<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, 2001


                        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 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>
<Caption>
          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

     Indicated by a 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. [X]

     The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based upon the closing sale price of Common Stock on January 2,
2002, as reported on the Nasdaq National Market, was approximately $20.9 million
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Registrant's Common Stock).

     As of January 2, 2002, the Registrant had 27,627,912 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 2001 Annual Meeting of Stockholders.............               III
</Table>


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

<PAGE>


                            CROSSROADS SYSTEMS, INC.

     Unless otherwise indicated, "we," "us," and "our" 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................................................................  12

   Item 2.     Properties........................................................................................  20

   Item 3.     Legal Proceedings.................................................................................  21

   Item 4.     Submission of Matters to a Vote of Security Holders...............................................  22

PART II..........................................................................................................  23

   Item 5.     Market for Registrant's Common Equity and Related Stockholder Matters.............................  23

   Item 6.     Selected Consolidated Financial Data..............................................................  24

   Item 7.     Management's Discussion and Analysis of Financial Condition and Results of Operations.............  25

   Item 8.     Financial Statements and Supplementary Data.......................................................  32

   Item 9.     Changes and Disagreements with Accountants on Accounting and Financial Disclosure.................  32

PART III.........................................................................................................  33

   Item 10.    Directors And Executive Officers Of The Registrant................................................  33

   Item 11.    Executive Compensation............................................................................  34

   Item 12.    Security Ownership Of Certain Beneficial Owners And Management....................................  34

   Item 13.    Certain Relationships and Related Transactions....................................................  34

PART IV..........................................................................................................  35

   Item 14.    Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................  35
</Table>


                       NOTE ON INCORPORATION BY REFERENCE

     Throughout this report, various information and data are incorporated by
reference to portions of our 2002 Proxy Statement. Any reference in this report
to disclosures in our 2002 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 the leading provider of enterprise data routing solutions for open
system storage area networks, based on our market share of storage routers
shipped. By using our storage routers to serve as the interconnect between
storage area networks, or 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
storage area networks our storage routers decrease congestion in the transfer of
data within a network, reduce the time required to back up data, improve
utilization of storage resources, and preserve and enhance existing server and
storage system investments.

     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, Enterprise Systems Connection (ESCON),
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 a varying port counts. We have applied this expertise
in these protocols to develop solutions for leading server and storage system
providers such as ACAL, ADIC, ATL, Bell Micro, Compaq, Cranel, Datalink, Dell,
Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM,
McDATA, sanrise, StorageTek, Sun Microsystems, Tech Data and Unisys which enable
customers to connect to the information that they require to run their
businesses, regardless of the technology or location.

     In August 2001, we announced that we had re-engaged with Compaq, which had
decided to introduce a competitive product in fiscal 2000. Under the new
agreement, Crossroads and Compaq will develop a range of solutions for
protecting data in networked storage environments with the first delivery in
early calendar 2002.

     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, and InfiniBand fabrics. One element of the 8000 is the Crossroads
Visual Manager software. This software increases the intelligence in the SAN and
reduces the cost of storage management.

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 enterprise storage router. The
10000 is a fully redundant, modular storage router that performs protocol and
storage management functions between storage devices and the network. It will
provide multi-protocol connectivity and management of SCSI and Fibre Channel
storage devices into Fibre Channel, iSCSI and InfiniBand storage networks.

     During fiscal 2001, we succeeded in two important lawsuits that
demonstrated our ability to protect important aspects of our intellectual
property portfolio. In June, 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, hereinafter "`972 patent") in a $15 million
settlement. The '972 patent allows for a device to provide security and access
controls for Fibre Channel hosts to SCSI storage behind that device. In
September, 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.

     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 storage area networks. We also sell our storage routers through companies
that distribute, resell or integrate our storage routers as part of a complete
SAN solution.


                                       1
<PAGE>


INDUSTRY BACKGROUND

     Increasing Importance of Information Management

     Electronic commerce and online communications are driving the volume and
variety of data to be stored. Audio and video applications, graphics files,
transactions and email need more than just space. Today's storage systems must
also ensure the integrity of that data, its security and availability -- 24x7 --
often on disparate corporate infrastructures while the number of storage
protocols grows. 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 back up their data and provide for disaster recovery
solutions. They need intelligent storage networking, and our experience suggests
that even as information technology budgets tighten, demand remains high.

     The Interconnect Bottleneck and Limitations of Direct Attach Storage System
Architecture

     Historically, the connection between data storage capacity and
microprocessors has been facilitated by a direct connection over a SCSI
interface. While data storage capacity and microprocessor speeds have increased
dramatically, the speed at which information is transmitted from storage systems
to microprocessors has not increased nearly as rapidly. This imbalance has
resulted in bottlenecks at the interconnection points where the input and output
of data occur. This bottleneck causes large delays in the movement of data
between the microprocessor and data storage, significantly slowing down
day-to-day operations and frustrating users. The bottleneck persists, in large
part, due to the performance and distance limitations of the direct attach SCSI
interface.

     A second bottleneck occurs because users can access information residing on
a storage device only from the server connected to that storage device and
because a significant amount of data must be moved across the local area
network, or LAN. First, the amounts of data which can traverse the SCSI
interconnect between the server and the storage device at a given time is
severely limited. Therefore, the information going to and coming from the
storage device is more difficult to access and manage. Moreover, the number of
requests for stored data from the server grows, congestion within the server
increases and server performance further decreases. Second, the LAN becomes
congested, slowing an organization's day-to-day operations. As a result, many
organizations are moving away from direct attach storage system architectures to
SANs to reduce bottlenecks and improve their overall information management.

     Applications Enabled by Fibre Channel SANs

     Fibre Channel SANs have enabled a number of important applications,
including:

     o    LAN-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 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 local area networks, or 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.

     o    Consolidated and Shared Storage. In the traditional 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 the same storage devices, enabling more stored data
          to be available to more users, and reducing the need to add more
          servers or storage devices to support greater storage requirements.

     o    Data Mirroring and Disaster Tolerance. SANs improve an organization's
          ability to ensure the integrity of its data by facilitating data
          replication, or mirroring, and enhanced disaster tolerance and
          recovery. In mirroring, two copies of transaction data are created and
          maintained on separate storage systems. This redundancy reduces the
          chance of data loss or corruption. Because SANs enable very high data
          transmission rates and support transmission distances of up to 10
          kilometers per Fibre Channel link, SANs enable mirroring across
          storage systems that may be many kilometers apart from each other.


                                       2
<PAGE>


     o    Server-free Backup. Server-free backup further extends the benefits of
          LAN-free backup by virtually removing the server from the backup
          process. This application enables automated data movement between
          storage systems directly across the SAN, removing the backup server
          from the data path. As a result, the backup process is faster and more
          efficient.

     The Need for Storage Routers to Facilitate the Adoption of SANs and
Emerging Protocols

     Most organizations have made significant investments in storage devices and
servers that use SCSI, Fibre Channel, ESCON, and Ethernet. Thus, in order to
enable organizations to achieve the benefits of deploying a storage area
network, the SAN must be able to operate in conjunction with the different
protocols employed by the devices which are connected to it or within it.
Several other current and emerging protocols, including Internet-based SCSI
protocol, or iSCSI, and Infiniband have been, or are expected to be,
incorporated into commercial SAN products, servers and storage systems in the
future. As new protocols achieve commercial acceptance, storage routers will be
increasingly essential to provide compatibility to existing solutions.

THE CROSSROADS SOLUTION

     We are the leading provider of enterprise data center routing solutions for
open system storage area networks, 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. We have developed or acquired extensive expertise in
several different input-output (I/O) and networking protocols, including SCSI,
Fibre Channel, ESCON, Ethernet, TCP/IP, iSCSI and InfiniBand. We apply this
expertise in these protocols to develop solutions that enable customers to
connect to the information that they require to run their businesses, regardless
of the technology or location. Our storage routers are designed to operate in
any SAN computing environment. We have utilized this expertise to produce
solutions for leading server and storage system providers such as ACAL, ADIC,
ATL, Bell Micro, Compaq, Cranel, Datalink , Dell, Fujitsu-Siemens, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, IBM, McDATA, SANrise, StorageTek, Sun
Microsystems, Tech Data and Unisys.

     In August, we debuted our Crossroads 8000 with the Crossroads Visual
Manager(TM) (CVM(TM)) software and our comMON code base, the Crossroads OS. Our
CVM software greatly simplifies storage router configuration and management,
while our Crossroads OS common hardware architecture is a modular, scaleable
code base that will be used in our future routers. This means storage OEMs will
be able to leverage qualification testing done with the Crossroads 8000 to
reduce time to market for future Crossroads routers, such as the Crossroads
10000, including 2 gigabit/second Fibre Channel, iSCSI and InfiniBand routers,
when available. Incorporated into our storage routers is our proprietary storage
routing software that "intelligently" examines data traffic in the SAN to
prioritize transmission and minimize congestion in the flow of data. This
software also enables communication between different protocols, enables sharing
of storage resources by multiple servers and can be adapted to new protocols as
they emerge. Our proprietary software is combined with software management tools
and embedded in our storage routers.

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 enterprise storage router, which
will be available generally in Spring, 2002. The 10000 is a fully redundant,
modular storage router that performs protocol and storage management functions
between storage devices and the network. It will provide multi-protocol
connectivity and management of SCSI and Fibre Channel storage devices into Fibre
Channel, iSCSI and InfiniBand storage networks.

     We believe that deploying our storage routers helps organizations improve
and reduce their total cost of information management by offering a number of
important benefits, including:

     Providing Broad, Verified Interoperability

     Crossroads storage routers undergo extensive testing in many SAN
configurations with a wide range of SAN hardware components and software
applications. Since Crossroads storage routers share a common hardware and
software architecture, interoperability issues that are resolved on the 8000
remain "fixed" in future storage routers.


                                       3
<PAGE>


Leading ISVs, including VERITAS, Legato, and Computer Associates, have certified
the Crossroads 8000, which will also speed their certification of future
Crossroads routers.

     Increasing Scalability and Implementation Flexibility

     Our storage routers enable individual storage devices to be managed as an
integrated system rather then as a collection of stand-alone devices. Based on
the Crossroads routing architecture and the Crossroads OS, the Crossroads
storage router is highly modular and easily supports a wide range of storage
protocols. This enables tape library and disk subsystem OEMs to deliver
networked storage solutions that are easy-to-manage, highly scaleable, and
adaptable to their customer's changing backup requirements. Our fifth generation
storage router, the 10000, includes the flexibility to add different protocol
modules as well as additional host and storage device connectivity modules
within the router due to our flexible hardware architecture.

     Leveraging Customers' Storage Investments

     Our 10000 storage routers are designed to support four key storage
networking protocols-SCSI, FC, iSCSI and InfiniBand. Because our storage routers
are built on a standard Crossroads Routing platform and common Crossroads Router
OS, new protocols can easily be added so the customers' investment is protected
with flexible connectivity to upgrade to future protocols as they become
available.

     Facilitating Efficient Backup and Recovery

     By allowing the backup process to be accomplished across the SAN, rather
than across the local area network, or LAN, all of our storage routers can
remove a common source of congestion within the LAN. As a result, the primary
computer network has greater availability to perform day-to-day operations.
LAN-free backup also provides flexibility to conduct backup at any time of day.
This capability is increasingly important as users demand network availability
around the clock and from geographically dispersed locations. Server-free backup
provides further reductions in network and server utilization.

     Enhancing Storage Area Network Manageability

     The proprietary software embedded in our storage routers enhances the
ability of an organization to manage storage systems that are attached to the
storage router by translating network management protocols to storage management
protocols. We work closely with leading independent software vendors, such as
BMC Software, Computer Associates, Hewlett-Packard, IBM/Tivoli Systems, Legato
Systems, Sun Microsystems and VERITAS Software, to ensure that our storage
routers can be managed through their network management software products.

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 maintain
our position as the leading provider of storage routers and to leverage this
position to become the leading provider of I/O routing solutions. The key
elements of our strategy include the following:

     Be a customer centric, market driven Company

We are constantly talking with our customers, staying abreast of market trends
and participating on industry boards where we help shape storage industry
standards. Being market driven requires us to be closer than ever to our
customers while driving an efficient business model and ensuring our engineering
resources are aligned with demand. This strategy is driving our expanding
protocol portfolio, guiding our new line of multi-protocol storage routers that
offer connectivity and SAN manageability, and resulting in new business wins.

     Leverage our market position and core competencies to expand and diversify
our product offerings

     As storage networking evolves as an industry, new technologies and
solutions are constantly being introduced. In order to ensure that businesses
can access information regardless of technology, we must continue to introduce


                                       4
<PAGE>


products that provide the connectivity to both existing and future storage
devices and networks. We will remain agnostic to the type of technology that a
customer chooses to implement, but committed to providing the appropriate
connectivity solutions. In partnership with Compaq, Intel, Microsoft,
StorageTek, and VERITAS, we unveiled the Crossroads Internet SCSI - or iSCSI -
for storage networking. The demonstration showcased the combined technology and
interoperability of these industry leaders. In November 2001, we introduced our
InfiniBand prototype running on the Crossroads 8000, which showcased our
interoperability and multi-protocol connectivity with InfiniBand fabrics.

     Maintain our Market Leadership by continuing to invest in Intellectual
Property and Interoperability

     As the industry leader in interoperability, it is important that we
continue to invest resources in our test and interoperability labs. We
proactively ensure interoperability of our products with other SAN components
through rigorous testing and verification. Our strong relationships with leading
enterprise and storage management software companies, including BMC Software,
Computer Associates, Legato Systems, IBM/Tivoli Systems, and VERITAS Software,
is essential to the efficient and reliable integration of their capabilities
with our storage routers.

     In fiscal 2001, we successfully defended our `972 patent and believe it to
be a critical component in our market share growth. As we develop future
products, we continue to identify and develop intellectual property that we
believe will provide a competitive advantage and expand our market
opportunities. We have 8 issued patents, 2 allowed and over 60 pending worldwide
that we will continue to vigorously defend.


                                       5
<PAGE>


PRODUCTS

     Storage Router Products

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

<Table>
<Caption>
===============================================================================================================================
                            FIRST SHIPMENT           DEVICE
          PRODUCT              TO OEM             CONFIGURATION                     BENEFITS
-------------------------------------------------------------------------------------------------------------------------------
     STORAGE ROUTERS
-------------------------------------------------------------------------------------------------------------------------------
<S>                      <C>                 <C>                          <C>
            4100             August 1997     o  1 Fibre Channel           o  Enables LAN-free backup and recovery
                                             o  1 SCSI bus                o  Supports shared storage (disk, tape and optical)
                                             o  1 Ethernet                o  Connects up to 15 SCSI devices
                                                management port           o  Transmits data over distances up to 10 km
                                             o  Box product only          o  Enables server migration to SANs
-------------------------------------------------------------------------------------------------------------------------------
            4200             May 1998        o  1 Fibre Channel port      o  Provides same benefits as 4100
                                             o  2 SCSI buses              o  Connects up to 30 SCSI devices
                                             o  1 Ethernet
                                                management port
                                             o  Box product only
-------------------------------------------------------------------------------------------------------------------------------
            4x50             May 1999        o  1 Fibre Channel port      o  Provides the same benefits as 4200 router
                                             o  1 to 4 SCSI buses         o  Enables server-free backup
                                             o  1 Ethernet                o  Doubles the SCSI throughput via low
                                                management port              voltage differential (LVD) technology
                                             o  Box and embedded          o  Support for 3rd party copy
                                                product
-------------------------------------------------------------------------------------------------------------------------------
            8000             August 2001     o  2 Fibre Channel ports     o  Provides same benefits as 4X50
                                             o  4 SCSI LVD/HVD ports      o  Provides modular software in Crossroads Router OS
                                             o  1 Ethernet                o  Provides Crossroads Visual Manager (CVM)
                                                management port              for enhanced software for storage management
-------------------------------------------------------------------------------------------------------------------------------
            10000            Spring 2002     o  Up to 6 FC ports          o  Same benefits as 8000
                             (Anticipated)   o  Up to 12 LVD/HVD          o  Modular connectivity options
                                                SCSI ports                o  Improved performance
                                             o  1 Ethernet                o  Field replaceable, hot swappable fans and power
                                                management port              supplies
                                             o  Expansion capability
                                                to iSCSI and
                                                InfiniBand
-------------------------------------------------------------------------------------------------------------------------------
S/390 MAINFRAME CONNECTOR
-------------------------------------------------------------------------------------------------------------------------------
            6950             April 1995      o  1 PCI to 1 ESCON          o  Direct connection between open system servers (NT,
                            (by Polaris)                                     UNIX) and mainframe channel
                                                                          o  High-speed throughput of data
                                                                          o  Improved performance of LANs by offloading bulk
                                                                             file transfers
===============================================================================================================================
</Table>


     Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our 4200 product
accounted for 30%, 56% and 12% of our product revenue in fiscal 1999, 2000 and
2001, respectively, and our 4X50 product line accounted for 0%, 17% and 55% of
our product revenue in fiscal 1999, 2000 and 2001, 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, and InfiniBand


                                       6
<PAGE>


fabrics. One element of the 8000 is the Crossroads Visual Manager 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. The
demonstration showcased the combined technology and interoperability of these
industry leaders. In November 2001, we introduced our InfiniBand prototype
running on the Crossroads 8000, which showcased our interoperability and
multi-protocol connectivity with InfiniBand fabrics. We are a leading member of
the InfiniBand Trade Association(SM) and a member of the Marketing Working
Group.

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 enterprise storage router. The
10000 is a fully redundant, modular storage router that performs protocol and
storage management functions between storage devices and the network. It will
provide multi-protocol connectivity and management of SCSI and Fibre Channel
storage devices into Fibre Channel, iSCSI and InfiniBand storage networks.

OUR CUSTOMERS

     Our storage routers are currently sold to end-user organizations primarily
through the leading server and storage system providers and to a lesser extent,
through distributors, resellers, system integrators and storage system providers
under the Crossroads brand. We provide our products in a variety of
configurations including both stand-alone box and library-embedded router form
factors with a varying port counts. Our products are in solutions from ACAL,
ADIC, ATL, Bell Micro, Compaq, Cranel, Datalink, Dell, Fujitsu-Siemens, Groupe
Bull, Hewlett-Packard, Hitachi Data Systems, IBM, McDATA, SANrise, StorageTek,
Sun Microsystems, Tech Data and Unisys.

     During fiscal 2001, we broadened our revenue base resulting in the number
of customers representing approximately 75% of our total revenue increasing from
six to ten as of October 31, 2001. In fiscal 2001, revenue from Hewlett-Packard
and StorageTek represented 26% and 23% of our total revenue, respectively. No
other customer accounted for more than 10% of our revenue during fiscal 2001.
For fiscal 2001, our distribution channel of distributors, resellers and system
integrators collectively accounted for approximately 11% of our total revenue.

     In August 2001, the Company announced that we had re-engaged with Compaq,
which had decided to introduce a competitive product in fiscal 2000. Under the
new agreement, Crossroads and Compaq will develop a range of solutions for
protecting data in networked storage environments with the first delivery in
early 2002.

SALES AND MARKETING

     We base our sales and marketing strategy on an indirect sales model
executed through global OEMs and distributors, resellers 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
thought our OEMs, we have restructured our selling efforts to focus on growing
within those OEM accounts while maintaining and supporting our business through
our distributor and reseller channels in proportion to their volume.

     Our marketing organization primarily focuses on coordinating strategic
product planning activities with our major customers. This help us to determine
which market segments to pursue, understand their size and growth
characteristics, analyze competition, define product features, and construct
business analyses to measure expected return on investments. Additionally, our
marketing efforts are geared toward developing key relationships with OEMs,
distributors, resellers, system integrators, and independent software vendors;
participating in tradeshows to promote and launch our products; and coordinating
our involvement in various industry standards organizations.

CUSTOMER SERVICE AND SUPPORT

     Our customer support engineering organization is a regionalized engineering
force that 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
customers and resellers to solve end-user problems.


                                       7
<PAGE>


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 embedded software also
manages delays in data transmissions that result from variances in speeds and
provides accurate communication of transmission status to connected devices. Our
embedded software provides critical interoperability between diverse protocols,
enables sharing of storage resources by multiple servers and 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, which
we utilize 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) and IBM's ESCON for mainframes. We employ a large number of engineers and
technologists 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 leverage our
software and technical expertise in developing additional routers. Such
additional areas of focus include iSCSI over Gigabit Ethernet and SRP over
InfiniBand.

     Embedded Software Design

     We design, develop and test all of our own embedded software. As of October
31, 2001, our engineering staff included 25 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

     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. 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, improved manageability, broader interoperability, higher
          performance products and "intelligent" data management and data
          movement features.


                                       8
<PAGE>


     o    iSCSI-to-SCSI storage routing: To enable connectivity of SCSI storage
          devices to an Ethernet network using iSCSI protocol while leveraging
          development from our fibre channel-to-SCSI storage routing.

     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
$528,000 and $440,000 during fiscal 2000 and 2001, respectively, were $12.6
million and $17.7 million in fiscal 2000 and fiscal 2001, respectively. At
October 31, 2001, we employed 93 software and hardware engineers.

MANUFACTURING

     Our manufactured product contains printed circuit board assemblies which
consist of the electronics that control the function of our product. The printed
circuit board is assembled and tested by a contract manufacturer, who purchases
the required components 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,
enclosures, etc.) and tested to create the final product.

     During fiscal 2001, we received our last shipments from XeTel Corporation,
a contract manufacturer; and we have engaged another contract manufacturer,
Solectron, to assemble the printed circuit board for our current shipping
programs, including our 4x50, 8000, 10000, and embedded router family of
products. 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 our contract manufacturers currently purchase several key
components used in the manufacture of our products from single or limited
sources. Our contract manufacturers purchase 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 2001, we have maintained our ISO 9002 registration.

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 ATTO, Chaparral Network Storage and Nishan
Systems. In addition, during 2001, ADIC, one of our OEM customers, acquired
Pathlight Technology whose products are competitive with our 4100 and 4x50
product lines. 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    LAN router manufacturers;

     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.


                                       9
<PAGE>


     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.

     We believe the competitive factors in the storage router market include the
following:

     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.

INTELLECTUAL PROPERTY

     During fiscal 2001, we successfully protected our intellectual property
portfolio. In June, Pathlight Technology, a wholly owned subsidiary of Advanced
Digital Information Corp., admitted both the validity and infringement of the
`972 patent in a $15 million settlement. In September, 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 as well.

     We have eight patents issued, two allowed and nineteen patent applications
pending in the United States Patent and Trademark Office with respect to our
technology. We have thirty-five pending international patent applications (nine
in the European Patent Office, nine in Canada, seven in Japan, five in
Australia, two in Hong Kong, two in Indonesia and one in China). We also have
ten international patent applications pending under the Patent Cooperation
Treaty. However, none of our patents, including patents that may be issued in
the future, may adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to adequately protect our intellectual property could materially harm
our business. In addition, our competitors may independently develop similar or
superior technology.

     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.

     In May 2001, we executed a paid-up, royalty-free license to Inrange
Technologies Corporation for certain technology relating to 16-port Fibre
Channel switch design. This license allows Inrange to create and incorporate


                                       10
<PAGE>


into its own products modifications and derivative works of this licensed
technology.

     We have registered the trademark "CROSSROADS" in the United States. All
other trademarks, service marks or trade names referred to in this prospectus
are the property of their respective owners.

EMPLOYEES

     At October 31, 2001, we had 202 employees, with 93 engaged in research and
development; 35 in manufacturing; 37 in sales, marketing and customer support;
and 37 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.


                                       11
<PAGE>
               ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

     In addition to the other information in this 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 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, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER
BECOME PROFITABLE.

     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,
2001, we had an accumulated deficit of $115.5 million. We cannot be certain that
we will be able to sustain growth rates that we will need to realize sufficient
revenue to achieve profitability. We also 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. Our inability to realize the
benefit of the new agreement with Compaq Computer Corporation and the
uncertainty regarding the relationship with Compaq if its acquisition by
Hewlett-Packard is consummated may result in less than expected revenue which
could affect our ability to ever achieve cash flow break even or profitability.
Moreover, even if we do achieve profitability, we may not be able to sustain or
increase profitability.

DUE TO OUR LIMITED OPERATING HISTORY AND 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 short 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 and other factors that are
beyond our control, reduces our ability to accurately forecast our quarterly and
annual revenue. However, we use our forecasted revenue to establish our expense
budget. 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    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
          to us;


                                       12
<PAGE>


     o    the rate of adoption of storage area networks 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; and

     o    the rate at which new markets emerges for products we are currently
          developing.

     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.

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 and we filed a motion
to dismiss. 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 Item 14, Financial Statements -- Note 5 to Notes to
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 securities
litigation is based upon the same general set of facts and circumstances
outlined above in connection with the purported shareholder class actions. The
securities litigation 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 securities litigation also alleges
waste of corporate assets. We have not answered the securities litigation. We
believe the allegations in the securities litigation are also without merit and
intend to defend ourselves vigorously. An adverse judgment may have a material
adverse effect on our business and financial performance. See Item 14, Financial
Statements -- Note 5 to Notes to Consolidated Financial Statements.

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

     Fibre Channel-based storage area networks, or 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 potentially may
purchase our products from our customers 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. 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:


                                       13
<PAGE>


     o    educate potential OEM customers, distributors, resellers, 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, resellers, 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 only three principal products within our storage router
product family that we sell in commercial quantities. In particular, sales of
our 4100 and 4200 products have accounted for the vast majority of our product
revenue to date. To reduce our dependence on these products, we must
successfully develop and introduce to market new products and product
enhancements in a timely manner. On September 1, 2000, we began notifying our
customers that our 4100 product was at its "end of life." Customers who
purchased the 4100 product are continuing to migrate to our next generation of
products that we refer to as the 4x50 product line. While we are continuing to
sell our 4100 product, sales of our 4x50 product accounted for approximately 17%
and 55% of our product revenue during fiscal 2000 and 2001, respectively. Our
future growth and competitiveness will depend greatly on the market acceptance
of our newly introduced product lines, including the 8000 and 10000 storage
router. However, we have not received significant revenues from the sale of
either of these products and their market acceptance remains uncertain. If
either of these two products do not achieve sufficient market acceptance, our
future growth prospects will be seriously affected. 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 that could reduce
our revenue.

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

     o    growth of, and changing requirements of customers within, the SAN and
          storage router markets;

     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, reseller, 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 1998, 1999, 2000, and 2001 approximately 90%, 85%, 77% and 70% of
our revenue, respectively, was derived from six customers. In fiscal 2000,
Compaq and StorageTek represented 33% and 21% of our total revenue,
respectively. During fiscal 2001, ADIC, Compaq, Dell, Hewlett Packard and
StorageTek represented 8%, 2%, 8%, 26% and 23% of our total revenue,
respectively. During fiscal 2001, ADIC transitioned out of our router products
upon consummation of its acquisition of Pathlight Technology. In addition, in
September, 2001, Hewlett Packard and Compaq have announced their intent to
merge. If the merger is consummated or if we are unable to replace the revenue
lost due to ADIC's transition away from our line of storage routers, our results
of operations and future prospects will suffer.


                                       14
<PAGE>


     We rely on OEMs as a primary distribution channel as they are able to sell
our products to a large number of end-user organizations, which enables us to
achieve broad market penetration, with limited sales, marketing and customer
service and support resources from us. In August 2001, we announced that we had
re-engaged with Compaq, which had decided to introduce a competitive product in
fiscal 2000. Under the new agreement, Crossroads and Compaq will develop a range
of solutions for protecting data in networked storage environments with the
first delivery in early calendar 2002. 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 an 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 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 input/output 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
input/output bottlenecks. A number of large companies in the computer hardware
and software industries are actively involved in the development of new
technologies and standards that are expected to be incorporated 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


                                       15
<PAGE>


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.

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

     During fiscal 2001, we received our last shipments from XeTel Corporation,
a contract manufacturer; and we have engaged another contract manufacturer,
Solectron, to assemble the printed circuit board for our current shipping
programs, including our 4x50, 8000, and embedded router family of products. We
generally place orders for products with our contract manufacturer 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 our contract manufacturer 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. Our contract manufacturer has not provided assurance to us that adequate
capacity will be available to us within the time required to meet additional
demand for our products.

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 plan to introduce new products and product enhancements, which will
require that we coordinate our efforts with those of our component suppliers and
our contract manufacturers to rapidly achieve volume production. If we should
fail to effectively manage our relationships with our component suppliers and
our contract manufacturers, 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


                                       16
<PAGE>


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 ATTO, Chaparral Network Storage and Nishan
Systems. In addition, during 2001, ADIC, one of our OEM customers, acquired
Pathlight Technology whose products are competitive with our 4100 and 4x50
product lines. During April 2001, ADIC informed us that it intends to transition
out of our router products upon consummation of its acquisition of Pathlight
Technology, Inc., which they subsequently completed on May 11, 2001. 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 could
introduce additional competition in our markets, especially if one of our OEMs
begins to manufacture our higher end storage routers.

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 we have. 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


                                       17
<PAGE>


to embedded, 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 offset by higher average selling prices for
our newer products, as well as sales to distributors, resellers 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 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. We do not have employment contracts with any of our key
personnel with the exception of Mr. Sanders. The loss of the services of any of
our key employees, the inability to attract or retain qualified personnel in the
future or 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.


                                       18
<PAGE>


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.

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:

     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.

     As of December 31, 2001, our executive officers and directors beneficially
own approximately 16.8% 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. This concentration of voting power could
delay or prevent an acquisition of us on terms that other stockholders may
desire.


                                       19
<PAGE>


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.

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. 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.

THE RECENT ISSUANCE BY THE SEC OF AN ACCOUNTING BULLETIN RELATED TO REVENUE
RECOGNITION, SAB 101, MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL
PERFORMANCE.

     In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, referred to as SAB 101. SAB 101 summarizes
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Effective November 1, 2000, we
adopted SAB 101. While SAB 101 will not affect the fundamental aspects of our
operations as measured by product shipments and cash flows, implementation of
SAB 101 will affect our reported results of operations. It is possible that SAB
101 will result in increased fluctuations in our quarterly operating results and
increase the likelihood that we may fail to meet the expectations of securities
analysts for any period. The adoption of SAB 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 income for the year ended
October 31, 2001. Prior period financial statements have not been restated to
apply SAB 101 retroactively, however, the pro forma amounts included in the
Consolidated Statements of Operations reflect the net loss and net loss per
share assuming we had retroactively applied SAB 101 to all periods presented.

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 March 2006. The lease represents a commitment of $1.7
million per year until April 2003 and $1.8 million per year thereafter. In
conjunction with entering into the lease agreement, we signed an unconditional,
irrevocable letter of credit with a bank for $1.0 million, which is secured by a
$1.0 million certificate of deposit.


                                       20
<PAGE>


     Our Oregon facility consists of approximately 10,488 square feet in
Portland, Oregon. We lease this facility pursuant to a lease agreement that
started in December 1996 and expired in December 2001. In December 2001, we
renewed the lease for approximately 3,424 square feet which expires on October
31, 2004.

     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, 2001, we also maintained sales offices, each with 400
square feet or less, in Boston, Massachusetts; Boulder, Colorado; Manchester,
England and Munich, Germany.

ITEM 3. LEGAL PROCEEDINGS.

     Intellectual Property Litigation

     On March 31, 2000, we filed a lawsuit in the United States District Court
for the Western District of Texas against Chaparral Network Storage, Inc.
alleging that Chaparral has infringed our `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 have
infringed all claims of our `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.

     On April 14, 2000, we filed a lawsuit in the United States District Court
for the Western District of Texas against Pathlight Technology, Inc. alleging
that Pathlight has infringed the same `972 patent. Pathlight was subsequently
acquired by Advanced Digital Information Corporation on May 11, 2001. In June
2001, ADIC paid us $15.0 million in connection with the settlement of this
lawsuit which was recognized in the statement of operations for year ended
October 31, 2001. In connection with the settlement of the lawsuit, we granted
ADIC a non-exclusive license under the related patent.

     On May 19, 2000, Chaparral filed a counter-suit filed in District Court,
Boulder County, Colorado against us alleging tortuous interference with
prospective business relations. In April 2001, we moved to have this matter
dismissed, which the judge ordered, with prejudice.

     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 and we filed a motion
to dismiss, which was denied. The plaintiffs are seeking unspecified amounts of
compensatory damages, interests and costs, including legal fees. We deny the
allegations in the complaint and intend 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


                                       21
<PAGE>


duties to Crossroads. The derivative state action also alleges waste of
corporate assets. We have not answered 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.


                                       22
<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, 1999
    Fourth Quarter (from October 20, 1999) ....... $ 97.250    $ 36.250

FISCAL YEAR ENDED OCTOBER 31, 2000
    First Quarter ................................  102.250      58.375
    Second Quarter ...............................  202.250      45.500
    Third Quarter ................................   81.500       4.250
    Fourth Quarter ...............................   15.625       4.375

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
</Table>

     As of January 2, 2002, there were 27,627,912 shares of our common stock
outstanding held by 315 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.


                                       23
<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 data set forth below for each of the years in the three
year period ended October 31, 2001 and the balance sheet data as of October 31,
2000 and 2001 are derived from, and qualified by reference to, our audited
consolidated financial statements appearing elsewhere in this Annual Report. The
consolidated statement of operations data for the year ended October 31, 1997
and 1998 and the consolidated balance sheet data as of October 31, 1997, 1998
and 1999 are derived from audited consolidated financial statements not included
herein.

<Table>
<Caption>
                                                                      FISCAL YEAR ENDED OCTOBER 31,
                                                      -------------------------------------------------------------
                                                        1997           1998         1999        2000         2001
                                                      ---------    ---------    ---------    ---------    ---------
                                                                  (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                   <C>          <C>          <C>          <C>          <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
    Product revenue ...............................   $     821    $   2,930    $  18,859    $  32,486    $  35,896
    Other revenue .................................         188          279           65          562        1,434
                                                      ---------    ---------    ---------    ---------    ---------
        Total revenue .............................       1,009        3,209       18,924       33,048       37,330
Cost of revenue(1) ................................         465        1,913       11,079       19,104       22,013
                                                      ---------    ---------    ---------    ---------    ---------
Gross profit ......................................         544        1,296        7,845       13,944       15,317
                                                      ---------    ---------    ---------    ---------    ---------
Operating expenses(1):
    Sales and marketing ...........................         641        2,491        4,781       16,007       15,202
    Research and development ......................       1,329        2,342        5,551       13,143       18,118
    General and administrative ....................       1,323        1,899        3,017       31,242       16,043
    Amortization of intangibles ...................          --           --           --        8,808        9,680
    Write-down of intangibles .....................          --           --           --           --       25,007
    Litigation settlement .........................          --           --           --           --      (15,000)
                                                      ---------    ---------    ---------    ---------    ---------
        Total operating expenses ..................       3,293        6,732       13,349       69,200       69,050
                                                      ---------    ---------    ---------    ---------    ---------
Loss from operations ..............................      (2,749)      (5,436)      (5,504)     (55,256)     (53,733)
Other income (expense), net .......................          56           82          319        4,228        2,776
                                                      ---------    ---------    ---------    ---------    ---------
Net loss before cumulative effect of accounting
    change ........................................      (2,693)      (5,354)      (5,185)     (51,028)     (50,957)
Cumulative effect of accounting change ............          --           --           --           --         (130)
                                                      ---------    ---------    ---------    ---------    ---------
Net loss ..........................................      (2,693)      (5,354)      (5,185)     (51,028)     (51,087)
Accretion on redeemable
    convertible preferred stock ...................         (58)        (196)        (247)          --           --
                                                      ---------    ---------    ---------    ---------    ---------
Net loss attributable to common stock .............   $  (2,751)   $  (5,550)   $  (5,432)   $ (51,028)   $ (51,087)
                                                      ---------    ---------    ---------    ---------    ---------
Basic and diluted net loss per share ..............   $   (0.46)   $   (0.90)   $   (0.74)   $   (1.93)   $   (1.86)
                                                      ---------    ---------    ---------    ---------    ---------
Shares used in computing basic
      and diluted net loss per share ..............       6,000        6,146        7,378       26,467       27,414
                                                      ---------    ---------    ---------    ---------    ---------
(1) Stock-based compensation for the periods
    indicated was allocated as follows:
    Cost of revenue ...............................   $      --    $       2    $     133    $     288    $     123
    Sales and marketing ...........................          --           30          372        4,373          215
    Research and development ......................          --            6          280          528          440
    General and administrative ....................          --            3          420       22,501        6,283
                                                      ---------    ---------    ---------    ---------    ---------
        Total stock-based compensation ............   $      --    $      41    $   1,205    $  27,690    $   7,061
                                                      =========    =========    =========    =========    =========
</Table>

<Table>
<Caption>
                                                                              OCTOBER 31,
                                                      -------------------------------------------------------------
                                                         1997         1998        1999         2000         2001
                                                      ---------    ---------    ---------    ---------    ---------
                                                                            (IN THOUSANDS)
<S>                                                   <C>          <C>          <C>          <C>          <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
    investments ...................................   $   6,063    $   3,934    $  80,820    $  60,038    $  53,686
Working capital ...................................       5,757        4,461       83,165       62,287       51,271
Total assets ......................................       7,615        7,187       91,730      118,048       75,403
Long-term debt, net of current portion ............         301          591        1,325           --           --
Redeemable convertible preferred stock ............       9,277       13,438           --           --           --
Total stockholders' equity (deficit) ..............      (2,875)      (8,347)      84,885      108,752       64,246
</Table>


                                       24
<PAGE>


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

     The following discussion 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 14 of this Annual Report.

OVERVIEW

     We are the leading provider of enterprise data routing solutions for open
system storage area networks, based on our market share of storage routers
shipped. By using our storage routers to serve as the interconnect between
storage area networks, or 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
storage area networks our storage routers decrease congestion in the transfer of
data within a network, reduce the time required to back up data, improve
utilization of storage resources, and 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. Our
strategy includes key elements such as providing products compatible with
existing technologies to ensure connectivity for our customers, delivering
products that are on the cutting edge of technology, expanding field sales force
with coverage of key regional and OEM accounts, expanding distribution channels,
emphasizing quality through our Crossroads Quality Management (CQM) Program and
ensuring broad interoperability with CV-SAN testing and verification program
with leading software vendors.

     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, Enterprise Systems Connection (ESCON),
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 a varying port counts. We have applied this expertise
in these protocols to develop solutions for leading server and storage system
providers such as ACAL, ADIC, ATL, Bell Micro, Compaq, Cranel, Datalink, Dell,
Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM,
McDATA, sanrise, StorageTek, Sun Microsystems, Tech Data and Unisys which enable
customers to connect to the information that they require to run their
businesses, regardless of the technology or location.

     In August 2001, we announced that we had re-engaged with Compaq, which had
decided to introduce a competitive product in fiscal 2000. Under the new
agreement, Crossroads and Compaq will develop a range of solutions for
protecting data in networked storage environments with the first delivery in
early calendar 2002.

     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, and InfiniBand fabrics. One element of the 8000 is the Crossroads
Visual Manager software. This software increases the intelligence in the SAN and
reduces the cost of storage management.

     In January 2002, we expanded our product line with the launch of our fifth
generation product line -- the Crossroads 10000 enterprise storage router. The
10000 is a fully redundant, modular storage router that performs protocol and
storage management functions between storage devices and the network. It will
provide multi-protocol connectivity and management of SCSI and Fibre Channel
storage devices into Fibre Channel, iSCSI and InfiniBand storage networks.

     During fiscal 2001, we succeeded in two important lawsuits that
demonstrated our ability to protect important aspects of our intellectual
property portfolio. In June, 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, hereinafter "`972 patent") in a $15 million
settlement. In September, 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.


                                       25
<PAGE>


     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 storage area networks. 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 2000 and 2001, sales to Compaq accounted
for 33% and 2%, respectively, and sales to StorageTek accounted for 21% and 23%,
respectively. This decrease in sales to Compaq during fiscal 2001 was offset by
higher revenue through our expanded OEM revenue base including a new OEM
relationship with Sun Microsystems under which medium to large businesses are
given more bandwidth for data movement between Sun servers and S/390 class
mainframes, where more than half of the world's data is stored and managed. This
broadened revenue base was also evidenced by volume from our top 10 customers
representing 75% of our total revenue, 2 of which individually accounted for 10%
or more of our revenue, during fiscal 2001. This is compared to volume from our
top 6 customers representing 75% of our total revenue, 2 of which individually
accounted for 10% or more of our revenue, during fiscal 2000.

     In the past, we have experienced fluctuation in the timing of orders from
our OEM customers, and we expect to continue to experience these fluctuations in
the future. During April 2001, ADIC informed us that it intends to transition
out of our router products upon consummation of its acquisition of Pathlight
Technology, Inc., which they subsequently completed on May 11, 2001. In April
2001, we decided to write off inventory specifically related to ADIC resulting
in a charge of approximately $47,000. Other fluctuations have resulted from,
among other things, OEM customers placing 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.

     In March 2000, we consummated our acquisition of Polaris Communications,
Inc. Polaris was a leading developer and marketer of System 390, or S/390,
mainframe communication interfaces and systems delivering increased connectivity
and bandwidth options to enterprise data centers, focusing on high-speed
connections between open-systems and mainframes. During fiscal 2001, in response
to deteriorating macroeconomic conditions and the resulting decline in demand
and product revenue, we reassessed our product strategy, initiated a market
sizing exercise on our core business and examined our expense structure in an
attempt to realign our 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 because of indications that
the carrying amounts might not be recoverable based on the expected undiscounted
cash flows from the Polaris business unit. Based on a valuation prepared by an
independent third-party appraisal company, we recorded a write-down of these
intangible assets totaling $25.0 million.

     We expect to continue to experience significant customer concentration in
sales to key OEM accounts for the foreseeable future. With respect to sales of
our products to OEMs, we recognize product revenue when products are shipped and
risk of loss has passed to the OEM. Product sales to distributors, resellers and
system integrators who do not have return rights are recognized at the time of
shipment. To the extent that we sell products to distributors, resellers 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. At October 31, 2001, our deferred
revenue totaled approximately $746,000. We provide a repair or replace warranty
of between 15 and 39 months following the sale of our products, and we provide a
reserve for warranty costs when the related product revenue is recognized.

     In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998, 1999, 2000 and
2001 aggregating approximately $19.6 million. 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 $15.4
million has been amortized as of October 31, 2001.


                                       26
<PAGE>


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

<Table>
<Caption>
                                           YEAR ENDED OCTOBER 31,
                                        ---------------------------
                                          1999      2000      2001
                                        -------   -------   -------
<S>                                     <C>       <C>       <C>
Cost of revenue .....................   $   133   $   288   $   123
Sales and marketing .................       372     4,373       215
Research and development ............       280       528       440
General and administrative ..........       420    22,501     6,283
                                        -------   -------   -------
  Total stock-based compensation ....   $ 1,205   $27,690   $ 7,061
                                        =======   =======   =======
</Table>

     We expect to amortize the remaining amounts of deferred stock-based
compensation as of October 31, 2001 in the periods indicated (in thousands):

<Table>
<Caption>
                                               YEAR ENDED OCTOBER 31,
                                         ---------------------------------
                                          2002     2003     2004    TOTAL
                                         ------   ------   ------   ------
<S>                                      <C>      <C>      <C>      <C>
Cost of revenue ......................   $   56   $   11   $   --   $   67
Sales and marketing ..................       64       13       --       77
Research and development .............       97       20       --      117
General and administrative ...........    2,541    1,011      101    3,653
                                         ------   ------   ------   ------
   Total stock-based compensation ....   $2,758   $1,055   $  101   $3,914
                                         ======   ======   ======   ======
</Table>

     In fiscal 2000, we purchased shares of Series A preferred stock of
Banderacom Corporation (formerly known as INH Semiconductor Corporation) for
$99,999. In May, 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 have eight patents issued, two allowed and nineteen patent applications
pending in the United States Patent and Trademark Office with respect to our
technology. We have thirty-five pending international patent applications (nine
in the European Patent Office, nine in Canada, seven in Japan, five in
Australia, two in Hong Kong, two in Indonesia and one in China). We also have
ten international patent applications pending under the Patent Cooperation
Treaty. However, none of our patents, including patents that may be issued in
the future, may adequately protect our technology from infringement or prevent
others from claiming that our technology infringes that of third parties.
Failure to adequately protect our intellectual property could materially harm
our business. In addition, our competitors may independently develop similar or
superior technology.

     We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $115.5
million at October 31, 2001. As of October 31, 2001, we had approximately $55.6
million of federal 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 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.


                                       27
<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 14. Financial Statements--Note 7 to Notes to Consolidated
Financial Statements.

<Table>
<Caption>
                                         FISCAL YEAR ENDED OCTOBER 31,
                                         -----------------------------
                                           1999      2000      2001
                                          -----     -----     -----
<S>                                        <C>       <C>       <C>
Revenue:
  Product revenue .....................    99.7%     98.3%     96.2%
  Other revenue .......................     0.3       1.7       3.8
                                          -----     -----     -----
          Total revenue ...............   100.0     100.0     100.0
Cost of revenue .......................    57.8      56.9      58.6
                                          -----     -----     -----
Gross margin ..........................    42.2      43.1      41.4
                                          -----     -----     -----
Operating expenses:
  Sales and marketing .................    23.3      35.2      40.1
  Research and development ............    27.8      38.2      47.4
  General and administrative ..........    13.7      26.4      26.1
  Amortization of intangibles .........      --      26.7      25.9
                                          -----     -----     -----
          Total operating expenses ....    64.8     126.5     139.5
                                          -----     -----     -----
Loss from operations ..................   (22.6)    (83.4)    (98.1)
Other income (expense) ................     1.7      12.8       7.4
                                          -----     -----     -----
Net loss ..............................   (20.9)%   (70.6)%   (90.7)%
                                          =====     =====     =====
</Table>


COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1999, 2000, AND 2001

     Revenue. Our total revenue increased 74.6% from $18.9 million in fiscal
1999 to $33.0 million in fiscal 2000, and increased 13.0 % to $37.3 million in
fiscal 2001. Without the inclusion of Polaris products and services from the
date of acquisition, total revenue increased 9.2% in fiscal 2001 compared to
fiscal 2000.

     Product revenue. Product revenue increased 72.3% from $18.9 million in
fiscal 1999 to $32.5 million in fiscal 2000, and increased 10.5% to $35.9
million in fiscal 2001. As a percentage of total revenue, product revenue
decreased from 99.7% in fiscal 1999 to 98.3% in fiscal 2000, and decreased to
96.2% in fiscal 2001. The increase in product revenue resulted from increased
sales of our storage router product family through an increased customer base
and increased sales to our significant OEMs, customers, distributors, resellers
and system integrators in conjunction with a growing demand for storage routers.
This broadened revenue base was also evidenced by volume from our top 10
customers representing 75% of our total revenue, two of which individually
accounted for 10.0% or more of our revenue. In addition, we launched the
Crossroads 4x50 line of high-performance intelligent routers that enable
companies to realize the benefits of managing their mission critical data using
applications such as server-free backup and LAN-free backup while protecting the
investments made in their current enterprise systems. Our 4x50 line accounted
for approximately 17.4% and 54.7% of our product revenue during fiscal 2000 and
2001, respectively.

     Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue increased 764.8% from $65,000 in fiscal
1999 to $562,000 in fiscal 2000, and increased 155.0% to $1.4 million fiscal
2001. The increase in fiscal 2001 was primarily due to the license of certain
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 $133,000, $288,000 and $123,000 during fiscal 1999, 2000 and
2001, respectively, increased 71.9% from $10.9 million in fiscal 1999 to $18.8
million in fiscal 2000, and increased 16.3% to $ 21.9 million in fiscal 2001.
These increases were primarily due to increases in unit sales volume and a
corresponding increase in costs related to manufacturing. Gross profit, net of
stock-based compensation, increased 78.4% from $8.0 million in fiscal 1999 to
$14.2 million in fiscal 2000, and 8.5% to $15.4 million in fiscal 2001. The
increase was primarily due to increased product revenue in each of these
periods. Gross margin increased from 42.2% in fiscal 1999 to 43.1% in fiscal
2000, and decreased to 41.4 % in fiscal 2001. This decrease was primarily due to
a lower margin product mix


                                       28
<PAGE>


resulting from the shift to our embedded routers during fiscal 2001. These
embedded routers are lower cost than the stand-alone box routers and this lower
cost is passed on to our OEM customers.

     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
$372,000, $4.4 million and $215,000 during fiscal 1999, 2000 and 2001,
respectively, increased 163.9% from $4.4 million in fiscal 1999 to $11.6 million
in fiscal 2000, and increased 28.8% to $15.0 million in fiscal 2001. The
increases in sales and marketing expenses during fiscal 2001 was primarily due
to increased consulting and professional services of approximately $110,000,
increased tradeshow related expenses of approximately $195,000, increased
equipment related expenses of approximately $305,000, increased depreciation of
approximately $195,000 and the hiring of additional sales and marketing
personnel resulting in approximately $1.8 million of increased compensation
expense. Sales and marketing personnel totaled 46, 56 and 37 at October 31,
1999, 2000 and 2001, respectively. We examined our expense structure in an
attempt to realign our business plan to achieve profitability resulting in a
reduction in force towards the end of fiscal 2001. As a percentage of total
revenue, sales and marketing expenses, net of stock-based compensation,
increased from 23.3% in fiscal 1999 to 35.2% in fiscal 2000 and increased to
40.1% in fiscal 2001. 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 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 $280,000, $528,000
and $440,000 during fiscal 1999, 2000 and 2001, respectively, increased 139.4%
from $5.3 million in fiscal 1999 to $12.6 million in fiscal 2000, and increased
40.1% to $17.7 million in fiscal 2001. This increase in research and development
expenses was primarily due to the hiring of additional research and development
personnel resulting in approximately $2.1 million of increased compensation
expense, increased prototyping costs of approximately $440,000 related to the
ongoing development of an expanded product line, increased consulting and
professional services of approximately $110,000 and approximately $530,000 of
increased depreciation expense. Research and development personnel totaled 58,
89 and 93 at October 31, 1999, 2000 and 2001. As a percentage of total revenue,
research and development expenses, net of stock-based compensation, increased
from 27.8% in fiscal 1999 to 38.2% in fiscal 2000, and increased to 47.4% in
fiscal 2001. 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 $420,000, $22.5 million and $6.3 million during
fiscal 1999, 2000 and 2001, respectively, increased 236.4% from $2.6 million in
fiscal 1999 to $8.7 million in fiscal 2000, and increased 11.7% to $9.8 million
in fiscal 2001. The increases in general and administrative expenses in fiscal
1999, 2000 and 2001 were primarily due to the hiring of administrative personnel
resulting in approximately $770,000, $2.0 million and $800,000 of increased
compensation expense, respectively. These additions were necessary to manage and
support the growth in our business as a public company. General and
administrative personnel totaled 27, 41 and 37 at October 31, 1999, 2000 and
2001. Legal costs associated with patent infringement and class action
shareholder lawsuits totaled approximately $0, $939,000 and $2.6 million during
fiscal 1999, 2000 and 2001, respectively. As a percentage of total revenue,
general and administrative expenses increased from 13.7% in fiscal 1999 to 26.4%
in fiscal 2000, and decreased to 26.1% in fiscal 2001.

     Litigation settlement. During fiscal 2001, we received $15.0 million from
ADIC in connection with the settlement of our patent infringement lawsuit filed
against Pathlight Technology, Inc. Pathlight 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.

     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 $319,600, $4.2 million and $2.8 million during


                                       29
<PAGE>


fiscal 1999, 2000 and 2001, respectively, representing 1.7%, 12.8% and 7.4% of
total revenue respectively. The decrease in other income, net was primarily due
to decreased interest income on short-term investments resulting from weakening
macro-economic conditions and, thus, lower yields on our investments.

LIQUIDITY AND CAPITAL RESOURCES

     Our principal sources of liquidity at October 31, 2001 consisted of $43.7
million in cash and cash equivalents and $10.0 million in short-term
investments.

     In January 2001, the Company extended its 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, 2002 at which time we intend to extend the term,
accordingly. As of October 31, 2001, there were no borrowings outstanding under
the revolving line of credit and no term loans outstanding.

     In February 2000, we entered into a $1.0 million letter of credit in
connection with the lease requirements of our new headquarters.

     During fiscal 2001, cash utilized for operating activities was $33,000,
compared to $9.7 million in fiscal 2000 and $5.3 million in fiscal 1999. The
decrease in net cash utilized reflects primarily proceeds from a $15.0 million
litigation settlement and decreases in accounts receivable and inventory and an
increase in accounts payable.

     During fiscal 2001, cash provided by investing activities was $1.9 million,
compared to $7.4 million in cash utilized for investing activities in fiscal
2000 and $20.1 million in fiscal 1999. The decrease in net cash utilized in
fiscal 2001 reflected the maturity of held-to-maturity investments, net of
purchases, of $7.6 million, and decreased capital expenditures. Capital
expenditures were $2.3 million, $10.7 million and $5.6 million in fiscal 1999,
2000 and 2001, 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 our business
expansion. We anticipate additional capital expenditures through fiscal 2002 of
at least $4.6 million.

     During fiscal 2001, cash utilized for financing activities was $611,000,
compared to $1.7 million in fiscal 2000 and $85.1 million in cash provided by
financing activities in fiscal 1999. The decrease in cash utilized in fiscal
2001 reflected the payment of our existing debt of $2.4 million in fiscal 2000
offset by $1.4 million used to repurchase 472,300 shares through our stock
buy-back program during fiscal 2001. 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 (which amount
includes the $12.0 million of proceeds received from the private placement of
our Series E preferred stock in August 1999), 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. On March 21, 2000, we consummated our
acquisition of Polaris Communications, Inc., and 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.

RECENT ACCOUNTING PRONOUNCEMENTS

     In June 1998, the Financial Accounting Standards Board, or FASB, issued,
Statement of Financial Accounting Standards, or SFAS, No. 133, "Accounting for
Derivatives and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments


                                       30
<PAGE>


and Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133, an amendment of FASB Statement No. 133," is effective for all fiscal
quarters of fiscal years beginning after June 15, 2000. We do not currently
engage or plan to engage in hedging activities or intend to own or plan to
purchase any derivative instruments.

     In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB No. 101") which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective for all fiscal quarters of fiscal years beginning after December 15,
1999. Effective November 1, 2000, we 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. Prior period financial
statements have not been restated to apply SAB No. 101 retroactively, however,
the pro forma amounts included in the Consolidated Statements of Operations
reflect the net loss and net loss per share assuming the Company had
retroactively applied SAB No. 101 to all periods presented.

     In June 2001, the FASB issued SFAS No. 141, "Business Combinations," ("SFAS
No. 141") 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 SFAS No. 141 will 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," ("SFAS No. 142") 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 adopted SFAS No. 142. We currently do not have
any goodwill, so we do not expect SFAS No. 142 to have a material impact on our
financial position or results of operations. In the event that SFAS No. 142 is
determined to have a material impact on our financial position or results of
operations, we would be required to report such changes no later than the
quarter ending January 31, 2002.

     In October 2001, the FASB issued SFAS No. 144, "Impairment of long-lived
Assets," ("SFAS No. 144") which supercedes SFAS No. 121, "Accounting for the
Impairment of long-lived Assets and for long-lived Assets to be disposed of"
("SFAS 121"). SFAS No. 144 retains the requirements of SFAS No. 121 to (a)
recognize an impairment loss only 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 the Company's fiscal year ended October 31, 2003. The
adoption of SFAS No. 144 is not expected to have any material adverse impact on
the Company's financial position or results of its operations.

ITEM 7A. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISKS

     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-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 115").
All of the cash equivalents and short-term investments are treated as held to
maturity under SFAS 115.


                                       31
<PAGE>


     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,
2001 was 3.29%. The fair value of securities held at October 31, 2001 was $23.3
million.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

     The information required by this item is included in Part IV Item 14 (a)(1)
and (2).

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

     None.


                                       32
<PAGE>

                                    PART III


ITEM 10. EXECUTIVE OFFICERS OF THE REGISTRANT.

     The following table sets forth, as of December 31, 2001, certain
information concerning our executive officers:

<Table>
<Caption>
  NAME                                AGE                  POSITION(S)
  ----                                ----                 -----------
<S>                                   <C>  <C>
  Larry Sanders ...................   55   President and Chief Executive Officer
  Reagan Y. Sakai .................   42   Vice President, Chief Financial Officer, Secretary and Treasurer
  Rich Lautzenheiser ..............   37   Vice President of Marketing
  Patricia E. Prince ..............   37   Vice President and Corporate Counsel
  Robert C. Sims ..................   34   Vice President of Engineering and Operations
  Allen R. Sockwell ...............   41   Vice President of Human Resources
</Table>


     LARRY SANDERS has served as our President and Chief Executive Officer since
November 2001. From February 2000 to November 2001, Mr. Sanders served as our
President and Chief Operating. High technology marketing, sales and management
form the core of his experience. Before Crossroads, he was the President and
Chief Executive Officer of Fujitsu Computer Products of America, where he was
responsible for the strategic direction and management of the company's sales,
marketing, research, development and manufacturing operations. While at Fujitsu
Computer Products, he successfully re-engineered the organization and
spearheaded its move toward becoming a leading global supplier of storage and
imaging products. He began his career in the high technology industry with IBM
where he held several sales and marketing management positions over 12 years.
From IBM, he moved on to Lockheed's Anaheim-based subsidiary, CalComp, a
computer graphics peripherals manufacturer and distributor that marketed more
than 100 products internationally. At CalComp, he held a number of senior
management positions, eventually serving as Group President. Immediately prior
to joining Fujitsu, he worked for Conner Peripherals, a $2.5 billion
manufacturer of hard disk drives and other peripheral storage devices. As the
vice president of Far East sales and then vice president of international sales,
he led the entire sales, marketing and support organization in the Far East and
Europe.

     REAGAN Y. SAKAI has served as our Vice President, Chief Financial Officer,
Secretary and Treasurer since May 1999. From August 1996 to April 1999, he
served as the Director of Corporate Finance and as Division Controller of the
Eagle Product Division at Exabyte, a public data storage company. From April
1994 to July 1996, he served as Director of Corporate Financial Planning and
Analysis at Maxtor, a disk drive company. He also worked extensively on
corporate cost reductions and strategic merger and acquisitions analyses. From
1989 to 1994, Mr. Sakai managed and directed all treasury activities at McDATA
Corporation including planning, forecasting, product line analyses, risk
management, and external financial relationships & partnerships. From 1986 to
1989, he was with StorageTek Corporation, where he managed the International
Business Planning group responsible for the financial planning & analysis for 8
foreign subsidiaries and 3 distributor groups. Mr. Sakai holds a B.S. in finance
and an M.B.A., both from the University of Colorado.

     RICH LAUTZENHEISER has served as our Vice President of Marketing since
March 2001. From June 2000 to March 2001, Mr. Lautzenheiser served as our
Director of Product Management for Extended Routers and Active Fabric(R). From
March 2000 to June 2000, Mr. Lautzenheiser served as our Senior Marketing
Manager for InfiniBand products. Prior to joining Crossroads, Lautzenheiser was
the Strategic Marketing Manager for the Tachyon family of Fibre Channel protocol
controllers at Agilent Technologies and Hewlett-Packard Company. He also held
various strategic marketing and product marketing positions at Symbios Logic, a
storage system, IO components and ASIC company that was acquired by LSI Logic in
1998. Rich holds a BSEE from the University of Cincinnati, and an MBA from the
University of Colorado.

     PATRICIA E. PRINCE has served as our Vice President and Corporate Counsel
since July 2000. From October 1999 to July 2000, Ms. Prince served as our
General Counsel. Prior to joining Crossroads, she served as the general counsel
for Dazel Corp. from 1996 to May 1999, when it was acquired by Hewlett Packard.
From 1994 to 1996, she was with Tadpole Technology, Inc., a wholly owned
subsidiary of Tadpole Technology Plc, a listed corporation on the London Stock
Exchange. At Tadpole, she last served as counsel for the designer and
manufacturer of portable, mobile computing solutions for professional markets.
Prince is licensed to practice law in New York and Connecticut and holds a
bachelor's degree from Indiana University and a J.D. from Pace University.


                                       33
<PAGE>

     ROBERT C. SIMS has served as our Vice President of Engineering and
Operations since April 2001. 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. Prior to joining
Crossroads, he 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. Sims
holds a bachelor's in electrical engineering from Colorado State University.

     ALLEN R. SOCKWELL joined us as our Vice President of Human Resources in
September 1999. From October 1998 to August 1999, Mr. Sockwell served as Vice
President of Human Resources, and from February 1996 to October 1998 as Director
of Human Resources, at Compaq, where he managed human resources activities for
Compaq's global supply chain management and manufacturing operations. From June
1982 to February 1996, Mr. Sockwell was employed by IBM where he last served as
Manager of Human Resources for a semiconductor design and fabrication facility.
Mr. Sockwell holds a B.S. in general management from Purdue 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."

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."

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."

                                       34
<PAGE>


                                    PART IV


ITEM 14. 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,  2000 and 2001 ...............   F-2
Consolidated Statements of Operations for each of the three
   years in the period ended October 31, 2001 ..............................   F-3
Consolidated  Statements of Changes in Stockholders' Equity for
   each of the three years in the period ended October 31, 2001 ............   F-4
Consolidated Statements of Cash Flows for each of the three
   years in the period ended October 31, 2001 ..............................   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.

<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 Stock Incentive Plan (filed as Exhibit
          10.2 to the IPO Registration Statement and incorporated herein by
          reference)

10.3*     Amendment No.1 to Crossroads Systems, Inc. 1999 Stock Incentive Plan
          (filed as Exhibit 99.2 to the Registrant's Statement on Form S-8 (SEC
          File No.333-62336) and incorporated herein by reference)

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

10.5*     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)
</Table>


                                       35
<PAGE>


<Table>
<Caption>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<S>       <C>
10.6*+    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)

10.7*     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)

10.8*     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)

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

10.10*    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)

10.11*    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)

10.12     Letter Agreement dated February 19, 2001 by and between Registrant and
          John Middleton

10.13*    Letter Agreement dated February 28, 2000 by and between Registrant and
          Larry Sanders (filed as Exhibit 10.13 to Registrant's Annual Report on
          Form 10-K dated January 16, 2001 and incorporated herein by reference)

10.14*    Settlement and License Agreement dated June 12, 2001 by and between
          Registrant and Advanced Digital Information Corporation (files as
          Exhibit 10.16 to Registrants Quarterly Report on Form 10-Q dated June
          14, 2001 and incorporated herein by reference)

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
</Table>


*    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.

          None.


                                       36
<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/ Larry Sanders
                                          -------------------------------------
                                          Larry Sanders,
                                          President and Chief Executive Officer

                                POWER OF ATTORNEY

     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby severally constitutes and appoints, Larry Sanders and
Reagan Y. Sakai, and each or any of them, his 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/ LARRY SANDERS           President and Chief Executive Officer     January 17, 2002
----------------------------     (principal executive officer), Director
Larry Sanders

    /s/ REAGAN Y. SAKAI          Chief Financial Officer (principal        January 17, 2002
----------------------------     financial and accounting officer)
Reagan Y. Sakai


     /s/ BRIAN R. SMITH          Chairman of the Board                     January 17, 2002
----------------------------
Brian R. Smith

  /s/ RICHARD D. EYESTONE        Director                                  January 17, 2002
----------------------------
Richard D. Eyestone

   /s/ DAVID L. RIEGEL           Director                                  January 17, 2002
----------------------------
David L. Riegel

    /s/ WILLIAM P. WOOD          Director                                  January 17, 2002
----------------------------
William P. Wood

     /s/ PAUL S. ZITO            Director                                  January 17, 2002
----------------------------
Paul S. Zito
</Table>


<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, 2000 and 2001, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 2001 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 30, 2001


                                      F-1
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<Table>
<Caption>
                                                ASSETS

                                                                                     OCTOBER 31,
                                                                                ----------------------
                                                                                   2000         2001
                                                                                ---------    ---------
<S>                                                                             <C>          <C>
Current assets:
  Cash and cash equivalents .................................................   $  42,447    $  43,686
  Short-term investments ....................................................      17,591       10,000
                                                                                ---------    ---------
        Total cash, cash equivalents and short-term investments .............      60,038       53,686
  Accounts receivable, net of allowance for doubtful
     accounts of $231 and $388, respectively ................................       5,590        3,768
  Inventories, net ..........................................................       3,918        3,080
  Prepaids and other current assets .........................................       2,037        1,894
                                                                                ---------    ---------
          Total current assets ..............................................      71,583       62,428
Note receivable from related party, net .....................................         159          244
Property and equipment, net .................................................      10,062       11,021
Intangibles, net ............................................................      35,686          997
Other assets ................................................................         558          713
                                                                                ---------    ---------
          Total assets ......................................................   $ 118,048    $  75,403
                                                                                =========    =========

            LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
                              STOCKHOLDERS' EQUITY

Current liabilities:
  Accounts payable ..........................................................   $   4,852    $   7,070
  Accrued expenses ..........................................................       2,933        2,744
  Accrued warranty costs ....................................................         414          597
  Deferred revenue ..........................................................       1,097          746
                                                                                ---------    ---------
        Total current liabilities ...........................................       9,296       11,157

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,
   27,690,673 and 27,542,664 shares issued and outstanding, respectively ....          28           28
Additional paid-in capital ..................................................     183,390      184,042
Deferred stock-based compensation ...........................................      (9,734)      (3,914)
Notes receivable from stockholders ..........................................        (249)        (118)
Accumulated deficit .........................................................     (64,448)    (115,535)
Treasury stock at cost (405,961 and 467,794 shares, respectively) ...........        (235)        (257)
                                                                                ---------    ---------
       Total stockholders' equity ...........................................     108,752       64,246
                                                                                ---------    ---------
       Total liabilities, redeemable convertible preferred
          stock and stockholders' equity ....................................   $ 118,048    $  75,403
                                                                                =========    =========
</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>
                                                                                   YEARS ENDED OCTOBER 31,
                                                                        --------------------------------------------
                                                                             1999           2000           2001
                                                                        ------------    ------------    ------------
<S>                                                                     <C>             <C>             <C>
Revenue:
   Product revenue ..................................................   $     18,859    $     32,486    $     35,896
   Other revenue ....................................................             65             562           1,434
                                                                        ------------    ------------    ------------
               Total revenue ........................................         18,924          33,048          37,330
Cost of revenue (including stock-based compensation expense
   of $133, $288 and $123, respectively) ............................         11,079          19,104          22,013
                                                                        ------------    ------------    ------------
Gross profit ........................................................          7,845          13,944          15,317
                                                                        ------------    ------------    ------------
Operating expenses:
   Sales and marketing (including stock-based compensation
     expense of $372, $4,373 and $215, respectively) ................          4,781          16,007          15,202
   Research and development (including stock-based
      compensation expense of $280, $528 and $440, respectively) ....          5,551          13,143          18,118
   General and administrative (including stock-based
      compensation expense of $420, $22,501 and $6,283,
        respectively) ...............................................          3,017          31,242          16,043
   Amortization of intangibles ......................................             --           8,808           9,680
   Write-down of intangibles ........................................             --              --          25,007
   Litigation settlement ............................................             --              --         (15,000)
                                                                        ------------    ------------    ------------
               Total operating expenses .............................         13,349          69,200          69,050
                                                                        ------------    ------------    ------------
Loss from operations ................................................         (5,504)        (55,256)        (53,733)
Other income (expense):
   Interest income ..................................................            433           4,347           2,763
   Interest expense .................................................           (122)            (37)             --
   Other income (expense) ...........................................              8             (82)             13
                                                                        ------------    ------------    ------------
       Other income, net ............................................            319           4,228           2,776
                                                                        ------------    ------------    ------------
Net loss before cumulative effect of accounting change ..............         (5,185)        (51,028)        (50,957)
Cumulative effect of accounting change ..............................             --              --            (130)
                                                                        ------------    ------------    ------------
Net loss ............................................................         (5,185)        (51,028)        (51,087)
Accretion on redeemable convertible preferred stock .................           (247)             --              --
                                                                        ------------    ------------    ------------
Net loss attributable to common stock ...............................   $     (5,432)   $    (51,028)   $    (51,087)
Basic and diluted net loss per share:
   Before cumulative effect of accounting change ....................   $      (0.74)   $      (1.93)   $      (1.85)
   Cumulative effect of accounting change ...........................             --              --           (0.01)
                                                                        ------------    ------------    ------------
       Basic and diluted net loss per share .........................   $      (0.74)   $      (1.93)   $      (1.86)
                                                                        ============    ============    ============
Pro forma amounts assuming accounting change is applied
   retroactively:
   Net loss attributable to common stock ............................   $     (5,568)   $    (51,085)   $         --
   Net loss per share, basic and diluted ............................   $      (0.75)   $      (1.93)   $         --
                                                                        ------------    ------------    ------------
Shares used in computing basic and diluted net loss per share .......      7,377,984      26,466,601      27,414,078
                                                                        ============    ============    ============
</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       ACCUMULATED
                                        SHARES      AMOUNT        CAPITAL     COMPENSATION  STOCKHOLDERS     DEFICIT
                                     -----------   ----------    ----------   ------------  ------------   -----------
<S>                                   <C>          <C>           <C>          <C>           <C>            <C>
Balance at October 31, 1998 .......    6,378,468            6            72          (188)           --        (8,235)
  Issuance of common stock
     upon exercise of stock
     options ......................    2,534,112            3           753            --          (447)           --
  Stock-based compensation ........           --           --         4,735        (3,530)           --            --
  Accretion on redeemable
     convertible preferred
     stock ........................           --           --          (247)           --            --            --
  Conversion of redeemable
     convertible preferred
     stock ........................   13,599,839           14        30,920            --            --            --
  Initial public offering .........    4,037,500            4        66,228            --            --            --
  Accrued interest on
     notes receivable from
     stockholders .................           --           --            --            --           (16)           --
  Net loss ........................           --           --            --            --            --        (5,185)
                                     -----------   ----------    ----------    ----------    ----------    ----------
Balance at October 31, 1999 .......   26,549,919           27       102,461        (3,718)         (463)      (13,420)
  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 ........................           --           --            --            --            --       (51,028)
                                     -----------   ----------    ----------    ----------    ----------    ----------
Balance at October 31, 2000 .......   27,690,673           28       183,390        (9,734)         (249)      (64,448)
  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 ........................           --           --            --            --            --       (51,087)
                                     -----------   ----------    ----------    ----------    ----------    ----------
Balance at October 31, 2001 .......  $27,542,664   $       28    $  184,042    $   (3,914)   $     (118)   $ (115,535)
                                     -----------   ----------    ----------    ----------    ----------    ----------
<Caption>
                                                      TOTAL
                                      TREASURY    STOCKHOLDERS'
                                       STOCK         EQUITY
                                     ----------   -------------
<S>                                   <C>         <C>
Balance at October 31, 1998 .......          (2)       (8,347)
  Issuance of common stock
     upon exercise of stock
     options ......................          --           309
  Stock-based compensation ........          --         1,205
  Accretion on redeemable
     convertible preferred
     stock ........................          --          (247)
  Conversion of redeemable
     convertible preferred
     stock ........................          --        30,934
  Initial public offering .........          --        66,232
  Accrued interest on
     notes receivable from
     stockholders .................          --           (16)
  Net loss ........................          --        (5,185)
                                     ----------    ----------
Balance at October 31, 1999 .......          (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)
                                     ----------    ----------
Balance at October 31, 2000 .......        (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)
                                             --       (51,087)
  Net loss ........................  ----------    ----------
                                     $     (257)   $   64,246
Balance at October 31, 2001 .......  ----------    ----------
</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,
                                                                       --------------------------------
                                                                         1999        2000        2001
                                                                       --------    --------    --------
<S>                                                                    <C>         <C>         <C>
  Cash flows from operating activities:
    Net loss .......................................................   $ (5,185)   $(51,028)   $(51,087)
    Adjustments to reconcile net loss to net cash used in
       operating activities:
       Depreciation ................................................        971       2,942       4,640
       Amortization of intangibles .................................         --       8,808       9,680
       Write-down of intangibles ...................................         --          --      25,007
       Stock-based compensation ....................................      1,205      27,690       7,061
       Loss on disposal of property and equipment ..................          9          --          24
       Provision for doubtful accounts receivable ..................         81         136         157
       Provision for excess and obsolete inventory .................        296       1,758        (309)
       Changes in assets and liabilities:
         Accounts receivable .......................................     (2,829)     (1,664)      1,665
         Inventories ...............................................     (2,678)     (2,006)      1,147
         Prepaids and other assets .................................       (703)       (978)        143
         Accounts payable ..........................................      2,453       1,505       2,218
         Accrued expenses ..........................................        906       2,047        (189)
         Accrued warranty expenses .................................         --         105         183
         Deferred revenue and other ................................        138         994        (373)
                                                                       --------    --------    --------
            Net cash used in operating activities ..................     (5,336)     (9,691)        (33)
                                                                       --------    --------    --------
  Cash flows from investing activities:
    Purchase of property and equipment .............................     (2,306)    (10,653)     (5,623)
    Cash acquired, net of payments for business acquisitions .......         --       1,013          --
    Proceeds from sale of property and equipment ...................         21          --          --
    Purchase of held-to-maturity investments .......................    (19,500)    (17,591)    (11,967)
    Maturity of held-to-maturity investments .......................      2,239      19,500      19,558
    Payment of note receivable from related party ..................       (100)        226         140
    Other assets ...................................................       (456)         60        (225)
                                                                       --------    --------    --------
            Net cash provided by (used in) investing activities ....    (20,102)     (7,445)      1,883
                                                                       --------    --------    --------
  Cash flows from financing activities:
    Proceeds from issuance of common stock .........................        309         851         825
    Proceeds from initial public offering ..........................     72,675          --          --
    Costs associated with initial public offering ..................     (6,443)        (40)         --
    Proceeds from issuance of preferred stock, net of
           issuance costs ..........................................     17,249          --          --
    Repurchase and retirement of common stock ......................         --          --      (1,414)
    Purchase of treasury stock .....................................         --        (233)        (22)
    Borrowings under long-term debt agreements .....................      1,750          --          --
    Repayment of long-term indebtedness ............................       (477)     (2,356)         --
    Other ..........................................................         --          41          --
                                                                       --------    --------    --------
            Net cash provided by (used in) financing activities ....     85,063      (1,737)       (611)
                                                                       --------    --------    --------
  Net increase (decrease) in cash and cash equivalents .............     59,625     (18,873)      1,239
  Cash and cash equivalents, beginning of period ...................      1,695      61,320      42,447
                                                                       --------    --------    --------
  Cash and cash equivalents, end of period .........................   $ 61,320    $ 42,447    $ 43,686
                                                                       ========    ========    ========
  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
                        (IN THOUSANDS, EXCEPT SHARE DATA)


1. ORGANIZATION AND BUSINESS:

     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 the leading provider of enterprise data center routing solutions
for open system storage area networks ("SANs") including S/390 connections.
Crossroads sells its products and services primarily to leading storage system
and server original equipment manufacturers, distributors, resellers, system
integrators and storage service providers. The Company is organized and operates
as one business segment. All intercompany balances and transactions have been
eliminated in consolidation.

     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 (Note 3).

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

          Fiscal Year

     During 1999, the Company changed its fiscal year-end from December 31 to
October 31. The Company's consolidated financial statements have been restated
for all periods presented to reflect this change. This change did not have a
material impact on Crossroads' financial statements for all periods presented.

          Principles of Consolidation

     The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. See Note 3 for information regarding the
acquisition of Polaris. All inter-company 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 revenues and expenses during
the reporting periods. 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 and on deposit. All
highly liquid investments with maturity of three months or less when purchased
are considered to be cash equivalents. Cash equivalents consist primarily of
cash deposited in money market accounts and high-grade commercial paper. Cash
equivalents totaled $41.2 and $42.7 million at October 31, 2000 and 2001,
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 $1.0 million, which is secured by a $1.0 million certificate of
deposit. 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 high grade commercial paper and
corporate debt 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.


                                      F-6
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


          Inventories

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

     Inventories consist of the following:

<Table>
<Caption>
                                                                YEAR ENDED OCTOBER 31,
                                                                ----------------------
                                                                   2000       2001
                                                                 -------    -------
<S>                                                             <C>         <C>
Raw materials ................................................   $ 4,154    $ 3,692
Work-in-process ..............................................       183         --
Finished goods ...............................................     1,670      1,168
                                                                 -------    -------
                                                                   6,007      4,860
        Less:  Allowance for excess and obsolete inventory ...    (2,089)    (1,780)
                                                                 -------    -------
                                                                 $ 3,918    $ 3,080
                                                                 =======    =======
</Table>

          Investments

     The Company accounts for its investment in Banderacom Corporation (formerly
INH Semiconductor Corporation) ("Banderacom") using the cost method as the
Company's investment represents less than a 20% ownership interest and the
Company is not able to exert significant influence over Banderacom. The
Company's investment in Banderacom, which is included in other non-current
assets, was approximately $100 and $292 at October 31, 2000 and 2001,
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. The Company had trade accounts receivable from four
customers, which comprised approximately 51% and 36% of total trade accounts
receivable at October 31, 2000 and 2001, 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's products are concentrated in the storage area network
industry that is highly competitive and subject to rapid technological change.
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. 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 percentage of sales to significant customers was as follows:

<Table>
<Caption>
                                           YEARS ENDED OCTOBER 31,
                                           -----------------------
                                           1999      2000      2001
                                           ----      ----      ----
<S>                                       <C>       <C>        <C>
            Customer A ................     36%       33%         2%
            Customer B.................     36%       21%        23%
            Customer C.................      4%        7%         8%
            Customer D.................      3%        6%        26%
</Table>

     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


                                      F-7
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


financial condition or results of operations. During April 2001, Advanced
Digital Information Corporation ("ADIC"), Customer C above, informed the Company
that it intends to transition out of its router products upon consummation of
its acquisition of Pathlight Technology, Inc. ("Pathlight"), which they
subsequently completed on May 11, 2001. Sales to ADIC were approximately $2.3
million and $3.0 million during the year ended October 31, 2000 and 2001,
respectively. In April, we decided to write off inventory specifically related
to ADIC resulting in a charge of approximately $47.

          Fair Value of Financial Instruments

     The fair values of the Company's cash and cash equivalents and accrued
expenses approximate their carrying values due to their short maturities. The
fair value of the Company's debt obligations approximates their carrying values
based on interest rates currently available for instruments with similar terms.

          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.

     Property and equipment consist of the following:

<Table>
<Caption>
                                                            OCTOBER 31,
                                                       --------------------
                                                         2000        2001
                                                       --------    --------
<S>                                                    <C>         <C>
Equipment ..........................................   $ 12,013    $ 17,509
Furniture and fixtures .............................      1,911       1,878
Leasehold improvements .............................        916         906
                                                       --------    --------
                                                         14,840      20,293
Less: accumulated depreciation and amortization ....     (4,778)     (9,272)
                                                       --------    --------
                                                       $ 10,062    $ 11,021
                                                       ========    ========
</Table>

          Goodwill and Purchased Intangible Assets

     Goodwill and purchased intangible assets are carried at cost less
accumulated amortization. Amortization is computed using the straight-line
method over the economic lives of the respective assets, generally three to
seven years.

          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

     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. Prior period financial statements have not been restated to
apply SAB 101 retroactively, however, the pro forma amounts included in the
Consolidated Statements of Operations reflect the net loss and net loss per
share assuming the Company had retroactively applied SAB 101 to all periods
presented.


                                      F-8
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


     Revenue from product sales to customers that do not have rights of return,
including product sales to original equipment manufacturers and certain
distributors, resellers and system integrators, are recognized upon shipment.
Sales and cost of sales related to customers that have 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
revenues as of October 31, 2000 and 2001 were approximately $1,097 and $746,
respectively.

          Advertising Costs

     The Company expenses all advertising costs as incurred.

          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, 1999, 2000,
and 2001. The Company has provided a full valuation allowance because the
realization of tax benefits associated with net operating loss carry-forwards 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.

     The Company has excluded all redeemable convertible preferred stock, up
until the date of their conversion, and all outstanding stock options from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of common stock
equivalents excluded from the calculations


                                      F-9
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


of diluted net loss per common share were 15,103,255, 4,653,318 and 4,980,563
for the years ended October 31, 1999, 2000 and 2001, 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, the design, development, manufacturing, marketing and selling of Fibre
Channel storage solutions for SAN's. Service revenues to date have not been
significant. The Company operates principally in one geographic area, the United
States. Major customers are discussed above.

          Impairment of Long-Lived Assets

     The Company assesses long-lived assets for impairment under FASB's SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets to be Disposed Of."
Under those rules, goodwill associated with assets acquired in a purchase
business combination is included in impairment evaluations when events or
circumstances exist that indicate the carrying amount of those assets may not be
recoverable based on the undiscounted cash flows of the businesses acquired over
the remaining amortization period. Should the review indicate that goodwill is
not recoverable, the Company's carrying value of the goodwill would be reduced
by the estimated shortfall of the cash flows.

          Recent Accounting Pronouncements

     In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. SFAS No. 133, as amended by SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133, an amendment of FASB Statement No.
133," is effective for all fiscal quarters of fiscal years beginning after June
15, 2000. The Company does not currently engage or plan to engage in hedging
activities or intend to own or plan to purchase any derivative instruments.

     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 SFAS No. 141 will 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," ("SFAS No. 142") 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 adopted SFAS No. 142. The Company
currently does not have any goodwill, so it does not expect SFAS No. 142 to have
a material impact on its financial


                                      F-10
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


position or results of operations. In the event that SFAS No. 142 is determined
to have a material impact on its financial position or results of operations,
the Company would be required to report such changes no later than the quarter
ending January 31, 2002.

     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
only 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 the
Company's fiscal year ended October 31, 2003. The adoption of SFAS No. 144 is
not expected to have any material adverse impact on the Company's financial
position or results of its operations.

          Reclassifications

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

3. ACQUISITION OF POLARIS:

     On March 21, 2000, Crossroads consummated its acquisition of Polaris.
Polaris was a leading developer and marketer of S/390 mainframe communication
interfaces and systems delivering increased connectivity and bandwidth options
to enterprise data centers, focusing on high-speed connections between
open-systems and mainframes. The aggregate purchase price of $46.6 million
consisted of the issuance of 428,625 shares of Crossroads common stock valued at
approximately $44.5 million, the issuance of 21,375 options to purchase
Crossroads common stock valued at approximately $1.9 million and $0.2 million of
other direct acquisition costs. The results of operations of Polaris and the
estimated fair value of the assets acquired and liabilities assumed are included
in Crossroads' financial statements from the date of acquisition.

     The purchase price was allocated to the assets acquired and liabilities
assumed based on Crossroads' estimates of fair value. The fair value assigned to
intangible assets acquired was based on a valuation prepared by an independent
third-party appraisal company and consists of proven research and development,
the in-place workforce and the installed customer base. The purchase price
exceeded the amounts allocated to tangible and intangible assets acquired less
liabilities assumed by approximately $41.3 million. The assigned values are
being amortized on a straight-line basis. Amortization of intangibles totaled
approximately $8.8 and $9.7 million for the fiscal years ended October 31, 2000
and 2001, respectively.

     During the fiscal 2001, in response to uncertain macroeconomic conditions
and the resulting decline in demand and product revenue, management reassessed
Crossroads' 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 as there were indications that the carrying amounts
might not be recoverable based on the expected undiscounted cash flows from the
Polaris business unit. Based on a valuation prepared by an independent
third-party appraisal company, Crossroads recorded a write-down of these
intangible assets totaling $25.0 million.


                                      F-11
<PAGE>
                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


     The Company's allocation of the purchase price and the resulting assigned
values for the net assets acquired are as follows:

<Table>
<Caption>
                                                     VALUE ASSIGNED     AMORTIZABLE
                                                     TO NET ASSETS         LIFE
BALANCE SHEET CATEGORY                                 ACQUIRED           (YEARS)
----------------------                               --------------     -----------
<S>                                                  <C>                <C>
   Intangible assets:
      Proven research and development ............   $  1,030               5 - 7
      In-place workforce .........................      1,800                   4
      Customer base ..............................        340                   5
      Goodwill ...................................     41,324                   3
                                                     --------
                                                       44,494
   Less:
      Accumulated amortization ...................    (18,490)
      Write-down of intangibles ..................    (25,007)
                                                     --------
   Intangible assets, net at October 31, 2001 ....   $    997
                                                     ========
   Other assets, net of liabilities assumed ......   $  2,121
                                                     ========
</Table>

     The following table represents unaudited consolidated pro forma information
as if Crossroads and Polaris had been combined as of the beginning of the
periods presented. The pro forma data is presented for illustrative purposes
only and is not necessarily indicative of the combined financial position or
results of operations of future periods or the results that actually would have
occurred had Crossroads and Polaris been a combined company during the specified
periods.

     The pro forma combined results include the effects of the purchase price
allocation, amortization of intangible assets, and certain adjustments required
to conform to Crossroads' accounting policies.

<Table>
<Caption>
                                 PRO FORMA
                                YEAR ENDED
                                OCTOBER 31,
                           ---------------------
                             2000        2001
                           --------    --------
<S>                        <C>         <C>
Total revenue ..........   $ 35,248    $ 37,330
Net loss ...............    (51,087)    (62,652)
Net loss per share .....   $  (2.33)   $  (1.86)
</Table>


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 million with a
borrowing base of 80% of eligible accounts receivable. The line of credit
matures on February 1, 2002 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. 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, 2000 and 2001.

     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. During
certain quarters in 1999 and 2000, the Company was not in compliance with its
profitability covenant.

     In December 1999, the Company paid off the remaining balance, principal
plus accrued interest, under its existing term loan and equipment line.

5. COMMITMENTS AND CONTINGENCIES:

          Leases

     The Company leases office space and equipment under long-term operating
lease agreements that expire on various dates through January 31, 2006. Rental
expense under these agreements was approximately $466, $1,611 and $2,326 for the
years ended October 31, 1999, 2000, and 2001, respectively. In April 2000,
Crossroads relocated
                                      F-12
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


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
March 31, 2006, and represents a lease commitment of $1.7 million per year for
the first three years and $1.8 million per year, thereafter. In conjunction with
entering into the lease agreement, Crossroads signed an unconditional,
irrevocable letter of credit with a bank for $1.0 million, which is secured by a
$1.0 million certificate of deposit.

     The minimum annual future rentals under the terms of these leases at
October 31, 2001 are as follows:

<Table>
<Caption>
FISCAL YEAR
-----------
<S>                                                <C>
    2002........................................   $ 1,986
    2003........................................     2,008
    2004........................................     1,963
    2005........................................     1,827
    2006........................................       758
    thereafter..................................        --
                                                   -------
                                                   $ 8,542
                                                   =======
</Table>

          Legal Proceedings

          Intellectual Property Litigation

     On March 31, 2000, Crossroads filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral has infringed one of its
patents (5,941,972, hereinafter "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 have 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.

     On April 14, 2000, Crossroads 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 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 in the statement of
operations for fiscal 2001. In connection with the settlement of the lawsuit,
the Company granted ADIC a non-exclusive license under the related patent.

     On May 19, 2000, Chaparral filed a counter-suit against Crossroads alleging
tortuous 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 and the
Company filed a motion to dismiss, which was denied. The plaintiffs are seeking
unspecified amounts of compensatory damages, interests and costs, including
legal fees. The Company denies the allegations in the complaint and intends 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 the Company
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 lawsuit. The inability
of the Company to prevail in this action could have a material adverse effect on
the Company's future business, financial condition and results of operations.


                                      F-13
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


          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. The Company has not answered 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 the Company 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 inability of the Company to prevail in
this action could have a material adverse effect on the Company's future
business, financial condition and results of operations.

          Other

     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.

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.

          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, 2000 and 2001, no shares of preferred stock
were issued or outstanding.

7. STOCKHOLDERS' EQUITY:

          Amendment to Certificate of Incorporation and Stock Split

     On September 15, 1999, the Company's board of directors authorized the
amendment of the Company's Certificate of Incorporation and changed the
aggregate number of shares of capital stock authorized to be issued to
175,000,000 shares of common stock and 25,000,000 shares of preferred stock. The
board of directors also authorized and the Company effected a three-for-two
stock split for outstanding shares of common stock. All share information
included in the accompanying consolidated financial statements and notes thereto
have been retroactively adjusted to reflect the stock split and the increase in
the number of authorized shares.

          Initial Public Offering

     In October 1999, the Company completed its initial public offering of
4,312,500 shares of its common stock including the exercise of the underwriters'
over-allotment option. A total of 4,037,500 of those shares of common stock were
sold by the Company resulting in net proceeds of $66,232 after deducting
offering expenses and the underwriting discount of $6,443.

          Deferred Compensation

     In connection with the grant of certain stock options to our employees and
directors, the Company recorded


                                      F-14
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


deferred compensation aggregating $19.6 million in 1998, 1999, 2000, and 2001,
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 $15.4 million has been amortized as of October 31, 2001.

     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,
                                        ---------------------------
                                          1999      2000      2001
                                        -------   -------   -------
<S>                                     <C>       <C>       <C>
Cost of revenue .....................   $   133   $   288   $   123
Sales and marketing .................       372     4,373       215
Research and development ............       280       528       440
General and administrative ..........       420    22,501     6,283
                                        -------   -------   -------
  Total stock-based compensation ....   $ 1,205   $27,690   $ 7,061
                                        =======   =======   =======
</Table>

     We expect to amortize the remaining amounts of deferred stock-based
compensation as of October 31, 2001 in the periods indicated (in thousands):

<Table>
<Caption>
                                               YEAR ENDED OCTOBER 31,
                                         ---------------------------------
                                          2002     2003     2004     TOTAL
                                         ------   ------   ------   ------
<S>                                      <C>      <C>      <C>      <C>
Cost of revenue ......................   $   56   $   11   $   --   $   67
Sales and marketing ..................       64       13       --       77
Research and development .............       97       20       --      117
General and administrative ...........    2,541    1,011      101    3,653
                                         ------   ------   ------   ------
   Total stock-based compensation ....   $2,758   $1,055   $  101   $3,914
                                         ======   ======   ======   ======
</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.

     The 1999 Plan provides for a maximum number of common shares to be
optioned/issued of 6,375,000. 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 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 two
percent (2%) 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 500,000 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.

     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


                                      F-15
<PAGE>


                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


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,
                                    ---------------------------------------------------------------------------
                                            1999                       2000                     2001
                                    ---------------------    -----------------------    -----------------------
                                                 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.................       2,614,125    $  0.16       1,470,336    $  6.73      3,432,571    $ 36.27
Granted......................       1,590,646       6.48       2,825,895      45.65      2,924,400       4.64
Exercised....................      (2,534,112)      0.30        (438,990)      0.64       (117,039)      1.30
Forfeited....................        (200,322)      0.45        (424,668)     33.21     (1,843,869)     48.20
                                   ----------                -----------               -----------
Outstanding at end of
   period....................       1,470,337    $  6.73       3,432,571    $ 36.27      4,396,063    $ 11.16
                                   ==========                ===========               ===========
Options exercisable at the
   end of the period.........       1,470,337                    841,371                 1,215,635
                                   ==========                ===========               ===========
</Table>


     At October 31, 2001 the Company had the right to repurchase 63,229 shares
of outstanding common stock issued upon exercise of stock options with a
weighted average exercise price of $0.98.

     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 Plan under the
provisions of SFAS No. 123. Had compensation cost for the Plan been determined
based upon the fair value at the grant date for employee awards under the 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:

<Table>
<Caption>
                                                                      YEAR ENDED OCTOBER 31,
                                                                 ---------------------------------
                                                                    1999        2000       2001
                                                                 ---------   ---------   ---------
<S>                                                              <C>         <C>         <C>
Net loss attributable to common stock -- as reported .........   $ (5,432)   $(51,028)   $(51,087)
Net loss attributable to common stock -- pro forma ...........   $ (5,625)   $(43,242)   $(47,966)
Basic and diluted net loss per share -- as reported ..........   $  (0.74)   $  (1.93)   $  (1.86)
Basic and diluted net loss per share -- pro forma ............   $  (0.76)   $  (1.63)   $  (1.75)
</Table>


<Table>
<Caption>
                                                                       YEAR ENDED OCTOBER 31,
                                                                   -----------------------------
                                                                    1999        2000       2001
                                                                   ------     -------     ------
<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................................     $3,933     $68,757     $7,204
                                                                   ======     =======     ======
               Per share value................................     $ 6.65     $ 33.48     $ 3.39
                                                                   ======     =======     ======
  Exercise price less than the market price of
     stock on the grant date:
               Aggregate value................................     $4,891     $60,571     $2,719
                                                                   ======     =======     ======
               Per share value................................     $ 4.90     $ 78.95     $ 5.44
                                                                   ======     =======     ======
  Exercise price greater than the market price of
     stock on the grant date:
               Aggregate value................................     $   --     $    --     $1,538
                                                                   ======     =======     ======
               Per share value................................     $   --     $    --     $ 5.13
                                                                   ======     =======     ======
</Table>


                                      F-16
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


     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 1999, 2000 and 2001: no dividend yield; risk-free
interest rate of 5.57%, 6.07% and 4.64%; expected volatility of 109%, 120% and
120%; expected lives of four years, respectively.

     The following table summarizes information with respect to stock options
outstanding under all plans at October 31, 2001:

<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          6.3             $  0.23            19,688         $  0.23
$  0.50 - $  0.50 .........        35,183          6.9             $  0.50            35,183         $  0.50
$  0.83 - $  1.00 .........        97,563          7.4             $  0.94            97,563         $  0.94
$  1.33 - $  1.33 .........        41,448          7.7             $  1.33            41,448         $  1.33
$  2.65 - $  3.30 .........     1,315,650          9.7             $  2.65             3,000         $  2.65
$  4.56 - $  6.49 .........     1,583,622          8.9             $  4.78           445,788         $  4.56
$  6.94 - $ 10.00 .........       557,710          8.9             $  8.92           135,742         $  9.38
$ 11.25 - $ 13.81 .........        19,980          8.7             $ 13.49             5,182         $ 13.50
$ 18.00 - $ 25.25 .........       252,200          7.9             $ 18.11           250,137         $ 18.05
$ 39.88 - $ 39.88 .........       296,981          8.0             $ 39.88           105,461         $ 39.88
$ 64.88 - $ 84.50 .........        94,520          8.3             $ 71.62            37,388         $ 72.11
$103.25 - $142.75 .........        81,518          7.0             $115.23            39,055         $116.48
                                ---------         ----             -------         ---------         -------
$  0.23 - $142.75 .........     4,396,063          8.9             $ 11.16         1,215,635         $ 16.06
                                =========         ====             =======         =========         =======
</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 0, 5,000
and 0 options to non-employees for consulting services in fiscal 1999, 2000, and
2001 at a weighted average exercise price of $0, $6.94 and $0, respectively. The
stock-based compensation associated with the grant of stock options to
non-employees for the year ended October 31, 2001 was not significant.

     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.

          Employee Stock Purchase Plan

     The Company's Employee Stock Purchase Plan (the "Plan") became effective
immediately upon the effective date of the Company's initial public offering.
The Plan 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 450,000 shares of common stock for issuance under the Plan.
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.


                                      F-17
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


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

9. INCOME TAXES:

     As of October 31, 2000 and 2001 the Company had federal net operating loss
carryforwards of approximately $39,571 and $55,647, respectively, and research
and experimentation tax credit carryforwards of approximately $475 and $751,
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:

<Table>
<Caption>
                                                               OCTOBER 31,
                                                          --------------------
                                                            2000        2001
                                                          --------    --------
<S>                                                       <C>         <C>
Deferred tax assets:
  Net operating losses ................................   $ 14,246    $ 20,033
  Inventory and other reserves ........................      4,078       6,540
  Basis of property and equipment .....................        524         370
  Research and experimentation credit .................        475         751
Net deferred tax assets before valuation allowance ....     19,323      27,694
Valuation allowance ...................................    (19,323)    (27,694)
                                                          --------    --------
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,
                                                 ---------------------------------
                                                   1999        2000        2001
                                                 --------    --------    ---------
<S>                                              <C>         <C>         <C>
Tax benefit at statutory rate of 34% .........   $  1,874    $ 18,370    $  18,391
Research and experimentation credit ..........        246          19           --
Amortization of stock-based compensation .....       (410)         --           --
Non-deductible goodwill ......................        (31)     (4,111)     (12,487)
Other ........................................         15         119        2,467
Net increase in valuation allowance ..........     (1,694)    (14,397)      (8,371)
                                                 --------    --------    ---------
                                                 $     --    $     --    $      --
                                                 ========    ========    =========
</Table>

     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.


                                      F-18
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


10. RELATED PARTY TRANSACTIONS:

          Product Sales

     The Company recorded product sales of $1,235 to certain holders of shares
of redeemable convertible preferred stock of the Company for the years ended
October 31, 1999. Accounts receivable from these preferred stockholders totaled
approximately $378 at October 31,1999. During 1999, all shares of the Company's
redeemable convertible preferred stock were converted into common stock (see
Note 6). The Company recorded product sales of $4,151 and $12,881 to these
significant shareholders for the years ended October 31, 2000 and 2001,
respectively, while the related accounts receivable totaled approximately $1,150
and $820 at October 31, 2000 and 2001, respectively.

          Notes Receivable

     During May 1999, the Company's board of directors approved the acceptance
of full recourse notes in the amount of $442 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 interests are due in one lump sum in 2003. In March 2000, the Company
repurchased 232,500 unvested shares for approximately $123 and subsequently
collected $114 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 and collected
approximately $59 in principal and interest payments 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 and collected
approximately $16 in principal and interest payments upon the retirement of the
Company's former vice-president of engineering. The principal balance of these
full recourse notes was approximately $118 as of October 31, 2001.

     In October 1999, the Company loaned an officer of the Company $100 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 interests are due in one
lump sum on December 31, 2006.

     In July 2000, the Company loaned an employee of the Company $50 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 interests are due in
one lump sum on July 1, 2002.

     In April 2001, the Company loaned an officer of the Company $45 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 interests are due in
one lump sum on October 16, 2001.

     In May 2001, the Company loaned an employee of the Company $25 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 interests are due in
one lump sum on November 14, 2002.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

     Cash paid for interest totaled $113, $34 and $0 during fiscal year 1999,
2000 and 2001, respectively.

     Accretion on redeemable convertible preferred stock totaled $247, $0 and $0
during fiscal year 1999, 2000 and 2001, respectively.

     Loans to officers and notes receivable from stockholders totaled $542, $365
and $320 during fiscal year 1999, 2000 and 2001, respectively.


                                      F-19
<PAGE>

                    CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                        (IN THOUSANDS, EXCEPT SHARE DATA)


12. EMPLOYEE BENEFITS:

     In 1996, the Company established the Crossroads Systems, Inc. 401(k)
Savings Plan (the "1996 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 1996 Plan. The Company may make matching
contributions to those employees participating in the 1996 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 1996 Plan. The Company
made no matching contributions under any plan for the years ended October 31,
1999, 2000 and 2001.

13. 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>


                                      F-20
<PAGE>


                        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 30, 2001 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 14(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 financial statements.



PRICEWATERHOUSECOOPERS LLP

Austin, Texas
November 30, 2001


                                      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, 1999:
  Allowance for doubtful accounts .................     $   14        $   81       $    --      $   95
  Allowance for excess and obsolete inventory .....     $   35        $  296       $    --      $  331
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
</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 Stock Incentive Plan (filed as Exhibit
          10.2 to the IPO Registration Statement and incorporated herein by
          reference)

10.3*     Amendment No.1 to Crossroads Systems, Inc. 1999 Stock Incentive Plan
          (filed as Exhibit 99.2 to the Registrant's Statement on Form S-8 (SEC
          File No.333-62336) and incorporated herein by reference)

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

10.5*     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)

10.6*+    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)

10.7*     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)

10.8*     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)

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

10.10*    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)

10.11*    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)

10.12     Letter Agreement dated February 19, 2001 by and between Registrant and
          John Middleton

10.13*    Letter Agreement dated February 28, 2000 by and between Registrant and
          Larry Sanders (filed as Exhibit 10.13 to Registrant's Annual Report on
          Form 10-K dated January 16, 2001 and incorporated herein by reference)

10.14*    Settlement and License Agreement dated June 12, 2001 by and between
          Registrant and Advanced Digital Information Corporation (files as
          Exhibit 10.16 to Registrants Quarterly Report on Form 10-Q dated June
          14, 2001 and incorporated herein by reference)
</Table>

<PAGE>


<Table>
<Caption>
EXHIBIT
NUMBER                             DESCRIPTION
-------                            -----------
<S>       <C>
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
</Table>


*    Incorporated herein by reference to the indicated filing

+    Confidential treatment previously granted