Hewlett-Packard and
Compaq, two of our three largest OEM customers, have merged which could result
in a disruption in our sales to these two customers.

     In recent quarters, unfavorable economic conditions and reduced information
technology, or IT, spending rates in the United States, Europe, and Asia have
lead to a decline in our growth rates compared to historical trends. We are
unable to predict when IT spending rates will return to historical levels, if at
all.

     Our post-sales obligations are generally limited to product warranties with
a duration of 12 to 39 months following the sale of our products. Warranty
costs, sales returns, and other allowances are accrued based on experience when
the related product revenue is recognized. Service revenue is recognized over
the service period.

     Product revenue. Product revenue increased 10.5% from $32.5 million in
fiscal 2000 to $35.9 million in fiscal 2001, and decreased 6.9% to $33.4 million
in fiscal 2002. The decrease in product revenue resulted from decreased sales of
our storage router product family due to customers postponing purchases of our
older products in anticipation of, the release of our newer product families. In
addition, various product and customer transitions, overall unfavorable economic
conditions and reduced IT spending rates worldwide have also contributed to a
decrease in product revenue. As a percentage of total revenue, product revenue
decreased from 98.3% in fiscal 2000 to 96.2% in fiscal 2001, and increased to
98.4% in fiscal 2002.

     With respect to sales of our products to OEMs, product revenue is
recognized when persuasive evidence of an arrangement exists, delivery has
occurred, fee is fixed or determinable, collectibility is probable and risk of
loss has passed to the OEM. Revenue from sales to distributors, VARs and system
integrators is recognized upon reported sell-through. To the extent that we sell
products to distributors, VARs and system integrators that have rights of


                                       30
<PAGE>


return, we defer revenue and the related cost of revenue associated with such
sales and recognize these amounts when that customer sells our products to its
customers. At October 31, 2002, our deferred revenue totaled approximately
$727,000.

     Other revenue. Other revenue includes sales of maintenance contracts,
consulting fees and fees received from the licensing of other intellectual
property. Other revenue increased 150% from $562,000 in fiscal 2000 to $1.4
million in fiscal 2001, and decreased 61.0% to $559,000 in fiscal 2002. The
increase in fiscal 2001 and subsequent decrease in fiscal 2002 was primarily due
to the non-recurring licensing revenue from the technology acquired from Polaris
of $775,000.

     Cost of revenue and gross margin. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead, warranty
costs and stock-based compensation. Cost of revenue, net of stock-based
compensation of $288,000, $123,000 and $84,000 during fiscal 2000, 2001 and
2002, respectively, increased 16.3% from $18.8 million in fiscal 2000 to $21.9
million in fiscal 2001, and increased 3.1% to $ 22.6 million in fiscal 2002.
These increases were primarily due to increases in unit sales volume and a
corresponding increase in manufacturing costs. Gross profit, net of stock-based
compensation, increased 8.5% from $14.2 million in fiscal 2000 to $15.4 million
in fiscal 2001, and decreased 26.1% to $11.4 million in fiscal 2002. The
decrease in fiscal 2002 was primarily due to decreased product revenue and lower
margin product mix. Gross margin decreased from 43.1% in fiscal 2000 to 41.4% in
fiscal 2001, and decreased to 33.6% in fiscal 2002. This decrease in gross
margin was primarily due to a lower margin product mix resulting from the
increase in sales of our lower margin embedded routers during fiscal 2002. These
embedded routers are lower cost than the stand-alone box routers and this lower
cost is passed on to our OEM customers. The decrease was also due to lower
margin OEM product sales.

     In November 2002, we amended our existing licensing agreement with
Hewlett-Packard. Pursuant to this amendment, beginning in February 2003, we will
outsource the manufacturing of our embedded routers to Hewlett-Packard. We
believe this agreement will allow us to leverage the strengths of both
companies. We will use Hewlett-Packard's economies of scale in manufacturing and
systems integration expertise and combine that with our software, value-added
applications and intellectual property. Under the agreement, Hewlett-Packard
will manufacture the hardware and license the software from us for its current
line of embedded solutions. Together, we should be able to drive efficiencies
for both companies while delivering cost-effective storage solutions to
end-users. We anticipate that the transition of the manufacturing of our
embedded routers will increase our gross margins due to Hewlett-Packard's
ability to manufacture the hardware with greater economies of scale.

     We will continue to manufacture our box-based 4x50, 6000 and 10000 products
for Hewlett-Packard, as well as for our other OEMs for whom we will also
continue to manufacture our Crossroads branded solutions. We have seen recent
price strength in the 10000 line because of its software capabilities and we
have also realized manufacturing savings. Both of these factors should drive
higher gross margins. We are currently working under the new agreement and plan
to transition the manufacturing of our embedded solutions by the beginning of
our fiscal second quarter 2003.

     Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs, other promotional activities and stock-based compensation.
Sales and marketing expenses, net of stock-based compensation of approximately
$4.4 million, $215,000 and $481,000 during fiscal 2000, 2001 and 2002,
respectively, increased 28.8% from $11.6 million in fiscal 2000 to $15.0 million
in fiscal 2001, and decreased 62.3% to $5.6 million in fiscal 2002. The decrease
in sales and marketing expenses in fiscal 2002 was primarily due to our
restructuring efforts which resulted in approximately $5.2 million of decreased
compensation expense. Sales and marketing personnel totaled 56, 37 and 13 at
October 31, 2000, 2001 and 2002, respectively. This reduction in force also
resulted in decreased travel and entertainment expenses of approximately $1.1
million, decreased corporate allocations of approximately $715,000, decreased
professional fees of approximately $442,000, decreased prototype expenses of
approximately $253,000, decreased tradeshow expenses of approximately $180,000
and decreased depreciation of approximately $127,000. As a percentage of total
revenue, sales and marketing expenses, net of stock-based compensation,
increased from 35.2% in fiscal 2000 to 40.1% in fiscal 2001 and decreased to
16.6% in fiscal 2002. We anticipate that sales and marketing expenses may
fluctuate as a percentage of total revenue, due to our ongoing sales and
marketing efforts intended to broaden awareness of the benefits of our existing
and recently introduced products.

     Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development,
prototyping expenses and stock-based compensation. Research and development
expenses, net of stock based compensation of approximately $528,000, $440,000
and $369,000 during


                                       31
<PAGE>


fiscal 2000, 2001 and 2002, respectively, increased 40.1% from $12.6 million in
fiscal 2000 to $17.7 million in fiscal 2001, and decreased 8.6% to $16.2 million
in fiscal 2002. This decrease in research and development expenses during fiscal
2002 was primarily due to our restructuring efforts which resulted in
approximately $705,000 of decreased compensation expense and decreased
prototyping costs of approximately $591,000. Research and development personnel
totaled 89, 93 and 66 at October 31, 2000, 2001 and 2002, respectively. As a
percentage of total revenue, research and development expenses, net of
stock-based compensation, increased from 38.2% in fiscal 2000 to 47.4% in fiscal
2001, and increased to 47.5% in fiscal 2002. We anticipate that research and
development expenses may fluctuate as a percentage of total revenue, due to our
ongoing research and development in developing our technologies and expanding
our product offerings.

     General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses, insurance costs and stock-based
compensation. General and administrative expenses, net of stock-based
compensation of approximately $22.5 million, $6.3 million and $3.6 million
during fiscal 2000, 2001 and 2002, respectively, increased 11.7% from $8.7
million in fiscal 2000 to $9.8 million in fiscal 2001, and decreased 43.5% to
$5.5 million in fiscal 2002. The decrease in general and administrative expenses
during fiscal 2002 was primarily due to our restructuring efforts which resulted
in approximately $2.3 million of decreased compensation expense and
approximately $1.7 million of decreased professional fees, primarily related to
increased litigation expenses in fiscal 2001. General and administrative
personnel totaled 41, 37 and 17 at October 31, 2000, 2001 and 2002,
respectively. Legal costs associated with patent infringement and class action
shareholder lawsuits totaled approximately $939,000, $2.6 million and $254,000
during fiscal 2000, 2001 and 2002, respectively. As a percentage of total
revenue, general and administrative expenses decreased from 26.4% in fiscal 2000
to 26.1% in fiscal 2001, and decreased to 16.2% in fiscal 2002. We anticipate
that general and administrative expenses will increase due to increased D&O
insurance costs and increased costs associated with compliance with the
additional reporting and other obligations imposed by the Sarbanes-Oxley Act of
2002 and related legislation and regulatory changes.

     Litigation settlement. During fiscal 2001, we received approximately $15.0
million from ADIC in connection with the settlement of our patent infringement
lawsuit filed against Pathlight Technology, Inc., which was acquired by ADIC in
May 2001. In connection with the settlement of the lawsuit, we granted ADIC a
non-exclusive license under the related patent.

     Stock based compensation. In connection with the grant of stock options to
our employees and directors, we recorded deferred compensation aggregating
approximately $22.6 million since fiscal 1998. Deferred compensation represents,
for accounting purposes, the difference between the deemed fair value of the
common stock underlying these options and their exercise price on the date of
grant. The difference has been recorded as deferred stock-based compensation and
is being amortized over the vesting period of the applicable options, typically
four years. Of the total deferred compensation amount, approximately $22.3
million has been amortized as of October 31, 2002.

     Stock-based compensation for the periods indicated was allocated as follows
(in thousands):

<Table>
<Caption>

                                                       YEAR ENDED OCTOBER 31,
                                                 ----------------------------------
                                                   2000         2001         2002
                                                 --------     --------     --------
<S>                                              <C>          <C>          <C>
    Cost of revenue ........................     $    288     $    123     $     84
    Sales and marketing ....................        4,373          215          481
    Research and development ...............          528          440          369
    General and administrative .............       22,501        6,283        3,640
                                                 --------     --------     --------
      Total stock-based compensation .......     $ 27,690     $  7,061     $  4,574
                                                 ========     ========     ========
</Table>

     We expect to amortize the remaining amounts of deferred stock-based
compensation as of October 31, 2002 in the periods indicated (in thousands):

<Table>
<Caption>

                                                            YEAR ENDED OCTOBER 31,
                                                      ----------------------------------
                                                        2003         2004         TOTAL
                                                      --------     --------     --------
<S>                                                   <C>          <C>          <C>
    Cost of revenue .............................     $     21     $     --           21
    Sales and marketing .........................           59            2           61
    Research and development ....................           92            2           94
    General and administrative ..................          129            6          135
                                                      --------     --------     --------
       Total stock-based compensation ...........     $    301     $     10     $    311
                                                      ========     ========     ========
</Table>


                                       32
<PAGE>


     Business restructuring expenses and asset impairment charges. In May 2002,
our board of directors approved, and we completed, a restructuring plan to
reduce our workforce by approximately 25%, or 40 people (primarily in the sales,
marketing and general and administrative areas), to scale down our
infrastructure and consolidate operations. In connection with the restructuring,
Brian R. Smith, our founder and chairman, returned as chief executive officer
and president, replacing Larry Sanders. Robert C. Sims, formerly vice president
of engineering and operations, was named chief operating officer and also
assumed management of sales and marketing.

     In fiscal 2002, we recorded $3.7 million in business restructuring expenses
and a $1.2 million impairment of assets charge. Components of business
restructuring expenses, asset impairments and the remaining restructuring
accruals as of October 31, 2002 are as follows (in thousands):

<Table>
<Caption>

                                                                                                    EMPLOYEE
                                                                                                   SEPARATION
                                                            FACILITY LEASE          ASSET           AND OTHER
                                                             ABANDONMENT         IMPAIRMENTS          COSTS               TOTAL
                                                            --------------       -----------       -----------          ---------
<S>                                                         <C>                  <C>               <C>                  <C>
    Effect of restructuring plan and impact to
    accrued liabilities ..............................         $   2,114          $   1,208          $   1,552          $   4,874
    Cash activity ....................................              (157)                --             (1,051)            (1,208)
    Non-cash activity ................................                --             (1,208)              (175)            (1,383)
                                                               ---------          ---------          ---------          ---------
    Balance as of October 31, 2002 ...................         $   1,957                $--          $     326          $   2,283
                                                               =========          =========          =========          =========
</Table>

     As of October 31, 2002, remaining cash expenditures resulting from the
restructuring are estimated to be $2.3 million and relate primarily to facility
lease abandonment losses. Excluding facility lease abandonment losses, we
estimate that these costs will be substantially incurred within one year of the
restructuring. We have substantially implemented our restructuring efforts
initiated in conjunction with the restructuring announcement made during fiscal
2002; however, there can be no assurance that we will not undertake future
restructuring efforts.

     Consolidation of excess facilities. Facility lease abandonment losses
relate to lease commitments for excess office space we have vacated as a result
of the restructuring plan. We recorded $2.1 million in restructuring expenses in
relation to a site consolidation during fiscal 2002. Total lease commitments
include the remaining lease liabilities, leasehold improvements required to
sub-lease the vacated space and brokerage commissions. The estimated costs of
vacating these leased facilities, including estimated costs to sublease, were
based on market information and trend analysis as estimated by management.
However, we expect that actual results may differ from these estimates in the
near term and such differences could be material to our financial statements. Of
the $2.1 million charge recorded during fiscal 2002, approximately $1.9 million
relates to the base rent and fixed operating expenses of the vacated space
through the lease term which ends April 15, 2006.

     Asset impairments. Asset impairments recorded pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed of", relate to the
impairment of computer equipment, software, furniture and fixtures and certain
leasehold improvements. The majority of fixed assets were impaired as a direct
result of our restructuring plan, reducing our workforce by 25%, and decision to
vacate certain office space, resulting in an impairment of $836,000 during
fiscal 2002. The remaining fixed assets considered impaired of $372,000 relate
to IT infrastructure and unique test equipment that can no longer be utilized
based on the current product roadmap and business environment.

     Employee separation and other costs. Employee separation and other costs,
which include severance, related taxes, outplacement and other benefits payable
to approximately 40 terminated employees, totaled $1.6 million during fiscal
2002. Employee groups impacted by the restructuring efforts include personnel in
positions throughout the company, primarily in the sales, marketing and general
administrative functions. The Company completed its restructuring plan and is
not currently planning any further restructuring efforts; however, there can be
no assurance future restructuring efforts will not be necessary.

     Impairment of other assets. In fiscal 2000, we purchased shares of Series A
preferred stock of Banderacom Corporation (formerly known as INH Semiconductor
Corporation) for $99,999. In fiscal 2001, we purchased shares of Series B
preferred stock of Banderacom Corporation for $192,000. Banderacom is a fabless
semiconductor company focused on supplying InfiniBand semiconductor devices used
to increase the bandwidth, scalability, and reliability, of computer,
networking, storage, and server system products. We hold less than 20 percent of
the voting equity of Banderacom, and neither have nor seek corporate governance
or significant influence over its operating


                                       33
<PAGE>


and financial policies. We monitor this investment for impairment on a quarterly
basis and make appropriate reductions in the carrying value when such impairment
is determined to be other-than-temporary. Due to the downturn in the private
equity markets generally and the performance of Banderacom in particular, we
recorded an impairment charge of the remaining carrying value of our investment
in Banderacom of approximately $292,000 in the fourth quarter of fiscal 2002.

     Other income, net. Other income, net consists primarily of interest income
on short-term investments partially offset by interest expense. Other income,
net was approximately $4.2 million, $2.8 million and $979,000 during fiscal
2000, 2001 and 2002, respectively, representing 12.8%, 7.4% and 2.9% of total
revenue respectively. The decrease in other income, net is due to decreasing
cash balances and decreased interest income on short-term investments resulting
from weakening macro economic conditions and, thus, lower yields on our
investments.

NET OPERATING LOSSES

     Since our inception in mid 1995, we have incurred substantial costs to
develop our technology and products, to market, sell and service these products,
to recruit and train personnel and to build a corporate infrastructure. As a
result, we have incurred significant operating losses in every fiscal quarter
and annual period since mid 1995 and our accumulated deficit was $141.0 million
at October 31, 2002. As of October 31, 2002, we had approximately $70.4 million
of net operating loss carryforwards. These net operating loss carryforwards
begin to expire in 2011. We have not recognized any benefit from the future use
of loss carryforwards for these periods or for any other periods since inception
due to uncertainties regarding the realization of deferred tax assets based on
our taxable earnings history. Under the Tax Reform Act of 1986, the amount of
and the benefit from net operating losses that can be carried forward may be
limited in certain circumstances. Events that may cause a limitation on our tax
carryovers include, but are not limited to, a cumulative ownership change of
more than 50% over a three-year period.

     We believe our success depends on the continued development and acceptance
of our products and services, the growth of our customer base as well as the
overall growth in the storage router market. Accordingly, we intend to invest in
research and development, sales, marketing, professional services and to a
lesser extent our operational and financial systems, as necessary.

LIQUIDITY AND CAPITAL RESOURCES

     The following table presents selected financial statistics and information
(dollars in thousands):

<Table>
<Caption>

                                                             OCTOBER 31,      OCTOBER 31,
                                                             2001             2002
                                                             -----------      -----------
<S>                                                          <C>              <C>
    Cash and cash equivalents                                $  43,686        $  14,723
    Short-term investments                                   $  10,000        $  19,588
    Working capital                                          $  51,271        $  34,855
    Current ratio                                                5.6:1            4.9:1
    Days of sales outstanding - for the quarter ended               40               64
</Table>

     Our principal sources of liquidity at October 31, 2002 consisted of $14.7
million in cash and cash equivalents and $19.6 million in short-term
investments.

     In January 2002, we extended our existing line of credit with Silicon
Valley Bank. The committed revolving line is an advance of up to $3.0 million
with a borrowing base of 80% of eligible accounts receivable. The line of credit
contains provisions that prohibit the payment of cash dividends and require the
maintenance of specified levels of tangible net worth and certain financial
performance covenants measured on a monthly basis. The line of credit matures on
February 1, 2003 at which time we intend to extend the term. As of October 31,
2002, there were no borrowings outstanding under the revolving line of credit
and no term loans outstanding.

     In February 2002, we extended a $500,000 letter of credit in connection
with the lease requirements of our headquarters.

     During fiscal 2002, cash utilized for operating activities was $15.7
million, compared to $33,000 in fiscal 2001 and $9.7 million in fiscal 2000. The
increase in net cash utilized primarily reflects proceeds from a $15.0 million
litigation settlement in fiscal 2001, which significantly reduced cash utilized
in operating activities for fiscal 2001.


                                       34
<PAGE>


In addition, there were increases in accounts receivable and decreases in
accounts payable and accrued liabilities in fiscal 2002.

     During fiscal 2002, cash utilized by investing activities was $11.4
million, compared to $1.9 million in cash provided for investing activities in
fiscal 2001 and $7.4 million utilized in fiscal 2000. The increase in net cash
utilized in fiscal 2002 reflected the purchase of held-to-maturity investments,
net of maturities, of $9.6 million: Capital expenditures were $10.7 million,
$5.6 million and $1.9 million in fiscal 2000, 2001 and 2002, respectively. These
expenditures reflect our investments in computer equipment and software, test
equipment, software development tools and leasehold improvements, all of which
were required to support new product offerings.

     During fiscal 2002, cash utilized for financing activities was $1.9
million, compared to $611,000 in fiscal 2001 and $1.7 million in fiscal 2000.
The increase in cash utilized in fiscal 2002 reflected an increase in the
repurchase and retirement of common stock through our stock repurchase program.
In fiscal 2001 and 2002, we repurchased and retired common stock in the amount
of $1.4 million and $2.3 million of our common stock, respectively. In addition,
we received less common stock proceeds in fiscal 2002. Proceeds from issuance of
common stock in fiscal 2001 and 2002 were $825,000 and $444,000, respectively.
We have funded our operations to date primarily through sales of preferred stock
and our initial public offering, resulting in aggregate gross proceeds to us of
$98.2 million, product sales and, to a lesser extent, bank debt (equipment
loan).

     We believe our existing cash balances and our credit facilities will be
sufficient to meet our capital requirements beyond the next 12 months. However,
we could be required or could elect to seek additional funding prior to that
time. Our future capital requirements will depend on many factors, including the
rate of revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing activities, the timing
of introductions of new products and enhancements to existing products, and
market acceptance of our products. Additionally, we may enter into additional
acquisitions or strategic arrangements in the future that also could require us
to seek additional equity or debt financing. We cannot assure you that
additional equity or debt financing, if required, will be available to us on
acceptable terms, or at all.

STOCK REPURCHASE PROGRAM

     In September 2001, our board of directors authorized the repurchase of up
to $5.0 million of our common stock in the open market pursuant to which we
repurchased 661,300 shares of our common stock for an aggregate purchase of $2.1
from May 2002 million during the six-month period from September 2001 to April
2002. In May 2002, the board of directors authorized the extension of our stock
repurchase program by approving a program to repurchase up to an additional $5.0
million worth of our common stock in the open market pursuant to which we
repurchased 1,714,465 shares of our common stock for an aggregate purchase of
$1.7 million from May 2002 through October 31, 2002. In October 2002, the board
of directors authorized the further extension of our stock repurchase program
through 2003. As of October 31, 2002, we had repurchased an aggregate of
2,375,765 shares of our common stock for an aggregate purchase price of $3.8
million. Under the repurchase program, the stock will be purchased in the open
market or privately negotiated transactions from time to time in compliance with
the SEC's Rule 10b-18, subject to market conditions, applicable legal
requirements and other factors. The timing and amounts of any purchases will be
as determined by our management from time to time or may be suspended at any
time without prior notice, depending on market conditions and other factors they
deem relevant. The timing and size of any future stock repurchases are subject
to market conditions, stock prices, cash position and other cash requirements.

STOCKHOLDER RIGHTS PLAN

     On August 21, 2002, our board of directors approved, adopted and entered
into a Stockholder Rights Plan ("The Plan". The Plan is similar to plans adopted
by many other companies and was not adopted in response to any attempt to
acquire us, nor were we aware of any such efforts at the time of adoption.

     The Plan is designed to enable our stockholders to realize the full value
of their investment by providing for fair and equal treatment of all
stockholders in the event that an unsolicited attempt is made to acquire the
company. Adoption of the Plan is intended to deter coercive takeover tactics
including the accumulation of shares in the open market or through private
transactions and to prevent an acquiror from gaining control of the company
without offering a fair price to all of our stockholders.

     Under the Plan, we declared and paid a dividend of one right for each share
of common stock held by stockholders of record as of the close of business on
September 3, 2002. Each right initially entitles stockholders to


                                       35
<PAGE>


purchase one unit of a share of our preferred stock at $12 per share. However,
the rights are not immediately exercisable and will become exercisable only upon
the occurrence of certain events. If a person or group acquires or announces a
tender or exchange offer that would result in the acquisition of 15 percent or
more of our common stock while the Plan remains in place, then, unless the
rights are redeemed by us for $0.01 per right, all rights holders except the
acquirer will be entitled to acquire our common stock at a significant discount.
The rights are intended to enable all stockholders to realize the long-term
value of their investment in the company. The rights will not prevent a takeover
attempt, but should encourage anyone seeking to acquire us to negotiate with the
board prior to attempting a takeover. The rights will expire on September 3,
2012.


      Management by Objective Bonus Program

      On          , our board of directors approved ....
         ---------


                                       36
<PAGE>


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     Management's discussion and analysis of our financial condition and results
of operations are based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires management
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to customer programs and incentives, product returns, bad debts,
inventories, intangible assets, warranty obligations, restructuring,
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 believe the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
Consolidated Financial Statements:

     o   Revenue recognition

     o   Warranty obligations

     o   Excess and obsolete inventories

     o   Allowance for doubtful accounts

     o   Facility lease abandonment losses

     Revenue recognition. With respect to sales of our products to OEMs, we
recognize product revenue when persuasive evidence of an arrangement exists,
delivery has occurred, fee is fixed or determinable, collectibility is probable
and risk of loss has passed to the OEM. Product sales to distributors, VARs and
system integrators who do not have return rights are recognized upon reported
sell-through to end-users. To the extent that we sell products to distributors,
VARs and system integrators that have rights of return, we defer revenue and the
related cost of revenue associated with such sales and recognize these amounts
when that customer sells our products to its customers. Deferred revenue as of
October 31, 2002 was approximately $727,000. As described above, management
judgments and estimates must be made and used in connection with the revenue
recognized in any accounting period. Material differences may result in the
amount and timing of our revenue for any period if our management made different
judgments or utilized different estimates.

     Warranty obligations. We provide for the estimated cost of product
warranties at the time revenue is recognized. These estimates are developed
based on historical information. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of our component suppliers, our warranty obligation is affected by product
failure rates, material usage and service delivery costs incurred in correcting
a product failure. Should actual product failure rates, material usage or
service delivery costs differ from management's estimates, revisions to the
estimated warranty liability would be required.

     Excess and obsolete inventories. We write down our inventories for
estimated obsolescence or unmarketable inventory based on the difference between
the cost of inventories and the estimated market value based upon assumptions
about future demand and market conditions. If actual demand and/or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.

     Allowance for doubtful accounts. We continuously assess the collectibility
of outstanding customer invoices and in doing such, we maintain an allowance for
estimated losses resulting from the non-collection of customer receivables. In
estimating this allowance, we consider factors such as:

     o   historical collection experience;

     o   a customer's current credit-worthiness;

     o   customer concentrations;

     o   age of the receivable balance, both individually and in the aggregate;
         and

     o   general economic conditions that may affect a customer's ability to
         pay.


                                       37
<PAGE>


     Actual customer collections could differ from our estimates. For example,
if the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

     Facility lease abandonment losses. We vacated excess leased facilities as a
result of the restructuring plan we initiated during fiscal 2002. We recorded an
accrual of $2.1 million for the remaining lease liabilities of such vacated
properties, leasehold improvements required to sublease the vacated space, as
well as brokerage commissions. We estimated costs of vacating these leased
facilities, including estimated costs to sublease, based on market information
and trend analysis. It is reasonably possible that actual results will differ
from these estimates in the near term, and such differences could be material to
our financial statements. Of the $2.1 million charge recorded during fiscal
2002, approximately $1.8 million relates to the base rent and fixed operating
expenses of the vacated space through the lease term which ends April 15, 2006.

CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS

     We lease office space and equipment under long-term operating lease
agreements that expire on various dates through April 15, 2006. Rental expense
under these agreements was approximately $1.6 million, $2.3 million and $2.2
million for the years ended October 31, 2000, 2001 and 2002, respectively. In
April 2000, we relocated our headquarters in accordance with an agreement to
lease approximately 63,548 square feet of general office, laboratory, and
administrative space in Austin, Texas. The term of the lease agreement is six
years, from April 1, 2000 through April 15, 2006, and represents a lease
commitment of $1.9 million per year through the lease term. In conjunction with
entering into the lease agreement, we signed an unconditional, irrevocable
letter of credit with a bank for $500,000, which is secured by a $3.0 million
line of credit.

     The following summarizes our contractual cash obligations as of October 31,
2002 (in thousands):

<Table>
<Caption>

                                                                              PAYMENTS DUE BY PERIOD
                                                 ------------------------------------------------------------------------------
                                                                FISCAL      FISCAL        FISCAL       FISCAL
                                                   TOTAL         2003        2004          2005         2006            BEYOND
                                                 --------     --------     --------      --------     --------         --------
<S>                                              <C>          <C>          <C>           <C>          <C>              <C>
    Operating leases ...................         $  7,107     $  2,114     $  2,131      $  1,908     $    954         $     --
                                                 ========     ========     ========      ========     ========         ========
        (Total contractual cash obligations)
</Table>

     The following summarizes our other manufacturing commitments as of October
31, 2002 (in thousands):

<Table>
<Caption>

                                                                    AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
                                                 ------------------------------------------------------------------------------
                                                                FISCAL      FISCAL        FISCAL       FISCAL
                                                   TOTAL         2003        2004          2005         2006            BEYOND
                                                 --------     --------     --------      --------     --------         --------
<S>                                              <C>          <C>          <C>           <C>          <C>              <C>
Manufacturing commitments...............         $    50      $     50     $    ---      $    ---     $   ---          $     --
                                                 =======      ========     ========      ========     =======          ========
     (Total manufacturing commitments)
</Table>

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires that all business combinations be accounted for under the purchase
method and defines the criteria for identifying intangible assets for
recognition apart from goodwill. SFAS No. 141 applies to business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the acquisition date is July 1, 2001 or later. We
have not initiated any business combinations subsequent to June 30, 2001;
therefore, the adoption of SFAS No. 141 did not have a material impact on our
financial position or results of operations.

     In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes how goodwill and other intangible assets are accounted
for subsequent to their initial recognition. Under this standard, goodwill and
other intangibles assets having indefinite useful lives are no longer amortized,
but are subjected to periodic assessments of impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. Effective November
1, 2001, we early adopted SFAS No. 142. We currently do not have any goodwill;
therefore, the adoption of SFAS No. 142 did not have a material impact on our
financial position or results of operations.


                                       38
<PAGE>


     In October 2001, the FASB issued SFAS No. 144, "Impairment of Long-lived
Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144
retains the requirements of SFAS No. 121 to (a) recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS No. 144
removes goodwill from its scope. SFAS No. 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, or for our
fiscal year ended October 31, 2003. The adoption of SFAS No. 144 is not expected
to have a material impact on our financial position or results of operations.

     In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,44,
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002."
This statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that statement," SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or describe their applicability
under changed conditions. SFAS No. 145 is effective for financial statements
issued for fiscal years beginning after May 15, 2002, the adoption of which is
not expected to have a material impact on our financial position or results of
operations.

     In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
for restructuring costs and supersedes previous accounting guidance, principally
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF Issue No. 94-3"). SFAS No. 146 requires that the
liability associated with exit or disposal activities be recognized when the
liability is incurred. Under EITF Issue No. 94-3, liabilities for exit costs
were recognized when a Company commits to an exit plan. SFAS No. 146 also
establishes that a liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing and amount of recognizing
restructuring costs. We will adopt the provisions of SFAS No. 146 for any
restructuring activities initiated after December 31, 2002.

     In November 2002, the FASB issued FASB Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that upon
issuance of a guarantee, a guarantor must recognize a liability for the fair
value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN 45 is not expected to have a material effect on our
financial position, results of operations, or cash flows.

     In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS No. 123
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS No. 148 is effective for fiscal years beginning after December 15,
2002. The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after December 15,
2002. We do not expect the adoption of SFAS No. 148 to have a material effect on
our financial position, results of operations, or cash flows.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS.

     All of our investments are entered into for other than trading purposes.
Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.

     We invest our cash in a variety of financial instruments, including bank
time deposits and taxable and tax-


                                       39
<PAGE>


advantaged variable rate and fixed rate obligations of corporations,
municipalities, and local, state and national government entities and agencies.
These investments are denominated in U.S. dollars.

     Interest income on our investments is carried in "Other income, net." We
account for our investment instruments in accordance with SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No.
115"). All of the cash equivalents and short-term investments are treated as
held to maturity under SFAS No. 115.

     Investments in both fixed rate and floating rate interest earning
instruments carry a degree of interest rate risk. Fixed rate securities may have
their fair market value adversely impacted due to a rise in interest rates,
while floating rate securities may produce less income than expected if interest
rates fall. Due in part to these factors, our future investment income may fall
short of expectations due to changes in interest rates or we may suffer losses
in principal if forced to sell securities that have seen a decline in market
value due to changes in interest rates. Our investment securities are held for
purposes other than trading. While certain of the investment securities had
maturities in excess of 90 days, we intend to liquidate such securities within
one year. The weighted-average interest on investment securities at October 31,
2002 was 2.35%. The fair value of securities held at October 31, 2002 was
approximately $21.6 million, of this, $19.6 million was classified as short-term
investments. We believe that our investment policy is conservative, both in
terms of the average maturity of our investments and the credit quality of the
investments we hold.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The information required by this item is included in Part IV, Item 15
(a)(1) and (2).

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.

     None.


                                       40
<PAGE>

                                    PART III



ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT.

     The information required by this section is incorporated by reference from
the information in the section entitled "Election of Directors" in the Proxy
Statement. Item 405 of Regulation S-K calls for disclosure of any known late
filing or failure by an insider to file a report required by Section 16 of the
Exchange Act. This disclosure is contained in the section entitled "Section
16(a) Beneficial Ownership Reporting Compliance" in the Proxy Statement and is
incorporated by reference herein. The information required by this Item with
respect to the Company's executive officers is contained in Item 1 of Part I of
this Annual Report under the heading "Executive Officers of the Registrant."

ITEM 11. EXECUTIVE COMPENSATION.

     The information required by this Item is incorporated by reference to our
Proxy Statement under the sections captioned "Executive Compensation and Other
Information" and "Certain Transactions."

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this Item is incorporated by reference to our
Proxy Statement under the section captioned "Ownership of Securities."


                                       41


<PAGE>



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

     The information required by this Item is incorporated by reference to our
Proxy Statement under the section captioned "Certain Transactions."

ITEM 14. CONTROLS AND PROCEDURES.

     We performed an evaluation under the supervision and with the participation
of our management, including our Chief Executive Officer ("CEO") and Chief
Financial Officer ("CFO"), of the effectiveness of the design and operation of
our disclosure controls and procedures, as defined in Rule 13a-14(c) under the
Securities Exchange Act of 1934 (the "Exchange Act"). Based on that evaluation,
our management, including our CEO and CFO, concluded that our disclosure
controls and procedures were effective as of January 17, 2003 to ensure that
information required to be disclosed by us in the reports filed or submitted by
us under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. There have been no
significant changes in our internal controls or other factors that could
significantly affect our internal controls subsequent to January 17, 2003.



                                       42
<PAGE>

                                    PART IV


ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

      (a)   The following documents are filed as part of this Form 10-K:

            1. Consolidated Financial Statements. The following consolidated
financial statements of Crossroads Systems, Inc. are filed as a part of this
Form 10-K on the pages indicated:

<Table>
<Caption>

                                                                                                                        PAGE
                                                                                                                        ----
<S>                                                                                                                     <C>
               Report of Independent Accountants........................................................................F-1
               Consolidated Balance Sheets as of October 31, 2001 and 2002..............................................F-2
               Consolidated Statements of Operations for each of the three years in the
                 period ended October 31, 2002..........................................................................F-3
               Consolidated Statements of Changes in Stockholders' Equity for each of the
                 three years in the period ended October 31, 2002.......................................................F-4
               Consolidated Statements of Cash Flows for each of the three years in the
                 period ended October 31, 2002..........................................................................F-5
               Notes to Consolidated Financial Statements...............................................................F-6
</Table>


            2. Consolidated Financial Statement Schedules. The following
consolidated financial statement schedule of Crossroads Systems, Inc. is filed
as a part of this Form 10-K on the pages indicated:


<Table>
<Caption>

                                                                                                                       PAGE
                                                                                                                       ----
<S>                                                                                                                    <C>
               Report of Independent Accountants.......................................................................S-1
               Schedule II - Valuation and Qualifying Accounts.........................................................S-2
</Table>


Schedules not listed above have been omitted because the information required to
be set forth therein is not applicable or is shown in the consolidated financial
statements or the notes thereto.

             3. Exhibits.



      EXHIBIT
      NUMBER            DESCRIPTION

        3.1*          Sixth Amended and Restated Certificate of Incorporation
                      (filed as Exhibit 3.1 to the Registrant's Registration
                      Statement on Form S-1 (SEC File No. 333-85505) (the "IPO
                      Registration Statement") and incorporated herein by
                      reference)

        3.2*          Amended and Restated Bylaws (filed as Exhibit 3.2 to the
                      IPO Registration Statement and incorporated herein by
                      reference)

        4.1*          Specimen certificate for shares of common stock (filed as
                      Exhibit 4.1 to the IPO Registration Statement and
                      incorporated herein by reference)

       10.1*          Form of Indemnity Agreement between Registrant and each of
                      its directors and executive officers (filed as Exhibit
                      10.1 to the IPO Registration Statement and incorporated
                      herein by reference)

       10.2*          Crossroads Systems, Inc. 1999 Employee Stock Purchase Plan
                      (filed as Exhibit 10.3 to the IPO Registration Statement
                      and incorporated herein by reference)

       10.3*          Fourth Amended and Restated Investors Rights Agreement
                      dated August 6, 1999 by and among Registrant and certain
                      purchasers of Registrant's preferred stock (filed as
                      Exhibit 10.4 to the IPO Registration Statement and
                      incorporated herein by reference)

       10.4*+         OEM Agreement dated April 23, 1998 by and between
                      Registrant and Storage Technology Corporation (filed as
                      Exhibit 10.5 to the IPO Registration Statement and
                      incorporated herein by reference)

       10.5*          Form of Stock Pledge Agreement by and between Registrant
                      and Reagan Y. Sakai (filed as Exhibit 10.12 to the IPO
                      Registration Statement and incorporated herein by
                      reference)



                                       43
<PAGE>
      EXHIBIT
      NUMBER          DESCRIPTION

       10.6*          Form of Note Secured by Stock Pledge Agreement issued to
                      Registrant by Reagan Y. Sakai (filed as Exhibit 10.13 to
                      the IPO Registration Statement and incorporated herein by
                      reference)

       10.7           Loan Modification Agreement dated December 31, 2000 by and
                      between Registrant and Silicon Valley Bank

       10.8*          Office Building Lease dated October 8, 1999 by and between
                      Registrant and Maplewood Associates, L.P. (filed as
                      Exhibit 10.15 to the IPO Registration Statement and
                      incorporated herein by reference)

       10.9*          CP4200 License Agreement dated April 15, 1998 by and
                      between Registrant and Hewlett-Packard Company (filed as
                      Exhibit 10.16 to the IPO Registration Statement and
                      incorporated herein by reference)

       10.10*         Crossroads Systems, Inc. Amended and Restated 1999 Stock
                      Incentive Plan (filed as Exhibit 99. (d)(2) to the
                      Registrant's Schedule TO/I (SEC File No. 5-57603) and
                      incorporated herein by reference)

       10.11*         Rights Agreement, dated as of August 21, 2002, by and
                      between Registrant and American Stock Transfer & Trust
                      Company, which includes the form of Certificate of
                      Designation for the Series A junior participating
                      preferred stock as Exhibit A, the form of Rights
                      Certificate as Exhibit B and the Summary of Rights to
                      Purchase Series A Preferred Stock as Exhibit C (field as
                      Exhibit 4 to the Registrant's Current Report on Form 8-K
                      dated August 21, 2002 and incorporated herein by
                      reference)

       10.12          Employment Agreement, dated as of January 6, 2003 by and
                      between Registrant and Andrea Wenholz

       10.13          Fiscal Year 2002 Stock Bonus Incentive Program Letter
                      Agreement, dated as of November 13, 2001, from Registrant
                      to Rob Sims

       10.14          Fiscal Year 2003 Stock Bonus Incentive Program Letter
                      Agreement, dated November 4, 2002 from Registrant to Rob
                      Sims

       10.15          Fiscal Year 2003 Stock Bonus Incentive Program Letter
                      Agreement, dated November 20, 2002 from Registrant to
                      Brian R. Smith

       10.16          Fiscal Year 2003 Stock Bonus Incentive Program Letter
                      Agreement, dated January 6, 2003, from Registrant to
                      Andrea Wenholz

       21.1           Subsidiaries of the Registrant

       23.1           Consent of PricewaterhouseCoopers LLP

       24.1           Power of Attorney, pursuant to which amendments to this
                      Form 10-K may be filed, is included on the signature page
                      contained on Part IV of this Form 10-K

       99.1           Certification to the Securities and Exchange Commission,
                      as required by Section 906 of the Sarbanes-Oxley Act of
                      2002

       * Incorporated herein by reference to the indicated filing

       + Confidential treatment previously granted

         (b) Reports on Form 8-K filed during the last quarter of the period
             covered by this report.

             During the three months ended October 31, 2002, we filed the
             following Current Reports on Form 8-K:

         o   We filed a Form 8-K dated August 21, 2002 (Item 5) announcing that
             our board of directors adopted a stockholder rights plan in which
             preferred share purchase rights will be distributed as a dividend
             at a rate of one right for each share of common stock outstanding
             as of the date of business on September 3, 2002.

         o   We filed a Form 8-K dated August 30, 2002 (Item 5) announcing that
             we had received a notice from NASDAQ that for 30 consecutive
             trading days the bid price of our common stock closed below the
             minimum $1.00 per share required for continued inclusion on the
             NASDAQ National Market.


                                       44

<PAGE>



                                   SIGNATURES

      Pursuant to the requirements of the Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           CROSSROADS SYSTEMS, INC.

                                           By:  /s/ Brian R. Smith
                                              ---------------------------------
                                              Brian R. Smith,
                                              President, Chief Executive Officer
                                              and Chairman of the Board


                                POWER OF ATTORNEY

      KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints, Brian R. Smith and
Andrea Wenholz, and each or any of them, his or her true and lawful
attorney-in-fact and agent, each with the power of substitution and
resubstitution, for him in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, hereby ratifying and confirming all that
each said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<Table>
<Caption>

NAME                                    TITLE                                                   DATE
----                                    -----                                                   ----

<S>                                     <C>                                                     <C>
        /s/ BRIAN R. SMITH              President, Chief Executive Officer and                  January 29, 2003
--------------------------------        Chairman of the Board (principal
Brian R. Smith                          executive officer)

        /s/ ANDREA WENHOLZ              Vice President, Chief Financial Officer,                January 29, 2003
--------------------------------        Secretary and Treasurer
Andrea Wenholz                          (principal financial and accounting officer)

        /s/ RICHARD D. EYESTONE         Director                                                January 29, 2003
--------------------------------
Richard D. Eyestone

        /s/ DAVID L. RIEGEL             Director                                                January 29, 2003
--------------------------------
David L. Riegel

        /s/ WILLIAM P. WOOD             Director                                                January 29, 2003
--------------------------------
William P. Wood

        /s/ PAUL S. ZITO                Director                                                January 29, 2003
--------------------------------
Paul S. Zito
</Table>




<PAGE>


CERTIFICATIONS

I, Brian R. Smith, certify that:

     1.   I have reviewed this annual report on Form 10-K of Crossroads Systems,
          Inc.;

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

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

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

               a)   designed such disclosure controls and procedures to ensure
                    that material information relating to the registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others within those entities, particularly during the
                    period in which this annual report is being prepared;

               b)   evaluated the effectiveness of the registrant's disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this annual report (the "Evaluation
                    Date"); and

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

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

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

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

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


Date: January 28, 2003

/s/ Brian R. Smith
---------------------
Brian R. Smith
Chairman of the Board, President and
Chief Executive Officer
(Principal Executive Officer)


                                       2

<PAGE>


                                 CERTIFICATIONS


I, Andrea Wenholz, certify that:

     1.   I have reviewed this annual report on Form 10-K of Crossroads Systems,
          Inc.;

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

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

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

               a)   designed such disclosure controls and procedures to ensure
                    that material information relating to the registrant,
                    including its consolidated subsidiaries, is made known to us
                    by others within those entities, particularly during the
                    period in which this annual report is being prepared;

               b)   evaluated the effectiveness of the registrant's disclosure
                    controls and procedures as of a date within 90 days prior to
                    the filing date of this annual report (the "Evaluation
                    Date"); and

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

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

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

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

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


Date: January 28, 2003

/s/  Andrea Wenholz
-----------------------
Andrea Wenholz
Vice President, Chief Financial Officer,
Secretary and Treasurer
(Principal Accounting Officer)



                                       3

<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
      Crossroads Systems, Inc. and Subsidiaries

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows present fairly, in all material respects, the financial position of
Crossroads Systems, Inc. and Subsidiaries at October 31, 2001 and 2002, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.






PRICEWATERHOUSECOOPERS LLP

Austin, Texas
November 26, 2002




                                      F-1
<PAGE>



                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES


                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                   ASSETS

                                                                                      OCTOBER 31,
                                                                              ------------    ------------
                                                                                  2001            2002
                                                                              ------------    ------------

<S>                                                                           <C>             <C>
Current assets:
  Cash and cash equivalents ...............................................   $     43,686    $     14,723
  Short-term investments ..................................................         10,000          19,588
                                                                              ------------    ------------
       Total cash, cash equivalents and short-term investments ............         53,686          34,311
  Accounts receivable, net of allowance for doubtful
     accounts of $388 and $277, respectively ..............................          3,768           5,721
  Inventories, net ........................................................          3,080           2,767
  Prepaids and other current assets .......................................          1,894             956
                                                                              ------------    ------------
       Total current assets ...............................................         62,428          43,755
Note receivable from related party, net ...................................            244              63
Property and equipment, net ...............................................         11,021           6,106
Intangibles, net ..........................................................            997             173
Other assets ..............................................................            713             362
                                                                              ------------    ------------
       Total assets .......................................................   $     75,403    $     50,459
                                                                              ============    ============


                          LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                                           STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ........................................................   $      7,070    $      4,165
  Accrued expenses ........................................................          2,744           3,393
  Accrued warranty costs ..................................................            597             615
  Deferred revenue ........................................................            746             727
                                                                              ------------    ------------
       Total current liabilities ..........................................         11,157           8,900

Commitments and contingencies


Redeemable convertible preferred stock, $.001 par value, 25,000,000
       shares authorized, none designated, and none issued and outstanding              --              --
Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized,
       27,542,664 and 25,870,508 shares issued, respectively ..............             28              26
Additional paid-in capital ................................................        184,042         183,253
Deferred stock-based compensation .........................................         (3,914)           (311)
Notes receivable from stockholder .........................................           (118)           (126)
Accumulated deficit .......................................................       (115,535)       (141,024)
Treasury stock at cost (467,794 and 469,237 shares, respectively) .........           (257)           (259)
                                                                              ------------    ------------
       Total stockholders' equity .........................................         64,246          41,559
                                                                              ------------    ------------
       Total liabilities, redeemable convertible preferred
          stock and stockholders' equity ..................................   $     75,403    $     50,459
                                                                              ============    ============
</Table>



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



                                       F-2

<PAGE>
                   CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<Table>
<Caption>

                                                                                    YEAR ENDED OCTOBER 31,
                                                                             2000            2001             2002
                                                                         ------------    ------------    ------------

<S>                                                                      <C>             <C>             <C>
Revenue:
   Product revenue ...................................................   $     32,486    $     35,896    $     33,429
   Other revenue .....................................................            562           1,434             559

                                                                         ------------    ------------    ------------
               Total revenue .........................................         33,048          37,330          33,988
Cost of revenue (including stock-based compensation expense
      of $288, $123 and $84, respectively) ...........................         19,104          22,013          22,661
                                                                         ------------    ------------    ------------
Gross profit .........................................................         13,944          15,317          11,327
                                                                         ------------    ------------    ------------
Operating expenses:
   Sales and marketing (including stock-based compensation
     expense of $4,373, $215 and $481, respectively) .................         16,007          15,202           6,126
   Research and development (including stock-based
     compensation expense of $528, $440 and $369, respectively) ......         13,143          18,118          16,520
   General and administrative (including stock-based
     compensation expense of $22,501, $6,283 and $3,640,
     respectively) ...................................................         31,242          16,043           9,158
   Amortization of intangibles .......................................          8,808           9,680             278
   Impairment of intangibles and other assets ........................             --          25,007           2,047
   Business restructuring expenses ...................................             --              --           3,666
   Litigation settlement .............................................             --         (15,000)             --
                                                                         ------------    ------------    ------------
               Total operating expenses ..............................         69,200          69,050          37,795
                                                                         ------------    ------------    ------------
Loss from operations .................................................        (55,256)        (53,733)        (26,468)
Other income (expense):
   Interest income ...................................................          4,347           2,763             979
   Interest expense ..................................................            (37)             --              --
   Other income (expense) ............................................            (82)             13              --
                                                                         ------------    ------------    ------------
       Other income, net .............................................          4,228           2,776             979
                                                                         ------------    ------------    ------------
Net loss before cumulative effect of accounting change ...............        (51,028)        (50,957)        (25,489)
Cumulative effect of accounting change ...............................             --            (130)             --
                                                                         ------------    ------------    ------------
Net loss .............................................................   $    (51,028)   $    (51,087)   $    (25,489)
                                                                         ============    ============    ============
Basic and diluted net loss per share:
   Before cumulative effect of accounting change .....................   $      (1.93)   $      (1.85)   $      (0.95)
   Cumulative effect of accounting change ............................             --           (0.01)             --
                                                                         ------------    ------------    ------------
       Basic and diluted net loss per share ..........................   $      (1.93)   $      (1.86)   $      (0.95)
                                                                         ============    ============    ============
Pro forma amounts assuming accounting change is applied retroactively:
   Net loss ..........................................................   $    (51,085)   $         --    $         --
   Net loss per share, basic and diluted .............................   $      (1.93)   $         --    $         --
                                                                         ------------    ------------    ------------
Shares used in computing basic and diluted net loss per share ........     26,466,601      27,414,078      26,878,387
                                                                         ============    ============    ============
</Table>





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


                                      F-3


<PAGE>
                   CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)


<Table>
<Caption>

                                                                                                                     NOTES
                                                       COMMON STOCK              ADDITIONAL        DEFERRED        RECEIVABLE
                                              ------------------------------      PAID-IN         STOCK-BASED         FROM
                                                 SHARES           AMOUNT          CAPITAL        COMPENSATION     STOCKHOLDERS
                                              -------------    -------------    -------------    -------------    -------------

<S>                                           <C>              <C>              <C>              <C>              <C>
Balance at October 31, 1999 ...............      26,549,919               27          102,461           (3,718)            (463)
  Issuance of common stock
     upon exercise of stock
     options ..............................         662,791                1               95               --               --
  Issuance of common stock for
     purchase acquisitions ................         428,625               --           46,373               --               --
  Issuance of common stock
     for employee stock
     purchase plan ........................          49,338               --              755               --               --
  Purchase of treasury
     stock (383,461 shares) ...............              --               --               --               --               --
  Stock-based compensation ................              --               --           33,706           (6,016)              --
  Payments on notes
     receivable from stockholders .........              --               --               --               --              235
  Accrued interest on
     notes receivable from stockholders ...              --               --               --               --              (21)
  Net loss ................................              --               --               --               --               --
                                              -------------    -------------    -------------    -------------    -------------
Balance at October 31, 2000 ...............      27,690,673               28          183,390           (9,734)            (249)
  Issuance of common stock
     upon exercise of stock
     options ..............................         174,440               --              160               --               --
  Issuance of common stock
     for employee stock
     purchase plan ........................         149,851               --              665               --               --
  Purchase of treasury
     stock (61,833 shares) ................              --               --               --               --               --
  Stock-based compensation ................              --               --            1,241            5,820               --
  Payments on notes
     receivable from stockholders .........              --               --               --               --              140
  Accrued interest on  notes receivable
     from stockholders ....................              --               --               --               --               (9)
  Retirement of shares
     purchased under stock
     buy-back program .....................        (472,300)              --           (1,414)              --               --
  Net loss .................................              --               --               --               --               --
                                              -------------    -------------    -------------    -------------    -------------
Balance at October 31, 2001 ...............      27,542,664    $          28    $     184,042    $      (3,914)   $        (118)
  Issuance of common stock
     upon exercise of stock
     options ..............................          94,522               --              102               --               --
  Issuance of common stock
     for employee stock
     purchase plan ........................         136,787               --              342               --               --
  Retirement of shares
     purchased under stock
     buy-back program .....................      (1,903,465)              (2)          (2,338)              --               --
  Purchase of treasury
     stock (1,443 shares) .................              --               --               --               --               --
  Stock-based compensation .................             --               --            1,105            3,603               --
  Accrued interest on notes
     receivable from
     stockholders .........................              --               --               --               --               (8)
  Net loss ................................              --               --               --               --               --
                                              -------------    -------------    -------------    -------------    -------------
Balance at October 31, 2002 ...............      25,870,508    $          26    $     183,253    $        (311)   $        (126)
                                              =============    =============    =============    =============    =============

<Caption>


                                                                                     TOTAL
                                                ACCUMULATED        TREASURY      STOCKHOLDERS'
                                                  DEFICIT           STOCK           EQUITY
                                               -------------    -------------    -------------

<S>                                            <C>              <C>          <C>
Balance at October 31, 1999 ...............          (13,420)              (2)          84,885
  Issuance of common stock
     upon exercise of stock
     options ..............................               --               --               96
  Issuance of common stock for
     purchase acquisitions ................               --               --           46,373
  Issuance of common stock
     for employee stock
     purchase plan ........................               --               --              755
  Purchase of treasury
     stock (383,461 shares) ...............               --             (233)            (233)
  Stock-based compensation ................               --               --           27,690
  Payments on notes
     receivable from stockholders .........               --               --              235
  Accrued interest on
     notes receivable from stockholders ...               --               --              (21)
  Net loss ................................          (51,028)              --          (51,028)
                                               -------------    -------------    -------------
Balance at October 31, 2000 ...............          (64,448)            (235)         108,752
  Issuance of common stock
     upon exercise of stock
     options ..............................               --               --              160
  Issuance of common stock
     for employee stock
     purchase plan ........................               --               --              665
  Purchase of treasury
     stock (61,833 shares) ................               --              (22)             (22)
  Stock-based compensation ................               --               --            7,061
  Payments on notes
     receivable from stockholders .........               --               --              140
  Accrued interest on  notes receivable
     from stockholders ....................               --               --               (9)
  Retirement of shares
     purchased under stock
     buy-back program .....................               --               --           (1,414)
  Net loss ................................          (51,087)              --          (51,087)
                                               -------------    -------------    -------------
Balance at October 31, 2001 ...............    $    (115,535)   $        (257)   $      64,246
  Issuance of common stock
     upon exercise of stock
     options ..............................               --               --              102
  Issuance of common stock
     for employee stock
     purchase plan ........................               --               --              342
  Retirement of shares
     purchased under stock
     buy-back program .....................               --               --           (2,340)
  Purchase of treasury
     stock (1,443 shares) .................               --               (2)              (2)
  Stock-based compensation ................               --               --            4,708
  Accrued interest on notes
     receivable from
     stockholders .........................               --               --               (8)
  Net loss ................................          (25,489)              --          (25,489)
                                               -------------    -------------    -------------
Balance at October 31, 2002 ...............    $    (141,024)   $        (259)   $      41,559
                                               =============    =============    =============
</Table>



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




                                      F-4
<PAGE>
                   CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)


<Table>
<Caption>


                                                                                      YEAR ENDED OCTOBER 31,
                                                                       --------------------------------------------------
                                                                            2000             2001            2002
                                                                       --------------    --------------    --------------

<S>                                                                    <C>               <C>               <C>
Cash flows from operating activities:
  Net loss .........................................................   $      (51,028)   $      (51,087)   $      (25,489)
  Adjustments to reconcile net loss to net cash used in
     operating activities:
     Depreciation ..................................................            2,942             4,640             5,559
     Amortization of intangibles ...................................            8,808             9,680               278
     Impairment of intangibles and other assets ....................               --            25,007             2,047
     Stock-based compensation ......................................           27,690             7,061             4,574
     Loss on disposal of property and equipment ....................               --                24                --
     Provision for doubtful accounts receivable ....................              136               157              (111)
     Provision for excess and obsolete inventory ...................            1,758              (309)             (791)
     Business restructuring expenses ...............................               --                --             2,283
     Changes in assets and liabilities:
       Accounts receivable .........................................           (1,664)            1,665            (1,842)
       Inventories .................................................           (2,006)            1,147             1,104
       Prepaids and other assets ...................................             (978)              143               938
       Accounts payable ............................................            1,505             2,218            (2,905)
       Accrued expenses ............................................            2,047              (189)           (1,379)
       Accrued warranty costs ......................................              105               183                18
       Deferred revenue and other ..................................              994              (373)               26
                                                                       --------------    --------------    --------------
          Net cash used in operating activities ....................           (9,691)              (33)          (15,690)
                                                                       --------------    --------------    --------------
Cash flows from investing activities:
  Purchase of property and equipment ...............................          (10,653)           (5,623)           (1,866)
  Cash acquired, net of payments for business acquisitions .........            1,013                --                --
  Proceeds from sale of property and equipment .....................               --                --                14
  Purchase of held-to-maturity investments .........................          (17,591)          (11,967)          (52,537)
  Maturities of held-to-maturity investments .......................           19,500            19,558            42,950
  Payment of note receivable from related party ....................              226               140                64
  Other assets .....................................................               60              (225)               --
                                                                       --------------    --------------    --------------
          Net cash provided by (used in) investing activities ......           (7,445)            1,883           (11,375)
                                                                       --------------    --------------    --------------
Cash flows from financing activities:
  Proceeds from issuance of common stock ...........................              851               825               444
  Costs associated with initial public offering ....................              (40)               --                --
  Repurchase and retirement of common stock ........................               --            (1,414)           (2,340)
  Purchase of treasury stock .......................................             (233)              (22)               (2)
  Repayment of long-term indebtedness ..............................           (2,356)               --                --
  Other ............................................................               41                --                --
                                                                       --------------    --------------    --------------
          Net cash provided by (used in) financing activities ......           (1,737)             (611)           (1,898)
                                                                       --------------    --------------    --------------
Net increase (decrease) in cash and cash equivalents ...............          (18,873)            1,239           (28,963)
Cash and cash equivalents, beginning of period .....................           61,320            42,447            43,686
                                                                       --------------    --------------    --------------
Cash and cash equivalents, end of period ...........................   $       42,447    $       43,686    $       14,723
                                                                       ==============    ==============    ==============
Supplemental disclosure of non-cash investing and
  financing activities:
  The Company purchased all of the assets of Polaris
  Communications, Inc. during fiscal year 2000.  Assets acquired
  and liabilities assumed were as follows:
     Fair value of assets acquired .................................   $       46,751    $           --    $           --
     Liabilities assumed ...........................................             (171)               --                --
  Stock issued in connection with the acquisition ..................          (44,483)               --                --
  Options issued in connection with the acquisition ................           (1,890)               --                --
                                                                       --------------    --------------    --------------
  Cash payments for acquisition of Polaris .........................   $          207    $           --    $           --
                                                                       ==============    ==============    ==============

</Table>


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


                                      F-5

<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. ORGANIZATION AND BASIS OF PRESENTATION:

      The accompanying consolidated financial statements include the accounts of
Crossroads Systems, Inc. ("Crossroads" or the "Company") and its wholly-owned
subsidiaries. Headquartered in Austin, Texas, Crossroads, a Delaware
corporation, is a leading global provider of connectivity for storage networking
solutions. Crossroads sells its products and services primarily to leading
storage system and server original equipment manufacturers, distributors, VARs,
system integrators and storage service providers. The Company is organized and
operates as one business segment.


2.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

               Principles of Consolidation

      The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. Crossroads completed the acquisition of
Polaris Communications, Inc. ("Polaris") during the second quarter of fiscal
2000. This acquisition was accounted for under the purchase method of
accounting. All intercompany transactions and balances have been eliminated in
consolidation.

               Use of Estimates

      The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenue and
expenses during the reporting periods. Estimates are used for, but not limited
to, the useful lives of property and equipment, allowances for doubtful accounts
and product returns, inventory and warranty reserves, impairment charges,
facilities lease losses and other charges, accrued liabilities and other
reserves and contingencies. Actual results could differ from those estimates and
such differences may be material to the financial statements.

               Cash and Cash Equivalents

      Cash and cash equivalents consist of cash on hand, cash on deposit and all
highly liquid investments with original maturities at the date of purchase less
than three months . Cash equivalents consist primarily of cash deposited in
money market accounts and high-grade commercial paper. Cash equivalents totaled
$43.7 million and $14.7 million at October 31, 2001 and 2002, respectively. In
conjunction with entering into a lease agreement for its headquarters, the
Company signed an unconditional, irrevocable letter of credit with a bank for
$500,000, which is secured by a $3.0 million line of credit. While the Company's
cash and cash equivalents are on deposit with high quality FDIC insured
financial institutions, at times such deposits exceed insured limits. The
Company has not experienced any losses in such accounts.

               Short-Term Investments

      Short-term investments consist primarily of U.S. government agency debt,
municipal debt instruments, corporate obligations and certificates of deposit
with original maturities at the date of purchase greater than three months and
less than twelve months. All short-term investments have been classified as held
to maturity and are carried at amortized cost, which approximates fair value,
due to the short period of time to maturity. As of October 31, 2001 and 2002,
the fair value and amortized cost of short-term investments were approximately
$10.0 million and $19.6 million, respectively.

               Inventories

      Inventories are stated at the lower of cost or market. Cost is determined
using standard cost, which approximates the first-in, first-out method.
Provisions, when required, are made to reduce excess and obsolete inventories to
their estimated net realizable values.



                                      F-6
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



      Inventories consist of the following (in thousands):

<Table>
<Caption>


                                                                   YEAR ENDED OCTOBER 31,
                                                                 ----------------------------
                                                                     2001            2002
                                                                 ------------    ------------

<S>                                                              <C>             <C>
Raw materials ................................................   $      3,692    $      2,089
Finished goods ...............................................          1,168           1,667
                                                                 ------------    ------------
                                                                        4,860           3,756
        Less: Allowance for excess and obsolete inventory ....         (1,780)           (989)
                                                                 ------------    ------------
                                                                 $      3,080    $      2,767
                                                                 ============    ============
</Table>


               Investments

      The Company accounted for its investment in Banderacom Corporation
(formerly INH Semiconductor Corporation) ("Banderacom") using the cost method
because the Company's investment represents less than a 20% ownership interest
and the Company is not able to exert significant influence over Banderacom.
However, in fiscal 2002, the Company wrote off its investment in Banderacom,
which was included in other non-current assets. The Company's investment in
Banderacom was approximately $292,000 and $0 at October 31, 2001 and 2002,
respectively.

               Concentrations

      Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
short-term investments and accounts receivable. The Company invests only in high
credit quality short-term debt instruments and limits the amount of credit
exposure to any one entity.

      The Company's sales are primarily concentrated in the United States and
are primarily derived from sales to original equipment manufacturers in the
computer storage and server industry. Revenue is concentrated with several major
customers. The loss of a major customer, a change of suppliers or significant
technological change in the industry could affect operating results adversely.
The Company had trade accounts receivable from four customers, which comprised
approximately 36% and 58% of total trade accounts receivable at October 31, 2001
and 2002, respectively. The Company performs credit evaluations of its customers
and generally does not require collateral on accounts receivable balances and
provides allowances for potential credit losses and product sales returns. The
Company has established reserves for credit losses and sales returns and other
allowances. The Company has not experienced material credit losses in any of the
periods presented.

      The Company's business is concentrated in the storage area networking
industry, which has been impacted by unfavorable economic conditions and reduced
information technology (IT) spending rates. Accordingly, the Company's future
success depends upon the buying patterns of customers in the storage area
networking industry, their response to current and future IT investment trends,
and the continued demand by such customers for the Company's products. The
Company's continued success will depend upon its ability to enhance its existing
products and to develop and introduce, on a timely basis, new cost-effective
products and features that keep pace with technological developments and
emerging industry standards. The Company's supplier arrangement for the
production of certain vital components of its storage routers is concentrated
with a small number of key suppliers.

      Additionally, the Company relies on a limited number of contract
manufacturers to provide manufacturing services for its products. The inability
of any contract manufacturer or supplier to fulfill supply requirements could
materially impact future operating results.

      The percentage of sales to significant customers was as follows:

<Table>
<Caption>


                                                         YEAR ENDED OCTOBER 31,
                                         -----------------------------------------------------
                                               2000              2001               2002
                                         ---------------    ---------------    ---------------

<S>                                      <C>                 <C>                <C>
Compaq* ..............................                33%                 2%                 6%
StorageTek ...........................                21%                23%                24%
ADIC .................................                 7%                 8%                 0%
Hewlett Packard* .....................                 6%                26%                16%
Hewlett Packard (including Compaq)* ..                 0%                 0%                29%
</Table>

      In May 2002, Hewlett-Packard completed its acquisition of Company. These
percentages reflect sales to Hewlett-Packard and Company prior to the merger
and sales to the combined company after the merger.


                                      F-7
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


        The level of sales to any customer may vary from quarter to quarter.
However, we expect that significant customer concentration will continue for the
foreseeable future. The loss of any one of these customers, or a decrease in the
level of sales to any one of these customers, could have a material adverse
impact on the Company's financial condition or results of operations. During
April 2001, Advanced Digital Information Corporation ("ADIC") transitioned out
of the Company's router products when it acquired Pathlight Technology, Inc.
("Pathlight"). Sales to ADIC were approximately $2.3 million, $3.0 million and
$13,000 during the year ended October 31, 2000, 2001 and 2002, respectively.

               Fair Value of Financial Instruments

      The fair values of the Company's cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate their carrying
values due to their short maturities.

               Property and Equipment

      The Company's property and equipment are stated at cost and depreciated
using the straight-line method over the estimated useful lives of the respective
assets, generally one to three years for equipment and five years for furniture
and fixtures. Leasehold improvements are amortized on a straight-line basis over
the shorter of the estimated useful life of the related asset or the remaining
life of the lease. Upon retirement or disposition of assets, the cost and
related accumulated depreciation are removed from the accounts, and the related
gains or losses are reflected in operations.

      The Company assesses long-lived assets other than goodwill for impairment
under Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for the Impairment of Long-Lived Assets to be Disposed Of." Impairment of
goodwill is assessed under SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 121 requires long-lived assets to be held and used by an entity be
reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. When performing
this review, the Company estimates the future cash flows expected to result from
the use of the asset and its eventual disposition. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less than the
carrying amount of the asset, an impairment charge is recognized. Impairment
charges related to long-lived assets other than goodwill were approximately $0,
$0 and $2.0 million for the years ended October 31, 2000, 2001 and 2002,
respectively.


      Property and equipment consist of the following (in thousands):


<Table>
<Caption>

                                                                    OCTOBER 31,
                                                          ------------------------------
                                                              2001             2002
                                                          -------------    -------------
<S>                                                       <C>              <C>
Equipment .............................................   $      17,509    $      16,534
Furniture and fixtures ................................           1,878            1,367
Leasehold improvements ................................             906              707
                                                          -------------    -------------
                                                                 20,293           18,608
Less: accumulated depreciation and amortization .......          (9,272)         (12,502)
                                                          -------------    -------------
                                                          $      11,021    $       6,106
                                                          =============    =============
</Table>


             Goodwill and Purchased Intangible Assets

      In June 2001, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No.142 addresses the
accounting and reporting for acquired goodwill and other intangible assets. SFAS
No. 142 discontinues amortization of acquired goodwill and instead requires
annual impairment testing of acquired goodwill. Intangible assets are amortized
over their useful economic life and tested for impairment in accordance with
SFAS No.121.

      The Company adopted SFAS No.142 effective November 1, 2002. During the
fiscal years ended October 31, 2000 and 2001, the Company had goodwill
amortization of approximately $8.4 million and $9.2 million, respectively. There
was no goodwill amortization expense for the year ended October 31, 2002.



                                      F-8
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      During fiscal 2001, in response to uncertain macroeconomic conditions and
the resulting decline in demand and product revenue, management reassessed the
Company's product strategy, initiated a market sizing exercise on its core
business and examined the expense structure in an attempt to realign its
business plan to achieve profitability. The strategic review triggered a
reduction in force and an impairment evaluation of the intangible assets related
to the Polaris acquisition under SFAS No. 121. Based on a valuation prepared by
an independent third-party appraisal company, the Company recorded a write-down
of these intangible assets totaling $25.0 million, including all remaining
unamortized goodwill.

      During fiscal 2002, a further write-down of the remaining balance of
unamortized intangible assets relating to the Polaris acquisition was made in
the amount of $0.5 million, based on an evaluation of future undiscounted cash
flows under SFAS No. 121. Accumulated amortization of intangible assets was $___
and $____ at October 31, 2001 and 2002, respectively.

      The following table reflects the effect of SFAS No. 142 on net loss and
net loss per share as if SFAS No. 142 had been in effect for all periods
presented (in thousands except per share amounts):

<Table>
<Caption>
                                                  YEAR ENDED OCTOBER 31,
                                             ------------------------------
                                               2000       2001       2002
                                             --------   --------   --------
<S>                                          <C>        <C>        <C>
Net loss:
   Reported net loss                         $(51,028)  $(51,087)  $(25,489)
   Add back goodwill amortization               8,428      9,195         --
                                             --------   --------   --------
   Adjusted net loss                         $(42,600)  $(41,892)  $(25,489)
                                             ========   ========   ========

Basic and diluted net loss per share:
   Reported net loss per share               $  (1.93)  $  (1.86)  $   (.95)
   Add back goodwill amortization                 .32        .33         --
                                             --------   --------   --------
   Adjusted net loss per share               $  (1.61)  $  (1.53)  $   (.95)
                                             ========   ========   ========
</Table>

               Accrued Liabilities

      Accrued liabilities consist of the following (in thousands):

<Table>
<Caption>

                                                               OCTOBER 31,
                                                          ---------------------
                                                             2001        2002
                                                          ---------   ---------
<S>                                                       <C>         <C>
Facility lease abandonment - restructuring ............   $      --   $   1,957
Employee separation and other costs - restructuring ...          --         326
Vacation ..............................................         374         305
Marketing development funds ...........................         378         251
Payroll related .......................................       1,595         214
Property, state and franchise taxes ...................         115         144
Other .................................................         282         196
                                                          ---------   ---------
                                                          $   2,744   $   3,393
                                                          =========   =========
</Table>

               Treasury Stock

      Treasury stock purchases are accounted for under the cost method whereby
the entire cost of the acquired stock is recorded as treasury stock. Gains and
losses on the subsequent reissuance of shares are credited or charged to capital
in excess of par value using the average-cost method.

               Revenue Recognition

      Product revenue is generally recognized when persuasive evidence of an
arrangement exists, delivery has occurred, price is fixed or determinable, and
collectibility is probable. Revenue from product sales to customers that do not
have rights of return, including product sales to original equipment
manufacturers and certain distributors, VARs and system integrators, are
recognized upon shipment. Sales and cost of sales related to customers that have




                                      F-9
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


rights of return are deferred and subsequently recognized upon sell-through to
end-users. The Company provides for the estimated cost to repair or replace
products under warranty and technical support costs when the related product
revenue is recognized. Deferred revenue as of October 31, 2001 and 2002 were
approximately $746,000 and $727,000, respectively.

      In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. Effective November 1, 2000, the
Company adopted SAB No. 101. The adoption of SAB No. 101 resulted in a change in
method of revenue recognition for certain product shipments due to the specified
shipping terms for these shipments. The cumulative effect of this accounting
change was $130,000, which has been included in net loss for the year ended
October 31, 2001.

               Advertising Costs

    The Company expenses all advertising costs as incurred. Advertising costs
for the years ended October 31, 2000, 2001 and 2002 were $287,000, $228,000 and
$22,000, respectively.

               Stock-Based Compensation

      Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees," and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
fair value of the Company's stock at the date of grant over the amount an
employee must pay to acquire the stock amortized over the vesting period. In
1995, the Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation," which establishes a fair value based method of accounting for
stock-based plans. Companies that elect to account for stock-based compensation
plans in accordance with APB Opinion No. 25 are required to disclose the pro
forma net income (loss) that would have resulted from the use of the fair value
based method. Accordingly, pro forma disclosures that are required under SFAS
No. 123 are included in Note 8.

               Income Taxes

      The Company accounts for income taxes in accordance with the liability
method. Under the liability method, deferred tax assets and liabilities are
recorded for the expected future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The Company recorded
no income tax expense or benefit during the years ended October 31, 2001, 2001
and 2002. The Company has provided a full valuation allowance because the
realization of tax benefits associated with net operating loss carryforwards is
not considered more likely than not.

               Computation of Net Loss Per Share

      In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per
share is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding for the period, less shares
subject to repurchase. Diluted earnings per share is computed by giving effect
to all dilutive potential common shares that were outstanding during the period.
Basic earnings per share excludes the dilutive effect of common stock
equivalents such as stock options, while earnings per share, assuming dilution,
includes such dilutive effects. Future weighted-average shares outstanding
calculations will be impacted by the following factors: (i) the ongoing issuance
of common stock associated with stock option exercises; (ii) the issuance of
common shares associated with our employee stock purchase program; (iii) any
fluctuations in our stock price, which could cause changes in the number of
common stock equivalents included in the earnings per share, assuming dilution
computation; and (iv) the issuance of common stock to effect business
combinations should we enter into such transactions.



                                      F-10
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      The Company has excluded all outstanding stock options from the
calculation of diluted net loss per share because all such options are
antidilutive for all periods presented. The total number of common stock
equivalents excluded from the calculations of diluted net loss, per common share
were 4,653,318, 4,980,563 and 6,149,369 for the years ended October 31, 2000,
2001 and 2002, respectively.

               Comprehensive Income

      The Company reports comprehensive income in accordance with SFAS No. 130,
"Reporting Comprehensive Income". This standard defines comprehensive income as
the changes in equity of an enterprise except those resulting from stockholders
transactions. Accordingly, comprehensive income (loss) includes certain changes
in equity that are excluded from net income (loss). The Company has had no items
of other comprehensive income (loss) for each of the three years presented and
accordingly, comprehensive (loss) for all periods presented approximated net
loss.

               Reportable Segments

      In June 1997, the FASB issued SFAS No. 131 "Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 establishes standards for
disclosures about operating segments, products and services, geographical areas
and major customers. The Company is organized and operates as one operating
segment, with the objective of designing, developing, manufacturing, marketing
and selling its storage router and ServerAttach product lines. Service revenue
to date has not been significant. The Company operates principally in one
geographic area, the United States. Major customers are discussed above.

               Recent Accounting Pronouncements

      In June 2001, the FASB issued SFAS No. 141, "Business Combinations," which
requires that all business combinations be accounted for under the purchase
method and defines the criteria for identifying intangible assets for
recognition apart from goodwill. SFAS No. 141 applies to business combinations
initiated after June 30, 2001 and all business combinations accounted for using
the purchase method for which the acquisition date is July 1, 2001 or later. The
Company has not initiated any business combinations subsequent to June 30, 2001;
therefore, the adoption of SFAS No. 141 did not have a material impact on the
Company's financial position or results of operations.

      In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," which changes how goodwill and other intangible assets are accounted
for subsequent to their initial recognition. Under this standard, goodwill and
other intangibles assets having indefinite useful lives are no longer amortized,
but are subjected to periodic assessments of impairment. SFAS No. 142 is
effective for fiscal years beginning after December 15, 2001. Effective November
1, 2001, the Company early adopted SFAS No. 142. The Company currently does not
have any goodwill; therefore, the adoption of SFAS No. 142 did not have a
material impact on the Company's financial position or results of operations.

      In October 2001, the FASB issued SFAS No. 144, "Impairment of Long-lived
Assets," which supercedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144
retains the requirements of SFAS No. 121 to (a) recognize an impairment loss if
the carrying amount of a long-lived asset is not recoverable from its
undiscounted cash flows and (b) measure an impairment loss as the difference
between the carrying amount and the fair value of the asset. SFAS No. 144
removes goodwill from its scope. SFAS No. 144 is applicable to financial
statements issued for fiscal years beginning after December 15, 2001, or for our
fiscal year ended October 31, 2003. The adoption of SFAS No. 144 is not expected
to have a material impact on the Company's financial position or results of
operations.

      In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Nos. 4,44,
and 64, Amendment of SFAS No. 13, and Technical Corrections as of April 2002."
This Statement rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt, and an amendment of that Statement", SFAS No. 64,
"Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements." This
Statement also rescinds SFAS No. 44, "Accounting for Intangible Assets of Motor
Carriers." This Statement amends SFAS No. 13, "Accounting for Leases", to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. This
Statement also amends other existing authoritative pronouncements to make
various technical corrections, clarify meanings, or




                                      F-11

<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


describe their applicability under changed conditions. SFAS No. 145 is effective
for financial statements issued for fiscal years beginning after May 15, 2002.
The adoption of SFAS No. 145 is not expected to have a material impact on the
Company's financial position or results of operations.

      In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses accounting
for restructuring costs and supersedes previous accounting guidance, principally
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" ("EITF Issue No. 94-3"). SFAS No. 146 requires that the
liability associated with exit or disposal activities be recognized when the
liability is incurred. Under EITF Issue No. 94-3, liabilities for exit costs
were recognized when a Company commits to an exit plan. SFAS No. 146 also
establishes that a liability should initially be measured and recorded at fair
value. Accordingly, SFAS No. 146 may affect the timing and amount of recognizing
restructuring costs. The Company will adopt the provisions of SFAS No. 146 for
any restructuring activities initiated after December 31, 2002.

        In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" (FIN 45). FIN 45 requires that
upon issuance of a guarantee, a guarantor must recognize a liability for the
fair value of an obligation assumed under a guarantee. FIN 45 also requires
additional disclosures by a guarantor in its interim and annual financial
statements about the obligations associated with guarantees issued. The
recognition provisions of FIN 45 are effective for any guarantees issued or
modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15,
2002. The adoption of FIN45 is not expected to have a material effect on the
Company's financial position, results of operations, or cash flows.

        In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure". SFAS No. 148 amends SFAS
No. 123 "Accounting for Stock-Based Compensation," to provide alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123 to require prominent
disclosures in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the method
used on reported results. SFAS No. 148 is effective for fiscal years beginning
after December 15, 2002. The interim disclosure provisions are effective for
financial reports containing financial statements for interim periods beginning
after December 15, 2002. The Company does not expect the adoption of SFAS No.
148 to have a material effect on our financial position, results of operations,
or cash flows.

               Reclassifications

       Certain reclassifications have been made to prior year balances in order
to conform to current year presentation.


3.      BUSINESS RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT:

       In May 2002, our board of directors approved and the company subsequently
completed a restructuring plan to reduce its workforce by approximately 25
percent, or 40 people (primarily in the sales, marketing and general and
administrative areas), to scale down our infrastructure and to consolidate
operations. In connection with the restructuring, Brian R. Smith, our founder
and chairman, returned as chief executive officer and president, replacing Larry
Sanders. Robert C. Sims, formerly vice president of engineering and operations,
was named chief operating officer and also assumed management of sales and
marketing.



                                      F-12
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


       As a result of this restructuring plan, we recorded $3.7 million in
business restructuring expenses and a $1.2 million impairment of assets charge.
Components of business restructuring expenses, asset impairments and the
remaining restructuring accruals as of October 31, 2002 are as follows (in
thousands):


<Table>
<Caption>

                                                                                                   EMPLOYEE
                                                                                                   SEPARATION
                                                          FACILITY LEASE         ASSET             AND OTHER
                                                            ABANDONMENT       IMPAIRMENTS            COSTS              TOTAL
                                                          ---------------    ---------------    ---------------    ---------------

<S>                                                       <C>                <C>                <C>                <C>
Effect of restructuring plan and impact to accrued
liabilities ...........................................   $         2,114    $         1,208    $         1,552    $         4,874
Cash activity .........................................              (157)                --             (1,051)            (1,208)
Non-cash activity .....................................                --             (1,208)              (175)            (1,383)
                                                          ---------------    ---------------    ---------------    ---------------
Balance as of October 31, 2002 ........................   $         1,957    $            --    $           326    $         2,283
                                                          ===============    ===============    ===============    ===============
</Table>


      As of October 31, 2002, remaining cash expenditures resulting from the
restructuring are estimated to be $2.3 million and relate primarily to facility
lease abandonment losses. Excluding facility lease abandonment losses, we
estimate that these costs will be substantially incurred within one year of the
restructuring. We have substantially completed our restructuring efforts
initiated in conjunction with the restructuring announcement made during fiscal
2002; however, there can be no assurance future restructuring efforts will not
be necessary.

     Facility Lease Abandonment. Facility lease abandonment losses relate to
lease obligations for excess office space we have vacated as a result of the
restructuring plan. We recorded $2.1 million in business restructuring expenses
in relation to a site consolidation during fiscal 2002. Total lease commitments
include the remaining lease liabilities, leasehold improvements required to sub
lease the vacated space and brokerage commissions. The estimated costs of
vacating these leased facilities, including estimated costs to sublease, were
based on market information and trend analysis as estimated by management.
However, we expect actual results may differ from these estimates in the near
term, and such differences could be material to our financial statements. Of the
$2.1 million charge recorded during fiscal 2002, approximately $1.8 million
relates to the base rent and fixed operating expenses of the vacated space
through the lease term which ends April 15, 2006.

      Asset Impairments. Asset impairments recorded pursuant to Statement of
Financial Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of", relate to the
impairment of computer equipment, software, furniture and fixtures and certain
leasehold improvements. The majority of fixed assets were impaired as a direct
result of our restructuring plan, reducing our workforce by 25%, and decision to
vacate certain office space, resulting in an impairment of approximately
$836,000 during fiscal 2002. The remaining fixed assets considered impaired of
approximately $372,000 relate to IT infrastructure and unique test equipment
that can no longer be utilized based on the current product roadmap and business
environment.

      Employee Separation and Other Costs. Employee separation and other costs,
which include severance, related taxes, outplacement and other benefits, payable
to approximately 40 terminated employees, totaled approximately $1.6 million
during fiscal 2002. Employee groups impacted by the restructuring plan include
personnel in positions throughout the company, primarily in the sales, marketing
and general administrative functions. The Company completed its restructuring
plan and is not currently planning any further restructuring efforts, however,
there can be no assurance future restructuring efforts will not be necessary.

4.   LINE OF CREDIT AND DEBT:

      In January 2001, the Company extended its existing line of credit with its
bank. The committed revolving line is an advance of up to $3.0 million with a
borrowing base of 80% of eligible accounts receivable. The line of credit
matures on February 1, 2003 at which time we intend to extend the term
accordingly. The amount available for borrowings under the line of credit
arrangement at any point in time is based upon eligible accounts receivable and
inventory balances. Borrowings under the equipment line may be used to purchase
general operating equipment.





                                      F-13
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Interest accrues and is payable monthly on outstanding balances under these
lines at the bank's prime rate. There were no outstanding borrowings under the
equipment line at October 31, 2001 and 2002. The amount available to borrow
against our credit line was $3.0 million as of October 31, 2002.

      Borrowings under the line of credit and equipment line arrangements are
collateralized by substantially all assets of the Company, excluding
intellectual property. Under the provisions of these credit arrangements, the
Company is prohibited from declaring or paying dividends. Additionally, the
Company must meet certain quarterly minimum financial covenants, including
minimum tangible net worth, liquidity ratio and profitability covenants.

5.   COMMITMENTS AND CONTINGENCIES:

               Leases

      The Company leases office space and equipment under long-term operating
lease agreements that expire on various dates through April 15, 2006. Rental
expense under these agreements was approximately $1.6 million, $2.3 million and
$2.2 million for the years ended October 31, 2000, 2001 and 2002, respectively.
In April 2000, Crossroads relocated its headquarters in accordance with an
agreement to lease approximately 63,548 square feet of general office,
laboratory, and administrative space in Austin, Texas. The term of the lease
agreement is six years, from April 1, 2000 through April 15, 2006, and
represents a lease commitment of $1.9 million per year through the lease term.

      On August 1, 2002, the Company abandoned 18,180 square feet of our
headquarter facility pursuant to the execution of our business restructuring
plan. The site consolidation resulted in a $2.1 million facility lease loss
charge, of which $1.8 million relates to the base rent and fixed operating
expenses of the vacated space through the end of the lease term on April 15,
2006.

      In conjunction with entering into the lease agreement, Crossroads signed
an unconditional, irrevocable letter of credit with a bank for $500,000, which
is secured by a $3.0 million line of credit.

      The minimum annual future rentals under the terms of these leases at
      October 31, 2002 are as follows (in thousands):

<Table>
<Caption>


FISCAL YEAR
<S>                                                                  <C>
    2003.........................................................    $     2,114
    2004.........................................................          2,131
    2005.........................................................          1,908
    2006.........................................................            954
    Thereafter...................................................             --
                                                                     -----------
                                                                     $     7,107
                                                                     ===========
</Table>

               Legal Proceedings

               Intellectual Property Litigation

        On March 31, 2000, the Company filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral has infringed one of its
patents (5,941,972, hereinafter the "972 patent") with some of their products.
In September 2001, the jury found that the '972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning had infringed all
claims of the Crossroads '972 patent. The federal judge in this matter issued a
permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, the Company was awarded damages with a royalty amount of
5% for Chaparral's router product line and 3% for their RAID product line.
Chaparral has appealed the judgment against it, contending that the '972 patent
is invalid and not infringed. The Company intends to vigorously defend the
appeal.

        On April 14, 2000, the Company filed a lawsuit against Pathlight
Technology, Inc. alleging that Pathlight has infringed one of its patents with
their SAN Data Gateway Router. Pathlight was subsequently acquired by ADIC on



                                      F-14
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


May 11, 2001. In June 2001, ADIC paid the Company $15.0 million in connection
with the settlement of this lawsuit, this payment was recognized as contra
operating expense in the statement of operations for the year ended October 31,
2001. In connection with the settlement of the lawsuit, the Company granted ADIC
a non-exclusive license under the '972 patent.

        On May 19, 2000, Chaparral filed a counter-suit against us alleging
tortious interference with prospective business relations. The Company moved to
have this matter dismissed, which the judge ordered, with prejudice, in April
2001.

               Securities Class Action Litigation

        The Company and several of its officers and directors were named as
defendants in several class action lawsuits filed in the United States District
Court for the Western District of Texas. The plaintiffs in the actions purport
to represent purchasers of our common stock during various periods ranging from
January 25, 2000 through August 24, 2000. The Court consolidated the actions and
appointed a lead plaintiff under the Private Securities Litigation Reform Act of
1995. The amended consolidated complaint was filed in February 2001. On November
22, 2002, the court granted our motion for summary judgment, concluding that the
plaintiffs failed to demonstrate an essential element to their claim of
securities fraud. The Company anticipates that the plaintiffs will appeal this
judgment to the Fifth Circuit Court of Appeals. The plaintiffs are seeking
unspecified amounts of compensatory damages, interests and costs, including
legal fees. The Company denies the allegations in the complaint and will
continue to defend itself vigorously. The class action lawsuit is still at an
early stage. Consequently, it is not possible at this time to predict whether we
will incur any liability or to estimate the damages, or the range of damages, if
any, that we might incur in connection with this lawsuit. Our inability to
prevail in this action could have a material adverse effect on our future
business, financial condition and results of operations.

               Derivative State Action

      On November 21, 2001, a derivative state action was filed in the 261st
District Court of Travis County, Texas on behalf of Crossroads by James Robke
and named several of its officers and directors as defendants. The derivative
state action is based upon the same general set of facts and circumstances
outlined above in connection with the purported securities class action
litigation. The derivative state action alleges that certain of the individual
defendants sold shares while in possession of material inside information in
purported breach of their fiduciary duties to Crossroads. The derivative state
action also alleges waste of corporate assets. On January 28, 2002, the Company
filed an answer and general denial to the derivative state action. The Company
believes the allegations in the derivative state action are without merit and
intends to defend itself vigorously. The derivative state action is still at an
early stage. Consequently, it is not possible at this time to predict whether we
will incur any liability or to estimate the damages, or the range of damages, if
any, that the Company might incur in connection with this action. The Company's
inability to prevail in this action could have a material adverse effect on its
future business, financial condition and results of operations.

               Other

      From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that,
other than the matters described above, there are no claims or actions pending
or threatened against the Company, the ultimate disposition of which would have
a material impact on the Company's financial position, results of operations or
cash flows.

      If the Company reduces or cancels production orders with its third party
contract manufacturer, the Company may be required to reimburse its contract
manufacturer for materials purchased on its behalf in the normal course of
business.

6.   REDEEMABLE CONVERTIBLE PREFERRED STOCK:

               Conversion

      All shares of the Company's redeemable convertible preferred stock were
converted into common stock of the Company on October 19, 1999, the effective
date of the Company's initial public offering, at the rate of 1.5 to 1.


                                      F-15
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


               Authorized Shares

     The Company has the authority to issue 25,000,000 million shares of
preferred stock, par value $.001 per share, subject to the designation of the
board of directors. At October 31, 2001 and 2002, no shares of preferred stock
were issued or outstanding.


7.             STOCKHOLDERS' EQUITY:

               Deferred Compensation

      In connection with the grant of certain stock options to our employees and
directors, the Company recorded deferred compensation aggregating $22.6 million
since fiscal 1998, representing the difference between the deemed fair value of
the common stock underlying these options and their exercise price at the date
of grant. Such amount is presented as a reduction of stockholders' equity and is
being amortized over the vesting period of the applicable individual options,
generally four years. Deferred compensation expense is decreased in the period
of forfeiture for any accrued but unvested compensation arising from the early
termination of an option holder's services. Of the total deferred compensation
amount, approximately $22.3 million has been amortized or cancelled as of
October 31, 2002.

      The Company allocates stock-based compensation to specific line items
within the statement of operations based on the classification of the employees
who received the benefit.

      Stock-based compensation for the periods indicated was allocated as
follows (in thousands):

<Table>
<Caption>


                                               YEAR ENDED OCTOBER 31,
                                         ------------------------------------
                                            2000         2001         2002
                                         ----------   ----------   ----------

<S>                                      <C>          <C>          <C>
Cost of revenue ......................   $      288   $      123   $       84
Sales and marketing ..................        4,373          215          481
Research and development .............          528          440          369
General and administrative ...........       22,501        6,283        3,640
                                         ----------   ----------   ----------
  Total stock-based compensation .....   $   27,690   $    7,061   $    4,574
                                         ==========   ==========   ==========
</Table>

      We expect to amortize the remaining amounts of deferred stock-based
compensation as of October 31, 2002 in the periods indicated (in thousands):


<Table>
<Caption>

                                                    YEAR ENDED OCTOBER 31,
                                           ------------------------------------------
                                               2003          2004           TOTAL
                                           ------------   ------------   ------------

<S>                                        <C>            <C>            <C>
Cost of revenue ........................   $         21   $         --             21
Sales and marketing ....................             59              2             61
Research and development ...............             92              2             94
General and administrative .............            129              6            135
                                           ------------   ------------   ------------
   Total stock-based compensation ......   $        301   $         10   $        311
                                           ============   ============   ============

</Table>


8.   STOCK INCENTIVE/PURCHASE PLANS:

               1999 Stock Incentive Plan

       The 1999 Stock Incentive Plan the ("1999 Plan") is the successor program
to the Company's 1996 Stock Option/Stock Issuance Plan (the "1996 Plan"). The
1999 Plan became effective in October 1999. At that time, all outstanding
options under the 1996 Plan transferred to the 1999 Plan, and no further options
will be granted under the 1996 Plan.




                                      F-16
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



      The 1999 Plan provides for a maximum number of common shares to be issued
of 8,838,160. Accordingly, the Company has reserved a sufficient number of
shares of common stock to permit exercise of options or issuance of common
shares in accordance with the terms of the 1999 Plan. The share reserve under
the 1999 Plan will automatically increase on the first trading day in January of
each calendar year, beginning with calendar year 2001, by an amount equal to
four percent (4%) of the total number of shares of common stock outstanding on
the last trading day of December in the prior calendar year, but in no event
will this annual increase exceed 1,000,000 shares. Non-Statutory stock options
may be granted to Company employees, members of the board, and consultants at
the exercise price determined by the board of directors or by the Company's
compensation committee. Options granted under the plan may have a term of no
more than 10 years.

      Stock appreciation rights may be issued to certain officers subject to
Section 16 of the Securities Exchange Act of 1934 under the discretionary option
grant program. These rights will provide the holders with the election to
surrender their outstanding options for a payment from us equal to the fair
market value of the shares subject to the surrendered options less the exercise
price payable for those shares. The Company may make the payment in cash or in
shares of common stock. None of the options originally issued under the 1996
Plan have any stock appreciation rights.

      The following table summarizes stock option activity under all of the
Plans for all periods presented:


<Table>
<Caption>

                                                                 YEAR ENDED OCTOBER 31,
                                 -------------------------------------------------------------------------------------------
                                             2000                          2001                           2002
                                 ----------------------------   ----------------------------   -----------------------------
                                                    WEIGHTED                      WEIGHTED                       WEIGHTED
                                                    AVERAGE                       AVERAGE                        AVERAGE
                                                    EXERCISE                      EXERCISE                       EXERCISE
                                    SHARES           PRICE         SHARES          PRICE          SHARES           PRICE
                                 ------------    ------------   ------------    ------------   ------------    -------------
<S>                              <C>             <C>            <C>             <C>            <C>             <C>

Outstanding at beginning
   of period .................      1,470,336    $       6.73      3,432,571    $      36.27      4,396,063    $      11.16
Granted ......................      2,825,895           45.65      2,924,400            4.64      3,306,837            2.46
Exercised ....................       (438,990)           0.64       (117,039)           1.30        (94,547)           1.08
Forfeited ....................       (424,668)          33.21     (1,843,869)          48.20     (2,218,968)          12.03
                                 ------------                   ------------                   ------------
Outstanding at end of
   period ....................      3,432,571    $      36.27      4,396,063    $      11.16      5,389,385    $       5.64
                                 ============                   ============                   ============
Options exercisable at the
   End of the period .........        841,371    $       9.16      1,215,635    $      16.06      2,744,818    $       6.57
                                 ============                   ============                   ============
</Table>



      At October 31, 2002 the Company had the right to repurchase 5,729 shares
of outstanding common stock issued upon exercise of stock options with a
weighted average exercise price of $1.08.

      The Company has elected to follow the provisions prescribed by APB Opinion
No. 25 and its related interpretations, for financial reporting purposes,
whereby the difference between the exercise price and the fair value at the date
of grant is recognized as compensation expense (see Note 7, Stockholders' Equity
- Deferred Compensation).

      The Company has adopted the disclosure provisions of SFAS No. 123.
Accordingly, no compensation expense has been recognized for the 1999 Plan under
the provisions of SFAS No. 123. Had compensation cost for the 1999 Plan been
determined based upon the fair value at the grant date for employee awards under
the 1999 Plan consistent with the methodology prescribed under SFAS No. 123, the
Company's net loss would have been increased or decreased, respectively, to the
following pro forma amounts (in thousands):

<Table>
<Caption>


                                                                        YEAR ENDED OCTOBER 31,
                                                               --------------------------------------------
                                                                   2000           2001             2002
                                                               ------------    ------------    ------------

<S>                                                            <C>             <C>             <C>
Net loss -- as reported ....................................   $    (51,028)   $    (51,087)   $    (25,489)
Net loss -- pro forma ......................................   $    (43,242)   $    (49,630)   $    (33,141)
Basic and diluted net loss per share -- as reported ........   $      (1.93)   $      (1.86)   $      (0.95)
Basic and diluted net loss per share -- pro forma ..........   $      (1.63)   $      (1.81)   $      (1.23)
Pro forma compensation expense .............................   $    (19,904)   $     (5,604)   $    (12,226)
Cumulative pro forma compensation expense since inception ..   $    (21,400)   $    (27,004)   $    (39,230)
</Table>



                                      F-17
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


<Table>
<Caption>


                                                                                            YEAR ENDED OCTOBER 31,
                                                                                 ------------------------------------------------
                                                                                      2000            2001             2002
                                                                                 --------------   --------------   --------------

<S>                                                                              <C>              <C>              <C>
Weighted average grant-date fair value of options granted:
  Exercise price equal to market price of stock on
    the grant date:
               Aggregate value ...............................................   $       68,757   $        7,204   $        4,969
                                                                                 ==============   ==============   ==============
               Per share value ...............................................   $        33.48   $         3.39   $         1.84
                                                                                 ==============   ==============   ==============
  Exercise price less than the market price of stock on the grant date:
               Aggregate value ...............................................   $       60,571   $        2,719   $        1,797
                                                                                 ==============   ==============   ==============
               Per share value ...............................................   $        78.95   $         5.44   $         2.06
                                                                                 ==============   ==============   ==============
  Exercise price greater than the market price of stock on the grant date:
               Aggregate value ...............................................   $           --   $        1,538   $           --
                                                                                 ==============   ==============   ==============
               Per share value ...............................................   $           --   $         5.13   $           --
                                                                                 ==============   ==============   ==============

</Table>


      The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 2000, 2001 and 2002: no dividend yield; risk-free
interest rate of 6.07%, 4.64% and 3.87%, respectively; expected volatility of
120%, 120% and 105%, respectively; expected lives of four years.

      The following table summarizes information with respect to stock options
outstanding under all plans at October 31, 2002:

<Table>
<Caption>

                                            OPTIONS OUTSTANDING                                     OPTIONS EXERCISABLE
                             ----------------------------------------------------------      -------------------------------------
                                NUMBER        WEIGHTED-AVERAGE         WEIGHTED-AVERAGE           NUMBER          WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES      OUTSTANDING     REMAINING YEARS           EXERCISE PRICE          EXERCISABLE        EXERCISE PRICE
------------------------     ------------     ----------------         ----------------      ------------------   ---------------

<S>                         <C>               <C>                      <C>                   <C>                  <C>
$    0.23 - $    0.23              19,688               5.3            $          0.23                   19,688   $          0.23
$    0.50 - $    0.71             247,095               9.5            $          0.65                  169,995   $          0.69
$    0.83 - $    1.00             132,529               7.6            $          0.90                   91,978   $          0.93
$    1.33 - $    1.55           1,579,447               9.5            $          1.55                  352,566   $          1.53
$    2.51 - $    3.54           1,357,677               6.3            $          2.65                  805,752   $          2.62
$    4.49 - $    6.49           1,547,898               5.8            $          5.03                  986,846   $          4.87
$    6.94 - $   10.00             212,838               7.7            $          8.72                  128,344   $          8.86
$   11.25 - $   13.81              12,730               7.8            $         13.30                    6,364   $         13.30
$   18.00 - $   25.25              37,090               6.9            $         18.59                   35,777   $         18.34
$   39.88 - $   39.88             152,926               7.5            $         39.88                   86,634   $         39.88
$   64.88 - $   84.50              70,557               6.5            $         71.48                   49,056   $         71.46
$  103.25 - $  142.75              18,910               7.4            $        128.61                   11,818   $        128.61
                             ------------     -------------            ---------------       ------------------   ---------------
$    0.00 - $  142.75           5,389,385               7.7            $          5.64                2,744,818   $          6.57
                             ============     =============            ===============       ==================   ===============
</Table>

      Options granted to non-employees are recorded at fair value in accordance
with SFAS No. 123. These options were issued pursuant to the 1996 Plan and 1999
Plan and are reflected in the disclosures above. The Company granted 5,000
options to non-employees for consulting services in fiscal 2000 at a weighted
average exercise price of $6.94 and did not grant any options to non-employees
for consulting services in fiscal 2001 and 2002.

      The 1999 Plan includes change in control provisions that may result in the
accelerated vesting of outstanding option grants and stock issuances. The 1999
Plan will terminate no later than September 30, 2009.

OPEN - INSERT RESTRICTED SHARE LANGUAGE BASED ON MILESTONES

               Employee Stock Purchase Plan

      The Company's Employee Stock Purchase Plan (the "ESPP") became effective
immediately upon the effective date of the Company's initial public offering.
The ESPP is designed to allow eligible employees to purchase shares of common
stock, at semi-annual intervals, with their accumulated payroll deductions. The
Company has reserved





                                      F-18
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


450,000 shares of common stock for issuance under the ESPP. The reserve will
automatically increase on the first trading day of January in each calendar
year, beginning in calendar year 2001, by an amount equal to one percent (1%) of
the total number of outstanding shares of common stock on the last trading day
of December in the prior calendar year. In no event will any such annual
increase exceed 250,000 shares.

      Eligible employees may contribute up to 15% of his or her base salary
through payroll deductions, and the accumulated deductions will be applied to
the purchase of shares on each semi-annual purchase date. The purchase price per
share will be equal to 85% of the fair market value per share on the
participant's entry date into the eligible offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of May and November each
year. However, a participant may not purchase more than 750 shares on any one
semi-annual purchase date, and no more than 75,000 shares may be purchased in
total by all participants on any one semi-annual purchase date.

      Should the Company be acquired by merger or sale of substantially all of
our assets or more than fifty percent of its voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately prior to the acquisition.

      The ESPP will terminate no later than the last business day of November
2009. The board may at any time amend, suspend or discontinue the ESPP. However,
certain amendments may require stockholder approval.

9.     INCOME TAXES:

      As of October 31, 2001 and 2002, the Company had federal net operating
loss carryforwards of approximately $55.6 million and $70.4 million,
respectively, and research and experimentation tax credit carryforwards of
approximately $751,000 and $1.2 million, respectively. The Company's net
operating loss carryforward is subject to a limitation on its utilization.

      Under the provisions of SFAS No. 109, "Accounting for Income Taxes," the
components of the net deferred tax amounts recognized in the accompanying
balance sheets are as follows (in thousands):

<Table>
<Caption>

                                                                       OCTOBER 31,
                                                               ----------------------------
                                                                   2001            2002
                                                               ------------    ------------

<S>                                                            <C>             <C>
Deferred tax assets:
  Net operating losses .....................................   $     20,033    $     26,752
  Inventory and other reserves .............................          6,540           8,362
  Basis of property and equipment ..........................            370             832
  Research and experimentation credit ......................            751           1,196
Net deferred tax assets before valuation allowance .........         27,694          37,142
Valuation allowance ........................................        (27,694)        (37,142)
                                                               ------------    ------------
Net deferred tax asset .....................................   $         --    $         --
                                                               ============    ============
</Table>


      Due to the uncertainty surrounding the realization of the benefits of its
favorable tax attributes in future tax returns, the Company has placed a
valuation allowance against all of its otherwise recognizable net deferred tax
asset.

      Following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory Federal income tax rates to pretax loss
and the reported amount of income tax benefit:

<Table>
<Caption>


                                                       YEAR ENDED OCTOBER 31,
                                           --------------------------------------------------
                                               2000              2001              2002
                                           --------------    --------------    --------------

<S>                                        <C>               <C>               <C>
Tax benefit at statutory rate of 34% ...   $       18,370    $       18,391    $        8,666
Research and experimentation credit ....               19               276               445
Non-deductible goodwill ................           (4,111)          (12,487)             (297)
Other ..................................              119             2,191               634
Net increase in valuation allowance ....          (14,397)           (8,371)           (9,448)
                                           --------------    --------------    --------------
                                           $           --    $           --    $           --
                                           ==============    ==============    ==============
</Table>



                                      F-19
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


      Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events that may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three-year period. Certain of the Company's operating losses that can be
utilized in any one taxable year for federal tax purposes have been limited by
one or more such ownership changes. For federal income tax purposes, net
operating loss carryforwards begin to expire in 2011.


10.    RELATED PARTY TRANSACTIONS:

               Notes Receivable

      During May 1999, the Company's board of directors approved the acceptance
of full recourse notes in the amount of approximately $442,000 from certain of
the Company's officers as consideration for the exercise of 1,014,999 options.
The notes accrue interest at 7% per year, compounded semi-annually and principal
and accrued interest is due in one lump sum in 2003. In March 2000, the Company
repurchased 232,500 unvested shares for approximately $123,000 and subsequently
collected $114,000 in principal and interest upon the retirement of the
Company's former president and chief operating officer. In June 2000, the
Company repurchased 88,125 unvested shares for approximately $52,000 and
collected approximately $59,000 in principal and interest upon the retirement of
the Company's former vice-president of sales. In January 2001, the Company
repurchased 13,594 unvested shares for approximately $9,000 and collected
approximately $16,000 in principal and interest upon the retirement of the
Company's former vice-president of engineering. The balance of these full
recourse notes was approximately $126,000 as of October 31, 2002.

      In October 1999, the Company loaned an officer of the Company $100,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 6 years or upon the date in which
the officer ceases to remain in service. The note accrues interest at 7% per
year, compounded annually and principal and accrued interest is due in one lump
sum on December 31, 2006. During fiscal 2002, the Company forgave the balance of
this note of approximately $120,000 due under this note as part of a severance
agreement entered into as a result of the Company's restructuring plan.

      In July 2000, the Company loaned an employee of the Company $50,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 2 years or upon the date in which
the employee ceases to remain in service. The note accrues interest at 10.5% per
year, compounded semi-annually and principal and accrued interest was due in one
lump sum on July 1, 2002. The terms on this note were extended and the balance
is approximately $63,000 as of October 31, 2002.

      In April 2001, the Company loaned an officer of the Company $45,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 6 months or upon the date in which
the officer ceases to remain in service. The note accrues interest at 7.5% per
year, compounded semi-annually and principal and accrued interest was due in one
lump sum on October 16, 2001. During fiscal 2002, the Company collected the
balance of approximately $47,000 due under this note.

      In May 2001, the Company loaned an employee of the Company $25,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 18 months or upon the date in which
the employee ceases to remain in service. The note accrues interest at 7.5% per
year, compounded semi-annually and principal and accrued interest was due in one
lump sum on November 14, 2002. During fiscal 2002, the Company collected the
balance of approximately $26,000 due under this note.






                                      F-20
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.    SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

      Cash paid for interest totaled $34,000, $0 and $0 during fiscal years
2000, 2001 and 2002, respectively.

      Cash paid for taxes totaled $23,000, $97,000 and $114,000 during fiscal
years 2000, 2001 and 2002, respectively.


12.    EMPLOYEE BENEFITS:

      In 1996, the Company established the Crossroads Systems, Inc. 401(k)
Savings Plan (the "Savings Plan"), which is a qualified plan under section
401(k) of the Internal Revenue Code. All employees who have attained 18 years of
age are eligible to enroll in the Savings Plan. The Company may make matching
contributions to those employees participating in the Savings Plan based upon
Company productivity and profitability. Company contributions vest over a period
of six years. In October 2000, the Company adopted a new 401(k) Savings Plan
that meets all of the criteria set forth above in the Savings Plan. The Company
made no matching contributions under any plan for the years ended October 31,
2000, 2001 and 2002.


13. STOCKHOLDER RIGHTS PLAN:

      On August 21, 2002, the Company's Board of Directors approved, adopted and
entered into a Stockholder Rights Plan ("Rights Plan"). The Rights Plan is
similar to plans adopted by many other companies, and was not adopted in
response to any attempt to acquire the Company, nor was the Company aware of any
such efforts at the time of adoption.

      The Rights Plan is designed to enable the Company's stockholders to
realize the full value of their investment by providing for fair and equal
treatment of all stockholders in the event that an unsolicited attempt is made
to acquire the Company. Adoption of the Rights Plan is intended to deter
coercive takeover tactics including the accumulation of shares in the open
market or through private transactions and to prevent an acquiror from gaining
control of the Company without offering a fair price to all of the Company's
stockholders.

      Under the Rights Plan, the Company declared and paid a dividend of one
right for each share of common stock held by stockholders of record as of the
close of business on September 3, 2002 (the "Rights"). Each Right initially
entitles stockholders to purchase one unit of a share of the Company's preferred
stock at $12 per share. However, the Rights are not immediately exercisable and
will become exercisable only upon the occurrence of certain events. If a person
or group acquires or announces a tender or exchange offer that would result in
the acquisition of 15 % or more of the Company's common stock while the Rights
Plan remains in place, then, unless the Rights are redeemed by the Company for
$0.01 per right, all Rights holders except the acquirer will be entitled to
acquire the Company's common stock at a significant discount. The Rights are
intended to enable all stockholders to realize the long-term value of their
investment in the Company. The Rights will not prevent a takeover attempt, but
should encourage anyone seeking to acquire the Company to negotiate with the
Board of Directors prior to attempting a takeover. The Rights will expire on
September 3, 2012.


14. SUBSEQUENT EVENTS:

      In January 2003, the Company announced that its Board of Directors
approved a voluntary stock option exchange program (the "Program") for
employees. Under the Program, employees were offered the opportunity to exchange
outstanding stock options with exercise prices equal to or greater than $0.01
per share for new stock options. Participating employees will exchange
outstanding stock options for new stock options exercisable for a number of
shares determined by an exchange ratio of either 1 for 3, 1 for 4, or 1 for 5,
depending on the exercise price of the exchanged stock option. The Company
expects to grant the new options to purchase shares of its common stock on or
promptly after August 12, 2003, which is the first business day that is six
months and one day after the cancellation of the exchanged options.



                                      F-21
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15. UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA:


<Table>
<Caption>

                                                           QUARTER
                                 ------------------------------------------------------------     FISCAL
                                     FIRST           SECOND          THIRD          FOURTH         YEAR 2001
                                 ------------    ------------    ------------    ------------    ------------
<S>                              <C>             <C>             <C>             <C>             <C>
Total revenue ................   $      9,974    $     10,214    $      8,430    $      8,712    $     37,330

Gross profit .................   $      5,098    $      4,077    $      3,190    $      2,952    $     15,317

Net loss .....................   $    (10,740)   $    (11,618)   $    (20,782)   $     (7,947)   $    (51,087)

Basic and diluted net loss
    per share ................   $      (0.39)   $      (0.42)   $      (0.75)   $      (0.30)   $      (1.86)
</Table>


<Table>
<Caption>


                                                           QUARTER
                                 ------------------------------------------------------------       FISCAL
                                     FIRST          SECOND          THIRD          FOURTH          YEAR 2002
                                 ------------    ------------    ------------    ------------    ------------

<S>                              <C>             <C>             <C>             <C>             <C>
Total revenue ................   $      9,197    $      9,064    $      7,495    $      8,232    $     33,988
Gross profit .................   $      3,321    $      3,079    $      2,405    $      2,522    $     11,327

Net loss .....................   $     (6,394)   $     (5,479)   $     (8,229)   $     (5,387)   $    (25,489)

Basic and diluted net loss
    per share ................   $      (0.23)   $      (0.20)   $      (0.31)   $      (0.21)   $      (0.95)

</Table>





                                      F-22
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES


                        REPORT OF INDEPENDENT ACCOUNTANTS
                         ON FINANCIAL STATEMENT SCHEDULE

To the Board of Directors and Stockholders of Crossroads Systems, Inc.
and Subsidiaries

      Our audits of the consolidated financial statements referred to in our
report dated November 26, 2002 appearing in this Annual Report on Form 10-K of
Crossroads Systems, Inc. and Subsidiaries also included an audit of the
financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our
opinion, this financial statement schedule presents fairly, in all materials
respects, the information set forth therein when read in conjunction with the
related, consolidated financial statements.








PRICEWATERHOUSECOOPERS LLP

Austin, Texas
November 26, 2002



                                      S-1
<PAGE>
                                   SCHEDULE II
                        VALUATION AND QUALIFYING ACCOUNTS

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
                                 (IN THOUSANDS)


<Table>
<Caption>

                                                        BALANCE AT       CHARGED TO                            BALANCE AT
                                                        BEGINNING        COSTS AND                               END OF
                                                        OF PERIOD         EXPENSES           DEDUCTIONS          PERIOD
                                                     ---------------   ---------------    ---------------    ---------------

<S>                                                  <C>               <C>                <C>                <C>
Year ended October 31, 2000:
  Allowance for doubtful accounts ................   $            95   $           136    $            --    $           231
  Allowance for excess and obsolete inventory ....   $           331   $         2,071    $          (313)   $         2,089

Year ended October 31, 2001:
  Allowance for doubtful accounts ................   $           231   $           157    $            --    $           388
  Allowance for excess and obsolete inventory ....   $         2,089   $         1,021    $        (1,330)   $         1,780

Year ended October 31, 2002:
  Allowance for doubtful accounts ................   $           388   $          (125)   $            14    $           277
  Allowance for excess and obsolete inventory ....   $         1,780   $           520    $        (1,311)   $           989
</Table>




                                      S-2
<PAGE>
                                INDEX TO EXHIBITS

<Table>
<Caption>



     EXHIBIT
      NUMBER       DESCRIPTION
     -------       -----------

<S>                <C>
        3.1*       Sixth Amended and Restated Certificate of Incorporation
                   (filed as Exhibit 3.1 to the Registrant's Registration
                   Statement on Form S-1 (SEC File No. 333-85505) (the "IPO
                   Registration Statement") and incorporated herein by
                   reference)

        3.2*       Amended and Restated Bylaws (filed as Exhibit 3.2 to the IPO
                   Registration Statement and incorporated herein by reference)

        4.1*       Specimen certificate for shares of common stock (filed as
                   Exhibit 4.1 to the IPO Registration Statement and
                   incorporated herein by reference)

       10.1*       Form of Indemnity Agreement between Registrant and each of
                   its directors and executive officers (filed as Exhibit 10.1
                   to the IPO Registration Statement and incorporated herein by
                   reference)

       10.2*       Crossroads Systems, Inc. 1999 Employee Stock Purchase Plan
                   (filed as Exhibit 10.3 to the IPO Registration Statement and
                   incorporated herein by reference)

       10.3*       Fourth Amended and Restated Investors Rights Agreement dated
                   August 6, 1999 by and among Registrant and certain purchasers
                   of Registrant's preferred stock (filed as Exhibit 10.4 to the
                   IPO Registration Statement and incorporated herein by
                   reference)

       10.4*+      OEM Agreement dated April 23, 1998 by and between Registrant
                   and Storage Technology Corporation (filed as Exhibit 10.5 to
                   the IPO Registration Statement and incorporated herein by
                   reference)

       10.5*       Form of Stock Pledge Agreement by and between Registrant and
                   Reagan Y. Sakai (filed as Exhibit 10.12 to the IPO
                   Registration Statement and incorporated herein by reference)

       10.6*       Form of Note Secured by Stock Pledge Agreement issued to
                   Registrant by each of James H. Moore, Reagan Y. Sakai (filed
                   as Exhibit 10.13 to the IPO Registration Statement and
                   incorporated herein by reference)

       10.7*       Loan Modification Agreement dated December 31, 2000 by and
                   between Registrant and Silicon Valley Bank

       10.8*       Office Building Lease dated October 8, 1999 by and between
                   Registrant and Maplewood Associates, L.P. (filed as Exhibit
                   10.15 to the IPO Registration Statement and incorporated
                   herein by reference)

       10.9*       CP4200 License Agreement dated April 15, 1998 by and between
                   Registrant and Hewlett-Packard Company (filed as Exhibit
                   10.16 to the IPO Registration Statement and incorporated
                   herein by reference)

       10.10*      Crossroads Systems, Inc. Amended and Restated 1999 Stock
                   Incentive Plan (filed as Exhibit 99.(d)(2) to the
                   Registrant's Schedule TO/I (SEC File No. 5-57603) and
                   incorporated herein by reference)

       10.11*      Rights Agreement, dated as of August 21, 2002, by and between
                   Registrant and American Stock Transfer & Trust Company, which
                   includes the form of Certificate of Designation for the
                   Series A junior participating preferred stock as Exhibit A,
                   the form of Rights Certificate as Exhibit B and the Summary
                   of Rights to Purchase Series A Preferred Stock as Exhibit C
                   (field as Exhibit 4 to the Registrant's Current Report on
                   Form 8-K dated August 21, 2002 and incorporated herein by
                   reference)

       10.12       Employment Agreement, dated as of January 6, 2003 by and
                   between Registrant and Andrea Wenholz

       10.13       Fiscal Year 2002 Stock Bonus Incentive Program Letter
                   Agreement, dated as of November 13, 2001, from Registrant to
                   Rob Sims
</Table>
<PAGE>

<Table>
<Caption>



     EXHIBIT
      NUMBER       DESCRIPTION
     -------       -----------

<S>                <C>

       10.14       Fiscal Year 2003 Stock Bonus Incentive Program Letter
                   Agreement, dated November 4, 2002 from Registrant to Rob Sims

       10.15       Fiscal Year 2003 Stock Bonus Incentive Program Letter
                   Agreement, dated November 20, 2002 from Registrant to Brian
                   R. Smith

       10.16       Fiscal Year 2003 Stock Bonus Incentive Program Letter
                   Agreement, dated January 6, 2003, from Registrant to Andrea
                   Wenholz

       21.1        Subsidiaries of the Registrant

       23.1        Consent of PricewaterhouseCoopers LLP

       24.1        Power of Attorney, pursuant to which amendments to this Form
                   10-K may be filed, is included on the signature page
                   contained on Part IV of this Form 10-K

       99.1        Certification to the Securities and Exchange Commission, as
                   required by Section 906 of the Sarbanes-Oxley Act of 2002

</Table>

*    Incorporated herein by reference to the indicated filing

+    Confidential treatment previously granted