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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark one)

For the Fiscal Year Ended October 31, 2004

OR

For the transition period from                      to                     

Commission file number 000-30362

CROSSROADS SYSTEMS, INC.

(Exact name of Registrant as Specified in its Charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.001 per share

Preferred Stock Purchase Rights

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    þ  Yes    ¨  No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

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

The aggregate market value of registrant’s common stock held by non-affiliates of the registrant, based upon the closing price of a share of registrant’s common stock on April 30, 2004, as reported by The NASDAQ Stock Market on that date: $43.4 million.

Number of shares of the registrant’s common stock outstanding as of January 25, 2005: 25,906,649

DOCUMENTS INCORPORATED BY REFERENCE.

Portions of the registrant’s Proxy statement relating to the registrant’s 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated.

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CROSSROADS SYSTEMS, INC.

FORM 10-K

Unless otherwise indicated, “we,” “us,” “our” and the “Company” mean Crossroads Systems, Inc. We own the trademark “Crossroads.” All other trademarks or tradenames referred to in this document are the property of their respective owners. References in this document to “$” or “dollars” are to United States of America currency. Our fiscal year ends October 31.

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NOTE ON INCORPORATION BY REFERENCE

Throughout this report, various information and data are incorporated by reference to portions of our Proxy Statement for our 2005 Annual Meeting of Stockholders. Any reference in this report to disclosures in our Proxy Statement shall constitute incorporation by reference of that specific material into this Form 10-K.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than historical or current facts, including, without limitation, statements about our business strategy, plans and objectives of management and our future prospects, are forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, such forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from these expectations. Such risks and uncertainties include, without limitation, the following:

You can identify these forward looking statements by the use of words such as “may,” “will,” “expect,” “intend,” “anticipate,” “believe,” “estimate,” and “continue”. You should read statements that contain these and other similar words carefully because they discuss our future expectations, making projections of our future results of operations, our future financial condition, or 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 “Additional Factors That May Affect Future Results” in Item 1 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this report, as well as any cautionary language in this annual report, provide examples of risks, uncertainties and events that may cause our actual results to differ materially from the expectations we described in our forward-looking statements.

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PART I

Overview

We are a leading global provider of data routing solutions for storage area networks (SANs) based on our market share of storage routers shipped. Crossroads provides customers with secure, reliable and sustainable storage products to connect tape and disk storage devices through intelligent routing positioned at the network’s edge. In addition to providing “Intelligence At The Edge,” our products also enable multi-protocol independent connectivity for flexible configuration of the data ports used for storage devices, making it easier and more cost-effective for companies to store, retrieve and protect the integrity of their data. We operate in two reportable industry segments: Device Controllers and Network Solution Appliances. Refer to Note 7 in the accompanying financial statements for further information regarding our reportable segments.

We provide our products in a variety of configurations including both a stand-alone box and an embedded product with varying port counts. Our products are installed at companies, institutions and other entities, ranging from large enterprises to small businesses. Our products and services are marketed and sold to end users through our distribution partners, including original equipment manufacturers (OEMs), distributors and value-added resellers (VARs).

We were incorporated on September 26, 1996 as Crossroads Holding Corporation and are the successor to operations of our predecessor Texas corporation, Crossroads Systems (Texas), Inc. Our corporate headquarters are located at 8300 North MoPac Expressway, Austin, Texas, 78759. Our telephone number is (512) 349-0300. Our Web site address is www.crossroads.com. We had 150 employees at October 31, 2004.

Customer Challenges

Information Growth and Data Management Challenge

The volume of data storage that companies utilize and process continues to increase significantly and this growth has dramatically increased the cost of administering that data. This challenge has driven many organizations to reassess the way they manage their data storage environments. Until the advent of SANs, the connection between data storage devices and servers had been facilitated by a direct connection through Small Computer System Interface (SCSI) or other interfaces. SANs have become effective and efficient ways for an enterprise to manage its expanding storage infrastructure. Today, the number of SANs are increasing along with the number of devices in any given SAN. SANs have become essential and are now critical components of a business’ infrastructure.

SANs Solve Data Growth Problems

SANs provide a wide range of benefits and advantages for the data storage administrator, including:

Existing storage assets can also be consolidated with SANs allowing administrators to utilize more of their storage assets, reduce administrative workloads and increase flexibility in server access of consolidated storage.

One critical problem with data growth is the reduction in the time available for the backup and recovery functions needed to protect data. By utilizing a SAN, the backup and recovery processes are now performed on a

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dedicated machine that is optimized for the storage network. This, combined with the added performance of SANs, results in a significant reduction in the time required for backup and recovery functions.

SANs also serve as simple, cost-effective ways to backup data and allow organizations to more efficiently scale for growth. Companies have increasing demand for secured methods to manage their data and provide for disaster recovery. Finally, as organizations continue to add storage over time, SANs provide the most flexible architecture to manage their storage infrastructure.

SANs Continue to Expand in Size and Function

Internet protocol (IP) SANs are emerging as new protocols such as iSCSI (Internet SCSI) are introduced and adopted. IP SANs utilize Ethernet connectivity, which could potentially drive lower equipment and operation costs. IP SAN utilization is expected to grow within the enterprise as departmental servers are now able to connect to corporate SAN resources, thus creating a whole new class of end users, such as small to medium-size businesses and workgroups.

Growth in Storage System Capabilities Continues

Disk and tape systems continue to grow in terms of capacity and data throughput year-over-year. With this increase, storage costs continue to decline as storage becomes commoditized. This growth in capabilities and capacities has also created problems of complexity. Customers are seeking tools and solutions that reduce this complexity, improve operating efficiency and assure availability. Storage vendors are responding to the added complexity of larger, mission critical SANs by continuing to address interoperability problems that have plagued SANs in the past as well as seeking ways to provide additional functionality to their products that reduce the time and overall resource requirements of the customer.

Increasing Costs of Data Center Operations

The cost of data center ownership is more than just the hardware and applications comprising the core infrastructure. Rather, the significant, long-term costs associated with data centers are the costs of day-to-day operations, such as data backup and recovery, hardware and software maintenance, performance management, and resource allocation. Storage vendors are responding to customer needs with solutions designed to automate or eliminate these administrative tasks and provide convenient, centralized management of resources while at the same time enhancing flexibility and improving performance.

Growing Concern for Regulatory Compliance

Recently enacted regulations such as the Sarbanes-Oxley Act, the Patriot Act, and the Gramm-Leach-Bliley Act affect U.S. based companies. Other businesses are further affected by industry-specific regulatory acts such as Rule 17a-4 of the Securities Exchange Act of 1934, as amended, which requires the preservation of records by certain exchange members and brokers and dealers, the Health Insurance Portability and Accountability Act and several government defense requirements. Storage vendors are responding with solutions designed to address such regulations and the need for data permanence, security, and confidentiality while reducing business risks and improving information access.

Our Solutions

We are responding to these customer challenges with products that improve the utility of networked storage. Our current products as well as products in development, provide expanded solution options for connectivity such as Fibre Channel or iSCSI, or multiple media types such as tape, disk and optical. Our device controller products operate in any SAN environment and help our customers improve and reduce their total cost of information management. Our products increase the availability and functionality of storage networks by

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providing the ability to dynamically manage SAN devices. We are focused on delivering products to our customers that enable them to leverage their existing investments in servers and storage devices. Our products deliver value by reducing complexity and overhead for the storage administrator. This is accomplished through our easy to manage multi-protocol platform that provides connectivity to new and existing storage architectures. Our routers undergo extensive testing in many SAN configurations with a wide range of SAN hardware components and software applications. Leading independent software vendors and independent hardware vendors, including Brocade, Computer Associates, Legato and VERITAS Software, have verified our products.

In the future, we believe the basic protocol to protocol conversion bridge business is challenged due to: (1) the introduction of native fibre-channel tape drives and the lowering cost of fibre-channel switches; (2) the consolidation of bridge components into storage processors which provide the basic protocol to protocol conversion at lower cost and higher performance; and (3) the market pressures requiring the commoditization of basic connectivity.

Crossroads response to this challenge is to bring intelligent, focused solutions to the marketplace that solve specific customer problems in the areas of data access, use, and storage. These solutions will be flexible, versatile, and scalable by taking advantage of the power that is inherent in the LAN and the SAN. By providing special purposed network appliances, we will achieve our vision of delivering solutions that provide “Intelligence at the Edge.” This term describes our approach to deliver products positioned between storage devices and the network which enables us to maximize storage resource understanding, utilization and management by providing value-add features and functionality.

To achieve our vision, we believe we must transform our business from a primarily hardware company providing tape device networking interfaces to a networking solutions company that incorporates software on specifically purposed hardware solutions.

Our Strategy and Implementation

Fiscal 2004

In fiscal 2004, we focused on five primary tasks:

Realize Growth in ServerAttach Products.    During fiscal 2003, we expanded our market base through the release of the ServerAttach product family, which enables server resources to take advantage of the SAN. We also hired additional sales personnel with a focus on driving product growth. In addition, we signed an OEM agreement with EMC that established Crossroads as a qualified solutions provider for embedded Fibre Channel connectivity and began shipping product in fiscal 2003. In fiscal 2004, our goal was to realize growth in this product family. We did see growth in the ServerAttach product; however, it did not reach the level that we had planned for the business, including our growth expectation from EMC.

Maintain and Expand Our Storage Routing Business.    During the year, we shipped our “next generation” storage routers to our existing OEM base, which included the release of our fibre-to-fibre based product. We also released the Crossroads 6240, our sixth generation storage router. In addition, we introduced our NearEdge product strategy to provide value-add software features to our existing and future storage router product line. We have seen an increased interest from our OEM customers for the NearEdge features, especially with our largest OEM, who began shipping products including many of these features as they became available over the course of fiscal 2004. We also continued the development of our iSCSI products, by working closely with new OEM customers.

Customer Base Expansion.    The third task focused on driving new business within our existing customer base. We have maintained strong relationships with our OEM partners as we have collaborated on new opportunities to bring even greater value to their library solutions. Our OEM relationship with StorageTek started in 1998 with products designed to improve connectivity and access of tape library resources. Since that time,

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Crossroads has supplied StorageTek with products from five generations of connectivity solutions to include most recently the SN3400 router in 2002, and the SN3300 router in 2003.

Intellectual Property Value.    During fiscal 2004, we continued to add industry-leading companies to a growing list of corporations that have licensed our patented technology. More specifically, in total, we have entered into agreements with Adaptec, ADIC, FalconStor, Hitachi, XioTech and others to license our technology. We have also strengthened our patent portfolio as we now have 27 issued patents and 58 pending patents worldwide.

Strategic Opportunities.    We have engaged in long-term strategic opportunities during this fiscal year that we believe will position us for growth beyond 2004. These opportunities include our investment in NexQL and the acquisition of technology from Teracruz, Inc.

In summary, during fiscal 2004 we have begun to transition our business from a single product company which provided a single component of a storage solution, to one that provides multiple product lines focused on providing a complete storage solution.

Fiscal 2005 and Beyond

Historically, we have sold Fibre Channel to SCSI bridge products for tape devices primarily through our OEM sales channel, with a small percentage of sales through our VAR channel. However, we believe our visibility of the basic protocol to protocol conversion bridge business is challenged due to: (1) the introduction of native Fibre Channel tape drives and the lowering cost of Fibre switches; (2) the consolidation of bridge components into storage processors which provide the basic protocol to protocol conversion at lower cost and higher performance; and (3) the market pressures requiring the commoditization of basic connectivity. With this challenge in mind, Crossroads began focusing on an “Intelligence At The Edge” strategy in early 2004 - a strategy designed to translate Crossroads technology leadership in FC-SCSI connectivity and expand it by developing solutions targeted at the FC-SAN, IP-SAN, and LAN environments.

What is “Intelligence At The Edge”?

“Intelligence At The Edge” defines Crossroads’ approach to maximizing storage resource understanding, utilization and management through the delivery of value-add features and functionality between storage devices and the network through specifically purposed devices that reside within the network and have a complete view of the application servers and the storage systems. The Crossroads approach leverages our storage routing expertise and provides solutions that enable IT managers to build networks of consolidated storage assets that offer improved performance, security and reliability without sacrificing scalability.

Why is “Intelligence At The Edge” important?

Today’s IT manager demands an effective level of storage resource understanding, utilization and management—the key advantages of Crossroads’ “Intelligence At The Edge” solutions are as follows:

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How does “Intelligence At The Edge” relate to Crossroads products?

Crossroads currently offers “Intelligence At The Edge” features that include patented Access Controls as well as Server-Free Backup. During fiscal 2005, we will continue to introduce additional features as part of our NearEdge Suite. Crossroads is committed to providing “Intelligence At The Edge” on the following platforms:

Our Products

Our products fall within two families, the Device Controller Family and the new Network Solutions Appliances Family. Our products are as follows:

Current Products

Device Controller Family (Storage Routers)

Our traditional business has been the protocol-to-protocol bridge products, or storage routers. Our family of storage routers has grown over the past year and we are currently engaged in the development and release of three new storage routers. We have also expanded the product line through the development of iSCSI products.

SA20:    Our ServerAttach SA20 is designed to provide cost effective FC-SAN connectivity for legacy SCSI servers. The SA20 supports one 2Gb FC port and two U160 SCSI buses. The platform can be provided in low voltage design or high voltage design SCSI configurations. The SA20 operates with most midrange servers, including IBM’s iSeries (AS/400) servers and supports proprietary IBM block sizes. The SA20 is a user friendly, cost effective, and reliable method to integrating legacy SCSI server systems into FC SANs.

SA40:    Our ServerAttach SA40 is designed to provide enterprise-class FC-SAN connectivity for legacy SCSI servers. This platform incorporates a modular architecture with dual, hot-swappable power supplies and advanced environmental monitoring features. There are four available slots that can be populated with FC or SCSI connectivity modules. The SA40 is a highly scalable, highly reliable platform that can support up to 300 Mb/s of sustained throughput. The SA40 supports all of the features of the SA20 in a more flexible, robust and high performance solution.

6000:    The 6000 Storage Router is designed to provide value added software functionality and cost effective FC connectivity for SCSI tape library systems. The 6000 supports one 2Gb FC and two U160 SCSI buses. The 6000 includes many advanced features that help to increase the security, the performance and the reliability of tape storage solutions. The 6000 provides advanced resource management solutions in both the control path and the

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data path to the backup systems within a SCSI library. Crossroads is working with tape library vendors to bring advanced features that have traditionally only been available in high-end library systems to the mainstream of the tape automation market.

6240:    The 6240 Storage Router is designed to offer the same functionality as the 6000 in a two 2Gb FC x four U160 SCSI configuration. The 6240 lowers the cost per port for FC to SCSI connectivity, and offers the same advanced software features that are available for the 6000.

10000:    The 10000 Storage Router is designed to provide value added software functionality and enterprise-class FC SAN connectivity for SCSI tape library systems. This platform incorporates a modular architecture with dual, hot-swappable power supplies and advanced environmental monitoring features. There are four available slots that can be populated with FC or SCSI connectivity modules. The 10000 is a highly scalable, highly reliable platform that can support up to 300 Mb/s of sustained throughput. The 10000 supports all of the features of the 6000 in a more flexible, robust and high performance solution.

Future Products

The goal of our product development efforts is to diversify our product portfolio and increase revenue potential by addressing new markets. Our future product direction can be characterized as follows:

Device Controller Family (Storage Routers and ServerAttach)

We are focused on delivering high performance Internet Small Computer Systems Interface (iSCSI) storage routers that will incorporate support for alternate protocols, such as NDMP. New iSCSI storage routers, currently in testing with a major OEM, should be released in fiscal 2005. Our products will provide secure, reliable and sustainable storage solutions for connecting tape and disk storage devices through intelligent routing positioned at the network’s edge.

Network Solution Appliances Family

The Network Solution Appliances Family spans both the disk storage and tape storage markets. We plan to introduce Network Solution Appliance products beginning in fiscal 2005 which will provide versatile, high performance, low latency solutions across IT networks which will improve the utilization and management of storage resources.

Our Customers

We market, sell, and support our products through a wide range of distribution partners, including OEM partners, distributors, systems integrators, and value-added resellers. Our OEM partners offer our products under their own private label or as Crossroads branded solutions. Sales through OEM partners comprise the majority of our business. Our authorized distributors, systems integrators and value-added resellers market, sell and support Crossroads branded products. Some of these distribution partners also sell product education and other value-added services. We have partner agreements with many of the companies that sell storage systems and subsystems.

Prior to offering our products for sale through OEMs, 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 environment as well as rigorous reliability testing. This qualification process can continue for a year or longer. 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 future sales opportunities. If we are unsuccessful or delayed in qualifying any products with an OEM customer, such failure or delay would preclude or delay sales of that product to the OEM.

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Historically, we have had strong relationships with our OEM customers and continue to expand our existing relationships as we look for new OEM opportunities. We are further targeting an expansion into three areas during fiscal 2005:

Our products are used in product offerings from ACAL, Bell Micro, DLT Solutions, EMC, Fujitsu-Siemens, Groupe Bull, HP, Info-X, Overland Storage, Promark, Scientific Digital, StorageTek, Quantum and Unisys.

Our Competition

The market for SAN products is competitive. Our products are differentiated from traditional storage router competitors by virtue of our product features and patented technology. We anticipate that the market for our products will continue to evolve and will remain subject to rapid technological change.

Crossroads currently controls 89% of the traditional market for FC-SCSI bridge products according to Gartner Dataquest (2004). Although there are other companies that produce bridges, none of them have a significant market share for these products. As the demand for bridge solutions continues to decline (due to the increased adoption of native FC tape drives), some companies are choosing to discontinue their FC-SCSI products. Both ATTO and Bridgeworks continue to produce low cost FC-SCSI routers, but have not been able to achieve significant market penetration. Among the remaining traditional bridge vendors, ADIC is the only other company that is enabling advanced library management solutions through native FC and FC-SCSI bridge platforms; ultimately turning their product into a storage router. Although the demand for traditional bridge products is declining, the demand for advanced library resource management solutions (enabled through the storage routers) is increasing. During this market shift (bridges to storage routers), we anticipate that Crossroads and ADIC will remain the primary suppliers in the growing market for advanced library management solutions. We are the only remaining vendor to offer ServerAttach functionality for legacy systems; and therefore, it is anticipated that Crossroads will be able to increase our market share for these solutions over the course of next year. In the market for iSCSI-SCSI bridge solutions, there are currently two competitors offering products with potentially other larger vendors on the horizon. ATTO and Bridgeworks currently offer relatively low cost iSCSI solutions. Additionally, in the hypercompetitive iSCSI market, we are focused on delivering high performance products that will incorporate support for alternate protocols such as the software feature, NDMP.

From a high level, key industry drivers defining the competitive landscape and creating new revenue opportunities for Crossroads in FY2005 are:

Internet Small Computer System Interface (iSCSI) transmits Small Computer System Interface (SCSI) commands and associated block data over IP infrastructure using TCP/IP. This technology enables the implementation of low-cost, extended range SANs and is considered “transformational” in nature. Gartner predicts a 20% to 50% uptake by target audiences looking to implement low-cost, extended range SANs.

Storage resource manageability provides real-time and historical information on the storage hardware/software/server infrastructure regarding availability, capacity and performance. It identifies storage usage, availability and performance by application, business unit or user. There are many

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storage resource manageability centric products currently in the market today, however, the technology supporting this manageability needs broader platform and application support. Because of its potential to improve areas such as quality of service (QOS), including performance, availability and agility of the storage infrastructure, while constantly reducing costs and head count, Gartner predicts that storage management resource products can expect an uptake of between 1% and 5% by target audiences.

Information Lifecycle Management (ILM) technologies enable organizations to dynamically and seamlessly manage corporate information according to its changing value over time. For users, the motivations are economic (i.e., more efficient storage utilization), operational (i.e., automated management of increasingly distributed system resources) and legal (i.e., required by state and federal regulations, such as the Sarbanes-Oxley Act and others). Although arguably vendor-driven and perhaps somewhat ‘utopian’ in vision, ILM is becoming a very attractive idea for CIOs and, subsequently, an area of emerging marketplace activity for vendors in the enterprise storage and software arenas. In translating this opportunity into an objective business view, the technologies associated with ILM represent the second fastest segment of the storage software market.

The market for SAN products generally, and storage routers in particular, is increasingly competitive. Our products are differentiated from traditional router competitors by virtue of our product features and patented technology. We anticipate that the market for our products will continue to evolve and will remain subject to rapid technological change. We currently face direct competition primarily from ATTO and Bridgeworks. We also expect to face competition in the future from one or more of the following sources:

Seasonality

Although operating results have not been materially and adversely affected by seasonality in the past, because of the significant seasonal effects experienced within the industry, particularly in Europe, our future operating results could be materially adversely affected by seasonality. See “Risk Factors – Factors, some of which are beyond our control, could cause our quarterly results to fluctuate” accompanying this Annual Report on Form 10-K.

Research and Development

The storage networking industry we compete in is subject to rapid technological developments, evolving industry standards, changes in customer requirements, and new product introductions. As a result, we believe that our research and development efforts are essential to successfully deliver innovative products that address the needs of our customers. Our research and development team works closely with our marketing and sales team and our OEM customers to develop product features and enhance performance. Development activities are conducted with extensive validation testing both internally and at our major OEM customers.

We have invested heavily in research and development to support current and future product development. We continue to enhance and extend our products to anticipate and meet customer requirements. We continue to

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increase the speed and performance of our storage routing products to deliver higher port density and cost-optimized solutions. Our products are designed to support current industry standards and will continue to be designed to support emerging standards that are consistent with our product strategy. Members of our senior engineering team are also actively engaged in the development of industry standards, which allows us to focus our product strategies in areas that are aligned with the latest industry standards.

Historically, we have addressed the input/output (I/O) controller business, specifically in providing bridging capabilities to tape and library solutions. As this market has matured, our traditional business has been challenged on many fronts with the impact for engineering coming in the form of: (1) product commoditization (driving lower cost & higher performance requirements to maintain Crossroads value); and (2) new companies developing ASICs (router on a chip) that provide higher performance, and lower cost solutions. With these factors in mind, the engineering challenge is to deliver storage router products required to maintain and grow our current business and add to the value of the company.

The engineering team has also been challenged to create a general purpose I/O architecture that provides low-latency/high-throughput I/O capabilities (Crossroads Network Routing Platform). This platform would help with our corporate strategy for providing intelligent network solutions. The engineering team is working on several solutions as described below.

Crossroads Storage Routing

Historically, we have designed and developed custom hardware platforms to serve the router market. This has suited our needs due to the lack of technological integration required in the storage market. As I/O technologies have become more integrated, basic bridging functions (protocol to protocol) are becoming more integrated as well. This higher level of integration (and thus cost reduction) is required due to the continued pricing pressures from OEM’s for the basic bridging technology.

Rather than compete against or ignore this trend, our strategy is to embrace the ASIC components. We have established component partners to develop the basic hardware board platforms that when combined with our routing expertise, enable us to deliver the solutions our OEM customers require at a lower price.

We believe that we also can gain significant market differentiation by working with these partners to integrate our Crossroads routing management interface (RMI) engine into the fast path of the ASIC, giving us accelerated performance for the overall system solution. It is key to note that this performance would not only impact the throughput of the system (traditional requirements for tape based systems), but would also give us market leading performance in I/O per second (IOPs) which is the primary measurement for disk based controllers.

Hardware Platforms

The engineering strategy to deliver the hardware platforms required for the Crossroads Network Routing Platform is two fold:  (1) leverage the Crossroads Storage Routing platform and (2) embrace white-box servers. The approach is dependent upon the solution requirements.

Our strategy for storage routing includes integrated ASIC system designs which are providing previously unobtainable I/O performance, cost and integration capabilities. Through flexible design requirements, as well as pointed variations to a platform, the Crossroads Storage Routing platforms may be heavily leveraged in these solutions.

In situations where the performance, time-to-market and cost requirements do not match well to an existing, or under-development Crossroads Storage Router platform, a white-box server will be evaluated for the solution. White-box servers provide a cost-effective, generic alternative for branded hardware platforms. In conjunction

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with the Software Strategy, Crossroads has the ability to choose off-the-shelf components to build a Crossroads Network Routing Platform. These servers can be quickly sized to the requirements, with processor speed, memory size, I/O controllers, I/O bandwidth and disk capacities factoring into the selection and the quick deployment of a new Crossroads Network Routing Platform.

System Software

The RMI architecture provides the foundation for all of our platforms. With this interface, we are able to take advantage of any SCSI protocol and efficiently route from one interface to another. The RMI architecture enables our products to achieve the low-latency/high-throughput requirements of both the Crossroads Router Platform and the Crossroads Network Routing Platform. Our engineering team has begun to migrate the RMI architecture from VxWorks to Linux. This migration is nearing completion and enables the next part of our corporate strategy:  adding solutions on top of the core routing capability. To support the hosting of applications, the Crossroads software team must continue to formalize the RMI interface under Linux. This formalization includes:

The development team must have the expertise and resources to work with third-party software to help with the education of engineers, or assist in the porting effort of software to the router platforms. With the implementation of the strategy described above, the provisions for hosting applications on the Crossroads Network Routing Platform now exist. It is possible to host software from many different sources.

As of October 31, 2004, our engineering staff included software engineers with expertise in embedded software, management tools, software applications and graphical user interface development. Our research and development expenses were $13.7 million in fiscal 2004.

Manufacturing

Our manufacturing group provides three primary services to the company. Engineering Services provides the structure for Crossroads to release and control our products, Manufacturing Operations provides final assembly and test of products, and also provides purchasing support development programs and all other non-inventory purchases.

We use Solectron Corporation and Celestica Corporation, third-party contract manufacturers, to assemble the printed circuit board for our current products. These printed circuit board assemblies consist of the electronics that control the function of our product. The contract manufacturers purchase the required components for our printed circuit board to meet demand in accordance with our purchase orders and our forecast. During product final assembly and test, the printed circuit board is assembled with the remaining components, the power supply, cables and enclosures, and is tested to create the final product. We also perform on-going reliability testing to ensure that fluctuations in materials or processes are quickly identified and corrected before problems occur in the field. We also employ standard quality practices (out of box audit, in-line audit) to maintain quality control.

The contract manufacturers invoice us based on prices and payment terms mutually agreed upon and set forth in purchase orders we issue to them. The pricing takes into account component costs, manufacturing costs and margin requirements. Although the purchase orders we place with the contract manufacturers are cancelable, the terms of our manufacturing agreement with them would require us to purchase all excess or obsolete material

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not returnable or usable by other customers. 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.

Although we use standard parts and components for our products where possible, we currently purchase several key components used in the manufacture of our products from single or limited sources. Our principal single-source components include application specific integrated circuits, licensed software and the chassis. We have an obligation to our contract manufacturers for portions of excess inventory arising from a sudden reduction in purchase orders by us to the extent it differs from the forecast, which we supply to our contract manufacturers.

We have continued efforts to reduce cost and improve margins. In the spring of 2003, we partnered with HP to move the manufacturing of their products to an HP managed custom manufacturer.

During fiscal 2004, we have maintained our ISO 9002 registration.

Patents, Intellectual Property and Licensing

As of October 31, 2004, we had 27 patents issued and 58 patents pending worldwide. 32 patent applications are pending in the United States Patent and Trademark Office with respect to our technology. We have 26 pending international patent applications (primarily in the European and Japanese Patent Offices). We also have 8 international patent applications pending under the Patent Cooperation Treaty.

We rely on a combination of patents, copyrights, trademarks, trade secrets, confidentiality agreements, and other contractual restrictions with employees and third parties to establish and protect our proprietary rights. We maintain a program to identify and obtain patent protection for our inventions. It is possible that we will not receive patents for every application we file. Furthermore, our issued patents may not adequately protect our technology from infringement or prevent others from claiming that our products infringe their patents. Failure to protect our intellectual property could materially harm our business. In addition, our competitors may independently develop similar or superior technology. It is possible that litigation may be necessary in the future to enforce our intellectual property rights, to protect our trade secrets, or to determine the validity and scope of the proprietary rights of others. Litigation could result in substantial costs and diversion of resources and could materially harm our business.

Some of our products are designed to include software or other intellectual property licensed from third parties. While it may be necessary in the future to seek or renew licenses relating to various aspects of our products, we believe that such licenses generally could be obtained on commercially reasonable terms.

We have registered the trademarks “CROSSROADS” and “CROSSROADS SYSTEMS” in the United States and in other countries. In addition, the Crossroads logo, ServerAttach, Crossroads ServerAttach Manager, CSM, Crossroads Visual Manager, and CVM are trademarks of Crossroads Systems, Inc., in the United States and in other countries. All other trademarks, service marks or trade names referred to in this Annual Report on Form 10-K is the property of their respective owners.

Employees

At January 25, 2005, we had 147 employees, with 90 engaged in research and development and customer support, 20 in manufacturing, 13 in sales and marketing, and 24 in administration, information technology, human resources 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. Competition for technical personnel in the computing industry continues to be significant. We believe that our success depends in part on our ability to hire, assimilate, and retain qualified personnel. We cannot assure you that we will continue to be successful at hiring, assimilating, and retaining employees in the future.

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Additional Information

Our Internet address is www.crossroads.com. We make available through our Web site our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, and other filings with the Securities and Exchange Commission as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission.

The SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The public also may read and copy these filings at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. Information about this Public Reference Room is available by calling 1-800-SEC-0330.

Executive Officers of the Registrant

The following table sets forth, as of December 31, 2004, certain information concerning our executive officers at that date who are also our current executive officers:

Robert C. Sims has served as our President and Chief Executive Officer since October 2003 and as a member of our Board of Directors since November 2003. From May 2002 to September 2003, Mr. Sims served as our Chief Operating Officer. From April 2001 to May 2002, Mr. Sims served as our Vice President of Engineering and Operations. From July 2000 to April 2001, Mr. Sims served as our Vice President of Operations and Corporate Quality. From March 1999 to July 2000, Mr. Sims served as our Director of Operations. Prior to joining Crossroads, from January 1998 to March 1999, Mr. Sims managed the advanced manufacturing and product test organizations at Kentek Corp. From 1990 to 1998, Mr. Sims served in various capacities at Exabyte, including manager of the manufacturing engineering and quality organizations for the high-end tape drive division. Mr. Sims received a B.S.E.E. from Colorado State University.

Bill Georgas has served as our Vice President, Sales and Marketing since July 2004. From September 2002 to June 2004, Mr. Georgas served as the Vice President of Global Account Sales for AT&T. From June 2000 to August 2002, Mr. Georgas served as Regional Sales Director for Equant, Inc. Prior to Equant, Inc., from 1992 to 2000, Mr. Georgas served in various sales capacities at MCI Worldcom, including District Operations Manager . Mr. Georgas received a B.S. in General Engineering from the U.S. Military Academy at West Point and a M.B.A from Chapman University.

Brian Bianchi has served as our Vice President, Engineering Development since November 2004. From May 2002 to October 2004, Mr. Bianchi served as our Director of Development and Product Test. From April 1998 until April 2002, Mr. Bianchi served in various engineering capacities at Crossroads. Prior to joining Crossroads, from May 1996 to March 1998, Mr. Bianchi served as Technical Program Manager for Hewlett Packard. From June 1988 to April 1996, Mr. Bianchi served in various capacities at Convex Computer Corporation, including Networking & I/O Software Manager. Mr. Bianchi received a B.A. in Computer Science from The University of Texas at Austin.

Further information required by this Item is incorporated by reference to our Proxy Statement under the sections captioned “Election of Directors” and “Compliance with Section 16(a) of the Securities Exchange Act of 1934.”

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ADDITIONAL FACTORS THAT MAY AFFECT FUTURE RESULTS

In addition to the other information in this Annual Report on Form 10-K, the following factors should be considered in evaluating Crossroads and our business. These factors include, but are not limited to the factors listed below. Additional risks and uncertainties that we are unaware of or that we currently deem immaterial also may become important factors that affect us. This document is qualified in its entirety by these risk factors.

If any of the following risks actually occur, they could materially harm our business, financial condition or results of operations. In that case, the market price of our common stock could decline.

We have incurred significant losses and negative cash flow, we expect future losses and we may never be profitable or maintain a consistent positive cash flow position.

We have incurred significant losses in every fiscal quarter since fiscal 1996 and expect to continue to incur losses in the future. As of October 31, 2004, we had an accumulated deficit of $153.8 million. We cannot be certain that we will be able to generate sufficient revenue to achieve profitability or become consistently cash flow positive. Although we restructured our organization in 2002, which significantly reduced our expense structure, we still expect to incur significant sales and marketing, research and development and general and administrative expenses and, as a result, we expect to continue to incur losses. We expect fluctuations in our cash flow position to continue in future quarters throughout fiscal 2005.

We have experienced and expect to continue to experience significant period-to-period fluctuations in our revenue and operating results, which makes our financial results difficult to predict and may result in volatility in our stock price.

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

Factors, some of which are beyond our control, could cause our quarterly results to fluctuate, including:

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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 could lead to fluctuations in quarterly revenue and gross profits.

We are introducing a new family of products that represents a fundamental shift in our strategic direction which entails significant risk. If we are unable to successfully develop these new products, if these new markets fail to develop to the extent and as quickly as we expect, or if we are not successful in this strategic shift, our business will be materially and adversely affected.

We have recently announced our “Intelligence At The Edge” approach to maximizing storage resource understanding, utilization and management through the delivery of new features and functionality between storage devices and the network. The result of this new approach is our Network Solution Appliance Family of products which we plan to introduce in the second quarter of fiscal 2005. This new approach entails significant risks, such as new markets and new competition, and represents a fundamental shift in our business. If we are not successful in implementing this new strategy, our business will be materially and adversely affected.

We believe the protocol-to-protocol conversion bridge business, the basis of our current products, is challenged and may never grow to the levels we expected.

We believe our current business, the protocol to protocol conversion bridge business, is challenged due to:

The protocol to protocol conversion bridge business is the basis for our current business and our current products. If this business is unable to overcome these challenges, revenue from sales of our current products may be stagnant or decrease. Due to our belief that our current business model is challenged, we are attempting to transform ourselves into a networking solutions company. If we are unable to successfully complete this transformation, our business will be materially and adversely affected.

Global economic conditions may continue to negatively impact us and the price of our common stock.

The macroeconomic environment and capital spending on information technology in the past three fiscal years resulted in continued uncertainty in our revenue expectations. The operating results of our business depend on the overall demand for storage area network products. Because our sales are primarily to major OEM customers whose businesses fluctuate with general economic and business conditions, continued soft demand for storage area network products caused by budgetary constraints has resulted in decreased revenue. We may be

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especially prone to this as a result of the relatively high percentage of revenue we have historically derived from the high-tech industry, which has been more adversely impacted by the economic environment. In particular, continuing economic uncertainty has resulted in a general reduction in information technology spending. This reduction in information technology spending has helped lead to a decline in our growth rates compared to historical trends. Customers may continue to defer or reconsider purchasing products if they continue to experience a lack of growth in their business or if the general economy fails to significantly improve, resulting in a continued decrease in our product revenue.

The storage technology market is characterized by rapid technological evolution, and our success depends on our ability to develop new products.

The market for our products is characterized by rapidly changing technology and evolving industry standards and is highly competitive with respect to timely innovation. The introduction of new products embodying new or alternative technology or the emergence of new industry standards could render our existing products obsolete or unmarketable. Our future success will depend in part on our ability to anticipate changes in technology, to gain access to such technology for incorporation into our products and to develop new and enhanced products on a timely and cost-effective basis. Risks inherent in the development and introduction of new products include:

We have also entered into a strategic relationship with NexQL for the joint development of advanced data management solutions. This relationship may not result in additional products that obtain market acceptance.

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

Failure to manage our business effectively could seriously harm our business, financial condition and prospects.

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

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An adverse decision in the various securities class action lawsuits filed against us may have a material adverse effect on our business and financial performance.

We, and several of our officers and directors, were named as defendants in several class action lawsuits filed in the United States District Court for the Western District of Texas. The plaintiffs in the actions purport to represent purchasers of our common stock during various periods ranging from January 25, 2000 through August 24, 2000. On February 24, 2003, the Court entered a final judgment in the defendant’s favor. Plaintiff’s appealed to the United States Court of Appeals for the Fifth Circuit. On April 14, 2004, the Fifth Circuit issued an opinion, which affirmed in part and vacated in part the district court’s ruling. The remaining claims were remanded to the district court. On May 12, 2004, the Fifth Circuit denied plaintiff’s request for panel rehearing. In December 2004, we reached an agreement in principle to settle this litigation. The shareholder class will receive a total payment of $4.35 million. Of that amount, our directors-and-officers insurance carriers agreed to pay $3.35 million and we agreed to pay $1.0 million.

Our business is dependent on the storage area network market, which is unpredictable, and if this market does not expand as we anticipate, our business will suffer.

Substantially all of our current and many of our proposed future products are used exclusively in SANs and, therefore, our business is dependent on the SAN market. Accordingly, the widespread adoption of SANs for use in organizations’ computing systems is critical to our future success. Most of the organizations that would be likely to purchase our products have invested substantial resources in their existing computing and data storage systems and, as a result, may be reluctant or slow to adopt a new approach like SANs, particularly in the current economic environment. SANs are often implemented in connection with the deployment of new storage systems and servers. Therefore, our future success is also substantially dependent on the market for new storage systems and servers. Furthermore, the ability of the different components used in a SAN to function effectively, or interoperate, with each other when placed in a computing system has not yet been achieved on a widespread basis. Until greater interoperability is achieved, customers may be reluctant to deploy SANs. Our success in generating revenue in the emerging SAN market will depend on, among other things, our ability to:

We have limited product offerings and our success depends on our ability to develop in a timely manner new and enhanced products that achieve market acceptance.

We currently have a limited number of products that we sell in commercial quantities. Our future growth and competitiveness will depend greatly on the market acceptance of our product lines, including the storage routers and the ServerAttach line of products. We have received revenue from the sale of our storage routers and ServerAttach lines of products; however, the market acceptance of our ServerAttach line of products sold through the channel remains uncertain. If the ServerAttach line of products does not achieve sufficient market acceptance, our future growth prospects could be seriously harmed. Moreover, even if we are able to develop and commercially introduce new products and enhancements, these new products or enhancements may not achieve market acceptance.

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

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We depend on a limited number of customers for the vast majority of our revenue. The loss of or significant reduction in orders from any key customers would significantly reduce our revenue and would substantially harm our future results of operations.

In fiscal 2002, 2003, and 2004, 75%, 75% and 84% of our total sales, respectively, was derived from OEM customers with more than ten percent of our total sales. In fiscal 2004, HP, StorageTek and EMC represented 48%, 21% and 15% of our total revenue, respectively. Although we added EMC to our list of significant OEM customers for fiscal 2004, our operating results now and in the foreseeable future will continue to depend on sales to a relatively small number of OEM customers. Therefore, the loss of any of our key OEM customers, or a significant reduction in sales to any one of them, would significantly reduce our revenue.

Our OEM customers require our products to undergo a lengthy and expensive qualification process that does not assure product sales.

Prior to offering our products for sale, our OEM customers require that each of our products undergo an extensive qualification process, which involves interoperability testing of our product in the OEM’s system as well as rigorous reliability testing. This qualification process may continue for a year or longer. However, qualification of a product by an OEM does not assure any sales of the product to the OEM. Despite this uncertainty, we devote substantial resources, including sales, marketing and management efforts, toward qualifying our products with OEMs in anticipation of future sales opportunities. 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 current products depends significantly upon the need to interconnect small computer system interface (SCSI) tape storage systems with Fibre Channel SANs, and we expect to face competition from manufacturers of tape storage systems that incorporate Fibre Channel interfaces into their products.

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

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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, such as internet SCSI (iSCSI). A number of large companies in the computer hardware and software industries are actively involved in the development of new technologies and standards that we expect to incorporate in our new products. Should any of these companies delay or abandon their efforts to develop commercially available products based on these new technologies and standards, our research and development efforts with respect to such technologies and standards likely would have no appreciable value. In addition, if we do not correctly anticipate new technologies and standards, or if our products based on these new technologies and standards fail to achieve market acceptance, our competitors may be better able to address market demand than would we. Furthermore, if markets for these new technologies and standards develop later than we anticipate, or do not develop at all, demand for our products that are currently in development would suffer, resulting in less revenue for these products than we currently anticipate.

Uncertainties involving sales and demand forecasts for our products could negatively affect our business.

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

We are subject to increased inventory risks and costs because we manufacture products in advance of binding commitments from our customers to purchase our products.

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

The loss of our primary contract manufacturers, or the failure to forecast demand accurately for our products or to manage our relationship with our primary contract manufacturers successfully, would negatively impact our ability to manufacture and sell our products.

We rely on a limited number of contract manufacturers, primarily Solectron and Celestica, to assemble the printed circuit board for our current shipping programs, including our 6000 and 10000 and ServerAttach line of products. We generally place orders for products with Solectron and Celestica approximately four months prior to the anticipated delivery date, with order volumes based on forecasts of demand from our customers. Accordingly, if we inaccurately forecast demand for our products, we may be unable to obtain adequate manufacturing capacity from Solectron or Celestica to meet our customers’ delivery requirements, or we may accumulate excess inventories. We have on occasion in the past been unable to adequately respond to unexpected

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increases in customer purchase orders, and therefore were unable to benefit from this incremental demand. Solectron and Celestica have not provided assurance to us that adequate capacity will be available to us within the time required to meet additional demand for our products.

Our plans to introduce new products and product enhancements to market require coordination across our suppliers and manufacturers, which exposes us to risks of delay or poor execution from a variety of sources.

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

We depend on sole source and limited source suppliers for certain key components, and if we are unable to buy these components on a timely basis, our delayed ability to deliver our products to our customers may result in reduced revenue and lost sales.

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

Competition within our markets may reduce sales of our products and reduce our market share.

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

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could introduce additional competition in our markets, especially, if one of our OEMs begins to manufacture our higher end storage routers. While we do not currently face significant direct competition for our ServerAttach products, we anticipate we will see increased competition as this market develops.

We are a relatively small company with limited resources compared to some of our current and potential competitors.

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

We have licensed our storage router technology to a key customer, which may enable this customer to compete with us.

In November 2002, we amended our existing licensing agreement with HP. Pursuant to this amendment we have outsourced the manufacturing of our embedded routers to HP. As a result, we do not incur the inventory and overhead costs of the hardware, and we will receive a royalty from HP for licensing our technology, which will result in less aggregate revenue for us. However, even though total revenue from the sale of our embedded routers will be less in the future, our arrangement will have a positive impact on gross margin. We believe this agreement will allow us to leverage the strengths of both companies, including HP’s economies of scale in manufacturing and systems integration expertise and our software, value-added applications and intellectual property. We have been working under this new agreement since the fiscal second quarter of 2003. HP has vastly greater resources and distribution capabilities than we do, and therefore, it could establish market acceptance in a relatively short time frame for any competitive products that it may introduce using our licensed technologies, which, in turn, would reduce demand for our products from HP and could reduce demand for our products from other customers.

Unit prices of our products decrease over time, and if we cannot increase our sales volumes and develop new, higher margin products, our revenue will decline.

As storage networking continues to mature as an industry, we have seen a trend towards simplification of devices. The impact of this trend on our business has been the push for, and subsequent ramp of embedded routers being shipped with tape libraries. These embedded routers are lower cost than the stand-alone box routers and this lower cost is passed on to our OEM customers. As our mix shifts from box routers to embedded routers, we will see a reduction in average price per unit and revenue will decline if volume does not increase. To date, some of our agreements with OEM customers, including our largest customer, provide for quarterly reductions in pricing on a product-by-product basis, with the actual discount determined according to the volume potential expected from the customer, the OEM’s customer base, the credibility the OEM may bring to our solution, additional technology the OEM may help us incorporate with our product, and other Crossroads products the OEM supports. Notwithstanding, the decreases in our average selling prices of our older generation products generally have been partially offset by higher average selling prices for our newer products, as well as sales to distributors 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

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products do not receive broad market acceptance. In addition, declines in our average selling prices may be more pronounced should we encounter significant pricing pressures from increased competition within the storage router market.

Our products are complex and may contain undetected software or hardware errors that could lead to an increase in our costs or a reduction in our revenue.

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

We depend on our key personnel to manage our business effectively in a rapidly changing market, and if we are unable to retain our current personnel and hire additional personnel, our ability to sell our products could be harmed.

We believe our future success will depend in large part upon our ability to attract and retain highly skilled managerial, engineering and sales and marketing personnel. Moreover, we maintain a relatively small staff of executive management and are highly dependent on those individuals, in particular Rob Sims, our chief executive officer to provide continuity in the execution of our growth plans. The loss of the services of any of our key employees or key management would harm our business. Additionally, our inability to attract or retain qualified personnel in the future or any delays in hiring required personnel, particularly engineers and sales personnel, could delay the development and introduction of, and negatively impact our ability to sell, our products.

We may be unable to protect our intellectual property, which would negatively affect our ability to compete.

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

Our efforts to protect our intellectual property may cause us to become involved in costly and lengthy litigation, which could seriously harm our business.

In recent years, there has been significant litigation in the United States involving patents, trademarks and other intellectual property rights. From time to time, we receive letters from various industry participants alleging

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infringement of patents, trademarks or misappropriation of trade secrets or from customers requesting indemnification for claims brought against them by third parties. The exploratory nature of these inquiries has become relatively common in the semiconductor industry. We typically respond when appropriate and as advised by legal counsel. We have been involved in litigation to protect our intellectual property rights in the past and may become involved in such litigation again in the future. For example, in November 2003 we filed a lawsuit against Dot Hill Systems alleging that they infringed two of our patents. In December 2003 Dot Hill denied infringement and alleged that two of our patents were invalid and unenforceable. In 2000, we filed a lawsuit against Pathlight Technology alleging that they had infringed one of our patents. Pathlight was subsequently acquired by ADIC and in June 2001 ADIC paid us $15.0 million in settlement of this lawsuit. In the future, we may become involved in additional litigation to defend allegations of infringement asserted by others, both directly and indirectly as a result of certain industry-standard indemnities we may offer to our customers. Legal proceedings could subject us to significant liability for damages or invalidate our intellectual property rights. Any litigation, regardless of its outcome, would likely be time consuming and expensive to resolve and would divert management’s time and attention. Any potential intellectual property litigation against us could force us to take specific actions, including:

In September 2004, we received notice from Tech Data Corporation, a distributor of some of our products, informing us that they had been contacted by Patriot Scientific Corporation regarding the infringement of one of Patriot’s patents by processors contained in our products. Tech Data has requested that we indemnify them in connection with this claim. We are investigating this matter.

Any acquisitions we make could disrupt our business and harm our financial condition.

As part of our growth strategy, we intend to review opportunities to acquire other businesses or technologies that would complement our current products, expand the breadth of our markets or enhance our technical capabilities. For example, in December 2003 we entered into certain strategic agreements with NexQL, a development stage company. Under the terms of these agreements, we have an exclusive right, but not an obligation, to purchase NexQL. In addition, in October 2004, we purchased application acceleration and monitoring assets which represented substantially all of the assets of Teracruz, Inc., a privately held company located in Alabama. In connection with the purchase of the Teracruz assets, we assumed Teracruz’s lease obligation for its facility in Alabama and we hired five former Teracruz employees. We also must integrate the Teracruz assets into our future products. Any acquisitions, including any potential acquisition of NexQL, would entail a number of risks that could materially and adversely affect our business and operating results, including:

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Our relationship with NexQL subjects us to numerous risks and uncertainties.

We are a party to several agreements with NexQL. As of October 31, 2004, we had a minority equity interest in NexQL of approximately 25% and we held one of NexQL’s four board of director seats. Our relationship with NexQL subjects us to numerous risks and uncertainties, including:

Our strategic relationship with and investment in NexQL, a development stage company, is an important component of our strategic plan and if our relationship with NexQL fails to develop our business could be materially and adversely affected.

As of the time of this Annual Report, we have tentatively agreed to provide up to an additional $2.0 million in the loan facility to further fund the operations of NexQL, subject to negotiation of definitive documents. At this time, NexQL is wholly dependent on us for financing and if, for whatever reason, we are unwilling or unable to continue to fund NexQL or to assist NexQL to locate another source of financing, it would materially and adversely affect NexQL and we could lose the entire value of our investment. As our investment in and relationship with NexQL is an important component of our business strategy, any adverse development that affects NexQL or our relationship with NexQL could have a material adverse effect on our strategy and accordingly would harm our business, financial results and prospects.

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.

Provisions in our charter documents and Delaware law could prevent, delay or impede a change in control of us and may reduce the market price of our common stock.

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

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merging with us, which may adversely affect the market price of our common stock. Further, in August 2002, our Board of Directors approved, adopted and entered into a Stockholder Rights Plan which also may have the effect of discouraging, delaying or preventing an acquisition which stockholders otherwise may desire to support.

Our common stock is currently trading above $1.00 per share. However, if the closing bid price of our common stock were to fall below $1.00 per share for more than 30 consecutive trading days, our stock could be at risk of being delisted from The NASDAQ National Market.

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

Our stock price is volatile.

The market price of our common stock has been volatile in the past and may be volatile in the future. For example, since November 1, 2003, the intra-day market price of our common stock as quoted on The NASDAQ Stock Market fluctuated between $1.16 and $3.81. The market price of our common stock may be significantly affected by the following factors:

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.

We are headquartered in Austin, Texas under a lease that expires in April 2006. Our final assembly and test facility of approximately 15,550 square feet is also located in Austin, Texas. The lease agreement on this facility expires in April 2006. In addition, we assumed a lease space in Huntsville, Alabama, which expires on July 31, 2007.

Intellectual Property Litigation

On November 4, 2003, we filed a lawsuit against Dot Hill Systems, Inc. (“Dot Hill”) alleging that Dot Hill has infringed two of our patents, U.S. Patent No. 5,941,972 (hereinafter “the ’972 Patent”) and U.S. Patent No. 6,425,035 (hereinafter “the ‘035 Patent”), with some of Dot Hill’s products. Dot Hill filed an answer on

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December 17, 2003 denying infringement and alleging the ‘972 and ‘035 Patents are invalid and unenforceable. We plan to vigorously defend our patents against these counterclaims.

Securities Class Action Litigation

We, and several of our officers and directors, were named as defendants in several class action lawsuits filed in the United States District Court for the Western District of Texas. The plaintiffs in the actions purport to represent purchasers of our common stock during various periods ranging from January 25, 2000 through August 24, 2000. On February 24, 2003, the Court entered a final judgment in the defendant’s favor. Plaintiff’s appealed to the United States Court of Appeals for the Fifth Circuit. On April 14, 2004, the Fifth Circuit issued an opinion, which affirmed in part and vacated in part the district court’s ruling. The remaining claims were remanded to the district court. On May 12, 2004, the Fifth Circuit denied plaintiff’s request for panel rehearing. In December 2004, we reached an agreement in principle to settle this litigation. The shareholder class will receive a total payment of $4.35 million. Of that amount, our directors-and-officers insurance carriers agreed to pay $3.35 million and we agreed to pay $1.0 million.

In addition, we are involved in various legal proceedings and claims that arise in the normal course of our business. While many of these matters involve inherent uncertainty, our management believes that the amount of the liability, if any, ultimately incurred by us with respect to any existing proceedings and claims, net of applicable reserves and available insurance, will not materially harm our business, financial condition or results of operations.

No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year covered by this Annual Report on Form 10-K.

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PART II

Our common stock has been quoted on The NASDAQ Stock Market under the symbol “CRDS” since our initial public offering on October 20, 1999. Prior to the initial public offering, there had been no public market for our common stock. The following table lists the high and low per share closing market prices for our common stock as reported by The NASDAQ Stock Market for the periods indicated:

We believe that a number of factors may cause the market price of our common stock to fluctuate significantly. See “Item 1. Business – Additional Factors that May Affect Future Risks.”

As of January 14, 2005, there were 26,392,822 shares of our common stock outstanding held by approximately 261 stockholders of record (not including beneficial holders of stock held in street name).

We have never declared or paid cash dividends on our capital stock. We currently anticipate retaining, all available funds, if any, to finance internal growth and product development as well as other management initiatives, including acquisitions. Payment of dividends in the future will depend upon our earnings and financial condition and such other factors as the directors may consider or deem appropriate at the time.

As partial consideration for the purchase of substantially all of the assets of Teracruz, Inc., on October 29, 2004 we issued a Common Stock Purchase Warrant to Teracruz, Inc. to purchase up to 267,176 shares of our common stock at a purchase price of $1.38 per share. This warrant becomes exercisable October 29, 2005 and expires October 29, 2009. This issuance was made pursuant to an exemption from registration under the Securities Act of 1933, as amended, in reliance on Section 4(2) thereof.

The Securities and Exchange Commission on October 19, 1999 declared effective our registration statement on Form S-1 (File No. 333-85505) relating to the initial public offering of our common stock. As of October 31, 2004, we have used all of the net offering proceeds for the purchase of temporary investments, consisting of cash, cash equivalents, and short-term investments. We currently intend to use the net proceeds of the offering for working capital and general corporate purposes, including financing accounts receivable and capital expenditures made in the ordinary course of business. We also may apply a portion of the proceeds of the offering to acquire businesses, products and technologies, or enter into strategic relationships such as our relationship with NexQL, that are complementary to our current or future business and product offerings. We also may apply a portion of the proceeds to the payment of cash dividends or for additional stock repurchases or other similar transactions.

The information concerning our equity compensation plans appearing under “Equity Compensation Plan Information” is included in our Proxy Statement.

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The following selected consolidated financial data should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in Item 7 of this Annual Report and other financial information appearing elsewhere in this Annual Report. The consolidated balance sheet data as of October 31, 2003 and 2004 and the consolidated statement of operations data for the years ended October 31, 2002, 2003 and 2004 set forth below are derived from, and qualified by reference to, our audited consolidated financial statements appearing elsewhere in this Annual Report. The consolidated balance sheet data for the years ended October 31, 2000, 2001 and 2002 and the consolidated statement of operations data for the years ended October 31, 2000 and 2001 are derived from audited consolidated financial statements not included herein.

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The following discussion and analysis of financial condition and results of operations should be read in conjunction with the selected consolidated financial data in Item 6 of Part II of this Annual Report and our consolidated financial statements and notes thereto in Item 15 of Part IV of this Annual Report.

This discussion contains forward-looking statements, within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Please see the “Cautionary Statement” and “Additional Factors that may Affect Future Results” under Item 1 of Part I for a discussion of the uncertainties, risks and assumptions associated with these statements.

Overview

Enterprises are generating vast quantities of data. The volume of stored data is growing due to increased digital content, online transaction processing and large databases. The growth of e-business, and the need to retain data for longer periods of time, is increasing the demand for storage and data management solutions. Enterprises increasingly need to maintain easy access to historical information due to business or regulatory requirements. Our storage routers serve as the interconnect between SANs and the other devices in a computer network and allow organizations to more effectively and efficiently store, manage and ensure the integrity and availability of their data. Specifically, when used in SANs, our storage routers:

We provide our products in a variety of configurations including both stand-alone box and library-embedded router form factors with varying port counts. Our products are installed at companies, institutions, and other entities ranging from large enterprises to small businesses. Our products and services are marketed and sold to end users through our distribution partners, including original equipment manufacturers (OEMs), distributors and value-added resellers (VARs). For the fiscal years ended 2002, 2003 and 2004, sales to OEM customers with greater than ten percent of our total sales accounted for 75%, 75% and 84% of our total revenue, respectively.

While the quantity of online data continues to grow, the price of storage and storage networking hardware continues to decline. Data growth is outpacing IT spending growth. Companies are migrating towards modular, scalable systems rather than large, fixed frame systems. Companies are looking for storage systems with data management, software to help simplify data storage and reduce the total cost of ownership. We believe the basic protocol to protocol conversion bridge business is challenged due to:

Crossroads’ vision is to bring intelligent, focused solutions to the marketplace that solves specific customer problems in the area of data access, use and storage. These solutions should be flexible, versatile, and scalable by taking advantage of the power that is inherent in the Local Area Network (LAN) and the Storage Area Network (SAN). By providing special purposed network appliances, we believe that Crossroads can achieve its vision of delivering solutions that provide “Intelligence At The Edge.”

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This vision will require us to transform ourself from a primarily hardware company providing tape device networking interfaces to a networking solutions company that incorporates software on specifically purposed hardware solutions.

We cannot assure that our new products will be introduced in a timely manner to capitalize on these trends. If we fail to respond to certain significant market trends, or if any market trends and emerging standards on which we are basing our assumptions do not materialize as anticipated, our business could be materially adversely affected. Additionally, we plan to invest more resources in the people and programs necessary to best optimize these growth opportunities. However, we cannot assure you that such investments will achieve our objectives. See “Risk Factors” under Item 1.

In fiscal 2004, we focused on five primary tasks:

Realize Growth in ServerAttach Products.    During fiscal 2003, we expanded our market base through the release of the ServerAttach product family, which enables server resources to take advantage of the SAN. We also hired additional sales personnel with a focus on driving product growth. In addition, we signed a key OEM agreement with EMC that established Crossroads as a qualified solutions provider for embedded Fibre Channel connectivity and began shipping product in fiscal 2003. In fiscal 2004, our goal was to realize growth in these products. We did see growth in the ServerAttach product; however, it did not reach the level that we had planned for the business, including our growth expectation from EMC.

Maintain and Expand Our Storage Routing Business.    During the year, we saw next generation storage routers ship in our existing OEM base, which included the release of a fibre to fibre based product. We also released our 6240 sixth generation storage router. In addition, our NearEdge product strategy provides value-add software features to our existing and future storage router product line. We have seen an increased interest from our OEMs for the NearEdge features especially within our largest OEM who began shipping many of these features as they became available over the course of 2004. We have also continued development of our iSCSI products, began working closely with new OEMs and we are anticipating additional product releases in fiscal 2005.

Customer Base Expansion.    The third task focused on driving new business within our existing customer base. We have maintained strong relationships with our OEM partners as we work closely with them on new opportunities to bring even greater value to their library solutions. For example, our OEM relationship with StorageTek started in 1998 with products designed to improve connectivity and access of tape library resources. Since that time, Crossroads has supplied StorageTek with products from five generations of connectivity solutions to include most recently the SN3400 router in 2002, and the SN3300 router in 2003.

Intellectual Property Value.    During fiscal 2004, we continued to add industry-leading companies to a growing list of corporations who have licensed our patented technology. More specifically, we have entered into agreements with Adaptec, ADIC, XioTech, Hitachi, FalconStor and others to license our technology. We have also strengthened our patent portfolio as we now have 27 issued patents and 58 pending patents worldwide.

Strategic Opportunities.    We have engaged in strategic opportunities of a long-term nature during this fiscal year that will position us for growth of our business beyond 2004. These opportunities include our investment in NexQL and the asset and technology acquisition of Teracruz.

In summary, fiscal year 2004 was a year of transition from a single product company to one that provides multiple product lines, going beyond an element of a solution to providing a complete solution.

Results of Operations

Our net loss was $25.5 million for fiscal 2002 and $6.4 million for both fiscal 2003 and 2004. The 75% decrease in net loss during fiscal 2003 primarily reflects the impact of the shift to a royalty model with HP and our business restructuring efforts in fiscal 2002. Our investment in NexQL and securities class action litigation

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settlement during fiscal 2004 had a significant impact on our current net loss. Net operating expenses and net loss attributable to NexQL and the securities class action litigation settlement for fiscal 2004 were approximately $2.3 million and $1.0 million, respectively. Excluding the impact of NexQL and the securities class action litigation settlement, our net loss improved during fiscal 2004 as a result of improving gross margins.

The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our revenue, costs of revenue and gross profit:

Total Revenue

Total revenue consists of product revenue and royalty and other revenue. In fiscal 2003, we transitioned our embedded router business with HP to a royalty model whereby they would manufacture the products and pay us a specified royalty on each unit shipped. Under this model, our product revenue declined in both fiscal 2003 and 2004, as expected, because we have outsourced the manufacturing of our embedded routers to HP and the royalty revenue we receive is now classified under royalty and other revenue.

A significant portion of our revenue is concentrated among a relatively small number of OEM customers. In fiscal 2004, three customers each represented greater than ten percent of our total revenues for a combined total of 84% of our total revenue. We expect that a significant portion of our future revenue will continue to come from sales of products to a relatively small number of customers. Therefore, the loss of, or a decrease in the level of sales to, any one of these customers, could seriously harm our financial condition and results of operations.

Product Revenue

Product revenue consists of sales of our storage router and ServerAttach lines of products. Our product revenue is primarily generated from our OEM partners. Product revenue decreased 22% and 42% during fiscal 2003 and 2004, respectively. Product revenue decreases in fiscal 2003 and fiscal 2004 as compared to fiscal 2002 were primarily the result of our successful transition to a royalty model for embedded products with HP. Going forward, we expect to continue to see a decrease in product revenue from HP, as a result of the royalty model, though we are anticipating an overall increase in product revenue as we begin to introduce new products during fiscal 2005.

Royalty and Other Revenue

Royalty and other revenue consist of revenue from the licensing of IP, royalty payments from HP and sales of service contracts. IP licensing arrangements typically consist of upfront nonrefundable fees. These fees are

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collected as consideration for either past or future sales of licensee products. When a license agreement is signed, delivery of the license has occurred and there are no remaining obligations outstanding, we record revenue from upfront nonrefundable IP licensing arrangements. License arrangements can also include a royalty stream that is recognized quarterly based on reports from the licensee. Revenue from royalty payments from HP is recognized monthly based on reports from HP and quarterly from other IP licensees. Service revenue is recognized ratably over the service period. Royalty, IP licensing and service revenue were approximately $8.8 million, $1.9 million and $275,000, respectively, in fiscal year 2004.

Royalty and other revenue for fiscal 2003 and 2004 increased due to our transition to a royalty based model with HP in the second fiscal quarter of 2003 and patent license arrangements made at various times in both fiscal 2003 and 2004. IP license revenue represented 51% and 17% of our royalty and other revenue during fiscal 2003 and 2004, respectively. Comparatively, royalty revenue from HP increased in fiscal 2004 as we released more products as part of the royalty model. IP licensing revenue decreased from fiscal 2003 to fiscal 2004 mainly due to a large one-time license payment received in fiscal 2003.

Given the nature of patent license agreements, the timing of IP license revenue is difficult to forecast and therefore is expected to cause fluctuations in royalty and other revenue. Our potential to generate patent license revenue in the future will be largely dependent upon our ability to identify and pursue additional, potential licensees.

Gross Profit

Gross profit is total revenue less total cost of revenue. Total gross profit increased 39% and 15% during fiscal 2003 and 2004. The increases in total gross profit and gross profit percentage reflect lower cost of product revenue associated with the royalty model with HP, IP license revenue and, to a lesser extent, sales of higher margin products.

Cost of product revenue consists primarily of contract manufacturing costs, material costs, manufacturing overhead, third party software licenses, warranty costs and stock-based compensation. Cost of product revenue decreased 26% and 56% during fiscal 2003 and 2004, respectively.

The decrease in cost of product revenue was expected with the transition to the royalty model with HP. Under this model, HP manufactures our embedded products, which has resulted in lower manufacturing costs to us. In addition, product costs relative to product revenue decreased primarily due to lower manufacturing costs and higher margin product mix.

The cost of product revenue was also impacted during fiscal 2004 due to changes in management’s estimates of the reserve for excess and obsolete inventories and warranty. During fiscal 2004, we increased the reserve for excess and obsolete inventories by approximately $0.2 million due to a business decision to discontinue production efforts related to the development of a new product. We also reduced our warranty reserve by approximately $0.1 million due to decreasing product sales over the past three years, as a result of the transition to the royalty model with HP. The cost of product revenue may continue to fluctuate based on the introduction of new products and changes in product mix and other fluctuations in the components of cost of product revenue.

We expect to introduce new products throughout fiscal 2005. As new or enhanced products are introduced, we must successfully manage the transition from older products to avoid excessive levels of older product inventories, and ensure that sufficient supplies of new products can be delivered to meet customer demands. Our revenue and gross profit margin will be adversely affected if we fail to successfully manage the introductions of these new products.

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Operating Expenses

Sales and Marketing Expenses

Sales and marketing expenses consist primarily of salaries, commissions, travel, tradeshow and advertising programs, other promotional activities and stock-based compensation expenses. The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our sales and marketing expenses:

Sales and marketing expenses decreased 26% and 1% during fiscal 2003 and 2004, respectively.

Sales and marketing expenses were relatively flat during fiscal 2004 primarily as a result of a decrease in evaluation unit costs and recruiting expenses of approximately $0.4 million, offset by an increase in compensation costs associated with higher headcount.

In fiscal 2004, as a result of consolidation of NexQL’s results, we also included approximately $0.2 million of NexQL sales and marketing expenses, primarily for compensation and tradeshow related costs. If NexQL’s results continue to be consolidated, we anticipate that sales and marketing expenses related to NexQL would increase in the future with further product introduction and development.

The decrease in sales and marketing expenses in fiscal 2003 was primarily due to our restructuring efforts in May of 2002, which resulted in approximately $1.2 million of reduced compensation expense, including stock based compensation, and a $0.3 million decrease in depreciation expense due to the write-down of assets and a reduction in capital purchases. In fiscal 2003, we hired the majority of our new sales force at the end of the fiscal year, which accounts for an increase in headcount despite the reduction of compensation cost.

We anticipate that sales and marketing expenses may increase as we plan to launch new products during fiscal 2005.

Research and Development Expenses

Research and development expenses consist primarily of salaries and other personnel-related costs, product development costs and stock-based compensation expenses. The following sets forth, for the periods indicated, a year-over-year comparison of the key components of our research and development expenses:

Research and development expenses have decreased 28% in fiscal 2003 and increased 15% in fiscal 2004.

The increase in research and development expenses in fiscal 2004 was primarily due to increased compensation costs associated with higher headcount and increased spending on prototypes and outside services for the development of new products. In fiscal 2004, as a result of consolidation of NexQL’s results, we also included approximately $1.3 million of NexQL research and development expenses, primarily for compensation and prototype related costs. If NexQL’s results continue to be consolidated, we anticipate that research and development costs related to NexQL would increase as they continue to progress through various product development stages.

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Research and development expenses decreased in fiscal 2003 as we realized a full fiscal year of cost reductions, due to the restructuring efforts made in May of 2002. In fiscal 2003, compensation expense decreased $1.0 million, including stock-based compensation, and overhead costs decreased $1.6 million. As we began entering into contracts for nonrecurring engineering services on behalf of certain customers, development expenses decreased approximately $1.2 million in fiscal 2003. Under the terms of these nonrecurring engineering service contracts, we are reimbursed for personnel and pre-production product costs incurred on behalf of our customers.

We anticipate that research and development expenses will increase in future periods as we plan to continue the development of our technologies and expand our product offerings.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries and other personnel-related costs, costs of our administrative, executive and information technology departments, as well as legal and accounting, insurance and stock-based compensation expenses. The following table sets forth, for the periods indicated, a year-over-year comparison of the key components of our general and administrative expenses:

General and administrative expenses have decreased 32% and 12% during fiscal 2003 and 2004, respectively.

In fiscal 2004, as a result of consolidation of NexQL’s results, we also included approximately $0.2 million of NexQL general and administrative expenses, primarily for compensation, legal and insurance related costs. If NexQL’s results continue to be consolidated, we anticipate that general and administrative costs related to NexQL would increase as the development company continues to mature.

The decrease in general and administrative expenses in fiscal 2003 and 2004 were primarily due to decreases in insurance, depreciation and stock-based compensation expense. We anticipate that general and administrative expenses may begin to increase throughout fiscal 2005 due to additional costs associated with the Sarbanes-Oxley Act of 2002 and other related legislative and regulatory changes.

NexQL

During the first fiscal quarter of 2004, we entered into a strategic relationship with NexQL, a privately-held development stage company. Pursuant to certain agreements with NexQL, through October 31, 2004 we have invested $1.0 million to purchase NexQL common stock and may provide NexQL with up to an additional $1.5 million under a loan facility, over a discretionary time period. Through October 31, 2004, we have loaned NexQL approximately $0.3 million. We also have an exclusive right, but not an obligation, to purchase NexQL. If we choose to exercise this right, the purchase would be subject to various conditions, including the amount and type of consideration. Depending upon the structure of the purchase, one condition could be the need for us to obtain stockholder approval. The exclusive right to purchase NexQL will lapse at various times after NexQL completes certain milestones.

In connection with the adoption of the Revised Interpretation of FIN 46 (FIN 46R), we concluded that NexQL is a Variable Interest Entity (VIE) and that we are the primary beneficiary. Under FIN 46R transition

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rules, the operating results of NexQL continued to be accounted for on the equity method for the six months ended April 30, 2004. The Company consolidated the statements of operations and cash flows of NexQL beginning May 1, 2004.

Crossroads did not record any amounts as revenue related to NexQL for fiscal 2004. Net operating expenses and net loss attributable to NexQL for fiscal 2004 were approximately $2.3 million. Our overall results were significantly impacted as a result of our investment in NexQL and adoption of FIN 46R. NexQL entered into a Master Reseller Agreement (Agreement) on July 30, 2004 with a reseller in Europe. Subject to the terms of the Agreement, NexQL has assigned specific customer accounts exclusively to the reseller for an initial fee of $50,000. In August 2004, NexQL delivered product simulators to the reseller and has collected $950,000 for the simulators and $50,000 for the Agreement. Crossroads will recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable and collection is probable. Securities and Exchange Commission Staff Accounting Bulletin No. 104, -“Revenue Recognition” requires us to be able to estimate returns and warranty expenses prior to recognizing revenue. Since NexQL has no history selling their products, we are not able to estimate returns and warranty expense. Revenue from sales of products prior to the time we are able to estimate returns and warranty expense will be deferred. As of October 31, 2004 the entire $1.0 million has been deferred.

We monitored our investment in NexQL for impairment during the first two quarters of fiscal 2004 and made appropriate reductions in its carrying value and recorded an impairment charge based on the financial condition and near-term prospects of NexQL. These impairment charges are included in the caption, NexQL research and development, in the consolidated statement of operations. The impairment charge, including our percentage of losses on our investment in NexQL, was approximately $0.7 million for fiscal 2004. NexQL technologies and products are in the early stages of development and may never materialize. Effective April 30, 2004, we consolidated NexQL in accordance with FIN 46R and as a result potential additional losses from NexQL will impact our consolidated statement of operations, which could cause substantial fluctuations in our financial results.

Income Taxes

We recorded no income tax expense or benefit during the years ended October 31, 2002 and 2004. The income tax expense of approximately $0.3 million recorded in 2003 resulted from withholdings on income generated in a foreign country. We have provided a full valuation allowance against our deferred tax assets because the realization of related tax benefits is not considered more likely than not.

Business Restructuring Expenses and Asset Impairment

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

Components of business restructuring expenses and the remaining restructuring accruals as of October 31, 2004 are as follows (in thousands):

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In March 2003, we entered into an agreement to sublease a portion of our abandoned facilities. The anticipated rent payments from this sublease are approximately $0.5 million through January 2006. In addition, we signed another agreement to sublease a portion of our abandoned facilities during the third fiscal quarter of 2003. The anticipated rent payments from this sublease are approximately $0.1 million through January 2006.

In total, we reduced our restructuring accrual by approximately $0.3 million during fiscal 2004, principally for rent payments to be received over the next twelve months of both sublease terms. We assess recoverability of these sublease payments on a quarterly basis.

We have substantially completed our restructuring efforts initiated in conjunction with the restructuring announcement made during fiscal 2002; however, there can be no assurance that future restructuring efforts will not be necessary.

Liquidity and Capital Resources

The following table presents selected financial statistics and information (dollars in thousands):

Our principal sources of liquidity at October 31, 2004 consisted of $13.9 million in cash and cash equivalents and $14.6 million in short-term investments.

In fiscal 2004, we extended our existing line of credit with Silicon Valley Bank. The committed revolving line is an advance of up to $3.0 million with a borrowing base of 80% of eligible accounts receivable. The line of credit contains provisions that prohibit the payment of cash dividends and require the maintenance of specified levels of tangible net worth and certain financial performance covenants measured on a monthly basis. The line of credit matures in June 2005 at which time we will review the terms. As of October 31, 2004, there were no borrowings outstanding under the revolving line of credit and no term loans outstanding.

In February 2004, we extended a $100,000 letter of credit in connection with the lease requirements of our headquarters.

During fiscal 2004, cash provided by operating activities was $0.3 million, compared to $1.5 million and $15.7 million utilized in fiscal 2003 and 2002, respectively. The increase in net cash provided during fiscal 2004 is primarily the result of the positive cash impact of NexQL’s $1.0 million deferred revenue and the accrual of $1.0 million related to the settlement of our class action lawsuit, as well the continuing effect of improving gross margins. The decrease in cash utilized during fiscal 2003 reflects a decrease in net loss due to improved gross margins, and decreases in inventory spending. The improvement in gross margin resulted from the royalty model with HP and intellectual property license revenue. In addition, the transition to the royalty model reduced our inventory purchasing requirements. We expect cash utilized in operating activities to increase as required to support new product offerings, mainly relating to advertising and research and development.

During fiscal 2004, cash utilized by investing activities was $0.9 million, compared to $2.1 million provided in fiscal 2003 and $11.4 million utilized in fiscal 2002. The increase in net cash utilized in fiscal 2004 is largely attributable to an increase in capital spending, our investment in NexQL and the cash impact of our acquisition of

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the assets of Teracruz, Inc. The increase in net cash provided in fiscal 2003 reflected the maturity of held-to- maturity investments, net of purchases, of $2.9 million as compared to the purchase of held-to-maturity investments, net of maturities, of $9.6 million in fiscal 2002. Capital expenditures were $1.9 million, $0.8 million and $2.0 million in fiscal 2002, 2003 and 2004, respectively. These expenditures reflect our investments in computer equipment and software, test equipment, software development tools and leasehold improvements. Fiscal 2004 also included $0.2 million relating to capital purchases by NexQL. We will continue to monitor our capital requirements but we expect capital spending to increase as required to support new product offerings.

During fiscal 2004, cash utilized in financing activities was $0.2 million, compared to $0.6 million in fiscal 2003 and $1.9 million in fiscal 2002. The decrease in cash utilized in financing activities during fiscal 2004 is due to the offsetting impact of very little stock repurchase activity in fiscal 2004 and the reduction of book overdrafts at October 31, 2004 to $0.1 million, due to the timing of vendor payments. Financing activities during fiscal 2003 included an increase in book overdrafts of $0.8 million, compared to fiscal 2002. In addition, we repurchased and retired less common stock through our stock repurchase program in fiscal 2003, as compared to fiscal 2002. In fiscal 2002, 2003 and 2004, we repurchased and retired common stock in the amount of $2.3 million, $2.0 million and approximately $32,000, respectively. We expect cash utilized in financing activities may fluctuate as we cannot determine, at this time, if the company will extend its stock repurchase program.

We have funded our operations to date primarily through sales of preferred stock and our initial public offering, resulting in aggregate gross proceeds to us of $98.2 million. We believe our existing cash balances and our credit facilities will be sufficient to meet our capital requirements beyond the next 12 months. However, we could be required or could elect to seek additional funding prior to that time. Our future capital requirements will depend on many factors, including the rate of revenue growth, including licensing revenue, if any, 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. In fiscal 2004, we entered into a technology development agreement with NexQL Corporation for the joint development of advanced data management solutions. During the term of this and other strategic agreements, we will provide funding up to $2.5 million to NexQL, and have tentatively agreed to extend an additional $2.0 million in funding. During fiscal 2004, we provided approximately $1.3 million of funding to NexQL. We have also provided an additional $0.8 million to NexQL during fiscal 2005. In total, we have funded $2.1 million to NexQL as of the date of this Annual Report. Additionally, we may enter into additional strategic arrangements or acquisitions in the future that could require us to seek additional equity or debt financing. We cannot assure that additional equity or debt financing, if required, will be available to us on acceptable terms, or at all.

Stock Repurchase Program

In September 2001, our board of directors authorized a stock repurchase program pursuant to which we were authorized to repurchase up to $5.0 million of our common stock in the open market. From September 2001 to April 2002, we repurchased 661,300 shares of our common stock at an aggregate purchase price of $2.1 million. In May 2002, our board of directors authorized the extension of our stock repurchase program and authorized the repurchase up to an additional $5.0 million worth of our common stock, for an aggregate amount of up to $7.1 million. From May 2002 through October 31, 2002, we repurchased 1,714,465 shares of our common stock at an aggregate purchase price of $1.7 million. In October 2002, our board of directors authorized the further extension of our stock repurchase program through the end of 2003. From November 2002 to October 31, 2003, we repurchased 1,772,300 shares of our common stock at an aggregate purchase price of $2.0 million. As of October 31, 2003, we had repurchased an aggregate of 4,148,065 shares of our common stock for an aggregate purchase price of $5.7 million under our stock repurchase program representing a total of approximately 15% of the Company based on shares of our common stock outstanding at the commencement of the repurchase program. There were no stock repurchases under our open market stock repurchase program in fiscal 2004.

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

Stockholder Rights Plan

On August 21, 2002, our board of directors approved, adopted and entered into a Stockholder Rights Plan. The plan is similar to plans adopted by many other companies and was not adopted in response to any attempt to acquire us, nor were we aware of any such efforts at the time of adoption.

The plan is designed to enable our stockholders to realize the full value of their investment by providing for fair and equal treatment of all stockholders in the event that an unsolicited attempt is made to acquire the company. Adoption of the plan is intended to deter coercive takeover tactics including the accumulation of shares in the open market or through private transactions and to prevent an acquiror from gaining control of the company without offering a fair price to all of our stockholders.

Under the plan, we declared and paid a dividend of one right for each share of common stock held by stockholders of record as of the close of business on September 3, 2002. Each right initially entitles stockholders to purchase one unit of a share of our preferred stock at $12 per share. However, the rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. If a person or group acquires or announces a tender or exchange offer that would result in the acquisition of 15 percent or more of our common stock while the plan remains in place, then, unless the rights are redeemed by us for $0.01 per right, all rights holders except the acquirer will be entitled to acquire our common stock at a significant discount. The rights are intended to enable all stockholders to realize the long-term value of their investment in the company. The rights will not prevent a takeover attempt, but should encourage anyone seeking to acquire us to negotiate with the board prior to attempting a takeover. The rights will expire on September 3, 2012.

Contractual Cash Obligations and Commitments

We lease office space and equipment under long-term operating lease agreements that expire on various dates through July 2007.

In April 2000, we relocated our headquarters in accordance with an agreement to lease approximately 63,500 square feet of administrative office space in Austin, Texas. During fiscal 2004, we renegotiated the terms of our lease to relinquish approximately 4,700 square feet of office space. The term of the lease agreement is approximately six years, from April 1, 2000 through April 15, 2006, and represents a lease commitment of approximately $1.8 million per year through the lease term. In conjunction with entering into the lease agreement, we signed an unconditional, irrevocable letter of credit with a bank for $100,000, which is secured by a $3.0 million line of credit.

Our final assembly and test facility of approximately 15,550 square feet also is located in Austin, Texas. The lease agreement on this facility expires in April 2006.

Pursuant to the terms of our acquisition of Teracruz, Inc. assets on October 29, 2004, we assumed a lease of approximately 3,919 square feet in Huntsville, Alabama that expires in July 2007. This facility is currently being used for engineering purposes.

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The following summarizes our contractual cash obligations as of October 31, 2004 (in thousands):

Our other manufacturing commitments relating to open purchase orders was approximately $72,000 at October 31, 2004.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, deferred taxes, investment in privately-held company and consolidation, warranty obligations, excess and obsolete inventories, allowance for doubtful accounts, facility lease abandonment losses associated with our restructuring, valuation of intangibles and litigation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies, among others, affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue recognition.    With respect to sales of our products to the OEMs, we recognize product revenue when persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed or determinable, collectibility is probable and risk of loss has passed to the OEM. Product sales to distributors, VARs and system

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integrators who do not have return rights are recognized upon shipment. To the extent that we sell products to distributors, VARs and system integrators that have rights of return, we defer revenue and the related cost of revenue associated with such sales and recognize these amounts when that customer sells our products to its customers. Management’s judgments and estimates must be made and used in connection with the revenue recognized in any given accounting period. Material differences may result in the amount and timing of our revenue, in any given accounting period, if our management alters the method by which they derive such judgments or estimates.

Royalty and other revenue includes licensing of intellectual property (IP), royalty payments and sales of service contracts. IP licensing arrangements typically consist of upfront nonrefundable fees including payments related to past sales of licensee products or payments related to a paid-up license in which the licensee makes a single payment for a lifetime patent license. Once a license agreement is signed, delivery of the license has occurred and there are no remaining obligations outstanding, the Company records revenue from upfront nonrefundable IP license fees. Service revenue is recognized over the applicable service period.

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

Judgment is required in determining our deferred tax assets and liabilities and our valuation allowance recorded against our net deferred tax assets. In assessing the potential realization of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The ultimate realization of deferred tax assets is dependent upon us attaining future taxable income during the period in which our deferred tax assets are recoverable. Due to uncertainty surrounding our ability to generate taxable income in the future, we have determined that it is more likely than not that we will not be able to utilize any of the benefits of our deferred tax assets, including net operating loss carry forwards, before they expire. Therefore, we have provided a 100% valuation allowance on our deferred tax assets, and our net deferred tax assets as of October 31, 2004 is zero.

Investment in privately-held company and consolidation.    We assess the impairment of investments whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include: (i) inherent risk of investment due to stage of development, (ii) underperformance relative to projected future operating results, and (iii) changes in the strategy of business. When we determine that the carrying value of an investment may not be recoverable, an impairment charge is recorded.

As of October 31, 2004, we had a minority equity interest in NexQL of approximately 25% and we held one of four of NexQL’s board of director seats. Currently, NexQL has a negative equity position. If we are required to consolidate our financial results with NexQL in the future, any additional losses will impact our consolidated statement of operations. The factors used to determine how we will account for our interest in NexQL in the future makes it difficult for us to assess the impact of NexQL on our financial results in future periods.

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

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