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

FORM 10-Q

(MARK ONE)

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

FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2003

[ ] 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: 000-30362

CROSSROADS SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

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

8300 NORTH MOPAC EXPRESSWAY
AUSTIN, TEXAS 78759
(Address of Registrant's principal executive offices, including zip code.)

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

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

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

As of June 13, 2003 Registrant had outstanding 24,214,853 shares of common
stock, par value $0.001 per share.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

FORM 10-Q
QUARTER ENDED APRIL 30, 2003

TABLE OF CONTENTS

<Table>
<Caption>
PAGE
----

PART I FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Balance Sheets as of October 31, 2002 and
April 30, 2003................................................... 2

Condensed Consolidated Statements of Operations for the three and
six months ended April 30, 2002 and 2003......................... 3

Condensed Consolidated Statements of Cash Flows for the six months
ended April 30, 2002 and 2003.................................... 4

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

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................ 13

Item 3. Quantitative and Qualitative Disclosures About Market Risk......... 36

Item 4. Controls and Procedures............................................ 36

PART II OTHER INFORMATION

Item 1. Legal Proceedings.................................................. 37

Item 2. Changes in Securities and Use of Proceeds.......................... 37

Item 3. Defaults Upon Senior Securities.................................... 37

Item 4. Submission of Matters to a Vote of Security Holders................ 38

Item 5. Other Information.................................................. 38

Item 6. Exhibits and Reports on Form 8-K................................... 38

SIGNATURES................................................................... 39

CERTIFICATIONS............................................................... 40
</Table>

PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
OCTOBER 31, APRIL 30,
2002 2003
----------- ---------

ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 14,723 $ 16,396
Short-term investments ..................................................... 19,588 15,161
--------- ---------
Total cash, cash equivalents and short-term investments ................ 34,311 31,557
Accounts receivable, net of allowance for doubtful
accounts of $277 and $219, respectively .................................. 5,721 3,408
Inventories, net ........................................................... 2,767 3,060
Prepaids and other current assets .......................................... 956 1,275
--------- ---------
Total current assets ................................................... 43,755 39,300
Notes receivable from related party ............................................ 63 67
Property and equipment, net .................................................... 6,106 4,663
Intangibles, net ............................................................... 173 --
Other assets ................................................................... 362 344
--------- ---------
Total assets ........................................................... $ 50,459 $ 44,374
========= =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................................... $ 3,839 $ 3,975
Accrued expenses ........................................................... 3,719 2,852
Accrued warranty costs ..................................................... 615 821
Deferred revenue ........................................................... 727 472
--------- ---------
Total current liabilities .............................................. 8,900 8,120
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $.001 par value, 175,000,000 shares authorized,
25,870,508 and 23,849,736 shares issued and outstanding, respectively .... 26 24
Additional paid-in capital ................................................. 183,253 182,162
Deferred stock-based compensation .......................................... (311) (513)
Notes receivable from stockholders ......................................... (126) --
Accumulated deficit ........................................................ (141,024) (145,419)
Treasury stock at cost (469,237 and 0 shares, respectively) ................ (259) --
--------- ---------
Total stockholders' equity ............................................. 41,559 36,254
--------- ---------
Total liabilities and stockholders' equity ............................. $ 50,459 $ 44,374
========= =========
</Table>

See accompanying notes to unaudited condensed consolidated financial statements.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
---------------------------- ----------------------------
2002 2003 2002 2003
------------ ------------ ------------ ------------

Revenue:
Product .................................................... $ 8,963 $ 8,142 $ 17,997 $ 17,703
Royalty and other .......................................... 101 437 264 548
------------ ------------ ------------ ------------
Total revenue ................................. 9,064 8,579 18,261 18,251

Cost of revenue (including stock-based compensation
expense of $23, $8, $47 and $20, respectively) ........... 5,985 5,188 11,861 11,617
------------ ------------ ------------ ------------
Gross profit .................................................... 3,079 3,391 6,400 6,634
------------ ------------ ------------ ------------

Operating expenses:
Sales and marketing (including stock-based compensation
expense of $102, $33, $291 and $110, respectively) ....... 1,673 990 3,983 2,015
Research and development (including stock-based
compensation expense of $96, $78, $175 and $172
respectively) ............................................ 4,573 2,999 9,757 6,138
General and administrative (including stock-based
compensation expense of $765, $147, $1,720
and $456, respectively) .................................. 2,473 1,503 4,942 3,147
Business restructuring expense ............................. -- (140) -- (140)
Amortization of intangibles ................................ 70 -- 140 173
------------ ------------ ------------ ------------
Total operating expenses ...................... 8,789 5,352 18,822 11,333
------------ ------------ ------------ ------------

Loss from operations ............................................ (5,710) (1,961) (12,422) (4,699)

Other income, net .......................................... 231 143 549 304
------------ ------------ ------------ ------------

Net loss ........................................................ $ (5,479) $ (1,818) $ (11,873) $ (4,395)
============ ============ ============ ============

Basic and diluted net loss per share ............................ $ (0.20) $ (0.08) $ (0.44) $ (0.18)
============ ============ ============ ============
Shares used in computing basic and
diluted net loss per share ................................. 27,269,731 24,147,186 27,272,360 24,625,775
============ ============ ============ ============
</Table>

See accompanying notes to unaudited condensed consolidated financial statements.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

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

<Table>
<Caption>
SIX MONTHS ENDED
APRIL 30,
-----------------------
2002 2003
-------- --------

Cash flows from operating activities:
Net loss ................................................................. $(11,873) $ (4,395)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation ........................................................ 3,208 1,964
Amortization of intangibles ......................................... 140 173
Gain/loss on disposal of fixed assets ............................... -- 61
Stock-based compensation ............................................ 2,233 758
Provision for doubtful accounts receivable .......................... (132) (58)
Provision for excess and obsolete inventories ....................... 474 248
Changes in assets and liabilities:
Accounts receivable ................................................. (923) 2,371
Inventories ......................................................... (347) (541)
Prepaids and other current assets ................................... 209 (319)
Accounts payable .................................................... (2,181) 136
Accrued expenses and other .......................................... (881) (902)
-------- --------
Net cash used in operating activities ................... (10,073) (504)
-------- --------
Cash flows from investing activities:
Purchase of property and equipment ....................................... (1,462) (581)
Purchase of held-to-maturity investments ................................. (21,288) (11,248)
Maturity of held-to-maturity investments ................................. -- 15,676
Payment of note receivable from stockholders ............................. 63 126
-------- --------
Net cash provided by (used in) investing activities ..... (22,687) 3,973
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock ................................... 356 52
Purchase of common stock under open market
stock purchase program .............................................. (669) (1,848)
-------- --------
Net cash used in financing activities ................... (313) (1,796)
-------- --------
Net increase (decrease) in cash and cash equivalents ........................... (33,073) 1,673
Cash and cash equivalents, beginning of period ................................. 43,686 14,723
-------- --------
Cash and cash equivalents, end of period ....................................... $ 10,613 $ 16,396
======== ========
</Table>

See accompanying notes to unaudited condensed consolidated financial statements.

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

1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

In the opinion of management, the accompanying Condensed Consolidated
Financial Statements for Crossroads Systems, Inc. (collectively with its
wholly-owned subsidiaries "Crossroads" or the "Company") contain all adjustments
necessary to present fairly its financial position as of October 31, 2002 and
April 30, 2003, its results of operations for the three and six month periods
ended April 30, 2002 and 2003, and its cash flows for the six month periods
ended April 30, 2002 and 2003. Certain reclassifications have been made to prior
year amounts in order to conform to the current year presentation. The results
of operations for the three and six months ended April 30, 2003 are not
necessarily indicative of results that may be expected for any other interim
period or for the full year.

The accompanying financial data as of April 30, 2003, and for the three and
six month periods ended April 30, 2002 and 2003, have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been condensed or
omitted pursuant to the SEC's rules and regulations. These unaudited financial
statements should be read in conjunction with the audited financial statements
and related notes for the year ended October 31, 2002, included in our Annual
Report on Form 10-K.

The preparation of financial statements in accordance with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.

Revenue Recognition

Product revenue is generally recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable,
collectibility is probable and the risk of loss has passed to the customer.
Revenue from product sales to customers that do not have rights of return,
including product sales to Original Equipment Manufacturers (OEMs) and certain
distributors, Value Added Resellers (VARs) and system integrators, are
recognized upon shipment. Sales and cost of sales related to customers that have
rights of return are deferred and subsequently recognized upon sell-through to
end-users.

Warranty Costs

The Company provides for the estimated cost to repair or replace products
under warranty and technical support costs when the related product revenue is
recognized. The Company warrants products for a period from 12 to 39 months
following the sale of its products. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs (See note 6).

Recent Accounting Pronouncements

In May 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 150, "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity." SFAS No. 150 states that companies that issue financial instruments
that have characteristics of both liabilities and equity will have to determine
if the instrument should be classified as a liability or equity for financial
instruments entered into or modified after May 31, 2003. The Company does not
expect the adoption of FASB No. 150 to have a material effect on its operating
results or financial condition.

SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities" was issued in April 2003. SFAS No. 149 amends and clarifies
accounting for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities under SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 149 is
generally effective for derivative instruments, including derivative instruments
embedded in certain contracts, entered into or modified after June 30, 2003 and
for hedging relationships designated after June 30, 2003. The Company does not
expect the adoption of SFAS No. 149 to have a material impact on its operating
results or financial condition.

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

In January 2003, the FASB issued FASB Interpretation No.46 (FIN 46),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No.51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. The Company does not expect the
adoption of FIN 46 to have a material effect on its operating results or
financial condition.

In November 2002, the Emerging Issues Task Force (EITF) reached a consensus
on Issue No.00-21, "Revenue Arrangements with Multiple Deliverables." EITF Issue
No.00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets, The provisions of EITF Issue No.00-21 will apply to revenue arrangements
entered into in fiscal periods beginning after June 15, 2003. The Company does
not expect the adoption of EITF 00-21 to have a material effect on its operating
results or financial condition.

Stock-based Compensation

As of April 30, 2003, the Company has one stock-based employee compensation
plan, which is described more fully in Note 8 of our Annual Report on Form 10-K.
The Company accounts for this plan under the recognition and measurement
principles of APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. The following table illustrates the effect on net
loss and loss per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based Compensation,"
as amended by SFAS No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure," to stock-based employee compensation (in thousands,
except share data):

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- -----------------------
2002 2003 2002 2003
-------- -------- -------- --------

Net loss, as reported ........................................... $ (5,479) $ (1,818) $(11,873) $ (4,395)
Stock-based employee compensation expense
included in reported net loss .............................. 986 266 2,233 758
Stock-based employee compensation expense
determined under fair value based method for all awards .... (4,606) (2,882) (8,771) (7,977)
-------- -------- -------- --------

Pro forma net loss .............................................. $ (9,099) $ (4,434) $(18,411) $(11,614)
======== ======== ======== ========

Net loss per share:
Basic and diluted - as reported ............................ $ (0.20) $ (0.08) $ (0.44) $ (0.18)
Basic and diluted - pro forma .............................. $ (0.33) $ (0.18) $ (0.68) $ (0.47)
</Table>

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

2. INVENTORIES, NET

Inventories, net consist of the following (in thousands):

<Table>
<Caption>
OCTOBER 31, APRIL 30,
2002 2003
----------- ---------

Raw materials ........................................................ $ 2,089 $ 2,176
Work-in-process ...................................................... -- 164
Finished goods ....................................................... 1,667 1,361
------- -------
3,756 3,701
Less: Allowance for excess and obsolete inventory ...... (989) (641)
------- -------
$ 2,767 $ 3,060
======= =======
</Table>

3. CONCENTRATIONS

Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents, short-term
investments and accounts receivable. The Company invests only in high credit
quality short-term instruments.

The Company's sales are primarily concentrated in the United States and are
primarily derived from sales to OEMs in the computer storage and server
industry. 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 Company had trade
accounts receivable from four customers, which comprised approximately 58% and
86% of total trade accounts receivable at October 31, 2002 and April 30, 2003,
respectively. The Company performs credit evaluations of its customers and
generally does not require collateral on accounts receivable balances. The
Company has established reserves for credit losses and sales returns and other
allowances. The Company has not experienced material credit losses in any of the
periods presented.

The Company's business is concentrated in the storage area networking
industry, which has been impacted by unfavorable economic conditions and reduced
information technology, or IT, spending rates. Accordingly, the Company's future
success depends upon the buying patterns of customers in the storage area
networking industry, their response to current and future IT investment trends,
and the continued demand by such customers for the Company's products. The
Company's continued success will depend upon its ability to enhance its existing
products and to develop and introduce, on a timely basis, new cost-effective
products and features that keep pace with technological developments and
emerging industry standards. 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.

Additionally, the Company relies on a limited number of contract
manufacturers to provide manufacturing services for its products. The inability
of any contract manufacturer or supplier to fulfill supply requirements could
materially impact future operating results.

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

The percentage of sales to significant customers was as follows:

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2002 2003 2002 2003
------ ------ ------ ------

Compaq (pre-merger)* .............. 17.7% -- 10.3% --
StorageTek ........................ 32.6% 29.3% 33.5% 24.8%
Hewlett-Packard (pre-merger)* ..... 23.5% -- 30.1% --
Hewlett-Packard* .................. -- 57.5% -- 60.5%
</Table>

* In May 2002, Hewlett-Packard completed its acquisition of Compaq. These
percentages reflect sales to Hewlett-Packard and Compaq prior to the merger and
sales to the combined company after the merger.

The level of sales to any customer may vary from quarter to quarter.
However, the Company expects that significant customer concentration,
particularly to our two major customers, will continue for the foreseeable
future. The loss or a decrease in the level of sales to either of these
customers could have a material adverse impact on the Company's financial
condition or results of operations.

4. BUSINESS RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT

In May 2002, the Company's board of directors approved and the Company
subsequently completed a restructuring plan that reduced its workforce by
approximately 25%, or 40 people (primarily in the sales, marketing and general
and administrative areas), to scale down its infrastructure and to consolidate
operations.

Components of business restructuring expenses and the remaining
restructuring accruals as of April 30, 2003 are as follows (in thousands):

<Table>
<Caption>
EMPLOYEE
SEPARATION
FACILITY AND OTHER
LEASE COSTS TOTAL
-------- ---------- -------

Balance as of October 31, 2002 ................... $ 1,957 $ 326 $ 2,283

Cash activity ........................... (128) (136) (264)
Non-cash activity ....................... -- -- --
------- ------- -------
Balance as of January 31, 2003 ................... 1,829 190 2,019
------- ------- -------

Cash activity ........................... (154) (140) (294)
Non-cash activity ....................... (140) -- (140)

------- ------- -------
Balance as of April 30, 2003 ..................... $ 1,535 $ 50 $ 1,585
======= ======= =======
</Table>

In March 2003, the Company signed an agreement to sublease a portion of its
abandoned facilities. The anticipated rent payments from this sublease are
approximately $0.5 million through January 2006. The Company decreased the
restructuring accrual by approximately $0.1 million at April 30, 2003 for rent
payments to be received during the initial twelve months of the sublease term.
The Company will assess recoverability of these sublease payments on a quarterly
basis.

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

As of April 30, 2003, remaining cash expenditures resulting from the
restructuring are estimated to be approximately $1.6 million and relate
primarily to facility lease abandonment losses. Excluding facility lease
abandonment losses, these costs have been substantially incurred as of April 30,
2003. The Company has substantially completed their restructuring efforts
initiated in conjunction with the restructuring announcement made during fiscal
2002; however, there can be no assurance future restructuring efforts will not
be necessary.

5. LINE OF CREDIT

As of May 2003, the Company carried a 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
matured on February 1, 2003, and the Company renegotiated an extension for this
line of credit. As of April 30, 2003, there were no borrowings outstanding under
this revolving line of credit.

6. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company leases its facility and certain equipment under various
operating lease agreements expiring on various dates through April 2006. In
conjunction with entering into a lease agreement for its headquarters, the
Company signed an unconditional, irrevocable letter of credit with a bank for
$250,000, which is secured by the $3.0 million line of credit (See note 5).
Future minimum lease payments under all non-cancelable operating leases as of
April 30, 2003 were approximately $5.8 million. In addition to base rent on its
facilities lease, many of the operating lease agreements require that the
Company pay a proportional share of the respective facilities' operating
expenses.

As of April 30, 2003, the Company had a facility lease losses reserve,
related to future facility lease commitments of approximately $1.5 million (see
Note 4) of space abandoned as part of the Company's restructuring plan.

GUARANTEES AND PRODUCT WARRANTIES

FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," requires that upon
issuance of a guarantee, the guarantor must disclose and recognize a liability
for the fair value of the obligation it assumes under that guarantee. The
initial recognition and measurement requirement of FIN 45 is effective for
guarantees issued or modified after December 31, 2002. As of April 30, 2003, the
Company's guarantees that were issued or modified after December 31, 2002, were
not material.

The disclosure requirements of FIN 45 are effective for interim and annual
periods ending after December 15, 2002, and are applicable to the Company's
product warranty liability and certain guarantees issued before December 31,
2002. The Company's guarantees issued before December 31, 2002, which would have
been disclosed in accordance with the disclosure requirements of FIN 45, were
not material.

It is the Company's policy to repair or replace products that have been
authorized for repair or replacement by the Company's customers. The Company
maintains a reserve for the estimated costs of such repairs or replacements and
adjusts the reserve based on historical sales volumes as well as actual costs
incurred. Activity in the reserve for product returns during the six months
ended April 30, 2003 was as follows (in thousands):

<Table>
<Caption>
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------ ---------- ---------- --------------

Warranty reserve......................... $ 615 $ 301 $ (95) $ 821
===== ===== ===== =====
</Table>

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

LEGAL PROCEEDINGS

Intellectual Property Litigation

On March 31, 2000, the Company filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral had infringed one of its
patents (5,941,972, hereinafter the "972 patent") with some of their products.
In September 2001, the jury found that the '972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning had infringed all
claims of the Crossroads '972 patent. The federal judge in this matter issued a
permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, the Company was awarded damages with a royalty amount of
5% for Chaparral's router product line and 3% for their RAID product line.
Chaparral appealed the judgment against it, contending that the '972 patent is
invalid and not infringed. In February 2003, the Federal Circuit Court of
Appeals affirmed the lower court ruling that Crossroads' patent was valid and
willfully infringed by Chaparral, which must stop shipping all products that
contain the Crossroads technology and pay Crossroads a royalty for prior
shipments.

On May 19, 2000, Chaparral filed a counter-suit against us 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. On November 22, 2002, the court
granted the Company's motion for summary judgment. On February 26, 2003, the
plaintiffs filed a notice of appeal. The plaintiffs are seeking unspecified
amounts of compensatory damages, interest and costs, including legal fees. The
Company denies the allegations in the complaint and intends to defend itself
vigorously. 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.

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. On January 28, 2002, the Company
filed an answer and general denial to the derivative state action. The Company
believes the allegations in the derivative state action are without merit and
intends to defend itself vigorously. At this time, it is not possible 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.

Other

From time to time, the Company may be involved in litigation relating to
claims arising out of its ordinary course of business. Management believes that,
other than the matters described above, there are no claims or actions pending
or threatened against the Company, the ultimate disposition of which would have
a material impact on the Company's financial position, results of operations or
cash flows. 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 in the normal course
of business.

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

7. STOCKHOLDERS' EQUITY

TREASURY STOCK

During the fiscal second quarter of 2003, the Company elected to retire all
outstanding shares of treasury stock. Therefore, as of April 30, 2003, there was
no treasury stock outstanding.

DEFERRED STOCK BASED COMPENSATION

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.

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

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------ ------------------
2002 2003 2002 2003
------ ------ ------ ------

Cost of revenue ........................ $ 23 $ 8 $ 47 $ 20
Sales and marketing .................... 102 33 291 110
Research and development ............... 96 78 175 172
General and administrative ............. 765 147 1,720 456
------ ------ ------ ------
Total stock-based compensation ...... $ 986 $ 266 $2,233 $ 758
====== ====== ====== ======
</Table>

STOCK OPTION EXCHANGE PROGRAM

On February 10, 2003, the Company completed a stock option exchange program
offered to all eligible option holders. Under the exchange offer, eligible
employees and non-employee members of the board of directors had the opportunity
to tender for cancellation certain eligible stock options in exchange for new
options to be granted at least six months and one day after the cancellation of
the tendered options. The number of shares subject to each new option was based
on the exercise price of the exchanged option. If the exercise price per share
of a returned option was $3.99 or less, the number of shares that will be
subject to the new option will be determined by dividing the number of shares
subject to the returned option by 3. If the exercise price per shares of a
returned option was at least $4.00 but not more than $49.99, the number of
shares that will be subject to the new option will be determined by dividing the
number of shares subject to the returned option by 4. If the exercise price per
share of a returned option was $50.00 or more, the number of shares that will be
subject to the new option will be determined by dividing the number of shares
subject to the returned option by 5.

The Company accepted approximately 498,806 options for cancellation and
exchange which equals approximately 10.7% of the total number of options
eligible for exchange. While the executive officers and members of the board of
directors were eligible to participate in the exchange program, none of them
elected to participate in the program. The Company currently expects to grant
approximately 97,626 new options, taking into consideration employee
terminations since the cancellation date. The exercise price per share of the
new options will be equal to the fair market value of our common stock on the
new grant date, which is expected to be on or promptly after August 12, 2003.
Crossroads does not expect to record any compensation expense as a result of the
exchange program.

8. NET LOSS PER SHARE

In accordance with SFAS No. 128, "Earnings Per Share," ("SFAS No. 128")
basic and diluted net loss per share is computed by dividing the loss to common
stockholders by the weighted average number of common shares

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

outstanding for the period, less shares subject to repurchase. Diluted loss per
share is equivalent to basic loss per share because all common stock equivalents
are antidilutive for all periods presented.

Common stock equivalents consist of outstanding stock options. The total
number of outstanding stock options excluded from the calculations of diluted
net loss per common share were 5,711,149 and 6,868,248 as of April 30, 2002 and
2003, respectively.

9. RELATED PARTY TRANSACTIONS

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 was due in one
lump sum on July 1, 2002. The terms on this note have been extended to July 1,
2004 and the balance is approximately $67,000 as of April 30, 2003.

10. SUBSEQUENT EVENTS

On May 19, 2003, the Company received a payment from Chaparral of
approximately $0.2 million to substantially satisfy the damages judgment that
was based on past sales of infringing products.

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

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

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

o improve utilization of storage resources; and

o preserve and enhance existing server and storage system investments.

Our mission is to be the company customers trust to link business with
information, regardless of technology or location. Our objective is to maintain
our position as a 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:

o solve customer storage issues;

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

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

To date, we have sold our products primarily to original equipment
manufacturers, or OEMs, of servers and storage systems. For the six months ended
April 30, 2002 and 2003, sales to our OEM customers accounted for 89% and 94% of
our total revenue, respectively. These computer equipment manufacturers sell our
storage routers to end-user organizations for use in their SANs. We also sell
our storage routers through companies that distribute, resell or integrate our
storage routers as part of a complete SAN solution.

A significant portion of our revenue is concentrated among a small number of
OEM customers, and the merger of Hewlett-Packard and Compaq has resulted in
additional concentration. For the six months ended April 30, 2002 and 2003,
StorageTek and Hewlett-Packard represented 74% and 85% of our total revenue,
respectively. For the six months ended April 30, 2002 and 2003, our distribution
channel, consisting of our distributors, value-added resellers or VARs and
systems integrators, accounted for 11% and 6% of our total revenue,
respectively. The level of sales to any single customer may vary and the loss or
decrease in the level of sales to either of our significant customers would
seriously harm our financial condition and results of operations. Fluctuations
in revenue have resulted from, among other things, product and customer
transitions, OEM qualification and testing and reduced IT spending rates. We
expect that a significant portion of our future revenue will continue to come
from sales of products to a relatively small number of customers.

On a product basis, sales have shifted to our fifth generation of products,
the 6000 and 10000, and to our embedded line of products. Sales of the 4100,
4200 and 4x50 product lines, accounted for approximately 52% and 25% of our
product revenue during the six months ended April 30, 2002 and 2003,
respectively. This decrease was partially offset by increased sales of fifth
generation products, which accounted for approximately 12% and 36% of our
product revenue during the six months ended April 30, 2002 and 2003,
respectively. We anticipate that sales of our older products as a percentage of
our total revenue will continue to decrease as we successfully transition our
customers to our newer product platforms. Additionally, 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 increase of,
embedded routers shipped within tape libraries. These embedded routers are
essentially the board component with the same functionality of our stand alone
box products. Sales of our embedded products accounted for approximately 25% and
32% of our product revenue during the six months ended April 30, 2002 and 2003,
respectively.

RECENT EVENTS

In May 2003, we named John Cummings our vice president of sales and business
development. He has 24 years of sales, operations and business development
experience. Prior to joining Crossroads, Mr. Cummings served as the worldwide
senior vice president of sales and business development for ProvisionSoft, Inc.,
a leading provider of application-driven automated storage and server
provisioning software. Mr. Cummings also worked for Sun Microsystems, Inc.
(Sun), where he held the title of Director of Sales for Financial Services
(Northeast U.S.). While at Sun, Mr. Cummings played a central role in moving the
sales focus to enterprise solutions for the insurance, securities and banking
industries. Mr. Cummings has also held executive sales management and operations
positions at such companies as SunGard Business Integration and Sangate Systems,
Inc. He holds a bachelor of arts degree from the University of Massachusetts.

In April 2003, we announced the general availability of the Crossroads
ServerAttach(TM) SA20. The SA20 is designed to connect mid-range SCSI servers to
Fibre Channel storage architectures, such as SANs, and is well suited for the
small to medium business market. It complements the enterprise-class
ServerAttach SA40 which we launched in December of 2002 to give customers a
wider range of options for ServerAttach solutions.

In April 2003, we announced a new channel program with Quantum Corp., a
leading provider of data protection systems, that bundles Crossroads 2Gb Fibre
Channel storage routers with Quantum ATL P-Series tape libraries to authorized
solution providers. The combination of technologies increases SAN performance
and is part of the Crossroads strategy to expand its market share in storage
routing.

In March 2003 we announced that we have entered into a reseller relationship
with XIOtech Corporation for the Crossroads ServerAttach family of products.
XIOtech focuses on enterprise-level customers worldwide in the healthcare and
government markets.

BUSINESS RESTRUCTURING EXPENSES AND ASSET IMPAIRMENT

In May 2002, our board of directors approved and the company subsequently
completed a restructuring plan that reduced our workforce by approximately 25%,
or 40 people (primarily in the sales, marketing and general and administrative
areas), to scale down our infrastructure and to consolidate operations.

Components of business restructuring expenses, asset impairments and the
remaining restructuring accruals as of April 30, 2003 are as follows (in
thousands):

<Table>
<Caption>
EMPLOYEE
SEPARATION
FACILITY AND OTHER
LEASE COSTS TOTAL
---------- ---------- -------

Balance as of October 31, 2002 ......... $ 1,957 $ 326 $ 2,283

Cash activity ................... (128) (136) (264)
Non-cash activity ............... -- -- --
------- ------- -------
Balance as of January 31, 2003 ......... 1,829 190 2,019
------- ------- -------
Cash activity ................... (154) (140) (294)
Non-cash activity ............... (140) -- (140)
------- ------- -------
Balance as of April 30, 2003 ........... $ 1,535 $ 50 $ 1,585
======= ======= =======
</Table>

In March 2003, the Company signed an agreement to sublease a portion of its
abandoned facilities. The anticipated rent payments from this sublease are
approximately $0.5 million through January 2006. The Company decreased the
restructuring accrual by approximately $0.1 million at April 30, 2003 for rent
payments to be received during the initial twelve months of the sublease term.
We will assess recoverability of these sublease payments on a quarterly basis.

As of April 30, 2003, remaining cash expenditures resulting from the
restructuring are estimated to be $1.6 million and relate primarily to facility
lease abandonment losses. Excluding facility lease abandonment losses, these
costs have been substantially incurred as of April 30, 2003. We have
substantially completed our restructuring efforts initiated in conjunction with
the restructuring announcement made during fiscal 2002; however, there can be no
assurance future restructuring efforts will not be necessary.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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, revenue and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to revenue recognition, deferred taxes,
warranty obligations, inventories, bad debts, facility lease abandonment losses
associated with our restructuring 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.

We believe the following critical accounting policies, among others, affect
our more significant judgments and estimates used in the preparation of our
Condensed Consolidated Financial Statements:

o Revenue recognition;

o Deferred taxes;

o Warranty obligations;

o Excess and obsolete inventories;

o Allowance for doubtful accounts;

o Facility lease abandonment losses; and

o Litigation

Revenue recognition. With respect to sales of our products to the Original
Equipment Manufacturer (OEM), we recognize product revenue when persuasive
evidence of an arrangement exists, delivery has occurred, price is fixed or
determinable, collectibility is probable and risk of loss has passed to the OEM.
Product sales to distributors, VARs and system integrators who do not have
return rights are recognized upon shipment. To the extent that we sell products
to distributors, VARs 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 revenue as of April 30, 2003 was approximately $0.5 million. 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.

Deferred taxes. As part of the process of preparing our financial
statements, we are required to estimate our income taxes. This process involves
us estimating our actual current tax exposure together with assessing temporary
differences resulting from differing treatment of items for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our balance sheet. We must then assess the likelihood that
our deferred tax assets will be recovered from future taxable income and to the
extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we change this valuation allowance in a period, we must
include an expense within the tax provision in our statement of operations.

Significant judgment is required in determining our deferred tax assets and
liabilities and our valuation allowance recorded against our net deferred tax
assets. In assessing the potential realization of deferred tax assets, we
consider whether it is more likely than not that some portion or all of the
deferred tax assets will be realized. The ultimate realization of deferred tax
assets is dependent upon us attaining future taxable income during the period in
which our deferred tax assets are recoverable. Due to uncertainty surrounding
our ability to generate taxable income in the near future, we have determined
that it is more likely than not that we will not be able to utilize any of the
benefits of our deferred tax assets, including net operating loss carry
forwards, before they expire. Therefore, we have provided a 100% valuation
allowance on our deferred tax assets, and our net deferred tax assets as of
April 30, 2003 is zero.

Warranty obligations. We provide 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. We write down our 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.

Allowance for doubtful accounts. We continuously assess the collectibility
of outstanding customer invoices and in doing such, we maintain an allowance for
estimated losses resulting from the non-collection of customer receivables. In
estimating this allowance, we consider factors such as:

o historical collection experience;

o a customer's current credit-worthiness;

o customer concentrations;

o age of the receivable balance, both individually and in the
aggregate; and

o general economic conditions that may affect a customer's ability to
pay.

Actual customer collections could differ from our estimates. For example, if
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.

Facility lease abandonment losses. We vacated excess leased facilities as a
result of the restructuring plan we initiated during fiscal 2002. We recorded an
accrual of $2.1 million for the remaining lease liabilities of such vacated
properties, leasehold improvements required to sublease the vacated space, as
well as brokerage commissions. We estimated costs of vacating these leased
facilities, including estimated costs to sublease, based on market information
and trend analysis. Any sublease payments received by us are recorded as a
reduction to this accrual based on the specified sublease terms. Actual results
may differ from these estimates in the near term, and such differences could be
material to our financial statements. In March 2003, the Company signed an
agreement to sublease a portion of its abandoned facilities. The anticipated
rent payments from this sublease are approximately $0.5 million through January
2006. The Company decreased the restructuring accrual by approximately $0.1
million at April 30, 2003 for rent payments to be received during the initial
twelve months of the sublease term. We will assess recoverability of these
sublease payments on a quarterly basis. Of the initial $2.1 million charge
recorded during fiscal 2002, approximately $1.8 million relates to the base rent
and fixed operating expenses of the vacated space through the lease term, which
ends April 15, 2006.

Litigation. We evaluate contingent liabilities, including threatened or
pending litigation in accordance with SFAS No. 5, "Accounting for Contingencies"
and record accruals when the outcome of these matters is deemed probable and the
liability is reasonably estimable. We make these assessments based upon the
facts and circumstances, and in some instances based in part upon the advice of
outside legal counsel. As of April 30, 2003, we have not accrued any costs
associated with any pending or threatened litigation as no amounts have been
deemed probable or reasonably estimable. However, any changes in the threatened
or pending litigation could result in revisions to our estimates of the
potential liability and could materially impact our results of operations and
financial position.

RESULTS OF OPERATIONS

The following table sets forth our consolidated financial data for the
periods indicated in thousands and expressed as a percentage of our total
revenue. (Dollars in thousands):

<Table>
<Caption>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------------------ -------------------------------------------
2002 2003 2002 2003
------------------ ------------------- ------------------ -------------------

Product revenue .................... $ 8,963 98.9 % $ 8,142 94.9 % $ 17,997 98.6 % $ 17,703 97.0 %
Royalty and other revenue .......... 101 1.1 437 5.1 264 1.4 548 3.0
-------- ------- -------- -------- -------- ------- -------- --------

Total revenue ...................... 9,064 100.0 8,579 100.0 18,261 100.0 18,251 100.0
Cost of revenue .................... 5,985 66.0 5,188 60.5 11,861 65.0 11,617 63.7
-------- ------- -------- -------- -------- ------- -------- --------

Gross profit ....................... 3,079 34.0 3,391 39.5 6,400 35.0 6,634 36.3

Operating expenses:
Sales and marketing .............. 1,673 18.5 990 11.5 3,983 21.8 2,015 11.1
Research and development ......... 4,573 50.4 2,999 35.0 9,757 53.4 6,138 33.6
General and administrative ....... 2,473 27.3 1,503 17.5 4,942 27.1 3,147 17.2
Business restructuring expense ... -- -- (140) (1.6) -- -- (140) (0.7)
Amortization of intangibles ...... 70 0.8 -- -- 140 0.8 173 0.9
-------- ------- -------- -------- -------- ------- -------- --------

Total operating expenses ....... 8,789 97.0 5,352 62.4 18,822 103.1 11,333 62.1
-------- ------- -------- -------- -------- ------- -------- --------

Loss from operations ............... (5,710) (63.0) (1,961) (22.9) (12,422) (68.1) (4,699) (25.8)
-------- ------- -------- -------- -------- ------- -------- --------

Other income, net .............. 231 2.6 143 1.7 549 3.1 304 1.7
-------- ------- -------- -------- -------- ------- -------- --------
Net loss ........................... $ (5,479) (60.4)% $ (1,818) (21.2)% $(11,873) (65.0)% $ (4,395) (24.1)%
======== ======= ======== ======== ======== ======= ======== ========
</Table>

COMPARISON OF THREE MONTHS ENDED APRIL 30, 2002 AND 2003

Product revenue. Product revenue decreased 9.2% from approximately $9.0
million for the three months ended April 30, 2002 to approximately $8.1 million
for the three months ended April 30, 2003. The decrease in product revenue was
primarily related to higher product revenue in the three months ended April 30,
2002 as compared to the three months ended April 30, 2003, due to StorageTek's
last time buy of discontinued products. In addition, we discontinued our
reseller business relationship with Luminex Software (Luminex) in February 2003.
During the three months ended April 30, 2002 and 2003, product sales to
StorageTek were $3.0 million and $2.5 million, respectively, and product sales
to Luminex were approximately $0.8 million and approximately $22,000,
respectively. We have also seen channel product sales decrease from
approximately $0.9 million to approximately $0.5 million for the three months
ended April 30, 2002 and 2003, respectively. However, we continued to experience
increased sales of our fifth generation products to Hewlett-Packard. During the
three months ended April 30, 2002 and 2003, sales to Hewlett-Packard were $3.7
million and $4.6 million, respectively. Overall unfavorable macro-economic
conditions and reduced IT spending rates worldwide have also contributed to a
decrease in product revenue.

In March 2002, we entered into an exclusive reseller business relationship
with Luminex Software. Provided that Luminex met specified minimum purchase
thresholds, Luminex would have the option to purchase the assets of our Oregon
subsidiary and intellectual property related to the mainframe products,
including the right to manufacture those products. Luminex met these minimum
purchase thresholds, and we completed the sale of the Oregon business in
February 2003.

from the sale of our embedded routers will be less in the future, our
arrangement will have a positive impact on our gross margin. We believe this
agreement will allow us to leverage the strengths of both companies including
Hewlett-Packard's economies of scale in manufacturing and systems integration
expertise and our technology and intellectual property. We are currently working
under the new agreement and will experience the full impact of this transition
during our fiscal third quarter of 2003.

Royalty and other revenue. Royalty and other revenue includes sales of
service contracts, consulting fees and fees received from the licensing of other
intellectual property. Service revenue is recognized over the service period.
Royalty and other revenue increased 332.7% from approximately $0.1 million for
the three months ended April 30, 2002 to approximately $0.4 million for the
three months ended April 30, 2003. The increase in royalty and other revenue was
primarily related to approximately $0.3 million in royalties earned during the
three months ended April 30, 2003 under our amended licensing agreement with
Hewlett-Packard.

Cost of revenue and gross profit. Cost of revenue consists primarily of
contract manufacturing costs, material costs, manufacturing overhead, warranty
costs and stock-based compensation. Cost of revenue decreased 13.3% from
approximately $6.0 million for the three months ended April 30, 2002 to
approximately $5.2 million for the three months ended April 30, 2003. The
decrease in cost of revenue was due to decreases in volume and manufacturing
cost savings.

Gross profit increased 10.1% from approximately $3.1 million for the three
months ended April 30, 2002 to approximately $3.4 million for the three months
ended April 30, 2003. Gross profit margin increased from 34.0% for the three
months ended April 30, 2002 to 39.5% for the three months ended April 30, 2003.
This increase in gross margin is primarily attributable to our recent transition
to a royalty-based sales model with Hewlett-Packard as well as a higher margin
product mix from our fifth generation products.

Under the terms of the amended agreement with Hewlett-Packard for our
embedded products, we will continue to manufacture our stand-alone box versions
of our fifth generation products for Hewlett-Packard, as well as for our other
OEMs for whom we will also continue to manufacture our Crossroads branded
solutions. We have seen a higher proportion of revenues being comprised of sales
of the fifth generation products as we transition from our older product lines.
The fifth generation products also provide a higher margin as compared to our
older product lines due to their enhanced features and functionalities. Both of
these factors should continue to have a positive impact on gross margin.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel, advertising
programs, other promotional activities and stock-based compensation expenses.
Sales and marketing expenses decreased 40.8% from $1.7 million for the three
months ended April 30, 2002 to $1.0 million for the three months ended April 30,
2003. Stock based compensation expense was approximately $102,000 and $33,000
for the three months ended April 30, 2002 and 2003, respectively. The decrease
in sales and marketing expenses was primarily due to our restructuring efforts
during fiscal 2002, which resulted in approximately $0.2 million of decreased
advertising and marketing expenses and approximately $0.2 million of decreased
compensation expenses. Sales and marketing personnel totaled 21 at April 30,
2002 and 15 at April 30, 2003. This reduction in force combined with improved
expense management efforts resulted in decreased corporate overhead allocations,
travel and tradeshow expenditures. As a percentage of total revenue, sales and
marketing expenses decreased from 18.5% for the three months ended April 30,
2002 to 11.5% for the three months ended April 30, 2003. We anticipate that
sales and marketing expenses may increase as a percentage of total revenue, due
to our ongoing sales and marketing efforts that are intended to broaden
awareness of the benefits of our existing and recently introduced products, as
well as the growth of our sales and marketing organization.

Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development and
stock-based compensation expenses. Research and development expenses decreased
34.4% from $4.6 million for the three months ended April 30, 2002 to $3.0
million for the three months ended April 30, 2003. Stock based compensation
expense was approximately $96,000 and $78,000 for the three months ended April
30, 2002 and 2003, respectively. The decrease in research and development
expenses was primarily due to our restructuring efforts during fiscal 2002,
which resulted in approximately $0.8 million of decreased compensation expenses
and overhead allocations. Research and development personnel totaled 77 at April
30, 2002 and 68 at April 30, 2003. As a percentage of total revenue, research
and development expenses decreased from 50.4% for the three months ended April
30, 2002 to 35.0% for the three months ended April 30, 2003. We

anticipate that research and development expenses may fluctuate as a percentage
of total revenue, due to our continued development of our technologies and the
expansion of our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, costs of our
administrative, executive and information technology departments, as well as
legal and accounting, insurance and stock-based compensation expenses. General
and administrative expenses decreased 39.2% from $2.5 million for the three
months ended April 30, 2002 to $1.5 million for the three months ended April 30,
2003. Stock based compensation expense was approximately $0.8 million and $0.1
million for the three months ended April 30, 2002 and 2003, respectively. The
decrease in general and administrative expenses was primarily due to our
restructuring efforts in fiscal 2002, which resulted in approximately $0.3
million of decreased depreciation expense and approximately $0.2 million of
decreased compensation expense. General and administrative personnel totaled 30
at April 30, 2002 and 20 at April 30, 2003. As a percentage of total revenue,
general and administrative expenses decreased from 27.3% for the three months
ended April 30, 2002 to 17.5% for the three months ended April 30, 2003. We
anticipate that general and administrative expenses may increase due to
increased costs associated with the Sarbanes-Oxley Act of 2002 and related
legislative and regulatory changes.

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 $0.2 million and $0.1 million for the three months ended
April 30, 2002 and 2003, respectively, representing 2.6% and 1.7% of total
revenue, respectively. The decrease in other income, net was primarily due to
decreased cash and cash equivalents and short-term investment balances and lower
interest rates.

COMPARISON OF SIX MONTHS ENDED APRIL 30, 2002 AND 2003

Product revenue. Product revenue decreased 1.6% from approximately $18.0
million for the six months ended April 30, 2002 to approximately $17.7 million
for the six months ended April 30, 2003. The slight decrease in product revenue
was primarily due to a decrease in revenue from StorageTek partially offset by
an increase in revenue from Hewlett-Packard. The decrease in StorageTek's
product revenue was related to higher product revenue in the six months ended
April 30, 2002 as compared to the six months ended April 30, 2003, due to
StorageTek's last time buy of discontinued products. The increase in revenue
from Hewlett-Packard was due to the increase in sales of our fifth generation
products for the six months ended April 30, 2003. During the six months ended
April 30, 2002 and 2003, product sales to StorageTek were approximately $6.1
million and approximately $4.5 million, respectively, and sales to
Hewlett-Packard were approximately $7.4 million and approximately $10.7 million,
respectively. In addition, we discontinued our reseller business relationship
with Luminex in February 2003 and have experienced a decrease in channel and
second tier OEM product sales. During the six months ended April 30, 2002 and
2003, product sales to Luminex were approximately $1.3 million and approximately
$0.3 million, respectively, and sales to channel and second tier OEM customers
were approximately $2.8 million and approximately $1.6 million for the six
months ended April 30, 2002 and 2003.

Royalty and other revenue. Royalty and other revenue includes sales of
service contracts, consulting fees and fees received from the licensing of other
intellectual property. Service revenue is recognized over the service period.
Royalty and other revenue increased 107.6% from approximately $0.3 million for
the six months ended April 30, 2002 to approximately $0.5 million for the six
months ended April 30, 2003. The increase in royalty and other revenue was
primarily related to approximately $0.3 million in royalties earned during the
three months ended April 30, 2003 under our amended licensing agreement with
Hewlett-Packard.

Cost of revenue and gross profit. Cost of revenue consists primarily of
contract manufacturing costs, material costs, manufacturing overhead, warranty
costs and stock-based compensation expenses. Cost of revenue decreased 2.1% from
approximately $11.9 million for the six months ended April 30, 2002 to
approximately $11.6 million for the six months ended April 30, 2003. Stock based
compensation was approximately $47,000 and approximately $20,000 for the six
months ended April 30, 2002 and 2003, respectively. The decrease in cost of
revenue was due to decreases in volume and manufacturing cost savings.

Gross profit increased 3.7% from $6.4 million for the six months ended April
30, 2002 to approximately $6.6 million for the six months ended April 30, 2003.
Gross profit margin increased from 35.0% for the six months ended April 30, 2002
to 36.3% for the six months ended April 30, 2003. This increase in gross margin
is primarily attributable to our recent transition to a royalty-based sales
model with Hewlett-Packard as well as a higher margin product mix from our fifth
generation products.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel, advertising
programs, other promotional activities and stock-based compensation expenses.
Sales and marketing expenses decreased 49.4% from approximately $4.0 million for
the six months ended April 30, 2002 to approximately $2.0 million for the six
months ended April 30, 2003. Stock-based compensation expense was approximately
$0.3 million and approximately $0.1 million for the six months ended April 30,
2002 and 2003, respectively. The decrease in sales and marketing expenses was
primarily due to our restructuring efforts during fiscal 2002, which resulted in
approximately $0.2 million of decreased advertising and marketing expenses and
approximately $0.8 million of decreased compensation expenses. Sales and
marketing personnel totaled 21 at April 30, 2002 and 15 at April 30, 2003. This
reduction in force combined with improved expense management efforts resulted in
decreased corporate overhead allocations, travel and tradeshow expenditures. As
a percentage of total revenue, sales and marketing expenses decreased from 21.8%
for the six months ended April 30, 2002 to 11.1% for the six months ended April
30, 2003. We anticipate that sales and marketing expenses may increase as a
percentage of total revenue, due to our ongoing sales and marketing efforts that
are intended to broaden awareness of the benefits of our existing and recently
introduced products, as well as the growth of our sales and marketing
organization.

Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development,
prototype and stock-based compensation expenses. Research and development
expenses decreased 37.1% from $9.8 million for the six months ended April 30,
2002 to $6.1 million for the six months ended April 30, 2003. Stock based
compensation expense was approximately $0.2 million and $0.2 million for the six
months ended April 30, 2002 and 2003, respectively. The decrease in research and
development expenses was primarily due to our restructuring efforts during
fiscal 2002, which resulted in approximately $1.0 million of decreased
compensation expenses, decreased corporate overhead allocations of approximately
$0.8 million and decreased prototype costs of approximately $0.9 million.
Research and development personnel totaled 77 at April 30, 2002 and 68 at April
30, 2003. As a percentage of total revenue, research and development expenses
decreased from 53.4% for the six months ended April 30, 2002 to 33.6% for the
six months ended April 30, 2003. We anticipate that research and development
expenses may fluctuate as a percentage of total revenue, due to our continued
development of our technologies and the expansion of our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, costs of our
administrative, executive and information technology departments, as well as
legal and accounting, insurance and stock-based compensation expenses. General
and administrative expenses decreased 36.3% from approximately $4.9 million for
the six months ended April 30, 2002 to approximately $3.1 million for the six
months ended April 30, 2003. Stock-based compensation expense was approximately
$1.7 million and $0.5 million for the six months ended April 30, 2002 and 2003,
respectively. The decrease in general and administrative expenses was primarily
due to our restructuring efforts in fiscal 2002, which resulted in approximately
$0.7 million of decreased depreciation expense and approximately $0.3 million of
decreased compensation expense. General and administrative personnel totaled 30
at April 30, 2002 and 20 at April 30, 2003. As a percentage of total revenue,
general and administrative expenses decreased from 27.1% for the six months
ended April 30, 2002 to 17.2% for the six months ended April 30, 2003. We
anticipate that general and administrative expenses may increase due to
increased costs associated with the Sarbanes-Oxley Act of 2002 and related
legislation and regulatory changes.

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 $0.5 million and approximately $0.3 million for the six
months ended April 30, 2002 and 2003, respectively, representing 3.1% and 1.7%
of total revenue, respectively. The decrease in other income, net was primarily
due to decreased cash and cash equivalents and short-term investment balances
and lower interest rates.

LIQUIDITY AND CAPITAL RESOURCES

The following table presents selected financial statistics and information
related to our liquidity and capital resources (dollars in thousands):

<Table>
<Caption>
OCTOBER 31, APRIL 30,
2002 2003
----------- ---------

Cash and cash equivalents $14,723 $16,396
Short-term investments $19,588 $15,161
Working capital $34,855 $31,180
Current ratio 4.9:1 4.8:1
Days of sales outstanding - for the quarter ended 64 35
</Table>

Our principal sources of liquidity at April 30, 2003 consisted of $16.4
million in cash and cash equivalents and $15.2 million in short-term
investments.

In May 2002, we renegotiated our line of credit with Silicon Valley Bank.
The committed revolving line is an advance of up to $3.0 million with a
borrowing base of 80% of eligible accounts receivable. The line of credit
contains provisions that prohibit the payment of cash dividends and require the
maintenance of specified levels of tangible net worth and certain financial
performance covenants measured on a monthly basis. The line of credit matured on
February 1, 2003 and we negotiated an extension for this line of credit. As of
April 30, 2003, there were no borrowings outstanding under the revolving line of
credit and no term loans outstanding.

As of April 30, 2003, 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 approximately $10.1 million for
the six months ended April 30, 2002 as compared to approximately $0.5 million
for the six months ended April 30, 2003. This decrease in net cash utilized was
primarily due to a significant reduction in net loss for the six months ended
April 30, 2003 as compared to the six

months ended April 30, 2002. In addition, due to our revenue linearity and
better than expected collection efforts, we experienced a significant decrease
in accounts receivable during the six months ended April 30, 2003.

Cash utilized by investing activities was approximately $22.7 million for
the six months ended April 30, 2002 as compared to approximately $4.0 million
provided by investing activities for the six months ended April 30, 2003. The
increase in net cash provided by investing activities reflects the maturity of
held-to-maturity investments, net of purchases, of approximately $4.4 million
during the six months ended April 30, 2003, compared to the purchase of
held-to-maturity investments of approximately $21.3 million during the six
months ended April 30, 2002. Capital expenditures were $1.5 million and $0.6
million for the six months ended April 30, 2002 and 2003, respectively. These
capital 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 ongoing research and development in
developing our technologies and expanding our product offerings. We anticipate
moderate additional capital expenditures through fiscal 2003, primarily to
support our ongoing product development efforts.

Cash utilized by financing activities was approximately $0.3 million for the
six months ended April 30, 2002 as compared to approximately $1.8 million for
the six months ended April 30, 2003. The increased utilization of net cash
reflects the purchase of Crossroads' shares through our open market stock
purchase program of approximately $1.8 million during the six months ended April
30, 2003, compared to approximately $0.7 million during the six months ended
April 30, 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, 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, the amount of cash used to fund our stock
repurchase program, and market acceptance of our products. Additionally, we may
enter into 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 a stock repurchase
program pursuant to which we were authorized to repurchase up to $5.0 million of
our common stock in the open market. From September 2001 to April 2002, we
repurchased 661,300 shares of our common stock at an aggregate purchase price of
$2.1 million. In May 2002, our board of directors authorized the extension of
our stock repurchase program and authorized the repurchase up to an additional
$5.0 million worth of our common stock, for an aggregate amount of up to $7.1
million. From May 2002 through October 31, 2002, we repurchased 1,714,465 shares
of our common stock at an aggregate purchase price of $1.7 million. In October
2002, our board of directors authorized the further extension of our stock
repurchase program through the end of 2003. From November 2002 to April 30,
2003, we repurchased 1,682,000 shares of our common stock at an aggregate
purchase price of $1.8 million. As of April 30, 2003, we had repurchased an
aggregate of 4,057,765 shares of our common stock for an aggregate purchase
price of $5.6 million under our stock repurchase program.

Under the repurchase program, the stock will be purchased in the open market
or privately negotiated transactions from time to time in compliance with the
SEC's Rule 10b-18, subject to market conditions, applicable legal requirements
and other factors. The timing and amounts of any purchases will be as determined
by our management from time to time or may be suspended at any time without
prior notice, depending on market conditions and other factors they deem
relevant. The timing and size of any future stock repurchases are subject to
market conditions, stock prices, cash position and other cash requirements.

CONTRACTUAL CASH OBLIGATIONS AND COMMITMENTS

We lease office space and equipment under long-term operating lease
agreements that expire on various dates through April 15, 2006. In April 2000,
we relocated our headquarters in accordance with an agreement to lease
approximately 63,548 square feet of administrative office space in Austin,
Texas. The term of the lease agreement is six years, from April 1, 2000 through
April 15, 2006, and represents a lease commitment of approximately $1.8 million
per year through the lease term. In conjunction with entering into the lease
agreement, we signed an unconditional, irrevocable letter of credit with a bank
for $250,000, which is secured by a $3.0 million line of credit.

The following summarizes our contractual cash obligations as of April 30,
2003 (in thousands):

<Table>
<Caption>
PAYMENTS DUE BY PERIOD
--------------------------------------------------------------------
LESS THAN MORE THAN
TOTAL 1 YEAR 1-3 YEARS 3-5 YEARS 5 YEARS
------- --------- --------- --------- ---------

Operating leases ........ $ 5,846 $ 1,038 $ 4,808 $ -- $ --
======= ======= ======= ======= =======
</Table>

RECENT ACCOUNTING PRONOUNCEMENTS

ADDITIONAL 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. The discussion below addresses some of these factors. Additional
risks and uncertainties that we are unaware of or that we currently deem
immaterial also may become important factors that affect us.

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

We have incurred significant losses in every fiscal quarter since fiscal
1996 and expect to continue to incur losses in the future. As of April 30, 2003,
we had an accumulated deficit of $145.4 million. We cannot be certain that we
will be able to generate sufficient revenue to achieve profitability or become
cash flow positive. Although we engaged in a restructuring plan in 2002 pursuant
to which we significantly reduced our expense structure, we still expect to
incur significant sales and marketing, research and development and general and
administrative expenses and, as a result, we expect to continue to incur losses.
Moreover, even if we do achieve profitability, we may not be able to sustain or
increase profitability or cash flow.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

products and to develop new and enhanced products on a timely and cost-effective
basis. Risks inherent in the development and introduction of new products
include:

o delay in our initial shipment of new products;

o the difficulty in forecasting customer demand accurately;

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

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

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

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

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

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

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

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

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

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

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

We and several of our officers and directors were named as defendants in
several class action lawsuits filed in the United States District Court for the
Western District of Texas. The plaintiffs in the actions purport to represent
purchasers of our common stock during various periods ranging from January 25,
2000 through August 24, 2000. On November 22, 2002, the court granted our motion
for summary judgment, concluding that the plaintiffs failed to demonstrate an
essential element to their claim of securities fraud. On February 26, 2003, the
plaintiffs filed a notice of appeal to the Fifth Circuit Court of Appeals. The
plaintiffs are seeking unspecified amounts of compensatory damages, interest and
costs, including legal fees. The litigation is still 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.

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. On January 28, 2002, the Company
filed an answer and general denial to the derivative state action. The Company
believes the allegations in the derivative state action are without merit and
intends to defend itself vigorously. Our inability to prevail in this action
could have a material adverse effect on our future business, financial condition
and results of operations.

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

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

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

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

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

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

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

We currently have a limited number of products that we sell in commercial
quantities. Our future growth and competitiveness will depend greatly on the
market acceptance of our newly introduced product lines, including the 6000 and
10000 storage routers as well as the ServerAttach line of products which were
released in 2002. While we have recently begun to receive revenue from the sale
of our 6000, 10000 and ServerAttach line of products, their market acceptance
remains uncertain. If any of these products do not achieve sufficient market
acceptance, our future growth prospects could be seriously harmed. Moreover,
even if we are able to develop and commercially introduce new products and
enhancements, these new products or enhancements may not achieve market
acceptance.

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

o growth of the SAN market;

o changing requirements of customers within the SAN market;

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

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

o our customer service and support capabilities and responsiveness; and

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

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

In fiscal 2000, 2001, 2002, and the six months ended April 30, 2003,
approximately 77%, 70%, 78% and 85% of our total revenue, respectively, was
derived from six customers or less. In fiscal 2002, Hewlett-Packard and
StorageTek represented 51% and 24% of our total revenue, respectively. For the
six months ended April 30, 2003, Hewlett-Packard and StorageTek represented 61%
and 25% of our total revenue, respectively. In May 2002, the merger between
Hewlett-Packard and Compaq was consummated which significantly increased our
customer concentration. If we experience any adverse effect of the acquisition
of Compaq by Hewlett-Packard, including the risks due to the increase in
customer concentration or any change in product focus or strategy which
adversely affects anticipated revenue or margins or our overall relationship
with the newly combined company, our results of operations and future prospects
will suffer. Our operating results in the foreseeable future will continue to
depend on sales to a relatively small number of OEM customers. Therefore, the
loss of any of our key OEM customers, or a significant reduction in sales to any
one of them, would significantly reduce our revenue.

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

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

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

In traditional computer networks, system backup is accomplished by
transferring data from applications and databases through the servers used in
the network to tape drives or other media where the data is safely stored. Tape
storage devices generally rely on a SCSI connection to interface with the server
in receiving and transmitting data. Our routers enable these SCSI-based storage
devices to interface with the fibre channel-based devices 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 in the market today. If these or other manufacturers
are successful in fibre channel-based storage systems, demand for our storage
router products would be materially reduced and our revenue would decline.

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

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

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

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

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

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

us to increased risks of high inventory carrying costs and increased
obsolescence and may increase our operating costs.

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

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

WE HAVE ENGAGED IN RESTRUCTURING EFFORTS IN 2002 WHICH HAVE REDUCED OUR SALES
AND MARKETING ORGANIZATION FROM 21 EMPLOYEES TO 15 EMPLOYEES, A REDUCTION OF
29%. THIS REDUCTION IN OUR SALES AND MARKETING FORCE MAY DECREASE OUR ABILITY TO
AGGRESSIVELY TARGET NEW MARKETS.

In May 2002, we had a reduction in force which impacted our sales and
marketing organization significantly. While we feel that our sales and marketing
organization is sufficient to support our current products and customer base,
the current size of our sales and marketing organization may prohibit us from
actively pursuing new markets or opportunities. For example, we believe that
enhancing our sales and marketing efforts will be key to our ability to achieve
widespread customer penetration for our ServerAttach product line, which is
critical to our future growth prospects.

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

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

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

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

delay our manufacturing and render us unable to deliver products to customers on
a scheduled delivery date. We also may experience shortages of certain
components from time to time, which also could delay our manufacturing.
Manufacturing delays could negatively impact our ability to sell our products
and damage our customer relationships.

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

The market for SAN products generally, and storage routers in particular, is
increasingly competitive. We anticipate that the market for our products will
continually evolve and will be subject to rapid technological change. We
currently face competition from ADIC through their acquisition of Pathlight in
2001, ATTO and Chaparral Network Storage. In addition, other OEM customers could
develop products or technologies internally, or by entering into strategic
relationships with or acquiring other existing SAN product providers that would
replace their need for our products and would become a source of competition. We
expect to face competition in the future from OEMs, including our customers and
potential customers, LAN router manufacturers, storage system industry
suppliers, including manufacturers and vendors of other SAN products or entire
SAN systems, and innovative start-up companies. For example, manufacturers of
fibre channel switches or directors 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. While we do not currently face significant
direct competition for our ServerAttach(TM) products, we anticipate we will see
increased competition as this market develops.

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

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

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

In November 2002, we amended our existing licensing agreement with
Hewlett-Packard. Pursuant to this amendment we have outsourced the manufacturing
of our embedded routers to Hewlett-Packard. As a result, we do not carry the
inventory and overhead costs of the hardware, and we will receive a royalty from
Hewlett-Packard for licensing our technology, which will result in less
aggregate revenue for us. However, even though total revenue from the sale of
our embedded routers will be less in the future, our arrangement will have a
positive impact on per unit gross margin. We believe this agreement will allow
us to leverage the strengths of both companies including Hewlett-Packard's
economies of scale in manufacturing and systems integration expertise and our
software, value-added applications and intellectual property. We are currently
working under the new agreement and will experience the full effect of our
transition the manufacturing of our embedded solutions during our fiscal third
quarter of 2003. 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
using our licensed technologies, 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 SOME 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 devices. The impact of this trend on our
business has been the push for, and subsequent ramp of embedded routers being
shipped with tape libraries. These embedded routers are lower cost than the
stand-alone box routers and this lower cost is passed on to our OEM customers.
As our mix shifts from box routers to embedded routers, we will see a reduction
in average price per unit and revenue will decline if volume does not increase.
To date, some of our agreements with OEM customers, including our largest
customer, provide for quarterly reductions in pricing on a product-by-product
basis, with the actual discount determined according to the volume potential
expected from the customer, the OEM's customer base, the credibility the OEM may
bring to our solution, additional technology the OEM may help us incorporate
with our product, and other Crossroads products the OEM supports.
Notwithstanding, the decreases in our average selling prices of our older
products generally have been partially offset by higher average selling prices
for our newer products, as well as sales to distributors, VARs and system
integrators where price decreases are not generally required. Nonetheless, we
could experience declines in our average unit selling prices for our products in
the future, especially if our newer products do not receive broad market
acceptance. In addition, declines in our average selling prices may be more
pronounced should we encounter significant pricing pressures from increased
competition within the storage router market.

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

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

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

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

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

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

steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where applicable laws may not protect our
proprietary rights as fully as in the United States.

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

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

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

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

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

As we have discussed elsewhere in this report, we have engaged in lengthy
and costly litigation regarding our '972 patent. While we have prevailed to date
in these cases, we cannot assure you that we would prevail in any future effort
to enforce our rights in the '972 patent.

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

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

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

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

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

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

o potential loss of key employees of the acquired company.

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

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

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

Our executive officers and directors, and their affiliates, beneficially own
a significant portion of the total voting power of our company, as of April 30,
2003. As a result, these stockholders will be able to exert significant control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions. Our ongoing open
market stock repurchase program has also increased the control our affiliates
have over us. This concentration of voting power could delay or prevent an
acquisition of us on terms that other stockholders may desire.

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

Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware that may discourage, delay or prevent someone from
acquiring or merging with us, which may adversely affect the market price of our
common stock. Further, in August 2002, our Board of Directors approved, adopted
and entered into a Stockholder Rights Plan which also may have the effect of
discouraging, delaying or preventing an acquisition which stockholders otherwise
may desire to support.

OUR STOCK PRICE MAY BE VOLATILE.

The market price of our common stock has been volatile in the past and may
be volatile in the future. For example, since May 1, 2002, the market price of
our common stock as quoted on the NASDAQ National Market System fluctuated
between $0.38 and $2.25. 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 distributions by Austin Ventures of our common stock to their limited
partners;

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

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

o departures of key personnel.

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

For a description of the Company's market risks, see "Item 7 - Management's
Discussion and analysis of Financial Condition and Results of Operations -
Market Risk" in the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2002.

ITEM 4. CONTROLS AND PROCEDURES.

(a) Evaluation of disclosure controls and procedures.

Our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rules 13a-14(c) and 15d-14(c) under the Securities Exchange Act of
1934, as amended (the "Exchange Act")), as of a date within 90 days of the
filing date of this Quarterly Report on Form 10-Q. Based on that evaluation,
they have concluded that as of such date, our disclosure controls and procedures
are effective and designed to ensure that information required to be disclosed
by us in reports that we file or submit under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
applicable SEC rules and forms.

(b) Changes in internal controls

There have been no significant changes in our internal controls or other
factors that could significantly affect internal controls subsequent to the date
of evaluation by our CEO and CFO.

CROSSROADS SYSTEMS, INC. AND SUBSIDIARIES

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Intellectual Property Litigation

On March 31, 2000, the Company filed a lawsuit against Chaparral Network
Storage, Inc. ("Chaparral") alleging that Chaparral had infringed one of its
patents (5,941,972, hereinafter the "972 patent") with some of their products.
In September 2001, the jury found that the '972 patent was valid and that all of
Chaparral's RAID and router products that contained LUN Zoning had infringed all
claims of the Crossroads '972 patent. The federal judge in this matter issued a
permanent injunction against Chaparral from manufacturing any RAID or router
product that contained LUN Zoning or access controls and assessed punitive
damages. As a result, the Company was awarded damages with a royalty amount of
5% for Chaparral's router product line and 3% for their RAID product line.
Chaparral appealed the judgment against it, contending that the '972 patent is
invalid and not infringed. In February 2003, the Federal Circuit Court of
Appeals recently affirmed the lower court ruling that Crossroads' patent was
valid and willfully infringed by Chaparral, which must stop shipping all
products that contain the Crossroads technology and pay Crossroads a royalty for
prior shipments. On May 19, 2003, the Company received a payment from Chaparral
of approximately $0.2 million to substantially satisfy the damages judgment that
was based on past sales of infringing products.

There have been no other changes in our legal proceedings since the
Company's quarterly report on Form 10-Q filed for the first fiscal quarter of
2003.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

At our annual meeting of stockholders held on March 27, 2003, our stockholders
voted on the following matters:

(1) The election of two Class II directors to serve until our 2006
annual meeting or until his or her successor has been elected and qualified. The
nominees of the board of directors were elected by the following vote:

<Table>
<Caption>
In Favor Withheld

Richard D. Eyestone 18,311,790 395,203
William P. Wood 18,310,020 396,973
</Table>

(2) The approval of the appointment of KPMG LLP as independent auditors
for the fiscal year ending October 31, 2003. The appointment was approved by a
vote of 18,338,060 shares in favor, 353,964 shares opposed and 14,969 shares
abstaining.

ITEM 5. OTHER INFORMATION

On June 9, 2003, Austin Ventures (AV), an early investor in Crossroads,
distributed 600,000 shares of Crossroads common stock to limited and general
partners. According to AV, the distribution was made based on contractual
obligations under AV's agreements with its partners. Following this
distribution, AV will hold approximately 2.1 million shares of Crossroads common
stock. AV has not made any determination as to the timing or amounts of any
future distribution of Crossroads stock held by its funds.

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

(a) Exhibits

99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002

(b) Reports on Form 8-K

During the fiscal quarter ended April 30, 2003, Crossroads filed the
following current report on Form 8-K:

o We filed a Form 8-K dated February 12, 2003 announcing that our
board of directors appointed KPMG LLP to serve as our independent
public accountants and dismissed our former independent public
accountants, PricewaterhouseCoopers LLP.

o We filed a Form 8-K/A dated February 12, 2003 announcing that the
appointment of KPMG LLP to serve as our independent public
accountants had become effective.

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.

June 13, 2003 /s/ Brian R. Smith
------------- ---------------------------------------------
(Date) Brian R. Smith
Chief Executive Officer
(Principal Executive Officer)

June 13, 2003 /s/ Andrea C. Wenholz
------------- ---------------------------------------------
(Date) Andrea C. Wenholz
Chief Financial Officer
(Principal Financial and Accounting Officer)

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Brian R. Smith, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crossroads
Systems, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which
such statements were made, not misleading with respect to the period
covered by this quarterly report;

3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:

a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b) Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and

c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons fulfilling the
equivalent function):

a) All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant deficiencies
and material weaknesses.

Date: June 13, 2003

/s/ Brian R. Smith
-------------------------------------
Brian R. Smith
Chairman of the Board, President and
Chief Executive Officer

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 302
OF THE SARBANES-OXLEY ACT OF 2002

I, Andrea C. Wenholz, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Crossroads
Systems, Inc.;

a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;

b. Evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date");
and

c. Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;

a. All significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and

b. Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and

Date: June 13, 2003

/s/ Andrea C. Wenholz
------------------------------------------
Andrea C. Wenholz
Vice President and Chief Financial Officer

EXHIBIT INDEX

<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION
------- -----------

99.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002
</Table>