UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington D.C. 20549


____________________








FORM 10-Q








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





For the quarterly period ended October 31, 2003





( )  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934





For the transition period from _________ to __________





_________________





Commission file number: 000-26952








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 by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes  No X


The Registrants revenues for its recent fiscal year were $13,630,900.


The aggregate market value of voting stock based upon the closing sale price held by non-affiliates of the Registrant on July 31, 2003 was $2,354,621.





(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
November 24, 2003
13,900,720































Item 1. Financial StatementsENTRADA NETWORKS, INC.CONSOLIDATED BALANCE SHEETS(In Thousands)October 31,


January 31,2003


2003(unaudited)


(audited
)ASSETSCURRENT ASSETSCash and equivalents

$
229

$
808Short-term Investments


57


45Accounts receivable, net of allowance for doubtfulaccounts of $67 and $212, respectively


495


1,329Inventory, net of reserves of $3,453 and $3,809, respectively


3,531


3,576Prepaid expenses and other current assets


345


509TOTAL CURRENT ASSETS


4,657


6,267PROPERTY AND EQUIPMENT, NET


652


1,073OTHER ASSETSDeposits


39


31Restricted cash


-


300TOTAL OTHER ASSETS


39


331TOTAL ASSETS

$
5,348

$
7,671LIABILITIES AND STOCKHOLDERS' EQUITYCURRENT LIABILITIESAccounts payable


289


810Other current and accrued liabilities


569


1,409Short-term debt


246


474Capital lease obligations


-


68TOTAL LIABILITIES

$
1,104

$
2,761STOCKHOLDERS' EQUITYPreferred stock, $.001 par value, 2,000 shares authorized, no shares outstanding


-


-Common stock, $.001 par value; 50,000 shares authorized; 13,901 sharesissued and outstanding at October 31, 2003; 12,937 shares issuedand outstanding at January 31, 2003


13


13Additional paid-in capital


52,001


52,001Accumulated other comprehensive income (loss)


4


-Accumulated deficit


(47,646
)

(47,104
)Treasury Stock (402,616 shares at cost)


(128
)

-TOTAL STOCKHOLDERS' EQUITY


4,244


4,910TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

$
5,348

$
7,671See accompanying notes to consolidated financial statements.











ENTRADA NETWORKS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)(In Thousands, except per share amounts)Three months ended
Nine months endedOctober 31,
October 31,2003


2002


2003


2002NET REVENUESProduct

$
695

$
3,731

$
4,927

$
9,531Services


236


328


765


1,117TOTAL NET REVENUES


931


4,059


5,692


10,648COST OF REVENUEProduct


481


1,894


3,099


5,504Services


77


(22
)

247


99TOTAL COST OF REVENUE


558


1,872


3,346


5,603GROSS PROFIT


373


2,187


2,346


5,045OPERATING EXPENSESSelling and marketing


80


206


390


633Engineering, research and development


260


285


941


853General and administrative


258


569


1,220


1,587Other operating expenses


-


120


341


360TOTAL OPERATING EXPENSES


598


1,180


2,892


3,433INCOME (LOSS) FROM OPERATIONS


(225
)

1,007


(546
)

1,612OTHER CHARGESInterest expense, net


(5
)

(57
)

(12
)

(156
)Other income (expense)


-


(85
)

15


(89
)TOTAL OTHER CHARGES


(5
)

(142
)

3


(245
)NET INCOME (LOSS)

$
(230
)
$
865

$
(543
)
$
1,367INCOME (LOSS) PER COMMON SHARE:WEIGHTED AVERAGE COMMON SHARES OUTSTANDINGBASIC


13,901


12,937


13,402


12,755DILUTED


13,901


12,973


13,402


12,823BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHAREBASIC

$
(0.02
)
$
0.07

$
(0.04
)
$
0.11DILUTED

$
(0.02
)
$
0.07

$
(0.04
)
$
0.11See accompanying notes to consolidated financial statements.














ENTRADA NETWORKS, INC.AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

Nine Months Ended(In Thousands)

October 31,2003


2002CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
(543
)
$
1,367Adjustments to reconcile net income (loss) to net cash provided by operating activities:Depreciation and amortization


425


468Non-cash change in short-term investment


(8
)

(4
)Accounts receivable and inventory reserve changes


(500
)

52Gain or (loss) on sale of property and equipment


-


149Issuance of common stock in payment of liabilities


-


89Changes in assets and liabilities net of effects of business entity acquisition:(Increase) decrease in accounts receivable


979


39(Increase) decrease in inventories


401


(370
)(Increase) decrease in prepaid and other current assets


456


11Increase (decrease) in accounts payable


(524
)

(1,256
)Increase (decrease) in accrued expenses


(501
)

(1,352
)Increase (decrease) in other current liabilities


(336
)

80NET CASH USED IN OPERATING ACTIVITIES:


(151
)

(727
)CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of treasury stock


(128
)

-Investment in marketable securities


-


(49
)Purchase of property and equipment


(4
)

(11
)NET CASH USED IN INVESTING ACTIVITIES


(132
)

(60
)CASH FLOWS FROM FINANCING ACTIVITIES:Increase (repayment) of short-term debt


(228
)

618Repayment of capital lease obligations


(68
)

(22
)NET CASH PROVIDED BY FINANCING ACTIVITIES


(296
)

596INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS


(579
)

(191
)CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD


808


698CASH AND CASH EQUIVALENTS - END OF PERIOD

$
229

$
507See accompanying notes to consolidated financial statements.













ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(In thousands, except per share amounts)
_____________________________________________________________________________





Entrada Networks, Inc.,  through its  three wholly owned subsidiaries, is in the business of developing, marketing and selling products for the network connectivity industry.





Our Torrey Pines Networks ("Torrey Pines") segment designs, develops, and markets storage area network ("SAN") transport products.





Our Rixon Networks ("Rixon") segment designs, 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.





Our Sync Research ("Sync") segment 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 and nine months ended October 31, 2003 and 2002 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, 2003 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 April 30, 2003.





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, and 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 October 31 and for the three months and nine months ended October 31, 2003 and 2002, have been made. The results of operations for the three and nine months ended October 31, 2003 are not necessarily indicative of the operating results for the full year.





Recent Accounting Pronouncements





In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("SFAS 150"). SFAS 150 clarifies the accounting for certain financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in the balance sheets. Previously, many of those financial instruments were classified as equity. SFAS 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The adoption of this pronouncement did not have a material impact on our results of operations and financial condition.




ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)
_____________________________________________________________________________







In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities" ("SFAS 149"). SFAS 149 amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"). In particular, it (1) clarifies under what circumstances a contract with an initial net investment meets the characteristic of a derivative as discussed in SFAS 133, (2) clarifies when a derivative contains a financing component, (3) amends the definition of an underlying to conform it to the language used in FASB Interpretation No. ("FIN") 45, "Guarantor Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45") and (4) amends certain other existing pronouncements. SFAS 149 will be effective for contracts entered into or modified after June 30, 2003, except as stated below, and for hedging relationships designated after June 30, 2003.The provisions of SFAS 149 that relate to guidance in SFAS 133 Implementation Issues that have been effective for fiscal quarters which began prior to June 15, 2003, will continue to be applied in accordance with their respective effective dates. In addition, certain provisions relating to forward purchases or sales of when-issued securities or other securities that do not yet exist, will be applied to both existing contracts as well as new contracts entered into after June 30, 2003. We adopted this pronouncement with no material impact on our results of operations and financial condition.





In November 2002, the FASB Emerging Issues Task Force ("EITF") reached a consensus on Issue 00-21, "Accounting for Revenue Arrangements with Multiple Deliverables" ("EITF 00-21"). In the absence of higher level accounting literature, EITF 00-21 governs how to separate and allocate revenue to goods or services or both that are to be delivered in a bundled sales arrangement. EITF 00-21 applies to revenue arrangements entered into after June 30, 2003 and allows for either prospective application or cumulative adjustment upon adoption. We adopted this pronouncement with no material impact on its results of operations and financial condition.








Stock-Based Compensation  All stock options issued to employees have an exercise price not less than the fair market value of our common stock on the date of grant, and in accordance with the accounting for such options utilizing the intrinsic value method there is no related compensation expense recorded in our financial statements. Had compensation cost for stock-based compensation been determined based on the fair value at the grant dates in accordance with the method delineated in Statement of Accounting Standards No. 123, our net loss and loss per share for the three and nine months ended October 31, 2003 would have been increased and our net income and income per share for the three and nine months ended October 31, 2002 would decrease as follows:








Three Months Ended October 31,
Nine months Ended October 31,2003


2002


2003


2002Net income (loss):As reported

$
(230
)
$
865

$
(543
)
$
1,367Add: Stock based employee compensation expense


-


-


-


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


(16
)

(10
)

(221
)

(611
)Pro forma income (loss) per share:


(246
)

855


(764
)

756Basic and diluted EPS as reported

$
(0.02
)
$
0.07

$
(0.04
)
$
0.11Pro forma basic and diluted EPS

$
(0.02
)
$
0.07

$
(0.06
)
$
0.06










ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)







BALANCE SHEET DETAIL





Consolidated inventories at October 31, 2003 and January 31, 2003 consisted of:





October 31, 2003
January 31, 2003Raw material

$
3,410

$
3,736Work in process


164


163Finished goods


3,410


3,4866,984


7,385Less: valuation reserve


(3,453
)

(3,809
)Net Inventories

$
3,531

$
3,576





TREASURY STOCK





On May 27, 2003, we announced that our Board of Directors has authorized the repurchase of up to $500,000 of the Companys common stock over the twelve months from that date at prevailing market prices. Stock repurchases may be made from time-to-time during the twelve-month period at management's discretion, either in the open market or through privately negotiated transactions.







During the three month period ended October 31, 2003, no shares were repurchased.








EARNINGS PER SHARE CALCULATION





The following data show the amounts used in computing basic earnings per share for the three and nine months ended October 31, 2003 and 2002.




Three Months Ended October 31,
Nine months Ended October 31,2003


2002


2003


2002Net income (loss) available to commonstockholders used in basic and diluted EPS

$
(230
)
$
865

$
(543
)
$
1,367Weighted average number of common sharesused in basic EPS


13,900,720


12,936,774


13,402,474


12,754,649








We had net loss of $230 and $543, respectively, for the three month and nine month period ended October 31, 2003 and a net income of $865 and $1,367, respectively, for the three month and nine month period ended October 31, 2002. Accordingly, the effect of dilutive securities including vested and non-vested stock options to acquire common stock are not included in the calculation of EPS for the three month and nine month period ended October 31, 2003 because their effect would be anti-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.








ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)







Three Months Ended October 31,
Nine months Ended October 31,2003
2002
2003
2002Net income (loss) available to commonstockholders used in basic EPS

$
(230
)
$
865

$
(543
)
$
1,367Weighted average number of common sharesused in basic EPS


13,900,720


12,936,774


13,402,474


12,754,649Effect of dilutive securities:Stock benefit plans


-


36,005


-


67,930Weighted average number of common sharesand dilutive potential common stockused in diluted EPS


13,900,720


12,972,779


13,402,474


12,822,579







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 anti-dilutive. Options to purchase common shares that were outstanding but were not included in the computation of diluted earnings per shares because their effect would be anti-dilutive for the 2003 periods or their exercise price was greater than the average market price of the common shares for the 2002 periods that each option was outstanding were 2,134,345 and 902,682 for the three and nine months ended October 31, 2003 and 1,256,628 and 1,725,258 for the three and nine months ended October 31, 2002, respectively.





COMMITMENTS AND CONTINGINCIES





Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million, subject to a limitation equal to 80% 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 October 31, 2003). 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 and were 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 was renewed October 29, 2003. The amendment to our loan agreement is provided as exhibit 10.13. We are in compliance with our bank line of credit covenants as of October 31, 2003.





Product warranty liabilities are not material to these consolidated financial statements.





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 October 31, 2003.








ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)







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 October 31, 2003.







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 October 31, 2003. We perform ongoing evaluations of our customers and require letters of credit or other collateral arrangements as appropriate.





At October 31, 2003, Ingram Micro accounted for 23.9%, Ross Microsystems for 23.3%, and Computer Overseas Corp for 12.7% of net accounts receivables. At January 31, 2003, Cisco accounted for 45.9%, MCI Worldcom accounted for 31.9% and Ingram Micro accounted for 10.9% of net accounts receivables.





Customers accounting for more than 10% of net revenues during the quarters ended October 31, 2003 and 2002 were:





October 31,
October 31,2003


2002Cisco


77.8
%

33.8
%U. S. Navy


-


29.4
%








OPERATING SEGMENT INFORMATION





Geographical Information




The table below presents external revenues based on the locations of the customer:





Three months ended October 31,

Nine months ended October 312003


2002


2003


2002Net Revenues:United States

$
833

$
3,847

$
5,297

$
9,967Europe


98


212


395


681Other


--


--


--


--Total net revenues

$
931

$
4,059

$
5,692

$
10,648





ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)




Products and Service Revenue









Three months ended October 31,
Nine months ended October 31,2003


2002


2003


2002Net Revenues:Network adapter cards

$
578

$
3,574

$
4,535

$
9,121Frame relay network products


117


157


392


410Service and support


236


328


765


1,117Total net revenue

$
931

$
4,059

$
5,692

$
10,648








Supplemental Financial Information





There were no inter-segment revenues.








Three Month Segment Financial Information ended October 31, 2003:





We have three operating segments, Rixon Networks, Inc., Sync Research, Inc. and Torrey Pines Networks, Inc.




Rixon Networks


Sync Research


Torrey Pines Networks


TotalQuarter ended October 31, 2003Total Revenues

$
578

$
353

$
-


931Net Income (loss)


(390
)

249


(89
)

(230
)Depreciation and amortization expense


71


13


41


125Inventory reserve additions


-


-


-


-Capital asset additions


-


-


-


-Total Assets

$
3,933

$
740

$
675

$
5,348





Nine month Segment Financial Information ended October 31, 2003:





We have three operating segments, Rixon Networks, Inc., Sync Research, Inc. and Torrey Pines Networks, Inc.





Rixon Networks

Sync Research

Torrey Pines Networks

TotalNine months ended October 31, 2003Total Revenues

$ 4,535

$ 1,157

$ -

$ 5,692Net Income (loss)

(720)

453

(276)

(543)Depreciation and amortization expense

262

40

123

425Inventory reserve additions

-

-

-

-Capital asset additions

4

-

-

4Total Assets

$ 3,933
$ 740
$ 675
$ 5,348







ENTRADA NETWORKS, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Continued
(In thousands, except per share amounts)




Three Month Segment Financial Information ended October 31, 2002:





We have three operating subsidiaries, Rixon Networks, Inc., Torrey Pines Networks, Inc. and Sync Research, Inc.





Rixon Networks


Sync Research


Torrey Pines Networks


TotalQuarter ended October 31, 2002Total Revenues

$
3,574

$
485

$
-

$
4,059Net income (loss)


740


168


(43
)

865Depreciation and amortization expense


100


16


40


156Inventory reserve additions


(133
)

(4
)

-


(137
)Capital asset additions


-


-


11


11Total Assets

$
7,159

$
1,302

$
498

$
8,959








Nine month Segment Financial Information ended October 31, 2002:





We have three operating segments, Rixon Networks, Inc., Sync Research, Inc. and Torrey Pines Networks, Inc.





Rixon Networks


Sync Research


Torrey Pines Networks


TotalNine months ended October 31, 2002Total Revenues

$
9,121

$
1,527

$
-

$
10,648Net income (loss)


1,194


302


(129
)

1,367Depreciation and amortization expense


253


51


164


468Inventory reserve additions


(133
)

(4
)

-


(137
)Capital asset additions


-


-


11


11Total Assets

$
7,159

$
1,302

$
498

$
8,959
















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.





Results of Operations/Comparison of the three months ended October 31, 2003 and 2002




Net revenues. Net revenues were $0.9 million for the three months ended October 31, 2003, compared with $4.1 million for the three months ended October 31, 2002, a decrease of 77.1%. The decrease in net revenues in the three months ended October 31, 2003 compared to the three months ended October 31, 2002 resulted primarily from reduced product shipments to Cisco resulting from their earlier announced decision to cease purchasing an adapter card from us.





Our Sync Research net revenues from the frame relay and service business were $0.4 million for the three months ended October 31, 2003 compared to $0.5 million net revenues for the three months ended October 31, 2002. This 27.2% reduction was primarily due to a lower level of legacy service contracts. It is expected that our legacy service contracts will continue to decline.





Our Rixon Networks net revenues are primarily from adapter card product revenues. These product revenues decreased $3.0 million or 83.8% to $0.6 million for the three months ended October 31, 2003 from $3.6 million the three months ended October 31, 2002. This was primarily due to reduced shipments to Cisco during the quarter and a single large contract that shipped in this quarter last year.





Cisco advised us that it would discontinue purchasing from us an adapter card starting in this third quarter of the current fiscal year. The net revenues attributable to this specific adapter card amounted to $0.3 million , approximately 32% of total net revenues or 43.4% of product revenues , in the three months ended October 31, 2003 and $1.4 million or 33.9% of net revenues in the three months ended October 31, 2002. The loss of such sales to Cisco has had a major impact on our revenues and operating results, and there can be no assurance that the sales of this legacy product line could be restored to its current levels.





In anticipation of the reduced revenues we have expanded our sales team by hiring a sales person and adding two independent sales representatives to bring in new sales not only for this family of adapter cards but also for Torrey Pines Silverline? product line and many of Rixon Networks legacy products. Additionally, we have downsized the workforce, from 35 employees including consultants to 22, and continue to examine every cost and expense item in order to reduce the cost burden proportional to the lost revenue. For the months of September and October, 2003, we operated close to our adjusted breakeven point.





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 $0.4 million for the quarter ended October 31, 2003 from $2.2 million for the quarter ended October 31, 2002. Our gross margin decreased to 40.1% for the three months ended October 31, 2003 as compared to 53.9% for the three months ended October 31, 2002. This is primarily due to lower net revenues from our loss of the Cisco adapter card.





Our Sync Research gross profit of $0.2 million for the quarter ended October 31, 2003 was lower than the $0.3 million from the quarter ended October 31, 2002 due to a one-time credit taken in the prior year.





Our Rixon Networks gross profit was 89.0% lower to $0.2 million for the quarter ended October 31, 2003 compared to $1.9 million for the quarter ended October 31, 2002. This was primarily due to reduced Cisco revenues and a single large contract shipment in the third quarter of last year ended October 31, 2002.





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 dropped to $0.1 million, or 8.6% of net revenues for the quarter ended October 31, 2003, compared to $0.2 million or 5.1 % of net revenues for the quarter ended October 31, 2002. The decrease in selling and marketing expenses reflects the cost cutting efforts and lower commissions paid on sales while the higher percentages reflects primarily the lower revenue base for the three months ended October 31, 2003.











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 $0.26 million, or 27.9% of net revenues, for the quarter ended October 31, 2003, compared with $0.29 million, or 7.0% of net revenues, for the quarter ended October 31, 2002. The increase in research and development percentage was primarily due to the lower revenues and the decreased expenses primarily reflect cost containment efforts.





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 were $0.26 million, or 27.9% of net revenues, for the quarter ended October 31, 2003 compared to $0.57 million, or 14.0 % of net revenues, for the quarter ended October 31, 2002.





Other operating expenses . Other operating expenses for the three months ended October 31, 2003, were $0.0 million compared with $0.12 million or 3.0% of our net revenues for the three months ended October 31, 2002. In the third quarter of 2002 the amount was rent expense for our unoccupied facility in Annapolis Junction, MD. This lease was terminated effective July 31, 2003. The lease was to otherwise expire in October 2004.





Income taxes . There was no provision for income taxes for the three-month periods ended October 31, 2003 and 2002. At January 31, 2003, our deferred income tax assets consists primarily of net operating loss carry forwards. At October 31, 2003 the Company had available federal and state net operating loss carry forwards of approximately $76 million and $27 million, respectively, for income tax purposes. The federal and state losses will expire in varying amounts through 2021 and 2007, respectively. As of January 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 $76 million and $27 million net operating loss carry forwards for federal and state taxes, approximately $64 million and $20.6 million will be subject to such limitation, respectively.





Results of Operations/Comparison of the Nine months Ended October 31, 2003 and 2002




Net revenues .   Net revenues were $5.7 million for the nine months ended October 31, 2003, compared with $10.6 million for the nine months ended October 31, 2002. The 46.2% or $4.9 million decrease in net revenue in the nine months ended October 31, 2003 resulted primarily from $4.6 million reductions in our Rixon product shipments (primarily to Cisco).





Cisco had advised that it would discontinue purchasing from us an adapter card starting from the third quarter of the current fiscal year. The net revenues attributable to this specific adapter card was $3.5 million, approximately 61.4% of total net revenues in the nine months ended October 31, 2003 and $5.6 million or 52.7% of our total net revenues in the nine months ended October 31, 2002. The loss of such sales to Cisco has had a major impact on our revenues and operating results, and there can be no assurance that the sales of this legacy product line could be restored to its current levels.





We had no revenues from our Torrey Pines subsidiary.





Gross profit . Cost of revenues 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. Gross profit was $2.3 million and $5.0 million for the nine month period ended October 31, 2003 and 2002. Our gross margin was 41.2% for the nine months ended October 31, 2003, compared with 47.4% for the nine months ended October 31, 2002. The decline in gross margins resulted primarily from shipments of products with lower margins in Rixon partially offset by lower overall manufacturing and customer service costs.





Selling and marketing . Selling and marketing expenses consist primarily of employee compensation and related costs, commissions to revenue representatives, tradeshow expenses, advertising, facilities costs, and travel expenses. Selling and marketing expenses decreased to $0.39 million, or 6.9% of net revenue for the nine months ended October 31, 2003, from $0.6 million and 5.9% of net revenue for the nine months ended October 31, 2002. The decrease in selling and marketing expense was primarily due to the cost cutting efforts and lower commissions paid on sales in all the segments.










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 $0.9 million, or 16.5% of net revenue, for the nine months ended October 31, 2003, compared with $0.9 million, or 8.0% of net revenue, for the nine months ended October 31, 2002.





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 to $1.2 million, or 21.4% of net revenue, for the nine months ended October 31, 2003 compared to $1.6 million, or 14.9% of net revenue, for the nine months ended October 31, 2002. The decrease in general and administrative expense was primarily due to the cost cutting efforts. The increase in general and administrative expense as percentage of revenue was primarily due to a decline in base revenue.





Other operating expenses . Other operating expenses for the nine months ended October 31, 2003, were $0.34 million or 6.0% of net revenues compared to $0.36 million or 3.4% of net revenues for the nine months ended October 31, 2002. In both periods the expenses related to rent expense for our facility in Annapolis Junction, Maryland. This lease was terminated for the facility effective July 31, 2003. The lease was to otherwise expire in October 2004.





Income taxes . There was no provision for income taxes for the three-month periods ended October 31, 2003 and 2002. At January 31, 2003, our deferred income tax assets consist of net operating loss carry forwards. At October 31, 2003, the Company had available federal and state net operating loss carry forwards of approximately $76 million and $27 million, respectively, for income tax purposes. The federal and state losses will expire in varying amounts through 2021 and 2007, respectively. As of January 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 $76 million and $27 million net loss carry forwards for federal and state taxes, approximately $64 million and $20.6 million will be subject to such limitation, respectively.








Liquidity and Capital Resources





Our working capital was $3.6 million at October 31, 2003, an increase of $0.3 million from the $3.3 million at October 31, 2002. Cash flow used in operations was $151,000 during the nine months ended October 31, 2003 compared with $727,000 for the nine months ended October 31, 2002. The decrease in cash flows used by operations reflects a reduction in operating costs reflected in lower payments for accounts payable and accrued expenses, a decrease in accounts receivable, inventory and prepaids and our net loss from operations after adjustment for non-cash expenses including depreciation, amortization, reserves and valuation allowances. During the nine months ended October 31, 2003, operating cash flow reflects cash used for accounts payables, accrued expenses and in other current liabilities offset by a decrease in inventories, accounts receivable and prepaids. During the same nine months ended October 31, 2002, operating cash flow reflected decreases in accounts receivable, accounts payable, and accrued expenses and increases in net inventories and in other current liabilities .





On May 27, 2003, we announced that our Board of Directors has authorized the repurchase of up to $500,000 of the Companys common stock over the twelve months from that date at prevailing market prices. Stock repurchases may be made from time-to-time during the twelve-month period at management's discretion, either in the open market or through privately negotiated transactions. Repurchases will be made under the program using the Company's own cash resources.





During the nine month period ended October 31, 2003, we repurchased 18,001 shares of our common stock from certain shareholders in the open market pursuant to a previously announced odd-lot repurchase program and 384,615 shares from our Chairman and CEO pursuant to a private agreement approved by our independent directors. The aggregate purchase price for the 402,616 shares of our common stock was $127,000.








Our financing activities during the nine months ended October 31, 2003 used cash flows of $296,000, primarily in connection with repayment of short-term debt and capital lease obligations. Our financing activities during the nine months ended October 31, 2002, was an increase of $596,000 primarily in conjunction with our increase in short-term debt offset partially by the repayment of our capital lease obligations.













Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million, subject to a limitation equal to 80% 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 October 31, 2003). 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 and were 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 was renewed for 12 months on October 29, 2003. We are in compliance with our bank line of credit covenants as of October 31, 2003.





The covenant regarding tangible net worth requires us to maintain that measure to be at least $3.8 million plus 50% of quarterly net income. Ciscos decision to discontinue purchasing the specific adapter card from us from the third quarter of fiscal 2004 and onwards will likely have a material impact on our operating results from that point forward. Unless the Company is able to significantly increase revenues from other products and further reduce operating expenses, for which there can be no assurance, the Company would suffer operating losses in the future that could put the Company in jeopardy at some future date of meeting the tangible net worth covenant.




Outstanding borrowings against this line of credit were $0.2 million at October 31, 2003. 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.





While we anticipate an operating loss for the next quarter and the year based on the loss of revenues from Cisco and our declining legacy service contracts, we are working toward a breakeven cash flow with our personnel reductions and cost cutting measures. However, there can be no assurance that future revenue gains from our additional sales personnel or anticipated cost reductions will occur or be sufficient if there are further reductions in revenue from changes in the economy or our product marketing areas.




The following table presents, at October 31, 2003, our obligations and commitments to make future payments under contracts and contingent commitments.Payment Due by Period as of October 31, 2003Less than


1-3


4-5


After 5Contractual Obligations


Total


1Year


Years


Years


Years(In thousands)Short Term Debt

$
246

$
246

$
-

$
-

$
-Capital Lease Obligations


-


-


-


-


-Total Contractual Cash Obligations

$
246

$
246

$
-

$
-

$
-










Not included on this table are normal recurring trade accounts payable and accrued expenses as presented on the accompanying financial statements.


Our equity compensation plan and outstanding warrant information as of October 31, 2003 is as follows:





Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(a)


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 category**Equity Compensation Plans Approved by Security Holders


2,879,862

$
1.15


1,443,152Equity Compensation Plans Not Approved by Security Holders*


75,757

$
3.30


-Total


2,955,619

$
1.21


1,443,152





* Represents 75,757 warrants issued to Silicon Valley Bank to acquire our common stock.





On October 31, 2003, we had minimal backlog. In addition to this, our service commitments on October 31, 2003 were approximately $0.2 million. We include in our backlog only orders confirmed with a purchase order for products and services to be shipped or provided to our customers with approved credit status within twelve months.





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.





(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


Certain Cautionary Statements





Certain statements in this Quarterly Report on Form 10-Q, including, but not limited to, Part I, Item 2  "Managements Discussion and Analysis of Financial Condition and Results of Operations," contain 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, that are not historical facts but rather reflect current expectations concerning future results and events. The words "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, some of which are beyond the Companys 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 the Companys current and future products, reliance on vendors and product lines, competition, performance of new products, performance of affiliates and their future operating results, the Companys ability to establish successful strategic alliances, quarterly and seasonal fluctuations, dependence on senior management and possible volatility of stock price.





RISK FACTORS





In connection with the safe harbor contained in the Private Securities Litigation Reform Act of 1995 we are 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:





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 include Adaptec, Intel Corporation, Interphase, CNT, Vixel, ADVA, ONI Systems Corporation, TransMode, Pandatel, Finisar 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.





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 currently 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. 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 effect our business.










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 external financing, for which there can be no assurance, we could be constrained in pursuing new opportunities aggressively.





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 nine months ended October 31, 2003 of $0.5 million, and for the years ended January 31, 2002 and 2001 of $10.7 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 projects, 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: 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 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 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.





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 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. We, and our contract manufacturers currently purchase several key components of our products from a limited number of suppliers. We purchase each of these components on a purchase order basis and have no long-term contracts for these components. In addition, 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.





We may be unable to protect our intellectual property, which could limit our ability to compete. 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 corporate partners, and control access to, and distribution of, our software, documentation and other proprietary information. Despite our efforts to protect our proprietary rights, 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 the laws may not protect our proprietary rights as fully as in the United States. If competitors gain access to our technology, our ability to compete could be harmed.





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 products that use such technology. If we are forced to take any of the foregoing actions, our business may be seriously harmed.





If necessary licenses of third-party technology are not available to us or are very expensive, our products could become obsolete. We may be required to license technology from third parties to develop new products or product enhancements. We cannot assure you that third-party licenses will be available to us on commercially reasonable terms, if at all. If we are required to obtain any third-party licenses to develop new products and product enhancements, we could be required to obtain substitute technology, which could result in lower performance or greater cost, either of which could seriously harm the competitiveness of our products.





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 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 to comply with those industry standards so that each particular product can be accepted by its intended customers and we are not aware of any standards based product modifications 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. We are a member of several standards committees, which enables us to participate in the development of standards for emerging technologies. 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.





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 backlog at any point may not be a good indicator of expected revenues . Our backlog at the beginning of each quarter typically is neither a good predictor nor sufficient to achieve expected revenue for the quarter. To achieve our revenue objective, we are dependent upon obtaining orders during each quarter for shipment during that quarter. Furthermore, our agreements with our customers typically provide that they may change delivery schedules and cancel orders within specified time frames, typically 30 days or more prior to the scheduled shipment date, without significant penalty. Our customers have in the past built, and may in the future, build significant inventory in order to facilitate more rapid deployment of anticipated major projects or for other reasons. Decisions by such customers to reduce their inventory levels have led and could lead to reductions in purchases from us. These reductions, in turn, have and could cause fluctuations in our operating results and have had and could have an adverse effect on our business, financial condition and results of operations in periods in which the inventory is reduced.





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.





A substantial number of our common shares are eligible for future sale. No prediction can be made as to the effect, if any, that future sales of common stock that we may make, or the availability of common stock for future sales, will have on the market price of common stock prevailing from time to time. Sales of a substantial number of shares of common stock in the public market could adversely affect the market price for our common stock and reported earnings per share.










Availability of raw materials. Many of our products require components that may not be readily available. These include microprocessors, custom integrated circuits and other electronic components. To minimize the risks of component or product shortages, we attempt to maintain multiple supply sources. However, there can be no assurance that such sources will be adequate to meet our needs.





Patents, trademarks and licenses. We currently 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.





As is common in our industry, we have from time to time received notification from other companies claiming that certain of our products may infringe intellectual property rights held by such companies. Any claim or litigation, with or without merit, could be costly, time consuming and could result in a diversion of managements attention, which could harm our business. If we were found to be infringing the intellectual property rights of any third party, we could be subject to liabilities for such infringement, which could be material, and could be required to seek licenses from other companies or to refrain from using, manufacturing or selling certain products or using certain processes. Although holders of patents and other intellectual property rights often offer licenses to their patent or other intellectual property rights, no assurance can be given that licenses would be offered, that the terms of any offered license would be acceptable to us or that failure to obtain a license would not cause its operating results to suffer.





Employees. As of October 31, 2003 we had 22 employees and independent contractors, including five (5) in engineering, six (6) in manufacturing, test, repair, inventory control and quality assurance, four (4) in sales, sales support and marketing, two (2) in customer service and support, four (4) in administration, and one (1) executive. None of our employees is represented by a collective bargaining agreement, and we believe that relations with our employees are good, but we could be at risk if one or more employees choose to leave.





Fluctuations in revenue and operating results. The industries we operate in are subject to fluctuation. Our operating results may fluctuate as a result of a number of factors, including the timing of orders from, and shipments to, customers; the timing of new product introductions and the market acceptance of those products; increased competition; changes in manufacturing costs; availability of parts; changes in the mix of product sales; the rate of end-user adoption and carrier and private network deployment of our solutions; factors associated with international operations; and changes in world economic conditions.





AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION IN THIS DOCUMENT, YOU SHOULD CAREFULLY CONSIDER THE RISK FACTORS BEFORE DECIDING TO INVEST OR MAINTAIN AN INVESTMENT IN SHARES OF OUR COMMON STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCURS, IT IS LIKELY THAT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS WOULD BE HARMED. AS A RESULT, THE TRADING PRICE OF OUR COMMON STOCK COULD DECLINE, AND YOU COULD LOSE PART OR ALL OF YOUR INVESTMENT.





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.










We currently do not have any commitments for additional financing. In addition, deteriorating global economic conditions may cause prolonged 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.





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.





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 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 ability to pay, could have a material and adverse on our operating and financial results. In fact, during the three months ended October 31, 2003, Cisco Systems, accounted for approximately 21.9% of our consolidated net revenues and during the nine months ended October 31, 2003, Cisco Systems, accounted for approximately 62.0% of our consolidated net revenues. Cisco advised that it will discontinue purchasing from us an adapter card starting from the third quarter of the current fiscal year. This will have a major impact on our future revenues and operating results, and there can be no assurance that the sales of this legacy product line could be restored to its current levels. This adapter card 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 this adaptor card shipments to Cisco amounts to approximately $0.3 million and is deemed necessary and/or sufficient for replacements in the field. Therefore, the impact on our inventory is not material.





OUR BUSINESS COULD SUFFER IF WE OR OUR CONTRACT MANUFACTURERS ARE UNABLE TO OBTAIN COMPONENTS OF OUR PRODUCTS FROM OUTSIDE SUPPLIERS. 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 currently 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 currently 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.










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 RELY HEAVILY ON OUR MANAGEMENT AND BOARD OF DIRECTORS, AND THE LOSS 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. The loss of Dr. Chadha, Dr. Sethi 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 quarter ended October 31, 2003, the high and low closing sale prices of our common stock were $0.23 and $0.14, 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, securities analysts and investors, the price of our common stock likely will decline, perhaps substantially. In the past, securities class action litigation often has been brought against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation 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.





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 October 31, 2003, 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 October 31, 2003, we also had outstanding options and warrants that were exercisable for or convertible into approximately 2,203,059 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.











Item 6. Exhibits and Reports on Form 8-K





(a)  Exhibits





10.13 Silicon Valley Bank Amendment to Loan Documents dated October 29, 2003 provided herein.




(b)  Reports on Form 8-K





Our Form 8-K filed April 14, 2003 providing our fiscal year ended January 31, 2003 earnings release.


Our Form 8-K filed July 8, 2003 providing financial impact of Cisco discontinuing purchasing an adapter card.


Our Form 8-K filed August 25, 2003 providing our Q2 FY2004 earnings release for the period ended July 31, 2004




(c)  Certifications





31.1  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.








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: December 15, 2003






















SUBSIDIARIARIES OF THE REGISTRANT





Rixon Networks, Inc., a Delaware corporation





Sync Research, Inc., a Delaware corporation




Torrey Pines Networks, Inc., a Delaware corporation