CROSSROADS SYSTEMS INC, 424B4, 1999-10-20

CROSSROADS SYSTEMS INC
424B4, 1999-10-20
COMPUTER PERIPHERAL EQUIPMENT, NEC

Previous: COLONIAL MASSACHUSETTS INSURED MUNICIPAL FUND, 8-A12B, 1999-10-20

Next: AETHER SYSTEMS INC, S-1/A, 1999-10-20

<PAGE> 1

FILED PURSUANT TO RULE 424(b)(4)
REG. NO. 333-85505
PROSPECTUS

3,750,000 SHARES

[CROSSROADS LOGO]

COMMON STOCK

This is an initial public offering of shares of common stock of Crossroads
Systems, Inc. Prior to this offering, there has been no public market for our
shares.

Our common stock has been approved for trading and quotation on the Nasdaq
National Market under the symbol "CRDS."

OUR BUSINESS INVOLVES SIGNIFICANT RISKS. THESE RISKS ARE DESCRIBED UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE 9.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

---------------------------

<TABLE>
<CAPTION>
PER SHARE TOTAL
<S> <C> <C>
Public offering price....................................... $18.00 $67,500,000
Underwriting discounts and commissions...................... $ 1.26 $ 4,725,000
Proceeds, before expenses, to Crossroads.................... $16.74 $62,775,000
</TABLE>

The underwriters may also purchase from us and two selling stockholders up
to an additional 562,500 shares of common stock at the public offering price,
less the underwriting discounts and commissions, to cover over-allotments. For
information regarding the selling stockholders, please see the section entitled
"Principal and Selling Stockholders" on page 61.

The underwriters expect to deliver the shares in New York, New York on
October 25, 1999.

---------------------------

SG COWEN
DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER
INCORPORATED
MORGAN KEEGAN & COMPANY, INC.
October 19, 1999
<PAGE> 2

[INSIDE FRONT COVER GRAPHICS:

The graphic depicts a schematic diagram of a Fibre Channel storage area
network, or SAN. At the top of the diagram is the caption "The Crossroads
Solution" and the following paragraph:

Crossroads' storage routers connect servers and storage systems in a
storage area network, enabling rapid, seamless communication across that
network. Our storage routers serve as an interconnect between a storage area
network (SAN) and network servers and storage devices. With Crossroads storage
routers, organizations are able to more effectively and efficiently store,
manage and ensure the integrity and availability of their data.

The title above the Fibre Channel SAN is "Fibre Channel Storage Area
Network." At the top of the diagram is a "Hub/Switch" which is connected via
Fibre Channel to three Crossroads storage routers, which are in turn connected
to "Network Servers." On the left of the diagram, one storage router is
connected via Small Computer System Interface, or SCSI, to a "SCSI Disk Storage
System." In the center of the diagram, the storage router is connected via SCSI
to two "Network Servers." On the right of the diagram, the storage router is
connected via SCSI to a "Tape Library." The four Network Servers in the center
of the diagram are connected through an "Ethernet" connection to five "Network
End Users" depicted as computer terminals.

Below the diagram are three explanatory paragraphs, from left to right as
follows:

- - LEVERAGE EXISTING INVESTMENTS. Many organizations' network servers and storage
systems are connected via the Small Computer System Interface (SCSI). SCSI
devices are not compatible with the Fibre Channel protocol used in storage area
networks. Our storage routers enable the connection of SCSI-based storage
systems within a storage area network.

- - ENHANCED STORAGE PERFORMANCE. By allowing storage systems to be accessible to
all servers on the network, our storage routers reduce local area network
congestion and enable networks to utilize their storage resources more
effectively.

- - FASTER DATA BACKUP. Our storage routers enable data backup processes to be
completed more rapidly over a SAN without slowing the local area network's
regular data processing activity.]
<PAGE> 3

TABLE OF CONTENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................... 5
Risk Factors............................. 9
Note Regarding Forward-Looking
Statements............................. 19
Use of Proceeds.......................... 20
Dividend Policy.......................... 20
Capitalization........................... 21
Dilution................................. 22
Selected Consolidated Financial Data..... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................. 24
</TABLE>

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Business................................. 34
Management............................... 48
Certain Transactions..................... 58
Principal and Selling Stockholders....... 61
Description of Capital Stock............. 63
Shares Eligible for Future Sale.......... 66
Underwriting............................. 68
Legal Matters............................ 70
Experts.................................. 70
Where You Can Find Additional Information
About Crossroads....................... 70
Index to Consolidated Financial
Statements............................. F-1
</TABLE>

---------------------

UNTIL NOVEMBER 14, 1999, ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER
A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4

[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]
<PAGE> 5

PROSPECTUS SUMMARY

The following is only a summary. You should carefully read the more
detailed information contained in this prospectus, including the consolidated
financial statements and related notes. Our business involves significant risks.
You should carefully consider the information under the heading "Risk Factors."

CROSSROADS SYSTEMS, INC.

We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. A storage router is a
piece of computer equipment that is installed between other computer devices to
enable them to exchange data with each other even though these devices use
different, incompatible rules and conventions, or computer protocols, to
transfer data. Without the storage router, these devices would be unable to
communicate with each other. The need for storage routers has emerged in recent
years due to significant changes in the way that many organizations are storing
data.

Dramatic growth in the amount of data that must be stored, combined with
the need for faster, more reliable and more efficient data access and data
management capabilities, have led many organizations to seek an improved way of
storing, accessing and managing data. In traditional computer networks, each
storage device is connected to only one server, and therefore can be accessed
only by that server. The computer protocol used to connect and transfer data
between the server and storage device is called the small computer system
interface, or SCSI. As more data must be stored and retrieved, organizations
increasingly are finding that this one-to-one, or point-to-point, connection is
not sufficiently fast, efficient and reliable to support growing demands for
data. In addition, in most organizations today, data backup -- or creating a
duplicate copy of data to protect it from corruption or loss -- is accomplished
by moving large volumes of stored data from a dedicated storage device over the
primary computer network to a backup storage device. Since the primary computer
network also is responsible for conducting day-to-day computer operations, this
added data movement results in substantial congestion, slowing day-to-day
computer operations.

To address these problems, organizations have recently begun to install
storage area networks, or SANs, which are computer networks dedicated to data
storage. A storage area network uses a different, higher performance computer
protocol, known as Fibre Channel, to transfer data. A storage area network also
removes the one-to-one connection between servers and storage devices, and
instead, allows many servers to connect to and share access with many storage
devices. The "many-to-many" connection enabled by the storage area network,
combined with the Fibre Channel protocol, permits faster, more efficient, more
reliable and more manageable data transfer processes. Furthermore, the storage
area network has the potential to enable data backup to be accomplished over it
instead of over the primary computer network, thus substantially reducing
congestion on the primary computer network and allowing much more efficient
day-to-day operations.

As storage area networks are relatively new, most storage devices in the
market continue to be sold with the small computer system interface.
Additionally, most organizations have made significant investments in storage
devices and servers that use the small computer system interface. Thus, in order
for devices of the storage area network that use Fibre Channel to function with
storage devices and servers that use the small computer system interface,
storage routers, such as those sold by Crossroads, must be installed between
these devices. In particular, storage routers are essential to shifting data
backup processes from the primary computer network to the storage area network
since most data backup storage devices use the small computer system interface
and can only connect to the storage area network through a storage router. As
new computer protocols are introduced in the future, storage routers will be
increasingly essential to enable rapid, seamless communication among servers,
storage devices and storage area network devices that use diverse protocols.

5
<PAGE> 6

Our storage routers offer organizations a number of important benefits
today by:

- Facilitating Efficient Backup and Recovery. Our storage routers enable
organizations to effect their backup processes over the storage area
network rather than over the primary computer network. As a result, the
primary computer network has greater availability to perform day-to-day
operations. In addition, by using the Fibre Channel protocol, our
products allow organizations to store the same data at multiple locations
over distances of up to 10 kilometers so that data can be restored from a
remote site when a primary storage device fails or is damaged.

- Providing Broad, Verified Interoperability. Our storage routers are
designed to function together, or interoperate, with all commercially
available Fibre Channel devices. We have tested and verified this
interoperability in over 2,500 different configurations of storage area
networks.

- Increasing Scalability and Implementation Flexibility. Our storage
routers are designed to operate in any SAN computing environment and are
capable of scaling to accommodate the growing needs of organizations to
support more users and use more devices and applications within their
storage area networks, and to transfer data over longer distances than
was possible in point-to-point architectures.

- Enhancing Manageability. Our storage routers serve as a platform for
advanced storage management functions, including remote diagnostics,
remote management and real-time application monitoring.

- Leveraging Existing Server and Storage Device Investments. Our storage
routers enable an organization's continued use of its large installed
base of servers and storage devices that rely on the small computer
system interface within a storage area network. They also facilitate more
efficient use of existing storage capacity by permitting multiple servers
to connect to multiple storage systems.

We intend to capitalize on our market leadership in storage routing
solutions by expanding and enhancing our customer relationships with
manufacturers of servers and storage systems and by extending the
interoperability of our products with other components of storage area networks.
We also plan to leverage our significant technology expertise to remain at the
forefront of the storage area networking market and develop routing solutions
for emerging market opportunities. For example, we are currently developing
routing products that incorporate emerging protocols, including the recently
announced System I/O. Furthermore, we intend to continue building relationships
with leading storage management software vendors to ensure that our products
work together with their products to effectively move, store and manage data. We
believe that our storage routers represent a critical component of storage area
networks and will increase in importance in the ongoing evolution of storage
area networks.

To date, we have sold approximately 6,000 storage routers, primarily to
major manufacturers of servers and storage systems. These manufacturers sell our
storage routers to end-user organizations as a key component of the storage area
networks that these organizations have purchased to improve the flow of data in
their computer systems. Customers that accounted for more than ten percent of
our revenues in our fiscal year ended October 31, 1998 and our nine month fiscal
period ended July 31, 1999 were ADIC, Compaq, Hewlett-Packard and StorageTek. We
have also recently begun to sell our products to companies that distribute,
resell or integrate our products as part of a complete storage area network
solution. We contract with third parties to manufacture our storage routers and,
to date, one contract manufacturer has manufactured a significant portion of our
products.

Our principal executive offices are located at 9390 Research Boulevard,
Suite II-300, Austin, Texas 78759. Our telephone number is (512) 349-0300.
6
<PAGE> 7

THE OFFERING

Common stock we are offering............. 3,750,000 shares
Common stock to be outstanding after this
offering................................. 25,632,926 shares
Use of proceeds.......................... We intend to use the net proceeds
for working capital and other
general corporate purposes, as well
as capital expenditures, expansion
of our marketing and distribution
activities, research and product
development, and potential
acquisitions.
Nasdaq National Market symbol............ CRDS

The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of July 31, 1999, and assumes
the conversion of all of our preferred stock into common stock. This number
excludes 1,553,343 shares of common stock issuable upon exercise of options
outstanding as of July 31, 1999 with a weighted average exercise price of $0.50
per share and 1,016,079 additional shares of common stock reserved under our
option plan as of July 31, 1999, and assumes no exercise of the underwriters'
over-allotment option.

---------------------

ASSUMPTIONS THAT APPLY TO THIS PROSPECTUS

This offering is for 3,750,000 shares. The underwriters have a 30-day
option to purchase up to 562,500 additional shares from us and the selling
stockholders to cover over-allotments. Some of the disclosures in this
prospectus would be different if the underwriters exercise the over-allotment
option. Unless we state otherwise, the information in this prospectus assumes
that the underwriters will not exercise the over-allotment option.

Except where we state otherwise, the information we present in this
prospectus:

- reflects a 3-for-2 split of our common stock effected as of August 12,
1999;

- reflects our sale of 801,667 shares of our Series E preferred stock on
August 6, 1999 for an aggregate purchase price of approximately $12.0
million; and

- reflects the conversion of all outstanding shares of preferred stock into
13,599,848 shares of common stock upon the closing of this offering.

Our fiscal year ends on October 31. Therefore, a reference to "fiscal
1998," for example, is to our fiscal year ended October 31, 1998.
---------------------

All references in this prospectus to "we," "us," "ours," "Crossroads" and
"Crossroads Systems" are intended to include Crossroads Systems, Inc., our
wholly-owned subsidiary Crossroads Systems (Texas), Inc., and our predecessor
Infinity Commstor, LLC.
---------------------

YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT. WE
ARE OFFERING TO SELL AND SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN
JURISDICTIONS WHERE OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN
THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS
OF THE TIME OF DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF OUR COMMON STOCK.

7
<PAGE> 8

SUMMARY CONSOLIDATED FINANCIAL DATA

The following tables summarize our consolidated financial data. For a more
detailed explanation of our financial condition and operating results, you
should read "Management's Discussion and Analysis of Financial Condition and
Results of Operations," our consolidated financial statements and the notes to
those statements included in this prospectus. Unaudited pro forma basic and
diluted net loss per share have been calculated assuming the conversion of all
outstanding preferred stock into common stock as if the shares had converted
immediately upon their issuance.

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
----------------------------- -----------------
1996 1997 1998 1998 1999
------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Product revenue.............................. $ 160 $ 821 $ 2,930 $ 1,721 $11,728
Other revenue................................ 332 188 279 276 65
------ ------- ------- ------- -------
Total revenue........................ 492 1,009 3,209 1,997 11,793
Gross profit................................... 322 544 1,298 944 4,828
Loss from operations........................... (204) (2,749) (5,436) (3,917) (3,735)
Net loss....................................... (212) (2,693) (5,354) (3,812) (3,645)
Net loss attributable to common stock.......... (212) (2,751) (5,550) (3,953) (3,892)
Basic and diluted net loss per share........... $(0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
Shares used in computing basic and diluted net
loss per share............................... 6,000 6,000 6,146 6,120 7,005
Pro forma basic and diluted net loss per
share........................................ $ (0.32) $ (0.19)
Shares used in computing pro forma basic and
diluted net loss per share................... 17,088 20,605
</TABLE>

The following table contains a summary of our consolidated balance sheet:

- on an actual basis at July 31, 1999;

- on a pro forma basis to reflect (a) the issuance of 801,667 shares of
Series E preferred stock on August 6, 1999 as if such issuance had
occurred on July 31, 1999; and (b) the conversion of all outstanding
shares of preferred stock into 13,599,848 shares of common stock as if
such conversion had occurred on July 31, 1999; and

- on a pro forma as adjusted basis at July 31, 1999 to additionally reflect
net proceeds from the sale of 3,750,000 shares of common stock offered
hereby at an initial public offering price of $18.00 per share.

<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 6,492 $18,492 $80,267
Working capital............................................. 6,220 18,220 79,995
Total assets................................................ 14,140 26,140 87,915
Long-term debt, net of current portion...................... 936 936 936
Redeemable convertible preferred stock...................... 18,942 -- --
Total stockholders' equity (deficit)........................ (11,603) 19,339 81,114
</TABLE>

8
<PAGE> 9

RISK FACTORS

You should carefully consider the risks described below before making an
investment decision. You should also refer to the other information in this
prospectus, including our financial statements and the related notes. The risks
and uncertainties described below are those that we currently believe may
materially affect our company. Additional risks and uncertainties that we are
unaware of or that we currently deem immaterial also may become important
factors that affect our company.

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

We have incurred significant losses in every fiscal quarter since the end
of fiscal 1996 and expect to continue to incur losses in the future. As of July
31, 1999, we had an accumulated deficit of $11.9 million. Although our revenue
has grown in recent quarters, we cannot be certain that we will be able to
sustain these growth rates or that we will realize sufficient revenue to achieve
profitability. We also expect to incur significant product development, sales
and marketing and administrative expenses and, as a result, we expect to
continue to incur losses. We will need to generate significant revenue to
achieve profitability. Moreover, even if we do achieve profitability, we may not
be able to sustain or increase profitability.

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

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

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

We have experienced and expect to continue to experience significant
period-to-period fluctuations in our revenue and operating results due to a
number of factors, and any such variations and factors may cause our stock price
to fluctuate. Accordingly, you should not rely on the results of any past
quarterly or annual periods as an indication of our future performance. It is
likely that in some future period our operating result will be below the
expectations of public market analysts or investors. If this occurs, our stock
price may drop, perhaps significantly.

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

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

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

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

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

- the rate at which new markets emerge for products we are currently
developing.
9
<PAGE> 10

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 margins.

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

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

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

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

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

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

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

We currently have only three principal products within our storage router
product family that we sell in commercial quantities. In particular, sales of
our 4100 product have accounted for the vast majority of our product revenue to
date. In fiscal 1998 and in the nine months ended July 31, 1999, sales of our
4100 product accounted for 50% and 71% of our product revenue. To reduce our
dependence on the 4100 product, we must successfully develop and introduce to
market new products and product enhancements in a timely manner. Even if we are
able to develop and commercially introduce new products and enhancements, these
new products or enhancements may not achieve market acceptance which could
reduce our revenue.

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

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

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

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

10
<PAGE> 11

- our customer service and support capabilities and responsiveness; and

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

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

Approximately 90% of our revenue in each of fiscal 1998 and the nine months
ended July 31, 1999 was derived from six OEM customers. Furthermore, during
fiscal 1998, our four largest customers -- ADIC, Compaq, Hewlett-Packard and
StorageTek -- accounted for 25%, 20%, 16% and 14% of our total revenue,
respectively. In the nine months ended July 31, 1999, revenue from Compaq and
StorageTek represented 44% and 30% of our total revenue. We rely on OEMs as a
primary distribution channel as they are able to sell our products to a large
number of end-user organizations, which enables us to achieve broad market
penetration, with limited sales, marketing and customer service and support
resources from us. Our operating results in the foreseeable future will continue
to depend on sales to a relatively small number of OEM customers. Therefore, the
loss of any of our key OEM customers, or a significant reduction in sales to any
one of them, would significantly reduce our revenue.

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

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

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

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

11
<PAGE> 12

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

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

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

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

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

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

THE LOSS OF OUR PRIMARY CONTRACT 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.

To date, we have relied on a third-party manufacturer, XeTel Corporation,
to manufacture substantially all of our products on a purchase order basis. We
do not have a long-term supply contract with XeTel and, therefore, XeTel is not
obligated to manufacture products for us for any specific period, or in any
specific quantity, except as may be provided in a particular purchase order.
Although we believe that other providers of manufacturing services can
adequately address our needs, we expect that it would take approximately three
months to transition the performance of these services from XeTel to a new
manufacturer. We generally place orders for products with XeTel approximately
four months prior to the anticipated delivery date, with order volumes based on
forecasts of demand from our customers. Accordingly, if we inaccurately forecast
demand for our products, we may be unable to obtain adequate manufacturing
capacity from XeTel to meet our customers' delivery requirements, or we may
accumulate
12
<PAGE> 13

excess inventories. We have on occasion in the past been unable to adequately
respond to unexpected increases in customer purchase orders, and therefore were
unable to benefit from this incremental demand. XeTel has not provided
assurances to us that adequate capacity will be available to us within the time
required to meet additional demand for our products.

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

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

WE ARE TRANSITIONING THE FINAL ASSEMBLY AND TEST PORTION OF OUR MANUFACTURING
PROCESS TO AN IN-HOUSE FACILITY, WHICH WILL INCREASE OUR FIXED COSTS AND EXPOSE
US TO INCREASED INVENTORY RISKS.

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

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

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

13
<PAGE> 14

components. If we overestimate our component requirements, we may have excess
inventory which would increase our costs. If we underestimate our component
requirements, we may have inadequate inventory which would delay our
manufacturing and render us unable to deliver products to customers on a
scheduled delivery date. We also may experience shortages of certain components
from time to time, which also could delay our manufacturing. Manufacturing
delays could negatively impact our ability to sell our products and damage our
customer relationships.

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

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

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

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

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

We have licensed our 4200 storage router technology to Hewlett-Packard.
Hewlett-Packard is a stockholder of our company and a key customer. While
Hewlett-Packard has not introduced to market any products competitive to ours
that use the licensed technology, it could potentially do so in the future.
Because Hewlett-Packard has vastly greater resources and distribution
capabilities than Crossroads, it could establish market acceptance in a
relatively short time frame for any competitive products that it may introduce,
which, in turn, would reduce demand for our products from Hewlett-Packard and
could reduce demand for our products from other customers.

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

Many of our agreements with OEM customers provide for decreases in the
price of our products over time. In addition, we anticipate that, as products in
the SAN market become standardized and more
14
<PAGE> 15

widely available, we may need to reduce the average unit selling price of our
products in the future to respond to competitive pricing pressures or new
product introductions by our competitors. If we are unable to offset the
anticipated decrease in our average selling prices by increasing our sales
volume, our revenue will decline.

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

Networking products such as ours frequently contain undetected software or
hardware errors when first introduced or as new versions are released. Our
products are complex and errors have been found in the past and may be found
from time to time in the future. In addition, our products include components
from a number of third-party vendors. We rely on the quality testing of these
vendors to ensure the adequate operation of their products. Because our products
are manufactured with a number of components supplied by various third-party
sources, should problems occur in the operation or performance of our products,
it may be difficult to identify the source. In addition, our products are
deployed within SANs from a variety of vendors. Therefore, the occurrence of
hardware and software errors, whether caused by our or another vendor's SAN
products, could adversely affect sales of our products. Furthermore, defects may
not be discovered until our products are already deployed in the SAN. These
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 are currently aware of a defect in a module purchased
from a component supplier that was incorporated into some of our installed
products. While we no longer include this module in new products, the existence
of this defective module in our installed product base could result in product
returns and future loss of business.

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

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

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

Our rapid growth in personnel and operations has placed, and will continue
to place, a significant strain on our management and operational resources,
including our physical facilities and enterprise resource planning system. We
plan to continue to aggressively expand our operations following this offering
to pursue existing and potential market opportunities. We plan to relocate our
headquarters facility to a larger facility in the near future. In addition, we
also are planning to replace our current enterprise resource planning system in
2000 in order to integrate manufacturing, resource planning and financial
accounting. We expect these changes to be disruptive, time-consuming and
expensive processes. If we are unsuccessful or experience delays in effecting
these changes, our ability to effectively manage our operations may be
compromised.

15
<PAGE> 16

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

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

- increased complexity and costs of managing international operations;

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

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

- longer sales cycles;

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

- political and economic instability.

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

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

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

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

In recent years, there has been significant litigation in the United States
involving patents, trademarks and other intellectual property rights. Although
we have not been involved in intellectual property litigation, we may become
involved in litigation in the future to protect our intellectual property or
defend allegations of infringement asserted by others. Legal proceedings could
subject us to significant liability for damages or invalidate our intellectual
property rights. Any litigation, regardless of its outcome, would likely be time
consuming and expensive to resolve and would divert management's time and
attention. Any potential intellectual property litigation also could force us to
take specific actions, including:

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

- 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

16
<PAGE> 17

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

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

As part of our growth strategy, we intend to review opportunities to
acquire other businesses or technologies that would complement our current
products, expand the breadth of our markets or enhance our technical
capabilities. Although we are currently not subject to any agreement or letter
of intent with respect to potential acquisitions, we have from time to time
engaged in acquisition discussions with other parties. Acquisitions entail a
number of risks that could materially and adversely affect our business and
operating results, including:

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

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

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

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

- 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.

WE FACE A NUMBER OF UNKNOWN RISKS ASSOCIATED WITH YEAR 2000 PROBLEMS.

The Year 2000 computer issue creates risks for us. If our suppliers,
distributors and complementary solution providers fail to correct their Year
2000 problems, these failures could result in an interruption in, or a failure
of, our normal business activities or operations. If a Year 2000 problem occurs,
it may be difficult to determine which vendor's products have caused the
problem. These failures could interrupt our operations and damage our
relationships with our customers. Due to the general uncertainty inherent in the
Year 2000 problem resulting from the readiness of third-party suppliers and
vendors, we are unable to determine at this time whether any Year 2000 failures
will harm our business and financial condition. In addition, Year 2000
compliance issues or concerns of our customers or their end users could delay or
reduce their demand for our products.

OUR MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT OUR
STOCKHOLDERS MAY NOT AGREE WITH AND IN WAYS THAT DO NOT IMPROVE OUR EFFORTS TO
ACHIEVE PROFITABILITY OR INCREASE OUR STOCK PRICE.

Although in "Use of Proceeds" we have specified some ways in which we
initially intend to use a portion of the proceeds of this offering, our
management will have considerable discretion in the application of the net
proceeds received by us from this offering, and you will not have the
opportunity, as part of your investment decision, to assess whether the proceeds
are being used appropriately. You must rely on the judgment of our management
regarding the application of the proceeds of this offering. The net proceeds may
be used for corporate purposes that do not improve our efforts to achieve
profitability or increase our stock price. Pending application of the net
proceeds from this offering, they may be placed in investments that do not
produce income or that lose value.

17
<PAGE> 18

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

Upon completion of this offering, our executive officers and directors, and
their respective affiliates, will beneficially own, in the aggregate,
approximately 49% of our outstanding common stock. As a result, these
stockholders will be able to exert significant control over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. This concentration of voting power could
delay or prevent an acquisition of our company on terms which other stockholders
may desire.

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

Provisions of our certificate of incorporation and bylaws could have the
effect of discouraging, delaying or preventing a merger or acquisition that a
stockholder may consider favorable. We also are subject to the anti-takeover
laws of the State of Delaware which may discourage, delay or prevent someone
from acquiring or merging with us, which may adversely affect the market price
of our common stock. Please see "Description of Capital Stock -- Anti-Takeover
Effects" for more information concerning anti-takeover provisions.

OUR STOCK PRICE MAY BE VOLATILE, AND YOU MAY NOT BE ABLE TO RESELL YOUR SHARES
AT OR ABOVE THE INITIAL PUBLIC OFFERING PRICE.

There has been no public market for our common stock prior to this
offering. The initial public offering price for our common stock was determined
through negotiations between the underwriters and us. This initial public
offering price may vary from the market price of our common stock after the
offering. If you purchase shares of common stock, you may not be able to resell
those shares at or above the initial public offering price. The market price of
our common stock may fluctuate significantly in response to numerous factors,
some of which are beyond our control, including the following:

- actual or anticipated fluctuations in our operating results;

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

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

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

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

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

- 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.

18
<PAGE> 19

OF OUR TOTAL OUTSTANDING SHARES, 22,198,423, OR 86%, ARE RESTRICTED FROM
IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR FUTURE. THIS COULD
CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP SIGNIFICANTLY, EVEN IF OUR
BUSINESS IS DOING WELL.

After this offering, we will have outstanding 25,948,423 shares of common
stock based on the number of shares outstanding at September 30, 1999. This
includes the 3,750,000 shares we are selling in this offering, which may be
resold in the public market immediately, except for any shares purchased by Dell
U.S.A., L.P. and The Dell Foundation, Inc., each of which is subject to
restrictions on resale for a 90-day period beginning on the date of this
prospectus. The remaining 22,198,423 shares will become available for resale in
the public market as shown in the chart below.

<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF SHARES SHARES OUTSTANDING DATE OF AVAILABILITY FOR RESALE INTO THE PUBLIC MARKET
- ---------------- ------------------ ------------------------------------------------------
<C> <C> <S>
3,750,000 14% Immediately (except to the extent purchased by Dell
affiliates or our affiliates).
18,321,822 71% 180 days after the date of this prospectus due to an
agreement these stockholders have with the underwriters.
However, the underwriters can waive this restriction and
allow these stockholders to sell their shares at any time
without prior notice.
3,876,601 15% Between 181 and 365 days after the date of this prospectus
due to the requirements of the federal securities laws.
</TABLE>

As restrictions on resale end, the market price of our stock could drop
significantly if the holders of restricted shares sell them or are perceived by
the market as intending to sell them. For more detailed information, see "Shares
Eligible for Future Sale" on page 66.

YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION IN THE NET TANGIBLE BOOK
VALUE OF YOUR SHARES.

The initial public offering price is substantially higher than the net
tangible book value per share of our outstanding common stock immediately after
this offering. Accordingly, at the initial public offering price of $18.00 per
share, if you purchase common stock in this offering, you will incur immediate
dilution of approximately $14.84 in the net tangible book value per share of our
common stock from the price you pay for our common stock. Please see "Dilution"
for information regarding the dilution you will experience.

---------------------

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains forward-looking statements that involve
substantial risks and uncertainties. You can identify these statements by
forward-looking words such as "may," "will," "expect," "intend," "anticipate,"
"believe," "estimate," "continue" and other similar words. You should read
statements that contain these words carefully because they discuss our future
expectations, make projections of our future results of operations or of our
financial condition or state other "forward-looking" information. We believe
that it is important to communicate our future expectations to our investors.
However, there may be events in the future that we are not able to accurately
predict or control. The factors listed in the sections captioned "Risk Factors"
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations," as well as any cautionary language in this prospectus, provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you invest in our common stock, you should be aware that the
occurrence of the events described in the "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
sections and elsewhere in this prospectus could have a material adverse effect
on our business, operating results and financial condition.

19
<PAGE> 20

USE OF PROCEEDS

At the initial public offering price of $18.00 per share, we will receive
approximately $61.8 million from our sale of 3,750,000 shares of common stock,
net of estimated offering expenses and underwriting discounts and commissions
payable by us. If the underwriters exercise their over-allotment option in full,
we will receive an additional $4.8 million in net proceeds and selling
stockholders will receive an aggregate of $4.6 million in net proceeds. We will
not receive any portion of the net proceeds received by the selling stockholders
from the sale of their shares upon exercise of the underwriters' over-allotment
option. See "Principal and Selling Stockholders."

The principal purposes of this offering are to increase our equity capital,
create a public market for our common stock under market conditions that we
believe are favorable, facilitate future access by us to public equity markets
and provide us with increased visibility in our markets. As of the date of this
prospectus, we have internally forecasted the particular uses for the net
proceeds to be received upon completion of this offering. However, we currently
have no formal plan for the use of the offering proceeds, nor have we sought the
advice of or received reports from any of our professional advisors regarding
the use of the offering proceeds. We currently estimate that the net proceeds of
the offering will be used as follows:

- 8% for capital expenditures (including the purchase of a new enterprise
resource planning system; leasehold improvements; additional costs
associated with the transition to an in-house facility of the final
assembly and test portions of our manufacturing process, including
modification to our facilities and test and other manufacturing
equipment; and equipment and software to support our projected growth in
personnel);

- 7% for expansion of our marketing and distribution activities;

- 9% for various product development initiatives; and

- 76% for working capital and other general corporate purposes.

Notwithstanding the estimates set forth above, our management will have
significant flexibility in applying the net proceeds of this offering. For
example, we may use a portion of the net proceeds to acquire businesses,
products or technologies that are complementary to our current or future
business and product lines. Although we are currently not subject to any
agreement or letter of intent with respect to potential acquisitions, we have
from time to time engaged in acquisition discussions with other parties. Pending
any such uses of the proceeds of this offering, we will invest the net proceeds
of this offering in short-term, investment grade, interest-bearing instruments.

DIVIDEND POLICY

We have never declared or paid any cash dividends on our common stock or
preferred stock, and we do not intend to pay cash dividends on our common stock
in the foreseeable future. We currently expect to retain any future earnings to
fund the operation and expansion of our business. In addition, the terms of our
credit agreements prohibit the payment of cash dividends.

20
<PAGE> 21

CAPITALIZATION

The following table sets forth our capitalization at July 31, 1999:

- on an actual basis (giving effect to the 3-for-2 split of our common
stock effected as of August 12, 1999);

You should read the following table in conjunction with our consolidated
financial statements and the notes to those statements which are included in
this prospectus.

<TABLE>
<CAPTION>
JULY 31, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS, EXCEPT SHARE DATA)
<S> <C> <C> <C>
Long-term debt, net of current portion...................... $ 936 $ 936 $ 936
Redeemable convertible preferred stock, $0.001 par value,
11,000,000 shares authorized, 8,614,898 and 9,481,565
shares designated actual and pro forma, 8,264,898 shares
issued and outstanding, actual; no shares issued or
outstanding, pro forma and pro forma as adjusted.......... 18,942 -- --
Stockholders' equity (deficit):
Common stock, $0.001 par value, 49,000,000 shares
authorized, 8,283,078 shares issued and outstanding,
actual; 49,000,000 shares authorized, 21,882,926 shares
issued and outstanding, pro forma; 49,000,000 shares
authorized, 25,632,926 shares issued and outstanding,
pro forma as adjusted.................................. 8 22 26
Additional paid-in capital.................................. 5,107 36,035 97,806
Deferred stock-based compensation........................... (4,389) (4,389) (4,389)
Notes receivable from stockholders.......................... (447) (447) (447)
Accumulated deficit......................................... (11,880) (11,880) (11,880)
Treasury stock.............................................. (2) (2) (2)
-------- -------- --------
Total stockholders' equity (deficit)................. (11,603) 19,339 81,114
-------- -------- --------
Total capitalization.............................. $ 8,275 $ 20,275 $ 82,050
======== ======== ========
</TABLE>

The share information set forth above excludes:

- 1,553,343 shares subject to outstanding options under our stock option
plan with a weighted average exercise price of $0.50 per share; and

- 1,016,079 additional shares of common stock reserved for issuance under
our stock option plan.

21
<PAGE> 22

DILUTION

Our pro forma net tangible book value at July 31, 1999 was $19.3 million,
or $0.88 per share of common stock. Pro forma net tangible book value per share
represents the amount of our total tangible assets reduced by the amount of our
total liabilities, divided by the pro forma number of shares of common stock
outstanding as of July 31, 1999, after giving effect to:

- our sale of 801,667 shares of Series E preferred stock for approximately
$12.0 million on August 6, 1999 as if such sale had occurred on July 31,
1999; and

- the conversion of all outstanding shares of our preferred stock into
13,599,848 shares of common stock.

Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of shares of common
stock in this offering and the pro forma net tangible book value per share of
common stock immediately after the completion of this offering. After giving
effect to our sale of 3,750,000 shares of common stock in this offering at an
initial public offering price of $18.00 per share and after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us, our adjusted pro forma net tangible book value at July 31, 1999 would
have been $81.1 million, or $3.16 per share. This amount represents an immediate
increase in pro forma net tangible book value to our existing stockholders of
$2.28 per share and an immediate dilution to new investors of $14.84 per share.
The following table illustrates this per share dilution:

<TABLE>
<S> <C> <C>
Initial public offering price per share..................... $18.00
Pro forma net tangible book value per share at July 31,
1999...................................................... $0.88
Increase in pro forma net tangible book value per share
attributable to new investors............................. 2.28
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.16
------
Dilution per share to new investors......................... $14.84
======
</TABLE>

If the underwriters exercise their over-allotment option in full, our
adjusted pro forma net tangible book value at July 31, 1999 would have been
$85.9 million, or $3.32 per share, representing an immediate increase in pro
forma net tangible book value to our existing stockholders of $2.44 per share
and an immediate dilution to new investors of $14.68 per share.

The following table summarizes, on a pro forma basis, at July 31, 1999,
after giving effect to the pro forma adjustments described above, the
differences between the number of shares of common stock purchased from us, the
aggregate cash consideration paid to us and the average price per share paid by
our existing stockholders and by new investors purchasing shares of common stock
in this offering. The calculation below is based on an initial public offering
price of $18.00 per share, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us:

<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..................... 21,882,926 85.4% $30,731,000 31.3% $ 1.40
New investors............................. 3,750,000 14.6 67,500,000 68.7 18.00
---------- ----- ----------- -----
Total........................... 25,632,926 100.0% $98,231,000 100.0%
========== ===== =========== =====
</TABLE>

This discussion and table assume no exercise of any stock options
outstanding at July 31, 1999. At July 31, 1999, there were options outstanding
under our stock option plan to purchase a total of 1,553,343 shares of common
stock with a weighted average exercise price of $0.50 per share. To the extent
that any of these options are exercised, there will be further dilution to new
investors.

22
<PAGE> 23

SELECTED CONSOLIDATED FINANCIAL DATA

The selected consolidated financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and the notes to those
statements included in this prospectus. The consolidated balance sheet data at
October 31, 1997, 1998 and July 31, 1999 and the consolidated statement of
operations data for the years ended October 31, 1996, 1997, 1998 and for the
nine-month period ended July 31, 1999 have been derived from audited
consolidated financial statements included in this prospectus. The consolidated
balance sheet data at October 31, 1995 and 1996 and the consolidated statement
of operations data for the period from May 1, 1995 (inception) to October 31,
1995 has been derived from unaudited consolidated financial statements not
included in this prospectus. The consolidated statement of operations data for
the nine months ended July 31, 1998 is derived from unaudited consolidated
financial statements included in this prospectus. Operating results for the nine
months ended July 31, 1999 are not necessarily indicative of the results that
may be expected for the full fiscal year or any future period.

<TABLE>
<CAPTION>
PERIOD FROM
MAY 1, 1995 NINE MONTHS ENDED
(INCEPTION) TO FISCAL YEAR ENDED OCTOBER 31, JULY 31,
OCTOBER 31, ------------------------------------------------ -------------------------------
1995 1996 1997 1998 1998 1999
-------------- -------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenue:
Product revenue........... $ 15 $ 160 $ 821 $ 2,930 $ 1,721 $11,728
Other revenue............. 270 332 188 279 276 65
------- ------- ------- ------- -------- -------
Total revenue....... 285 492 1,009 3,209 1,997 11,793
Cost of revenue............. 160 170 465 1,911 1,053 6,965
------- ------- ------- ------- -------- -------
Gross profit................ 125 322 544 1,298 944 4,828
------- ------- ------- ------- -------- -------
Operating expenses:
Sales and marketing....... -- -- 641 2,461 1,886 2,791
Research and
development............. -- 291 1,329 2,336 1,550 3,539
General and
administrative.......... 52 235 1,323 1,896 1,411 1,699
Amortization of
stock-based
compensation............ -- -- -- 41 14 534
------- ------- ------- ------- -------- -------
Total operating
expenses.......... 52 526 3,293 6,734 4,861 8,563
------- ------- ------- ------- -------- -------
Income (loss) from
operations................ 73 (204) (2,749) (5,436) (3,917) (3,735)
Other income (expense),
net....................... (3) (8) 56 82 105 90
------- ------- ------- ------- -------- -------
Net income (loss)........... 70 (212) (2,693) (5,354) (3,812) (3,645)
Accretion on redeemable
convertible preferred
stock..................... -- -- (58) (196) (141) (247)
------- ------- ------- ------- -------- -------
Net income (loss)
attributable to common
stock..................... $ 70 $ (212) $(2,751) $(5,550) $ (3,953) $(3,892)
======= ======= ======= ======= ======== =======
Basic and diluted net loss
per share................. $ (0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
======= ======= ======= ======== =======
Shares used in computing
basic and diluted net loss
per share................. 6,000 6,000 6,146 6,120 7,005
======= ======= ======= ======== =======
Pro forma basic and diluted
net loss per share........ $ (0.32) $ (0.19)
======= =======
Shares used in computing pro
forma basic and diluted
net loss per share........ 17,088 20,605
======= =======
</TABLE>

<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------------------
1995 1996 1997 1998 JULY 31, 1999
------- ------- ------- ------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 31 $ -- $ 6,063 $ 3,934 $ 6,492
Working capital............................................. 99 (168) 5,757 4,461 6,220
Total assets................................................ 127 150 7,615 7,187 14,140
Long-term debt, net of current portion...................... 41 82 301 591 936
Redeemable convertible preferred stock...................... -- -- 9,277 13,438 18,942
Total stockholders' equity (deficit)........................ 85 (124) (2,875) (8,347) (11,603)
</TABLE>

23
<PAGE> 24

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this prospectus. The following discussion contains forward-looking statements
that involve risks and uncertainties. Our actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those discussed below and elsewhere in this
prospectus, particularly under the heading "Risk Factors."

OVERVIEW

We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. Storage routers are
computer equipment that organizations use to connect servers and storage systems
together in a storage area network, or SAN. A SAN is a high speed computer
network that facilitates data transfers among servers and storage systems using
high performance data communications that follow the industry-accepted rules and
conventions, which are commonly referred to as computer protocols. By using our
storage routers to serve as the interconnect between SANs and the other devices
in a computer network, organizations are able to more effectively and
efficiently store, manage and ensure the integrity and availability of their
data.

Our company was originally formed in 1995 as Infinity Commstor, LLC, a
Texas limited liability company. In 1996, Infinity Commstor was merged into a
newly formed Delaware corporation, which became Crossroads Systems, Inc., with
operations conducted through a wholly owned Texas corporation subsidiary. Since
mid-1996, our operating activities have related primarily to increasing our
research and development capabilities, designing, developing and marketing our
storage routers, staffing our administrative, marketing and sales organizations
and establishing relationships with OEMs and distributors, resellers and system
integrators. We began shipping our first product, the Crossroads 4100 storage
router, to OEMs for their evaluation in July 1997. Prior to that time, our
revenue was derived principally from consulting services related to the
implementation of Fibre Channel components and from the sale of a software
developer's kit used to deploy Fibre Channel systems. Since the introduction of
our 4100 product, we have expanded our storage router product line and sold
approximately 6,000 storage routers.

To date, we have derived substantially all of our product revenue from
sales of storage routers to server and storage system OEMs. To a lesser extent,
we have sold products to distributors, resellers and system integrators. Our OEM
customers are ADIC, ATL Products, Compaq, Dell, Exabyte, Groupe Bull,
Hewlett-Packard, Hitachi Data Systems, INRANGE, McDATA and StorageTek. A few OEM
customers historically have accounted for a substantial portion of our revenue.
During fiscal 1998, our four largest customers -- ADIC, Compaq, Hewlett-Packard
and StorageTek -- accounted for 25%, 20%, 16% and 14% of our total revenue,
respectively. During the nine month period ended July 31, 1999, sales to Compaq
and StorageTek accounted for 44% and 30% of our total revenue. No other customer
accounted for more than 10% of our total revenue in these periods. While we
currently sell products to all of our OEM customers, we do not have contracts
with Compaq or with some of our other customers. Although none of our customers
is obligated to purchase minimum quantities of our products, we seek to enter
into contracts in order to provide a framework for our customer relationships.
Generally, our contracts require our customers to provide us with forecasts to
assist us in our planning and ordering process. They also specify payment terms,
allocate liability for potential third party claims and provide for other terms
governing the legal rights of the parties.

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

24
<PAGE> 25

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

Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our first
generation product -- the 4100 -- has accounted for 50% and 71% of our product
revenue in fiscal 1998 and in the nine month period ended July 31, 1999,
respectively. Moreover, although we negotiate the prices for our products on an
individual basis with each of our OEM customers, many of our current agreements
with our OEM customers include provisions that require reductions in the sales
price for our products over time. We believe that this practice is common within
our industry. To date, our agreements with OEM customers, including our largest
customers, provide for quarterly reductions in pricing on a product-by-product
basis ranging from 8% to 15% annually, with the actual discount determined
according to the volume potential expected from the customer, the OEM's customer
base, the credibility the OEM may bring to our solution, additional technology
the OEM may help us incorporate with our product and other Crossroads products
the OEM supports. Notwithstanding, the decreases in our average selling prices
of our older products has been offset by higher average selling prices for our
newer products, as well as sales to distributors, resellers and system
integrators where price decreases are not generally required. Nonetheless, we
could experience declines in our average unit selling prices for our products in
the future, especially if our newer products do not receive broad market
acceptance or if our efforts to increase sales to distributors, resellers and
system integrators are not successful. In addition, declines in our average
selling prices may be more pronounced should we encounter significant pricing
pressures from increased competition within the storage router market.

With respect to sales of our products to OEMs, we recognize product revenue
when products are shipped to the OEM. Product sales to distributors, resellers
and system integrators who do not have return rights are recognized at the time
of shipment. To the extent that we sell products to distributors, resellers and
system integrators that have rights of return, we defer revenue and cost of
revenue associated with such sales and recognize these amounts when that
customer sells our products to its customers. At July 31, 1999, our deferred
revenue totaled $61,000. We provide a repair or replace warranty of between 15
and 39 months following the sale of our products, and we provide a reserve for
warranty costs when the related product revenue is recognized.

To date, we have outsourced substantially all of our manufacturing
requirements to XeTel Corporation, a contract manufacturer, and a significant
portion of our cost of revenue historically has consisted of payments to that
manufacturer. We currently are transitioning the final assembly and test portion
of our manufacturing process from our contract manufacturer to an in-house
facility. In connection with this transition, we have incurred one-time charges
of $230,000 in moving and operating expenses, including our planned customer
qualification efforts, and $330,000 in purchased equipment and leasehold
improvements. Beginning in September 1999, we have incurred and expect to
continue to incur monthly charges of $90,000 related to rent, payroll and other
operating expenses. During the transition period, which could continue through
the end of fiscal 1999, we anticipate that our manufacturing costs will
increase, and gross margin will decrease, as we incur costs of final assembly
and test performed both by us and our contract manufacturer. We expect the total
cost of this transition to be less than $700,000. We believe that bringing final
assembly and test operations in-house will allow us to reduce our total
manufacturing costs on a per unit basis and provide us with greater flexibility
to respond to changes in customer demand. As the needs of our customers continue
to evolve, we plan to reassess our manufacturing requirements on a periodic
basis and effect appropriate changes to our manufacturing processes.

In connection with the grant of stock options to our employees and
directors, we recorded deferred compensation during fiscal 1998 and the nine
months ended July 31, 1999 aggregating approximately
25
<PAGE> 26

$5.0 million. Deferred compensation represents, for accounting purposes, the
difference between the deemed fair value of the common stock underlying these
options and their exercise price at the date of grant. The difference has been
recorded as deferred stock-based compensation and is being amortized over the
vesting period of the applicable options, generally four years. Of the total
deferred compensation amount, $575,000 has been amortized as of July 31, 1999.
The amortization of deferred compensation is recorded as an operating expense.
We currently expect to amortize the remaining amounts of deferred compensation
as of July 31, 1999 in the periods indicated:

<TABLE>
<S> <C>
August 1, 1999 to October 31, 1999.............. $ 700,000
November 1, 1999 to October 31, 2000............ 2,234,000
November 1, 2000 to October 31, 2001............ 950,000
November 1, 2001 to October 31, 2002............ 425,000
November 1, 2002 to July 31, 2003............... 80,000
----------
$4,389,000
==========
</TABLE>

We have incurred significant operating losses in every fiscal quarter and
annual period since November 1, 1995 and our accumulated deficit was $11.9
million at July 31, 1999. Moreover, we anticipate that we will continue to incur
net losses on both a quarterly and annual basis for the foreseeable future, in
part due to our plans to devote substantial resources to expand our sales and
marketing and research and development activities.

As of July 31, 1999, we had approximately $10.6 million of federal net
operating loss carryforwards. These net operating loss carryforwards begin to
expire in 2011. We have not recognized any benefit from the future use of loss
carryforwards for these periods or for any other periods since inception due to
uncertainties regarding the realization of deferred tax assets based on our
taxable earnings history.

RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED OCTOBER 31, JULY 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue............................. 32.5% 81.4% 91.3% 86.2% 99.4%
Other revenue............................... 67.5 18.6 8.7 13.8 0.6
------ ------ ------ ------ ------
Total revenue....................... 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................... 34.6 46.1 59.6 52.7 59.1
------ ------ ------ ------ ------
Gross margin.................................. 65.4 53.9 40.4 47.3 40.9
------ ------ ------ ------ ------
Operating expenses:
Sales and marketing......................... -- 63.5 76.7 94.4 23.7
Research and development.................... 59.1 131.7 72.7 77.6 30.0
General and administrative.................. 47.8 131.2 59.1 70.6 14.4
Amortization of stock-based compensation.... -- -- 1.3 0.7 4.5
------ ------ ------ ------ ------
Total operating expenses............ 106.9 326.4 209.8 243.3 72.6
------ ------ ------ ------ ------
Loss from operations.......................... (41.5) (272.5) (169.4) (196.0) (31.7)
Other income (expense)........................ (1.6) 5.6 2.6 5.2 0.8
------ ------ ------ ------ ------
Net loss...................................... (43.1)% (266.9)% (166.8)% (190.8)% (30.9)%
====== ====== ====== ====== ======
</TABLE>

26
<PAGE> 27

COMPARISON OF NINE MONTHS ENDED JULY 31, 1998 TO NINE MONTHS ENDED JULY 31, 1999

Revenue. Total revenue increased 491% from $2.0 million in the nine months
ended July 31, 1998 to $11.8 million in the comparable 1999 period.

Product revenue. Product revenue increased 581% from $1.7 million in the
nine months ended July 31, 1998 to $11.7 million in the comparable 1999 period.
The increase in product revenue was primarily due to the increase in product
sales to significant OEM customers of $8.0 million and the introduction of our
4200 storage router product in May 1998 which resulted in an increase in revenue
of $2.8 million. As a percentage of total revenue, product revenue increased
from 86% in the nine months ended July 31, 1998 to 99% in the comparable 1999
period.

Other revenue. Other revenue includes sales of licenses for a software
developer's kit, consulting fees and fees received from the licensing of other
intellectual property. Other revenue decreased 76% from $276,000 in the nine
months ended July 31, 1998 to $65,000 in the comparable 1999 period. Other
revenue was higher in the 1998 period principally due to the nonrecurring
license of a product design for $150,000 in that period. As a percentage of
total revenue, other revenue decreased from 14% in the nine months ended July
31, 1998 to 0.6% in the comparable 1999 period. We do not anticipate significant
other revenue in the future.

Cost of revenue and gross margin. Cost of revenue consists primarily of
contract manufacturing costs, materials costs, manufacturing overhead and
warranty costs. Cost of revenue increased 561% from $1.1 million in the nine
months ended July 31, 1998 to $7.0 million in the comparable 1999 period. This
increase was primarily due to the increased unit sales volume of 4,600 units in
the 1999 period. Gross profit increased 411% from $944,000 in the nine months
ended July 31, 1998 to $4.8 million in the comparable 1999 period. The increase
was primarily due to increased product revenue. Gross profit as a percentage of
total revenue, referred to as gross margin, decreased from 47% in the nine
months ended July 31, 1998 to 41% in the comparable 1999 period. Gross margin in
the nine month period ended July 31, 1998 was favorably impacted by nonrecurring
license revenue. Gross margin in the comparable 1999 period was negatively
impacted by the absence of material license revenue, a decline in weighted
average unit selling prices pursuant to contractually agreed price reductions
with certain OEM customers, costs incurred in anticipation of establishing
in-house final assembly and test operations, and, to a lesser extent, changes in
our customer and product mix.

Sales and marketing. Sales and marketing expenses consist primarily of
salaries, commissions and other personnel-related costs, travel expenses,
advertising programs and other promotional activities. Sales and marketing
expenses increased 48% from $1.9 million in the nine months ended July 31, 1998
to $2.8 million in the comparable 1999 period. The increase in sales and
marketing expenses was primarily due to the hiring of additional sales and
marketing personnel resulting in $300,000 of increased compensation expense and
increased commissions of $200,000 commensurate with greater sales. As a
percentage of total revenue, sales and marketing expenses decreased from 94% in
the nine months ended July 31, 1998 to 24% in the comparable 1999 period,
primarily as a result of substantially higher revenue in the 1999 period. We
anticipate that sales and marketing expenses will continue to increase in
absolute dollars and may fluctuate as a percentage of total revenue, due to the
planned expansion of our sales and marketing efforts and increased marketing
activity that is intended to broaden awareness of the benefits of our products.

Research and development. Research and development expenses consist
primarily of salaries and other personnel-related costs, product development and
prototyping expenses. Research and development expenses increased 128% from $1.6
million in the nine months ended July 31, 1998 to $3.5 million in the comparable
1999 period. The increase in research and development expenses was primarily due
to the hiring of additional research and development personnel resulting in
$700,000 of increased compensation expense and increased prototyping costs of
$700,000 related to the development of our 4200 product. As a percentage of
total revenue, research and development expenses decreased from 78% in the nine
months ended July 31, 1998 to 30% in the comparable 1999 period, primarily as a
result of substantially higher revenue in the 1999 period. Research and
development personnel totaled 21 at July 31, 1998 and 40 at July 31, 1999. We
expect that research and development expenses will continue to increase in
absolute
27
<PAGE> 28

dollars, but may fluctuate as a percentage of our total revenue, due to the
importance of research and development in developing our technologies and
expanding our product offerings.

General and administrative. General and administrative expenses consist
primarily of salaries and other personnel-related costs, facilities and other
costs of our administrative, executive and information technology departments,
as well as legal and accounting expenses and insurance costs. General and
administrative expenses increased 20% from $1.4 million in the nine months ended
July 31, 1998 to $1.7 million in the comparable 1999 period. The increase in
general and administrative expenses was due to increased staffing resulting in
$200,000 of increased compensation expense and associated expenses of $100,000
necessary to manage and support the growth of our business. As a percentage of
total revenue, general and administrative expenses decreased from 71% in the
nine months ended July 31, 1998 to 14% in the comparable 1999 period, primarily
as a result of substantially higher revenue in the 1999 period. We anticipate
that general and administrative expenses will continue to increase in absolute
dollars for the foreseeable future as we accommodate growth, add related
infrastructure and incur expenses related to being a public company. However, if
our revenue continues to increase, general and administrative expenses should
decrease as a percentage of total revenue.

COMPARISON OF FISCAL YEARS ENDED OCTOBER 31, 1996, 1997 AND 1998

Revenue. Our total revenue increased 105% from $492,000 in fiscal 1996 to
$1.0 million in fiscal 1997, and increased 218% to $3.2 million in fiscal 1998.

Product revenue. Product revenue increased 413% from $160,000 in fiscal
1996 to $821,000 in fiscal 1997, and increased 257% to $2.9 million in fiscal
1998. As a percentage of total revenue, product revenue increased from 33% in
fiscal 1996 to 81% in fiscal 1997, and to 91% in fiscal 1998. The increases in
product revenue resulted from increased product sales to significant OEM
customers of $2.5 million, in fiscal 1997, the introduction of our 4100 product
resulting in an increase of $500,000, and, in fiscal 1998, the introduction of
our 4200 product.

Other revenue. Other revenue decreased 43% from $332,000 in fiscal 1996 to
$188,000 in fiscal 1997, and increased 48% to $279,000 in fiscal 1998. The
increase in fiscal 1998 was due to the license of a product design for $150,000
in that period.

Cost of revenue and gross margin. Cost of revenue increased 174% from
$170,000 in fiscal 1996 to $465,000 in fiscal 1997, and increased 311% to $1.9
million in fiscal 1998. These increases were primarily due to increases in unit
sales volume and a corresponding increase in costs related to manufacturing of
$1.4 million. Gross profit increased 69% from $322,000 in fiscal 1996 to
$544,000 in fiscal 1997, and 139% to $1.3 million in fiscal 1998. The increase
was primarily due to higher sales in each period. Gross margin decreased from
65% in fiscal 1996 to 54% in fiscal 1997, and to 40% in fiscal 1998. The
decreases in gross margin resulted from decreases in the percentage of total
revenue attributable to higher margin license revenue.

Sales and marketing. Sales and marketing expenses increased from $0 in
fiscal 1996 to $641,000 in fiscal 1997, and increased 284% to $2.5 million in
fiscal 1998. The significant increase in sales and marketing expenses in fiscal
1998 was primarily due to the hiring of additional sales and marketing personnel
of $1.1 million and increased sales and marketing activities resulting in an
increase of $400,000. As a percentage of total revenue, sales and marketing
expenses increased from 64% in fiscal 1997 to 77% in fiscal 1998.

Research and development. Research and development expenses increased 357%
from $291,000 in fiscal 1996 to $1.3 million in fiscal 1997, and increased 76%
to $2.3 million in fiscal 1998. The increases primarily consisted of $500,000
for salaries and expenses from the hiring of additional research and development
personnel during fiscal 1997 and 1998 and product development and prototyping
costs of $400,000 related to the development of our 4100 product in fiscal 1997
and 4200 product in fiscal 1998. As a percentage of total revenue, research and
development expenses increased from 59% in fiscal 1996 to 132% in fiscal 1997,
and decreased to 73% in fiscal 1998. The decrease in fiscal 1998 was primarily
due to substantially higher revenue in that year.

28
<PAGE> 29

General and administrative. General and administrative expenses increased
463% from $235,000 in fiscal 1996 to $1.3 million in fiscal 1997, and 43% to
$1.9 million in fiscal 1998. The significant increase in general and
administrative expenses in fiscal 1997 was primarily due to the hiring of
administrative personnel resulting in increased compensation expense of $600,000
and associated expenses of $100,000, which were necessary to manage and support
the growth in our business. As a percentage of total revenue, general and
administrative expenses increased from 48% in fiscal 1996 to 131% in fiscal
1997, and decreased to 59% in fiscal 1998. The decrease in fiscal 1998 as a
percentage of total revenue was primarily due to substantially higher revenue in
that year.

SELECTED QUARTERLY RESULTS OF OPERATIONS

The following tables set forth our unaudited consolidated statement of
operations data for the seven fiscal quarters ended July 31, 1999, as well as
such data expressed as a percentage of our total revenue for the quarters
presented. This unaudited quarterly information has been prepared on the same
basis as our audited consolidated financial statements and, in the opinion of
our management, reflects all normal recurring adjustments that we consider
necessary for a fair presentation of the information for the periods presented.
Operating results for any quarter are not necessarily indicative of results for
any future period.

<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------
JAN. 31, APRIL 30, JULY 31, OCT. 31, JAN. 31, APRIL 30, JULY 31,
1998 1998 1998 1998 1999 1999 1999
-------- --------- -------- -------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue............................. $ 523 $ 427 $ 771 $ 1,209 $ 3,160 $ 3,503 $ 5,065
Other revenue............................... 19 158 98 4 60 3 2
------- ------- ------- ------- ------- ------- -------
Total revenue......................... 542 585 869 1,213 3,220 3,506 5,067
Cost of revenue............................... 249 321 483 858 1,807 2,029 3,129
------- ------- ------- ------- ------- ------- -------
Gross profit.................................. 293 264 386 355 1,413 1,477 1,938
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 543 589 753 576 770 853 1,168
Research and development.................... 455 506 589 786 838 990 1,711
General and administrative.................. 418 501 492 485 436 476 787
Amortization of stock-based compensation.... -- 1 13 27 49 98 387
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 1,416 1,597 1,847 1,874 2,093 2,417 4,053
------- ------- ------- ------- ------- ------- -------
Loss from operations.......................... (1,123) (1,333) (1,461) (1,519) (680) (940) (2,115)
Other income (expense)........................ 56 34 15 (23) 33 9 48
------- ------- ------- ------- ------- ------- -------
Net loss.............................. $(1,067) $(1,299) $(1,446) $(1,542) $ (647) $ (931) $(2,067)
======= ======= ======= ======= ======= ======= =======
</TABLE>

<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUE
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue............................. 96.5% 73.0% 88.7% 99.7% 98.1% 99.9% 100.0%
Other revenue............................... 3.5 27.0 11.3 0.3 1.9 0.1 --
------- ------- ------- ------- ------- ------- -------
Total revenue......................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue............................... 46.0 54.9 55.6 70.7 56.1 57.9 61.8
------- ------- ------- ------- ------- ------- -------
Gross margin.................................. 54.0 45.1 44.4 29.3 43.9 42.1 38.2
------- ------- ------- ------- ------- ------- -------
Operating expenses:
Sales and marketing......................... 100.2 100.7 86.7 47.5 23.9 24.3 23.0
Research and development.................... 83.9 86.5 67.8 64.8 26.0 28.2 33.8
General and administrative.................. 77.1 85.6 56.6 40.0 13.6 13.6 15.5
Amortization of stock-based compensation.... -- 0.2 1.5 2.2 1.5 2.8 7.6
------- ------- ------- ------- ------- ------- -------
Total operating expenses.............. 261.2 273.0 212.6 154.5 65.0 68.9 79.9
------- ------- ------- ------- ------- ------- -------
Loss from operations.......................... (207.2) (227.9) (168.2) (125.2) (21.1) (26.8) (41.7)
Other income (expense)........................ 10.3 5.8 1.7 (1.9) 1.0 0.2 0.9
------- ------- ------- ------- ------- ------- -------
Net loss.............................. (196.9)% (222.1)% (166.5)% (127.1)% (20.1)% (26.6)% (40.8)%
======= ======= ======= ======= ======= ======= =======
</TABLE>

29
<PAGE> 30

Our quarterly results of operations have fluctuated in the past and we
expect them to fluctuate in future periods due to a variety of reasons,
including those specifically discussed in the section captioned "Risk Factors."
For example, our product revenue was higher in the fiscal quarter ended January
31, 1998 than in the fiscal quarter ended April 30, 1998 due to the purchase of
units for qualification testing by a key OEM customer and a large order by
another OEM customer in the January 31, 1998 fiscal quarter. In the fiscal
quarters ended April 30 and July 31, 1998 and January 31, 1999, we received
significant other revenue primarily from the license to Hewlett-Packard of our
4200 product design. We do not expect significant other revenue on a recurring
basis.

Furthermore, we have experienced significant fluctuations in our gross
margin, due to a number of factors, including declines in average selling
prices. The decrease in gross margin from 54.0% in the fiscal quarter ended
January 31, 1998 to 45.1% in the fiscal quarter ended April 30, 1998 was
primarily due to a favorable product mix of higher margin product sales in the
quarter ended January 31, 1998. In the fiscal quarter ended October 31, 1998 we
recorded a charge of $86,000 for excess and obsolete inventory related to
reserves against certain components in support of our 4400 product line. In
addition, our gross margins declined in the fiscal quarter ended July 31, 1999
due to an increase in our manufacturing costs related to additional staffing and
facilities costs incurred to transition the final assembly and test portion of
our manufacturing operations to an in-house facility.

We have also experienced significant fluctuations in our operating
expenses. For example, our sales and marketing expenses increased in the fiscal
quarter ended July 31, 1998 because of costs incurred in closing a sales office
that quarter. Research and development expenses increased substantially in the
fiscal quarter ended July 31, 1999 due to increased prototyping costs and
payment of a non-recurring license fee. General and administrative expenses
increased in the fiscal quarter ended July 31, 1999 due to increased staffing in
our administrative and information technology departments.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of liquidity at July 31, 1999 consisted of $6.5
million in cash and cash equivalents and our bank credit facility. The credit
facility, as amended and restated in September 1999, includes a revolving line
of credit providing borrowings up to the lesser of (a) $2.5 million or (b) 80%
of eligible accounts receivable plus 25% of eligible inventories; and an
equipment loan agreement providing for financing up to $1.9 million. Borrowings
under the revolving line of credit bear interest at the bank's prime rate, which
was 8.0% at July 31, 1999, and are secured by our accounts receivable and
inventories. Term loan financing available to us under the equipment loan
agreement bears interest at the bank's prime rate plus 0.5%, is secured by the
related capital equipment and is payable through June 30, 2003. The line of
credit and the equipment loan agreement expire in August 2000. The line of
credit and equipment loan agreement contain provisions that prohibit the payment
of cash dividends and require the maintenance of specified levels of tangible
net worth and certain financial performance covenants measured on a monthly
basis. We entered into a modification letter with our bank in July 1999 to
revise an operating covenant in our loan agreements to bring us into compliance
with the terms of our loan agreements. Prior to such modification, we were in
default of a provision of our loan agreements. As of July 31, 1999, there were
no borrowings outstanding under the revolving line of credit and $1.7 million of
term loans outstanding.

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

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

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

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

30
<PAGE> 31

Additionally, the credit facility requires that we operate at a profit in each
fiscal quarter; however, we are allowed a loss which may not exceed $2.9 million
in each of the fiscal quarters ending October 31, 1999, January 31, 2000 and
April 30, 2000; $2.3 million in the fiscal quarter ending July 31, 2000; and
$1.5 million in the fiscal quarter ending October 31, 2000.

During fiscal 1996, cash utilized by operating activities was $15,000,
compared to $2.6 million in fiscal 1997, $5.8 million in fiscal 1998 and $2.1
million in the nine months ended July 31, 1999. The increases in net cash
utilized reflected increased losses from operations, working capital required to
fund the expansion of our operations and increases in inventories and accounts
receivable.

During fiscal 1996, cash provided by financing activities was $108,000
compared to $9.5 million in fiscal 1997, $4.6 million in fiscal 1998 and $6.2
million in the nine months ended July 31, 1999. We have funded our operations to
date primarily through sales of preferred stock, resulting in aggregate gross
proceeds to us of $30.6 million (which amount includes the $12.0 million of
proceeds received from the private placement of our Series E preferred stock in
August 1999), product sales and, to a lesser extent, bank debt.

During fiscal 1996, cash used in investing activities was $124,000 compared
to $840,000 in fiscal 1997 and $3.2 million in fiscal 1998. During the nine
months ended July 31, 1999, cash provided by investing activities was $754,000.
Capital expenditures were $123,000 in fiscal 1996, $719,000 in fiscal 1997,
$956,000 in fiscal 1998 and $1.5 million in the nine months ended July 31, 1999.
These expenditures reflect our investments in computer equipment, test
equipment, software development tools and leasehold improvements, all of which
were required to support our business expansion. We anticipate capital
expenditures through the remainder of fiscal 1999 and fiscal 2000 of at least
$5.0 million to fund our purchase of a new enterprise resource planning system;
leasehold improvements; costs associated with the transition to an in-house
facility of the final assembly and test portions of our manufacturing process,
including modification to our facilities and test and other manufacturing
equipment; and equipment and software to support our projected growth in
personnel.

We believe the net proceeds we receive from this offering, together with
our existing cash balances, the net proceeds from the sale of our Series E
preferred stock and our credit facilities, will be sufficient to meet our
capital requirements through at least the next 12 months. However, we could be
required, or could elect, to seek additional funding prior to that time. Our
future capital requirements will depend on many factors, including the rate of
revenue growth, the timing and extent of spending to support product development
efforts and expansion of sales and marketing activities, the timing of
introductions of new products and enhancements to existing products, and market
acceptance of our products. Although we are currently not a party to any
agreement or letter of intent with respect to a potential acquisition or
strategic arrangement, we may enter into acquisitions or strategic arrangements
in the future which also could require us to seek additional equity or debt
financing. We cannot assure you that additional equity or debt financing, if
required, will be available to us on acceptable terms, or at all.

YEAR 2000 COMPLIANCE

Impact of the Year 2000 computer problem. The Year 2000 computer problem
refers to the potential for system and processing failures of date-related data
as a result of computer-controlled systems using two digits rather than four to
define the applicable year. For example, computer programs that have time-
sensitive software may recognize a date represented as "00" as the year 1900
rather than 2000. This could result in system failures or miscalculations that
disrupt our operations.

To date, we have not experienced any Year 2000 issues with any of our
internal systems or our products, and we currently do not expect to experience
any such issues in the future.

Our Year 2000 compliance program. Our Year 2000 compliance program is based
on the program adopted by the U.S. Government Accounting Office. The program is
divided into six phases: awareness, assessment, renovation, validation,
implementation and monitoring. The program covers our information technology
systems, non-information technology systems and embedded technology. We have
completed

31
<PAGE> 32

the awareness phase, substantially completed the assessment phase and are
starting the renovation phase. We expect to be completed with the implementation
phase by the end of October 1999.

State of readiness of our products. We have been testing our existing
products for use in the year 2000 and beyond, and believe that using our
products as documented should not cause any Year 2000 related issues. While we
believe our products are Year 2000 compliant, it is impractical for us to test
all of our products in every computer environment or with all available
combinations of our products with products and components of our customers and
third-party suppliers of SAN products. As a result, there may be situations
where our products, when implemented in an organization's computing system with
products and components supplied by third parties, could result in Year 2000
issues for that organization.

State of readiness of our internal systems. Our business may be affected by
Year 2000 issues related to non-compliant internal systems developed by us or by
third-party vendors. We have requested, and have begun receiving, written
assurances from our third-party vendors for all of our material systems that
such systems are Year 2000 compliant. To date, we have identified one internal
system that will require an upgrade to be Year 2000 compliant and one of our
enterprise systems that utilizes a database system that will require an upgrade
to be Year 2000 compliant. Software necessary to effect these upgrades is
currently available. In addition, several of our administrative and engineering
systems rely on an operating system that will require an upgrade to be Year 2000
compliant, which is currently available.

State of readiness of our facilities. The operation of our facilities also
depends upon the computer-controlled systems of third parties such as suppliers
and service providers. We believe that absent a systemic failure outside our
control, such as a prolonged loss of electrical or telephone service, Year 2000
problems of these third parties will not have a material impact on our
operations. Our facilities use limited embedded technology and the failure of
that technology is not expected to have a material impact on our operations.

State of readiness of key third parties. We believe that our third-party
suppliers are sensitive to the need to be Year 2000 compliant. As part of the
assessment phase of our Year 2000 program, we are requesting written assurances
from our third-party suppliers that they are Year 2000 compliant. We have
received more than 50 responses from third party suppliers indicating that they
are Year 2000 compliant. However, there are only eight suppliers who could pose
significant problems to us if there was a Year 2000 event to interrupt
deliveries. They are AMP Inc., Austin Foam, Hewlett-Packard, IBM, LSI Logic,
Sterling Commerce, Tenere Inc. and Tyrex Corporation. Four of these,
Hewlett-Packard, IBM, Sterling Commerce and Tyrex, have already responded with
letters of compliance. The others have indicated that they are conducting a Year
2000 compliance review. In any event, we cannot assure you that a court would
find any of these written assurances legally enforceable in the event they
proved to be inaccurate. If we identify a material Year 2000 compliance issue
with a third-party supplier, we will work with that supplier to resolve the
issue or source the parts or services from a supplier that is Year 2000
compliant.

Use of independent verification. We have retained an independent
information technology consulting firm to assess our Year 2000 readiness and
identify areas where we may face Year 2000 compliance issues. This firm provided
to us in September 1999 a report regarding the status of our Year 2000
readiness. In conducting their analysis, the firm advised us that it assumed the
accuracy of Year 2000 compliance information which was available through
compliance databases, vendor Internet sites and vendor contacts was accurate,
and therefore did not perform any direct testing of our hardware or software.
However, their analysis did cover software packages found in our information
technology infrastructure. From a total of 196 different software packages: 48
were found to be compliant; 88 were compliant with minor issues or actions, such
as a software patch or a later software release, required to attain compliance;
56 packages were not reviewed since they were either part of another package or
were not actually part of our information technology infrastructure (for
example, an employee could have downloaded a software package from an external
source for his or her own personal use); and four packages still have not been
tested by the third party software vendor. We are in the process of addressing
any issues or actions required with regard to such software packages.

32
<PAGE> 33

Cost. Based on our assessment to date, we do not anticipate that costs
associated with remediation of our internal systems will exceed $250,000.

Worst case Year 2000 scenario. While it is impossible to evaluate every
aspect of Year 2000 compliance, we believe the worst case scenario related to
Year 2000 compliance issues would be the failure of a sole or limited source
component supplier to be Year 2000 compliant. The failure of one of these
suppliers to be Year 2000 compliant could seriously interrupt the flow of
materials into the manufacturing process and therefore delay the manufacture and
sale of our products and further entail a recall of installed products from
end-user organizations to replace the malfunctioning product. However, due to
the general uncertainty inherent in the Year 2000 computer problem resulting
from the uncertainty of the Year 2000 readiness of third-party component
suppliers, we are unable to determine at this time whether the consequences of
Year 2000 failures will have a material impact on our business.

Additional risks. Any failure by us to make our products Year 2000
compliant could result in a decrease in sales of our products, an increase in
allocation of resources to address Year 2000 problems of our customers without
additional revenue commensurate with such dedication of resources, or an
increase in litigation costs relating to losses suffered by our customers due to
such Year 2000 problems. Failures of our internal systems could temporarily
prevent us from processing orders, issuing invoices, and developing products,
and could require us to devote significant resources to correct such problems.

RECENT ACCOUNTING PRONOUNCEMENT

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

QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

Our interest income is sensitive to changes in the general level of U.S.
interest rates, particularly since the majority of our investments are in
short-term instruments. Due to the nature of our short-term investments, we have
concluded that there is no material market risk exposure. Therefore, no
quantitative tabular disclosures are required.

33
<PAGE> 34

BUSINESS

OVERVIEW

We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. Our storage routers serve
the critical function of enabling Fibre Channel storage area networks to connect
with many of an organization's other computer devices that use different
computer protocols. Specifically, when used in storage area networks our storage
routers decrease congestion in the transfer of data within a network, reduce the
time required to back up data, improve utilization of storage resources, and
preserve and enhance existing server and storage system investments.

To date, we have sold approximately 6,000 storage routers, primarily to
major manufacturers of servers and storage systems. These computer equipment
manufacturers sell our storage routers to end-user organizations for use in
their storage area networks. We have also recently begun to sell our storage
routers through companies that distribute, resell or integrate our storage
routers as part of a complete SAN solution.

INDUSTRY BACKGROUND

Increasing Importance of Information Management

Information management has become a strategic imperative for many
organizations today. The broad deployment of widely dispersed computer networks
combined with the widespread use of the Internet, intranets and electronic
commerce have enabled organizations to empower employees, customers and
suppliers with access to vast amounts of data. However, the dramatic growth in
the amount of data generated, stored, protected and accessed has created
increasingly serious information management challenges. Exacerbating these
challenges is the greater number and types of users who access this data, as
well as the proliferation of various types of software applications across many
different computer devices that use different protocols for the input and output
of data. Organizations therefore are seeking to implement processes and systems
that effectively and efficiently store, manage and ensure the integrity and
availability of data 24 hours-a-day, seven days-a-week, 365 days-a-year.

The Interconnect Bottleneck and Limitations of the Point-to-Point Storage
System Architecture

While data storage capacity and microprocessor speeds have increased
dramatically, the speed at which information is transmitted from storage systems
to microprocessors has not increased nearly as rapidly. This imbalance has
resulted in bottlenecks at the interconnection points where the input and output
of data occurs. These interconnect points are commonly referred to as the I/O.
These I/O bottlenecks cause large delays in the movement of data within a
network, significantly slowing down the network's day-to-day operations and
frustrating network users. The I/O bottleneck persists due, in large part, to
the limitations of the computer protocols that traditionally have been used to
transport data across the I/O.

One of the most commonly used I/O protocols is the small computer system
interface, or SCSI. While widely used, SCSI has inherent performance
limitations, including:

- the amount of data SCSI can transport at one time;

- the physical distances over which SCSI can operate;

- the limited number of storage devices SCSI can connect to a server;

- SCSI's inability to grow with and adapt to the requirements of growing
and changing computer networks;

- SCSI's lack of management capabilities; and

- SCSI's inability to connect more than one server to a storage device,
which restricts data accessibility.

34
<PAGE> 35

For example, a SCSI connection enables data throughput of only 40 or 80
megabytes per second, can transmit data over no more than 25 meters, and can
support a maximum of only 15 devices. In addition, SCSI does not have any
inherent capability to manage storage systems or any devices attached to those
systems. As a result, already busy network servers also must perform these
tasks. Finally, a SCSI-connected device can only be accessed by a single server.
If the server becomes unavailable for any reason, data on its connected device
becomes inaccessible. Despite its limitations, SCSI currently is the most
prevalent interconnect, or I/O, protocol and is expected to remain an important
I/O protocol in the future.

Adding to the problems created by the I/O bottleneck is the so-called
"point-to-point" architecture used in the vast majority of enterprise computing
systems today. This architecture relies on a dedicated, point-to-point SCSI
connection between each server and only one storage device. In effect, each
server/storage pair becomes an island. To perform data backup -- making a copy
of data to protect it from loss or corruption -- data must be moved from a
storage system, through its attached server, over the primary computer network
(referred to as the local area network, or LAN), then through another server to
a backup storage system. The following graphic depicts, in simplified form, the
point-to-point architecture:

[Description of Graphic:
The graphic depicts a standard local area network, or LAN. Across the top
of the diagram are three "Storage Devices": a "Tape Storage" device and two
"Disk Storage" devices. These storage devices are connected via SCSJ connections
to three "Servers": a "Unit" server, a "Window NT" server and a "Netware"
server. These three servers are connected to a "Local Area Network" (depicted in
the form of a cloud), to which various "Network End Users (Clients)"
(represented by computer terminals) are attached.]

Because users can access information residing on a storage device only from
the server connected to that storage device, and because a significant amount of
data must be moved across the local area network, two bottlenecks occur. First,
the amount of data which can traverse the SCSI interconnect between the server
and the storage device at a given time is severely limited, the information
going to and coming from the storage device is more difficult to access and
manage, and the risk of data loss is increased. As the number of requests for
stored data from the server grows, congestion within the server increases and
server performance further decreases. Second, the LAN becomes congested, slowing
an organization's day-to-day operations. As a result, many organizations are
moving away from point-to-point storage system architectures to reduce I/O
bottlenecks and improve their overall information management.

Addressing the I/O Bottleneck with Fibre Channel Storage Area Networks

The higher performance Fibre Channel protocol has received broad
recognition as a means to address many of the current limitations and
difficulties of information management. Fibre Channel is an industry standard
interconnect protocol developed in the early 1990s and approved by the American
National Standards Institute in 1994. Fibre Channel enables data throughput of
more than 100 megabytes per second, can transmit data over distances of up to 10
kilometers and can enable the interconnection of hundreds of different servers
and storage systems. As a result of these capabilities, Fibre Channel has
enabled the evolution of a new network storage architecture: the storage area
network, or SAN.

A storage area network, or SAN, is a high-speed computer network dedicated
to data storage that allows different types of storage devices, such as tape
libraries and disk arrays, to be shared by all end

35
<PAGE> 36

users through network servers. Similar to the way in which traditional local and
wide area computer networks permit any end user on the network to access any
network server, a SAN creates a "pool" of data storage that can be shared by
multiple servers. Through various configurations similar to those used in
traditional computer networks, SANs can connect any server with any storage
system, and storage systems with each other. This any-to-any connectivity
enables large amounts of data to be shared and accessed among servers and
storage systems running different computer operating systems or software
applications.

Three key devices enable the interconnection of a SAN with other network
components, as well as the various components of the SAN with each other:

- The Storage Hub is a Fibre Channel-based device which connects Fibre
Channel servers to Fibre Channel storage devices via a single shared data
communication path. Leading suppliers of storage hubs include Gadzoox
Networks and Vixel.

- The Storage Switch is a Fibre Channel-based device which connects Fibre
Channel servers to Fibre Channel storage devices via multiple
communication paths. Leading suppliers of storage switches include Ancor
Communications, Brocade Communications and McDATA.

- The Storage Router is a device which, in effect, translates
communications across different computer protocols, including both SCSI
and Fibre Channel, in order to connect all of the various components of
the SAN, including servers, storage systems, storage hubs and storage
switches. By enabling data transport across multiple computer protocols,
storage routers facilitate seamless communication between the SAN and
attached SCSI-based servers and storage systems. As such, storage routers
enable both server-to-storage and storage-to-storage communication. We
are the leading supplier of storage routers based on the number of units
shipped, and believe that we were the first company to ship a storage
router.

The following graphic depicts a basic SAN in which storage devices and
servers are connected in their own network, enabling multiple servers to access
multiple storage devices. Storage routers are shown here enabling the connection
of an organization's existing SCSI disk and SCSI tape storage devices, as well
as an existing SCSI server, to the Fibre Channel SAN.

Graphic schematic diagram of a storage area network
[DESCRIPTION OF GRAPHIC: The graphic depicts a schematic diagram of a
storage area network, or SAN. Across the top of the diagram, two "Storage
Devices" are depicted: a "Tape Storage" and a "Disk Storage" device. Each of
these storage devices are connected via the SCSI protocol to depictions of two
"Storage Routers." These storage routers are in turn connected to a "Fibre
Channel SAN with hubs/switches" (represented by a cloud) in the center of the
diagram. The SAN is connected to (i) three different servers running Unix,
Windows NT and Netware, respectively, (ii) "Fibre Channel Storage Devices," and
(iii) via a "Storage Router" through a SCSI connection to a "SCSI Server."
Finally, each of the servers is in turn connected to a "Local Area Network," to
which various "Network End Users (Clients)" are attached (represented by
computer terminals).]

36
<PAGE> 37

New Applications Enabled by Fibre Channel SANs

Fibre Channel SANs have enabled a number of important applications,
including:

- LAN-free Backup. Disruptions to a computer system can result in the loss
or corruption of data. Therefore, most organizations regularly perform
data backup by moving data from storage systems to separate or off-site
storage systems or data centers where the data can be safely stored.
Because data backup can account for a significant portion of the data
traffic over local area networks, it is often a major contributor to
bottlenecks at the input/output interconnect. As networks are
increasingly required to be available to users on an around-the-clock
basis, the available time during which data backup can be performed has
decreased, while the time required to perform backup has increased due to
the growth of the amount of data being backed up. Unlike traditional
backup which entails the use of multiple servers to access each of their
storage devices, LAN-free backup uses the SAN to move data from a storage
system through one server then directly to a backup storage system. By
moving the data backup function from the LAN to the SAN, LAN-free backup
substantially reduces I/O bottlenecks.

- Server-free Backup. The development of server-free backup has the
potential to further extend the benefits of LAN-free backup by virtually
removing the server from the backup process. This application will enable
automated data movement between storage systems directly across the SAN,
allowing data backup while utilizing a very small percentage of the
server's internal data processing capacity. As a result, organizations
will no longer need to identify lengthy time periods, or "backup
windows," for disconnecting servers from the network in order to perform
backup.

- Shared Storage. In the traditional point-to-point storage architecture, a
significant portion of storage resources are underutilized because they
are accessible only by a single server which may not efficiently use the
resource. With SANs, multiple servers can access the same storage
devices, enabling more stored data to be available to more users, and
reducing the need to add more servers or storage devices to support
greater storage requirements.

- Data Mirroring and Disaster Tolerance. SANs improve an organization's
ability to ensure the integrity of its data by facilitating data
replication, or mirroring, and enhanced disaster tolerance and recovery.
In mirroring, two copies of transaction data are created and maintained
on separate storage systems. This redundancy reduces the chance of data
loss or corruption. Because SANs enable very high data transmission rates
and support transmission distances of up to 10 kilometers per Fibre
Channel link, SANs enable mirroring across storage systems that may be
many kilometers apart from each other. These capabilities also facilitate
the creation and maintenance of offsite data centers that support
business recovery in the event data is lost at a primary storage site.

The Need for Storage Routers to Facilitate the Adoption of SANs and Emerging
I/O Protocols

As storage area networks are relatively new, most storage devices in the
market continue to be sold with the small computer system interface.
Additionally, most organizations have made significant investments in storage
devices and servers that use the small computer system interface. Thus, in order
to enable organizations to achieve the benefits of deploying a storage area
network, the SAN must be able to operate in conjunction with the different I/O
protocols employed by the devices which are connected to it or within it.
Because many organizations have made significant investments in computer
equipment which uses the small computer system interface protocol, organizations
are reluctant to replace these devices on a wholesale basis or to stop
purchasing them. As a result, these organizations will require their Fibre
Channel-based SANs to communicate with SCSI-based devices.

Several other current and emerging I/O protocols also are expected to be
incorporated into commercial SAN products, servers and storage systems in the
future. These protocols include asynchronous transfer mode, which would support
the high-speed transmission of data between multiple SANs via networks operating
over large distances, otherwise known as wide area networks. Other current and
future I/O protocols under development are intended to reduce the incidence of
I/O bottlenecks.

37
<PAGE> 38

These include Next Generation I/O (NGIO) and Future I/O, as well as System I/O,
the recently announced combination of these two competing protocols. As new
protocols achieve commercial acceptance, storage routers will be increasingly
essential to connect these devices to the SAN, enabling seamless communication
among servers, storage devices and other SAN components that utilize different
computer protocols.

THE CROSSROADS SOLUTION

We are the leading provider of storage routers for storage area networks,
based on our market share of storage routers shipped. Our storage routers enable
organizations to deploy SANs within their existing computing networks. Our
storage routers presently connect Fibre Channel SANs with SCSI servers and SCSI
storage systems and are fully interoperable with commercially available Fibre
Channel storage devices and equipment. Using our storage routers, organizations
can deploy and derive the benefits of SAN technology today, while preserving
their existing investments in SCSI-based computer equipment.

Incorporated into our storage routers is our proprietary storage routing
software that "intelligently" examines data traffic in the SAN to prioritize
transmission and minimize congestion in the flow of data. This software also
enables communication between different I/O protocols, supports rapid field
deployment of new storage area network configurations, enables sharing of
storage resources by multiple servers and can be adapted to new I/O protocols as
they emerge. Our proprietary software is combined with software management tools
and embedded in our storage routers. Our storage router hardware consists of
industry-standard microprocessors and industry-standard application specific
integrated circuits.

Our storage routers are purchased by end-user organizations of all sizes,
primarily to improve backup systems in their SANs. Our storage routers are in
use in the data centers of large, multi-national corporations, as well as in
smaller companies such as Crossroads, where we use two of our storage routers in
conjunction with our own storage area network for LAN-free backup and to connect
SCSI-based disk storage devices.

We believe that deploying our storage routers helps organizations improve
and reduce their total cost of information management by offering a number of
important benefits, including:

Facilitating Efficient Backup and Recovery

Currently, our storage routers are used primarily to connect SCSI tape
storage systems to Fibre Channel SANs for LAN-free backup. By allowing the
backup process to be accomplished across the SAN, rather than across the local
area network, our storage routers remove a common source of congestion within
the LAN. As a result, the primary computer network has greater availability to
perform day-to-day operations. LAN-free backup also provides flexibility to
conduct backup at any time of day. This capability is increasingly important as
users demand network availability around the clock and from geographically
dispersed locations. In addition, we have software nearing completion which is
designed to enable server-free backup. By removing the server almost entirely
from the backup process, server-free backup will offer further significant
reductions in network server utilization. Finally, our storage routers support
the distance capabilities of Fibre Channel SANs, enabling long distance data
mirroring and the creation of redundant data sites to restore data when a
dedicated storage system fails or is damaged.

Providing Broad, Verified Interoperability

Our storage routers are designed to function together, or interoperate,
with all commercially available Fibre Channel storage hubs and storage switches,
as well as other SAN components, including storage devices, host bus adapters,
operating systems and storage management software. Our storage routers function
in over 2,500 different configurations of SANs, thus providing organizations
with flexibility in designing and changing their SANs. Furthermore, our storage
routers support concurrent transmissions of data utilizing multiple computer
protocols, including SCSI and the Internet Protocol. Our storage routers can be
deployed in SANs which connect servers running diverse operating systems,
including NetWare, Unix and Windows NT. Our storage routers have been tested and
verified through our Crossroads
38
<PAGE> 39

Verified-Storage Area Network (CV-SAN) program, which is now available through
our Web-based Configurator.

Increasing Scalability and Implementation Flexibility

Our storage routers are designed to operate in any SAN computing
environment and are designed to be able to adapt as organizations grow and
change their computer networks to address their increasing data storage and
information management needs. Our storage routers also are designed to work in
all Fibre Channel SAN configurations so that organizations can modify their
storage architecture to address their changing needs without changing their
storage routers. Organizations can incrementally add storage routers as backup
demands grow or as new storage devices are added to their networks. Our newest
line of storage routers can be configured to support data transmission over
copper or fiber optic lines.

Enhancing Storage Area Network Manageability

Our storage routers are designed with features that support an
organization's ability to conduct systems diagnostics and management, as well as
real-time application monitoring, from remote locations. In addition, the
proprietary software embedded in our storage routers enhances the ability of an
organization to manage of storage systems that are attached to the storage
router by translating network management protocols to storage management
protocols. To this end, we work closely with leading independent software
vendors, such as BMC Software, Computer Associates, Hewlett-Packard and Tivoli
Systems, to ensure that our storage routers can be managed through their network
management software products.

Leveraging Existing Server and Storage System Investments

Our storage routers enable an organization's continued use of its large
installed base of servers and storage devices that rely on the small computer
system interface within a storage area network. In addition to enabling
organizations to preserve these existing investments, our storage routers
improve the functionality of those systems when operated in conjunction with a
SAN. For example, by connecting SCSI-only servers to SANs, a process referred to
as server migration, our storage routers enable those SCSI servers to run
applications on a SAN. By allowing consolidation of storage resources in
centralized facilities, our solutions also reduce the need for organizations to
maintain a number of geographically dispersed and costly data storage centers
and enable them to more efficiently use their existing data storage capacity.

OUR STRATEGY

Our objective is to maintain our position as the leading provider of
storage routers and to leverage this position to become the leading provider of
I/O routing solutions. The key elements of our strategy include the following:

Leverage and Extend Market Leadership

We are the leading provider of storage routers based on our market share of
storage routers shipped, and believe that we were the first company to ship
storage routers. We intend to capitalize on our market leadership position by
expanding the depth and breadth of our relationships with OEM, distributor,
reseller and system integrator customers. To achieve this objective, we are
committing additional resources to extend the interoperability of our storage
routers to address new and emerging applications. In order to accelerate the
interoperability of our storage routers, we developed the Crossroads
Verified-Storage Area Network program. We believe that CV-SAN differentiates our
company by proactively ensuring the interoperability of our products with other
SAN components. Through our CV-SAN initiative, we have tested and verified the
interoperability of over 2,500 different SAN configurations using our storage
routers. We intend to continue leveraging our technology expertise to expand and
improve our storage routers and gain additional market share.

39
<PAGE> 40

Leverage and Expand Our Relationships with Leading OEM Customers

We believe that working with leading OEMs enables us to effectively
distribute our storage routers, anticipate the needs of enterprises, introduce
new products to meet those needs and target new markets. Since OEMs must expend
substantial resources to qualify our storage routers for inclusion in their SAN
solutions, they tend to qualify only a few vendors for a particular product. As
a result, we believe that our success depends heavily on maintaining and
augmenting our OEM relationships. To date, we have cultivated customer
relationships with leading server and storage system OEMs, including ADIC, ATL
Products, Compaq, Dell, Exabyte, Groupe Bull, Hewlett-Packard, Hitachi Data
Systems, INRANGE, McDATA and StorageTek. We intend to continue targeting major
server and storage system OEMs to further strengthen our market position.

Capitalize on Emerging I/O Market Opportunities

We intend to leverage our significant expertise in software, hardware,
storage routing algorithms, and existing and emerging I/O protocols to remain at
the forefront of the SAN market. We believe this expertise has enabled us to
establish our market leadership in our core market of storage routing. We intend
to extend our technological capabilities to emerging I/O routing market
opportunities. We are currently developing:

- a SAN-to-WAN router, which will enable multiple SANs to be connected over
wide area networks;

- our Active Fabric storage router software, which we expect will provide
enhanced features for SANs, including server-free backup; and

- new I/O router products that will incorporate emerging I/O technology.

We actively participate in the working groups that define and shape
emerging I/O standards, including the System I/O forum, the recently announced
successor to the NGIO Forum (whose members included Dell, Hitachi Data Systems,
Intel, NEC, Siemens and Sun Microsystems) and the Future I/O Alliance (whose
members included Adaptec, Cisco, Compaq, Hewlett-Packard, IBM and 3Com). In
addition to the System I/O forum, we participate in the Storage Networking
Industry Association and Computer Associates' Storage Area Network Integrated
Technology Initiative. We believe that our participation in these working groups
helps us define optimal ways of building intelligent I/O interconnections,
influence relevant standards, implement and deliver products to OEMs and other
customers, and remain a technological leader.

Broaden Relationships with Leading Software Vendors

We believe that establishing relationships with leading enterprise and
storage management software companies is essential to facilitating the efficient
and reliable integration of their capabilities with our storage routers. To this
end, we have developed relationships with leading software vendors, including
BMC Software, Computer Associates, Legato Systems, Tivoli Systems and VERITAS
Software. The focus of our strategic initiatives with these companies has been
to ensure the integration of our storage routers with leading software solutions
to optimize SAN management. We intend to continue expanding our relationships
with leading software vendors to ensure the compatibility of our storage routers
with their software.

Expand Distribution Channels

In addition to building upon our established OEM sales channel, we believe
that we can achieve additional growth by selling through distributors, resellers
and system integrators. To date, we have developed relationships with Andataco,
Bdata, Bell Microproducts, Cranel, Datalink, EIE Data Media Products-Japan,
Pinacor and Tricom. We intend to enter into additional agreements with
distributors, resellers and system integrators, both in the United States and
abroad, to increase our geographic coverage

40
<PAGE> 41

and address additional opportunities. We regularly conduct sales training for
prospective distributor, reseller and system integrator customers to educate
them in the sale of our storage routers. In addition, we have initiated an
out-bound marketing program directed at end-user organizations to build greater
awareness of the benefits of our storage routers. This is intended to generate
demand for distributors, resellers and system integrators selling our storage
routers.

PRODUCTS

Our storage routers are an integral component of SAN solutions and are
critical to enabling organizations to attain the benefits of these solutions
within their existing computer network infrastructures. We have developed a line
of storage routers which enable bi-directional, seamless communications between
Fibre Channel devices in the SAN and SCSI devices. Each of our storage routers
is designed to support all forms of SAN architecture, including point-to-point,
arbitrated loop and switched fabric networks, provides management capability
through an Ethernet port, and supports full Simple Network Management Protocol,
or SNMP, and remote Web-based management.

Storage Router Products

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

<TABLE>
<CAPTION>
FIRST
PRODUCT SHIPMENT DEVICE
STORAGE ROUTER NAME TO OEM CONFIGURATION BENEFITS
<C> <C> <C> <S> <C>
- -------------------------------------------------------------------------------------------------------------------------
MID-RANGE 4100 August 1997 - 1 Fibre Channel port - Enables LAN-free backup and recovery
- 1 SCSI bus - Supports shared storage (disk, tape and optical)
- 1 Ethernet management - Connects up to 15 SCSI devices
port - Transmits data over distances up to 10 km
- Enables server migration to SANs
- -------------------------------------------------------------------------------------------------------------------------
ENTERPRISE 4400 September 1997 - 2 Fibre Channel ports - Allows RAID (Redundant Array of Independent
- 4 SCSI buses Disks) migration
- Enables LAN-free backup and recovery
- Supports shared storage (disk and tape)
- Connects up to 60 SCSI devices
- -------------------------------------------------------------------------------------------------------------------------
HIGH END 4200 May 1998 - 1 Fibre Channel port - Enables LAN-free backup and recovery
- 2 SCSI buses - Supports shared storage (disk, tape and optical)
- 1 Ethernet management - Connects up to 30 SCSI devices
port - Transmits data over distances up to 10 km
- Enables server migration to SANs
- -------------------------------------------------------------------------------------------------------------------------
THIRD 4x50* May 1999* - 1 Fibre Channel port Will provide the same benefits as 4200 router,
GENERATION - 1 to 4 SCSI buses and:
- 1 Ethernet management - Enable server-free backup
port - Double the SCSI throughput via low voltage
differential technology
- Provide enhanced software for storage management
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>

- ---------------

* The first product we are offering in our 4x50 family is the 4250 storage
router. The 4250 is currently in evaluation with OEMs.

Substantially all of our product revenue has been derived from sales of a
limited number of our storage router products. In particular, our 4100 product
has accounted for 50% and 71% of our product revenue in fiscal 1998 and in the
nine month period ended July 31, 1999, respectively.

Internal Product Testing and Verification through CV-SAN Program

Each of our storage routers undergoes an extensive testing and verification
process in our interoperability lab to assess its interoperability with the
various other components of the SAN, including storage systems, storage hubs,
storage switches, host bus adapters, operating systems and storage

41
<PAGE> 42

management software from a wide variety of vendors. Through our Crossroads
Verified-Storage Area Network program, we have tested and verified the
interoperability of approximately 2,500 different SAN configurations utilizing
our storage router solutions. We have designed our Web-based Configurator to
enable our customers to access this interoperability data and dynamically
configure interoperable SANs. Our Configurator serves as a tool for our current
and potential customers to assist them in designing a SAN by determining which
SAN components are interoperable with other SAN components.

OUR CUSTOMERS

To date, we have sold approximately 6,000 of our storage routers to OEM
customers. Our storage routers are currently sold to end-user organizations
primarily through OEMs under their brands, and to a lesser extent, through
distributors, resellers and system integrators under the Crossroads brand.

OEM Customers

Our primary customers are OEMs, including server and storage system
manufacturers. We believe that LAN-free backup is the primary end-user
application for which our storage routers are being used today. The following is
a list of our OEM customers, each of which has purchased at least $50,000 of our
products, and their branded Crossroads products:

<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
CROSSROADS
OEM OEM-BRANDED PRODUCT PRODUCT
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
ADIC FCR100 Fibre Channel Router 4100
FCR200 Fibre Channel Router 4200
FCR400 Fibre Channel Router 4400
- ------------------------------------------------------------------------------
ATL Products Crossroads 4200 4200
- ------------------------------------------------------------------------------
Compaq StorageWorks Fibre Channel Tape Controller 4100
- ------------------------------------------------------------------------------
Dell PowerVault 35F Multi-port Bridge 4200
- ------------------------------------------------------------------------------
Exabyte FC-11 Storage Router 4100
FC-12 Storage Router 4200
- ------------------------------------------------------------------------------
Groupe Bull SAN 4100 4100
SAN 4200 4200
- ------------------------------------------------------------------------------
Hewlett-Packard SureStore 2100 4200
- ------------------------------------------------------------------------------
Hitachi Data Systems Crossroads 4200 4200
- ------------------------------------------------------------------------------
INRANGE Fibre Channel SCSI eXchange: 9066/9067 FSX *
- ------------------------------------------------------------------------------
McDATA EB-1200 FabricGate 4200
- ------------------------------------------------------------------------------
StorageTek 3100 Fibre Channel/SCSI Bridge 4100
3200 Fibre Channel/SCSI Router 4200
- ---------------------------------------------------------------------------------------
</TABLE>

* This customer currently purchases a SCSI distance extender product that can be
upgraded to a 4100.

During fiscal 1998, our four largest customers -- ADIC, Compaq,
Hewlett-Packard and StorageTek -- accounted for 25%, 20%, 16% and 14% of our
total revenue, respectively. In the nine month period ended July 31, 1999,
revenue from Compaq and StorageTek represented 44% and 30% of our total revenue,
respectively. No other customer accounted for more than 10% of our revenue in
these periods.

42
<PAGE> 43

Distributors, Resellers and System Integrators

We expect to sell our products through additional channels as SANs mature
and broader interoperability of SAN components is demonstrated. As such, we are
investing significant resources in developing distributor, reseller and system
integrator relationships. As of July 31, 1999, we had relationships with the
following distributors, resellers and system integrators, each of which has sold
at least one of our products to an end-user organization:

<TABLE>
<CAPTION>
DISTRIBUTORS RESELLERS/SYSTEM INTEGRATORS
------------ ----------------------------
<S> <C>
Bell Microproducts Andataco
Cranel Bdata
Forefront Graphics Datalink
EIE Data Media Products-Japan
Tricom
</TABLE>

SALES AND MARKETING

We base our sales and marketing strategy on an indirect sales model
executed through OEMs and distributors, resellers and system integrators. For
the past two years, our sales activity has focused principally on OEM adoption
through extensive OEM testing and product qualification. As the market for SAN
products matures, we believe that open market branded sales through
distributors, resellers and system integrators will represent an increasing
percentage of our total revenues. While we sell most of our products today
through OEMs, with an expanded sales channel we believe that we will gain
broader brand awareness and a greater presence in the departmental and mid-sized
business markets where distributors, resellers and system integrators generally
have a strong presence and can influence product adoption choices.

We also anticipate expanding our international sales activities in the near
future. Currently, sales to international end users are handled through our OEM
customers. In the future, we plan to establish an office in Europe to support
and manage our customer relationships there.

Our marketing organization primarily focuses on coordinating strategic
planning activities which help us to determine market segments to pursue,
understand size and growth characteristics of these market segments, analyze
competition within the market segments, define product features to successfully
penetrate market segments and construct business analyses to measure expected
return on investments. Additionally, our marketing efforts are geared toward
developing key relationships with OEMs, distributors, resellers and system
integrators; participating in tradeshows to promote and launch our products; and
coordinating our involvement in various industry standards organizations. In
order to raise potential customer awareness of the benefits of our storage
routers, we also intend to increase our advertising in trade publications.

CUSTOMER SERVICE AND SUPPORT

Our customer service and support organization provides comprehensive
training programs and telephone, e-mail and Web-based direct support to our
customers. These programs allow us to minimize the need for a large end-user
support organization by enabling our OEMs to provide installation, service and
primary technical support to their customers while we focus on high-level
secondary support. In addition, we replicate field issues to help our customers
solve end-user problems and will test the interoperability of various SAN
configurations upon customer request. All newly verified SAN configurations are
entered into our online Configurator and published in our CV-SAN guide.

TECHNOLOGY

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

43
<PAGE> 44

I/O transactions between servers and storage systems. This software also manages
delays in data transmissions that result from variances in I/O speeds and
provides accurate communication of transmission status to connected devices. Our
software provides critical interoperability between diverse I/O computer
protocols, supports rapid field deployment of new configurations and features,
enables sharing of storage resources by multiple servers and can be adapted to
new I/O protocols as they emerge. Additionally, our software is easily
configurable and can be quickly adapted to varying customer requirements and
computing environments. While our software architecture serves as the foundation
for our current products, it is also designed to be able to accommodate several
planned generations of new designs. Our hardware is the "engine" that provides
basic performance and functionality such as operating speed, data movement,
external device connectivity, network management interfaces and the ability to
operate in extreme environmental conditions of temperature and humidity.

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

I/O Technologies

We believe that our I/O routing expertise is a critical factor in our
ability to maintain our leadership position in storage routing. There are three
key I/O technologies in use today for open systems and mainframe systems: SCSI
and Fibre Channel in open systems (e.g., NetWare, Windows NT and Unix) and IBM's
ESCON for mainframes. We employ a large number of engineers and technologists
who have significant involvement in the evolution of these I/O technologies.
Based on their expertise and our overall capabilities, we believe that we
possess insight and understanding into the capabilities and limits of each new
technology and the requirements for I/O routing. We initially chose to build our
routers to interconnect SCSI and Fibre Channel technology, and we plan to evolve
this interconnectivity into additional interfaces over time. As new I/O
standards are developed, we expect to contribute to these developments and
leverage our software and technical expertise in developing additional I/O
routers. Such additional areas of focus include ATM, Gigabit Ethernet, TCP/IP
and System I/O, the recently announced successor to both NGIO and Future I/O.

Embedded Software Design

We design, develop and test all of our own embedded software. As of July
31, 1999, our engineering staff included 24 software engineers with expertise in
embedded software, management tools, software applications and graphical user
interface development. We have considerable expertise in I/O protocol standards,
error detection and recovery and support. The flexibility to modify our software
to varying system configurations has enhanced our ability to rapidly achieve
verified interoperability.

I/O Standards

The Fibre Channel standards were drafted and are controlled by the ANSI
X3T11 Technical Committee of the National Committee for Information Technology
Standards. The Fibre Channel protocol, which allows storage transport via SCSI
operations on the Fibre Channel transport, falls under the X3T10 Technical
Committee. Our personnel have been and remain active members of these
committees, and we have initiated and contributed significant efforts in both,
including the FC-Tape proposal in X3T11 and the Extended Copy Command in the
X3T10 committee. Upon completion of the merger of NGIO and Future I/O, we will
become a member of the System I/O Forum, the successor to both the NGIO Forum
and the Future I/O Alliance. These standards efforts are directed at moving
network capabilities into I/O architecture, which will further extend the
complementary benefits and capabilities of I/O routers.

44
<PAGE> 45

MANUFACTURING

Our manufactured product contains printed circuit board assemblies which
consist of the electronics that control the function of our product. The printed
circuit board is assembled and tested by a contract manufacturer, who purchases
the required components to meet demand in accordance with our purchase orders
and six month forecast. During product final assembly and test, the printed
circuit board is assembled with the remaining components (power supply, cables,
enclosures, etc.) and tested to create the final product.

To date, substantially all of our manufacturing process other than final
assembly and test is outsourced to XeTel Corporation, a contract manufacturer.
XeTel invoices us based on agreed prices and payment terms that are set forth in
purchase orders issued by us. The pricing takes into account component costs,
manufacturing costs and margin requirements. XeTel purchases the components for
our products based upon our specifications; however, we assume the inventory
risk and risk of loss for these components ordered on our behalf. In this
process, we determine the components that are incorporated into our products and
select the appropriate suppliers of the components. Recently, we have engaged
another contract manufacturer, Solectron, to make our 4x50 family of products.
We believe that this will enable us to reduce our reliance on XeTel. Our
contract with XeTel is terminable by either party with 90 days advance written
notice.

During September 1999, we transferred much of the final assembly and test
portion of our product manufacturing process to our internal facilities. In
connection with this transition, which we expect to continue through the end of
fiscal 1999, we have hired additional employees, purchased the necessary
equipment, initiated customer qualification efforts and leased additional
facilities. We believe that bringing our final assembly and test operations
in-house will allow us to reduce our total per unit manufacturing costs and
provide us with greater flexibility to respond to changes in customer demand. As
the needs of our customers continue to evolve, we plan to reassess our
manufacturing requirements on a periodic basis and address changes as we deem
necessary.

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

RESEARCH AND DEVELOPMENT

We believe that our research and development efforts are essential to our
ability to successfully deliver innovative products that address the needs of
our customers as the I/O routing market evolves. Our research and development
team works closely with our marketing and sales team and OEMs to define product
features and performance. Development activities are conducted with extensive
validation testing at both our company and at our major customers.

Research and development programs that are currently underway focus on our
I/O routing initiatives:

- SCSI-to-Fibre Channel storage routing: Increased connectivity and port
density, improved manageability, broader interoperability and higher
performance products;

- Active Fabric software: Modular software focused on the development of
enhanced SAN features, including server-free backup, "intelligent" data
management and data movement;

- SAN-to-WAN I/O routing: Fibre Channel-to-asynchronous transfer mode
router products to enable connectivity of multiple SANs over a wide area
network; and

45
<PAGE> 46

- System I/O routing: Technology development focused on multi-protocol I/O
routing products for System I/O connecting to SCSI, Fibre Channel and
asynchronous transfer mode.

In developing our products, we recognize the importance of product
compatibility with existing and emerging I/O standards. In particular, Intel has
provided technical and consulting support to help us develop NGIO-enabled
versions of our storage routers, and will continue to provide technical and
consulting support for us in developing products based on the System I/O
standard. Four of our senior engineers are actively engaged in development of
industry standards which allows us to focus our product strategies in areas that
are aligned with those standards. Additionally, members of our development team
have experience in developing and protecting intellectual property. We believe
we have developed a strong intellectual property base in I/O routing and have
filed patents in that regard.

Our research and development expenses were $2.3 million in fiscal 1998 and
$3.5 million the nine months ended July 31, 1999. At July 31, 1999, we employed
24 software engineers and 16 hardware engineers.

OUR COMPETITION

- 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.

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. It is also possible that OEM customers
could develop and introduce products competitive with our product offerings.
Furthermore, we have licensed our 4200 storage router technology to
Hewlett-Packard, one of our OEM customers and a stockholder of our company.
While to date this OEM has not introduced competitive products based on this
technology, this OEM could potentially do so in the future.

We believe the competitive factors in the storage router market include the
following:

- OEM endorsement;

- product reliability and verified interoperability;

- customer service and technical support;

- product performance and features;

- brand awareness and credibility;

- ability to meet delivery schedules;

- strength of distribution channel; and

- price.

46
<PAGE> 47

INTELLECTUAL PROPERTY

We rely on a combination of patents, trademarks and trade secrets, as well
as confidentiality agreements and other contractual restrictions with employees
and third parties, to establish and protect our proprietary rights. Despite
these precautions, the measures we undertake may not be adequate to protect our
proprietary technology and may not preclude competitors from independently
developing products with functionality or features similar to our products. We
currently have one patent issued and 10 patent applications pending in the
United States with respect to our technology. We also have five patents pending
under the Patent Cooperation Treaty with the intent of filing in additional
countries. One of our patent applications pending under the Patent Cooperation
Treaty has a number of claims for which a favorable opinion of allowability has
been provided by the International Preliminary Examining Authority. However,
none of our patents, including patents that may be issued in the future, may
adequately protect our technology from infringement or prevent others from
claiming that our technology infringes that of third parties. Failure to protect
our intellectual property could materially harm our business. In addition, our
competitors may independently develop similar or superior technology.

We have issued a license to Hewlett-Packard under which they may license
our 4200 storage router technology. This license allows Hewlett-Packard to
create and incorporate into their own products modifications and derivative
works of this licensed technology. This license expires in April 2001 but will
automatically renew for successive one year periods after that date unless it is
terminated by either party.

We have registered the trademark "CROSSROADS" in the United States. The
trademark "CROSSROADS SYSTEMS" has been allowed in the United States. We have
filed a trademark registration application for "ACTIVE FABRIC" in the United
States. All other trademarks, service marks or trade names referred to in this
prospectus are the property of their respective owners.

EMPLOYEES

At July 31, 1999, we had 114 employees, with 40 engaged in research and
development; 20 in manufacturing; 16 in sales; 18 in marketing and customer
support; and 20 in administration, information technology and finance. None of
our employees are represented by a labor union. We have not experienced any work
stoppages and consider our relations with our employees to be good.

FACILITIES

Our corporate headquarters facility consists of approximately 24,000 square
feet in Austin, Texas. We lease our corporate headquarters facility pursuant to
a lease agreement that expires in December 2003. We recently entered into a
lease for our new corporate headquarters facility, consisting of 63,548 square
feet in Austin, Texas, which will commence in February 2000. The lease for our
new facility expires in January 2006. We currently intend to terminate the lease
for our existing headquarters facility shortly after we move to our new
facility.

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

We also maintain sales offices, each with 400 square feet or less, in
Boston, Massachusetts; Boulder, Colorado; and San Diego, California.

LITIGATION

We are not party to any legal proceedings.

47
<PAGE> 48

MANAGEMENT

EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEE

The following table sets forth certain information concerning our executive
officers, directors and a key employee:

<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ---- --- -----------
<S> <C> <C>
Executive Officers and Directors
Brian R. Smith............................... 34 Chief Executive Officer and Chairman of the
Board of Directors
James H. Moore............................... 61 President and Chief Operating Officer
Reagan Y. Sakai.............................. 40 Vice President, Chief Financial Officer,
Secretary and Treasurer
Robert F. LiVolsi............................ 47 Senior Vice President of Sales and Marketing
John R. Middleton............................ 42 Vice President of Engineering
Allen E. Sockwell............................ 39 Vice President of Human Resources
Richard D. Eyestone(1)....................... 53 Director
Wo Overstreet(1)............................. 49 Director
David L. Riegel(2)........................... 61 Director
William P. Wood(2)........................... 43 Director
Key Employee
T. Dale Quisenberry.......................... 40 Vice President of Corporate Accounts
</TABLE>

- ---------------

(1) Member of the compensation committee

(2) Member of the audit committee

Executive Officers and Directors

Brian R. Smith, a co-founder of Crossroads, has served as our Chief
Executive Officer and Chairman of the Board of Directors since our inception in
April 1995. From inception until October 1997, Mr. Smith also served as our
President. From October 1994 to April 1995, Mr. Smith was President of a
consulting services company. From January 1985 to October 1994, Mr. Smith held
various development and management positions at IBM. Among other things, he led
the development of IBM's Fibre Channel products and FDDI products and worked on
several ESCON projects. He was also a technical representative for IBM on the
Fibre Channel Systems Initiative for TCP/IP and SCSI. Mr. Smith has served on
the American National Standards Institute committee developing many Fibre
Channel standards since 1992. Mr. Smith holds a B.S.E.E. from the University of
Cincinnati and an M.S.E.E. from Purdue University.

James H. Moore has served as our President and Chief Operating Officer
since October 1997. From October 1996 to October 1997, Mr. Moore served as Vice
President and General Manager at Cirrus Logic, a linear circuit and mixed-signal
chip manufacturer. From October 1993 to October 1996, Mr. Moore served as a
Director of Computer Products at Analog Devices, an integrated circuit
manufacturer. From 1966 to 1990, Mr. Moore was employed by Texas Instruments
where he last served as Vice President -- General Manager for Texas
Instruments-Mexico. Mr. Moore holds a B.S.E.E. from Christian Brothers
University and an M.B.A. from Southern Methodist University.

Reagan Y. Sakai has served as our Vice President, Chief Financial Officer,
Secretary and Treasurer since May 1999. From August 1996 to April 1999, he
served as the Director of Corporate Finance and as Division Controller of the
Eagle Product Division at Exabyte, a public data storage company. From April
1994 to July 1996, he served as Director of Corporate Financial Planning and
Analysis at Maxtor, a disk

48
<PAGE> 49

drive company. Prior to that, he held various management positions at McDATA and
StorageTek. Mr. Sakai holds a B.S. in finance and an M.B.A., both from the
University of Colorado.

Robert F. LiVolsi has served as our Vice President of Sales and Marketing
since April 1998. From August 1995 to January 1998, Mr. LiVolsi was Vice
President and General Manager of the Eagle Division at Exabyte Corporation. From
February 1991 to August 1995, Mr. LiVolsi served as Vice President of Sales and
Marketing for Hewlett-Packard's Colorado Memory Systems subsidiary. Mr. LiVolsi
holds a B.A. in political science from Kent State University.

John R. Middleton has served as our Vice President of Engineering since
July 1999. From February 1997 to July 1999, Mr. Middleton served as our Senior
Director of Engineering. From November 1995 to January 1997, Mr. Middleton
served as an Engineering Manager at Compaq, where he managed the development of
LAN switches and hubs. From July 1992 to November 1995, he served as an
Engineering Manager at Thomas-Conrad Corporation, a networking company. Mr.
Middleton holds a B.S.E.E. from the University of Texas at Austin.

Allen E. Sockwell joined us as our Vice President of Human Resources in
September 1999. From October 1998 to August 1999, Mr. Sockwell served as Vice
President of Human Resources, and from February 1996 to October 1998 as Director
of Human Resources, at Compaq, where he managed human resources activities for
Compaq's global supply chain management and manufacturing operations. From June
1982 to February 1996, Mr. Sockwell was employed by IBM where he last served as
Manager of Human Resources for a semiconductor design and fabrication facility.
Mr. Sockwell holds a B.S. in general management from Purdue University.

Richard D. Eyestone has served as a member of our board of directors since
May 1999. From 1993 to September 1996, Mr. Eyestone was employed at Bay Networks
as Vice President of Sales and, from September 1996 to September 1998, as Senior
Vice President of Market and Product Management. Mr. Eyestone currently serves
on the board of directors of eSoft, Inc. and several private companies. Mr.
Eyestone holds a B.S.E. in education from Drake University and an M.B.A. from
the University of Iowa.

Wo Overstreet has served as a member of our board of directors since March
1997. Since January 1998, Ms. Overstreet has served as the President and Chief
Executive Officer of Creative Design Solutions, a network-attached storage
solution company. From December 1995 to September 1997, she served as Vice
President of Corporate Development and Vice President of Marketing and Sales of
McDATA, a subsidiary of EMC Corporation. From February 1992 to May 1995, Ms.
Overstreet served as a senior staff member for the Chief Operating Officer of
Exabyte. Ms. Overstreet serves on the board of directors of several private
companies. Ms. Overstreet holds a B.A. in philosophy and math from John Carroll
University.

David L. Riegel has served as a member of our board of directors since
November 1997. From November 1992 to September 1997, Mr. Riegel served as Chief
Operating Officer of Exabyte Corporation. Mr. Riegel has served on the board of
directors of Bolder Technologies Corporation, an energy technology company
involved in the development of rechargeable battery systems, since May 1992. Mr.
Riegel holds a B.S.E.E. from Purdue University.

William P. Wood has served as a member of our board of directors since
December 1996. Since 1984, Mr. Wood has been a general partner and, for funds
created since 1996, a special limited partner, of various funds associated with
Austin Ventures, a venture capital firm located in Austin, Texas. Mr. Wood
serves on the board of directors of Intelliquest Information Corp. and several
private companies. Mr. Wood holds a B.A. in history from Brown University and an
M.B.A. from Harvard University.

Key Employee

T. Dale Quisenberry, a co-founder of Crossroads, has served as our Vice
President of Corporate Accounts since March 1999. From January 1998 to March
1999, he served as our Vice President of Corporate Resources, and from September
1996 to December 1997, as our Vice President of Finance and
49
<PAGE> 50

Administration. From April 1995 to September 1996, Mr. Quisenberry served as the
Vice President of Sales and Marketing at our predecessor, Infinity Commstor,
LLC. From October 1994 to April 1995, Mr. Quisenberry was Vice President of a
consulting services company. Mr. Quisenberry also served as our Secretary from
our inception until May 1999.

CLASSIFIED BOARD OF DIRECTORS

At the first annual meeting of stockholders following the closing of our
initial public offering, our board of directors will be divided into three
classes of directors, as nearly equal in size as is practicable, to serve
staggered three-year terms:

- Class I, whose term will expire at the annual meeting of stockholders to
be held in fiscal 2001;

- Class II, whose term will expire at the annual meeting of stockholders to
be held in fiscal 2002; and

- Class III, whose term will expire at the annual meeting of stockholders
to be held in fiscal 2003.

Upon expiration of the term of a class of directors, the directors for that
class will be elected for three-year terms at the annual meeting of stockholders
in the year in which their term expires. Each director's term is subject to the
election and qualification of his or her successor, or his or her earlier death,
resignation or removal.

COMMITTEES OF THE BOARD OF DIRECTORS

Our board of directors has established an audit committee and a
compensation committee.

Audit Committee. The audit committee reports to the board of directors with
regard to the selection of our independent auditors, the scope of our annual
audits, fees to be paid to the auditors, the performance of our independent
auditors, compliance with our accounting and financial policies, and
management's procedures and policies relative to the adequacy of our internal
accounting controls. The members of the audit committee are Messrs. Riegel and
Wood.

Compensation Committee. The compensation committee reviews and makes
recommendations to the board regarding our compensation policies and all forms
of compensation to be provided to our directors, executive officers and certain
other employees. In addition, the compensation committee reviews bonus and stock
compensation arrangements for all of our other employees. The compensation
committee also administers our stock option and stock purchase plans. The
members of the compensation committee are Mr. Eyestone and Ms. Overstreet.

DIRECTOR COMPENSATION

Directors currently do not receive any fees from us for their service as
directors, although by resolution of the board, they may receive a fixed sum and
reimbursement for expenses in connection with their attendance at board and
committee meetings or a stated salary. On November 12, 1997, we granted David L.
Riegel options to purchase 45,000 shares of common stock at a price of $0.23 per
share.

In August 1999, the disinterested members of our board of directors
accelerated the vesting of all unvested stock options of Ms. Overstreet and Mr.
Riegel. 29,063 options held by Ms. Overstreet and 31,876 options held by Mr.
Riegel became immediately vested.

Non-employee directors will receive option grants at periodic intervals
under the automatic option grant program of our 1999 Stock Incentive Plan.
Non-employee and employee directors will also be eligible to receive option
grants under the discretionary option grant program of the 1999 plan. Under the
automatic option grant program, each individual who first becomes a non-employee
board member at any time after this offering will receive an option grant to
purchase 15,000 shares of common stock on the date such individual joins the
board. In addition, on the date of each annual stockholders meeting held after
this offering, each non-employee board member who continues to serve as a
non-employee board member

50
<PAGE> 51

will automatically be granted an option to purchase 5,000 shares of common
stock, provided such individual has served on the board for at least six months.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

None of our executive officers serves as a member of the board of directors
or compensation committee of any entity that has one or more of its executive
officers serving as a member of our board of directors or compensation
committee. Our compensation committee currently consists of Mr. Eyestone and Ms.
Overstreet, neither of whom currently serves or has previously served as an
officer or employee of our company. During the past year, the full board of
directors performed the functions generally performed by the compensation
committee of the board.

Mr. Wood, a member of our board of directors, is a general partner of the
general partner of two investment funds, and a special limited partner of the
general partner of one investment fund, all of which are affiliated with Austin
Ventures and have invested in us. In September 1998, Austin Ventures IV-A, L.P.
and Austin Ventures IV-B, L.P. purchased an aggregate of 250,000 shares of our
Series C preferred stock at a price of $4.00 per share. Mr. Wood is a general
partner of AV Partners IV, L.P., the general partner of each of Austin Ventures
IV-A, L.P. and Austin Ventures IV-B, L.P. In August 1999, Austin Ventures VI,
L.P. purchased 200,000 shares of our Series E preferred stock at a price of
$15.00 per share. Mr. Wood is a special limited partner of AV Partners VI, L.P.,
the general partner of Austin Ventures VI, L.P. Although the number of shares of
Series C preferred stock and Series E preferred stock outstanding was not
affected by the 3-for-2 split of our common stock, as a result of the stock
split, each share of Series C preferred stock and Series E preferred stock
automatically adjusted and became convertible into 1.5 shares of our common
stock. Accordingly, the 250,000 shares of Series C preferred stock and 200,000
shares of Series E preferred stock will automatically convert into 375,000
shares and 300,000 shares of our common stock, respectively, upon the
consummation of this offering, and the effective purchase price per share of the
common stock to be received upon such conversion will be $2.67 for the Series C
preferred stock and $10.00 for the Series E preferred stock. Austin Ventures
IV-A, L.P. and Austin Ventures IV-B, L.P. also own an aggregate of 3,934,783
shares of our Series A preferred stock and Series B preferred stock, which
automatically will convert into 5,922,175 shares of our common stock upon the
consummation of this offering. See "Certain Transactions" and "Principal and
Selling Stockholders."

Mr. Smith, our chief executive officer, is a member of our board of
directors, which performed the functions generally performed by the compensation
committee of the board during the past year. However, Mr. Smith did not
participate in any discussions regarding his compensation.

LIMITATION OF LIABILITY AND INDEMNIFICATION

Our certificate of incorporation limits the liability of our directors to
us or our stockholders for breaches of the directors' fiduciary duties to the
fullest extent permitted by Delaware law. In addition, our certificate of
incorporation and bylaws provide for mandatory indemnification of directors and
officers to the fullest extent permitted by Delaware law. We also maintain
directors' and officers' liability insurance and enter into indemnification
agreements with all of our directors and executive officers.

51
<PAGE> 52

EXECUTIVE COMPENSATION

The following table provides the total compensation paid to our chief
executive officer and our other executive officers whose compensation (salary
and bonus) exceeded $100,000 in fiscal 1998.

SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION ------------
----------------------------------------- SECURITIES
OTHER ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION SALARY ($) BONUS ($) COMPENSATION ($) OPTIONS (#)
- --------------------------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C>
Brian R. Smith............................ $150,000 $2,000 -- --
Chief Executive Officer
James H. Moore............................ 200,000 -- 1,015(1) 570,000
President and Chief Operating Officer
Robert F. LiVolsi......................... 100,849 9,420 -- 187,500
Senior Vice President of Sales and
Marketing
T. Dale Quisenberry(2).................... 120,000 -- -- --
Vice President
</TABLE>

- ---------------

(1) Represents the amount we paid in premiums for a life insurance policy for
Mr. Moore.

(2) Mr. Quisenberry served as an executive officer in fiscal 1998. He ceased to
be an executive officer in March 1999.

OPTION GRANTS IN LAST FISCAL YEAR

The following table provides information concerning individual grants of
stock options made during fiscal 1998 to each of our executive officers named in
the Summary Compensation Table. We have never granted any stock appreciation
rights.

The exercise prices represent our board's estimate of the fair market value
of the common stock on the grant date. In establishing these prices, our board
considered many factors, including our financial condition and operating
results, recent transactions and the market for comparable stocks.

The amounts shown as potential realizable value represent hypothetical
gains that could be achieved for the respective options if exercised at the end
of the option term. These amounts represent certain assumed rates of
appreciation in the value of our common stock. The 5% and 10% assumed annual
rates of compounded stock price appreciation are mandated by rules of the
Securities and Exchange Commission and do not represent our estimate or
projection of the future price of our common stock. The potential realizable
value is calculated based on the ten year term of the option at its time of
grant. It is calculated based on the assumption that our initial public offering
price, $18.00 per share, appreciates at the indicated annual rate compounded
annually for the entire term of the option and that the option is exercised and
sold on the last day of its term for the appreciated stock price. Actual gains,
if any, on stock option exercises depend on the future performance of our common
stock. The amounts reflected in the table may not necessarily be achieved.

We granted these options under our 1996 Stock Option/Stock Issuance Plan.
Each option has a maximum term of ten years, subject to earlier termination if
the optionee's services are terminated. Except as otherwise noted, these options
are immediately exercisable, but we have the right to repurchase, at the
exercise price, any shares that have not vested at the time the optionee
terminates employment with us. The percentage of total options granted to our
employees in the last fiscal year is based on options to purchase an aggregate
of 1,273,500 shares of common stock granted during fiscal 1998. The following
table sets forth information concerning the individual grants of stock options
to each of our named executive officers in fiscal 1998.

52
<PAGE> 53

OPTION GRANTS IN FISCAL 1998

<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------- OF ASSUMED ANNUAL RATES
PERCENT OF TOTAL OF STOCK PRICE APPRECIATION
NUMBER OF SECURITIES OPTIONS GRANTED EXERCISE FOR OPTION TERM
UNDERLYING OPTIONS TO EMPLOYEES PRICE EXPIRATION ---------------------------
NAME GRANTED(#)(1) IN FISCAL 1998(%) PER SHARE DATE 5%($) 10%($)
- ---- -------------------- ----------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Brian R. Smith....... -- -- -- -- -- --
James H. Moore....... 570,000(2) 44.8% $0.233 11/11/07 $16,579,649 $26,478,988
Robert F. LiVolsi.... 187,500(3) 14.7 0.233 05/12/08 5,453,832 8,710,193
T. Dale
Quisenberry........ -- -- -- -- -- --
</TABLE>

- ---------------

(1) These options are fully exercisable but if the employee leaves us before he
has vested in his option shares, we have the right to repurchase, at the
exercise price, any shares that have not vested.

(2) These options vested as to 25% on October 1, 1998 and vest as to the
remaining 75% in equal quarterly installments over the following 12
quarters.

(3) These options vested as to 25% on April 6, 1999 and vest as to the remaining
75% in equal quarterly installments over the following 12 quarters.

FISCAL YEAR-END OPTION VALUES

The following table provides information about stock options held as of
October 31, 1998 by each of our executive officers named in the Summary
Compensation Table. None of these executive officers exercised any options in
fiscal 1998. Actual gains on exercise, if any, will depend on the value of our
common stock on the date on which the shares are sold.

FISCAL 1998 OPTION VALUES

<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
OCTOBER 31, 1998(#) OCTOBER 31, 1998($)(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Brian R. Smith........................... -- -- -- --
James H. Moore(2)........................ 570,000 -- $10,127,190 --
Robert F. LiVolsi(3)..................... 187,500 -- 3,331,313 --
T. Dale Quisenberry...................... -- -- -- --
</TABLE>

- ---------------

(1) There was no public trading market for our common stock as of October 31,
1998. Accordingly, we have based the value of unexercised in-the-money
options at October 31, 1998 on our initial public offering price of $18.00
per share, less the applicable exercise price per share, multiplied by the
number of shares underlying the options. Actual gains on exercise, if any,
will depend on the value of our common stock on the date on which the shares
are sold.

(2) As of October 31, 1998, Mr. Moore's options were exercisable as to all
570,000 shares, 142,500 of which were vested and 427,500 of which were
unvested. If Mr. Moore leaves us before all of his option shares vest, we
have the right to repurchase the unvested option shares at the exercise
price paid per share.

(3) As of October 31, 1998, Mr. LiVolsi's options were exercisable as to all
187,500 shares, none of which had vested. If Mr. LiVolsi leaves us before
all of his option shares vest, we have the right to repurchase the unvested
shares at the exercise price paid per share.

1999 STOCK INCENTIVE PLAN

Introduction. The 1999 Stock Incentive Plan is the successor program to our
1996 Stock Option/ Stock Issuance Plan. The 1999 plan was adopted by our board
of directors and has been approved by our stockholders. The 1999 plan became
effective immediately upon the signing of the underwriting agreement

53
<PAGE> 54

for this offering. At that time, all outstanding options under the 1996 plan
transferred to the 1999 plan, and no further option grants will be made under
the 1996 plan. The transferred options will continue to be governed by their
existing terms, unless our compensation committee decides to extend one or more
features of the 1999 plan to those options. Except as otherwise noted below, the
transferred options have substantially the same terms as will be in effect for
grants made under the discretionary option grant program of our 1999 plan.

Share reserve. 3,868,923 shares of our common stock have been authorized
for issuance under the 1999 plan. This share reserve consists of the number of
shares carried over from the 1996 plan plus an additional increase of 1,500,000
shares. The share reserve under our 1999 plan will automatically increase on the
first trading day in January of each calendar year, beginning with calendar year
2001, by an amount equal to two percent (2%) of the total number of shares of
our common stock outstanding on the last trading day of December in the prior
calendar year, but in no event will this annual increase exceed 500,000 shares.
In addition, no participant in the 1999 plan may be granted stock options,
separately exercisable stock appreciation rights or direct stock issuances for
more than 500,000 shares of common stock in total in any calendar year.

Programs. Our 1999 plan has five separate programs:

- the discretionary option grant program, under which eligible employees
may be granted options to purchase shares of our common stock at an
exercise price not less than the fair market value of those shares on the
grant date;

- the stock issuance program, under which eligible individuals may be
issued shares of common stock directly, upon the attainment of
performance milestones, the completion of a specified period of service
or as a bonus for past services;

- the salary investment option grant program, under which our executive
officers and other highly compensated employees may be given the
opportunity to apply a portion of their base salary each year to the
acquisition of special below-market stock option grants;

- the automatic option grant program, under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to the fair market value of those shares on the grant date; and

- the director fee option grant program, under which our non-employee board
members may be given the opportunity to apply a portion of any retainer
fee otherwise payable to them in cash each year to the acquisition of
special below-market option grants.

Eligibility. The individuals eligible to participate in our 1999 plan
include our officers and other employees, our non-employee board members and any
consultants we hire.

Administration. The discretionary option grant and stock issuance programs
will be administered by our compensation committee. This committee will
determine which eligible individuals are to receive option grants or stock
issuances under those programs, the time or times when the grants or issuances
are to be made, the number of shares subject to each grant or issuance, the
status of any granted option as either an incentive stock option or a
nonstatutory stock option under the federal tax laws, the vesting schedule to be
in effect for the option grant or stock issuance and the maximum term for which
any granted option is to remain outstanding. The compensation committee will
also have the authority to select the executive officers and other highly
compensated employees who may participate in the salary investment option grant
program in the event that program is put into effect for one or more calendar
years.

Plan features. Our 1999 plan includes the following features:

- The exercise price for any options granted under the plan may be paid in
cash or in shares of our common stock valued at the fair market value on
the exercise date. The option may also be exercised through a same-day
sale program without any cash outlay by the optionee.
54
<PAGE> 55

- The compensation committee has the authority to cancel outstanding
options under the discretionary option grant program, including any
transferred options from our 1996 plan, in return for the grant of new
options for the same or different number of option shares with an
exercise price per share based upon the fair market value of our common
stock on the new grant date.

- Stock appreciation rights may be issued to certain officers subject to
Section 16 of the Securities Exchange Act of 1934 under the discretionary
option grant program. These rights will provide the holders with the
election to surrender their outstanding options for a payment from us
equal to the fair market value of the shares subject to the surrendered
options less the exercise price payable for those shares. We may make the
payment in cash or in shares of our common stock. None of the options
under our 1996 plan have any stock appreciation rights.

Change in control. The 1999 plan includes the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:

- In the event that we are acquired by merger or asset sale or
board-approved sale by the stockholders of more than 50% of our
outstanding voting stock, each outstanding option under the discretionary
option grant program which is not to be assumed by the successor
corporation or otherwise continued in effect will immediately become
exercisable for all the option shares, and all outstanding unvested
shares will immediately vest, except to the extent our repurchase rights
with respect to those shares are to be assigned to the successor
corporation or otherwise continued in effect.

- The compensation committee will have complete discretion to grant one or
more options which will become exercisable for all the option shares in
the event those options are assumed in the acquisition but the optionee's
service with us or the acquiring entity is subsequently involuntarily
terminated. The vesting of any outstanding shares under our 1999 plan may
be accelerated upon similar terms and conditions.

- The compensation committee may grant options and structure repurchase
rights so that the shares subject to those options or repurchase rights
will immediately vest in connection with a hostile take-over effected
through a successful tender offer for more than 50% of our outstanding
voting stock or a change in the majority of our board through one or more
contested elections. Such accelerated vesting may occur either at the
time of such transaction or upon the subsequent termination of the
optionee's services.

- The options currently outstanding under our 1996 plan will immediately
vest in the event we are acquired by merger or asset sale, unless those
options are assumed by the acquiring entity or our repurchase rights with
respect to any unvested shares subject to those options are assigned to
such entity. If the options are so assumed by the acquiring entity and
our repurchase rights are so assigned to such entity, then no accelerated
vesting will occur at the time of the acquisition but the options will
accelerate and vest in full upon an involuntary termination of the
optionee's employment within 18 months following the acquisition.

Salary investment option grant program. In the event the compensation
committee decides to put this program into effect for one or more calendar
years, each of our executive officers and other highly compensated employees may
elect to reduce his or her base salary for the calendar year by an amount not
less than $5,000 nor more than $50,000. Each selected individual who makes such
an election will automatically be granted, on the first trading day in January
of the calendar year for which his or her salary reduction is to be in effect,
an option to purchase that number of shares of common stock determined by
dividing the salary reduction amount by two-thirds of the fair market value per
share of our common stock on the grant date. Each option will have an exercise
price per share equal to one-third of the fair market value of the option shares
on the grant date. As a result, the option will be structured so that the fair
market value of the option shares on the grant date less the exercise price
payable for those shares will be equal to the amount of the salary reduction.
The option will become exercisable in a series

55
<PAGE> 56

of twelve equal monthly installments over the calendar year for which the salary
reduction is to be in effect.

Automatic option grant program. Each individual who first becomes a
non-employee board member at any time after the effective date of this offering
will receive an option grant to purchase 15,000 shares of common stock on the
date such individual joins the board. In addition, on the date of each annual
stockholders meeting held after the effective date of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member, including each of our current non-employee board members, will
automatically be granted an option to purchase 5,000 shares of common stock,
provided such individual has served on the board for at least six months.

Each automatic grant will have an exercise price per share equal to the
fair market value per share of our common stock on the grant date and will have
a term of 10 years, subject to earlier termination following the optionee's
cessation of board service. The option will be immediately exercisable for all
of the option shares; however, we may repurchase, at the exercise price paid per
share, any shares purchased under the option which are not vested at the time of
the optionee's cessation of board service. The shares subject to each initial
15,000-share automatic option grant will vest in a series of four successive
annual installments upon the optionee's completion of each year of board service
over the four-year period measured from the grant date. The shares subject to
each annual 5,000-share automatic grant will vest upon the optionee's completion
of one year of service measured from the grant date. However, the shares will
immediately vest in full upon certain changes in control or ownership or upon
the optionee's death or disability while then serving as a board member.

Director fee option grant program. If this program is put into effect in
the future, then each non-employee board member may elect to apply all or a
portion of any cash retainer fee for the year to the acquisition of a
below-market option grant. The option grant will automatically be made on the
first trading day in January of the calendar year for which the non-employee
board member would otherwise be paid the cash retainer fee in the absence of his
or her election. The option will have an exercise price per share equal to
one-third of the fair market value of the option shares on the grant date, and
the number of shares subject to the option will be determined by dividing the
amount of the retainer fee applied to the program by two-thirds of the fair
market value per share of our common stock on the grant date. As a result, the
option will be structured so that the fair market value of the option shares on
the grant date less the exercise price payable for those shares will be equal to
the portion of the retainer fee applied to that option. The option will become
exercisable in a series of twelve equal monthly installments over the calendar
year for which the election is in effect. However, the option will become
immediately exercisable for all the option shares upon the death or disability
of the optionee while then serving as a board member.

Additional program features. Our 1999 plan also has the following features:

- Outstanding options under the salary investment and director fee option
grant programs will immediately vest if we are acquired by a merger or
asset sale or if there is a successful tender offer for more than 50% of
our outstanding voting stock or a change in the majority of our board
through one or more contested elections.

- Limited stock appreciation rights will automatically be included as part
of each grant made under the salary investment option grant program and
the automatic and director fee option grant programs, and these rights
may also be granted to one or more officers as part of their option
grants under the discretionary option grant program. Options with this
feature may be surrendered to us upon the successful completion of a
hostile tender offer for more than 50% of our outstanding voting stock.
In return for the surrendered option, the optionee will be entitled to a
cash distribution from us in an amount per surrendered option share based
upon the highest price per share of our common stock paid in that tender
offer.

- The board may amend or modify the 1999 plan at any time, subject to any
required stockholder approval. The 1999 plan will terminate no later than
September 30, 2009.

56
<PAGE> 57

CHANGE IN CONTROL ARRANGEMENTS

If we are acquired in a stockholder-approved transaction, whether by merger
or asset sale, then all of the outstanding options granted under our 1996 plan,
including those held by our executive officers, will accelerate in full, unless
those options are assumed by the successor company and our repurchase rights
with respect to unvested option shares are assigned to that company. In
addition, if the optionee's employment is terminated other than for cause within
18 months after the acquisition, the options will accelerate and become fully
vested, and such options may be exercised at any time prior to the earlier of
the expiration date of the option or one year after such termination without
cause.

EMPLOYEE STOCK PURCHASE PLAN

Introduction. Our Employee Stock Purchase Plan was adopted by our board of
directors and has been approved by our stockholders. The plan became effective
immediately upon the signing of the underwriting agreement for this offering.
The plan is designed to allow our eligible employees and the eligible employees
of our participating subsidiaries to purchase shares of common stock, at
semi-annual intervals, with their accumulated payroll deductions.

Share reserve. 450,000 shares of our common stock initially have been
reserved for issuance. The reserve will automatically increase on the first
trading day of January in each calendar year, beginning in calendar year 2001,
by an amount equal to one percent (1%) of the total number of outstanding shares
of our common stock on the last trading day of December in the prior calendar
year. In no event will any such annual increase exceed 250,000 shares.

Offering periods. The plan has a series of successive offering periods,
each with a maximum duration of 24 months. The initial offering period began on
the date of the signing of the underwriting agreement for this offering and ends
on the last business day in November 2001. The next offering period will start
on the first business day in December 2001, and subsequent offering periods will
be set by our compensation committee.

Eligible employees. Individuals scheduled to work more than 20 hours per
week for more than five calendar months per year may join an offering period on
their start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of June and December each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.

Payroll deductions. A participant may contribute up to 15% of his or her
base salary through payroll deductions, and the accumulated deductions will be
applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per share
on the participant's entry date into the offering period or, if lower, 85% of
the fair market value per share on the semi-annual purchase date. Semi-annual
purchase dates will occur on the last business day of May and November each
year. However, a participant may not purchase more than 750 shares on any one
semi-annual purchase date, and no more than 75,000 shares may be purchased in
total by all participants on any one semi-annual purchase date. Our compensation
committee will have the authority to change these limitations for any subsequent
offering period.

Reset feature. If the fair market value per share of our common stock on
any purchase date is less than the fair market value per share on the start date
of the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.

Change in control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior to
the effective date of the acquisition. The purchase price will be equal to 85%
of the market value per share on the participant's entry date into the offering
period in which an acquisition occurs or, if lower, 85% of the fair market value
per share immediately prior to the acquisition.

Termination and amendment of plan. The plan will terminate no later than
the last business day of November 2009. The board may at any time amend, suspend
or discontinue the plan. However, certain amendments may require stockholder
approval.
57
<PAGE> 58

CERTAIN TRANSACTIONS

PRIVATE PLACEMENTS OF EQUITY

5% Stockholders. Since our inception in September 1996, we have raised
capital primarily through the sale of our securities, including:

- In December 1996 and May 1997, we sold an aggregate of 3,500,000 shares
of our Series A preferred stock at a price of $1.00 per share to funds
affiliated with Austin Ventures for an aggregate purchase price of $3.5
million. Concurrently with the closing of the financing, investment funds
affiliated with Austin Ventures became a 5% stockholder and William P.
Wood, a general partner of certain investment funds affiliated with
Austin Ventures, and a special limited partner of other funds associated
with Austin Ventures, became a director on our board of directors.
Although the number of shares of Series A preferred stock outstanding was
not affected by the 3-for-2 split of our common stock, as a result of
this stock split, each share of Series A preferred stock automatically
adjusted and became convertible into 1.5 shares of our common stock.
Accordingly, the 3,500,000 shares of our Series A preferred stock will
automatically convert into 5,250,000 shares of our common stock upon the
consummation of this offering, and the effective purchase price per share
of common stock to be received upon such conversion will be $0.67.

- In August 1997, we sold an aggregate of 2,173,914 shares of our Series B
preferred stock at a price of $2.30 per share to Advanced Digital
Information Corporation and investment funds affiliated with Austin
Ventures for an aggregate purchase price of $5.0 million. Concurrently
with the closing of this financing, ADIC became a 5% stockholder.
Although the number of shares of Series B preferred stock outstanding was
not affected by the 3-for-2 split of our common stock, as a result of
this stock split, each share of Series B preferred stock automatically
adjusted and became convertible into 1.5 shares of our common stock.
Accordingly, the 2,173,914 shares of our Series B preferred stock will
automatically convert into 3,260,871 shares of our common stock upon the
consummation of this offering, and the effective purchase price per share
of common stock to be received upon such conversion will be $1.53.

- In September 1998, we sold an aggregate of 1,000,000 shares of our Series
C preferred stock at a price of $4.00 per share to Hewlett-Packard
Company and investment funds affiliated with Austin Ventures for an
aggregate purchase price of $4.0 million. Concurrently with the closing
of this financing, Hewlett-Packard became a 5% stockholder. Although the
number of shares of Series C preferred stock outstanding was not affected
by the 3-for-2 split of our common stock, as a result of this stock
split, each share of Series C preferred stock automatically adjusted and
became convertible into 1.5 shares of our common stock. Accordingly, the
1,000,000 shares of our Series C preferred stock will automatically
convert into 1,500,000 shares of our common stock upon the consummation
of this offering, and the effective purchase price per share of common
stock to be received upon such conversion will be $2.67.

- In April 1999, we sold an aggregate of 970,210 shares of our Series D
preferred stock at a price of $5.45 per share to Intel Corporation and
Hewlett-Packard Company for an aggregate purchase price of $5.29 million.
Concurrently with the closing of this financing, Intel became a 5%
stockholder. Although the number of shares of Series D preferred stock
outstanding was not affected by the 3-for-2 split of our common stock, as
a result of this stock split, each share of Series D preferred stock
automatically adjusted and became convertible into 1.5 shares of our
common stock. Accordingly, the 970,210 shares of our Series D preferred
stock will automatically convert into 1,455,315 shares of our common
stock upon the consummation of this offering, and the effective purchase
price per share of common stock to be received upon such conversion will
be $3.63.

- In August 1999, we sold an aggregate of 266,667 shares of our Series E
preferred stock at a price of $15.00 per share to Intel Corporation and
investment funds affiliated with Austin Ventures for an aggregate
purchase price of $4.0 million. Although the number of shares of Series E
preferred stock outstanding was not affected by the 3-for-2 split of our
common stock, as a result of this stock split, each share of Series E
preferred stock automatically adjusted and became convertible into
58
<PAGE> 59

1.5 shares of our common stock. Accordingly, the 266,667 shares of our
Series E preferred stock will automatically convert into 400,001 shares
of our common stock upon the consummation of this offering, and the
effective purchase price per share of common stock to be received upon
such conversion will be $10.00.

The following table summarizes the shares of our preferred stock purchased
by our 5% stockholders since our inception and the number of shares of common
stock into which those shares of preferred stock will be converted upon the
consummation of this offering:

<TABLE>
<CAPTION>
SHARES OF SHARES OF SHARES OF SHARES OF SHARES OF AGGREGATE NUMBER OF
SERIES A SERIES B SERIES C SERIES D SERIES E SHARES OF COMMON STOCK
PREFERRED PREFERRED PREFERRED PREFERRED PREFERRED ISSUABLE UPON CONVERSION
INVESTOR STOCK STOCK STOCK STOCK STOCK OF PREFERRED STOCK
- -------- --------- --------- --------- --------- --------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Funds Affiliated with Austin
Ventures..................... 3,500,000 434,783 250,000 -- 200,000 6,577,175
Advanced Digital Information
Corporation.................. -- 1,739,131 -- -- -- 2,608,697
Hewlett-Packard Company........ -- -- 750,000 52,779 -- 1,204,169
Intel Corporation.............. -- -- -- 917,431 66,667 1,476,147
</TABLE>

Registration rights. We have granted the investors in our preferred stock
rights to require us to register or include their shares in a registered
offering of our securities. Please see "Description of Capital
Stock -- Registration Rights" for a description of these registration rights.

OTHER TRANSACTIONS

Advanced Digital Information Corporation. Concurrently with our Series B
preferred stock financing in which Advanced Digital Information Corporation
became a 5% stockholder, we entered into an OEM and Reseller Agreement with
ADIC. This agreement set forth the initial terms and conditions whereby ADIC
purchased our storage router products for use in connection with certain ADIC
products as well as for resale to third parties. Pursuant to this agreement, we
recorded revenue from product sales to ADIC in amounts of $275,000 in fiscal
1997, $800,000 in fiscal 1998, and $309,000 in the first nine months of fiscal
1999. In fiscal 1997, fiscal 1998 and the first nine months of fiscal 1999,
product sales to ADIC accounted for 27%, 25% and 2.6% of our total revenue,
respectively. This agreement expired by its terms in August 1999, and we have no
current plans to enter into a new contract with ADIC. The pricing and other
terms of our relationship with ADIC have been determined through arm's-length
negotiation on terms that we believe are no more favorable than those available
to third parties generally.

Hewlett-Packard Company. In April 1998, we entered into a License Agreement
with Hewlett-Packard, one of our 5% stockholders. Pursuant to this agreement, we
granted Hewlett-Packard a worldwide, non-exclusive, non-transferable,
non-sublicenseable license under which they may license our 4200 storage router
technology including the software and related hardware designs. Under this
license, Hewlett-Packard may incorporate this licensed technology into their
products and may distribute modifications and derivative works of the licensed
technology for use in their products, but may not directly sell our 4200 storage
router. We will continue to own the licensed technology and Hewlett-Packard owns
all rights to the derivative works they create. Additionally, the agreement sets
forth the terms by which Hewlett-Packard will test and qualify our new products,
as well as participate in our new product planning and development process.

We recorded revenue from Hewlett-Packard in amounts of approximately
$100,000 in fiscal 1997 and $500,000 in fiscal 1998. In fiscal 1997 and 1998,
revenue from Hewlett-Packard accounted for 11% and 16% of our total revenue,
respectively. These revenues consist of sales of our products to Hewlett-Packard
as well as royalties from the license we granted to them for our 4200 storage
router technology. In addition, from time to time, we purchase certain
components for our products from Hewlett-Packard. The pricing and other terms of
our relationships with Hewlett-Packard have been determined through arm's-
length negotiation on terms that we believe are no more favorable than those
available to third parties generally.

59
<PAGE> 60

Intel Corporation. Concurrently with our sale of Series D preferred stock
in which Intel became a 5% stockholder, we entered into a Collaboration
Agreement with Intel. Pursuant to this agreement, we intend to collaborate with
Intel on certain technical, public relations and marketing activities.
Specifically, Intel has provided technical and consulting support to help us
develop NGIO-enabled versions of our storage routers, and will continue to
provide technical and consulting support for us in developing products based on
the System I/O standard. Each party has agreed to assume full responsibility for
its own expenses associated with the activities under this agreement. Due to the
nature of this agreement, we are unable to place a monetary value on it.

Transactions with promoters. Upon the formation of our predecessor,
Infinity Commstor, LLC in April 1995, we issued membership interests to Brian R.
Smith and T. Dale Quisenberry in exchange for services and for certain equipment
and technology that we used in the formation of our business operations. In
September 1996, Infinity Commstor was merged into and became Crossroads.
Pursuant to this transaction, we issued Messrs. Smith and Quisenberry 4.8
million and 1.2 million shares of common stock, respectively. Messrs. Smith and
Quisenberry may be deemed to be promoters of our company. Our board, on which
Messrs. Smith and Quisenberry served at the time, valued this equipment and
technology according to its own judgment and did not obtain any independent
third-party valuation in determining the number of shares to issue in exchange
for this equipment and technology.

Stock options granted to executive officers and directors. For more
information regarding the grant of stock options to executive officers and
directors, please see "Management -- Director Compensation" and "-- Executive
Compensation."

Indemnification and insurance. We enter into indemnity agreements with and
purchase directors' and officers' insurance for our directors and executive
officers. For more information, please see "Management -- Limitation of
Liability and Indemnification" and "Description of Capital Stock -- Anti-
Takeover Effects -- Indemnification."

Loans to officers. In May 1999, we made loans to our officers James H.
Moore, Reagan Y. Sakai, Robert F. LiVolsi and John R. Middleton in the amounts
of $216,000, $99,999, $103,750 and $22,250, respectively, to allow each such
individual to exercise certain of his outstanding stock options. Each officer
delivered a full-recourse promissory note to us with respect to his loan. Each
promissory note is secured by the purchased shares and accrues interest at a
rate of 7.0% per annum, compounded semi-annually. Each note becomes due on May
26, 2003, or earlier if the officer leaves us or if the shares securing the
promissory note are sold. We have released 93,000 of the shares which secured
Mr. Moore's note to enable him to transfer these shares for estate planning
purposes. However, the fair market value of the remaining shares which secure
Mr. Moore's note, based on the per share price of our common stock in this
offering, substantially exceeds the $216,000 amount of Mr. Moore's note.

In addition, in September 1997, we loaned Mr. Moore $90,000 pursuant to a
full recourse promissory note that bears interest at the rate of 6.23% per
annum. In the event that Mr. Moore remains employed with us for a period of five
years, we will forgive all principal and accrued interest that is due under this
note.

60
<PAGE> 61

PRINCIPAL AND SELLING STOCKHOLDERS

The following table sets forth information regarding the beneficial
ownership of our common stock as of September 30, 1999, as adjusted to reflect
the sale of common stock offered by us in this offering for:

- each person known by us to beneficially own more than 5% of our common
stock;

- each executive officer named in the Summary Compensation Table on page
52;

- each of our directors; and

- all of our executive officers and directors as a group.

Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting and investment power with
respect to the securities. Except as indicated by footnote, and subject to
applicable community property laws, the persons named in the table have sole
voting and investment power with respect to all shares of common stock shown as
beneficially owned by them. The number of shares of common stock used to
calculate the percentage ownership of each listed person includes the shares of
common stock underlying options or warrants held by such persons that are
exercisable within 60 days of this offering. The percentage of beneficial
ownership before the offering is based on 22,198,423 shares, consisting of
8,598,575 shares of common stock outstanding as of September 30, 1999, and
13,599,848 shares issuable upon the conversion of the preferred stock.
Percentage of beneficial ownership after the offering is based on 25,948,423
shares, including the 3,750,000 shares to be sold in this offering.

Our company and our co-founders, Brain R. Smith and T. Dale Quisenberry,
may sell shares in connection with the exercise of the underwriters'
over-allotment option. Our company may sell up to 287,500 shares, Mr. Smith may
sell up to 200,000 shares, and Mr. Quisenberry may sell up to 75,000 shares. To
the extent the over-allotment option is exercised for less than 275,000 shares,
the shares to be sold will be allocated pro rata between Mr. Smith and Mr.
Quisenberry according to the total number of their shares subject to the
over-allotment option. The post-offering ownership percentages in the table
below do not take into account any exercise of the underwriters' over-allotment
option.

<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
BENEFICIALLY OWNED
--------------------
SHARES BEFORE AFTER
BENEFICIALLY THE THE
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING
------------------------ ------------ -------- ---------
<S> <C> <C> <C>
Executive Officers and Directors:
Brian R. Smith............................................ 4,770,000 21.5% 18.4%
James H. Moore............................................ 660,000 3.0 2.5
Robert F. LiVolsi......................................... 247,500 * *
Richard D. Eyestone....................................... 37,500 * *
Wo Overstreet............................................. 67,500 * *
David L. Riegel........................................... 52,500 * *
William P. Wood........................................... 6,277,175 28.3 24.2
T. Dale Quisenberry....................................... 1,200,000 5.4 4.6
All directors and executive officers as a group (10
persons)............................................... 12,622,175 56.9% 48.6%
Other 5% Stockholders:
Advanced Digital Information Corporation.................. 2,608,697 11.8% 10.1%
Funds affiliated with Austin Ventures..................... 6,577,175 29.6 25.3
Hewlett-Packard Company................................... 1,204,169 5.4 4.6
Intel Corporation......................................... 1,476,147 6.6% 5.7%
</TABLE>

- ---------------
* Indicates beneficial ownership of less than 1% of the total outstanding
common stock.

61
<PAGE> 62

Executive Officers and Directors. Additional information regarding the
beneficial ownership of shares held by our executive officers and directors is
contained below. The address for each executive officer and director, other than
Mr. Wood, is 9390 Research Boulevard, Suite II-300, Austin, Texas 78759.

- Brian R. Smith. These shares include 120,000 shares held in trust for the
benefit of Mr. Smith's children. Mr. Smith disclaims beneficial ownership
for the 120,000 shares held in trust for the benefit of his children.

- James H. Moore. 410,625 of these shares are currently unvested and are
subject to our right to repurchase them if Mr. Moore's services are
terminated prior to vesting.

- Robert F. LiVolsi. 188,907 of these shares are currently unvested and are
subject to our right to repurchase them if Mr. LiVolsi's services are
terminated prior to vesting.

- Richard D. Eyestone. Represents 37,500 shares of common stock issuable
upon exercise of stock options.

- David L. Riegel. These shares include options to purchase 38,437 shares
of common stock that are immediately exercisable.

- William P. Wood. All shares indicated as owned by Mr. Wood are included
due to his affiliation with funds affiliated with Austin Ventures. Mr.
Wood is a general partner of AV Partners IV, L.P., and a general partner
of (a) Austin Ventures IV-A, L.P. and (b) Austin Ventures IV-B, L.P. Mr.
Wood disclaims beneficial ownership of the shares held by Austin Ventures
IV-A, L.P., and Austin Ventures IV-B, L.P., except to the extent of his
pecuniary interest in such shares arising from his general partnership
interest in AV Partners IV, L.P. Mr. Wood is a special limited partner of
AV Partners VI, L.P., a general partner of Austin Ventures VI, L.P., and
as such does not have beneficial ownership of any of the 300,000 shares
owned by Austin Ventures VI, L.P. Mr. Wood's address is c/o Austin
Ventures, 114 West Seventh Street, Suite 1300, Austin, Texas 78701.

- T. Dale Quisenberry. Includes 780,000 shares owned by Mr. Quisenberry and
420,000 shares held in trusts for which Mr. Quisenberry serves as trustee
for the benefit of his children. Mr. Quisenberry disclaims beneficial
ownership for the 420,000 shares held in trust for the benefit of his
children. Mr. Quisenberry ceased to serve as an executive officer in
March 1999.

Other 5% Stockholders. Information regarding the beneficial owners of 5% or
more of our stock is set forth below.

- Funds affiliated with Austin Ventures. Includes (a) 2,026,211 shares held
by Austin Ventures IV-A, L.P.; (b) 4,250,964 shares held by Austin
Ventures IV-B, L.P.; and (c) 300,000 shares held by Austin Ventures VI,
L.P. These partnerships may be deemed to beneficially own each other's
shares because the general partners of each partnership are affiliated.
Each partnership, however, disclaims beneficial ownership of the others'
shares. The general partners of AV Partners IV, L.P., which is the
general partner of Austin Ventures IV-A, L.P. and Austin Ventures IV-B,
L.P. are Joseph C. Aragona, Kenneth DeAngelis, Jeffrey Garvey and William
P. Wood, each of whom disclaims beneficial ownership of the shares except
to the extent of his pecuniary interest, if any. The general partners of
AV Partners VI, L.P., which is the general partner of Austin Ventures VI,
L.P., are Joseph C. Aragona, Kenneth DeAngelis, Jeffrey Garvey, Edward
Olkkola, John D. Thornton and Blaine Wesner, each of whom disclaims
beneficial ownership of the shares except to the extent of his pecuniary
interest, if any. The address of the investment funds affiliated with
Austin Ventures is 114 West Seventh Street, Suite 1300, Austin, Texas
78701.

- Other Addresses. ADIC's address is 10201 Willows Road, Redmond,
Washington 98052. Hewlett-Packard's address is 3000 Hanover Street,
MS20BT, Palo Alto, California 94304-1181. Intel's address is 2200 Mission
College Boulevard, Santa Clara, California 95052.

62
<PAGE> 63

DESCRIPTION OF CAPITAL STOCK

Upon completion of this offering, our authorized capital stock will consist
of 175,000,000 shares of common stock, par value $0.001 per share, and
25,000,000 shares of preferred stock, par value $0.001 per share. The rights and
preferences of the authorized preferred stock may be designated from time to
time by our board of directors. The following summary is qualified by reference
to our certificate of incorporation and our bylaws, forms of which have been
filed as exhibits to the registration statement of which this prospectus is a
part.

COMMON STOCK

As of September 30, 1999, there were 8,598,575 shares of common stock
outstanding that were held of record by 71 stockholders. Holders of our common
stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. The holders of common stock are not entitled to cumulate voting
rights with respect to the election of directors, and as a result, minority
stockholders will not be able to elect directors on the basis of their votes
alone. Subject to limitations under Delaware law and preferences that may apply
to any outstanding shares of preferred stock, holders of common stock are
entitled to receive ratably such dividends or other distribution, if any, as may
be declared by our board of directors out of funds legally available therefor.
In the event of our liquidation, dissolution or winding up, holders of common
stock are entitled to share ratably in all assets remaining after payment of
liabilities, subject to the liquidation preference of any outstanding preferred
stock. The common stock has no preemptive, conversion or other rights to
subscribe for additional securities of Crossroads. There are no redemption or
sinking fund provisions applicable to the common stock. All outstanding shares
of common stock are, and all shares of common stock to be outstanding upon
completion of the offering will be, validly issued, fully paid and
nonassessable. The rights, preferences and privileges of holders of common stock
are subject to, and may be adversely affected by, the rights of the holders of
shares of any series of preferred stock that we may designate and issue in the
future.

PREFERRED STOCK

As of September 30, 1999, there were 9,066,565 shares of preferred stock
outstanding. Upon the closing of this offering, all outstanding shares of
preferred stock will automatically convert into 13,599,848 shares of common
stock. Our board of directors will have the authority, without further action by
the stockholders, to issue up to 25,000,000 shares of preferred stock in one or
more series, to fix the rights, preferences, privileges and restrictions of the
authorized preferred stock and to issue shares of each such series. The issuance
of preferred stock could have the effect of restricting dividends on the common
stock, diluting the voting power for the common stock, impairing the liquidation
rights of the common stock or delaying or preventing our change in control
without further action by the stockholders. At present, we have no plans to
issue any shares of preferred stock.

REGISTRATION RIGHTS

According to the terms of an investors' rights agreement, beginning 180
days after the closing of this offering, some of our stockholders who will hold
in the aggregate 13,599,848 shares of common stock, may require us to file a
registration statement under the Securities Act of 1933 with respect to the
resale of their shares. To demand such registration, investors holding an
aggregate of at least 9,066,565 shares must request that the registration
statement register the resale of at least 6,799,924 shares. We are not required
to effect more than two demand registrations in any twelve-month period.

Additionally, the holders of 19,599,848 shares of common stock, including
our co-founders Brian R. Smith and T. Dale Quisenberry, will have piggyback
registration rights with respect to the future registration of our shares of
common stock under the Securities Act. If we propose to register any shares of
common stock under the Securities Act, the holders of shares having piggyback
registration rights are entitled to receive notice of such registration and are
entitled to include their shares in the registration.

63
<PAGE> 64

At any time after we become eligible to file a registration statement on
Form S-3 under the Securities Act, holders of demand registration rights may
require us to file an unlimited number of registration statements on Form S-3
with respect to their shares of common stock.

These registration rights are subject to conditions and limitations,
including the right of the underwriters of an offering to limit the number of
shares of common stock to be included in the registration. We are generally
required to bear all of the expenses of all registrations under the investors'
rights agreement, except underwriting discounts and commissions. The investors'
rights agreement also contains our commitment to indemnify the holders of
registration rights for losses they incur in connection with registrations under
the agreement. Registration of any of the shares of common stock held by
security holders with registration rights would result in those shares becoming
freely tradeable without restriction under the Securities Act.

ANTI-TAKEOVER EFFECTS

Provisions of Delaware law, our certificate of incorporation, our bylaws
and certain contracts to which we are a party, could have the effect of delaying
or preventing a third party from acquiring us, even if the acquisition would
benefit our stockholders. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of our board of
directors and in the policies formulated by the board of directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of Crossroads. These provisions are designed to
reduce our vulnerability to an unsolicited proposal for a takeover that does not
contemplate the acquisition of all of our outstanding shares, or an unsolicited
proposal for the restructuring or sale of all or part of Crossroads.

Delaware anti-takeover statute. We are subject to the provisions of Section
203 of the Delaware General Corporation Law, an anti-takeover law. Subject to
certain exceptions, the statute prohibits a publicly held Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless:

- prior to such date, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;

- upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding, for purposes of determining the
number of shares outstanding, those shares owned (1) by persons who are
directors and also officers and (2) by employee stock plans in which
employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer; or

- on or after such date, the business combination is approved by the board
of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least 66 2/3% of the outstanding voting stock which is not owned by the
interested stockholder.

For purposes of Section 203, a "business combination" includes a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns, or within three years prior to
the date of determination whether the person is an "interested stockholder," did
own, 15% or more of the corporation's voting stock.

In addition, provisions of our certificate of incorporation and bylaws may
also have an anti-takeover effect. These provisions may delay, defer or prevent
a tender offer or takeover attempt of our company that

64
<PAGE> 65

a stockholder might consider in his or her best interest, including attempts
that might result in a premium over the market price for the shares held by our
stockholders. The following summarizes these provisions.

Classified board of directors. Our certificate of incorporation provides
that at the first annual meeting following the closing of our initial public
offering, our board of directors will be divided into three classes of
directors, as nearly equal in size as is practicable, serving staggered
three-year terms. As a result, approximately one-third of the board of directors
will be elected each year. These provisions, when coupled with the provisions of
our certificate of incorporation and bylaws authorizing our board of directors
to fill vacant directorships or increase the size of our board, may deter a
stockholder from removing incumbent directors and simultaneously gaining control
of the board of directors.

Stockholder action; special meeting of stockholders. Our certificate of
incorporation eliminates the ability of stockholders to act by written consent.
Our bylaws provide that special meetings of our stockholders may be called only
by a majority of our board of directors.

Advance notice requirements for stockholder proposals and director
nominations. Our bylaws provide that stockholders seeking to bring business
before an annual meeting of stockholders, or to nominate candidates for election
as directors at an annual meeting of stockholders, must provide us with timely
written notice of their proposal. To be timely, a stockholder's notice must be
delivered to or mailed and received at our principal executive offices not less
than 120 days before the date we released the notice of annual meeting to
stockholders in connection with the previous year's annual meeting. If, however,
no meeting was held in the prior year or the date of the annual meeting has been
changed by more than 30 days from the date contemplated in the notice of annual
meeting, notice by the stockholder, in order to be timely, must be received a
reasonable time before we release the notice of annual meeting to stockholders.
Our bylaws also specify certain requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders.

Authorized but unissued shares. Our authorized but unissued shares of
common stock and preferred stock are available for our board to issue without
stockholder approval. We may use these additional shares for a variety of
corporate purposes, including future public offerings to raise additional
capital, corporate acquisitions and employee benefit plans. The existence of our
authorized but unissued shares of common stock and preferred stock could render
it more difficult or discourage an attempt to obtain control of our company by
means of a proxy context, tender offer, merger or other transaction.

Supermajority vote provisions. The Delaware General Corporation Law
provides generally that the affirmative vote of a majority of the shares
entitled to vote on any matter is required to amend a corporation's certificate
of incorporation or bylaws, unless a corporation's certificate of incorporation
or bylaws, as the case may be, requires a greater percentage. Our certificate of
incorporation imposes supermajority vote requirements in connection with the
amendment of certain provisions of our certificate of incorporation, including
the provisions relating to the classified board of directors and action by
written consent of stockholders.

Indemnification. Our certificate of incorporation and bylaws require us to
indemnify our directors and officers to the fullest extent permitted by Delaware
law. In addition, our charter limits the personal liability of our board members
for breaches by the directors of their fiduciary duties to the fullest extent
permitted under Delaware law.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, and its address is 40 Wall Street, New York, New York
10005.

NASDAQ NATIONAL MARKET LISTING

Our common stock has been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance, under the trading symbol "CRDS."

65
<PAGE> 66

SHARES ELIGIBLE FOR FUTURE SALE

If our stockholders sell substantial amounts of our common stock in the
public market following this offering, the prevailing market price of our common
stock could decline. Furthermore, because we do not expect any shares will be
available for sale for 180 days after this offering as a result of the
contractual and legal restrictions on resale described below, sales of
substantial amounts of our common stock in the public market after these
restrictions lapse could adversely affect the prevailing market price of the
common stock and our ability to raise equity capital in the future.

Upon the closing of this offering, we will have outstanding an aggregate of
25,948,423 shares of our common stock, based upon the number of shares
outstanding at September 30, 1999 and assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
all shares sold in this offering will be freely tradeable without restriction or
further registration under the Securities Act unless they are purchased by our
"affiliates," as that term is defined in Rule 144 under the Securities Act, or
by Dell U.S.A., L.P. and The Dell Foundation, Inc., each of which has agreed to
restrictions on resale for a 90-day period beginning on the date of this
prospectus. The remaining shares will be eligible for sale in the public market
as follows:

<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
---------------- ----
<C> <S>
3,750,000 After the date of this
prospectus, freely tradeable
shares sold in this offering and
shares saleable under Rule 144(k)
that are not subject to 180-day
lock-up agreements, except that
any shares purchased by Dell
U.S.A., L.P. and The Dell
Foundation, Inc. will be subject
to restrictions on resale for a
90-day period beginning on the
date of this prospectus.

18,321,822 After 180 days from the date of
this prospectus, the 180-day
lock-up is released and these
shares are eligible for sale in
the public market under Rule 144
(subject, in some cases, to
volume limitations), Rule 144(k)
or Rule 701.

3,876,601 After 180 days from the date of
this prospectus, restricted
securities that are held for less
than one year and are not
eligible for sale in the public
market under Rule 144. However,
1,455,315 of these shares will
become eligible for sale in the
public market within 5 days after
the expiration of the lock-up.
</TABLE>

Lock-up agreements. All of our directors and officers and all of our
stockholders and option holders have signed or are otherwise subject to lock-up
agreements under which they have agreed not to transfer or dispose of, directly
or indirectly, any shares of our common stock or any securities convertible into
or exercisable or exchangeable for shares of our common stock for 180 days after
the date of this prospectus. In addition, each of Dell U.S.A., L.P. and The Dell
Foundation, Inc. has agreed to restrictions on resale

66
<PAGE> 67

with respect to any shares purchased by it in the offering for a 90-day period
beginning on the date of this prospectus. Transfers or dispositions can be made
sooner: (a) with the prior written consent of SG Cowen Securities Corporation,
in the case of certain transfers to affiliates who sign identical lock-up
agreements, or (b) if the transfer is a bona fide gift and the donee signs an
identical lock-up agreement. SG Cowen Securities Corporation may, in its sole
discretion, at any time and without prior notice, release all or any portion of
the shares subject to the lock-up agreements.

Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year, including the holding period
of certain prior owners other than affiliates, is entitled to sell within any
three-month period a number of shares that does not exceed the greater of (a) 1%
of the number of shares of our common stock then outstanding, which will equal
approximately 259,484 shares immediately after the offering, or (b) the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the filing of a notice on Form 144 with
respect to that sale. Sales under Rule 144 are also subject to certain
manner-of-sale provisions, notice requirements and the availability of current
public information about us.

Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale and who
has beneficially owned shares for at least two years, including the holding
period of certain prior owners other than affiliates, is entitled to sell those
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Therefore, unless otherwise
restricted, Rule 144(k) shares may be sold immediately upon the closing of this
offering.

Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, each of our directors, officers, employees, consultants or advisors who
purchased shares from us before the date of this prospectus in connection with a
compensatory stock plan or other written compensatory agreement is eligible to
resell such shares 90 days after the effective date of this offering in reliance
on Rule 144, but without compliance with certain restrictions, including the
holding period, contained in Rule 144.

Registration rights. After this offering, the holders of 19,599,848 shares
of our common stock will be entitled to certain rights with respect to the
registration of their shares under the Securities Act. See "Description of
Capital Stock -- Registration Rights." After any such registration of these
shares, such shares will be freely tradeable without restriction under the
Securities Act. These sales could cause the market price of our common stock to
decline.

Stock plans. As of September 30, 1999, options to purchase 1,360,358 shares
of common stock were outstanding under our 1996 plan. After this offering, we
intend to file a registration statement on Form S-8 under the Securities Act of
1933 covering shares of common stock reserved for issuance under our 1999 stock
incentive plan and our employee stock purchase plan. Based on the number of
options outstanding and shares reserved for issuance under our 1999 stock
incentive plan and our employee stock purchase plan, the Form S-8 registration
statement would cover 6,012,403 shares. The Form S-8 registration statement will
become effective immediately upon filing, whereupon, subject to the satisfaction
of applicable exercisability periods, Rule 144 volume limitations applicable to
affiliates and the agreements with the underwriters referred to above, shares of
common stock to be issued upon exercise of outstanding options granted pursuant
to our 1999 stock incentive plan and shares of common stock issued pursuant to
our employee stock purchase plan (to the extent that such shares were not held
by affiliates) will be available for immediate resale in the public market.

67
<PAGE> 68

UNDERWRITING

Crossroads, the selling stockholders and the underwriters named below have
entered into an underwriting agreement with respect to the shares being offered.
Subject to the terms and conditions of the underwriting agreement, each
underwriter has severally agreed to purchase the number of shares indicated in
the following table at the public offering price less the underwriting discounts
and commissions set forth on the cover page of this prospectus. SG Cowen
Securities Corporation, Dain Rauscher Wessels, a division of Dain Rauscher
Incorporated, and Morgan Keegan & Company, Inc. are the representatives of the
underwriters.

<TABLE>
<CAPTION>
NAME AMOUNT
- ---- ----------
<S> <C>
SG Cowen Securities Corporation............................. 1,581,000
Dain Rauscher Wessels....................................... 790,500
Morgan Keegan & Company, Inc................................ 790,500
BancBoston Robertson Stephens Inc........................... 65,000
Bear, Stearns & Co. Inc..................................... 65,000
Deutsche Bank Securities Inc................................ 65,000
Donaldson, Lufkin & Jenrette Securities Corporation......... 65,000
Hambrecht & Quist LLC....................................... 65,000
Salomon Smith Barney Inc.................................... 65,000
McDonald Investments Inc., a KeyCorp Company................ 33,000
Needham & Company, Inc. .................................... 33,000
U.S. Bancorp Piper Jaffray Inc. ............................ 33,000
Sanders Morris Mundy Inc. .................................. 33,000
Scott & Stringfellow, Inc. ................................. 33,000
Suntrust Equitable Securities Corporation................... 33,000
----------
Total............................................. 3,750,000
==========
</TABLE>

The underwriting agreement provides that the obligations of the
underwriters are conditional and may be terminated at their discretion based on
their assessment of the state of the financial markets. The obligations of the
underwriters may also be terminated upon the occurrence of other events
specified in the underwriting agreement. The underwriters are severally
committed to purchase all of the common stock being offered by us if any shares
are purchased, other than those covered by the over-allotment option described
below.

The underwriters propose to offer the common stock directly to the public
at the public offering price set forth on the cover page of this prospectus. The
underwriters may offer the common stock to securities dealers at that price less
a concession not in excess of $0.76 per share. Securities dealers may reallow a
concession not in excess of $0.10 per share to other dealers. After the shares
of the common stock are released for sale to the public, the underwriters may
vary the offering price and other selling terms from time to time.

Our company, Brian R. Smith and T. Dale Quisenberry have granted to the
underwriters an option to purchase up to an aggregate of 287,500, 200,000 and
75,000 additional shares of common stock, respectively, at the public offering
price set forth on the cover of this prospectus to cover over-allotments, if
any. The option is exercisable for a period of 30 days. In the event the
underwriters exercise only a portion of the over-allotment option, such shares
will be allocated first from the shares offered by Messrs. Smith and Quisenberry
on a pro rata basis (up to a total of 275,000 shares) and then by Crossroads. If
the underwriters exercise their over-allotment option, the underwriters have
severally agreed to purchase shares in approximately the same proportion as
shown in the table above.

We and, if the over-allotment option is exercised, the selling stockholders
have agreed to indemnify the underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, and to contribute to payments that
the underwriters may be required to make in respect of those liabilities.

Crossroads, our directors and executive officers, all principal
stockholders and certain other existing stockholders who hold an aggregate of
23,558,781 shares (including 1,360,358 shares issuable pursuant to

68
<PAGE> 69

options, all of which are exercisable within 60 days of October 1, 1999), based
on the number of shares of common stock outstanding as of September 30, 1999,
have agreed with the underwriters or are otherwise subject to agreements which
provide that for a period of 180 days following the date of this prospectus,
they will not dispose of or hedge any shares of common stock or any securities
convertible into or exchangeable for common stock. SG Cowen Securities
Corporation may, in its sole discretion, at any time without prior notice,
release all or any portion of the shares from the restrictions in any such
agreement to which SG Cowen Securities Corporation is a party.

The underwriters have reserved for sale, at the initial public offering
price, up to 175,000 shares of our common stock for some of our vendors,
customers and other people and entities with whom we maintain business
relationships who have expressed an interest in purchasing common stock in the
offering. At our request, the underwriters also have reserved, at the initial
public offering price, up to $3.6 million of common stock for sale to Dell
U.S.A., L.P., an indirect wholly owned subsidiary of Dell Computer Corporation,
and up to $400,000 of common stock for sale to The Dell Foundation, Inc. At the
initial public offering price of $18.00 per share, this represents an aggregate
of 222,222 shares of common stock reserved for sale to these Dell entities. Each
of the Dell entities will agree that, if it purchases any of the shares which
have been reserved for it, it will not sell or otherwise dispose of such shares
for a period of 90 days beginning on the date of this prospectus. The number of
shares available for sale to the general public will be reduced to the extent
these persons purchase the reserved shares. Any reserved shares not purchased
will be offered by the underwriters to the general public on the same terms as
the other shares.

In August 1999, Dain Rauscher Wessels Investors LLC, an affiliate of Dain
Rauscher Wessels, acquired 16,667 shares of Crossroads' Series E preferred stock
at a price of $18.00 per share for an aggregate purchase price of $250,000. Upon
the consummation of this offering, these shares will be converted into 25,000
shares of common stock. In addition, in August 1999 certain individuals
associated with Morgan Keegan & Company, Inc. who have performed services in
connection with this offering and a family trust of one of these individuals
acquired an aggregate of 16,667 shares of Crossroads' Series E preferred stock
at a price of $15.00 per share for an aggregate purchase price of $250,000. Upon
the consummation of this offering, these shares will be converted into 25,000
shares of common stock. We did not split our shares of Series E preferred stock
in our recent 3-for-2 stock split of our common stock; however, each of these
shares automatically adjusted and became convertible into 1.5 shares of our
common stock upon the effectiveness of this split. As a consequence, the
effective purchase price per share of common stock to be received upon such
conversion will be $10.00. With respect to the shares of Crossroads' Series E
preferred stock purchased by parties affiliated and associated with the
underwriters, the difference between this effective purchased price of $10.00
and the public offering price of $18.00 per share, or $8.00 per share, may be
deemed to constitute underwriting discounts and commissions of $400,000 in the
aggregate. All such shares held by parties affiliated or associated with the
underwriters are restricted from resale for a period of one year after the
offering.

The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions, penalty bids and passive market making in
accordance with Regulation M under the Securities Exchange Act of 1934.
Over-allotment involves syndicate sales in excess of the offering size, which
creates a syndicate short position. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Syndicate covering transactions involve purchases of the
common stock in the open market after the distribution has been completed in
order to cover syndicate short positions. Penalty bids permit the
representatives to reclaim a selling concession from a syndicate member when the
common stock originally sold by such syndicate member is purchased in a
syndicate covering transaction to cover syndicate short positions. In passive
market making, market makers in the common stock who are underwriters or
prospective underwriters may, subject to certain limitations, make bids for or
purchases of the common stock until the time, if any, at which a stabilizing bid
is made. These stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the common stock to be higher than it would
otherwise be in the absence of these transactions. These transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.

69
<PAGE> 70

Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price was determined by
negotiations between us and the underwriters. Among the factors considered in
these negotiations were prevailing market conditions, the market capitalizations
and the states of development of other companies that we and the underwriters
believe to be comparable to us, estimates of our business potential, our results
of operation in recent periods, the present state of our development and other
factors deemed relevant.

We estimate that our out-of-pocket expenses for this offering will be
approximately $1,000,000.

LEGAL MATTERS

The validity of the common stock offered hereby will be passed upon for us
by Brobeck, Phleger & Harrison LLP, Austin, Texas. Brobeck, Phleger & Harrison
LLP and certain attorneys and investment funds affiliated with Brobeck, Phleger
& Harrison LLP beneficially own shares of our Series E preferred stock which
upon consummation of this offering will convert into an aggregate of 7,500
shares of our common stock. Certain legal matters in connection with this
offering will be passed upon for the underwriters by Gray Cary Ware &
Freidenrich LLP, Austin, Texas.

EXPERTS

The financial statements as of October 31, 1997, 1998 and July 31, 1999 and
for each of the three years in the period ended October 31, 1998 and for the
nine months ended July 31, 1999 included in this prospectus have been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.

WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT CROSSROADS

We have filed with the Securities and Exchange Commission a registration
statement on Form S-1, including exhibits and schedules, under the Securities
Act of 1933 with respect to the shares of common stock to be sold in this
offering. This prospectus does not contain all the information included in the
registration statement and the exhibits thereto. For further information about
us and the shares of our common stock to be sold in this offering, please refer
to this registration statement. Complete exhibits have been filed with our
registration statement on Form S-1.

You may read and copy any contract, agreement or other document referred to
in this prospectus and any portion of our registration statement or any other
information from our filings at the Securities and Exchange Commission's public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You can
request copies of these documents, upon payment of a duplicating fee, by writing
to the Securities and Exchange Commission. Please call the Securities and
Exchange Commission at 1-800-SEC-0330 for further information about the public
reference rooms. Our filings with the Securities and Exchange Commission,
including our registration statement, are also available to you without charge
at the Securities and Exchange Commission's Web site, http://www.sec.gov.

As a result of this offering, we are subject to the information and
reporting requirements of the Securities Exchange Act of 1934, and will file and
furnish to our stockholders annual reports containing financial statements
audited by our independent auditors, make available to our stockholders
quarterly reports containing unaudited financial data for the first three
quarters of each fiscal year, proxy statements and other information with the
Securities and Exchange Commission.

You may read and copy any reports, statements or other information on file
at the public reference rooms or at the Securities and Exchange Commission's Web
site referred to above. You can also request copies of these documents, for a
copying fee, by writing to the Commission.

Our Web site is www.crossroads.com. THE INFORMATION CONTAINED ON OUR WEB
SITE IS NOT INCORPORATED BY REFERENCE INTO THIS PROSPECTUS.

70
<PAGE> 71

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of October 31, 1997 and 1998
and July 31, 1999, historical and pro forma (unaudited)... F-3
Consolidated Statements of Operations for each of the three
years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 (unaudited) and 1999...... F-4
Consolidated Statements of Changes in Stockholders' Deficit
for each of the three years in the period ended October
31, 1998 and for the nine months ended July 31, 1999...... F-5
Consolidated Statements of Cash Flows for each of the three
years in the period ended October 31, 1998 and for the
nine months ended July 31, 1998 (unaudited) and 1999...... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>

F-1
<PAGE> 72

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of
Crossroads Systems, Inc. and Subsidiary

In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' deficit
and cash flows listed in the index on page F-1 of this Form S-1 Registration
Statement present fairly, in all material respects, the financial position of
Crossroads Systems, Inc. and Subsidiary at October 31, 1997, 1998 and July 31,
1999, and the results of their operations and their cash flows for each of the
three years in the period ended October 31, 1998 and for the nine months ended
July 31, 1999 in conformity with generally accepted accounting principles. These
consolidated financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards, which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.

PricewaterhouseCoopers LLP

Austin, Texas
September 17, 1999

F-2
<PAGE> 73

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

ASSETS

<TABLE>
<CAPTION>
OCTOBER 31, JULY 31, 1999
----------------- ------------------------
1997 1998 HISTORICAL PRO FORMA
------- ------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents......................... $ 6,063 $ 1,695 $ 6,492 $ 18,492
Short-term investments............................ -- 2,239 -- --
Accounts receivable, net of allowance for doubtful
accounts of $8, $14, $59 and $59;
respectively................................... 353 906 2,641 2,641
Inventories....................................... 197 896 2,447 2,447
Prepaids and other current assets................. 56 230 505 505
------- ------- -------- --------
Total current assets...................... 6,669 5,966 12,085 24,085
Note receivable from related party.................. 90 90 90 90
Property and equipment, net......................... 632 968 1,816 1,816
Other assets........................................ 224 163 149 149
------- ------- -------- --------
Total assets.............................. $ 7,615 $ 7,187 $ 14,140 $ 26,140
======= ======= ======== ========

LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities:
Accounts payable.................................. $ 636 $ 875 $ 3,851 $ 3,851
Accrued expenses.................................. 98 138 1,191 1,191
Deferred revenue.................................. 7 -- 61 61
Current portion of long-term debt................. 171 492 762 762
------- ------- -------- --------
Total current liabilities................. 912 1,505 5,865 5,865
Long-term debt, net of current portion.............. 301 591 936 936
Commitments (Note 6)
Redeemable convertible preferred stock, $.001 par
value, 11,000,000 shares authorized, 6,294,688,
7,544,688, 8,614,898 and 9,481,565 shares
designated, respectively, 6,294,688, 7,294,688 and
8,264,898 issued and outstanding, respectively,
and none issued and outstanding pro forma,
aggregate liquidation value of $13,278 at October
31, 1998 and $18,565 at July 31, 1999............. 9,277 13,438 18,942 --
Stockholders' deficit:
Common stock, $.001 par value, 49,000,000 shares
authorized, 6,000,000, 6,378,468 and 8,283,078
shares issued and outstanding, respectively,
and 21,882,926 shares issued and outstanding
pro forma...................................... 6 6 8 22
Additional paid-in capital........................ -- 72 5,107 36,035
Deferred stock-based compensation................. -- (188) (4,389) (4,389)
Notes receivable from stockholders................ -- -- (447) (447)
Accumulated deficit............................... (2,881) (8,235) (11,880) (11,880)
Treasury stock at cost (22,500 shares at October
31, 1998 and July 31, 1999).................... -- (2) (2) (2)
------- ------- -------- --------
Total stockholders' (deficit) equity...... (2,875) (8,347) (11,603) 19,339
------- ------- -------- --------
Total liabilities, redeemable convertible
preferred stock and stockholders'
(deficit) equity........................ $ 7,615 $ 7,187 $ 14,140 $ 26,140
======= ======= ======== ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 74

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
---------------------------------- ------------------------
1996 1997 1998 1998 1999
--------- --------- ---------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue.................. $ 160 $ 821 $ 2,930 $ 1,721 $ 11,728
Other revenue.................... 332 188 279 276 65
--------- --------- ---------- --------- ----------
Total revenue............ 492 1,009 3,209 1,997 11,793
Cost of revenue.................... 170 465 1,911 1,053 6,965
--------- --------- ---------- --------- ----------
Gross profit....................... 322 544 1,298 944 4,828
--------- --------- ---------- --------- ----------
Operating expenses:
Sales and marketing.............. -- 641 2,461 1,886 2,791
Research and development......... 291 1,329 2,336 1,550 3,539
General and administrative....... 235 1,323 1,896 1,411 1,699
Amortization of stock-based
compensation.................. -- -- 41 14 534
--------- --------- ---------- --------- ----------
Total operating
expenses............... 526 3,293 6,734 4,861 8,563
--------- --------- ---------- --------- ----------
Loss from operations............... (204) (2,749) (5,436) (3,917) (3,735)
Other income (expense):
Interest income.................. -- 83 183 149 158
Interest expense................. (8) (29) (65) (44) (76)
Other income (expense)........... -- 2 (36) -- 8
--------- --------- ---------- --------- ----------
Other income (expense), net... (8) 56 82 105 90
--------- --------- ---------- --------- ----------
Net loss........................... (212) (2,693) (5,354) (3,812) (3,645)
Accretion on redeemable convertible
preferred stock.................. -- (58) (196) (141) (247)
--------- --------- ---------- --------- ----------
Net loss attributable to common
stock............................ $ (212) $ (2,751) $ (5,550) $ (3,953) $ (3,892)
========= ========= ========== ========= ==========
Basic and diluted net loss per
share............................ $ (0.04) $ (0.46) $ (0.90) $ (0.65) $ (0.56)
========= ========= ========== ========= ==========
Shares used in computing basic and
diluted net loss per share....... 6,000,000 6,000,000 6,146,115 6,120,220 7,005,174
========= ========= ========== ========= ==========
Pro forma basic and diluted net
loss per share................... $ (0.32) $ (0.19)
========== ==========
Shares used in computing pro forma
basic and diluted net loss per
share............................ 17,088,147 20,605,022
========== ==========
</TABLE>

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

F-4
<PAGE> 75

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL DEFERRED RECEIVABLE
------------------ PAID-IN STOCK-BASED FROM ACCUMULATED TREASURY
SHARES AMOUNT CAPITAL COMPENSATION SHAREHOLDERS DEFICIT STOCK
--------- ------ ---------- ------------ ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 1, 1995... 6,000,000 $6 $ 12 $ -- $ -- $ 70 $ --
Net loss.................... -- -- -- -- -- (212) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1996... 6,000,000 6 12 -- -- (142) --
Accretion on redeemable
convertible preferred
stock..................... (12) (46)
Net loss.................... -- -- -- -- -- (2,693) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1997... 6,000,000 6 -- -- -- (2,881) --
Issuance of common stock.... 378,468 -- 39 -- -- -- --
Purchase of treasury
stock..................... -- -- -- -- -- -- (2)
Stock-based compensation.... -- -- 229 (188) -- -- --
Accretion on redeemable
convertible preferred
stock..................... (196)
Net loss.................... -- -- -- -- -- (5,354) --
--------- -- ------ ------- ----- ---------- ----
Balance at October 31, 1998... 6,378,468 6 72 (188) -- (8,235) (2)
Issuance of common stock.... 1,904,610 2 547 -- (447) -- --
Stock-based compensation.... -- -- 4,735 (4,201) -- -- --
Accretion on redeemable
convertible preferred
stock..................... -- -- (247) -- -- -- --
Net loss.................... -- -- -- -- -- (3,645) --
--------- -- ------ ------- ----- ---------- ----
Balance at July 31, 1999...... 8,283,078 $8 $5,107 $(4,389) $(447) $ (11,880) $ (2)
========= == ====== ======= ===== ========== ====

TOTAL
STOCKHOLDERS'
DEFICIT
-------------
<S> <C>
Balance at November 1, 1995... $ 88
Net loss.................... (212)
--------
Balance at October 31, 1996... (124)
Accretion on redeemable
convertible preferred
stock..................... (58)
Net loss.................... (2,693)
--------
Balance at October 31, 1997... (2,875)
Issuance of common stock.... 39
Purchase of treasury
stock..................... (2)
Stock-based compensation.... 41
Accretion on redeemable
convertible preferred
stock..................... (196)
Net loss.................... (5,354)
--------
Balance at October 31, 1998... (8,347)
Issuance of common stock.... 102
Stock-based compensation.... 534
Accretion on redeemable
convertible preferred
stock..................... (247)
Net loss.................... (3,645)
--------
Balance at July 31, 1999...... $(11,603)
========
</TABLE>

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

F-5
<PAGE> 76

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED OCTOBER 31, JULY 31,
------------------------- ---------------------
1996 1997 1998 1998 1999
----- ------- ------- ----------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss................................... $(212) $(2,693) $(5,354) $(3,812) $(3,645)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 25 208 471 284 639
Amortization of stock-based
compensation.......................... -- -- 41 14 534
Loss on disposal of property and
equipment............................. -- 4 136 -- 12
Provision for doubtful accounts......... -- 8 6 1 45
Changes in assets and liabilities:
Accounts receivable................... 27 (319) (559) (152) (1,780)
Inventories........................... -- (197) (699) (509) (1,551)
Prepaids and other assets............. -- (248) (130) (114) (477)
Accounts payable...................... 114 523 239 (128) 2,976
Accrued expenses...................... 27 71 40 38 1,053
Deferred revenue...................... 4 3 (7) (7) 61
----- ------- ------- ------- -------
Net cash used in operating
activities....................... (15) (2,640) (5,816) (4,385) (2,133)
----- ------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment......... (123) (719) (956) (640) (1,499)
Proceeds from sale of property and
equipment............................... -- -- 13 -- --
Purchase of held to maturity investments... -- -- (2,239) -- --
Maturity of held to maturity investments... -- -- -- -- 2,239
Other assets............................... (1) (31) 17 -- 14
Note receivable from related party......... -- (90) -- -- --
----- ------- ------- ------- -------
Net cash (used in) provided by
investing activities............. (124) (840) (3,165) (640) 754
----- ------- ------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock..... -- -- 39 12 102
Proceeds from issuance of preferred stock,
net of issuance costs................... -- 9,219 3,965 -- 5,257
Purchase of treasury stock................. -- -- (2) -- --
Borrowings under long-term debt
agreements.............................. 131 602 852 644 963
Repayment of long-term indebtedness........ (23) (278) (241) (151) (348)
Deferred offering costs.................... -- -- -- -- 202
----- ------- ------- ------- -------
Net cash provided by financing
activities....................... 108 9,543 4,613 505 6,176
----- ------- ------- ------- -------
Net increase (decrease) in cash and cash
equivalents................................ (31) 6,063 (4,368) (4,520) 4,797
Cash and cash equivalents, beginning of
period..................................... 31 -- 6,063 6,063 1,695
----- ------- ------- ------- -------
Cash and cash equivalents, end of period..... $ -- $ 6,063 $ 1,695 $ 1,543 $ 6,492
===== ======= ======= ======= =======
</TABLE>

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

F-6
<PAGE> 77

CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE DATA)

1. ORGANIZATION AND BUSINESS:

Crossroads Systems, Inc. (the "Company"), a Delaware corporation, is a
provider of storage routers for storage area networks ("SANs"). The Company's
storage routers interconnect Fibre Channel SANs with small computer system
interface ("SCSI") servers and SCSI storage systems. The Company is organized
and operates as one business segment.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Principles of Consolidation

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

Fiscal Year

During 1999, the Company changed its fiscal year-end from December 31 to
October 31. The Company's consolidated financial statements have been restated
for all periods presented to reflect this change.

Interim Financial Information

The accompanying interim consolidated statements of operations and cash
flows for the nine months ended July 31, 1998 are unaudited but include all
adjustments, consisting only of normal recurring adjustments, which management
of the Company considers necessary for a fair presentation of the results of
operations and cash flows for the nine months ended July 31, 1998. The data
disclosed in these notes to the consolidated financial statements for the nine
months ended July 31, 1998 are unaudited.

The audited results of operations and cash flows for the nine months ended
July 31, 1999 are not necessarily indicative of the results to be expected for
the full year.

Unaudited Pro Forma Information

The unaudited pro forma balance sheet as of July 31, 1999 reflects the
issuance/conversion of the following equity securities into an aggregate of
13,599,848 shares of common stock:

<TABLE>
<S> <C>
(i) 4,000,000 shares of Series A redeemable convertible
preferred stock;

(ii) 2,294,688 shares of Series B redeemable convertible
preferred stock;

(iii) 1,000,000 shares of Series C redeemable convertible
preferred stock;

(iv) 970,210 shares of Series D redeemable convertible preferred
stock; and

(v) the issuance of 801,667 shares Series E redeemable
convertible preferred stock for net cash proceeds of
approximately $12,000 in August 1999, and subsequent
conversion into common stock, as if such sale and conversion
had occurred as of July 31, 1999.
</TABLE>

Although the number of shares of each series of the Company's preferred
stock was not affected by the three-for-two stock split (See Note 13), as a
result of this stock split, each share of the preferred stock automatically
adjusted and became convertible into 1.5 shares of the Company's common stock.

F-7
<PAGE> 78
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Use of Estimates

The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting periods. Actual results could differ from those estimates.

Risk and Uncertainties

The Company's products are concentrated in the storage area network
industry which is highly competitive and subject to rapid technological change.
These products are manufactured under contract by one supplier and revenue is
concentrated with several major customers. 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.

The loss of a major customer, interruption of product from the contract
manufacturer, a change of suppliers or significant technological change in the
industry could affect operating results adversely.

The percentage of sales to significant customers was as follows:

<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
OCTOBER 31, ENDED
------------ JULY 31,
1997 1998 1999
---- ---- -----------
<S> <C> <C> <C>
Customer A................................................ 17% 20% 44%
Customer B................................................ 3% 14% 30%
Customer C................................................ 27% 25% 3%
Customer D................................................ 11% 16% 4%
</TABLE>

For fiscal 1996, sales to three customers represented 16%, 16% and 19% of
total revenue.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash on hand and on deposit. Highly
liquid investments with a maturity of three months or less when purchased are
considered to be cash equivalents. Cash equivalents consist primarily of cash
deposited in money market accounts. While the Company's cash and cash
equivalents are on deposit with high quality FDIC insured financial
institutions, at times such deposits exceed insured limits. The Company has not
experienced any losses in such accounts.

Short-Term Investments

Short-term investments consist primarily of high grade commercial paper and
corporate debt with original maturities at the date of purchase greater than
three months and less than twelve months. All short-term investments have been
classified as held to maturity and are carried at cost, which approximates fair
value, due to the short period of time to maturity.

Concentrations of Credit Risk

Financial instruments which potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's sales are primarily concentrated in the
United States and in the technology industry. The Company had trade accounts
receivable from four customers which comprised approximately 68% and 78% of
total trade accounts

F-8
<PAGE> 79
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

receivable at October 31, 1998 and July 31, 1999, respectively. Additionally,
the Company had trade accounts receivable from two customers which comprised
approximately 74% of total trade accounts receivable at October 31, 1997. The
Company does not require collateral on accounts receivable balances and provides
allowances for potential credit losses.

Inventories

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

Property and Equipment

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

Fair Value of Financial Instruments

The fair values of the Company's cash and cash equivalents and accrued
expenses approximate their carrying values due to their short maturities. The
fair value of the Company's debt obligations approximates their carrying values
based on interest rates currently available for instruments with similar terms.

Revenue Recognition

Revenue from product sales to customers that do not have rights of return
or acceptance clauses, including product sales to original equipment
manufacturers and certain distributors, resellers and system integrators, are
recognized upon shipment. Revenue and related cost of revenue from product sales
to customers that have rights of return are deferred and subsequently recognized
upon sell-through to end users. Revenue from customers who have acceptance
clauses are not recognized until all acceptance criteria are satisfied.

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.

Research and Development

Expenditures related to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred.

The Company capitalizes certain software development costs subsequent to
the establishment of technological feasibility. To date, such costs incurred
following technological feasibility, but prior to general release, have been
insignificant.

Comprehensive Income

The Company has had no items of comprehensive income for each of the three
years in the period ended October 31, 1998 and the nine month period ended July
31, 1999.

F-9
<PAGE> 80
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Income Taxes

The Company accounts for income taxes in accordance with the liability
method. Under the liability method, deferred tax assets and liabilities are
recorded for the expected future tax consequences of temporary differences
between the financial reporting and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences are expected
to reverse. Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized. The Company recorded
no income tax expense during the years ended October 31, 1996, 1997 and 1998, or
the nine months ended July 31, 1998 and 1999. The Company has provided a full
valuation allowance because the realization of tax benefits associated with net
operating loss carryforwards is not assured.

Stock-Based Compensation

Stock-based compensation is recognized using the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations. Accordingly, compensation
cost for stock options is measured as the excess, if any, of the fair value of
the Company's stock at the date of grant over the amount an employee must pay to
acquire the stock amortized over the vesting period.

Computation of Net Loss Per Share

The Company adopted the provisions of Statement of Financial Accounting
Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), effective January 1,
1998. SFAS No. 128 requires the presentation of basic and diluted earnings per
share. Basic earnings per share is computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per share is computed by giving effect to all
dilutive potential common shares that were outstanding during the period. The
Company has excluded all redeemable convertible preferred stock and outstanding
stock options from the calculation of diluted net loss per share because all
such securities are antidilutive for all periods presented. The total number of
common stock equivalents excluded from the calculations of diluted net loss per
common share were 1,230,000, 11,639,532, 13,556,157, 14,103,750, and 13,950,690
for the years ended October 31, 1996, 1997 and 1998 and the nine months ended
July 31, 1998 and 1999, respectively.

Pro forma net loss per share, as presented in the statements of operations,
has been computed as described above and also gives effect, under Securities and
Exchange Commission guidance, to the conversion of the redeemable convertible
preferred stock (using the as-if-converted method).

The numerator in the pro forma net loss per share calculation is equivalent
to the net loss for each period presented. The denominator in the pro forma net
loss per share calculation is comprised of the following:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED JULY 31,
OCTOBER 31, 1998 1999
---------------- --------------
<S> <C> <C>
Weighted average number of common shares outstanding..... 6,146,115 7,005,174
Effect of convertible securities:
Redeemable convertible preferred stock................... 10,942,032 13,599,848
---------- ----------
Shares used in pro forma calculation................... 17,088,147 20,605,022
========== ==========
</TABLE>

F-10
<PAGE> 81
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

New Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards for derivative
instruments, including derivative instruments embedded in other contracts, and
for hedging activities. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The Company currently does not
engage or plan to engage in derivative instruments or hedging activities.

3. INVENTORIES:

Inventories consists of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
------------ JULY 31,
1997 1998 1999
---- ---- --------
<S> <C> <C> <C>
Raw materials............................................... $194 $317 $1,269
Finished goods.............................................. 3 579 1,178
---- ---- ------
$197 $896 $2,447
==== ==== ======
</TABLE>

4. PROPERTY AND EQUIPMENT:

Property and equipment consists of the following:

<TABLE>
<CAPTION>
OCTOBER 31,
--------------- JULY 31,
1997 1998 1999
----- ------ --------
<S> <C> <C> <C>
Equipment................................................ $ 716 $1,403 $ 2,848
Furniture and fixtures................................... 108 117 100
Leasehold improvements................................... 39 140 202
----- ------ -------
863 1,660 3,150
Less: accumulated depreciation........................... (231) (692) (1,334)
----- ------ -------
$ 632 $ 968 $ 1,816
===== ====== =======
</TABLE>

5. LONG-TERM DEBT:

At October 31, 1998 and July 31, 1999, the Company had an unused line of
credit of $2,500 and an equipment line of $1,000. The amount available for
borrowings under the line of credit arrangement at any point in time is based
upon eligible accounts receivable and inventory balances. Borrowings under the
equipment line may be used to purchase general operating equipment. Interest
accrues and is payable monthly on outstanding balances under these lines at the
bank's prime rate (8% at October 31, 1998 and July 31, 1999). Outstanding
borrowings under the equipment line were $780 and $902 at October 31, 1998 and
July 31, 1999, respectively, and are due in monthly installments through
December 2002. The last draw date under the line of credit arrangement and the
equipment line is in December 1999.

The Company has term loans with a bank, the proceeds of which were used to
finance equipment purchases. Borrowings outstanding under the term loans bear
interest at the bank's prime rate plus 0.5% (8.5% at October 31, 1998 and July
31, 1999) and are payable in equal monthly installments of principal and
interest through April 2002. Borrowings outstanding on the term loans were $303
and $796 at October 31, 1998 and July 31, 1999, respectively.

F-11
<PAGE> 82
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Borrowings under the line of credit, equipment line and term loan
arrangements are collateralized by substantially all assets of the Company,
excluding intellectual property. Under the provisions of these credit
arrangements, the Company is prohibited from declaring or paying dividends.
Additionally, the Company must meet certain quarterly minimum financial
covenants, including minimum tangible net worth, liquidity ratio and
profitability covenants. During certain quarters in 1998 and 1999, the Company
was not in compliance with its profitability covenant. The profitability
covenant violations were waived under the Company's credit arrangements in a
letter to the Company dated July 27, 1999.

The scheduled maturities of the Company's outstanding debt at July 31, 1999
are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999..................................................... $ 170
2000..................................................... 687
2001..................................................... 543
2002..................................................... 271
2003..................................................... 27
------
$1,698
======
</TABLE>

6. COMMITMENTS:

The Company leases office space and equipment under long-term operating
lease agreements which expire on various dates through April 30, 2002. Rental
expense under these agreements was approximately $29, $154, $327, $238 and $300
for the years ended October 31, 1996, 1997, 1998, and the nine month periods
ended July 31, 1998 and 1999, respectively. The minimum annual future rentals
under the terms of these leases at July 31, 1999 are as follows:

<TABLE>
<CAPTION>
FISCAL YEAR
- -----------
<S> <C>
1999..................................................... $ 404
2000..................................................... 529
2001..................................................... 530
2002..................................................... 451
2003..................................................... 297
2004..................................................... 93
------
$2,304
======
</TABLE>

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.

F-12
<PAGE> 83
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

7. REDEEMABLE CONVERTIBLE PREFERRED STOCK:

Following is a summary of redeemable convertible preferred stock issued by
the Company at July 31, 1999:

<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES ISSUED
SERIES DESIGNATED AND OUTSTANDING AMOUNT
- ------ ---------- --------------- -------
<S> <C> <C> <C>
Series A.......................................... 4,000,000 4,000,000 $ 3,971
Series B.......................................... 2,294,688 2,294,688 5,247
Series C.......................................... 1,250,000 1,000,000 3,966
Series D.......................................... 1,070,210 970,210 5,257
--------- --------- -------
8,614,898 8,264,898 $18,441
========= ========= =======
</TABLE>

The carrying value of the redeemable convertible preferred stock represents
the proceeds from the sale of the stock net of issuance costs of $125 plus
accretion. Accretion of the carrying value of the redeemable, convertible
preferred stock to its estimated mandatory redemption amount is calculated using
the effective interest method.

In August 1999, the Company's board of directors designated 866,667 shares
of preferred stock as Series E redeemable convertible preferred stock. Also in
August 1999, the Company sold 801,667 shares of Series E preferred stock for
proceeds of approximately $12,000, net of issuance costs of $25.

The rights with respect to Series A, B, C, D and E are as follows:

Dividends

The holders of shares of Series A, B, C, D and E preferred stock are
entitled to quarterly noncumulative dividends at the rate of $0.07, $0.16,
$0.28, $0.38 and $1.05 per annum per share, respectively, when and if
declared by the Company's board of directors through May 1, 2004. Beginning
May 1, 2004, dividends become cumulative and will accrue at the rates
aforementioned whether or not earned or declared. The Company's board of
directors has never declared a dividend on the Company's redeemable
convertible preferred stock.

Conversion

The Series A, B, C, D and E preferred stock may be converted into
common stock of the Company at the preferred stockholders' option, and
automatically in the event of an underwritten public offering of the
Company's common stock at a price not less than $10.00 per share and with
aggregate proceeds of not less than $10,000. The preferred stock is
convertible into common stock at a ratio determined by dividing the
original purchase price plus unpaid dividends by the conversion price,
initially the original purchase price, as adjusted for certain dilutive
events. Automatic conversion will also occur, at the then-applicable
conversion price, upon the conversion of two-thirds or more of the number
of Series A, B, C, D and E preferred stock issued. At October 31, 1998 and
July 31, 1999, the Company had reserved 10,942,032 and 12,397,347 shares of
common stock for the conversion of the Company's redeemable convertible
preferred stock.

Liquidation and Redemption

In the event of liquidation, the Series A, B, C, D and E preferred
stockholders are entitled to be paid $1.00, $2.30, $4.00, $5.45 and $15.00
per share, respectively, plus accrued dividends. The Series A, B, C, D and
E preferred stock is senior to all common stock with regard to liquidation
and

F-13
<PAGE> 84
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

dividend preferences. Commencing on September 4, 2006, the Company may be
required to redeem, upon the affirmative vote of two-thirds of the
preferred stockholders voting as a group, 50% of the outstanding shares of
preferred stock, and an additional 50% on September 4, 2007 with any
remaining shares of preferred stock to be redeemed at September 4, 2008, at
a redemption price equal to $1.00, $2.30, $4.00, $5.45 and $15.00 for
Series A, B, C, D and E respectively, plus accrued dividends.

Voting

The holder of each share of Series A, B, C, D and E preferred stock is
entitled to vote the number of shares of common stock into which each
preferred share is then convertible. All common and as-if-converted
preferred stockholders vote together as one group.

8. STOCK OPTION PLAN:

The Company has established the 1996 Stock Option/Stock Issuance Plan (the
"Plan"), providing for two separate equity programs: (i) the option grant
program providing for the granting of both incentive and non-statutory stock
options, as defined by the Internal Revenue Code, and (ii) the stock issuance
program providing for the issuance of common stock directly, either through the
immediate purchase of such shares or for services rendered to the Company.

The Plan provides for a maximum number of common shares to be
optioned/issued of 4,875,000. Accordingly, the Company has reserved a sufficient
number of shares of common stock to permit exercise of options or issuance of
common shares in accordance with the terms of the Plan. Under the Plan,
incentive stock options may be granted only to Company employees (including
officers and directors who are also employees) and shall be issued at an
exercise prices not less than 100% of the fair market value of the Company's
common stock at the grant date, as determined by the Company's board of
directors or by a committee of the board appointed to administer the Plan,
except for incentive stock option grants to a stockholder that owns greater than
10% of the Company's outstanding stock in which case the exercise price per
share is not less than 110% of the fair market value of the Company's common
stock at date of grant. Non-Statutory stock options may be granted to Company
employees, members of the board, and consultants at the exercise price
determined by the board of directors or a committee appointed by the board of
directors to administer the Plan. Options granted under the Plan are exercisable
no later than ten years from the date of grant except for incentive stock
options granted to an optionee that owns more than 10% of the voting stock at
the date of grant in which case the option term shall be five years from the
date of grant or shorter based on the terms enumerated in the related option
agreement. At the time of the grant, the Company's board of directors or
committee appointed by the board to administer the Plan determines the exercise
price and vesting schedules. Generally, 25% of each option is exercisable one
year from the vesting commencement date, as defined in the option agreement
after the grant and an additional 1/16th each quarter thereafter. The Plan
allows for options to be immediately exercisable, subject to the Company's right
of repurchase for unvested shares at the original exercise price.

The stock issuance program under the Plan allows eligible persons to
purchase shares of common stock at an amount that may be less than, equal to or
greater than the fair market value of the common shares on the issuance date.
Such shares may be fully vested when issued or may vest over time as the
recipient provides services or as specified performance objectives are attained
as determined by the board of directors or a committee appointed by the board to
administer the Plan. The Company retains the right to repurchase shares issued
in conjunction with the stock issuance program upon voluntary or involuntary
termination of service, provided that the stock purchase right has not been
exercised, at an amount equal to the original price paid by the purchaser.

F-14
<PAGE> 85
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

Option activity under the Plan and related information follows:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, NINE MONTHS
------------------------------------------------------------------ ENDED
1996 1997 1998 JULY 31, 1999
-------------------- -------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of period............... -- $ -- 1,230,000 $0.09 2,197,500 $0.10 2,614,125 $0.16
Granted................... 1,230,000 0.09 978,750 0.12 1,273,500 0.25 998,820 0.92
Exercised................. -- -- -- -- (400,968) 0.10 (1,904,610) 0.29
Cancelled................. -- -- (11,250) 0.10 (455,907) 0.15 (154,992) 0.19
--------- --------- --------- ----------
Outstanding at end of
period.................. 1,230,000 $0.09 2,197,500 $0.10 2,614,125 $0.16 1,553,343 $0.50
========= ========= ========= ==========
Options exercisable at the
end of the period....... 1,230,000 2,197,500 2,614,125 1,553,343
========= ========= ========= ==========
</TABLE>

At October 31, 1998 and July 31, 1999 the Company had the right to
repurchase 75,000 and 825,200 shares of outstanding common stock, respectively,
previously issued under its 1996 Plan.

The Company has elected to follow the provisions prescribed by the
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and its related interpretations, for financial reporting purposes and
has adopted the disclosure only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation. Accordingly, no compensation expense has been
recognized for the Plan under the provisions of SFAS No. 123. Had compensation
cost for the Plan been determined based upon the fair value at the grant date
for employee awards under the Plan consistent with the methodology prescribed
under SFAS No. 123, the Company's net loss would have been increased to the
following pro forma amounts:

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED
-------------------------- JULY 31,
1996 1997 1998 1999
------ ------- ------- -----------
<S> <C> <C> <C> <C>
Net loss -- as reported...................... $ (212) $(2,693) $(5,354) $(3,645)
Net loss -- pro forma........................ $ (216) $(2,702) $(5,402) $(3,851)
Basic and diluted net loss per share -- as
reported................................... $(0.04) $ (0.45) $ (0.87) $ (0.52)
Basic and diluted net loss per share -- pro
forma...................................... $(0.04) $ (0.45) $ (0.88) $ (0.55)
</TABLE>

<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED OCTOBER 31, ENDED
------------------------ JULY 31,
1996 1997 1998 1999
------ ------ ------ -----------
<S> <C> <C> <C> <C>
Weighted average grant-date fair value of options granted:
Exercise price equal to market price of stock on
the grant date:
Aggregate value............................ $ 11 $ 21 $ 38 --
===== ===== ===== ==========
Per share value............................ $0.01 $0.02 $0.04 --
===== ===== ===== ==========
Exercise price less than the market price of
stock on the grant date:
Aggregate value............................ -- -- $ 288 $4,893,319
===== ===== ===== ==========
Per share value............................ -- -- $0.84 $ 4.90
===== ===== ===== ==========
</TABLE>

F-15
<PAGE> 86
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted average
assumptions used for grants in 1996, 1997, 1998 and 1999: no dividend yield;
risk-free interest rate of 6.37%, 6.32%, 5.71% and 5.27%; and expected lives of
five years, respectively. The volatility of the Company's common stock
underlying the options was not considered because the Company's equity is not
publicly-traded as of October 31, 1996, 1997, 1998 and July 31, 1999,
respectively.

The following table summarizes information with respect to stock options
outstanding at October 31, 1998 and July 31, 1999:

October 31, 1998:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- --------------- ----------- ----------------
<S> <C> <C>
$0.08..................................................... 792,000 7.85
$0.10..................................................... 605,625 8.30
$0.23..................................................... 1,156,500 9.16
$0.50..................................................... 60,000 9.73
---------
2,614,125 8.58
=========
</TABLE>

July 31, 1999:

<TABLE>
<CAPTION>
OPTIONS OUTSTANDING AND
EXERCISABLE
------------------------------
WEIGHTED-AVERAGE
NUMBER REMAINING
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE
- --------------- ----------- ----------------
<S> <C> <C>
$0.08..................................................... 276,000 7.10
$0.10..................................................... 233,906 7.54
$0.23..................................................... 304,689 8.42
$0.50..................................................... 222,938 9.29
$0.83..................................................... 133,515 9.63
$1.00..................................................... 229,850 9.82
$1.33..................................................... 152,445 9.93
---------
1,553,343 8.64
=========
</TABLE>

Options granted to directors and non-employees are recorded at fair value
in accordance with SFAS No. 123. These options were issued pursuant to the Plan
and are reflected in the disclosures above. The Company granted 112,500 and
7,500 options to directors and non-employees for consulting services in fiscal
1997 and 1998 at a weighted average exercise price of $0.14 and $0.23,
respectively.

9. INCOME TAXES:

As of October 31, 1998 and July 31, 1999 the Company had federal net
operating loss carryforwards of approximately $7,740 and $10,580, respectively
and experimentation tax credit carryforwards of approximately $167 and $263,
respectively.

For federal income tax purposes, net operating loss carryforwards begin to
expire in 2011.

F-16
<PAGE> 87
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

The components of the net deferred tax asset are as follows:

<TABLE>
<CAPTION>
OCTOBER 31,
------------------ JULY 31,
1997 1998 1999
------- ------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards.................. $ 1,006 $ 2,865 $ 3,940
Inventory and warranty reserves................... -- 78 94
Depreciation...................................... 64 95 163
Research and experimentation credit............... 75 167 263
Net deferred tax assets before valuation
allowance......................................... 1,145 3,205 4,460
Valuation allowance................................. (1,145) (3,205) (4,460)
------- ------- -------
Net deferred tax asset.............................. $ -- $ -- $ --
======= ======= =======
</TABLE>

Following is a reconciliation of the amount of the income tax benefit that
would result from applying the statutory Federal income tax rates to pretax loss
and the reported amount of income tax benefit:

<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31, NINE MONTHS
-------------------------- ENDED
1996 1997 1998 JULY 31, 1999
---- ------- ------- -------------
<S> <C> <C> <C> <C>
Tax benefit at statutory rate of 34%........ $72 $ 916 $ 1,810 $ 1,239
State income tax benefit.................... 6 81 160 109
Research and experimentation credit......... 3 72 92 96
Net increase in valuation allowance......... (80) (1,065) (2,060) (1,256)
Amortization of stock-based compensation.... -- -- -- (182)
Permanent difference........................ (1) (4) (9) (6)
Other....................................... -- -- 7 --
--- ------- ------- -------
$-- $ -- $ -- $ --
=== ======= ======= =======
</TABLE>

Under the Tax Reform Act of 1986, the amount of and the benefit from net
operating losses that can be carried forward may be impaired in certain
circumstances. Events which may cause changes in the Company's tax carryovers
include, but are not limited to, a cumulative ownership change of more than 50%
over a three year period. Certain of the Company's operating losses that can be
utilized in any one taxable year for federal tax purposes have been limited by
one or more such ownership changes.

10. RELATED PARTY TRANSACTIONS:

Product Sales

The Company recorded product sales of $80, $383, $1,343 and $810 to certain
holders of shares of redeemable convertible preferred stock of the Company for
the years ended October 31, 1996, 1997, 1998, and the nine month period ended
July 31, 1999, respectively. Accounts receivable from these preferred
stockholders totaled approximately $277, $181 and $111 at October 31, 1997, 1998
and July 31, 1999 respectively.

Notes Receivable

In September 1997, the Company loaned an officer of the Company $90 in
exchange for a promissory note due in full, with accrued interest at a rate of
6.23%, in five years or upon the date in which the officer ceases to remain in
service. The Company has agreed to forgive the principal and interest due in the
event the employee remains in service continuously for five years from the date
of hire.

F-17
<PAGE> 88
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

During May 1999, the Company's board of directors approved the acceptance
of full recourse notes in the amount of $442,000 from certain of the Company's
officers as consideration for the exercise of 1,014,999 options. The notes
accrue interest at 7% per year, compounded semi-annually and principal and
accrued interest and are due in one lump sum in 2003.

11. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash paid for interest totaled $8, $29, $65, and $76 during fiscal year
1996, 1997, 1998 and the nine month period ended July 31, 1999, respectively.

Accretion on redeemable convertible preferred stock totaled $58, $196, and
$247 during fiscal year 1997, 1998 and the nine month period ended July 31,
1999, respectively.

12. EMPLOYEE BENEFITS:

In 1996, the Company established the Crossroads Systems, Inc. 401(k)
Savings Plan, which is a qualified plan under section 401(k) of the Internal
Revenue Code. All employees who have attained 18 years of age are eligible to
enroll in the Plan. The Company may make matching contributions to those
employees participating in the plan based upon Company productivity and
profitability. Company contributions vest over a period of six years. The
Company made no matching contributions for the years ended October 31, 1996,
1997 and 1998, and the nine month period ended July 31, 1999.

13. AMENDMENT TO CERTIFICATE OF INCORPORATION AND STOCK SPLIT:

On August 12, 1999, the Company's Board of Directors authorized the
amendment of the Company's Certificate of Incorporation and changed the
aggregate number of shares of capital stock authorized to be issued to
49,000,000 shares of common stock and 11,000,000 shares of preferred stock. The
Board of Directors also authorized and the Company effected a three-for-two
stock split for outstanding shares of common stock. All share information
included in the accompanying consolidated financial statements and notes thereto
have been retroactively adjusted to reflect the stock split and the increase in
the number of authorized shares.

14. SUBSEQUENT EVENTS:

1999 Employee Stock Purchase Plan

In September 1999, the Company's Board of Directors approved the adoption
of the Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan"). A
total of 450,000 shares of common stock have been reserved for issuance under
the Purchase Plan. The share reserve will automatically increase each calendar
year beginning in 2001 by an amount equal to 1% of the total number of
outstanding shares of our common stock on the last day of December in the prior
calendar year. The Purchase Plan permits eligible employees to purchase shares
of common stock through payroll deductions at 85% of the fair market value of
the common stock, as defined in the Purchase Plan.

1999 Stock Incentive Plan

In September 1999, the Board of Directors approved the Company's 1999 Stock
Incentive Plan (the "1999 Plan"). A total of 6,375,000 shares of common stock
have been reserved for issuance under the 1999 Plan. This share reserve includes
the number of shares carried over from the 1996 Stock Option/Stock Issuance
Plan. The share reserve will automatically increase each calendar year beginning
in 2001 by an amount equal to 2% of the total number of shares of our common
stock outstanding on the last day of December in the prior calendar year, but in
no event will the annual increase exceed 500,000. The 1999 Plan provides for:
(i) a discretionary option grant program under which eligible persons may be

F-18
<PAGE> 89
CROSSROADS SYSTEMS, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)

granted options to purchase shares of common stock; (ii) a salary investment
option grant program under which eligible employees may elect to have a portion
of their base salary invested each year in special options; (iii) a stock
issuance program under which eligible persons may be issued shares of common
stock directly, either through the immediate purchase of such shares or as a
bonus; (iv) an automatic option grant program under which eligible non-employee
board members will automatically receive options at periodic intervals to
purchase shares of common stock; and (v) a director fee option grant program
under which non-employee board members may elect to have all or part of their
annual retainer fee applied to a special option grant.

15. EVENT (UNAUDITED) SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT ACCOUNTANTS:

In September 1999, the Company extended its line of credit agreement to
August 2000 and increased the maximum amounts available under the line of credit
to $2,500 and the equipment line to $1,900. The amended and restated loan
agreement expires in August 2000.

F-19
<PAGE> 90

[THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY.]
<PAGE> 91

[INSIDE BACK COVER GRAPHIC:

The graphic consists of pictures of Crossroad's four storage routers. The title
of the diagram is "Crossroads Family of Storage Routers." Cascading from top
left to bottom right of the graphic to the bottom are pictures of the following:

- the Crossroads 4100 storage router;
- the Crossroads 4400 storage router;
- the Crossroads 4200 storage router; and
- the Crossroads 4250 storage router.

The Crossroads logo appears in the bottom left corner of the graphic.]
<PAGE> 92

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------

3,750,000 SHARES

[CROSSROADS LOGO]

COMMON STOCK

---------------------------

PROSPECTUS
---------------------------

SG COWEN

DAIN RAUSCHER WESSELS
A DIVISION OF DAIN RAUSCHER INCORPORATED

MORGAN KEEGAN & COMPANY, INC.

October 19, 1999

- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------