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 JULY 31, 2001

[ ] 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)

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 September 1, 2001, Registrant had outstanding 27,948,528 shares of
common stock, par value $0.001 per share.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of October 31, 2000 and
July 31, 2001................................................................... 3

Condensed Consolidated Statements of Operations for the three and nine months
ended July 31, 2000 and 2001.................................................... 4

Condensed Consolidated Statements of Cash Flows for the nine months ended
July 31, 2000 and 2001.......................................................... 5

Notes to Condensed Consolidated Financial Statements.............................. 6

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................................... 12

Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 29

PART II OTHER INFORMATION

Item 1. Legal Proceedings................................................................. 30

Item 6. Exhibits and Reports on Form 8-K.................................................. 30

SIGNATURES.................................................................................. 31
</Table>

2
3

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
OCTOBER 31, JULY 31,
2000 2001
------------ ------------

ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 42,447 $ 50,719
Short-term investments ................................................. 17,591 10,000
------------ ------------
Total cash, cash equivalents and short-term investments ............. 60,038 60,719
Accounts receivable, net of allowance for doubtful accounts
of $231 and $375, respectively ...................................... 5,590 4,206
Inventories, net ....................................................... 3,918 3,023
Prepaids and other current assets ...................................... 2,037 1,539
------------ ------------
Total current assets ................................................ 71,583 69,487
Notes receivable from related party, net .................................. 159 195
Property and equipment, net ............................................... 10,062 11,395
Intangibles, net .......................................................... 35,686 1,067
Other assets .............................................................. 558 745
------------ ------------
Total assets ....................................................... $ 118,048 $ 82,889
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ....................................................... $ 4,852 $ 6,607
Accrued expenses ....................................................... 2,933 2,283
Accrued warranty costs ................................................. 414 574
Deferred revenue ....................................................... 1,097 924
------------ ------------
Total current liabilities ........................................... 9,296 10,388
Commitments and contingencies
Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized,
27,690,673 and 27,948,153 shares issued and outstanding,
respectively ........................................................ 28 28
Additional paid-in capital ............................................. 183,390 185,453
Deferred stock-based compensation ...................................... (9,734) (4,969)
Notes receivable from stockholders ..................................... (249) (166)
Accumulated deficit .................................................... (64,448) (107,588)
Treasury stock at cost (405,961 and 445,164 shares, respectively) ...... (235) (257)
------------ ------------
Total stockholders' equity .......................................... 108,752 72,501
------------ ------------
Total liabilities and stockholders' equity .......................... $ 118,048 $ 82,889
============ ============
</Table>

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

3
4

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
--------------------------- ----------------------------
2000 2001 2000 2001
------------ ------------ ------------ ------------

Revenue:
Product revenue ................................................. $ 4,630 $ 7,731 $ 24,309 $ 27,441
Other revenue ................................................... 149 699 386 1,177
------------ ------------ ------------ ------------
Total revenue .............................................. 4,779 8,430 24,695 28,618
Cost of revenue (including stock-based compensation
expense of $73, $28, $242 and $100, respectively) ............... 4,189 5,240 14,578 16,253
------------ ------------ ------------ ------------
Gross profit ......................................................... 590 3,190 10,117 12,365
------------ ------------ ------------ ------------
Operating expenses:
Sales and marketing (including stock-based compensation
expense of $3,926, $54, $4,305 and $189, respectively) ..... 7,270 3,751 12,882 12,245
Research and development (including stock-based
compensation expense of $131, $52, $444 and $399,
respectively) .............................................. 4,187 4,572 9,322 12,936
General and administrative (including stock-based
compensation expense of $2,154, $1,145, $20,417
and $5,318, respectively) .................................. 4,367 3,806 26,267 12,857
Amortization of intangibles ..................................... 3,596 2,418 5,212 9,610
Write-down of intangibles ....................................... -- 25,007 -- 25,007
Litigation settlement ........................................... -- (15,000) -- (15,000)
------------ ------------ ------------ ------------
Total operating expenses ................................... 19,420 24,554 53,683 57,655
------------ ------------ ------------ ------------
Loss from operations ................................................. (18,830) (21,364) (43,566) (45,290)
Other income (expense):
Interest income ................................................. 1,003 583 3,302 2,265
Interest expense ................................................ (2) -- (33) --
Other income (expense) .......................................... (1) (1) (87) 15
------------ ------------ ------------ ------------
Other income, net .......................................... 1,000 582 3,182 2,280
------------ ------------ ------------ ------------
Net loss before cumulative effect of accounting change ............... (17,830) (20,782) (40,384) (43,010)
Cumulative effect of accounting change ............................... -- -- -- (130)
------------ ------------ ------------ ------------
Net loss ............................................................. $ (17,830) $ (20,782) $ (40,384) $ (43,140)
============ ============ ============ ============
Basic and diluted net loss per share:
Before cumulative effect of accounting change ................... $ (0.67) $ (0.75) $ (1.55) $ (1.56)
Cumulative effect of accounting change .......................... -- -- -- (0.01)
------------ ------------ ------------ ------------
Basic and diluted net loss per share ....................... $ (0.67) $ (0.75) $ (1.55) $ (1.57)
============ ============ ============ ============
Pro forma amounts assuming accounting change is applied retroactively:
Net loss ........................................................ $ 17,136 $ -- $ 40,554 $ --
Net loss per share, basic and diluted ........................... $ (0.64) $ -- $ (1.55) $ --
Shares used in computing basic and diluted net loss per share ........ 26,677,275 27,535,887 26,134,537 27,408,137
============ ============ ============ ============
</Table>

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

4
5

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
NINE MONTHS ENDED
JULY 31,
2000 2001
---------- ----------

Cash flows from operating activities:
Net loss ..................................................... $ (40,384) $ (43,140)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation .............................................. 1,895 3,648
Amortization of intangibles ............................... 5,212 9,610
Write-down of intangibles ................................. -- 25,007
Stock-based compensation .................................. 25,408 6,006
Provision for doubtful accounts receivable ................ 123 144
Provision for excess and obsolete inventories ............. 1,942 656
Amortization of note receivable from related party ...... 5 --
Changes in assets and liabilities:
Accounts receivable ....................................... (898) 1,240
Inventories ............................................... (3,586) 239
Prepaids and other current assets ......................... (1,353) 498
Accounts payable .......................................... 2,194 1,755
Accrued expenses .......................................... 1,053 (650)
Accrued warranty costs .................................... 23 160
Deferred revenue and other ................................ 505 (183)
---------- ----------
Net cash provided by (used in) operating activities ....... (7,861) 4,990
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ........................... (8,266) (4,981)
Cash acquired, net of payments for business acquisitions ..... 1,013 --
Purchase of held-to-maturity investments ..................... (7,590) (11,967)
Maturity of held-to-maturity investments ..................... 19,500 19,558
Payment of note receivable from related party ................ 59 59
Other assets ................................................. (138) (187)
---------- ----------
Net cash provided by investing activities ................. 4,578 2,482
---------- ----------
Cash flows from financing activities:
Proceeds from issuance of common stock ....................... 962 823
Costs associated with initial public offering ................ (115) --
Purchase of treasury stock ................................... (2) (22)
Repayment of long-term indebtedness .......................... (2,356) --
Other ........................................................ (36) (1)
---------- ----------
Net cash provided by (used in) financing activities ....... (1,547) 800
---------- ----------
Net increase in cash and cash equivalents ....................... (4,830) 8,272
Cash and cash equivalents, beginning of period .................. 61,320 42,447
---------- ----------
Cash and cash equivalents, end of period ........................ $ 56,490 $ 50,719
========== ==========
</Table>

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

5
6

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

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, 2000, included in our Annual Report on Form 10-K.

The results of operations for the three and nine months ended July 31, 2001
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 year 2000. This acquisition was
accounted for under the purchase method of accounting (Note 2).

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. Amortization of intangibles totaled
approximately $3.6 and $2.4 million for the three months ended July 31, 2000 and
2001, respectively.

During the fiscal quarter ended July 31, 2001, in response to uncertain
macroeconomic conditions and the resulting decline in demand and product
revenue, management reassessed Crossroads' product strategy, initiated a market
sizing exercise on its core business and examined the expense structure in an
attempt to realign its business plan to achieve profitability. The strategic
review triggered a reduction in force and an impairment evaluation of the
intangible assets related to the Polaris acquisition as there were indications
that the carrying amounts might not be recoverable based on the expected
undiscounted cash flows from the Polaris business unit. Based on a valuation
prepared by an independent third-party appraisal company, Crossroads recorded a
write-down of these intangible assets totaling $25.0 million.

6
7

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

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

<Table>
<Caption>
VALUE ASSIGNED AMORTIZABLE
TO NET ASSETS LIFE
BALANCE SHEET CATEGORY ACQUIRED (YEARS)
- ---------------------- -------------- -----------

Intangible assets:
Proven research and development .......... $ 1,030 5 - 7
In-place workforce ....................... 1,800 4
Customer base ............................ 340 5
Goodwill ................................. 41,324 3
--------
44,494
Less:
Accumulated amortization ................. (18,420)
Write-down of intangibles ................ (25,007)
--------
Intangible assets, net at July 31, 2001 ..... $ 1,067
========
Other assets, net of liabilities assumed .... $ 2,121
========
</Table>

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

<Table>
<Caption>
PRO FORMA
NINE MONTHS ENDED
JULY 31,
2000 2001
-------- --------

Total revenue ........... $ 26,737 $ 28,618
Net loss ................ (46,031) (43,140)
Net loss per share ...... $ (1.76) $ (1.57)
</Table>

3. INVENTORIES

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

Inventories consist of the following:

<Table>
<Caption>
OCTOBER 31, JULY 31,
2000 2001
------------ ------------

Raw materials ................................................. $ 4,154 $ 3,741
Work-in-process ............................................... 183 55
Finished goods ................................................ 1,670 1,091
------------ ------------
6,007 4,887
Less: Allowance for excess and obsolete inventory ..... (2,089) (1,864)
------------ ------------
$ 3,918 3,023
============ ============
</Table>

4. PROPERTY AND EQUIPMENT

Property and equipment consist of the following:

<Table>
<Caption>
OCTOBER 31, JULY 31,
2000 2001
------------ ------------

Equipment .................................................. $ 12,013 $ 16,782
Furniture and fixtures ..................................... 1,911 1,977
Leasehold improvements ..................................... 916 916
------------ ------------
14,840 19,675
Less: accumulated depreciation and amortization ... (4,778) (8,280)
------------ ------------
$ 10,062 $ 11,395
============ ============
</Table>

7
8

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

5. CONCENTRATIONS

The Company's sales are primarily concentrated in the United States and are
primarily derived from sales to original equipment manufacturers in the computer
storage and server industry. The Company had trade accounts receivable from four
customers, which comprised approximately 51% and 53% of total trade accounts
receivable at October 31, 2000 and July 31, 2001, respectively. The Company
performs credit evaluations of its customers and generally does not require
collateral on accounts receivable balances and provides allowances for potential
credit losses and product sales returns.

The Company's products are concentrated in the storage area network industry
that is highly competitive and subject to rapid technological change. The
Company's supplier arrangement for the production of certain vital components of
its storage routers is concentrated with a small number of key suppliers.
Revenue is concentrated with several major customers. The loss of a major
customer, a change of suppliers or significant technological change in the
industry could affect operating results adversely.

The percentage of sales to significant customers was as follows:

<Table>
<Caption>
YEAR ENDED NINE MONTHS ENDED
OCTOBER 31, JULY 31,
2000 2001
----------- -----------------

Customer A........................... 33% 2%
Customer B........................... 21% 21%
Customer C........................... 7% 10%
Customer D........................... 6% 17%
</Table>

The level of sales to any customer may vary from quarter to quarter.
However, we expect that significant customer concentration will continue for the
foreseeable future. The loss of any one of these customers, or a decrease in the
level of sales to any one of these customers, could have a material adverse
impact on the Company's financial condition or results of operations. During
April 2001, Advanced Digital Information Corporation ("ADIC"), Customer C above,
informed the Company that it intends to transition out of its router products
upon consummation of its acquisition of Pathlight Technology, Inc.
("Pathlight"), which they subsequently completed on May 11, 2001. Sales to ADIC
were approximately $2.3 million and $3.0 million during the year ended October
31, 2000 and the nine months ended July 31, 2001, respectively. In April, we
decided to write off inventory specifically related to ADIC resulting in a
charge of $47,000.

6. LINE OF CREDIT

In January 2001, the Company extended its existing line of credit with its
bank. The committed revolving line is an advance of up to $3 million with a
borrowing base of 80% of eligible accounts receivable. The line of credit
matures on February 1, 2002.

7. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

On March 31, 2000, Crossroads filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral has infringed one of its
patents (5,941,972, hereinafter "972 patent") with some of their products. In
September, the jury found that the 972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning have infringed
all claims of the Crossroads 972 patent. As a result, the Company was awarded
damages with a royalty amount of 5% for Chaparral's router product line and 3%
for their RAID product line. Crossroads will be pursuing an injunction based on
the jury's finding of infringement. The federal judge in this matter will
consider assessing punitive damages, which could treble the actual damages. The
Court will also consider the imposition of reasonable attorney's fees.

8
9

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

On April 14, 2000, Crossroads filed a lawsuit against Pathlight Technology,
Inc. alleging that Pathlight has infringed one of its patents with their SAN
Data Gateway Router. Pathlight was subsequently acquired by ADIC on May 11,
2001. In June 2001, ADIC paid the Company $15.0 million in connection with the
settlement of this lawsuit, this payment was recognized in the statement of
operations for the three and nine months ended July 31, 2001. In connection with
the settlement of the lawsuit, the Company granted ADIC a non-exclusive license
under the related patent.

On May 19, 2000, Chaparral filed a counter-suit against Crossroads alleging
tortuous interference with prospective business relations. The lawsuit was filed
in District Court, Boulder County, Colorado and Chaparral is seeking injunctive
relief as well as damages. Chaparral claims that the Company has made statements
that Chaparral has infringed the Company's patent rights and that these
statements are false and defamatory. The Company moved to have this matter
dismissed, which the judge ordered, with prejudice in April 2001.

The Company and several of its officers and directors were named as
defendants in several class action lawsuits filed in the United States District
Court for the Western District of Texas. The plaintiffs in the actions purport
to represent purchasers of our common stock during various periods ranging from
January 25, 2000 through August 24, 2000. The Court consolidated the actions and
appointed a lead plaintiff under the Private Securities Litigation Reform Act of
1995. The amended consolidated complaint was filed in February 2001. The
plaintiffs are seeking unspecified amounts of compensatory damages, interests
and costs, including legal fees. The Company continues to deny the allegations
in the complaint and intends to defend itself vigorously. On August 10, 2001,
the court denied the Company's motion to dismiss the consolidated amended
complaint. The class action lawsuit is still at an early stage. Consequently, it
is not possible at this time to predict whether the Company will incur any
liability or to estimate the damages, or the range of damages, if any, that the
Company might incur in connection with this lawsuit. The inability of the
Company to prevail in this action could have a material adverse effect on the
Company's future business, financial condition and results of operations.

Other

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

8. STOCK-BASED COMPENSATION

In connection with the grant of certain stock options to our employees and
directors, the Company recorded deferred compensation aggregating $19.6 million
in 1998, 1999, 2000, and the nine months ended July 31, 2001, representing the
difference between the deemed fair value of the common stock underlying these
options and their exercise price at the date of grant. Such amount is presented
as a reduction of stockholders' equity and is being amortized over the vesting
period of the applicable individual options, generally four years. Deferred
compensation expense is decreased in the period of forfeiture for any accrued
but unvested compensation arising from the early termination of an option
holder's services. Of the total deferred compensation amount, approximately
$14.6 million has been amortized as of July 31, 2001.

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

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------

Cost of revenue .................................. $ 73 $ 28 $ 242 $ 100
Sales and marketing .............................. 3,926 54 4,305 189
Research and development ......................... 131 52 444 399
General and administrative ....................... 2,154 1,145 20,417 5,318
-------- -------- -------- --------
Total stock-based compensation .... $ 6,284 $ 1,279 $ 25,408 $ 6,006
======== ======== ======== ========
</Table>

9
10

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

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

<Table>
<Caption>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2001 2002 2003 2004 TOTAL
-------- -------- -------- -------- --------

Cost of revenue ............................. $ 23 $ 56 $ 12 $ -- $ 91
Sales and marketing ......................... 26 64 13 -- 103
Research and development .................... 42 98 20 -- 160
General and administrative .................. 965 2,542 1,011 97 4,615
-------- -------- -------- -------- --------
Total stock-based compensation ...... $ 1,056 $ 2,760 $ 1,056 $ 97 $ 4,969
======== ======== ======== ======== ========
</Table>

9. NET LOSS PER SHARE

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

The Company has excluded all 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 4,721,061 and
5,564,803 for the nine months ended July 31, 2000 and 2001, respectively.

10. RECENT ACCOUNTING PRONOUNCEMENTS

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

In March 2000, the FASB issued Interpretation No. 44, "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion 25," ("Interpretation No. 44") which is generally effective July 1,
2000. Interpretation No. 44 clarifies the application of APB Opinion 25 for
certain matters, specifically (a) the definition of an employee for purposes of
applying APB Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of Interpretation No. 44 did not have a material
impact on the financial position or the results of operations.

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB No. 101") which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective for all fiscal quarters of fiscal years beginning after December 15,
1999. Effective November 1, 2000, the Company adopted SAB 101. The adoption of
SAB 101 resulted in a change in method of revenue recognition for certain
product shipments due to the specified shipping terms for these shipments. The
cumulative effect of this accounting change was $130,000, which has been
included in net loss for the nine months ended July 31, 2001. Prior period
financial statements have not been restated to apply SAB 101 retroactively,
however, the pro forma amounts included in the Condensed Consolidated Statements
of Operations reflect the net loss and net loss per share assuming the Company
had retroactively applied SAB 101 to all periods presented.

10
11

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

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

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," ("SFAS No. 142") which changes how goodwill and other intangible assets
are accounted for subsequent to their initial recognition. Under this standard,
goodwill and other intangibles assets having indefinite useful lives are no
longer amortized, but are subjected to periodic assessments of impairment. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. The
Company is currently in the process of evaluating SFAS No. 142 and the effect it
may have on our financial statements. As of this date, the Company does not
expect SFAS No. 142 to have a material impact on our financial position or
results of operations. In the event that SFAS No. 142 is determined to have a
material impact on the Company's financial position or results of operations,
the Company would be required to report such changes no later than the quarter
ending January 31, 2002.

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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.

OVERVIEW

We are the leading provider of enterprise data center routing solutions for
open system storage area networks, based on our market share of storage routers
shipped. 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. Specifically, when used in
storage area networks our storage routers improve utilization of storage
resources, and preserve and enhance existing server and storage system
investments.

Our mission is to be the company customers trust to link business with
information regardless of technology or location. Our objective is to maintain
our position as the leading provider of storage routing solutions as storage,
server, and network technologies and markets continue to grow and evolve. Our
strategy includes key elements such as providing products compatible with
existing technologies to ensure connectivity for our customers, delivering
products that are on the cutting edge of technology, expanding field sales force
with coverage of key regional and OEM accounts, expanding distribution channels,
emphasizing quality through our Crossroads Quality Management (CQM) Program and
ensuring broad interoperability with CV-SAN testing and verification program
with leading software vendors.

We have developed or acquired extensive expertise in several different
input-output (I/O) and networking protocols, including small computer system
interface (SCSI), Fibre Channel, Enterprise Systems Connection (ESCON),
Asynchronous Transfer Mode (ATM), Ethernet, Transmission Control
Protocol/Internet Protocol (TCP/IP) and InfiniBand. We have applied this
expertise in these protocols to develop solutions for leading server and storage
system providers such as ACAL, ADIC, ATL, Bell Micro, Compaq, Cranel, Datalink,
Dell, Fujitsu-Siemens, Groupe Bull, Hewlett-Packard, Hitachi Data Systems, IBM,
McDATA, SANrise, StorageTek, Sun Microsystems, Tech Data and Unisys.

We expanded our product line with the launch of our 4x50 family of storage
routers. The 4x50 line enables companies to realize the benefits of managing
their mission critical data using applications such as LAN-free and server-free
backup. The 4x50 provides the broadest array of connectivity options for the
departmental workgroup through the enterprise customer.

During the three months ended July 31, 2001, we launched the 8000 storage
router, which includes the Crossroads Visual Manager tm management software that
increases intelligence on the SAN. The 8000 is the first in a new line of
multi-protocol storage routers designed to connect storage devices into Fibre
Channel and internet small computer system interface (iSCSI) storage networks,
and InfiniBand fabrics.

To date, we have sold our products primarily to original equipment
manufacturers, or OEMs, of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their storage area networks. We also sell our storage routers through companies
that distribute, resell or integrate our storage routers as part of a complete
SAN solution. Recently, we have also begun to establish relationships to sell
our products through storage service providers, or SSPs, an important new class
of service providers that provide storage-related services to customers within
Internet data centers and large metropolitan areas. A few OEM customers
historically have accounted for a substantial portion of our revenue. During
fiscal 1999 and 2000, sales to Compaq and StorageTek respectively accounted for
36% and 36%, and 33% and 21%. During the nine months ended July 31, 2001, sales
to Compaq and StorageTek respectively accounted for 2% and 21% of our total
revenue. This decrease in sales to Compaq and StorageTek during the nine months
ended July 31, 2001 was offset by higher revenue through our expanded OEM
revenue base including a new OEM relationship with Sun Microsystems under which
medium to large businesses are given more

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bandwidth for data movement between Sun servers and S/390 class mainframes,
where more than half of the world's data is stored and managed. This broadened
revenue base was also evidenced by volume from our top nine customers
representing 75% of our total revenue, four of which individually accounted for
10% or more of our revenue, during the nine months ended July 31, 2001.

In the past, we have experienced fluctuation in the timing of orders from
our OEM customers, and we expect to continue to experience these fluctuations in
the future. During April 2001, ADIC informed us that it intends to transition
out of our router products upon consummation of its acquisition of Pathlight
Technology, Inc., which they subsequently completed on May 11, 2001. In April,
we decided to write off inventory specifically related to ADIC resulting in a
charge of $47,000. Other fluctuations have resulted from, among other things,
OEM customers placing initial orders for our products for purposes of
qualification and testing. As a result, we may report an increase in sales or a
commencement of sales of a product in a quarter that will not be followed by
similar sales in subsequent quarters as OEMs conduct qualification and testing.

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

In March 2000, we consummated our acquisition of Polaris Communications,
Inc. Polaris was a leading developer and marketer of System 390, or S/390,
mainframe communication interfaces and systems delivering increased connectivity
and bandwidth options to enterprise data centers, focusing on high-speed
connections between open-systems and mainframes. During the fiscal quarter ended
July 31, 2001, in response to deteriorating macroeconomic conditions and the
resulting decline in demand and product revenue, we reassessed our product
strategy, initiated a market sizing exercise on our core business and examined
our expense structure in an attempt to realign our business plan to achieve
profitability. The strategic review triggered a reduction in force and an
impairment evaluation of the intangible assets related to the Polaris
acquisition because of indications that the carrying amounts might not be
recoverable based on the expected undiscounted cash flows from the Polaris
business unit. Based on a valuation prepared by an independent third-party
appraisal company, we recorded a write-down of these intangible assets totaling
$25.0 million.

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, storage service providers and system integrators. Our worldwide
distribution channel accounted for approximately 4%, 10%, and 9% of our total
sales during the fiscal years 1999, 2000, and the nine months ended July 31,
2001, respectively. Although we anticipate that revenue derived from sales to
distributors, resellers and system integrators and through SSPs 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.

With respect to sales of our products to OEMs, we recognize product revenue
when products are shipped and risk of loss has passed to the OEM. Product sales
to distributors, resellers and system integrators who do not have return rights
are recognized at the time of shipment. To the extent that we sell products to
distributors, resellers and system integrators that have rights of return, we
defer revenue and the related cost of revenue associated with such sales and
recognize these amounts when that customer sells our products to its customers.
At July 31, 2001, our deferred revenue totaled $924,000. We provide a repair or
replace warranty of between 15 and 39 months following the sale of our products,
and we provide a reserve for warranty costs when the related product revenue is
recognized.

In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998, 1999, 2000, and
nine months ended July 31, 2001 aggregating approximately $19.6 million.
Deferred compensation represents, for accounting purposes, the difference
between the deemed fair value of the common stock underlying these options and
their exercise price on the date of grant. The difference has been recorded as
deferred stock-based compensation and is being amortized over the vesting period
of the applicable options, typically four years. Of the total deferred
compensation amount, approximately $14.6 million has been amortized as of July
31, 2001.

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

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2000 2001 2000 2001
-------- -------- -------- --------

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

<Table>
<Caption>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
2001 2002 2003 2004 TOTAL
-------- -------- -------- -------- --------

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

We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $107.6
million at July 31, 2001. As of July 31, 2001, we had approximately $57.7
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.

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RESULTS OF OPERATIONS

The following table sets forth our consolidated financial data for the
periods indicated expressed as a percentage of our total revenue, including the
aforementioned allocation of stock-based compensation for all periods presented.
See Item 1, Financial Statements (Unaudited) - Note 7 to Notes to Condensed
Consolidated Financial Statements.

<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
--------------------- ---------------------
2000 2001 2000 2001
-------- -------- -------- --------

Revenue:
Product revenue ................................ 96.9% 91.7% 98.4% 95.9%
Other revenue .................................. 3.1 8.3 1.6 4.1
-------- -------- -------- --------

Total revenue ............................ 100.0 100.0 100.0 100.0

Cost of revenue ....................................... 87.7 62.2 59.0 56.8
-------- -------- -------- --------

Gross profit .......................................... 12.3 37.8 41.0 43.2

Operating expenses:
Sales and marketing ............................ 152.1 44.5 52.2 42.8
Research and development ....................... 87.6 54.2 37.7 45.2
General and administrative ..................... 91.4 45.2 106.4 44.9
Amortization of intangibles .................... 75.2 28.7 21.1 33.6
Write-down of intangibles ...................... -- 296.6 -- 87.4
Litigation settlement .......................... -- (177.9) -- (52.4)
-------- -------- -------- --------

Total operating expenses ................. 406.3 291.3 217.4 201.5
-------- -------- -------- --------

Loss from operations .................................. (394.0) (253.5) (176.4) (158.3)

Other income, net ..................................... 20.9 6.9 12.9 8.0
-------- -------- -------- --------

Net loss before cumulative effect of acct change ...... (373.1) (246.6) (163.5) (150.3)

Cumulative effect of accounting change ................ -- -- -- (0.5)
-------- -------- -------- --------
Net loss .............................................. (373.1)% (246.6)% (163.5)% (150.8)%
======== ======== ======== ========
</Table>

COMPARISON OF THREE MONTHS ENDED JULY 31, 2000 AND 2001

Revenue. Total revenue increased 76.4% from $4.8 million for the three
months ended July 31, 2000 to $8.4 million for the three months ended July 31,
2001. Without the inclusion of Polaris products and services, total revenue
increased 144% for the three months ended July 31, 2001 compared to the same
period in fiscal 2000.

Product revenue. Product revenue increased 67.0% from $4.6 million for the
three months ended July 31, 2000 to $7.7 million for the three months ended July
31, 2001. As a percentage of total revenue, product revenue decreased from 96.9%
for the three months ended July 31, 2000 to 91.7% for the three months ended
July 31, 2001. This increase in product revenue, however, was substantially
related to a product return of approximately $1.1 million resulting from
StorageTek's shift in demand to our newer products during the comparable three
months ended July 31, 2000. In addition, we have increased our customer base and
increased sales to our other significant OEM and channel customers as evidenced
by volume from our top four customers representing 75.0%, three of which
individually accounted for 10.0% or more of our revenue. In addition, our
distribution channel accounted for 7.2% of our total revenue.

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 370.5% from $149,000 for the
three months ended July 31, 2000 to $699,000 for the three months ended July 31,
2001. During the three months ended July 31, 2001, we recognized approximately
$610,000 in other revenue associated with granting a license to use certain
technology acquired from Polaris. We expect to recognize the remaining $165,000
of this fee during the three months ended October 31, 2001.

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This increase in gross margin, however, was substantially related to a $1.3
million write-down of inventory resulting from the aforementioned shift in
demand and Compaq's plan to transition out of our 4100/4200 router solutions
during the comparable three months ended July 31, 2000. Gross profit margin, net
of stock-based compensation, increased from 13.9% for the three months ended
July 31, 2000 to 38.2% for the three months ended July 31, 2001.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs, other promotional activities and stock-based compensation.
Sales and marketing expenses, net of stock-based compensation of $3.9 million
and $54,000 during the three months ended July 31, 2000 and 2001, respectively,
increased 10.5% from $3.3 million for the three months ended July 31, 2000 to
$3.7 million for the three months ended July 31, 2001. This increase in sales
and marketing expenses for the three months ended July 31, 2001 was primarily
due to the hiring of additional sales and marketing personnel resulting in
approximately $441,000 of increased compensation expense. Sales and marketing
personnel totaled 51 at July 31, 2000 and 60 at July 31, 2001. As a percentage
of total revenue, sales and marketing expenses decreased from 152.1% for the
three months ended July 31, 2000 to 44.5% for the three months ended July 31,
2001. We anticipate that sales and marketing expenses may fluctuate as a
percentage of total revenue, due to our ongoing 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,
prototyping expenses and stock-based compensation. Research and development
expenses, net of increased stock-based compensation of $131,000 and $52,000
during the three months ended July 31, 2000 and 2001, respectively, increased
11.4% from $4.1 million for the three months ended July 31, 2000 to $4.5 million
for the three months ended July 31, 2001. This increase in research and
development expenses was primarily due to the hiring of additional research and
development personnel resulting in approximately $175,000 of increased
compensation expense and approximately $115,000 of increased depreciation
expense. Research and development personnel totaled 79 at July 31, 2000 and 87
at July 31, 2001. As a percentage of total revenue, research and development
expenses decreased from 87.6% for the three months ended July 31, 2000 to 54.2%
for the three months ended July 31, 2001. We anticipate that research and
development expenses may fluctuate as a percentage of total revenue, due to our
ongoing research and development in developing our technologies and expanding
our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses, insurance costs and stock-based
compensation. General and administrative expenses, net of increased stock-based
compensation of $2.2 million and $1.1 million during the three months ended July
31, 2000 and 2001, respectively, increased 20.3% from $2.2 million for the three
months ended July 31, 2000 to $2.7 million for the three months ended July 31,
2001. This increase in general and administrative expenses was primarily due to
the hiring of administrative personnel resulting in approximately $375,000 of
increased compensation expense for the three months ended July 31, 2001. General
and administrative personnel totaled 38 at July 31, 2000 and 40 at July 31,
2001. As a percentage of total revenue, general and administrative expenses
decreased from 91.4% for the three months ended July 31, 2000 to 45.2% for the
three months ended July 31, 2001. We anticipate that general and administrative
expenses may fluctuate as a percentage of total revenue, as we 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 NINE MONTHS ENDED JULY 31, 2000 AND 2001

Revenue. Total revenue increased 15.9% from $24.7 million for the nine
months ended July 31, 2000 to $28.6 million for the nine months ended July 31,
2001. Without the inclusion of Polaris products and services, total revenue
increased 10.6% for the nine months ended July 31, 2001 compared to the same
period in fiscal 2000.

Product revenue. Product revenue increased 12.9% from $24.3 million for the
nine months ended July 31, 2000 to $27.4 million for the nine months ended July
31, 2001. As a percentage of total revenue, product revenue decreased from 98.4%
for the nine months ended July 31, 2000 to 95.9% for the nine months ended July
31, 2001. The increase in product revenue resulted from increased sales of our
storage router product family through an increased customer base and increased
sales to our significant OEMs, customers, distributors, resellers and system
integrators in conjunction with a growing demand for storage routers. This
broadened revenue base was also evidenced by volume from our top nine customers
representing 75.0% of our total revenue, four of which individually accounted
for 10.0% or more of our revenue. In addition, we launched the Crossroads 4x50
line of high-performance intelligent routers that enable companies to realize
the benefits of managing their mission critical data using applications such as
server-free

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backup and LAN-free backup while protecting the investments made in their
current enterprise systems. Our 4x50 line accounted for approximately 14.1% and
58.5% of our product revenue during the nine months ended July 31, 2000 and
2001, respectively.

Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue increased 205.2% from $386,000 for the nine
months ended July 31, 2000 to $1.2 million for the nine months ended July 31,
2001. The increase for the nine months ended July 31, 2001 was due to the
license of a product design and royalties of $244,000 in that period. In
addition, we recognized approximately $610,000 in other revenue associated with
a $775,000 fee received upon granting a license to use certain technology
acquired from Polaris. We expect to recognize the remainder of the fee during
the three months ended October 31, 2001.

Cost of revenue and gross profit. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead, warranty
costs and stock-based compensation. Cost of revenue, net of stock-based
compensation of $242,000 and $100,000 during the nine months ended July 31, 2000
and 2001, respectively, increased 12.7% from $14.3 million for the nine months
ended July 31, 2000 to $16.2 million for the nine months ended July 31, 2001.
Gross profit, net of stock-based compensation, increased 20.3% from $10.4
million for the nine months ended July 31, 2000 to $12.5 for the nine months
ended July 31, 2001. Gross profit margin, net of stock-based compensation,
increased from 41.9% for the nine months ended July 31, 2000 to 43.6% for the
nine months ended July 31, 2001. This increase was primarily due to higher
margin OEM product sales, a higher margin product mix and significantly improved
revenue linearity during the period.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs, other promotional activities and stock-based compensation.
Sales and marketing expenses, net of stock-based compensation of $4.3 million
and $189,000 during the nine months ended July 31, 2000 and 2001, respectively,
increased 40.6% from $8.6 million for the nine months ended July 31, 2000 to
$12.1 million for the nine months ended July 31, 2001. This increase in sales
and marketing expenses for the nine months ended July 31, 2001 was primarily due
to increased consulting and professional services of approximately $172,000,
increased tradeshow related expenses of approximately $90,000, increased
equipment related expenses of approximately $245,000, increased depreciation of
approximately $170,000 and the hiring of additional sales and marketing
personnel resulting in approximately $2.6 million of increased compensation
expense. Sales and marketing personnel totaled 51 at July 31, 2000 and 60 at
July 31, 2001. As a percentage of total revenue, sales and marketing expenses
decreased from 52.2% for the nine months ended July 31, 2000 to 42.8% for the
nine months ended July 31, 2001. We anticipate that sales and marketing expenses
may fluctuate as a percentage of total revenue, due to our ongoing 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,
prototyping expenses and stock-based compensation. Research and development
expenses, net of increased stock-based compensation of $444,000 and $399,000
during the nine months ended July 31, 2000 and 2001, respectively, increased
41.2% from $8.9 million for the nine months ended July 31, 2000 to $12.5 million
for the nine months ended July 31, 2001. This increase in research and
development expenses was primarily due to the hiring of additional research and
development personnel resulting in approximately $1.7 million of increased
compensation expense, increased prototyping costs of approximately $164,000
related to the ongoing development of an expanded product line, increased
consulting and professional services of approximately $1.2 million and
approximately $415,000 of increased depreciation expense. Research and
development personnel totaled 79 at July 31, 2000 and 87 at July 31, 2001. As a
percentage of total revenue, research and development expenses increased from
37.7% for the nine months ended July 31, 2000 to 45.2% for the nine months ended
July 31, 2001. We anticipate that research and development expenses may
fluctuate as a percentage of total revenue, due to our ongoing research and
development in developing our technologies and expanding our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses, insurance costs and stock-based
compensation. General and administrative expenses, net of increased stock-based
compensation of $20.4 million and $5.3 million during the nine months ended July
31, 2000 and 2001, respectively, increased 28.9% from $5.9 million for the nine
months ended July 31, 2000 to $7.5 million for the nine months ended July 31,
2001. This increase in general and administrative expenses was primarily due to
increased legal costs associated with patent infringement lawsuits of
approximately $1.9 million. As a percentage of total revenue, general and
administrative expenses decreased from 106.4% for the nine months ended July 31,
2000 to 44.9% for the nine months ended July 31, 2001. We anticipate that
general and administrative expenses may fluctuate as a percentage of total
revenue, as we 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.

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LITIGATION SETTLEMENT

During the three months ended July 31, 2000, we received $15.0 million from
ADIC in connection with the settlement of our patent infringement lawsuit filed
against Pathlight Technology, Inc. Pathlight was acquired by ADIC in May 2001.
In connection with the settlement of the lawsuit, we granted ADIC a
non-exclusive license under the related patent.

OTHER INCOME, NET

Other income, net. Other income, net consists primarily of interest income
on short-term investments partially offset by interest expense. Other income,
net was $3.2 million and $2.3 million in the nine months ended July 31, 2000 and
2001, respectively, representing 12.9% and 8.0% of total revenue respectively.
The decrease in other income, net was primarily due to decreased interest income
on short-term investments resulting from weakening macro-economic conditions
and, thus, lower yields on our investments.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity at July 31, 2001 consisted of $50.7
million in cash and cash equivalents and $10.0 million in short-term
investments.

In January 2001, the Company extended its existing line of credit with
Silicon Valley Bank. The committed revolving line is an advance of up to $3.0
million with a borrowing base of 80% of eligible accounts receivable. The line
of credit matures on February 1, 2002. As of July 31, 2001, there were no
borrowings outstanding under the revolving line of credit and no term loans
outstanding.

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

Cash utilized by operating activities was $7.9 million for the nine months
ended July 31, 2000 as compared to cash provided by operating activities of $5.0
million for the nine months ended July 31, 2001. The increase in net cash
provided reflects a decrease in working capital required to fund the expansion
of our operations of approximately $5.1 million in addition to an increase in
non-cash items such as the write-down of intangibles, depreciation, amortization
and stock based compensation of approximately $7.7 million.

Cash provided by investing activities was $4.6 million for the nine months
ended July 31, 2000 as compared to $2.5 million for the nine months ended July
31, 2001. The decrease in net cash provided reflected the maturity of
held-to-maturity investments, net of purchases, of $7.6 million during the nine
months ended July 31, 2001 compared to $11.9 million during the nine months
ended July 31, 2000 offset by a decrease in capital expenditures during the
period. Capital expenditures were $8.3 million and $5.0 million for the nine
months ended July 31, 2000 and 2001, respectively. These expenditures reflect
our investments in computer equipment and software, test equipment, software
development tools and leasehold improvements, all of which were required to
support our business expansion. We anticipate additional capital expenditures
through fiscal 2001 of at least $3.4 million.

Cash utilized by financing activities was $1.5 million for the nine months
ended July 31, 2000 as compared to cash provided by financing activities of
$800,000 for the nine months ended July 31, 2001. The increase in net cash
provided by financing activities reflected the payment of our existing debt of
$2.4 million during the nine months ended July 31, 2000 offset by a decrease of
approximately $139,000 in proceeds from issuance of common stock during the nine
months ended July 31, 2001. We have funded our operations to date primarily
through sales of preferred stock and our initial public offering, resulting in
aggregate gross proceeds to us of $98.2 million (which amount includes the $12.0
million of proceeds received from the private placement of our Series E
preferred stock in August 1999), product sales and, to a lesser extent, bank
debt (equipment loan).

We believe our existing cash balances and our credit facilities will be
sufficient to meet our capital requirements beyond the next 12 months. However,
we could be required or could elect to seek additional funding prior to that
time. Our future capital requirements will depend on many factors, including the
rate of revenue growth, the timing and extent of spending to support product
development efforts and expansion of sales and marketing activities, the timing
of introductions of new products and enhancements to existing products, and
market acceptance of our products. On March 21, 2000, we consummated our
acquisition of Polaris Communications,

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Inc. and we may enter into additional acquisitions or strategic arrangements in
the future that also could require us to seek additional equity or debt
financing. We cannot assure you that additional equity or debt financing, if
required, will be available to us on acceptable terms, or at all.

RECENT ACCOUNTING PRONOUNCEMENTS

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

In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions Involving Stock Compensation - an interpretation of APB
Opinion 25," ("Interpretation No. 44") which is generally effective July 1,
2000. Interpretation No. 44 clarifies the application of APB Opinion 25 for
certain matters, specifically (a) the definition of an employee for purposes of
applying APB Opinion 25, (b) the criteria for determining whether a plan
qualifies as a non-compensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and (d)
the accounting for an exchange of stock compensation awards in a business
combination. The adoption of Interpretation No. 44 did not have a material
impact on the financial position or the results of operations.

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial
Statements," ("SAB No. 101") which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. SAB No. 101 is
effective for all fiscal quarters of fiscal years beginning after December 15,
1999. Effective November 1, 2000, we adopted SAB 101. The adoption of SAB 101
resulted in a change in method of revenue recognition for certain product
shipments due to the specified shipping terms for these shipments. The
cumulative effect of this accounting change was $130,000, which has been
included in net loss for the nine months ended July 31, 2001. Prior period
financial statements have not been restated to apply SAB 101 retroactively,
however, the pro forma amounts included in the Condensed Consolidated Statements
of Operations reflect the net loss and net loss per share assuming the Company
had retroactively applied SAB 101 to all periods presented.

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

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," ("SFAS No. 142") which changes how goodwill and other intangible assets
are accounted for subsequent to their initial recognition. Under this standard,
goodwill and other intangibles assets having indefinite useful lives are no
longer amortized, but are subjected to periodic assessments of impairment. SFAS
No. 142 is effective for fiscal years beginning after December 15, 2001. We are
currently in the process of evaluating SFAS No. 142 and the effect it may have
on our financial statements. As of this date, we do not expect SFAS No. 142 to
have a material impact on our financial position or results of operations. In
the event that SFAS No. 142 is determined to have a material impact on our
financial position or results of operations, we would be required to report such
changes no later than the quarter ending January 31, 2002.

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FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to the other information in this Form 10-Q, the following
factors should be considered in evaluating Crossroads and our business. These
factors include, but are not limited to the potential for significant losses to
continue; our inability to accurately predict revenue and budget for expenses
for future periods; fluctuations in revenue and operating results; class action
securities litigation; overall market performance; limited product lines;
limited number of OEM customers; lengthy OEM product qualification process;
competition; delays in research and development; inventory risks; the inability
to expand our distribution channels; the loss of our primary contract
manufacturers; risks of delay or poor execution from a variety of sources; final
assembly and test process; inventory risks; limited resources; pricing;
dependence upon key personnel; international operations; product liability
claims; the inability to protect our intellectual property rights, including any
adverse outcome in our pending patent litigation with certain of our
competitors; potential future acquisitions; concentration of ownership;
volatility of stock price; and the impact on our results or operations due to
changes in accounting standards, including the implementation of SAB 101 with
respect to revenue recognition. The discussion below addresses some of these
factors. Additional risks and uncertainties that we are unaware of or that we
currently deem immaterial also may become important factors that affect us.

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

We have incurred significant losses in every fiscal quarter since fiscal
1996 and expect to continue to incur losses in the future. As of July 31, 2001,
we had an accumulated deficit of $107.6 million. We cannot be certain that we
will be able to sustain growth rates that we will need to realize sufficient
revenue to achieve profitability. We also expect to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we expect to continue to incur losses. 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 five years and, thus, we
have only a short history from which to predict future revenue. This limited
operating experience, combined with the rapidly evolving nature of the storage
area network market in which we sell our products and other factors that are
beyond our control, reduces our ability to accurately forecast our quarterly and
annual revenue. However, we use our forecasted revenue to establish our expense
budget. Most of our expenses are fixed in the short term or incurred in advance
of anticipated revenue. As a result, we may not be able to decrease our expenses
in a timely manner to offset any shortfall of revenue.

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

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

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

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

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

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

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

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

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

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

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

We and several of our officers and directors were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. The Court consolidated the actions and appointed a
lead plaintiff under the Private Securities Litigation Reform Act of 1995. The
amended consolidated complaint was filed in February 2001 and we filed a motion
to dismiss. The litigation is at an early stage and it is not possible at this
time to predict whether we will incur any liability or to estimate the damages,
or the range of damages, that we might incur in connection with such actions. An
adverse judgment may have a material adverse effect on our business and
financial performance. See Item 1, Financial Statements (Unaudited) - Note 6 to
Notes to Condensed Consolidated Financial Statements.

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

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

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

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

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

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

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

We currently have only three principal products within our storage router
product family that we sell in commercial quantities. In particular, sales of
our 4100 and 4200 products have accounted for the vast majority of our product
revenue to date. To reduce our dependence on these products, we must
successfully develop and introduce to market new products and product
enhancements in a timely manner. On September 1, 2000, we began notifying our
customers that our 4100 product was at its "end of life." Customers

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who purchased the 4100 product are migrating to our next generation of products
that we refer to as the 4x50 product line. Sales of our 4x50 product accounted
for approximately 11.0% and 58.8% of our product revenue during the nine months
ended July 31, 2000 and 2001, respectively. During the nine months ended July
31, 2001, we decided to "end of life" the 7100 product line and apply our
knowledge in the SAN-to-SAN arena to the iSCSI market which we believe will be
the open systems application having broad customer and industry support. During
the three months ended July 31, 2001, we launched the 8000 storage router, which
includes the Crossroads Visual Manager(tm) management software that increases
intelligence on the SAN. The 8000 is the first in a new line of multi-protocol
storage routers designed to connect storage devices into Fibre Channel and iSCSI
storage networks, and InfiniBand fabrics. Even if we are able to develop and
commercially introduce new products and enhancements, these new products or
enhancements may not achieve market acceptance that could reduce our revenue.

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

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

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

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

o our customer service and support capabilities and responsiveness;
and

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

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

In fiscal 1998, 1999, 2000, and the nine months ended July 31, 2001,
approximately 90%, 85%, 77%, and 68% of our revenue, respectively, was derived
from six customers. In fiscal 2000, Compaq and StorageTek represented 33% and
21% of our total revenue, respectively. During the nine months ended July 31,
2001, ADIC, Compaq, Dell, Hewlett Packard and StorageTek represented 10.3%,
2.3%, 9.7%, 21.3% and 21.0% of our total revenue, respectively. During fiscal
2000, we recorded a $1.1 million return resulting from StorageTek's shift in
demand to our newer products. Moreover, Compaq discontinued purchasing our
4100/4200 line of storage routers and plans to internally manufacture its own
solution. In addition, in April 2001, ADIC informed us that it intends to
transition out of our router products upon consummation of its acquisition of
Pathlight Technology. If the level of StorageTek's purchases fails to return to
previous levels and if we are unable to replace the revenue lost due to Compaq's
and ADIC's transition away from our line of storage routers, our results of
operations and future prospects will suffer.

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 THAT DOES NOT ASSURE PRODUCT SALES.

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

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

In traditional computer networks, system backup is accomplished by
transferring data from applications and databases over the servers used in the
network to tape drives or other media where the data is safely stored. Tape
storage devices generally rely on an SCSI connection to interface with the
network in receiving and transmitting data. Our routers enable these SCSI-based
storage devices to interface with the Fibre Channel-based components of the SAN.
Because our routers allow communication between SCSI storage devices and a Fibre
Channel SAN, organizations are able to affect their backup processes over the
SAN rather than through the computer network, enabling the servers of the
network to remain available for other computing purposes. We currently derive
the majority of our revenue from sales of storage routers that are used to
connect SCSI-based tape storage systems with SANs. The introduction of tape
storage systems that incorporate Fibre Channel interfaces would enable tape
storage devices to communicate directly with SANs, without using storage
routers. We are aware that a number of manufacturers of storage systems,
including several of our current customers, are developing tape storage systems
with embedded Fibre Channel interfaces, with products expected to be introduced
to market in the near future. If these or other manufacturers are successful in
introducing Fibre Channel-based storage systems, demand for our storage router
products would be materially reduced and our revenue would decline.

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

Our products are intended to complement other SAN products to improve the
performance of computer networks by addressing the input/output bottlenecks that
have emerged between the storage systems and the servers within a computing
system. We have devoted and expect to continue to devote significant resources
to developing products based on emerging technologies and standards that reduce
input/output bottlenecks. A number of large companies in the computer hardware
and software industries are actively involved in the development of new
technologies and standards that are expected to be incorporated in our new
products. Should any of these companies delay or abandon their efforts to
develop commercially available products based on these new technologies and
standards, our research and development efforts with respect to such
technologies and standards likely would have no appreciable value. In addition,
if we do not correctly anticipate new technologies and standards, or if our
products based on these new technologies and standards fail to achieve market
acceptance, our competitors may be better able to address 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, system
integrators and storage service providers, 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, system integrators and storage system providers. The inability to
successfully execute this strategy could impede our future growth.

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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.

Prior to August 1999, we 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
August 1999, we 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 our contract
manufacturers approximately four months prior to the anticipated delivery date,
with order volumes based on forecasts of demand from our customers. Accordingly,
if we inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from our contract manufacturers to meet our
customers' delivery requirements, or we may accumulate excess inventories. We
have on occasion in the past been unable to adequately respond to unexpected
increases in customer purchase orders, and therefore were unable to benefit from
this incremental demand. Our contract manufacturers have not provided assurances
to us that adequate capacity will be available to us within the time required to
meet additional demand for our products.

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

We plan to introduce new products and product enhancements, which will
require that we coordinate our efforts with those of our component suppliers and
our contract manufacturers to rapidly achieve volume production. If we should
fail to effectively manage our relationships with our component suppliers and
our contract manufacturers, or if any of our suppliers or our manufacturers
experience delays, disruptions, capacity constraints or quality control problems
in their manufacturing operations, our ability to ship products to our customers
could be delayed, and our competitive position and reputation could be harmed.
Qualifying a new component supplier or contract manufacturer and commencing
volume production can be expensive and time consuming. If we are required to
change or choose to change suppliers, we may lose revenue and damage our
customer relationships.

TRANSITIONING THE FINAL ASSEMBLY AND TEST PORTION OF OUR MANUFACTURING PROCESS
TO AN IN-HOUSE FACILITY 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. If demand for our products does not support the effective
utilization of our manufacturing employees and additional facilities and
equipment, we may not realize any benefit from replacing these services
previously outsourced to a contract manufacturer with internal final assembly
and testing. Furthermore, internal final assembly and test operations require 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 revenue and may result in lost sales. We
generally use a rolling six-month forecast of our future product sales to
determine our component requirements. Lead times for ordering materials and
components vary significantly and depend on factors such as specific supplier
requirements, contract terms and current market demand for such components. If
we overestimate our component requirements, we may have excess inventory which
would increase our costs. If we underestimate our component requirements, we may
have inadequate inventory that would delay our manufacturing and render us
unable to deliver products to customers on a scheduled delivery date. We also
may experience shortages of certain components from time to time, which also
could delay our manufacturing. Manufacturing delays could negatively impact our
ability to sell our products and damage our customer relationships.

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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 Adva-SAN Ltd., ATTO, Chaparral Network Storage,
Computer Network Technologies and Pathlight Technology, who was recently
acquired by ADIC in May 2001. During fiscal 2000, Compaq informed us of its
intent to manufacture its own routers, rather than act as an OEM for our 4100
and 4200 lines of routers. During April 2001, ADIC informed us that it intends
to transition out of our router products upon consummation of its acquisition of
Pathlight Technology, Inc., which they subsequently completed on May 11, 2001.
In addition, other OEM customers could develop products or technologies
internally, or by entering into strategic relationships with or acquiring other
existing SAN product providers that would replace their need for our products
and would become a source of competition. We expect to face competition in the
future from OEMs, including our customers and potential customers, LAN router
manufacturers, storage system industry suppliers, including manufacturers and
vendors of other SAN products or entire SAN systems, and innovative start-up
companies. For example, manufacturers of Fibre Channel hubs or switches could
seek to include router functionality within their SAN products that would
obviate the need for our storage routers. As the market for SAN products grows,
we also may face competition from traditional networking companies and other
manufacturers of networking products. These networking companies may enter the
storage router market by introducing their own products or by entering into
strategic relationships with or acquiring other existing SAN product providers.
This could introduce additional competition in our markets, especially if Compaq
or another one of our OEMs begins to manufacture our higher end storage routers.
Moreover, we are currently in litigation with Chaparral in which we have alleged
their infringement of certain proprietary rights. If we are not successful in
this litigation, our competitive position may be harmed.

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

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

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

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

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

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 generally have been offset by higher average selling prices for
our newer products, as well as sales to distributors, resellers and system
integrators where price decreases are not generally required. Nonetheless, we
could experience declines in our average unit selling prices for our products in

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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.

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

Networking products such as ours may contain undetected software or hardware
errors when first introduced or as new versions are released. Our products are
complex and errors have been found in the past and may be found from time to
time in the future. For example in July, 2000, we voluntarily issued a
"stop-ship" on our 4x50 line and part of our 4200 line due to firmware issues,
which negatively affected our product revenue during fiscal 2000. In addition,
our products include components from a number of third-party vendors. We rely on
the quality testing of these vendors to ensure the adequate operation of their
products. Because our products are manufactured with a number of components
supplied by various third-party sources, should problems occur in the operation
or performance of our products, it may be difficult to identify the source. In
addition, our products are deployed within SANs from a variety of vendors.
Therefore, the occurrence of hardware and software errors, whether caused by our
or another vendor's SAN products, could adversely affect sales of our products.
Furthermore, defects may not be discovered until our products are already
deployed in the SAN. These errors also could cause us to incur significant
warranty, diagnostic and repair costs, divert the attention of our engineering
personnel from our product development efforts and cause significant customer
relations and business reputation problems.

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

We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. In particular, we believe that our future success is highly
dependent on Brian R. Smith, our co-founder and chairman of the board, and Larry
Sanders, our chief executive officer, 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 Mr. Sanders. 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.

WE HAVE INCREASED OUR INTERNATIONAL SALES ACTIVITIES, WHICH WILL SUBJECT US TO
ADDITIONAL BUSINESS RISKS.

We have opened 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
continue to develop relationships with international distributors, resellers,
system integrators and storage 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 rules;

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. Legal
proceedings could subject us to significant liability for damages or invalidate
our intellectual property rights. Any litigation, regardless of its outcome,
would likely be time consuming and expensive to resolve and would divert
management's time and attention. Any potential intellectual property litigation
against us could force us to take specific actions, including:

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

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

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

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

As part of our growth strategy, we intend to review opportunities to acquire
other businesses or technologies that would complement our current products,
expand the breadth of our markets or enhance our technical capabilities. For
example, in March 2000, we consummated our 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.

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

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preferred by OEM customers or end users. If larger companies do not support the
same industry standards that we do, or if competing standards emerge, our
products may not achieve market acceptance which would adversely affect our
business.

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

Our executive officers and directors, and their affiliates, beneficially own
a significant portion of the total voting power of our company. As a result,
these stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of voting power could
delay or prevent an acquisition of us on terms that other stockholders may
desire.

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

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

OUR STOCK PRICE MAY BE VOLATILE.

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

o actual or anticipated fluctuations in our operating results;

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

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

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

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

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

o departures of key personnel.

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

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

In December 1999, the SEC issued Staff Accounting Bulletin No. 101, Revenue
Recognition in Financial Statements, referred to as SAB 101. SAB 101 summarizes
the SEC staff's views in applying generally accepted accounting principles to
revenue recognition in financial statements. Effective November 1, 2000, we
adopted SAB 101. While SAB 101 will not affect the fundamental aspects of our
operations as measured by product shipments and cash flows, implementation of
SAB 101 will affect our reported results of operations. It is possible that SAB
101 will result in increased fluctuations in our quarterly operating results and
increase the likelihood that we may fail to meet the expectations of securities
analysts for any period. The adoption of SAB 101 resulted in a change in method
of revenue recognition for certain product shipments due to the specified
shipping terms for these shipments. The cumulative effect of this accounting
change was $130,000, which has been included in net income for the nine months
ended July 31, 2001. Prior period financial statements have not been restated to
apply SAB 101 retroactively, however, the pro forma amounts included in the
Condensed Consolidated Statements of Operations reflect the net loss and net
loss per share assuming we had retroactively applied SAB 101 to all periods
presented. We are also considering potential changes to the terms of our sales
agreements for equipment sales that could mitigate the impact of SAB 101.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk is contained on Page 31 of our 2000 Annual
Report on Form 10-K and is incorporated herein by reference to the annual
report.

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CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

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 (5,941,972,
hereinafter "972 patent") with some of their products. In September, the jury
found that the 972 patent was valid and that all of Chaparral's RAID and router
products that contained LUN Zoning have infringed all claims of our 972 patent.
As a result, we were awarded damages with a royalty amount of 5% for Chaparral's
router product line and 3% for their RAID product line. We will be pursuing an
injunction based on the jury's finding of infringement. The federal judge in
this matter will consider assessing punitive damages, which could treble the
actual damages. The Court will also consider the imposition of reasonable
attorney's fees.

On April 14, 2000, we filed a lawsuit against Pathlight Technology, Inc.
alleging that Pathlight has infringed one of our patents with their SAN Data
Gateway Router. Pathlight was subsequently acquired by Advanced Digital
Information Corporation on May 11, 2001. In June 2001, ADIC paid us $15.0
million in connection with the settlement of this lawsuit, this payment was
recognized in the statement of operations for the three and nine months ended
July 31, 2001. In connection with the settlement of the lawsuit, we granted ADIC
a non-exclusive license under the related patent.

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

We and several of our officers and directors were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. The Court consolidated the actions and appointed a
lead plaintiff under the Private Securities Litigation Reform Act of 1995. The
amended consolidated complaint was filed in February 2001. The plaintiffs are
seeking unspecified amounts of compensatory damages, interests and costs,
including legal fees. We continue to deny the allegations in the complaint and
intend to defend ourselves vigorously. On August 10, 2001, the court denied our
motion to dismiss the consolidated amended complaint. The class action lawsuit
is still at an early stage. Consequently, it is not possible at this time to
predict whether we will incur any liability or to estimate the damages, or the
range of damages, if any, that we might incur in connection with this lawsuit.
Our inability to prevail in this action could have a material adverse effect on
our future business, financial condition and results of operations.

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

(a) Exhibit Index

Exhibit Number Description
- -------------- -----------

10.16 Settlement and License Agreement dated June 12, 2001
by and between Crossroads Systems, Inc. and Advanced
Digital Corporation which was filed as Exhibit 10.16
to registrant's quarterly report on Form 10-Q dated
June 14, 2001 and is herein incorporated by this
reference.

(b) Reports on Form 8-K

Crossroads did not file any current reports on Form 8-K during the three months
ended July 31, 2001.

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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.

September 14, 2001 /s/ BRIAN R. SMITH
------------------ -----------------------------------------
(Date) Brian R. Smith
Chief Executive Officer
(Principal Executive Officer)

September 14, 2001 /s/ REAGAN Y. SAKAI
------------------ -----------------------------------------
(Date) Reagan Y. Sakai
Chief Financial Officer
(Principal Financial and Accounting
Officer)