CROSSROADS SYSTEMS INC - 10-K Annual Report

Back to GetFilings.com

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

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

----------

FORM 10-K

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

FOR THE FISCAL YEAR ENDED OCTOBER 31, 2002

COMMISSION FILE NUMBER 000-30362

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

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

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

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

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

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

Title of each class Name of each exchange on which registered
------------------- -----------------------------------------

Common Stock, par value $0.001 per share Nasdaq National Market

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

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

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

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

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

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

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

CROSSROADS SYSTEMS, INC.

FORM 10-K

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

TABLE OF CONTENTS

Table of Contents........................................................................................................i

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

NOTE ON INCORPORATION BY REFERENCE

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

i

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

PART I

ITEM 1. BUSINESS.

OVERVIEW

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

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

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

o improve utilization of storage resources; and

o preserve and enhance existing server and storage system investments.

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

o to solve customer storage issues;

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

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

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

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

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

1

INDUSTRY BACKGROUND

Information Growth and the Management Challenge

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

SANs Solve Data Growth Problems

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

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

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

Applications SANs Enable

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

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

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

2

THE CROSSROADS SOLUTION

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

ServerAttach Product Line

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

o secured storage access;

o ease of manageability;

o simple installation with offline pre-configuration; and

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

Storage Router Product Line

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

o secured storage access;

o multi-protocol connectivity;

o ease of manageability;

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

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

o quick setup and configuration.

OUR STRATEGY

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

Solve Customer Storage Issues

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

3

Grow Our Current Market Position and Expand Into Adjacent Markets

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

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

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

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

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

Increase Our Market Leadership by Continual Investment in Intellectual
Property

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

4

OUR PRODUCTS

Storage Router Products

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

5

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

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

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

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

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

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

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

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

6

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

DISTRIBUTION MODEL

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

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

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

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

OUR CUSTOMERS

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

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

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

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

SALES AND MARKETING

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

7

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

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

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

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

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

CUSTOMER SERVICE AND SUPPORT

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

OUR COMPETITION

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

o other OEMs, including our customers and potential customers;

o native fibre channel vendors;

o LAN switch manufacturers;

o future iSCSI vendors;

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

o current and future start-up companies.

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

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

8

o market share and position;

o OEM endorsement;

o product reliability and verified interoperability;

o customer service and technical support;

o product performance and features;

o brand awareness and credibility;

o ability to meet delivery schedules;

o strength of distribution channel;

o ease-of-use and manageability; and

o price.

TECHNOLOGY

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

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

o provides accurate communication of transmission status to connected
devices;

o provides critical interoperability between diverse protocols;

o enables sharing of storage resources by multiple servers; and

o can adapt to new protocols as they emerge.

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

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

I/O Technologies

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

9

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

o iSCSI over Gigabit Ethernet;

o SRP over InfiniBand;

o Serial Attached SCSI; and

o Serial ATA.

Embedded Software Design

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

RESEARCH AND DEVELOPMENT

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

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

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

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

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

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

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

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

10

MANUFACTURING

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

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

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

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

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

PATENTS, INTELLECTUAL PROPERTY AND LICENSING

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

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

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

11

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

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

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

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

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

EMPLOYEES

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

12

EXECUTIVE OFFICERS OF THE REGISTRANT

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

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

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

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

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

13

FACTORS THAT MAY AFFECT FUTURE RESULTS

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

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

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

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

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

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

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

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

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

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

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

14

to us;

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

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

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

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

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

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

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

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

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

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

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

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

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

o delay in our initial shipment of new products;

o the difficulty in forecasting customer demand accurately;

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

15

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

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

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

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

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

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

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

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

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

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

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

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

16

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

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

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

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

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

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

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

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

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

17

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

o growth of the SAN market;

o changing requirements of customers within the SAN market;

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

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

o our customer service and support capabilities and responsiveness; and

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

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

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

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

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

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

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

18

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

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

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

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

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

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

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

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

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

19

the time required to meet additional demand for our products.

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

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

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

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

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

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

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

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

20

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

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

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

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

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

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

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

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

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

21

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

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

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

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

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

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

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

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

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

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

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

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

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

22

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

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

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

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

o potential loss of key employees of the acquired company.

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

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

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

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

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

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

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

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

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

23

OUR STOCK PRICE MAY BE VOLATILE.

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

o actual or anticipated fluctuations in our operating results;

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

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

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

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

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

o departures of key personnel.

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

ITEM 2. PROPERTIES.

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

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

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

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

24

ITEM 3.

LEGAL PROCEEDINGS.

Intellectual Property Litigation

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

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

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

Securities Class Action Litigation

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

Derivative State Action

On November 21, 2001, a derivative state action was filed in the 261st
District Court of Travis County, Texas on behalf of Crossroads by James Robke
and named several of our officers and directors as defendants. The derivative
state action is based upon the same general set of facts and circumstances
outlined above in connection with the purported securities class action
litigation. The derivative state action alleges that certain of the individual
defendants sold shares while in possession of material inside information in
purported breach of their fiduciary du