UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 Washington D.C. 20549
 ____________________
 
 FORM 10-QSB
 
 (X)  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the quarterly period ended April 30, 2004
 
 ( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 For the transition period from _________ to __________
 
 _________________
 
 
 Commission file number: 000-26952
 
 
 ENTRADA NETWORKS, INC.
 (Exact name of registrant as specified in its charter)
 
 Delaware
33-0676350(State or other jurisdiction of
(I.R.S. Employerincorporation or organization)
Identification No.)
    12 Morgan, Irvine, California     92618(Address of principal executive office) (Zip Code)(949) 588-2070(Registrants telephone number, including area code)
 
 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. Yes X No ___
 
 Indicate the number of shares of each of the registrants classes of common stock, as of the latest practicable date.
 
 Title
Date
OutstandingCommon Stock, $.001 Par Value
May 26, 2004
13,900,720
 
  
 **Part I. Financial Information**
**Item 1. Financial Statements**ENTRADA NETWORKS, INC.AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS(In Thousands)April 30, 2004


January 31, 2004ASSETS


UnauditedCURRENT ASSETSCash and equivalents

$
178

$
72Accounts receivable, net


287


627Inventory, net


2,251


2,294Prepaid expenses and other current assets


272


284TOTAL CURRENT ASSETS


2,988


3,277PROPERTY AND EQUIPMENT, NET


505


590OTHER ASSETSDeposits


43


39TOTAL ASSETS

$
3,536

$
3,906LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESShort-term debtBank


123


65Other


457


-Total Short Term Debt


580


65Accounts payable


210


383Other current and accrued liabilities


600


659TOTAL CURRENT LIABILITIES


1,390


1,107TOTAL LIABILITIES
****


1,390


1,107STOCKHOLDERS' EQUITYCommon stock, $.001 par value; 50,000 shares authorized; 13,901 sharesissued and outstanding at January 31, 2004; 12,937 shares issuedand outstanding at January 31, 2003


13


13Treasury Stock


(102
)

(127
)Additional paid-in capital


52,060


52,001Accumulated deficit


(49,825
)

(49,088
)TOTAL STOCKHOLDERS' EQUITY


2,146


2,799TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
3,536

$
3,906See accompanying notes to condensed consolidated financial statements
 
 
 2   ENTRADA NETWORKS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSFOR THE FISCAL QUARTER ENDED APRIL 30, 2003, 2004(In Thousands, except per share amounts)

Three Months EndedApril 30,2004
2003NET REVENUES

UnauditedPRODUCT

$
205

$
2,386SERVICES


175


322TOTAL NET REVENUES


380


2,708COST OF REVENUEPRODUCT


272


1,399SERVICES


66


97TOTAL COST OF REVENUE


338


1,496GROSS PROFIT


42


1,212OPERATING EXPENSESSelling and marketing


78


197Engineering, research and development


240


284General and administrative


403


453Other operating expenses


0


60TOTAL OPERATING EXPENSES


721


994INCOME (LOSS) FROM OPERATIONS


(678
)

218OTHER CHARGESInterest expense, net


(59
)

(8
)Other income (expense)


-


23TOTAL OTHER CHARGES


(59
)

15INCOME (LOSS) FROM OPERATIONS


(737
)

233NET INCOME (LOSS)

$
(737
)
$
233INCOME (LOSS) PER COMMON SHARE:BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING


13,901


12,975NET INCOME (LOSS) PER COMMON SHARE:BASIC AND DILUTED NET LOSS PER COMMON SHARE

$
(0.05
)
$
0.02See accompanying notes to condensed consolidated financial statements
 
 3   ENTRADA NETWORKS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSFOR THE QUARTER ENDED APRIL 30, 2004, 2003(In Thousands)


2004


2003CASH FLOWS FROM OPERATING ACTIVITIES


Unaudited


UnauditedNet income (loss)

$
(737
)
$
233Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activitiesDepreciation and amortization


90


150Non cash interest


12


-Provision for accounts receivable and inventory


27


32Changes in assets and liabilities:Decrease in accounts receivable


313


286Decrease in inventories


43


(187
)Decrease in prepaid and other current assets


61


108Decrease in accounts payable


(172
)

(127
)Decrease in accrued expenses and other


(59
)

(98
)Increase in other current liabilities


-


1NET CASH PROVIDED BY (USED IN) CONTINUING OPERATING ACTIVITIES


(422
)

398CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of property and equipment


(5
)

(12
)NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES


(5
)

(12
)CASH FLOWS FROM FINANCING ACTIVITIES:Net proceeds (repayments) on short-term bank debt


58


(54
)Proceeds from short-term debt


500Repayment of capital lease obligations


-


(28
)Deferred financing costs


(25
)NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES


533


(82
)INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


106


304CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD


72


808CASH AND CASH EQUIVALENTS - END OF PERIOD

$
178

$
1,112See accompanying notes to consolidated financial statements.
 
 
 4ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)   Entrada Networks, Inc., through its wholly owned subsidiaries, (the Company, we, our or us), is in the business of developing, marketing and selling products for the network connectivity segments. Our Torrey Pines Networks (Torrey Pines) subsidiary designs, manufactures, markets and sells storage area network (SAN) and metropolitan area network transport products. Our Rixon Networks (Rixon) subsidiary manufactures, markets and sells a line of fast and gigabit Ethernet products that are incorporated into the remote access and other server products of Original Equipment Manufacturers (OEM). In addition, some of its products are deployed by telecommunications network operators, applications service providers, internet service providers, and the operators of corporate local area and wide area networks for the purpose of providing access to and transport within their networks. And, our Sync Research (Sync) subsidiary designs, manufactures, markets, sells and services frame relay products for some of the major financial institutions in the U.S. and abroad.
 
 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Presentation
 
 Entrada Networks, Inc., the Company, We, Our or Us, has prepared, without audit, the accompanying financial data for the three months ended April 30, 2004 and 2003 in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. The January 31, 2004 balance sheet was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. However, we believe that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on May 14, 2004.
 
 The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, the disclosure of contingent assets and liabilities. Actual results could materially differ from these estimates. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows as of April 30, 2004 and for the three months ended April 30, 2003, have been made. The results of operations for the three months ended April 30, 2004 are not necessarily indicative of the operating results for the full year.
 
 Recent Accounting Pronouncements
 
 In December 2002, FASB issued Statement No. 148 (SFAS No. 148), Accounting for Stock-Based Compensation   Transition and Disclosure   An Amendment of FASB Statement No. 123. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003 (April 30, 2003 for us). The adoption of SFAS No. 148 did not have a material effect on our financial position or results of operations. The adoption of SFAS No. 148 did result in a modification of disclosure in our financial statements included in our Annual Report on Form 10-K for the year ended January 31, 2004, and results in modified disclosure in our quarterly financial statements included in this quarterly report.
 
 5ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
  **Three Months Ended April 30,******

**2004**
**2003**Net income (loss):As reported

$
(737
)
$
233Add: Stock based employee compensation expense


20


-Deduct: Total stock based employee compensationexpense determined under fair value method


(111
)

(102
)Pro forma income (loss) per share:


(828
)

131Basic and diluted EPS as reported

$
(0.05
)
$
0.02Pro forma basic and diluted EPS

$
(0.06
)
$
0.01
 
 Guarantors Accounting for Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - In November 2002, the FASB issued FASB Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. In the course of business the Company has contractual guarantees in the form of warranties. However, these warranties are limited and do not represent significant commitments or contingent liabilities of the indebtedness of others. This pronouncement is effective for financial statements issued after December 15, 2002 and did not expected to have a material impact on the Companys financial statements.
 
 In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an interpretation of Accounting Research Bulletin No. 51, Consolidated Financial Statements. This pronouncement requires the consolidation of variable interest entities, as defined, and is effective immediately for variable interest entities created after January 31, 2002, and for variable interest entities in which an enterprise obtains an interest after that date. We have no variable interest entities and thus this interpretation does not have a material impact our financial statements.
 
 
 BALANCE SHEET DETAIL
 
 Consolidated inventories at April 30, 2004 and January 31, 2004 consist of:
 
 April 30, 2004
January 31, 2004Raw material

$
2,557

$
3,002Work in process


88


61Finished goods


2,912


2,6425,557


5,705Less: valuation reserve


(3,306
)

(3,411
)Net Inventories

$
2,251

$
2,294
 
 On February 6, 2004, we received $500,000 in debt financing from an unrelated and unaffiliated party. As part of this financing, we issued a one-year 18% Promissory Note secured by our assets and warrants to purchase 500,000 shares of common stock at a price of $0.35 per share for three years with piggyback registration rights. The Company has the right to prepay the loan without any penalties. This loan matures on January 29, 2005.
 
 TREASURY STOCK
 
 During April 2004, the Company re-issued 166,667 of our 384,615 treasury shares at cost to SBI Advisors, LLC for payment of fees in connection with the short-term debt issued on February 6, 2004. The fair value of the re-issued treasury shares are included in deferred interest costs in the amount of $28.
 
 6ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
  STOCKHOLDERS EQUITY
 
 We are authorized to issue the following shares of stock:
 50,000,000 shares of Common Stock
 2,000,000 shares of Preferred Stock
  During the quarter ended April 2004, the Company issued 500,000 warrants for their relative fair value. The deferred interest cost related to the warrants will be amortized over the life of the short-term debt issued February 6, 2004.
 
 EARNINGS PER SHARE CALCULATION
 
 The following data show the amounts used in computing basic earnings per share for the three months ended April 30, 2004 and 2003.
 
 **Three Months Ended April 30,******
****
**2004**
**2003**Net income (loss) available to commonstockholders used in basic and diluted EPS

$
(737
)
$
233Weighted average number of common sharesused in basic EPS


13,900,720


12,974,785
 
 
 We had loss of ($737) for the three month period ended April 30, 2004. Accordingly, the effect of dilutive securities including vested and non-vested stock options to acquire common stock are included in the calculation of EPS because the effect would be dilutive. The following data shows the effect of including the effect of dilutive securities on determining the weighted average number of common shares used to compute diluted EPS.
 
 Three Months Ended April 30,2004
2003Net income (loss) available to commonstockholders used in basic EPS

$
(737
)
$
233Weighted average number of common sharesused in basic EPS


13,900,720


12,974,785Effect of dilutive securities:Stock benefit plans


-


400,878Weighted average number of common sharesand dilutive potential common stockused in diluted EPS


13,900,720


13,375,663
 
 The shares issuable upon exercise of options represent the quarterly average of the shares issuable at exercise net of the shares assumed to have been purchased, at the average market price for the period, with the assumed exercise proceeds. Accordingly, options with exercise prices in excess of the average market price for the period are excluded because their effect would be antidilutive. Options to purchase common shares that were outstanding but were not included in the computation of diluted earnings per shares because their exercise price was greater than the average market price of the common shares for the period each option was outstanding were 2,135,434 and 689,301 for the three months ended April 30, 2004 and 2003, respectively.
 
 COMMITMENTS AND CONTINGINCIES
 
 Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million, subject to a limitation equal to 65% of our eligible receivables plus the lesser of $1.0 million or 40% of the liquidation value of our eligible inventory. Borrowings under the credit line bear interest at the bank's prime rate plus 2.5% (6.5% at April 30, 2004). In connection with the line of credit, we issued Silicon Valley Bank five-year warrants to purchase 75,757 shares of our common stock at $3.30 per share. The warrants were valued at $54,000 at the time of issuance. The $54,000 of deferred interest was amortized as interest expense over the twelve month term of the credit arrangement in the fiscal year 2002. The credit arrangement is subject to covenants regarding our tangible net worth, and is collateralized by accounts receivable, inventory and equipment. The credit facility will expire on October 31, 2004. In March 2003 the bank increased our eligible receivables limit to 80% of eligible accounts receivable. We were not in compliance with our bank line of credit covenants as of January 31, 2004. On April 19, 2004 our bank lowered our required minimum tangible net worth to $2.5 million. As of April 30, 2004, we were in compliance.
 
 7ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
  Under its bylaws, the Company is obligated to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or directors serving in such capacity. In addition, the Company has indemnification agreements with four of its directors that requires, subject to certain exceptions, to indemnify them to the fullest extent authorized or permitted by its bylaws and the Delaware Corporation Code. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited. However, the Company has a directors and officer liability insurance policy that limits its exposure and enables it to recover a portion of any future amounts paid. As a result of its insurance policy coverage, the Company believes the estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of April 30, 2004.
 
 The Company enters into indemnification provisions under (i) its agreements with other companies in its ordinary course of business, typically with business partners, contractors, and customers, landlords and (ii) its agreements with investors. Under these provisions the Company generally indemnifies and hold harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating to representations made by the Company with regard to intellectual property rights. These indemnification provisions generally survive termination of the underlying agreement. In addition, in some cases, the Company has agreed to reimburse employees for certain expenses and to provide salary continuation during short-term disability. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of April 30, 2004.
 
 CONCENTRATION OF CREDIT RISK
  
 Financial instruments that potentially subject us to concentration of credit risk consist primarily of temporary cash investments and trade receivables. As regards the former, we place our temporary cash investments with high credit financial institutions. At times such amounts may exceed F.D.I.C. limits.
 
 Although we are directly affected by the economic well being of significant customers listed in the following tables, management does not believe that significant credit risk exists at April 30, 2004. We perform ongoing evaluations of our customers and require letters of credit or other collateral arrangements as appropriate.
 
 At April 30, 2004, Geico accounted for 53.7%, Ingram Micro accounted for 15.6% and Lucent Technologies accounted for 10.1% of net receivables. At January 31, 2004 IntegraSys accounted for 62.0% and Ingram Micro accounted for 14.0% of net receivables.
 
 Customers accounting for more than 10% of net revenues during the quarters ended April 30, 2004 and 2003 were:
 
 **April 30, 2004**
**April 30, 2003**Cisco


-


71.5
%IntregraSys


22.7
%

-Geico Insurance


14.8
%

-Ingram Micro


13.8
%MCI Worldcom


-


15.0
%
 
 8ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
  OPERATING SEGMENT INFORMATION
 
 Geographical Information
 
 The table below presents external revenues based on the locations of the customer:
 
 **Three months ended April 30******
****
****
**2004**
****
****
**2003**Net Revenues:United States

$
323

$
2,629Europe


57


79Other


--


--Total net revenues

$
380

$
2,708
 
 Products and Service Revenue
 
 The table below presents external revenues for groups of similar products and services:
 
 **Three months ended April 30,******
****
****
**2004**
****
****
**2003**Net Revenues:Network adapter cards

$
130

$
2,262Frame relay network products


75


124Service and support


175


322Total net revenue

$
380

$
2,708
 
 Supplemental Financial Information
 
 There were no intersegment revenues.
 
 Three Month Segment Financial Information ended April 30, 2004:
 
 We have three operating segments, Rixon Networks, Inc., Sync Research, Inc. and Torrey Pines Networks, Inc.
 
 **Rixon Networks**
****
****
****
**Sync Research**
****
****
**Torrey Pines Networks**
****
****
****
****
**Total****Quarter ended April 30, 2004**Total Revenues

$
130

$
250

$
-

$
380Net Income (loss)


(693
)

75


(119
)

(737
)Depreciation and amortization expense


35


14


41


90Inventory reserve additions


-


-


-


-Capital asset additions


5


-


-


5Total Assets

$
2,162

$
693

$
678

$
3,533
 
 9ENTRADA NETWORKS, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
  Three Month Segment Financial Information ended April 30, 2003:
 
 We have three operating segments, Rixon Networks, Inc., Sync Research, Inc. and Torrey Pines Networks, Inc.
 
 **Rixon Networks**
****
****
****
**Sync Research**
****
****
**Torrey Pines Networks**
****
****
****
****
**Total****Quarter ended April 30, 2003**Total Revenues

$
2,262

$
446

$
-

$
2,708Net Income (loss)


201


113


(81
)

233Depreciation and amortization expense


95


14


41


150Inventory reserve additions


26


-


-


26Capital asset additions


-


-


-


-Total Assets

$
4,997

$
1,897

$
701

$
7,595
 
 
 10   
 Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
 Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the consolidated unaudited financial statements and related notes thereto. The results of operations in the consolidated unaudited financial statements reflect the operating results of Entrada Networks for all periods presented.
 
 Overview
 
 Our Strategic Plan is to:
 
  Explore acquisition opportunities that fit into our existing technologies with emphasis on our SAN markets. We have retained the investment banking services of SBI USA, a division of First Securities USA, Inc. As part of this engagement, SBI USA is providing advisory services with respect to capital raising, mergers and acquisitions, and communications with the investment community. SBI USA has also initiated a program to raise further external financing in order to allow us to pursue our business plan. This calls for acceleration of organic growth opportunities, especially in the storage area network transport product line where we are developing and marketing the Silverline-CWDM product line, and is actively pursuing acquisition opportunities to complement the current lines of business.
 
 Commercialize Torrey Pines optical Silverline SAN and metropolitan area networks transport product line.
 
 Bring our Rixon operation back to profitability through increased sales efforts and reduced overhead.
  Maintain superior service and support for our Sync legacy products to sustain our recent profitable track record.
 
 Our change in profitability
 
 Cisco Systems, Inc., our single largest customer, discontinued purchasing from us an adapter card starting from the third quarter of the just ended fiscal year 2004. During the twelve months ended January 31, 2004, Cisco Systems, accounted for approximately 56.7% of our consolidated net revenues. We had no revenue from Cisco Systems for the three months ended April 30, 2004.
 
 Fiscal Quarter Ended April 30,2004


Pct of
Revenue


2003


Pct of
Revenue


Difference


PctNET REVENUESPRODUCT

$
205


53.95
%
$
2,386


88.11
%

($2,181
)

-91.4
%SERVICES


175


46.05
%

322


11.89
%

($147
)

-45.7
%TOTAL NET REVENUES

$
380


100.00
%

2,708


100.00
%

($2,328
)

-86.0
%
 
 This has had a material impact on our revenues and operating results. In fiscal 2004 and the three months ended April 30, 2004, we made the following operating changes as shown on the following consolidated table, in thousands, which has reduced our operating costs $0.3 million for the fiscal quarter ended April 30, 2004 compared for the fiscal quarter ended April 30, 2003. These changes included reducing personnel and reviewing every expense item with the intent to reduce or eliminate it:
 
 Fiscal Quarter Ended April 30,2004


Pct of
Revenue


2003


Pct of
Revenue


Difference


PctSelling and marketing

$
78


20.5
%
$
197


7.27
%

($119
)

-60.4
%Engineering, research and development


240


63.2
%

284


10.49
%

($44
)

-15.5
%General and administrative


403


106.1
%

453


16.73
%

($50
)

-11.0
%Other operating expenses


0


0.0
%

60


2.22
%

($60
)

-100.0
%Total

$
721


189.7
%

994


36.71
%

(273
)

-27.5
%
 11
  Results of Operations/Comparison of the Three Months Ended April 30, 2004 and 2003
 
 Net revenues . Net revenues were $0.4 million for the three months ended April 30, 2004, compared with $2.7 million for the three months ended April 30, 2003. The decrease in net revenues in the three months ended April 30, 2003 compared to the three months ended April 30, 2002 resulted primarily from Cisco Systems, Inc. discontinued purchasing from us and from the decreases in our service revenues.
 
 Our Sync Research net revenues from the frame relay and service business declined 44.2% to $0.2 million for the three months ended April 30, 2004 compared to $0.4 million net revenues for the three months ended April 30, 2003. The largest portion of the drop for three months ended April 30, 2004 came from a 45.7% drop in service net revenues from $0.3 million in three months ended April 30, 2003 to $0.2 million for three months ended April 30, 2004. This drop was due to reduced service contracts from our legacy products.
 
 Our Sync Research product revenues decreased 40.3%compared to three months ended April 30, 2004 and 2003.
 
 Our Rixon Networks net revenues are primarily from adapter card product revenues. These product revenues decreased $2.1million or 94.3% to $0.1 million for the three months ended April 30, 2004 from $2.3 million the three months ended April 30, 2003. This was primarily due to Cisco Systems, Inc. discontinued purchasing from us.
 
 We had no revenues from our Torrey Pines Network subsidiary.
 
 Gross profit . Cost of revenue consists principally of the cost of components and subcontract assembly from outside manufacturers, in addition to in-house system integration, quality control, final testing and configuration. Overall gross profit declined to $43 thousand for the quarter ended April 30, 2004 from $1.2 million for the quarter ended April 30, 2003. Our gross margin decreased to 11.3% for the three months ended April 30, 2004 as compared to 44.8% for the three months ended April 30, 2003. This is primarily due to fixed manufacturing costs and the loss of revenue.
 
 Our Sync Research gross profit of $0.1 million for the quarter ended April 30, 2004 dropped by $0.1 million or 54.2% compared to $0.2 million for the quarter ended April 30, 2003. This was primarily due to lower service revenues offset partially by lower costs.
 
 Our Rixon Networks negative gross profit of $55 thousand for the quarter ended April 30, 2004 compared to a positive gross profit of $1.0 million for the quarter ended April 30, 2003. This again relates primarily to the loss of Cisco Systems, Inc as a customer.
 
 Selling and marketing . Selling and marketing expenses consist primarily of employee compensation and related costs, commissions to sales representatives, tradeshow expenses, facilities costs, and travel expenses. Selling and marketing expenses decreased to $78 thousand, or 20.5% of net revenues for the quarter ended April 30, 2004, compared to $0.2 million or 7.3% of net revenues for the quarter ended April 30, 2003. The increase in selling and marketing percentages reflects primarily the lower revenues for the three months ended April 30, 2004.
 
 Engineering, research and development . Engineering, research and development expenses consist primarily of compensation related costs for engineering personnel, facilities costs, and materials used in the design, development and support of our technologies. Engineering, research and development expenses were $0.2 million, or 63.2% of net revenues, for the quarter ended April 30, 2004, compared with $0.3 million, or 10.5% of net revenues, for the quarter ended April 30, 2003. The increase in research and development percentage was primarily due to the lower revenues.
 
 General and administrative . General and administrative expenses consist primarily of employee compensation and related costs, legal and accounting fees and public company costs. General and administrative expenses decreased approximately $0.1 million to $0.4 million or 106.1% of net revenues for the quarter ended April 30, 2004 compared to $0.5 million, or 16.7 % of net revenues, for the quarter ended April 30, 2003.
 
 Other operating expenses . Other operating expenses for the three months ended April 30, 2004, were $0.0 million compared with $0.1 million or 2.2% of net revenues for the three months ended April 30, 2003. The amount in Fiscal 2004 was for our unoccupied facility in Annapolis Junction, MD.
 
 12
  Income taxes . There was no provision for income taxes for the three-month periods ended April 30, 2004 and 2003. At April 30, 2004, our deferred income tax assets consist of net operating loss carry forwards. At April 30, 2003 the Company had available federal and state net operating loss carry forwards of approximately $75.5 million and $26.3 million, respectively, for income tax purposes. The federal and state losses will expire in varying amounts through 2021 and 2007, respectively. As of January 2004, 2003, 2002 and 2001 our effective income tax rate differs from the federal statutory income tax rate due to state taxes net of federal benefit, and other items.
 
 The utilization of the loss carry forwards as an offset to future taxable income is subject to limitations under U.S. federal income tax laws. One such limitation is imposed when there is a greater than 50% ownership change. We believe that such an ownership change occurred on August 31, 2000. Of the approximately $75.5 million and $26.3 million NOL for federal and state taxes, approximately $64 million and $20.6 million will be subject to such limitation, respectively.
 
 The benefit of the Company's operating loss carry forwards has been reduced 100% by a valuation allowance at April 30, 2004 and 2003
 
 Liquidity and Capital Resources
 
 Our working capital was $1.6 million at April 30, 2004, a decrease of $0.6 million from the $2.1 million at April 30, 2003. Cash flow used by operations was $401 during the three months ended April 30, 2004 compared with $398 provided by operations for the three months ended April 30, 2003. The decrease in cash flows provided by operations reflects a net loss from operations after adjustment for non-cash expenses including depreciation, amortization, reserves and valuation allowances as well as a decrease in accounts receivable. During the three months ended April 30, 2004, operating cash flow reflected increases in cash used for accounts payables and accrued expenses offset by decreases in current assets. During the same three months last year, our cash flow provided by operations reflected decreases in accounts receivable along with accounts payable and accrued expenses.
 
 Our investing activities consist primarily of purchases of property, plant and equipment and investing activities. Investments activities were $5 thousand in the three months ended April 30, 2004.
 
 Our financing activities during the three months ended April 30, 2004 provided cash flows of $0.5 million, primarily in connection with short-term bank and other debt. During the three months ended April 30, 2003, $82 thousand was used primarily in conjunction with repayment of capital lease obligations and short-term debt.
 
 Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million, subject to a limitation equal to 65% of our eligible receivables plus the lesser of $1.0 million or 40% of the liquidation value of our eligible inventory. Borrowings under the credit line bear interest at the bank's prime rate plus 2.5% (6.5% at April 30, 2004). In connection with the line of credit, we issued Silicon Valley Bank five-year warrants to purchase 75,757 shares of our common stock at $3.30 per share. The warrants were valued at $54,000 at the time of issuance. The $54,000 of deferred interest was amortized as interest expense over the twelve month term of the credit arrangement in the fiscal year 2002. The credit arrangement is subject to covenants regarding our tangible net worth, and is collateralized by accounts receivable, inventory and equipment. The credit facility will expire on October 31, 2004. In March 2003 the bank increased our eligible receivables limit to 80% of eligible accounts receivable. We were not in compliance with our bank line of credit covenants as of January 31, 2004. On April 19, 2004 our bank lowered our required minimum tangible net worth to $2.5 million. As of April 30, 2004, we were in compliance.
 
 Outstanding borrowings against this line of credit were $123 thousand at April 30, 2004. We anticipate that our available cash resources will be sufficient to meet our presently anticipated capital requirements through fiscal 2005. We continue to pursue external equity financing arrangements that could enhance our liquidity position in the coming years. Nonetheless, our future capital requirements may vary materially from those now planned including the need for additional working capital to accommodate infrastructure needs. There can be no assurances that our working capital requirements will not exceed our ability to generate sufficient cash internally to support our requirements and that external financing will be available or that, if available, such financing can be obtained on terms favorable to us and our shareholders.
 
 Critical Accounting Policies and Estimate s
 
 Our discussion and analysis of our financial condition and results of operations are 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 us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory and our allowance for uncollectable accounts receivable. 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 materially differ from these estimates under different assumptions or conditions.
 
 13
  We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:
 
 Since we account for and report our physical inventory at the "lower of cost or market", and such inventory comprises 70% of our current assets and 58% of total assets at Jan 31, 2004, we carefully evaluate the market value of that inventory on a continual basis.  In a business such as ours, wherein we are stocking replacement parts to satisfy a customer's unknown needs, determining obsolescence is an inherently subjective process.  Adjustments to obsolescence reserves are made based on judgments of market value that are supported by our best estimates of the future salability of specific items in that inventory. 
 Accounts receivable balances are evaluated on a continual basis and allowances are provided for potentially uncollectable accounts based on management's estimate of the collectability of customer accounts. If the financial condition of a customer were to deteriorate, resulting in an impairment of their ability to make payments, an additional allowance may be required. Allowance adjustments are charged to operations in the period in which the facts that give rise to the adjustments become known. 
 The following table presents, at April 30, 2004, our obligations and commitments to make future payments under contracts and contingent commitments.Payment Due by Period as of April 30, 2004(In thousands)








Less than


1-3


4-5


After 5Total

1Year


Years


Years


YearsContractual ObligationsShort Term Debt




$
580

$
580

$
-

$
-

$
-Operating Leases





105


105


-


-


-Total Contractual Cash Obligations




$
685

$
685

$
-

$
-

$
-
 
 14
  Our equity compensation plan and outstanding warrant information as of April 30, 2004 is as follows:
 
 **Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights**
****
****
**Weighted-Average Exercise price of Outstanding Options, Warrants and Rights**
****
****
**Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column (a)**Plan categoryEquity Compensation Plans Approved by Security Holders


3,353,556

$
1.01


1,619,458Equity Compensation Plans Not Approved by Security Holders*


575,757

$
0.74


-Total


3,929,313

$
0.97


1,619,458
 
 * Represents 500,000 warrants issued to SBI Partners IV, LLC. and 75,757 warrants issued to Silicon Valley Bank to acquire our common stock.
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk
 
 We periodically need additional financing for expenditures associated with establishing and expanding our operations. The interest rate that we will be able to obtain on debt financing will depend on market conditions at that time, and may differ from the rates we have secured on our current debt. Additionally, the interest rates charged by our present lenders adjust on the basis of the lenders' prime rate.
 
 We believe that the relatively moderate rate of inflation in the United States over the past few years has not had a significant impact on our sales or operating results or on the prices of raw materials. There can be no assurance, however, that inflation will not have a material adverse effect on our operating results in the future.
 
 All of our revenues and expenses are currently denominated in U.S. dollars and to date our business has not been affected by currency fluctuations. In the future, however, we could conduct business in several different countries and thus fluctuations in currency exchange rates could cause our products to become relatively more expensive in particular countries, leading to a reduction in revenues in that country. In addition, inflation in such countries could increase our expenses. In the future, we may engage in foreign currency denominated revenues or pay material amounts of expenses in foreign currencies and, in such event, may experience gains and losses due to currency fluctuations. Our operating results could be adversely affected by such fluctuations.
 
 We do not hold or issue derivative commodity instruments or other financial instruments for trading purposes. Investments do not impose a material market risk.
 
 Item 4. Controls and Procedures
 
 (a) Evaluation of Disclosure Controls and Procedures . The Companys Chief Executive Officer and its Chief Financial Officer, after evaluating the effectiveness of the Companys disclosure controls and procedures (as defined in the Securities Exchange Act of 1934 Rules 13a-14(c) and 15d-14(c) as of a date within 45 days of the filing date of this quarterly report on Form 10-Q (the Evaluation Date), have concluded that as of the Evaluation Date, the Companys disclosure controls and procedures were adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities, particularly during the period in which this quarterly report on Form 10-Q was being prepared.
 
 15
  (b) Changes in Internal Controls . There were no significant changes in the Companys internal controls or in other factors that could significantly affect the Companys disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.
 
 Part II. Other Information
 
 Item 5. Other Information
 
 The information for this item is specified in dollar amounts.
 
 On February 6, 2004, we received $500,000 in debt financing from an unrelated and unaffiliated party. As part of this financing, we issued a one-year 18% Promissory Note secured by our assets and warrants to purchase 500,000 shares of common stock at a price of $0.35 per share for three years with piggyback registration rights. The Company has the right to prepay the loan without any penalties. This loan matures on January 29, 2005.
 
 On May 14, 2004 the Company entered into Stock Purchase Agreements with SBI Brightline IV LLC, and Trilogy Investment Fund I, LLC ("Purchasers"). Subject to the terms of the Agreements the Company may issue and sell to the Purchasers and the Purchasers shall purchase from the Company up to 9,000,000 shares of common stock in four tranches as defined below:
 
 TRANCHE SCHEDULE
 
 Tranche


Number of Tranche Shares to be Purchased by SBI Brightline IV


PurchasePrice


Number of Tranche Shares to be Purchased by Triology Investment Fund I


PurchasePriceFirst Tranche


1,500,000

$
300,000 ($0.20 per share
)

750,000


$150,000 ($0.20 per share
)Second Tranche


1,500,000

$
412,500 ($0.275 per share
)

750,000


$150,000 ($0.20 per share
)Third Tranche


1,500,000

$
412,500 ($0.275 per share
)

750,000

$
206,250 ($0.275 per share
)Fourth Tranche


1,500,000

$
450,000 ($0.30 per share
)

750,000

$
206,250 ($0.275 per share
)TOTAL


6,000,000

$
1,575,000


3,000,000

$
712,500
 
 The Company may elect to sell all or part of Tranche Shares in the order listed above to the Purchasers at any time commencing on the date on which the Registration Statement of the Company covering the resale of the Shares is declared effective.
 
 On May 14, 2004, the Company entered into a Term Loan agreement with Hong Kong League Central Credit Union and Brightline Bridge Partners 1, LLC ("Lenders") and SBI Advisors, LLC as agent for the Lenders for $1,000,000. The Term Loan shall be repaid by January 29, 2005 without prepayment penalties. The Term Loan bears interest at 24% per annum. SBI Brightline IV, LLC and Brightline Bridge Partners 1, LLC received in May 2004, three year warrants to purchase 3,450,000 and 1,550,000 common stock shares, respectively, exercisable at $0.16 per common share as part of this transaction. Also, $75,000 of compensation expense in cash and 125,000 shares of common stock will be recorded in the second quarter of current fiscal year 2005. These warrants also have piggyback registration rights.
 
 On May 14, 2004, Torrey Pines Networks, the Companys subsidiary, acquired Microtek Systems, a leading provider of security, digital imaging, information infrastructures and storage solutions. Microtek was privately held and is based in Milwaukee, Wisconsin. Under the terms of this acquisition, we acquired all of the issued capital stock of Microtek for $750,000 in cash, $250,000 in promissory notes, 1,302,083 shares of our common stock, and other consideration
 
 16
  Microtek is built on core competencies of engineering strength, proprietary software and service quality to offer highly specialized services in consulting, assessment, and solutions to challenges in security, digital imaging, storage, and information infrastructures. It has an installed customer base across financial, healthcare and insurance sectors, particularly among clients in the mid-west. Microtek showed revenues of approximately $4.0 million for the twelve months ended December 31, 2003. It is headquartered in Milwaukee, Wisconsin and currently has seventeen employees.
 
 Certain Cautionary Statements
 
 Certain statements in this document, including statements in the Risk Factors, Our Business, and Managements Discussion and Analysis of Financial Condition and Results of Operations sections, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. These statements are not historical facts but rather reflect current expectations concerning future results and events. Words such as believes, expects, intends, plans, anticipates, likely, will and similar expressions identify such forward-looking statements. These forward-looking statements are subject to risks, uncertainties and other factors, including those set forth in the Risk Factors section of this document, some of which are beyond our control that could cause actual results to differ materially from those forecast or anticipated in such forward-looking statements. These factors include, but are not limited to, the technical and commercial success of our current and future products, reliance on vendors and product lines, competition, performance of new products, performance of affiliates and their future operating results, our ability to establish successful strategic alliances, quarterly and seasonal fluctuations, dependence on senior management and possible volatility of stock price. These factors are discussed generally in greater detail under the caption Risk Factors in this document.
 
 We wish to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. These risks and uncertainties are described in the following section. We specifically decline any obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated or unanticipated events or circumstances occurring after the date of such statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.
 
 
 RISK FACTORS
 
 These factors are discussed generally in greater detail under the caption Risk Factors in our Annual Report on Form 10-K, filed May 14, 2004.
 In connection with the safe harbor contained in the Private Securities Litigation Reform Act of 1995 we are hereby identifying important factors that could cause actual results to differ materially from those contained in any forward-looking statements made by us or on our behalf. Any such statement is qualified by reference to the following cautionary statements:
 
 We may be unable to obtain additional funding on satisfactory terms, which could interfere with our existing and planned operations, dilute our shareholders or impose burdensome financial restrictions on our business. Historically, we have relied upon cash from financing activities to fund most of the cash requirements of our operating and investing activities. Although we have been able to generate some cash from our operating activities in the recent past, there is no assurance we will be able to continue to do so in the future.
 
 Economic conditions may cause declines in investor confidence in and accessibility to capital markets. Further, because our common stock is not listed on a national exchange, the ability of any potential or future investors to achieve liquidity from our common stock is limited, which could inhibit, if not preclude, our ability to raise additional working capital on a timely basis, in sufficient amounts or on terms acceptable to us.
 
 Any future financing may cause significant dilution to existing shareholders. Any debt financing or other financing of securities senior to common stock would likely include financial and other covenants that will restrict our flexibility. At a minimum, we expect these covenants to include restrictions on our ability to pay dividends on our common stock. Any failure to comply with these covenants would have a material adverse effect on our business, prospects, financial condition, results of operations and cash flows.
 
 17
  If adequate funds are not available, we may also be required to delay, scale back or eliminate portions of our operations and product development efforts or to obtain funds through arrangements with strategic partners or others that may require us to relinquish rights to certain of our technologies or potential products or other assets. Accordingly, the inability to obtain this financing could result in a significant loss of ownership and/or control of our proprietary technology and other important assets and could also adversely affect our ability to fund our continued operations and our product development efforts that historically have contributed significantly to our competitiveness.
 
 We have limited working capital. Our working capital is limited and we are constantly challenged in executing our business plan. Additionally, our working capital does not allow us to fund significant organic growth opportunities or to cope with unforeseen contingencies. Unless we are able to secure additional external financing, for which there can be no assurance, we could be constrained in pursuing new opportunities aggressively.
 
 We have limited liquidity and resources.  We have reevaluated and refocused our strategy in light of our current difficult financial condition. We believe that our strategy is viable and can be achieved. Nevertheless, unless we are able to sustain improve revenue levels, cut further costs or raise additional capital to fund future operations, there can be no assurance that we will have sufficient liquidity and resources to successfully execute our plan .
 
 
 Our strategy and focus to increasingly focus on the operations of Torrey Pines Networks and restore the operations of Rixon Networks to profitability involves risk and may not be successful . We have increasingly focused on the operations of Torrey Pines Networks and product development efforts in the Storage Area Network and metropolitan network transport products marketplace. However, we have also focused on restoring the operations of Rixon Networks to profitability. We may be unsuccessful with this strategy. We may also not be unsuccessful in commercialization of our optical Silverline SAN and MAN transport product line. And, we may not be able to bring the operations of Rixon Networks operation back to profitability through increased sales efforts and reduced overhead.
 
 We rely on a relatively limited number of customers, and the loss of any significant customer could materially and adversely affect our business and financial condition. Historically, we have derived a significant portion of our revenues and accounts receivables from a relatively limited number of customers. The loss of one or more of these customers, or their inability to pay for our products and services, could have a material and adverse effect on our operating and financial results. In fact, Cisco, our single largest customer discontinued purchasing from us an adapter card starting from the third quarter of the just ended fiscal year 2004. During the twelve months ended January 31, 2004, Cisco Systems accounted for approximately 56.7% of our consolidated net revenues.
 
 This has had a major impact on our revenues and operating results, and there is no assurance expectation that the sales of this legacy product line could be restored to its current former levels. This adapter card previously purchased by Cisco was scheduled to go out of production last year but had been kept in production at Ciscos request while it qualified a replacement card.
 
 The inventory of raw materials and finished goods at hand exclusive to the adapter card shipments to Cisco amounts to approximately $0.3 million, before reserves, and is deemed necessary and/or sufficient for replacements in the field. Therefore, the impact on our inventory is not material.
 
 Our industry is highly competitive, and we may not have the resources required to compete successfully. The market for network connectivity products and services and storage area network transport equipment is extremely competitive and we expect competition to continue to intensify in the future. Our primary sources of competition competitors include Adaptec, Intel Corporation, Interphase, CNT, Vixel, ADVA, Ciena, TransMode, Pandatel, Finisar, and MRV Communications. and many other companies. We may also face competition from a number of other companies that have announced plans for new products to address the same problems that our products address. Many of our current and potential competitors have significantly greater resources, name recognition and customer relationships than us. In particular, established companies in the telecommunications equipment or computing industries may seek to expand their product offerings by designing and selling products using competitive technology that could render our products obsolete or have a material adverse effect on our revenue.
 
 We operate in a market where emerging companies enter the markets in which we are competing and new products and technologies are introduced. Increased competition may result in further price reductions, reduced gross margins and loss of market share, any of which could materially and adversely affect our business.
 
 18
  Our business will be seriously harmed if we are not able to develop and commercialize new or enhanced products. Our growth depends on our ability to successfully develop new or enhanced products. Our next generation of network management products and coarse wavelength division multiplexing products are under development. We cannot be sure whether these or other new products will be successfully developed and introduced to the market on a timely basis or at all. We will need to complete each of the following steps to successfully commercialize new products: complete product development, qualify and establish component suppliers, validate manufacturing methods, conduct extensive quality assurance and reliability testing, complete any software validation, and demonstrate systems interoperability.
 
 If we do not develop these products in a timely manner, our competitive position and financial condition could be adversely affected. In addition, as we introduce new or enhanced products, we must also manage the transition from older products to newer products. If we fail to do so, we may disrupt customer ordering patterns or may not be able to ensure that adequate supplies of new products can be delivered to meet anticipated customer demand. Any failure to effectively manage this transition may cause us to lose current and prospective customers.
 
 We maintain high levels of inventory with low turnover. We have historically maintained high levels of inventory to meet the output requirements of our customers over which we have little influence and to support our legacy products already in service. Many of our products require custom parts with long lead times and our inventory levels allow us to provide fast response to our customer needs. While we continually review our reserves for conservative valuations, significant changes in customer demand for our products could adversely and materially affect our business.
 
 Except for the fiscal year ending January 31, 2003, we incurred net losses over the recent past and may experience future losses. We have incurred losses from continuing operation during the twelve months ended January 31, 2004 of approximately $2.0 million, and for the years ended January 31, 2002 and 2001 of $10.77 million and $17.7 million, respectively. We have financed these losses through a combination of debt issuances, bank lines of credit and security placements. However, there can be no assurance that our working capital requirements will not exceed our ability to generate sufficient cash to support our requirements and the needed capital will have to be obtained from additional external sources.
 
 Our future growth depends on our ability to attract new customers, and on our customers' ability to sell additional services to their own customers. Most of our potential customers evaluate our network connectivity and storage area products for integrated deployment in larger systems. There are a limited number of potential customers for our products. If we are not selected by a potential customer for particular system project, our business may be seriously harmed. Similarly, our growth depends on our customers' success in selling integrated solutions based on our products and complementary products from others. Our success will depend on our ability to effectively anticipate and adapt to customer requirements and offer products and services that meet customer demands. Any failure of our current or prospective customers to purchase products from us for any reason, including a downturn in their business, would seriously harm our ability to grow our business.
 
 The time that our customers and potential customers require for testing and qualification before purchasing our networking products can be long and variable, which may cause our results of operations to be unpredictable. Before purchasing our products, potential customers must undertake a lengthy evaluation, testing and product qualification process. In addition, potential customers require time-consuming field trials of our products. Our sales effort requires the effective demonstration of the benefits of our products to, and significant training of, potential customers. In addition, the timing of deployment depends on many factors, including the sophistication of a customer and the complexity and size of a customer's networks. Our sales cycle, which is the period from the time a sales lead is generated until the recognition of revenue, can often be longer than one year. The length and variability of our sales cycle is beyond our control, including  and is affected by, among other things, : our customers' build out and deployment schedules, our customers' access to product purchase financing, our customers' needs for functional demonstration and field trials, and the manufacturing lead time for our products. Because our sales cycles are long and variable, our results of operations may be unpredictable.
 
 Our products may have errors or defects that we find only after deployment, which could seriously harm our business. Our products can only be fully tested after deployment. Our customers may discover errors or defects in our products, and our products may not operate as expected. If we are unable to fix errors or other problems that may be identified, we could experience loss of or delay in revenues and loss of market share, loss of customers, failure to attract new customers or achieve market acceptance, diversion of engineering resources, increased service and warranty costs, and legal actions by our customers. Any failure of our current or planned products to operate as expected could delay or prevent their adoption and seriously harm our business.
 
 If our products do not fully interoperate with our customers' systems, installations will be delayed or cancelled or our products could be returned. Many of our customers require that our products be designed to interoperate with their existing networks, each of which may have different specifications and utilize a variety of protocols. Our customers' networks contain multiple generations of products that have been added over time as these networks have grown and evolved. Our products must interoperate with all of the products within these networks as well as future products in order to meet our customers' requirements. If we are required to modify our product design to be compatible with our customers' systems to achieve a sale, it may result in a longer sales cycle, increased research and development expense and reduced margins on our products. If our products do not fully interoperate with those of our customers' networks, installations could be delayed, orders for our products could be cancelled or our products could be returned, any of which could seriously harm our business.
 
 19
  If we fail to establish and successfully maintain strategic alliances, our business may be harmed. Strategic alliances are an important part of our effort to expand our revenue opportunities and technological capabilities. We cannot be certain that we will be able to enter strategic alliances on terms that are favorable to us. Our business may be harmed if we fail to establish and maintain strategic alliances.
 
 Our business may be seriously harmed if we are unable to establish successful relationships with distributors and systems integrators. We believe that our future success is dependent upon our ability to establish successful relationships with a variety of distributors and systems integrators. As we expand domestically and internationally, we will increasingly depend on distributors and systems integrators. If we are unable to establish and expand these relationships, we may not be able to increase market awareness or sales of our products, which may prevent us from achieving and maintaining profitability.
 
 Our business for storage area networking products may be seriously harmed if the market for storage area networking products does not develop as we expect. Our planned product offerings are focused on the needs of providers customers that service storage area networks. The market for storage area networking products is new, and we cannot be certain that a viable market for our products will develop or be sustainable. If this market does not develop, or develops more slowly than we expect, our business may be seriously harmed. Furthermore, the storage area networking industry is subject to rapid technological change and newer technology or products developed by others could render our products non-competitive or obsolete. If the standards adopted are different from those that we have chosen to support, market acceptance of our products would be significantly reduced and our business will be seriously harmed.
 
 We depend upon contract manufacturers and any disruption in these relationships may cause us to fail to meet the demands of our customers and damage our customer relationships. We use contract manufacturers to manufacture and assemble our products in accordance with our specifications. We do not have long-term contracts with any of them, and none of them are obligated to perform services for us for any specific period or at any specified price, except as may be provided in a particular purchase order. We may not be able to effectively manage our relationships with these manufacturers and they may not meet our future requirements for timely delivery or provide us with the quality of products that we and our customers require.
 
 Each of our contract manufacturers also builds products for other companies. We cannot be certain that they will always have sufficient quantities of inventory available to fill our orders on a timely basis. Qualifying a new contract manufacturer and commencing volume production is expensive and time consuming and could result in a significant interruption in the supply of our products. If we are required to change contract manufacturers, we may suffer delays that could lead to the loss of revenue and damage our customer relationships.
 
 We rely on a limited number of suppliers for some of our components, and our business may be seriously harmed if our supply of any of these components is disrupted. The major components of our products include circuit boards, microprocessors, chipsets, and memory components among other components. Most of these components are available from multiple sources. However, some components used in our products are obtained from single or limited sources and may from time to time be in short supply. We have from time to time experienced, and are experiencing, difficulty in obtaining some components. We do not have guaranteed supply arrangements with any of our suppliers, and we cannot assure you that our suppliers will continue to meet our requirements. Shortages of components could not only limit our production capacity but also could result in higher costs due to the higher costs of components in short supply or the need to use higher-cost substitute components. Significant increases in the prices of components could have a material adverse effect on our results of operations because we may not be able to adjust product pricing to reflect the increases in component costs. Also, an extended interruption in the supply of components or a reduction in their quality or reliability would have a material adverse effect on our financial condition and results of operations by impairing our ability to timely deliver quality products to our customers. Delays in deliveries due to shortages of components or other factors may result in cancellation by our customers of all or part of their orders. Although customers who purchase from us products that are not readily available from other sources would be less likely than other customers of ours to cancel their orders due to production delays, we cannot assure you that cancellations will not occur.
 
 20
  The availability of many of these components to us is dependent in part by our ability to provide suppliers with accurate forecasts of our future requirements. In the event of a disruption in supply or if we receive an unexpectedly high level of purchase orders, we may not be able to develop an alternate source in a timely manner or at favorable prices. Any of these events could hurt our ability to deliver our products to our customers and negatively affect our operating margins. In addition, our reliance on our suppliers exposes us to potential supplier production difficulties or quality variations. Any such disruption in supply would seriously impact our present and future sales.
 
 In addition, we have from time to time received from manufacturers "last buy" notices that indicate that one or more components that we incorporate into our products will be discontinued. If we are unable to participate in a last buy or are unable to purchase an adequate quantity of last buy components to cover our needs until the time, if any, that we are able to find an appropriate substitute component that works with the current design of our product or to redesign our product to allow for use of a substitute component, we may have to eliminate the product from our product line. We believe that with respect to many of our single source components, we could obtain similar components from other sources. However, in response to past last buy notices, we have been working to alter product designs on some of our products to allow us to use alternative components. We cannot assure you that we will be successful in our redesign of these products or that we will not experience difficulties associated with future last buys. Further, we cannot assure you that future severe shortages of components that could increase the cost or delay the shipment of our products will not occur.
 
 We may be unable to protect our intellectual property, which could limit our ability to compete. We hold nine patents and have two patents pending for our Silverline product design. Although we attempt to protect our intellectual property rights through patents, trademarks, and copyrights, by maintaining certain technology as trade secrets and by other measures, we cannot assure you that any patent, trademark, copyright or other intellectual property rights owned by us will not be invalidated, circumvented or challenged; that such intellectual property rights will provide competitive advantages to us; or that any of our future patent applications, if any, will be issued with the scope of the claims sought by us, if at all. We cannot assure you that others will not develop technologies that are similar or superior to our technology, or that our competitors will not duplicate our technology or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business or intend to do business in the future.
 
 We believe that the future success of our business will depend on our ability to translate the technological expertise and innovation of our personnel into new and enhanced products. We cannot assure you that the steps taken by us will prevent misappropriation of our technology. In the future, we may take legal action to enforce our patents and other intellectual property rights, to protect our trade secrets, to determine the validity and scope of the proprietary rights of others, or to defend against claims of infringement or invalidity. Such litigation could result in substantial costs and diversion of resources and could harm our business and operating results.
 
 We could become subject to litigation regarding intellectual property rights, which could seriously harm our business and require us to incur significant costs. In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. We may be a party to litigation in the future to protect our intellectual property or as a result of an allegation that we infringe others' intellectual property. Any parties asserting that our products infringe upon their proprietary rights would force us to defend ourselves, and possibly our customers or manufacturers against the alleged infringement. These claims and any resulting lawsuits, if successful, could subject us to significant liability for damages and invalidation of our proprietary rights. Additionally, any claims and lawsuits, regardless of their merits, would likely be time-consuming and expensive to resolve and would divert management time and attention.
 
 Any claims of infringement of the intellectual property of others could also force us to do one or more of the following: stop selling, incorporating or using our products that use the challenged intellectual property; obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which may not be available to us on reasonable terms, or at all; or redesign those the infringing products that use such technology. If we are forced to take any of the foregoing actions, our business may be seriously harmed.
 
 The markets that our products address are governed by regulations and evolving industry standards. The market for our products is highly regulated and industry standards are intensive, with many standards evolving as new technologies are deployed. In the United States, our products must comply with various regulations defined by the Federal Communications Commission and standards established by Underwriters Laboratories. In addition, there are industry standards established by various organizations such as Fibre Channel Industry Association, American National Standards Institute, and Internet Engineering Task Force. We design our products in an effort  to comply with those industry standards so that each particular product can be accepted by its intended customer and we are not aware of any standards based product modifications that are currently required. To the extent non-compliance with such standards has a detrimental effect on customer acceptance, we must address such non-compliance in the design of our products. Standards for new services and network management are still evolving. However, as the standards evolve, we will be required to modify our products or develop and support new versions of our products. The failure of our products to comply or delays in compliance could materially and adversely affect our business, operating results and financial condition.
 
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  Our future revenues are unpredictable and our financial results may fluctuate. Our revenue and operating results could fluctuate substantially from quarter to quarter and from year to year. This could result from any one or a combination of factors such as the cancellation or postponement of orders, the timing and amount of significant orders from our largest customers, our success in developing, introducing and shipping product enhancements and new products, the mix of products we sell, new product introductions by competitors, pricing actions taken by us or our competitors, the timing of delivery and availability of components from suppliers, changes in material costs and general economic conditions.
 
 Our business may be adversely affected by competitive pressures, which we must react to. The industry we compete in is characterized by declining prices of existing products. Therefore continual improvements of manufacturing efficiencies and introduction of new products and enhancements to existing products are required to maintain gross margins. In response to customer demands or competitive pressures, or to pursue new product or market opportunities, we may take certain pricing or marketing actions, such as price reductions, volume discounts, or provisions of services at below market rates. These actions could materially and adversely affect our business, operating results and financial condition.
 
 If we are unsuccessful in our efforts to take advantage of distribution channels for our products, sales of our products may decline or fail to increase. We channel many of our products through a network of distribution outlets. We are continuing to develop and solidify our relationships with certified resellers, distributors and system integrators, many of which are part of a worldwide distribution network. To the extent we are unsuccessful in our efforts to create or maintain an adequate quality and quantity of these relationships, sales of our products may decline or fail to increase as we work to establish effective channels to market.
 
 We rely heavily on our management and board of directors, and the loss of any of their services could materially and adversely affect our business. Our success is highly dependent upon the continued services of key members of our management and board of directors, including our Chairman of the Board, Chief Executive Officer and President, Dr. Kanwar J.S. Chadha, and Vice Chairman and Chief Financial Officer, Dr. Davinder Sethi, and Mr. James Dziak, President of Microtek. The loss of Dr. Chadha, Dr. Sethi or Mr. Dziak or one or more other key members of our management or board of directors could have a material adverse effect on us because each of these individuals has experience and skills upon which we draw heavily in our day-to-day operations and/or strategic planning activities. We do not maintain key-man life insurance policies on any member of management. Our ability to pay cash compensation to retain key members of our management and board of directors is limited by our cash flows.
 
 Our common stock price is subject to significant volatility, which could result in substantial losses for investors. The stock market as a whole and individual stocks historically have experienced extreme price and volume fluctuations, which often have been unrelated to the performance of the related corporations. During the fiscal year ended January 31, 2004, the high and low closing sale prices of our common stock were $0.40 and $0.11, respectively. The market price of our common stock may exhibit significant fluctuations in the future in response to various factors, many of which are beyond our control and which include:
 
 ·  Variations in our quarterly operating results, which variations could result from, among other things, changes in the needs of one or more of our customers;
 ·  Changes in market valuations of similar companies and stock market price and volume fluctuations generally;
 ·  Economic conditions specific to the industries in which we operate;
 ·  Announcements by us or our competitors of new or enhanced products, technologies or services or significant contracts, acquisitions, strategic relationships, joint ventures or capital commitments;
 ·  Regulatory developments;
 ·  Additions or departures of key personnel; and
 ·  Future sales of our common stock or other debt or equity securities.
 
 If our operating results in future quarters fall below the expectations of market makers, and investors, the price of our common stock likely will decline, perhaps substantially. In the past, securities class action lawsuits have often has been brought against a company following periods of volatility in the market price of its their securities. We may in the future be the target of similar lawsuits. Securities litigation lawsuits could result in substantial costs and liabilities and could divert management's attention and resources. Consequently, the price at which you purchase shares of our common stock may not be indicative of the price that will prevail in the trading market. You may be unable to sell your shares of common stock at or above your purchase price, which may result in substantial losses to you.
 
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  Shares of our common stock eligible or to become eligible for public sale could adversely affect our stock price and make it difficult for us to raise additional capital through sales of equity securities. As of April 30, 2004, we had outstanding 13,900,720 shares of common stock, a substantial portion of which were unrestricted, were eligible for resale without registration under Rule 144 of the Securities Act of 1933, or were registered for resale or issued with registration rights. Disregarding beneficial ownership cap limitations that apply to some holders of our derivative securities, as of March 31, 2004, we also had outstanding options and warrants that were exercisable for or convertible into approximately  3,929,313 shares of common stock, nearly all of which were issued with registration rights. Sales of a substantial number of shares of our common stock in the public market, or the perception that sales could occur, could adversely affect the market price for our common stock. Any adverse effect on the market price for our common stock could make it difficult for us to sell equity securities at a time and at a price that we deem appropriate.
 
 Because our stock is not listed on a national securities exchange, you may find it difficult to dispose of or obtain quotations for our common stock. Our common stock trades under the symbol "ESAN" on the OTC Bulletin Board. Because our stock trades on the OTC Bulletin Board rather than on a national securities exchange, you may find it difficult to either dispose of, or to obtain quotations as to the price of, our common stock.
 
 Because we are subject to the Penny Stock rules, the level of trading activity in our stock may be reduced. Broker-dealer practices in connection with transactions in "penny stocks" are regulated by penny stock rules adopted by the Securities and Exchange Commission. Penny stocks, like shares of our common stock, generally are equity securities with a price of less than $5.00 (other than securities registered on some national securities exchanges or quoted on Nasdaq). The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document that provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and, if the broker-dealer is the sole market maker, the broker-dealer must disclose this fact and the broker-dealer's presumed control over the market, and monthly account statements showing the market value of each penny stock held in the customer's account. In addition, broker-dealers who sell these securities to persons other than established customers and "accredited investors" must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. Consequently, these requirements may have the effect of reducing the level of trading activity, if any, in the secondary market for a security subject to the penny stock rules, and investors in our common stock may find it difficult to sell their shares.
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 Item 6. Exhibits and Reports on Form 8-K
 
 (a)  Exhibits
 
 None
 
 (b)  Reports on Form 8-K
 
 Our Form 8-K filed February 6, 2004 announcing our $500,000 bridge loan.

Our Form 8-K filed April 6, 2003 providing our fiscal year ended January 31, 2004 earnings release.
 (c)Certifications31.1 Statement Under Oath for Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.31.2 Statement Under Oath for Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act.32.1 Statement Under Oath for Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.32.2 Statement Under Oath for Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act.
 
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  Signatures
 
 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 ENTRADA NETWORKS, INC.
 
 By: _/s/ Davinder Sethi_
 Davinder Sethi, Ph.D.
 Chief Financial Officer
 Principal Accounting Officer
 
 Date: June 14, 2004
 
 
   25 SUBSIDIARIES OF THE REGISTRANT
 
 Rixon Networks, Inc., a Delaware corporation
 
 Sync Research, Inc., a Delaware corporation
 
 Torrey Pines Networks, Inc., a Delaware corporation
 
 Microtek Systems, Inc. a Wisconsin corporation
 
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