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

FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the quarterly period ended APRIL 30, 2000
-------------------------------------------------

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

For the transition period from to
--------------------- ------------------------
Commission file number:
---------------------------------------------------------

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

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

8300 NORTH MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)

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

9390 Research Boulevard, Suite II-300
Austin, TX 78759
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Sections 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

As of June 1, 2000, Registrant had outstanding 27,352,818 shares of common
stock, par value $0.001 per share.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

Page
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of October 31, 1999 and
April 30, 2000.......................................................... 2

Condensed Consolidated Statements of Operations for the three and six
months ended April 30, 1999 and 2000.................................... 3

Condensed Consolidated Statements of Cash Flows for the six
months ended April 30, 1999 and 2000.................................... 4

Notes to Condensed Consolidated Financial Statements...................... 5

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................... 8

Item 3. Quantitative and Qualitative Disclosures About Market Risk................ 23

PART II OTHER INFORMATION

Item 1. Legal Proceedings......................................................... 24

Item 2. Changes in Securities and Use of Proceeds................................. 24

Item 6. Exhibits and Reports on Form 8-K.......................................... 24

SIGNATURES............................................................................ 26

INDEX TO EXHIBITS..................................................................... 27

1
3

PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

OCTOBER 31, APRIL 30,
1999 2000
---------- ----------

Current assets:
Cash and cash equivalents ...................................................... $ 61,320 $ 63,650
Short-term investments ......................................................... 19,500 7,590
Accounts receivable, net ....................................................... 3,654 9,830
Inventories .................................................................... 3,278 3,228
Prepaids and other current assets .............................................. 933 2,020
---------- ----------

Total current assets ....................................................... 88,685 86,318

Note receivable from related party, net ............................................ 154 100
Property and equipment, net ........................................................ 2,273 7,036
Intangibles, net ................................................................... -- 42,843
Other assets ....................................................................... 618 366
---------- ----------

Total assets ............................................................... $ 91,730 $ 136,663
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ............................................................... $ 3,328 $ 5,735
Accrued expenses ............................................................... 735 2,268
Accrued warranty costs ......................................................... 309 284
Deferred revenue ............................................................... 117 344
Current portion of long-term debt .............................................. 1,031 --
---------- ----------
Total current liabilities .................................................. 5,520 8,631
Long-term debt, net of current portion ............................................. 1,325 --
Commitments
Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized, respectively,
26,549,919 and 27,276,246 shares issued and outstanding, respectively...... 27 27
Additional paid-in capital ..................................................... 102,461 179,181
Deferred stock-based compensation .............................................. (3,718) (14,723)
Notes receivable from stockholders ............................................. (463) (352)
Accumulated deficit ............................................................ (13,420) (35,974)
Treasury stock at cost (22,500 and 264,843 shares, respectively) ............... (2) (127)
---------- ----------
Total stockholders' equity ................................................. 84,885 128,032
---------- ----------

Total liabilities and stockholders' equity ................................. $ 91,730 $ 136,663
========== ==========

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------

Revenue:
Product revenue ....................... $ 3,503 $ 10,987 $ 6,663 $ 19,679
Other revenue ......................... 3 136 63 237
------------ ------------ ------------ ------------

Total revenue .................... 3,506 11,123 6,726 19,916

Cost of revenue ............................. 2,029 5,583 3,836 10,221
------------ ------------ ------------ ------------

Gross profit ................................ 1,477 5,540 2,890 9,695
------------ ------------ ------------ ------------

Operating expenses:
Sales and marketing ................... 853 3,022 1,623 5,234
Research and development .............. 990 2,837 1,828 4,821
General and administrative ............ 476 2,320 912 3,637
Amortization of intangibles ........... -- 1,616 -- 1,616
Stock-based compensation .............. 98 18,435 147 19,123
------------ ------------ ------------ ------------

Total operating expenses ......... 2,417 28,230 4,510 34,431
------------ ------------ ------------ ------------

Loss from operations ........................ (940) (22,690) (1,620) (24,736)

Other income (expense):
Interest and dividend income .......... 32 1,138 79 2,299
Interest expense ...................... (23) (2) (45) (31)
Other ................................. -- (77) 8 (86)
------------ ------------ ------------ ------------

Other income, net ................ 9 1,059 42 2,182
------------ ------------ ------------ ------------

Net loss .................................... (931) (21,631) (1,578) (22,554)

Accretion on redeemable convertible
preferred stock ....................... (71) -- (142) --
------------ ------------ ------------ ------------
Net loss attributable to common stock ....... $ (1,002) $ (21,631) $ (1,720) $ (22,554)
============ ============ ============ ============

Basic and diluted net loss per share ........ $ (0.15) $ (0.83) $ (0.26) $ (0.87)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share ............ 6,652,230 26,090,132 6,538,371 25,860,187
============ ============ ============ ============

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

SIX MONTHS ENDED APRIL 30,
--------------------------
1999 2000
---------- ------------

Cash flows from operating activities:
Net loss ....................................................................... $ (1,578) $ (22,554)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ............................................... 395 2,634
Stock-based compensation .................................................... 147 19,123
Provision for doubtful accounts receivable .................................. 25 96
Amortization of note receivable from related party .......................... -- 5
Changes in assets and liabilities:
Accounts receivable ....................................................... (1,723) (5,835)
Inventories ............................................................... (525) 442
Prepaids and other assets ................................................. (180) (961)
Accounts payable .......................................................... 945 2,388
Accrued expenses .......................................................... 163 1,382
Accrued warranty costs .................................................... 60 (25)
Deferred revenue and other ................................................ 507 696
---------- ----------
Net cash used in operating activities .................................. (1,764) (2,609)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ............................................. (602) (5,704)
Cash acquired, net of payments for business acquisitions ....................... -- 1,053
Purchase of held-to-maturity investments ....................................... -- (7,590)
Maturity of held-to-maturity investments ....................................... 2,239 19,500
---------- ----------
Net cash provided by investing activities .............................. 1,637 7,259
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock ......................................... 56 137
Costs associated with initial public offering .................................. -- (6)
Proceeds from issuance of preferred stock,
net of issuance costs ....................................................... 5,289 --
Registration of stock option plan .............................................. -- (95)
Borrowings under long-term debt agreements ..................................... 557 --
Repayment of long-term indebtedness ............................................ (237) (2,356)
---------- ----------
Net cash provided by (used in) financing activities .................... 5,665 (2,320)
---------- ----------
Net increase in cash and cash equivalents ........................................ 5,538 2,330
Cash and cash equivalents, beginning of
period ......................................................................... 1,695 61,320
---------- ----------
Cash and cash equivalents, end of period ......................................... $ 7,233 $ 63,650
========== ==========

Supplemental disclosure of non-cash investing and financing activities:
The Company purchased all of the assets of Polaris Communications, Inc. during
fiscal year 2000. In conjunction with the acquisition, assets acquired and
liabilities assumed were as follows:
Fair value of assets acquired ............................................... $ -- $ 46,751
Liabilities assumed ......................................................... -- (171)
Stock issued in connection with the acquisition ................................ -- (44,483)
Options issued in connection with the acquisition .............................. -- (1,890)
---------- ----------
Cash payments for business acquisitions ........................................ $ -- $ 207
========== ==========

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements include the
accounts of Crossroads Systems, Inc. ("Crossroads" or the "Company") and its
wholly-owned subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.

The accompanying unaudited interim condensed consolidated financial
statements reflect all adjustments (consisting only of normal recurring entries)
which, in the opinion of our management, are necessary for a fair presentation
of the results for the interim periods presented. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the Securities and Exchange Commission's rules and
regulations. These financial statements should be read in conjunction with the
audited financial statements and related notes for the year ended October 31,
1999, included in our Annual Report on Form 10-K.

The results of operations for the three and the six months ended April 30,
2000 are not necessarily indicative of results that may be expected for any
other interim period or for the full year.

Crossroads completed the acquisition of Polaris Communications, Inc.
("Polaris") during the second quarter of fiscal 2000. This acquisition was
accounted for under the purchase method of accounting.

2. ACQUISITION OF POLARIS

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

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

The Company's allocation of the purchase price and the resulting assigned
values for the net assets acquired as of March 21, 2000 are as follows:

VALUE ASSIGNED AMORTIZABLE
TO NET ASSETS LIFE
BALANCE SHEET CATEGORY ACQUIRED (YEARS)
---------------------- ------------- -----------

Intangible assets:
Proven research and development $ 1,030 3 - 7
In-place workforce 1,800 4
Customer base 340 15
Goodwill 41,289 3
Other assets, net of liabilities assumed 2,121 --

5
7
CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The following table represents unaudited consolidated pro forma information
as if Crossroads and Polaris had been combined as of the beginning of the
periods presented. The pro forma data is presented for illustrative purposes
only and is not necessarily indicative of the combined financial position or
results of operations of future periods or the results that actually would have
occurred had Crossroads and Polaris been a combined company during the specified
periods. The pro forma combined results include the effects of the purchase
price allocation, amortization of intangible assets, and certain adjustments
required to conform to Crossroads' accounting policies.

PRO FORMA
SIX MONTHS ENDED
APRIL 30,
---------------------
1999 2000
-------- ------

Total revenue................................................. $ 7,892 21,959
Net loss...................................................... (8,923) (28,199)
Basic and diluted net loss per share.......................... $ (1.27) (1.07)

3. INVENTORIES

Inventories consist of the following:

OCTOBER 31, APRIL 30,
1999 2000
------------ ------------

Raw materials ................ $ 2,247 $ 2,120
Work in process .............. -- 56
Finished goods ............... 1,031 1,052
------------ ------------
$ 3,278 $ 3,228
============ ============

4. COMMITMENTS AND CONTINGENCIES

In April 2000, Crossroads relocated its headquarters in accordance with an
agreement to lease approximately 63,548 square feet of general office,
laboratory, and administrative space in Austin, Texas. The term of the lease
agreement is six years, from April 1, 2000 through March 31, 2006, and
represents a lease commitment of $1.7 million per year for the first three years
and $1.8 million per year, thereafter. In conjunction with entering into the
lease agreement, Crossroads signed an unconditional, irrevocable letter of
credit with a bank for $1.0 million.

5. STOCK BASED COMPENSATION

On March 1, 2000, Crossroads announced that Larry Sanders was named
president and chief operating officer of the Company. He succeeds Jim Moore, who
retired effective March 3, 2000. We recorded approximately $16.5 million of
stock based compensation in connection with accelerating the vesting of certain
stock options previously granted to Mr. Moore.

In connection with the grant of certain stock options to Mr. Sanders and to
a new member of our board of directors, Paul Zito, we recorded deferred
compensation during March 2000 aggregating approximately $13.6 million. Deferred
compensation represents, for accounting purposes, the difference between the
fair value of the common stock underlying these options and their exercise price
at the date of grant. The difference has been recorded as deferred stock-based
compensation and is being amortized over the vesting period of the applicable
options. The amortization associated with these options totaled approximately
$1.3 million during the three and six months ended April 30, 2000.

6
8

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

6. NET LOSS PER SHARE

The Company's net loss per share is calculated in accordance with Statement
of Financial Accounting Standards No. 128, "Earnings Per Share". This method
requires calculation of both earnings per share and earnings per share, assuming
dilution. Earnings per share excludes the dilutive effect of common stock
equivalents such as stock options, while earnings per share, assuming dilution,
includes such dilutive effects. Future weighted-average shares outstanding
calculations will be impacted by the following factors: (i) the ongoing issuance
of common stock associated with stock option exercises; (ii) the issuance of
common shares associated with our employee stock purchase program; (iii) any
fluctuations in our stock price, which could cause changes in the number of
common stock equivalents included in the earnings per share, assuming dilution
computation; and (iv) the issuance of common stock to effect business
combinations should we enter into such transactions.

The Company has excluded all redeemable convertible preferred stock, up
until the date of their conversion, and all outstanding stock options from the
calculation of diluted net loss per share because all such securities are
antidilutive for all periods presented. The total number of common stock
equivalents excluded from the calculations of diluted net loss per common share
were 14,735,277 and 2,808,014 for the three months ended April 30, 1999 and
2000, respectively.

7. LITIGATION

On March 31, 2000, we filed a lawsuit against Chaparral Network Storage,
Inc. alleging that Chaparral has infringed one of our patents with some of their
router products. The lawsuit was filed in United States District Court for the
Western District of Texas and we are seeking injunctive relief as well as
damages. Prior to filing the lawsuit, we notified Chaparral that it was
manufacturing and selling products that infringe one of our patents. Chaparral
continued to manufacture and sell the infringing products after receiving notice
from us.

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. The lawsuit was filed in United States District Court for the
Western District of Texas and we are seeking injunctive relief as well as
damages. Prior to filing the lawsuit, we notified Pathlight that it was
manufacturing and selling products that infringe one of our patents. Pathlight
continued to manufacture and sell the infringing products after receiving notice
from us.

8. RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivatives and Hedging
Activities" ("SFAS No. 133"), which establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts, and for hedging activities. SFAS No. 133 is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. We do not
currently engage or plan to engage in hedging activities or intend to own or
plan to purchase any derivative instruments.

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
("SAB No. 101"), which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. SAB No. 101 will be effective for
all fiscal quarters of fiscal years beginning after December 15, 1999. The
application of SAB No. 101 is not expected to have a material impact on the
financial statements of the Company.

9. SUBSEQUENT EVENTS

On May 19, 2000, Chaparral filed a counter-suit against us alleging tortious
interference with prospective business relations. The lawsuit was filed in
District Court, Boulder County, Colorado and Chaparral is seeking injunctive
relief as well as damages. Chaparral claims that we have made statements that
Chaparral has infringed the patent rights of the Company and that these
statements are false and defamatory.

7
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

This report contains forward-looking statements, within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, that involve risks and uncertainties, such as statements
concerning: growth and future operating results; developments in our markets and
strategic focus; new products and product enhancements; potential acquisitions
and the integration of acquired businesses, products and technologies; strategic
relationships; and future economic, business and regulatory conditions. Such
forward-looking statements are generally accompanied by words such as "plan,"
"estimate," "expect," "believe," "should," "would," "could," "anticipate," "may"
or other words that convey uncertainty of future events or outcomes. These
forward-looking statements and other statements made elsewhere in this report
are made in reliance on the Private Securities Litigation Reform Act of 1995.
The section below entitled "Factors That May Affect Future Results" sets forth
certain factors that could cause our actual future results to differ materially
from these statements.

OVERVIEW

Crossroads is the leading provider of storage routers for storage area
networks, based on our market share of storage routers shipped. Storage routers
are computer equipment that organizations use to connect servers and storage
systems together in a storage area network, or "SAN". A SAN is a high speed
computer network that facilitates data transfers among servers and storage
systems using high performance data communications that follow the
industry-accepted rules and conventions, which are commonly referred to as
computer protocols. 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.

Our company was originally formed in 1995 as Infinity Commstor, LLC, a Texas
limited liability company. In 1996, Infinity Commstor was merged into a newly
formed Delaware corporation, which became Crossroads Systems, Inc., with
operations conducted through a wholly-owned Texas corporation subsidiary. Since
mid-1996, our operating activities have related primarily to increasing our
research and development capabilities, designing, developing and marketing our
storage routers, staffing our administrative, marketing and sales organizations
and establishing relationships with other equipment manufacturers, or "OEMs",
and distributors, resellers and system integrators. We began shipping our first
product, the Crossroads 4100 storage router, to OEMs for their evaluation in
July 1997. Prior to that time, our revenue was derived principally from
consulting services related to the implementation of Fibre Channel components
and from the sale of a software developer's kit used to deploy Fibre Channel
systems. On March 21, 2000, Crossroads consummated its acquisition of Polaris
Communications, Inc. ("Polaris"). Polaris was a leading developer and marketer
of S/390 mainframe communication interfaces and systems delivering increased
connectivity and bandwidth options to enterprise data centers, focusing on
high-speed connections between open-systems and mainframes. The aggregate
purchase price of $46.6 million consisted of the issuance of 428,625 shares of
Crossroads common stock valued at approximately $44.5 million, the issuance of
21,375 options to purchase Crossroads common stock valued at approximately $1.9
million and $0.2 million of other direct acquisition costs. The acquisition of
Polaris was accounted for under the purchase method of accounting.

The Company recorded significant charges during the three months ended
April 30, 2000 in connection with the transition of our President and Chief
Operating Officer and the acquisition of Polaris. These charges included stock
based compensation expense of approximately $17.8 million and amortization of
intangibles of approximately $1.6 million.

In the past we have experienced fluctuation in the timing of orders from our
OEM customers, and we expect to continue to experience these fluctuations in the
future. These fluctuations have resulted from, among other things, OEM customers
placing initial orders for our products for purposes of qualification and
testing. As a result, we may report an increase in sales or a commencement of
sales of a product in a quarter that will not be followed by similar sales in
subsequent quarters as OEMs conduct qualification and testing.

8
10

A key element of our growth strategy is to expand our sales channels. To
this end, we have established relationships with a number of distributors,
resellers and system integrators. Although we anticipate that revenue derived
from sales to distributors, resellers and system integrators will increase as a
percentage of our total revenue in future periods, we expect to continue to
experience significant customer concentration in sales to key OEM accounts for
the foreseeable future.

Although we negotiate the prices for our products on an individual basis
with each of our OEM customers, 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
ranging from 8% to 15% annually, 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 has been offset by higher average selling prices for our newer
products, as well as sales to distributors, resellers and system integrators
where price decreases are not generally required. Nonetheless, we could
experience declines in our average unit selling prices for our products in the
future, especially if our newer products do not receive broad market acceptance
or if our efforts to increase sales to distributors, resellers and system
integrators are not successful. 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.

With respect to sales of our products to OEMs, we recognize product revenue
when products are shipped to the OEM. Product sales to distributors, resellers
and system integrators who do not have return rights are recognized at the time
of shipment. To the extent that we sell products to distributors, resellers and
system integrators that have rights of return, we defer revenue and cost of
revenue associated with such sales and recognize these amounts when that
customer sells our products to its customers. At April 30, 2000, our deferred
revenue totaled $344,000. We provide a repair or replace warranty of between 15
and 39 months following the sale of our products, and we provide a reserve for
warranty costs when the related product revenue is recognized.

Through August 1999, we outsourced substantially all of our manufacturing
requirements to XeTel Corporation ("Xetel"), a contract manufacturer, and a
significant portion of our cost of revenue historically has consisted of
payments to that manufacturer. In September 1999, we transitioned the final
assembly and test portion of our manufacturing process from Xetel to an in-house
facility. During the transition period, our manufacturing costs increased, and
our gross profit decreased, as we incurred costs of final assembly and test
performed both by our contract manufacturer and us. In fiscal 2000, we have
engaged another contract manufacturer, Solectron, to make our 4x50 family of
products. We believe that this will enable us to reduce our reliance on XeTel.
We believe that bringing final assembly and test operations in-house and the
addition of Solectron as another contract manufacturer have allowed us to reduce
our total manufacturing costs on a per unit basis and provides us with greater
flexibility to respond to changes in customer demand. 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.

In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998 and 1999
aggregating approximately $5.0 million. In addition, we recorded deferred
compensation during the six months ended April 30, 2000 aggregating
approximately $13.6 million. Deferred compensation represents, for accounting
purposes, the difference between the deemed fair value of the common stock
underlying these options and their exercise price at the date of grant. The
difference has been recorded as deferred stock-based compensation and is being
amortized over the vesting period of the applicable options, generally four
years. Of the total deferred compensation amount, approximately $3.8 million has
been amortized as of April 30, 2000. The amortization of deferred compensation
is recorded as an operating expense.

9
11

We currently expect to amortize the remaining amounts of deferred
compensation as of April 30, 2000 in the periods indicated (in thousands):

May 1, 2000 to October 31, 2000 ........ $ 4,851
November 1, 2000 to October 31, 2001 ... 6,131
November 1, 2001 to October 31, 2002 ... 2,653
November 1, 2002 to October 31, 2003 ... 998
November 1, 2003 to October 31, 2004 ... 90
-------
$14,723
=======

We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $36.0
million at April 30, 2000.

As of April 30, 2000, we had approximately $12.0 million of federal net
operating loss carryforwards. These net operating loss carryforwards begin to
expire in 2011. We have not recognized any benefit from the future use of loss
carryforwards for these periods or for any other periods since inception due to
uncertainties regarding the realization of deferred tax assets based on our
taxable earnings history.

RESULTS OF OPERATIONS

The following table sets forth our consolidated financial data for the
periods indicated expressed as a percentage of our total revenue.

THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ -----------------
1999 2000 1999 2000
------ ------ ------ ------

Revenue:
Product revenue ................. 99.9% 98.8% 99.1% 98.8%
Other revenue ................... 0.1 1.2 0.9 1.2
------ ------- ------ ------
Total revenue ............. 100.0 100.0 100.0 100.0
Cost of revenue ........................ 57.9 50.2 57.0 51.3
------ ------- ------ ------
Gross profit ........................... 42.1 49.8 43.0 48.7
Operating expenses:
Sales and marketing ............. 24.3 27.2 24.1 26.3
Research and development ........ 28.2 25.5 27.2 24.2
General and administrative ...... 13.6 20.9 13.6 18.3
Amortization of intangibles ..... -- 14.5 -- 8.1
Stock-based compensation ........ 2.8 165.7 2.2 96.0
------ ------- ------ ------
Total operating expenses .. 68.9 253.8 67.1 172.9
Loss from operations ................... (26.8) (204.0) (24.1) (124.2)
Other income, net ...................... 0.3 9.5 0.6 11.0
------ ------- ------ ------
Net loss ............................... (26.5)% (194.5)% (23.5)% (113.2)%
====== ======= ====== ======

COMPARISON OF THREE MONTHS ENDED APRIL 30, 1999 AND 2000

Revenue. Our total revenue increased 217% from $3.5 million for the three
months ended April 30, 1999 to $11.1 million for the three months ended April
30, 2000. Without the inclusion of Polaris products and services from the date
of acquisition, total revenue increased 200% for the three-month period ended
April 30, 2000 compared to the same period in 1999.

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Product revenue. Product revenue increased 214% from $3.5 million for the
three months ended April 30, 1999 to $11.0 million for the three months ended
April 30, 2000. As a percentage of total revenue, product revenue decreased from
99.9% for the three months ended April 30, 1999 to 98.8% for the three months
ended April 30, 2000. The increases in product revenue resulted from increased
sales of our storage router product family through an increased customer base
and increased sales to our significant original equipment manufacture customers,
distributors, resellers and system integrators in conjunction with a growing
demand for Storage Area Network routers.

Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue increased 5006% from $2,700 for the three
months ended April 30, 1999 to $136,100 for the three months ended April 30,
2000. The increase for the three months ended April 30, 2000 was due to the
license of a product design for $67,000 in that period. We do not anticipate
significant other revenue in the future.

Cost of revenue and gross profit. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead and
warranty costs. Cost of revenue increased 175% from $2.0 million for the three
months ended April 30, 1999 to $5.6 million for the three months ended April 30,
2000. These increases were primarily due to increases in unit sales volume and a
corresponding increase in costs related to manufacturing. Gross profit increased
275% from $1.5 million for the three months ended April 30, 1999 to $5.5 million
for the three months ended April 30, 2000. The increase was primarily due to
increased product revenue in each of these periods. Gross profit increased from
42.1% for the three months ended April 30, 1999 to 49.8% for the three months
ended April 30, 2000. The increase in gross profit resulted from favorable
customer and product mix in addition to the benefits of moving our final
assembly and test to an in-house facility.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs and other promotional activities. Sales and marketing
expenses increased 254% from $853,500 for the three months ended April 30, 1999
to $3.0 million for the three months ended April 30, 2000. The increase in sales
and marketing expenses for the three months ended April 30, 2000 was primarily
due to the hiring of additional sales and marketing personnel resulting in
approximately $1.6 million of increased compensation expense, including
increased commissions commensurate with greater sales. Sales and marketing
personnel totaled 22 at April 30, 1999 and 57 at April 30, 2000. As a percentage
of total revenue, sales and marketing expenses increased from 24.3% for the
three months ended April 30, 1999 to 27.2% for the three months ended April 30,
2000. We anticipate that sales and marketing expenses will continue to increase
in absolute dollars and may fluctuate as a percentage of total revenue, due to
the planned expansion of our sales and marketing efforts and increased marketing
activity that is intended to broaden awareness of the benefits of our products.

Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development and
prototyping expenses. Research and development expenses increased 187% from
$989,600 for the three months ended April 30, 1999 to $2.8 million for the three
months ended April 30, 2000. The increase in research and development expenses
was primarily due to the hiring of additional research and development personnel
resulting in approximately $900,000 of increased compensation expense, increased
prototyping costs of approximately $190,000 related to the development of our
4x50 product line and approximately $220,000 of increased depreciation expense.
Research and development personnel totaled 30 at April 30, 1999 and 71 at April
30, 2000. As a percentage of total revenue, research and development expenses
decreased from 28.2% for the three months ended April 30, 1999 to 25.5% for the
three months ended April 30, 2000. The decrease for the three months ended April
30, 2000 was primarily due to substantially higher revenue in the three months
ended April 30, 2000. We expect that research and development expenses will
continue to increase in absolute dollars and will fluctuate as a percentage of
our total revenue, due to the importance of research and development in
developing our technologies and expanding our product offerings.

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relocation of our corporate headquarters and legal costs associated with patent
infringement lawsuits. As a percentage of total revenue, general and
administrative expenses increased from 13.6% for the three months ended April
30, 1999 to 20.9% for the three months ended April 30, 2000. We anticipate that
general and administrative expenses will continue to increase in absolute
dollars for the foreseeable future as we accommodate growth, add related
infrastructure and incur expenses related to being a public company. However, if
our revenue continues to increase, general and administrative expenses should
decrease as a percentage of total revenue.

COMPARISON OF SIX MONTHS ENDED APRIL 30, 1999 AND 2000

Revenue. Our total revenue increased 196% from $6.7 million for the six
months ended April 30, 1999 to $19.9 million for the six months ended April 30,
2000. Without the inclusion of Polaris products and services from the date of
acquisition, total revenue increased 188% for the six-month period ended April
30, 2000 compared to the same period in 1999.

Product revenue. Product revenue increased 195% from $6.7 million for the
six months ended April 30, 1999 to $19.7 million for the six months ended April
30, 2000. As a percentage of total revenue, product revenue decreased from 99.1%
for the six months ended April 30, 1999 to 98.8% for the six months ended April
30, 2000. The increases in product revenue resulted from increased sales of our
storage router product family through an increased customer base and increased
sales to our significant original equipment manufacturers, customers,
distributors, resellers and system integrators in conjunction with a growing
demand for Storage Area Network routers.

Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue increased 277% from $63,000 for the six
months ended April 30, 1999 to $237,300 for the six months ended April 30, 2000.
The increase for the six months ended April 30, 2000 was due to the license of a
product design and royalties for $105,000 in that period. We do not anticipate
significant other revenue in the future.

Cost of revenue and gross profit. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead and
warranty costs. Cost of revenue increased 166% from $3.8 million for the six
months ended April 30, 1999 to $10.2 million for the six months ended April 30,
2000. These increases were primarily due to increases in unit sales volume and a
corresponding increase in costs related to manufacturing. Gross profit increased
236% from $2.9 million for the six months ended April 30, 1999 to $9.7 million
for the six months ended April 30, 2000. The increase was primarily due to
increased product revenue in each of these periods. Gross profit increased from
43.0% for the six months ended April 30, 1999 to 48.7% for the six months ended
April 30, 2000. The increase in gross profit resulted from favorable customer
and product mix in addition to the benefits of moving our final assembly and
test to an in-house facility.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs and other promotional activities. Sales and marketing
expenses increased 222% from $1.6 million for the six months ended April 30,
1999 to $5.2 million for the six months ended April 30, 2000. The increase in
sales and marketing expenses for the six months ended April 30, 2000 was
primarily due to the hiring of additional sales and marketing personnel
resulting in approximately $2.3 million of increased compensation expense,
including increased commissions commensurate with greater sales. Sales and
marketing personnel totaled 22 at April 30, 1999 and 57 at April 30, 2000. As a
percentage of total revenue, sales and marketing expenses increased from 24.1%
for the six months ended April 30, 1999 to 26.3% for the six months ended April
30, 2000. We anticipate that sales and marketing expenses will continue to
increase in absolute dollars and may fluctuate as a percentage of total revenue,
due to the planned expansion of our sales and marketing efforts and increased
marketing activity that is intended to broaden awareness of the benefits of our
products.

Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development and
prototyping expenses. Research and development expenses increased 164% from $1.8
million for the six months ended April 30, 1999 to $4.8 million for the six
months ended April 30, 2000. The increase in research and development expenses
was primarily due to the hiring of additional research and development personnel
resulting in approximately $1.4 million of increased compensation expense,
increased prototyping costs of approximately $300,000 related to the development
of our 4x50 product line and approximately $360,000 of increased depreciation
expense. Research and development personnel totaled 30 at April 30, 1999 and 71
at April 30, 2000. As a percentage of total revenue, research and development
expenses decreased from 27.2% for the six months ended April 30, 1999 to 24.2%
for the six months ended April 30, 2000. The

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decrease for the six months ended April 30, 2000 was primarily due to
substantially higher revenue in the six months ended April 30, 2000. We expect
that research and development expenses will continue to increase in absolute
dollars and will fluctuate as a percentage of our total revenue, due to the
importance of research and development in developing our technologies and
expanding our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses and insurance costs. General and
administrative expenses increased 299% from $911,900 for the six months ended
April 30, 1999 to $3.6 million for the six months ended April 30, 2000. The
increase in general and administrative expenses was primarily due to the hiring
of administrative personnel resulting in approximately $1.3 million of increased
compensation expense for the six months ended April 30, 2000 which were
necessary to manage and support the growth in our business as a public company.
General and administrative personnel totaled 13 at April 30, 1999 and 37 at
April 30, 2000. In addition, we incurred one-time expenses totaling
approximately $941,000 related to the transition of a president and new chief
operating officer, the relocation of our corporate headquarters and legal costs
associated with patent infringement lawsuits. As a percentage of total revenue,
general and administrative expenses increased from 13.6% for the six months
ended April 30, 1999 to 18.3% for the six months ended April 30, 2000. We
anticipate that general and administrative expenses will continue to increase in
absolute dollars for the foreseeable future as we accommodate growth, add
related infrastructure and incur expenses related to being a public company.
However, if our revenue continues to increase, general and administrative
expenses should decrease as a percentage of total revenue.

OTHER INCOME, NET

Other income, net consists primarily of interest income on short-term
investments partially offset by interest expense. Other income, net was $9,000
and $1.1 million in the three months ended April 30, 1999 and 2000,
respectively, representing 0.3% and 9.5% of total revenues, respectively. The
increase in other income, net was primarily due to increased cash, cash
equivalents and short-term investment balances resulting from the proceeds from
our initial public offering in October 1999.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity at April 30, 2000 consisted of $63.7
million in cash and cash equivalents, $7.6 million in short-term investments and
our bank credit facility. The credit facility, as amended and restated in
September 1999, includes a revolving line of credit providing borrowings up to
the lesser of (a) $2.5 million or (b) 80% of eligible accounts receivable plus
25% of eligible inventories; and an equipment loan agreement providing for
financing up to $1.9 million. Borrowings under the revolving line of credit bear
interest at the bank's prime rate, which was 8.75% at April 30, 2000, and are
secured by our accounts receivable and inventories. Term loan financing
available to us under the equipment loan agreement bears interest at the bank's
prime rate plus 0.5%, is secured by the related capital equipment and is payable
through June 30, 2003. The line of credit and the equipment loan agreement
expire in August 2000. The line of credit and equipment loan agreement contain
provisions that prohibit the payment of cash dividends and require the
maintenance of specified levels of tangible net worth and certain financial
performance covenants measured on a monthly basis. In February 2000, we entered
into a $1.0 million letter of credit in connection with the lease requirements
of our new facility. As of April 30, 2000, there were no borrowings outstanding
under the revolving line of credit and no term loans outstanding.

Our bank credit facility requires that we comply with the following
financial covenants:

o a quick ratio of at least 1.50-to-1.00 ("quick ratio" being defined as
the ratio of our consolidated, unrestricted cash; cash equivalents;
net billed accounts receivable; and investments with maturities of
fewer than twelve months to our current liabilities);

o a debt-to-tangible net worth ratio of not more than 1.00-to-1.00; and

o a liquidity coverage-to-debt service ratio of not less than
1.50-to-1.00 ("liquidity coverage" being defined as cash plus 80% of
accounts receivable eligible for borrowings).

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Additionally, the credit facility requires that we operate at a profit in each
fiscal quarter; however, we are allowed a loss which may not exceed $2.9 million
in each of the fiscal quarters ending October 31, 1999, January 31, 2000 and
April 30, 2000; $2.3 million in the fiscal quarter ending July 31, 2000; and
$1.5 million in the fiscal quarter ending October 31, 2000. Although we are in
violation of this financial covenant as of April 30, 2000, we have received
confirmation that a waiver will be obtained from our bank. During December
1999, we paid all outstanding obligations under our bank credit facility. As of
April 30, 2000, there were no borrowings outstanding under the revolving line of
credit and no term loans outstanding.

Cash utilized by operating activities was $1.8 million for the six months
ended April 30, 1999 as compared to $2.6 million for the six months ended April
30, 2000. The increases in net cash provided reflected increased losses from
operations, working capital required to fund the expansion of our operations and
increases in accounts receivable.

Cash provided by investing activities was $1.6 million for the six months
ended April 30, 1999 as compared to $7.3 million for the six months ended April
30, 2000. The increases in net cash provided reflected the maturity of
held-to-maturity investments, net of purchases, of $11.9 million, reduced by
capital expenditures during the period. Capital expenditures were $0.6 million
for the six months ended April 30, 1999 and $5.7 million for the six months
ended April 30, 2000. These expenditures reflect our investments in computer
equipment and software, test equipment, software development tools and leasehold
improvements, all of which were required to support our business expansion. We
anticipate capital expenditures through fiscal 2000 of at least $9.7 million to
fund our purchase of a new enterprise resource planning system; leasehold
improvements; costs associated with the transition to an in-house facility of
the final assembly and test portions of our manufacturing process, including
modification to our facilities and test and other manufacturing equipment; and
equipment and software to support our projected growth in personnel.

Cash provided by financing activities was $5.7 million for the six months
ended April 30, 1999 as compared to cash utilized by financing activities of
$2.3 million for the six months ended April 30, 2000. The increase in cash
utilized reflected the payment of our existing debt of $2.4 million in December
1999. We have funded our operations to date primarily through sales of preferred
stock and our initial public offering, resulting in aggregate gross proceeds to
us of $98.2 million (which includes the $12.0 million of proceeds received from
the private placement of our Series E preferred stock in August 1999), product
sales and, to a lesser extent, bank debt.

We believe the net proceeds we received from our initial public offering,
together with our existing cash balances, the net proceeds from the sale of our
Series E preferred stock and our credit facilities, will be sufficient to meet
our capital requirements through at least the next 12 months. However, we could
be required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including the rate of
revenue growth, the timing and extent of spending to support product development
efforts and expansion of sales and marketing activities, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. On March 21, 2000, Crossroads consummated its
acquisition of Polaris Communications, Inc. and we may enter into additional
acquisitions or strategic arrangements in the future which also could require us
to seek additional equity or debt financing. We cannot assure you that
additional equity or debt financing, if required, will be available to us on
acceptable terms, or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

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FACTORS THAT MAY AFFECT FUTURE RESULTS

Numerous factors may affect our business and future operating results. These
factors include, but are not limited to the potential for significant losses to
continue; our ability to accurately forecast our revenues; fluctuations in
revenue and operating results; overall market performance; limited product
lines; limited number of OEM customers; competition; delays in research and
development; inventory risks; the inability to expand our distribution channels;
the loss of our primary contract manufacturer; risks of delay or poor execution
from a variety of sources; inventory risks; limited resources; pricing;
dependence upon key personnel; international operations; product liability
claims; potential future acquisitions; concentration of ownership; and
volatility of stock price. The discussion below addresses some of these factors.
For a more thorough discussion of these and other factors that may affect our
business and future results, see the discussion under the caption "Additional
Factors That May Affect Future Results" in our Annual Report on Form 10-K dated
January 31, 2000.

WE HAVE INCURRED SIGNIFICANT LOSSES, WE EXPECT FUTURE LOSSES, AND WE MAY NEVER
BECOME PROFITABLE.

We have incurred significant losses in every fiscal quarter since the end of
fiscal 1996 and expect to continue to incur losses in the future. As of April
30, 2000, we had an accumulated deficit of $36.0 million. Although our revenue
has grown in recent quarters, we cannot be certain that we will be able to
sustain these growth rates or that we will realize sufficient revenue to achieve
profitability. We also expect to incur significant product development, sales
and marketing and administrative expenses and, as a result, we expect to
continue to incur losses. We will need to generate significant revenue to
achieve profitability. Moreover, even if we do achieve profitability, we may not
be able to sustain or increase profitability.

DUE TO OUR LIMITED OPERATING HISTORY AND THE UNCERTAIN 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 three years and, thus,
we have only a short history from which to predict future revenue. This limited
operating experience, combined with the rapidly evolving nature of the storage
area network market in which we sell our products and other factors which are
beyond our control, reduces our ability to accurately forecast our quarterly and
annual revenue. However, we use our forecasted revenue to establish our expense
budget. Most of our expenses are fixed in the short term or incurred in advance
of anticipated revenue. As a result, we may not be able to decrease our expenses
in a timely manner to offset any shortfall of revenue. We are currently
expanding our staffing and increasing our expense levels in anticipation of
future revenue growth. If our revenue does not increase as anticipated,
significant losses could result due to our higher expense levels.

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 result will be below
the expectations of public market analysts or investors. If this occurs, our
stock price may drop, perhaps significantly.

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

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

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

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

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

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

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

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

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

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

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

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

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

We currently have only three principal products within our storage router
product family that we sell in commercial quantities. In particular, sales of
our 4100 product have accounted for the vast majority of our product revenue to
date. To reduce our dependence on the 4100 product, we must successfully develop
and introduce to market new products and product enhancements in a timely
manner. Even if we are able to develop and commercially introduce new products
and enhancements, these new products or enhancements may not achieve market
acceptance which could reduce our revenue.

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

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

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

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

o our customer service and support capabilities and responsiveness; and

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

WE DEPEND ON A LIMITED NUMBER OF OEM CUSTOMERS FOR THE VAST MAJORITY OF OUR
REVENUE, AND THE LOSS OF OR SIGNIFICANT REDUCTION IN ORDERS FROM ANY KEY OEM
CUSTOMER WOULD SIGNIFICANTLY REDUCE OUR REVENUE.

In fiscal 1998, 1999 and the three months ended April 30, 2000,
approximately 90%, 85% and 74% of our revenue, respectively, was derived from
six OEM customers. Furthermore, during fiscal 1998, our four largest customers
- -- ADIC, Compaq, Hewlett-Packard and StorageTek -- accounted for 25%, 20%, 16%
and 14% of our total revenue, respectively. In fiscal 1999, revenue from Compaq
and StorageTek represented 36% and 36% of our total revenue, respectively.
During the three month period ended April 30, 2000, Compaq and StorageTek
represented 25% and 36% of our total revenue, respectively. We rely on OEMs as a
primary distribution channel as they are able to sell our products to a large
number of end-user organizations, which enables us to achieve broad market
penetration, with limited sales, marketing and customer service and support
resources from us. 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 WHICH 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 effect their backup processes over the
SAN rather than through the computer network, enabling the servers of the
network to remain available for other computing purposes. We currently derive
the majority of our revenue from sales of storage routers that are used to
connect SCSI-based tape storage systems with SANs. The introduction of tape
storage systems that incorporate Fibre Channel interfaces would enable tape
storage devices to communicate directly with SANs, without using storage
routers. We are aware that a number of manufacturers of storage systems,
including several of our current customers, are developing tape storage systems
with embedded Fibre Channel interfaces, with products expected to be introduced
to market in the near future. If

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these or other manufacturers are successful in introducing Fibre Channel-based
storage systems, demand for our storage router products would be materially
reduced and our revenue would decline.

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

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

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

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

FAILURE TO EXPAND OUR DISTRIBUTION CHANNELS AND MANAGE OUR DISTRIBUTION
RELATIONSHIPS COULD IMPEDE OUR FUTURE GROWTH.

The future growth of our business will depend in part on our ability to
expand our existing relationships with distributors, resellers and system
integrators, develop additional channels for the distribution and sale of our
products and manage these relationships. As part of our growth strategy, we
intend to expand our relationships with distributors, resellers and system
integrators. The inability to successfully execute this strategy could impede
our future growth.

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

To date, we have relied on a third-party manufacturer, XeTel, to manufacture
substantially all of our products on a purchase order basis. We do not have a
long-term supply contract with XeTel and, therefore, XeTel is not obligated to
manufacture products for us for any specific period, or in any specific
quantity, except as may be provided in a particular purchase order. In fiscal
2000, we have engaged another contract manufacturer, Solectron, to make our 4x50
family of products. We believe that this will enable us to reduce our reliance
on XeTel. We generally place orders for products with XeTel and 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 XeTel or 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. XeTel and Solectron have not provided assurances to us that

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adequate capacity will be available to us within the time required to meet
additional demand for our products. Our contract with XeTel can be terminated be
either party with 90 days advance written notice.

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

We plan to introduce new products and product enhancements, which will
require that we coordinate our efforts with those of our component suppliers and
our contract manufacturer to rapidly achieve volume production. If we should
fail to effectively manage our relationships with our component suppliers and
our contract manufacturer, or if any of our suppliers or our manufacturer
experiences delays, disruptions, capacity constraints or quality control
problems in its 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 HAVE TRANSITIONED THE FINAL ASSEMBLY AND TEST PORTION OF OUR MANUFACTURING
PROCESS TO AN IN-HOUSE FACILITY, WHICH HAS INCREASED OUR FIXED COSTS AND EXPOSED
US TO INCREASED INVENTORY RISKS.

In September 1999, we transitioned our final assembly and product test
operations in-house. Our contract manufacturer previously performed these
activities for us. Although we have personnel with prior experience in managing
assembly and test operations, we have not previously assembled our products, and
we may encounter difficulties and delays in establishing, maintaining or
expanding our internal assembly and test capabilities. Our assembly and test
operations also will require us to increase the number of our full-time and
part-time employees, purchase additional equipment and maintain larger
facilities, all of which will increase our fixed costs. If demand for our
products does not support the effective utilization of these employees and
additional facilities and equipment, we may not realize any benefit from
replacing our contract manufacturer with internal final assembly and testing.
Furthermore, internal final assembly and test operations requires us to manage
and maintain the components used in our products at our facilities. A
significant portion of this inventory will be useful only in the final assembly
of our products. Any decrease in demand for our products could result in a
substantial part of this inventory becoming excess, obsolete or otherwise
unusable. If our internal final assembly and test operations are underused or
mismanaged, we may incur significant costs that could adversely affect our
operating results.

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 revenues 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 which 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 ATTO, Chaparral, Pathlight and, to some extent,
Computer Network

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Technologies. In addition, our OEM customers could develop products or
technologies internally that would replace their need for our products and would
become a source of competition. We expect to face competition in the future from
storage system industry suppliers, including manufacturers and vendors of other
SAN products or entire SAN systems, as well as innovative start-up companies.
For example, manufacturers of Fibre Channel hubs or switches could seek to
include router functionality within their SAN products which 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.

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

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

WE HAVE LICENSED OUR 4200 STORAGE ROUTER TECHNOLOGY TO A STOCKHOLDER THAT IS
ALSO A KEY CUSTOMER, WHICH MAY ENABLE THIS CUSTOMER TO COMPETE WITH US.

We have licensed our 4200 storage router technology to Hewlett-Packard.
Hewlett-Packard is a stockholder of our company and a key customer. While
Hewlett-Packard has not introduced to market any products competitive to ours
that use the licensed technology, it could potentially do so in the future.
Because Hewlett-Packard has vastly greater resources and distribution
capabilities than Crossroads, 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.

Many of our agreements with OEM customers provide for decreases in the price
of our products over time. In addition, we anticipate that, as products in the
SAN market become standardized and more widely available, we may need to reduce
the average unit selling price of our products in the future to respond to
competitive pricing pressures or new product introductions by our competitors.
If we are unable to offset the anticipated decrease in our average selling
prices by increasing our sales volume, our revenue will decline.

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

Networking products such as ours frequently contain undetected software or
hardware errors when first introduced or as new versions are released. Our
products are complex and errors have been found in the past and may be found
from time to time in the future. In addition, our products include components
from a number of third-party vendors. We rely on the quality testing of these
vendors to ensure the adequate operation of their products. Because our products
are manufactured with a number of components supplied by various third-party
sources, should problems occur in the operation or performance of our products,
it may be difficult to identify the source. In addition, our products are
deployed within SANs from a variety of vendors. Therefore, the occurrence of
hardware and software errors, whether caused by our or another vendor's SAN
products, could adversely affect sales of our products. Furthermore, defects may
not be discovered until our products are already deployed in the SAN. These

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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. In particular, we believe that our future success is highly
dependent on Brian R. Smith, our co-founder, chief executive officer and
chairman of the board, to provide continuity in the execution of our growth
plans. We do not have employment contracts with any of our key personnel with
the exception of Larry Sanders, our president and chief operating officer. We
have experienced difficulty in hiring engineers with appropriate qualifications
in networking, routing and storage technologies and we may not be successful in
attracting and retaining sufficient levels of such engineers to support our
anticipated growth. The loss of the services of any of our key employees, the
inability to attract or retain qualified personnel in the future or delays in
hiring required personnel, particularly engineers and sales personnel, could
delay the development and introduction of, and negatively impact our ability to
sell, our products.

TO MANAGE OUR GROWTH AND EXPANSION, WE RELOCATED TO NEW FACILITIES AND PLAN TO
UPGRADE AND IMPLEMENT OUR ENTERPRISE RESOURCE PLANNING SYSTEM, WHICH MAY DISRUPT
OUR BUSINESS.

Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management and operational resources,
including our physical facilities and enterprise resource planning system. We
plan to continue to aggressively expand our operations to pursue existing and
potential market opportunities. We relocated our headquarters facility to a
larger facility. In addition, we have selected and are currently implementing a
new enterprise resource planning system in order to integrate manufacturing,
resource planning and financial accounting. We expect these changes to be
disruptive, time-consuming and expensive processes. If we are unsuccessful or
experience delays in effecting these changes, our ability to effectively manage
our operations may be compromised.

WE PLAN TO INCREASE OUR INTERNATIONAL SALES ACTIVITIES SIGNIFICANTLY, WHICH WILL
SUBJECT US TO ADDITIONAL BUSINESS RISKS.

To date, a significant portion of our products that are purchased by OEMs
are shipped to their end-user customers in international markets. We intend to
open sales offices in international markets to focus on expanding our
international sales activities in Europe and the Pacific Rim region. Our planned
international sales growth will be limited if we are unable to expand our
international sales channel relationships, hire additional personnel and develop
relationships with international distributors, resellers, system integrators and
service providers. We may not be able to maintain or increase international
market demand for our products. Our international sales activities are subject
to a number of risks, including:

o increased complexity and costs of managing international operations;

o protectionist laws and business practices that favor local competition
in some countries;

o multiple, conflicting and changing laws, regulations and tax schemes;

o longer sales cycles;

o greater difficulty in accounts receivable collection and longer
collection periods; and

o political and economic instability.

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To date, all of our sales to international customers have been denominated
in U.S. dollars. As a result, an increase in the value of the U.S. dollar
relative to foreign currencies could make our products more expensive for our
customers to purchase, thus rendering them less competitive.

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. For
example, we are currently involved in patent infringement litigation with
Chaparrel Network Storage, Inc. and Pathlight Technology, Inc. (See `Legal
Proceedings' below). 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 also could force us to take specific actions,
including:

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

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

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

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

As part of our growth strategy, we intend to review opportunities to acquire
other businesses or technologies that would complement our current products,
expand the breadth of our markets or enhance our technical capabilities. For
example, on March 21, 2000, Crossroads consummated its acquisition of Polaris
Communications, Inc. Acquisitions entail a number of risks that could materially
and adversely affect our business and operating results, including:

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

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

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

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

o potential loss of key employees of the acquired company.

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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 beneficially own approximately 35% of
the total voting power of our company. As a result, these stockholders will be
able to exert significant control over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of voting power could delay or
prevent an acquisition of our company on terms which 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 which may discourage, delay or prevent someone
from acquiring or merging with us, which may adversely affect the market price
of our common stock.

OUR STOCK PRICE MAY BE VOLATILE.

The market price of our common stock has been volatile in the past and may
be volatile in the future. The market price of our common stock may be
significantly affected by the following factors:

o actual or anticipated fluctuations in our operating results;

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

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

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

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

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

o departures of key personnel.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk is contained on Page 33 of our 1999
Annual Report on Form 10-K and is incorporated by reference to such annual
report.

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CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

PART II

ITEM 1. LEGAL PROCEEDINGS

On March 31, 2000, we filed a lawsuit against Chaparral Network
Storage, Inc. alleging that Chaparral has infringed one of our patents with
their router products. The lawsuit was filed in United States District Court for
the Western District of Texas and we are seeking injunctive relief as well as
damages. Prior to filing the lawsuit, we notified Chaparral that we believe that
it was manufacturing and selling products that infringe one of our patents.
Chaparral continued to manufacture and sell these products after receiving
notice from us.

On May 19, 2000, Chaparral filed a counter-suit against us alleging
tortious interference with prospective business relations. The lawsuit was filed
in District Court, Boulder County, Colorado and Chaparral is seeking injunctive
relief as well as damages. Chaparral claims that we have made statements that
Chaparral has infringed our patent rights and that these statements are false
and defamatory.

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. The lawsuit was filed in United States District Court for
the Western District of Texas and we are seeking injunctive relief as well as
damages. Prior to filing the lawsuit, we notified Pathlight that we believe that
it was manufacturing and selling products that infringe one of our patents.
Pathlight continued to manufacture and sell this product after receiving notice
from us.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

From February through April 30, 2000, we issued approximately 274,207
shares of our common stock to employees pursuant to exercises of stock options
(with exercise prices ranging from $0.08 to $10.00 per share) under our stock
plans. These issuances were deemed exempt from registration under Section 5 of
the Securities Act of 1933 in reliance upon Rule 701 thereunder. In addition,
the recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to,
or for sale in connection with, any distribution thereof and appropriate
restrictive transfer legends were affixed to the share certificates issued in
each such transaction.

On March 21, 2000, we acquired Polaris Communications, Inc. in
exchange for 428,625 shares of our common stock valued at approximately $44.5
million and options to purchase 21,375 shares of our common stock at an exercise
price of $5.00 per share.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibit Index

Exhibit Number Description

27.1 Financial Data Schedule

(b) Reports on Form 8-K

During the three months ended April 30, 2000, we filed the
following Current Reports on Form 8-K:

o We filed a Form 8-K dated February 3, 2000
(Item 5) announcing the Agreement and Plan of
Merger and Reorganization with Polaris and the
resignation of Ms. Wo Overstreet as a director
of the Company.

o We filed a Form 8-K dated March 21, 2000 (Item
2) announcing the completion of the acquisition
of Polaris.

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After April 30, 2000, we filed the following Current
Report on Form 8-K:

o We filed an Amended Form 8-K dated March 21,
2000 (Item 7) filing the financial statements
of Polaris for the years ended December 31,
1997, 1998 and 1999 and the unaudited pro forma
consolidated financial statements for
Crossroads.

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SIGNATURES

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

CROSSROADS SYSTEMS, INC.

June 14, 2000 /s/ Brian R. Smith
------------- -------------------------------------------------
(Date) Brian R. Smith
Chairman of the Board and Chief Executive Officer
(Principal executive officer)

June 14, 2000 /s/ Reagan Y. Sakai
------------- -------------------------------------------------
(Date) Reagan Y. Sakai
Chief Financial Officer
(Principal financial and accounting officer)

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INDEX TO EXHIBITS

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

27.1 Financial Data Schedule