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 JANUARY 31, 2002

[ ] 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 Identification No.)
incorporation or organization)

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 March 1, 2002, Registrant had outstanding _________ shares of common
stock, par value $0.001 per share.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

TABLE OF CONTENTS

PAGE
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of October 31, 2001 and
January 31, 2002................................................................................. 3

Condensed Consolidated Statements of Operations for the three months
ended January 31, 2001 and 2002.................................................................. 4

Condensed Consolidated Statements of Cash Flows for the three months ended
January 31, 2001 and 2002........................................................................ 5

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

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................................ 11

Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................................... 27

PART II OTHER INFORMATION

Item 1. Legal Proceedings.................................................................................. 28

Item 2. Changes in Securities and Use of Proceeds.......................................................... 29

Item 3. Defaults Upon Senior Securities.................................................................... 29

Item 4. Submission of Matters to a Vote of Security Holders................................................ 29

Item 5. Other Information.................................................................................. 29

Item 6. Exhibits and Reports on Form 8-K................................................................... 29

SIGNATURES................................................................................................... 30
</Table>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

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

ASSETS

Current assets:
Cash and cash equivalents .................................................. $ 43,686 $ 27,202
Short-term investments ..................................................... 10,000 19,000
--------- ---------
Total cash, cash equivalents and short-term investments ............... 53,686 46,202
Accounts receivable, net of allowance for doubtful
accounts of $388 and $277, respectively ................................. 3,768 4,591
Inventories, net ........................................................... 3,080 3,279
Prepaids and other current assets .......................................... 1,894 1,845
--------- ---------
Total current assets .................................................. 62,428 55,917
Notes receivable from related party, net ......................................... 244 191
Property and equipment, net ...................................................... 11,021 10,426
Intangibles, net ................................................................. 997 928
Other assets ..................................................................... 713 713
--------- ---------
Total assets .......................................................... $ 75,403 $ 68,175
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable ........................................................... $ 7,070 $ 5,796
Accrued expenses ........................................................... 2,744 1,532
Accrued warranty costs ..................................................... 597 719
Deferred revenue ........................................................... 746 705
--------- ---------
Total current liabilities ............................................. 11,157 8,752

Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized,
27,542,664 and 27,661,529 shares issued and outstanding, respectively .... 28 28
Additional paid-in capital ................................................. 184,042 185,591
Deferred stock-based compensation .......................................... (3,914) (3,889)
Notes receivable from stockholders ......................................... (118) (120)
Accumulated deficit ........................................................ (115,535) (121,929)
Treasury stock at cost (467,794 and 468,262 shares, respectively) .......... (257) (258)
--------- ---------
Total stockholders' equity ............................................ 64,246 59,423
--------- ---------
Total liabilities and stockholders' equity ............................ $ 75,403 68,175
========= =========
</Table>

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED
JANUARY 31,
-----------------------------
2001 2002
------------ ------------

Revenue:
Product revenue ...................................................... $ 9,824 $ 9,034
Other revenue ........................................................ 150 163
------------ ------------
Total revenue ........................................... 9,974 9,197
Cost of revenue (including stock-based compensation expense
of $39 and $24, respectively) ......................................... 4,876 5,876
------------ ------------
Gross profit .............................................................. 5,098 3,321
------------ ------------
Operating expenses:
Sales and marketing (including stock-based compensation
expense of $48 and $189, respectively) ............................. 4,068 2,310
Research and development (including stock-based
compensation expense of $265 and $79, respectively) ................ 4,302 5,184
General and administrative (including stock-based
compensation expense of $2,222 and $955, respectively) ............. 4,716 2,469
Amortization of intangibles .......................................... 3,596 70
------------ ------------
Total operating expenses .......................................... 16,682 10,033
------------ ------------
Loss from operations ...................................................... (11,584) (6,712)
Other income, net ................................................. 974 318
------------ ------------
Net loss before cumulative effect of accounting change .................... (10,610) (6,394)
Cumulative effect of accounting change .................................... (130) --
------------ ------------
Net loss .................................................................. $ (10,740) $ (6,394)
============ ============
Basic and diluted net loss per share:
Before cumulative effect of accounting change ........................ $ (0.38) $ (0.23)
Cumulative effect of accounting change ............................... (0.01) --
------------ ------------
Basic and diluted net loss per share .............................. $ (0.39) $ (0.23)
============ ============
Shares used in computing basic and
diluted net loss per share ........................................... 27,284,797 27,274,904
============ ============
</Table>

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

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

THREE MONTHS ENDED
JANUARY 31,
-----------------------------
2001 2002
------------ ------------

Cash flows from operating activities:
Net loss .................................................... $ (10,740) $ (6,394)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ............................................... 1,154 1,711
Amortization of intangibles ................................ 3,596 70
Stock-based compensation ................................... 2,574 1,247
Provision for doubtful accounts receivable ................. 44 (111)
Provision for excess and obsolete inventories .............. 90 (169)
Changes in assets and liabilities:
Accounts receivable ........................................ 438 (712)
Inventories ................................................ (44) (30)
Prepaids and other current assets .......................... 165 49
Accounts payable ........................................... 663 (1,274)
Accrued expenses ........................................... (327) (1,212)
Accrued warranty costs ..................................... 20 122
Deferred revenue ........................................... (325) (41)
Other ...................................................... (6) 3
------------ ------------
Net cash used in operating activities ...................... (2,698) (6,741)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment .......................... (1,270) (1,116)
Purchase of held-to-maturity investments .................... -- (9,000)
Maturity of held-to-maturity investments .................... 7,591 --
Payment of note receivable from related party ............... 17 47
Other assets ................................................ (4) --
------------ ------------
Net cash provided by (used in) investing activities ........ 6,334 (10,069)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of common stock ...................... 330 326
Purchase of treasury stock .................................. (19) --
Other ....................................................... -- --
------------ ------------
Net cash provided by (used in) financing activities ........ 311 326
------------ ------------
Net increase (decrease) in cash and cash equivalents .......... 3,947 (16,484)
Cash and cash equivalents, beginning of period ................ 42,447 43,686
------------ ------------
Cash and cash equivalents, end of period ...................... $ 46,394 $ 27,202
============ ============
</Table>

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

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

1. BASIS OF PRESENTATION

The accompanying 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 inter-company 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, 2001, included in our Annual Report on Form 10-K.

The results of operations for the three months ended January 31, 2002 are
not necessarily indicative of results that may be expected for any other interim
period or for the full year.

2. 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 (in thousands):

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

Raw materials .................................................. $ 3,692 $ 3,742
Work-in-process ................................................ -- 1
Finished goods ................................................. 1,168 1,147
------------ ------------
4,860 4,890
Less: Allowance for excess and obsolete inventory ....... (1,780) (1,611)
------------ ------------
$ 3,080 3,279
============ ============
</Table>

3. PROPERTY AND EQUIPMENT

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

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

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

Equipment ....................................................... $ 17,509 $ 18,417
Furniture and fixtures .......................................... 1,878 1,878
Leasehold improvements .......................................... 906 906
------------ ------------
20,293 21,201
Less: accumulated depreciation and amortization ...... (9,272) (10,775)
------------ ------------
$ 11,021 $ 10,426
============ ============
</Table>

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

4. 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 36% and 59% of total trade accounts
receivable at October 31, 2001 and January 31, 2002, respectively. The Company
performs credit evaluations of its customers and generally does not require
collateral on accounts receivable balances and provides allowances for potential
credit losses and product sales returns.

The Company'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:

THREE MONTHS ENDED
JANUARY 31,
------------------------
2001 2002
---------- ---------

Customer A .............. 3% 3%
Customer B .............. 15% 35%
Customer C .............. 11% 0%
Customer D .............. 17% 37%
</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,
transitioned out of the Company's router products upon consummation of its
acquisition of Pathlight Technology, Inc. ("Pathlight"), which was subsequently
completed on May 11, 2001. Sales to ADIC were approximately $1.1 million and $0
during the three months ended January 31, 2001 and 2002, respectively. In April
2001, we decided to write off inventory specifically related to ADIC resulting
in a charge of approximately $47,000.

5. LINE OF CREDIT

In January 2002, the Company extended its existing line of credit with its
bank. The committed revolving line provides for an advance of up to $3.0 million
with a borrowing base of 80% of eligible accounts receivable. The line of credit
matures on February 1, 2003. As of January 31, 2002, there were no borrowings
outstanding under this revolving line of credit.

6. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Intellectual Property Litigation

On March 31, 2000, Crossroads filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral has infringed one of its
patents (5,941,972, hereinafter "972 patent") with some of their products. In
September 2001, the jury found that the `972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning had infringed all
claims of the Crossroads `972 patent. The federal judge in this matter issued a
permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, the Company was awarded damages with a royalty amount of
5% for Chaparral's router product line and 3% for their RAID product line.

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 as contra operating
expense in the statement of operations for fiscal 2001. In connection with the
settlement of the lawsuit, the Company granted ADIC a non-exclusive license
under the related patent.

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

Securities Class Action Litigation

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

Derivative State Action

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

Other

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

7. STOCK-BASED COMPENSATION

In connection with the grant of certain stock options to our employees and
directors, the Company recorded deferred compensation aggregating $20.6 million
as of January 31, 2002, 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 $16.3 million has been amortized as
of January 31, 2002.

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

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

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

THREE MONTHS ENDED
JANUARY 31,
----------------------------
2001 2002
------------ ------------

Cost of revenue ............................. $ 39 $ 24
Sales and marketing ......................... 48 189
Research and development .................... 265 79
General and administrative .................. 2,222 955
------------ ------------
Total stock-based compensation ..... $ 2,574 $ 1,247
============ ============
</Table>

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

YEAR ENDED OCTOBER 31,
-------------------------------------------
2002 2003 2004 TOTAL
------------ ------------ ------------ ------------

Cost of revenue ............................. $ 60 $ 21 $ -- $ 81
Sales and marketing ......................... 232 89 2 323
Research and development .................... 269 102 2 373
General and administrative .................. 1,924 1,090 98 3,112
------------ ------------ ------------ ------------
Total stock-based compensation ......... $ 2,485 $ 1,302 $ 102 $ 3,889
------------ ------------ ------------ ------------
</Table>

8. 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 5,029,341 and
5,889,571 for the three months ended January 31, 2001 and 2002, respectively.

9. RECENT ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission staff released
Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements," which provides guidance on the recognition, presentation and
disclosure of revenue in financial statements. 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 No. 101. The adoption of SAB No. 101
resulted in a change in method of revenue recognition for certain product
shipments due to the specified shipping terms for these shipments. The
cumulative effect of this accounting change was approximately $130,000, which
has been included in net loss for the three months ended January 31, 2001. Prior
period financial statements have not been restated to apply SAB No. 101
retroactively.

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

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

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

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

10. RELATED PARTY TRANSACTIONS

Notes Receivable

During May 1999, the Company's board of directors approved the acceptance of
full recourse notes in the amount of approximately $442,000 from certain of the
Company's officers as consideration for the exercise of 1,014,999 options. The
notes accrue interest at 7% per year, compounded semi-annually and principal and
accrued interest is due in one lump sum in 2003. In March 2000, the Company
repurchased 232,500 unvested shares for approximately $123,000 and subsequently
collected $114,000 in principal and interest upon the retirement of the
Company's former president and chief operating officer. In June 2000, the
Company repurchased 88,125 unvested shares for approximately $52,000 and
collected approximately $59,000 in principal and interest upon the retirement of
the Company's former vice-president of sales. In January 2001, the Company
repurchased 13,594 unvested shares for approximately $9,000 and collected
approximately $16,000 in principal and interest upon the retirement of the
Company's former vice-president of engineering. The balance of these full
recourse notes was approximately $120,000 as of January 31, 2002.

In October 1999, the Company loaned an officer of the Company $100,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 6 years or upon the date in which
the officer ceases to remain in service. The note accrues interest at 7% per
year, compounded annually and principal and accrued interest is due in one lump
sum on December 31, 2006. The balance on this note was approximately $116,000 as
of January 31, 2002.

In July 2000, the Company loaned an employee of the Company $50,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 2 years or upon the date in which
the employee ceases to remain in service. The note accrues interest at 10.5% per
year, compounded semi-annually and principal and accrued interest is due in one
lump sum on July 1, 2002. The balance on this note was approximately $59,000 as
of January 31, 2002.

In April 2001, the Company loaned an officer of the Company $45,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 6 months or upon the date in which
the officer ceases to remain in service. The note accrues interest at 7.5% per
year, compounded semi-annually and principal and accrued interest is due in one
lump sum on October 16, 2001. During the three months ended January 31, 2002,
the Company collected the balance of approximately $47,000 due under this note.

In May 2001, the Company loaned an employee of the Company $25,000 for
personal reasons, not equity related, in exchange for a full recourse promissory
note due in full, with accrued interest, in 18 months or upon the date in which
the employee ceases to remain in service. The note accrues interest at 7.5% per
year, compounded semi-annually and principal and accrued interest is due in one
lump sum on November 14, 2002. The balance on this note was approximately
$16,000 as of January 31, 2002.

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 routing solutions for open
system storage area networks, based on our market share of storage routers
shipped. By using our storage routers to serve as the interconnect between
storage area networks, or SANs, and the other devices in a computer network,
organizations are able to more effectively and efficiently store, manage and
ensure the integrity and availability of their data. Specifically, when used in
storage area networks our storage routers decrease congestion in the transfer of
data within a network, reduce the time required to back up data, improve
utilization of storage resources, and preserve and enhance existing server and
storage system investments.

Our mission is to be the company customers trust to link business with
information regardless of technology or location. Our objective is to maintain
our position as the leading provider of storage routing solutions as storage,
server, and network technologies and markets continue to grow and evolve. The
key elements of our strategy are to 1) be a customer centric, market driven
company, 2) to leverage our market position and core competencies to expand and
diversify our product offerings and 3) to maintain our market leadership by
continuing to invest in intellectual property and interoperability.

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

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

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

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

During fiscal 2001, we succeeded in two important lawsuits that demonstrated
our ability to protect important aspects of our intellectual property portfolio.
In June, Pathlight Technology, a wholly owned subsidiary of Advanced Digital
Information Corp., admitted both the validity and infringement of one of our
patents (5,941,972, hereinafter "`972 patent") in a $15 million settlement. In
September, a jury and judge validated that same patent against Chaparral Network
Storage Corporation, while extending the patent's application to all RAID and
router products using Access Controls or LUN zoning, awarding us damages and
punitive damages.

To date, we have sold our products primarily to original equipment
manufacturers, or OEMs, of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their storage area networks. We also sell our storage routers through companies
that distribute, resell or integrate our storage routers as part of a complete
SAN solution. A few OEM customers historically have accounted for a substantial
portion of our revenue. During fiscal 2001, sales to Hewlett Packard accounted
for 17% of our total revenue and sales to StorageTek accounted for 15%. During
the three months ended January 31, 2002, sales to Hewlett Packard and StorageTek
respectively accounted for 37% and 35% of our total revenue.

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

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 January 31, 2002, our deferred
revenue totaled approximately $705,000. 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 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 third quarter of
fiscal 2001, in response to deteriorating macroeconomic conditions and the
resulting decline in demand and product revenue, we reassessed our product
strategy, initiated a market sizing exercise on our core business and examined
our expense structure in an attempt to realign our business plan to achieve
profitability. The strategic review triggered a reduction in force and an
impairment evaluation of the intangible assets related to the Polaris
acquisition because of indications that the carrying amounts might not be
recoverable based on the expected undiscounted cash flows from the Polaris
business unit. Based on a valuation prepared by an independent third-party
appraisal company, we recorded a write-down of these intangible assets totaling
$25.0 million.

In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation aggregating approximately $20.6
million as of January 31, 2002. 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 $16.3 million
has been amortized as of January 31, 2002.

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

THREE MONTHS ENDED
JANUARY 31,
----------------------------
2001 2002
------------ ------------

Cost of revenue .......................... $ 39 $ 24
Sales and marketing ...................... 48 189
Research and development ................. 265 79
General and administrative ............... 2,222 955
------------ ------------
Total stock-based compensation .... $ 2,574 $ 1,247
============ ============
</Table>

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

YEAR ENDED OCTOBER 31,
--------------------------------------------
2002 2003 2004 TOTAL
------------ ------------ ------------ ------------

Cost of revenue ............................. $ 60 $ 21 $ -- $ 81
Sales and marketing ......................... 232 89 2 323
Research and development .................... 269 102 2 373
General and administrative .................. 1,924 1,090 98 3,112
------------ ------------ ------------ ------------
Total stock-based compensation ...... $ 2,485 $ 1,302 $ 102 $ 3,889
------------ ------------ ------------ ------------
</Table>

In fiscal 2000, we purchased shares of Series A preferred stock of
Banderacom Corporation (formerly known as INH Semiconductor Corporation) for
$99,999. In fiscal 2001, we purchased shares of Series B preferred stock of
Banderacom Corporation for $192,000. Banderacom is a fabless semiconductor
company focused on supplying InfiniBand semiconductor devices used to increase
the bandwidth, scalability, and reliability, of computer, networking, storage,
and server system products.

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

We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $121.9
million at January 31, 2002. As of January 31, 2002, we had approximately $60.3
million of federal net operating loss carryforwards. These net operating loss
carryforwards begin to expire in 2011. We have not recognized any benefit from
the future use of loss carryforwards for these periods or for any other periods
since inception due to uncertainties regarding the realization of deferred tax
assets based on our taxable earnings history. Under the Tax Reform Act of 1986,
the amount of and the benefit from net operating losses that can be carried
forward may be impaired in certain circumstances. Events that may cause changes
in the Company's tax carryovers include, but are not limited to, a cumulative
ownership change of more than 50% over a three-year period.

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.

THREE MONTHS ENDED
JANUARY 31,
------------------------------
2001 2002
------------ ------------

Revenue:
Product revenue .......................... 98.5% 98.2%
Other revenue ............................ 1.5 1.8
------------ ------------
Total revenue ......................... 100.0 100.0
Cost of revenue ............................. 48.9 63.9
------------ ------------
Gross profit ................................ 51.1 36.1
Operating expenses:
Sales and marketing ...................... 40.8 25.1
Research and development ................. 43.1 56.4
General and administrative ............... 47.3 26.8
Amortization of intangibles .............. 36.1 0.8
------------ ------------
Total operating expenses .............. 167.3 109.1
------------ ------------
Loss from operations ........................ (116.2) (73.0)
Other income, net ........................... 9.8 3.5
------------ ------------
Net loss before cumulative effect of
accounting change ........................ (106.4) (69.5)
Cumulative effect of accounting change ...... (1.3) --
------------ ------------
Net loss .................................... (107.7)% (69.5)%
============ ============
</Table>

COMPARISON OF THREE MONTHS ENDED JANUARY 31, 2001 AND 2002

Total revenue. Total revenue decreased 7.8% from $10.0 million for the three
months ended January 31, 2001 to $9.2 million for the three months ended January
31, 2002.

Product revenue. Product revenue decreased 8.0% from $9.8 million for the
three months ended January 31, 2001 to $9.0 million for the three months ended
January 31, 2002. This decrease in product revenue was primarily related to an
initial stocking order of approximately $1.3 million from a new OEM relationship
with Sun Microsystems during the three months ended January 31, 2001. As a
percentage of total revenue, product revenue decreased from 98.5% for the three
months ended January 31, 2001 to 98.2% for the three months ended January 31,
2002. A significant portion of our product revenue is generated from sales of
the Crossroads 4x50 line of high-performance intelligent routers that enable
companies to realize the benefits of managing their mission critical data using
applications such as server-free backup and LAN-free backup while protecting the
investments made in their current enterprise systems. Sales of our 4x50 product
accounted for approximately 50% and 46% of our product revenue during the three
months ended January 31, 2001 and 2002, respectively. As storage networking
continues to mature as an industry, we have seen a trend towards simplification
of networking components and management. The impact of this trend on our
business has been the push for, and subsequent ramp of embedded routers being
shipped with tape libraries. Sales of our embedded products accounted for
approximately 0% and 36% of our product revenue during the three months ended
January 31, 2001 and 2002, respectively.

Other revenue. Other revenue includes sales of licenses for maintenance,
consulting fees and fees received from the licensing of other intellectual
property. Other revenue increased 8.9% from approximately $150,000 for the three
months ended January 31, 2001 to approximately $163,000 for the three months
ended January 31, 2002. During the three months ended January 31, 2002, we
recognized approximately $87,000 of technical service and support revenue,
$40,000 of royalties and approximately $20,000 in other revenue associated with
granting a license to use certain technology acquired from Polaris.

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 $39,000 and $24,000 during the three months ended January 31,
2001 and 2002, respectively, increased 21.0% from $4.8 million for the three
months ended January 31, 2001 to $5.9 million for the three months ended January
31, 2002. Gross profit, net of stock-based

compensation, decreased 34.9% from $5.1 million for the three months ended
January 31, 2001 to $3.3 million for the three months ended January 31, 2002.
Gross profit margin, net of stock-based compensation, decreased from 51.5% for
the three months ended January 31, 2001 to 36.4% for the three months ended
January 31, 2002. This decrease in gross margin was primarily due to a lower
margin product mix resulting from the shift to our embedded routers during
fiscal 2001. These embedded routers are lower cost than the stand-alone box
routers and this lower cost is passed on to our OEM customers. The decrease was
also due to lower margin OEM product sales and product mix.

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 $48,000 and
$189,000 during the three months ended January 31, 2001 and 2002, respectively,
decreased 47.3% from $4.0 million for the three months ended January 31, 2001 to
$2.1 million for the three months ended January 31, 2002. This decrease in sales
and marketing expenses for the three months ended January 31, 2002 was primarily
due to the reduction in sales and marketing personnel resulting in approximately
$885,000 of decreased compensation expense and approximately $225,000 of
decreased travel and entertainment expenses. Sales and marketing personnel
totaled 64 at January 31, 2001 and 23 at January 31, 2002. In addition, this
decrease was also attributable to decreased tradeshow expenses of approximately
$105,000, decreased depreciation and corporate overhead allocations of
approximately $260,000, decreased advertising and marketing communication
expenses of approximately $90,000 and decreased consulting fees of approximately
$97,000. As a percentage of total revenue, sales and marketing expenses
decreased from 40.8% for the three months ended January 31, 2001 to 25.1% for
the three months ended January 31, 2002. We anticipate that sales and marketing
expenses may fluctuate as a percentage of total revenue, due to our ongoing
sales and marketing efforts 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 stock-based compensation of $265,000 and $79,000 during the
three months ended January 31, 2001 and 2002, respectively, increased 26.5% from
$4.0 million for the three months ended January 31, 2001 to $5.1 million for the
three months ended January 31, 2002. This increase in research and development
expenses was primarily due to the hiring of additional research and development
personnel resulting in approximately $305,000 of increased compensation expense,
increased prototyping costs of approximately $238,000 related to the ongoing
development of an expanded product line and approximately $207,000 of increased
depreciation expense. Research and development personnel totaled 70 at January
31, 2001 and 93 at January 31, 2002. As a percentage of total revenue, research
and development expenses increased from 43.1% for the three months ended January
31, 2001 to 56.4% for the three months ended January 31, 2002. We anticipate
that research and development expenses may fluctuate as a percentage of total
revenue, due to our ongoing research and development in developing our
technologies and expanding our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative and executive departments, as well as legal and
accounting expenses, insurance costs and stock-based compensation. General and
administrative expenses, net of stock-based compensation of $2.2 million and
$1.0 million during the three months ended January 31, 2001 and 2002,
respectively, decreased 39.3% from $2.5 million for the three months ended
January 31, 2001 to $1.5 million for the three months ended January 31, 2002.
This decrease in general and administrative expenses was primarily due to the
reduction of administrative personnel resulting in approximately $235,000 of
decreased compensation expense, decreased legal costs associated with patent
infringement lawsuits of approximately $452,000 and decreased property taxes of
approximately $136,000. General and administrative personnel totaled 37 at
January 31, 2001 and 30 at January 31, 2002. As a percentage of total revenue,
general and administrative expenses decreased from 47.3% for the three months
ended January 31, 2001 to 26.8% for the three months ended January 31, 2002.

OTHER INCOME, NET

Other income, net consists primarily of interest income on short-term
investments partially offset by interest expense. Other income, net was
approximately $974,000 and $318,000 for the three months ended January 31, 2001
and 2002, respectively, representing 9.8% and 3.5% 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 January 31, 2002 consisted of $27.2
million in cash and cash equivalents and $19.0 million in short-term
investments.

In February 2000, we entered into a $1.0 million letter of credit in
connection with the lease requirements of our new facility. In January 2002, we
extended our existing line of credit with Silicon Valley Bank. The committed
revolving line is an advance of up to $3.0 million with a borrowing base of 80%
of eligible accounts receivable. The line of credit matures on February 1, 2003.
The line of credit contains provisions that prohibit the payment of cash
dividends and require the maintenance of specified levels of tangible net worth
and certain financial performance covenants measured on a monthly basis. As of
January 31, 2002, there were no borrowings outstanding under the revolving line
of credit and no term loans outstanding.

As of January 31, 2002, we did not have any relationships with
unconsolidated entities or financial partnerships, such as entities often
referred to as structured finance or special purpose entities, which would have
been established for the purpose of facilitating off-balance sheet arrangements
or other contractually narrow or limited purposes. As such, we are not exposed
to any financing, liquidity, market or credit risk that could arise if we had
engaged in such relationships.

Cash utilized by operating activities was $2.7 million for the three months
ended January 31, 2001 as compared to $6.7 million for the three months ended
January 31, 2002. The increase in net cash utilized reflects increases in
accounts receivable and decreases in accounts payable and accrued expenses of
approximately $4.0 million.

Cash provided by investing activities was $6.3 million for the three months
ended January 31, 2001 as compared to $10.1 million utilized by investing
activities for the three months ended January 31, 2002. The increase in net cash
utilized reflects the purchase of held-to-maturity investments of $9.0 million
during the three months ended January 31, 2002 compared to the maturity of
held-to-maturity investments of approximately $7.6 million during the three
months ended January 31, 2001. Capital expenditures were $1.3 million and $1.1
million for the three months ended January 31, 2001 and 2002, respectively.
These expenditures reflect our investments in computer equipment and software,
test equipment, software development tools and leasehold improvements, all of
which were required to support our continued research and development efforts.
We anticipate additional capital expenditures through fiscal 2002 of at least
$3.3 million.

Cash provided by financing activities was approximately $311,000 for the
three months ended January 31, 2001 as compared to approximately $326,000 for
the three months ended January 31, 2002. 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, the timing of introductions of new products and
enhancements to existing products, and market acceptance of our products. On
March 21, 2000, we consummated our acquisition of Polaris Communications, Inc.,
and we may enter into additional acquisitions or strategic arrangements in the
future that also could require us to seek additional equity or debt financing.
We cannot assure you that additional equity or debt financing, if required, will
be available to us on acceptable terms, or at all.

STOCK REPURCHASE PROGRAM

In September 2001, our board of directors authorized the repurchase of up
to $5.0 million of our common stock in the open market. Through January 31,
2002, we repurchased 472,300 shares of our common stock bringing total cash
outlay to date to approximately $1.4 million. The timing and size of any future
stock repurchases are subject to market conditions, stock prices, cash position
and other cash requirements.

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of our financial condition and results
of operations are based upon our condensed consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, we evaluate our
estimates, including those related to customer programs and incentives, product
returns, bad debts, inventories, intangible assets, warranty obligations,
restructuring and contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the

basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.

Our critical accounting policies are as follows:

o Revenue recognition

o Warranty obligations

o Excess and obsolete inventories

Revenue recognition. 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. Deferred revenues as of January 31, 2002 were
approximately $705,000. As described above, management judgments and estimates
must be made and used in connection with the revenue recognized in any
accounting period. Material differences may result in the amount and timing of
our revenue for any period if our management made different judgments or
utilized different estimates.

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

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

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

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

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 loss of
our primary contract manufacturers; risks of delay or poor execution from a
variety of sources; inventory risks; limited resources; pricing; dependence upon
key personnel; product liability claims; the inability to protect our
intellectual property rights; concentration of ownership; volatility of stock
price; and the impact on our results or operations due to changes in accounting
standards, including the implementation of SAB NO. 101 with respect to revenue
recognition. The discussion below addresses some of these factors. Additional
risks and uncertainties that we are unaware of or that we currently deem
immaterial also may become important factors that affect us.

WE HAVE INCURRED SIGNIFICANT LOSSES, 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 January 31,
2002, we had an accumulated deficit of $121.9 million. We cannot be certain that
we will be able to sustain growth rates that we will need to realize sufficient
revenue to achieve profitability. We also expect to incur significant sales and
marketing, research and development and general and administrative expenses and,
as a result, we expect to continue to incur losses. Our inability to realize the
benefit of the new agreement with Compaq Computer Corporation and the
uncertainty regarding the relationship with Compaq if its acquisition by
Hewlett-Packard is consummated may result in less than expected revenue which
could affect our ability to ever achieve profitability. Moreover, even if we do
achieve profitability, we may not be able to sustain or increase profitability.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

On November 21, 2001, a derivative state action was filed in the 261st
District Court of Travis County, Texas on behalf of Crossroads by James Robke
and named several of our officers and directors as defendants. The securities
litigation is based upon the same general set of facts and circumstances
outlined above in connection with the purported shareholder class actions. The
derivative state action alleges that certain of the individual defendants sold
shares while in possession of material inside information in purported breach of
their fiduciary duties to Crossroads. The derivative state action also alleges
waste of corporate assets. We have not answered the derivative state action. We
believe the allegations in the derivative state action are also without merit
and intend to defend ourselves vigorously. An adverse judgment may have a
material adverse effect on our business and financial performance. See 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 product lines within our storage
router product family that we sell in commercial quantities. In particular,
sales of our 4100 and 4200 products have accounted for the vast majority of our
product revenue to date. To reduce our dependence on these products, we must
successfully develop and introduce to market new products and product
enhancements in a timely manner. On September 1, 2000, we began notifying our
customers that our 4100 product was at its "end of life." Customers who
purchased the 4100 product are continuing to migrate to our next generation of
products that we refer to as the 4x50 product line. While we are continuing to
sell our 4100 product, sales of our 4x50 product accounted for approximately 50%
and 46% of our product revenue during the three months ended January 31, 2001
and 2002, respectively. Our future growth and competitiveness will depend
greatly on the market acceptance of our newly introduced product lines,
including the 8000 and 10000 storage router. However, we have not received
significant revenues from the sale of either of these products and their market
acceptance remains uncertain. If either of these two products do not achieve
sufficient market acceptance, our future growth prospects will be seriously
affected. Moreover, even if we are able to develop and commercially introduce
new products and enhancements, these new products or enhancements may not
achieve market acceptance that could reduce our revenue.

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

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

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

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

o our customer service and support capabilities and responsiveness;
and

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

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

In fiscal 1999, 2000, 2001 and the three months ended January 31, 2002,
approximately 85%, 77%, 70% and 81% of our revenue, respectively, was derived
from six customers. In fiscal 2001, Hewlett-Packard and StorageTek represented
26% and 23% of our total revenue, respectively. During the three months ended
January 31, 2002, Hewlett Packard and StorageTek represented 37% and 35% of our
total revenue, respectively. During fiscal 2001, ADIC transitioned out of our
router products upon consummation of its acquisition of Pathlight Technology. In
addition, in September, 2001, Hewlett Packard and Compaq have announced their
intent to merge. If the merger is consummated or if we are unable to replace the
revenue lost due to ADIC's transition away from our line of storage routers, our
results of operations and future prospects will suffer.

We rely on OEMs as a primary distribution channel as they are able to sell
our products to a large number of end-user organizations, which enables us to
achieve broad market penetration, with limited sales, marketing and customer
service and support resources from us. In August 2001, we announced that we had
re-engaged Compaq as a customer, which had decided to introduce a competitive
product in fiscal 2000. Under the new agreement, Crossroads and Compaq will
develop a range of solutions for protecting data in networked storage
environments with first delivery shipments scheduled in April 2002. Our
operating results in the foreseeable future will continue to depend on sales to
a relatively small number of OEM customers. Therefore, the loss of any of our
key OEM customers, or a significant reduction in sales to any one of them, would
significantly reduce our revenue.

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

Prior to offering our products for sale, our OEM customers require that each
of our products undergo an extensive qualification process, which involves
interoperability testing of our product in the OEM's system as well as rigorous
reliability testing. This

qualification process may continue for a year or longer. However, qualification
of a product by an OEM does not assure any sales of the product to the OEM.
Despite this uncertainty, we devote substantial resources, including sales,
marketing and management efforts, toward qualifying our products with OEMs in
anticipation of sales to them. If we are unsuccessful or delayed in qualifying
any products with an OEM, such failure or delay would preclude or delay sales of
that product to the OEM, which may impede our ability to grow our
business.

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

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

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

Our products are intended to complement other SAN products to improve the
performance of computer networks by addressing the input/output bottlenecks that
have emerged between the storage systems and the servers within a computing
system. We have devoted and expect to continue to devote significant resources
to developing products based on emerging technologies and standards that reduce
input/output bottlenecks. A number of large companies in the computer hardware
and software industries are actively involved in the development of new
technologies and standards that are expected to be incorporated in our new
products. Should any of these companies delay or abandon their efforts to
develop commercially available products based on these new technologies and
standards, our research and development efforts with respect to such
technologies and standards likely would have no appreciable value. In addition,
if we do not correctly anticipate new technologies and standards, or if our
products based on these new technologies and standards fail to achieve market
acceptance, our competitors may be better able to address 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 and risk of loss has passed to the OEM. As
a result, we incur inventory and manufacturing costs in advance of anticipated
revenue. Because demand for our products may not materialize, this product
delivery method subjects us to increased risks of high inventory carrying costs
and increased obsolescence and may increase our operating costs.

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

During fiscal 2001, we received our last shipments from XeTel Corporation, a
contract manufacturer; and we have engaged another contract manufacturer,
Solectron, to assemble the printed circuit board for our current shipping
programs, including our 4x50, 8000, 10000 and embedded router family of
products. We generally place orders for products with our contract manufacturer
approximately four months prior to the anticipated delivery date, with order
volumes based on forecasts of demand from our customers. Accordingly, if we
inaccurately forecast demand for our products, we may be unable to obtain
adequate manufacturing capacity from our contract manufacturer to meet our
customers' delivery requirements, or we may accumulate excess inventories. We
have on occasion in the past been unable to adequately respond to unexpected
increases in customer purchase orders, and therefore were unable to benefit from
this incremental demand. Our contract manufacturer has not provided assurance to
us that adequate capacity will be available to us within the time required to
meet additional demand for our products.

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

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

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

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

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

The market for SAN products generally, and storage routers in particular,
is increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ATTO, Chaparral Network Storage and Nishan
Systems. In addition, during 2001, ADIC, one of our OEM customers, acquired
Pathlight Technology whose products are competitive with our 4100 and 4x50
product lines. During April 2001, ADIC transitioned out of our router products
upon consummation of its acquisition of Pathlight Technology, Inc., which was
subsequently completed on May 11, 2001. In addition, other OEM customers could
develop products or technologies internally, or by entering into strategic
relationships with or acquiring other existing SAN product providers that would
replace their need for our products and would become a source of competition. We
expect to face competition in the future from OEMs, including our customers and
potential customers, LAN router manufacturers, storage system industry
suppliers, including manufacturers and vendors of other SAN products or entire
SAN systems, and innovative start-up companies. For example, manufacturers of
Fibre Channel hubs or switches could seek to include router functionality within
their SAN products that would obviate the need for our storage routers. As the
market for SAN products grows, we also may face competition from traditional
networking companies and other manufacturers of networking products. These
networking companies may enter the storage router market by introducing their
own products or by entering into

strategic relationships with or acquiring other existing SAN product providers.
This could introduce additional competition in our markets, especially if one of
our OEMs begins to manufacture our higher end storage routers.

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

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

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

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

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

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

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

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

significant warranty, diagnostic and repair costs, divert the attention of our
engineering personnel from our product development efforts and cause significant
customer relations and business reputation problems.

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

We believe our future success will depend in large part upon our ability to
attract and retain highly skilled managerial, engineering and sales and
marketing personnel. We do not have employment contracts with any of our key
personnel with the exception of Mr. Sanders. The loss of the services of any of
our key employees, the inability to attract or retain qualified personnel in the
future or delays in hiring required personnel, particularly engineers and sales
personnel, could delay the development and introduction of, and negatively
impact our ability to sell, our products.

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

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

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

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

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

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

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

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

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

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

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

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

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

o potential loss of key employees of the acquired company.

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

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

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

As of December 31, 2001, our executive officers and directors, and their
affiliates, beneficially own approximately 16.8% of the total voting power of
our company. As a result, these stockholders will be able to exert significant
control over all matters requiring stockholder approval, including the election
of directors and approval of significant corporate transactions. This
concentration of voting power could delay or prevent an acquisition of us on
terms that other stockholders may desire.

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 ISSUANCE BY THE SEC OF AN ACCOUNTING BULLETIN RELATED TO REVENUE
RECOGNITION, SAB NO. 101, MAY HAVE A MATERIAL ADVERSE IMPACT ON OUR FINANCIAL
PERFORMANCE.

In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No. 101,
"Revenue Recognition in Financial Statements." SAB No. 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 No. 101. While
SAB No. 101 will not affect the fundamental aspects of our operations as
measured by product shipments and cash flows, implementation of SAB No. 101 will
affect our reported results of operations. It is possible that SAB No. 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 No. 101 resulted in a change in method of
revenue recognition for certain product shipments due to the specified shipping
terms for these shipments. The cumulative effect of this accounting change was
approximately $130,000, which has been included in net income for the year ended
October 31, 2001. Prior period financial statements have not been restated to
apply SAB No. 101 retroactively.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information concerning market risk is contained on Pages 31 and 32 of our 2001
Annual Report on Form 10-K and is incorporated herein by reference to the annual
report.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Intellectual Property Litigation

On March 31, 2000, we filed a lawsuit in the United States District Court
for the Western District of Texas against Chaparral Network Storage, Inc.
alleging that Chaparral has infringed our `972 patent with some of their
products. In September 2001, the jury found that the `972 patent was valid and
that all of Chaparral's RAID and router products that contained LUN Zoning had
infringed all claims of our `972 patent. The federal judge in this matter issued
a permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, we were awarded damages with a royalty amount of 5% for
Chaparral's router product line and 3% for their RAID product line.

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

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

Securities Class Action Litigation

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

Derivative State Action

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

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

During the fiscal quarter ended January 31, 2002, we issued an
aggregate of 7,255 shares of our common stock to employees pursuant to exercises
of stock options that were granted prior to October 19, 1999, the date of our
initial public offering, with exercise prices ranging from $0.500 to $1.333 per
share. These issuances were deemed exempt from registration under Section 5 of
the Securities Act of 1933 in reliance upon Rule 701 thereunder and appropriate
legends were affixed to the share certificates issued in each such transaction.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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

Reports on Form 8-K

Crossroads did not file any current reports on Form 8-K during the
three months ended January 31, 2002.

SIGNATURES

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

CROSSROADS SYSTEMS, INC.

March 17, 2002 /s/ Larry Sanders
-------------- --------------------------------------------
(Date) Larry Sanders
Chief Executive Officer
(Principal Executive Officer)

March 17, 2002 /s/ Reagan Y. Sakai
-------------- --------------------------------------------
(Date) Reagan Y. Sakai
Chief Financial Officer
(Principal Financial and Accounting Officer)