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 July 31, 2003



o                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.








**Delaware**

**33-0676350**(State or other jurisdiction of incorporation or organization)

(I.R.S. EmployerIdentification No.)













**12 Morgan, Irvine, California**
**92618**(Address of principal executive office)
(Zip Code)








(949) 588-2070












X




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
August 12, 2003
13,900,720





















Item 1. Financial Statements**ENTRADA NETWORKS, INC.****AND SUBSIDIARIES*****CONSOLIDATED BALANCE SHEET***(In Thousands)July 31,


January 31,2003


2003(unaudited
)

(audited
)**ASSETS****CURRENT ASSETS**Cash and equivalents

$
850

$
808Short-term Investments


52


45Accounts receivable, net of allowance for doubtfulaccounts of $84 and $212, respectively


708


1,329Inventory, net of reserves of $3,799 and $3,809, respectively


3,581


3,576Prepaid expenses and other current assets


533


509**TOTAL CURRENT ASSETS**


5,724


6,267**PROPERTY AND EQUIPMENT, NET**


777


1,073**OTHER ASSETS**Deposits


31


31Restricted cash


0


300**TOTAL OTHER ASSETS******


31


331**TOTAL ASSETS**

$
6,532

$
7,671**LIABILITIES AND STOCKHOLDERS' EQUITY****CURRENT LIABILITIES******Accounts payable


597


810Other current and accrued liabilities


1,053


1,409Short-term debt


398


474Capital lease obligations


16


68**TOTAL LIABILITIES**

$
2,064

$
2,761**STOCKHOLDERS' EQUITY**Preferred 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 July 31, 2003; 12,937 shares issuedand outstanding at January 31, 2003


13


13Additional paid-in capital


52,001


52,001Accumulated other comprehensive income (loss)


(2
)

-Accumulated deficit


(47,417
)

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


(127
)

-**TOTAL STOCKHOLDERS' EQUITY**


4,468


4,910**TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY**

$
6,532

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






Page 2












**ENTRADA NETWORKS, INC.**
****
****
****
****
******AND SUBSIDIARIES*****CONSOLIDATED STATEMENT OF OPERATIONS***(In Thousands, except per share amounts)**Three months ended******
**Six months ended****July 31,**
**July 31,****2003**
****
****
**2002**
****
****
**2003**
****
****
**2002****NET REVENUES**PRODUCT

$
1,847

$
3,059

$
4,233

$
5,799SERVICES


206


307


528


790**TOTAL NET REVENUES**


2,053


3,366


4,761


6,589**COST OF REVENUE**PRODUCT


1,219


1,847


2,619


3,602SERVICES


73


(21
)

169


129**TOTAL COST OF REVENUE**


1,292


1,826


2,788


3,731**GROSS PROFIT**


761


1,540


1,973


2,858**OPERATING EXPENSES**Selling and marketing


148


219


310


426Engineering, research and development


362


283


681


568General and administrative


509


518


962


1,019Other operating expenses


281


120


341


240**TOTAL OPERATING EXPENSES**


1,300


1,140


2,294


2,253**INCOME (LOSS) FROM OPERATIONS**


(539
)

400


(321
)

605**OTHER CHARGES**Interest expense, net


(7
)

(52
)

(7
)

(103
)Other expense


-


-


15


-**TOTAL OTHER CHARGES**


(7
)

(52
)

8


(103
)**NET INCOME (LOSS)**

$
(546
)
$
348

$
(313
)
$
502**INCOME (LOSS) PER COMMON SHARE:****WEIGHTED AVERAGE COMMON SHARES OUTSTANDING**BASIC


13,318


12,813


13,149


12,644DILUTED


13,318


13,045


13,149


12,747**BASIC AND DILUTED NET INCOME (LOSS) PER COMMON SHARE**BASIC

$
(0.04
)
$
0.03

$
(0.02
)
$
0.04DILUTED

$
(0.04
)
$
0.03

$
(0.02
)
$
0.04See accompanying notes to consolidated financial statements.





Page 3






**ENTRADA NETWORKS, INC.**

****
******AND SUBSIDIARIES*****CONSOLIDATED STATEMENTS OF CASH FLOWS***(In Thousands)

**Six Months Ended July 31,****2003******
****
****
**2002****CASH FLOWS FROM OPERATING ACTIVITIES**Net income(loss)

$
(313
)
$
502Adjustments to reconcile net income (loss) to net cash provided byoperating activities:Depreciation and amortization


300


342Accounts receivable and inventory reserve changes


(139
)

(53
)Sale of property and equipment


-


20Non-cash change in short-term investment


(8
)

-Issuance of common stock in payment of liabilities


-


32Changes in assets and liabilities net of effects of business entityacquisition:(Increase) decrease in accounts receivable


749


1,003(Increase) decrease in inventories


5


(325
)(Increase) decrease in prepaid and other current assets


276


(55
)Increase (decrease) in accounts payable


(214
)

(588
)Increase (decrease) in accrued expenses


(195
)

(991
)Increase (decrease) in other current liabilities


(160
)

159**NET CASH PROVIDED BY OPERATING ACTIVITIES:**


301


46**CASH FLOWS USED IN INVESTING ACTIVITIES:**Purchase of treasury stock


(127
)

-Investment in marketable securities


-


(51
)Purchase of property and equipment


(4
)

-**NET CASH USED IN INVESTING ACTIVITIES**


(131
)

(51
)**CASH FLOWS FROM FINANCING ACTIVITIES:**Repayment of short-term debt


(76
)

(43
)Repayment of capital lease obligations


(52
)

(87
)**NET CASH USED IN FINANCING ACTIVITIES**


(128
)

(130
)**INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS**


42


(135
)**CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD**


808


698**CASH AND CASH EQUIVALENTS - END OF PERIOD**

$
850

$
563See accompanying notes to consolidated financial statements.





Page 4**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 is designing, developing, and marketing 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 six months ended July 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 July 31 and for the three months and six months ended July 31, 2003 and 2002, have been made. The results of operations for the three and six months ended July 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. This pronouncement will not have a material impact on our results of operations and financial condition.





Page 5**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 will apply the provisions of SFAS 149 on a prospective basis to contracts entered into or modified after June 30, 2003. We expect that this pronouncement will not have a 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 will apply the guidance of EITF 00-21 on a prospective basis and expect that this pronouncement will not have a material impact on its results of operations and financial condition.








Stock-Based Compensation  In December 2002, FASB issued Statement No. 148 (SFAS No. 148), "Accounting for Stock-Based Compensation   Transition and Disclosure   An Amendment of FASB Statement No. 123." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company is required to follow the prescribed format and provide the additional disclosures required by SFAS No. 148 in its annual financial statements for the year ended December 31, 2002 and must also provide the disclosures in its quarterly reports containing condensed financial statements for interim periods beginning with the quarterly period ended March 31, 2003. The adoption of SFAS No. 148 did not have a material effect on our financial position or results of operations. The adoption of SFAS No. 148 did result in a modification of disclosure in our financial statements included in this quarterly report on Form 10-Q.





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. Options which were granted prior to our August 31, 2000 merger were valued as part of the consideration for the merger. 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 six months ended July 31, 2003 would have been increased and would have increased the pro forma amounts presented and our net income and income per share for the three and six months ended July 31, 2002 would decrease and would have decreased the pro forma amounts presented:








Page 6**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




**Three Months Ended July 31,**
**Six Months Ended July 31,******
****
****
**2003**
****
****
**2002**
****
****
**2003**
****
****
**2002**Net income (loss):As reported

$
(546
)
$
348

$
(313
)
$
502Add: Stock based employee compensation expense


-


-


-


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


(16
)

(254
)

(205
)

(600
)Pro forma income (loss) per share:


(562
)

94


(518
)

(98
)Basic and diluted EPS as reported

$
(0.04
)
$
0.03

$
(0.02
)
$
0.04Pro forma basic and diluted EPS

$
(0.04
)
$
0.01

$
(0.04
)
$
(0.01
)





In January 2003, the FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest Entities," an interpretation of Accounting Research Bulletin No. 51, "Consolidated Financial Statements." This pronouncement requires the consolidation of variable interest entities, as defined, and is effective immediately for variable interest entities created after January 31, 2002, and for variable interest entities in which an enterprise obtains an interest after that date. The adoption of this interpretation did not have a material impact our financial statements.








BALANCE SHEET DETAIL





Consolidated inventories at July 31, 2003 and January 31, 2003 consist of:





**July 31, 2003**


**January 31, 2003**Raw material

$
3,493

$
3,736Work in process


283


163Finished goods


3,604


3,4867,380


7,385Less: valuation reserve


(3,799
)

(3,809
)Net Inventories

$
3,581

$
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 next twelve months 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 July 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 at a fair market 10 day average pricefrom 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 $126,677.





Page 7**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




EARNINGS PER SHARE CALCULATION





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


**Three Months Ended July 31,**
**Six Months Ended July 31,******
****
****
**2003**
****
****
**2002**
****
****
**2003**
****
****
**2002**Net income (loss) available to commonstockholders used in basic and diluted EPS

$
(546
)
$
348

$
(313
)
$
502Weighted average number of common sharesused in basic EPS


13,317,972


12,812,801


13,149,222


12,643,928





We had net loss of $(546) and $(313), respectively, for the three month and six month period ended July 31, 2003 and a net income of $348 and $502, respectively, for the three month and six month period ended July 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 six month period ended July 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.





**Three Months Ended July 31,**
**Six Months Ended July 31,******
****
****
**2003**
****
****
**2002**
****
****
**2003**
****
****
**2002**Net income available to commonstockholders used in basic EPS

$
(546
)
$
348

$
(313
)
$
502Weighted average number of common sharesused in basic EPS


13,317,972


12,812,801


13,149,222


12,643,928Effect of dilutive securities:Stock benefit plans


-


231,990


-


102,633Weighted average number of common sharesand dilutive potential common stockused in diluted EPS


13,317,972


13,044,791


13,149,222


12,746,561














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 999,068 and 846,752 for the three and six months ended July 31, 2003 and 2,910,884 and 2,927,397 for the three and six months ended July 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 July 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 will expire on October 31, 2003. We are in compliance with our bank line of credit covenants as of July 31, 2003.





Page 8**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




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 July 31, 2003.





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





At July 31, 2003, Cisco accounted for 31.0%, Celestica for 22.1%, Computer Overseas Corp for 13.2% and Ingram Micro accounted for 20.2% 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 July 31, 2003 and 2002 were:




**July 31,**
****
****
**July 31,**
********
****
****
**2003**
****
****
**2002**Cisco


46.9
%

56.1
%Computer Overseas Corp


10.6
%

-Celestica


10.3
%

-








Page 9**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




OPERATING SEGMENT INFORMATION





Geographical Information




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


**Three months ended July 31,**
**Six months ended July 31,**
********
****
****
**2003**
****
****
**2002**
****
****
**2003**
****
****
**2002**Net Revenues:United States

$
1,971

$
3,066

$
4,557

$
6,067Europe


82


300


204


522Other


--


--


--


--Total net revenues

$
2,053

$
3,366


4,761


6,589





Products and Service Revenue


**


The table below presents external revenues for groups of similar products and services:





**Three months ended July 31,**
**Six months ended July 31,******
****
****
**2003**
****
****
**2002**
****
****
**2003**
****
****
**2002**Net Revenues:Network adapter cards

$
1,695

$
2,918

$
3,957

$
5,547Frame relay network products


152


141


276


252Service and support


206


307


528


790Total net revenue

$
2,053

$
3,366

$
4,761

$
6,589








Supplemental Financial Information





There were no inter-segment revenues.








Page 10**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




Three Month Segment Financial Information ended July 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**
****
****
**Total**
********
****
**Quarter ended July 31, 2003**Total Revenues

$
1,695

$
358

$
-


2,053Net Income (loss)


(530
)

90


(106
)

(546
)Depreciation and amortization expense


95


14


41


150Inventory reserve additions


(36
)

-


-


(36
)Capital asset additions


4


-


-


4Total Assets

$
4,356

$
1,455

$
721

$
6,532





Six Month Segment Financial Information ended July 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**
****
****
****
**Total**
********
****
****
****
****
****
****
****
****
********
****
****
**Six months ended July 31, 2003**Total Revenues


3,957


804


-


4,761Net Income (loss)


(329
)

203


(187
)

(313
)Depreciation and amortization expense


185


32


83


300Inventory reserve additions


(10
)

-


-


(10
)Capital asset additions


4


-


-


4Total Assets

$
4,356

$
1,455

$
721

$
6,532





Page 11**ENTRADA NETWORKS, INC. AND SUBSIDIARIES**
**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(UNAUDITED)- Continued**
(In thousands, except per share amounts)




Three Month Segment Financial Information ended July 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**
****
****
****
**Total**
********
****
****
****
****
****
****
****
****
********
****
****
**Quarter ended July 31, 2002**Revenue from External Customers

$
2,918

$
448


-

$
3,366Inter-segment Revenues


-


-


-


-Total Revenues


2,918


448


-


3,366Net income (loss)


336


55


(43
)

348Depreciation and amortization expense


78


16


40


207Inventory reserve additions


(254
)

(45
)

-


(299
)Capital asset additions


-


-


-


-Total Assets

$
7,559

$
393

$
528

$
8,480









Six Month Segment Financial Information ended July 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**
****
****
****
**Total**
********
****
****
****
****
****
****
****
****
********
****
****
**Six Months ended July 31, 2002**Revenue from External Customers

$
5,547

$
1,042


-

$
6,589Inter-segment Revenues


-


-


-


-Total Revenues


5,547


1,042


-


6,589Net income (loss)


451


135


(84
)

502Depreciation and amortization expense


228


33


80


342Inventory reserve additions


(241
)

(27
)

-


(268
)Capital asset additions


-


-


-


-Total Assets

$
7,559

$
393

$
528

$
8,480








Page 12







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 July 31, 2003 and 2002




Net revenues Net revenues were $2.1 million for the three months ended July 31, 2003, compared with $3.4 million for the three months ended July 31, 2002. The decrease in net revenues in the three months ended July 31, 2003 compared to the three months ended July 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 stayed essentially the same at $0.4 million for the three months ended July 31, 2003 compared to net revenues for the three months ended July 31, 2002.





Our Rixon Networks net revenues are primarily from adapter card product revenues. These product revenues decreased $1.2 million or 41.9% to $1.7 million for the three months ended July 31, 2003 from $2.9 million the three months ended July 31, 2002. This was primarily due to reduced shipments to Cisco during the quarter.





Rixon Networks has historically derived a significant portion of its revenues from a relatively limited number of customers. During the three months ended July 31, 2003, revenues from Cisco Systems accounted for approximately 46.9% of our consolidated net revenues.





Cisco has advised that it will 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 amounted to $1.3 million, approximately 63% of our total net revenues or 70% of product sales, in the three months ended July 31, 2003. The loss of such sales to Cisco will likely 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.




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 (tm) product line and many of Rixon Networks legacy products. Additionally, we are aggressively downsizing the workforce, down from 35 employees including consultants to 20, and examining every cost and expense item in order to reduce the cost burden proportional to the lost revenue. Also, we have been successful in getting our lease for the vacant Annapolis Junction building terminated effective July 31, 2003.





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 $0.8 million for the quarter ended July 31, 2003 from $1.5 million for the quarter ended July 31, 2002. Our gross margin decreased to 37.1% for the three months ended July 31, 2003 as compared to 45.8% for the three months ended July 31, 2002. This is primarily due to lower net revenues.





Our Sync Research gross profit of $0.2 million for the quarter ended July 31, 2003 remained essentially the same as for the quarter ended July 31, 2002.





Our Rixon Networks gross profit was 51.4% lower to $0.6 million for the quarter ended July 31, 2003 compared to $1.2 million for the quarter ended July 31, 2002. This was primarily due to reduced revenues.





Page 13




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 $0.15 million, or 7.2% of net revenues for the quarter ended July 31, 2003, compared to $0.22 million or 6.5% of net revenues for the quarter ended July 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 July 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 $0.36 million, or 17.6% of net revenues, for the quarter ended July 31, 2003, compared with $0.28 million, or 8.4% of net revenues, for the quarter ended July 31, 2002. The increase in research and development percentage was primarily due to the lower revenues and the increased expenses were primarily added development expenses in our Torrey Pines Network subsidiary.





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 remained approximately the same at $0.5 million, or 24.8% of net revenues, for the quarter ended July 31, 2003 compared to $0.5 million, or 15.4 % of net revenues, for the quarter ended July 31, 2002.





Other operating expenses . Other operating expenses for the three months ended July 31, 2003, were $0.28 million or 13.7% compared with $0.1 million or 3.6% for the three months ended July 31, 2002. In both fiscal years the amount was rent expense for our unoccupied facility in Annapolis Junction, MD. The increased expense for the quarter ended July 31, 2003 was due to a lease termination agreement 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 July 31, 2003 and 2002. At January 31, 2003, our deferred income tax assets consist of net operating loss carry forwards. At July 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 Six Months Ended July 31, 2003 and 2002




Net revenues . Net revenues were $4.8 million for the six months ended July 31, 2003, compared with $6.6 million for the six months ended July 31, 2001. The 27.7% or $1.8 million decrease in net revenue in the six months ended July 31, 2003 resulted primarily from $1.6 million reductions in our Rixon product shipments (primarily to Cisco) and a $0.2 million decrease in our Sync Research support contracts for our frame relay customers.





Rixon Networks has historically derived a significant portion of its revenues from a relatively limited number of customers. During the six months ended July 31, 2003, Cisco Systems accounted for approximately 56.9% of our consolidated net revenues.





Cisco has advised that it will 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 $3.3 million, approximately 69% of total net revenues or 78% of product sales, in the six months ended July 31, 2003. The loss of such sales to Cisco 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.








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 $2.0 million and $2.9 million for the six month period ended July 31, 2003 and 2002. Our gross margin was 41.4% for the six months ended July 31, 2003, compared with 43.4% for the six months ended July 31, 2002. The decline in gross margins resulted primarily from lower product shipments in Rixon partially offset by lower overall manufacturing and customer service costs.





Page 14




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 $0.3 million, or 6.5% of net revenue for the six months ended July 31, 2003, from $0.4 million and 6.5% of net revenue for the six months ended July 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 $0.7 million, or 14.3% of net revenue, for the six months ended July 31, 2003, compared with $0.6 million, or 8.6% of net revenue, for the six months ended July 31, 2002. The increase in research and development expenses was primarily due to additions in our Torrey Pines Networks, Inc.s storage area networks development costs.





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 remained the same expense at $1.0 million, or 20.2% of net revenue, for the six months ended July 31, 2003 compared to $1.0 million, or 15.5% of net revenue, for the six months ended July 31, 2001. 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 six months ended July 31, 2003, were $0.3 million compared to $0.2 million for the six months ended July 31, 2002. In both periods the expenses related to rent expense for our facility in Annapolis Junction, Maryland. The increased expense for the six months ended July 31, 2003 was due to a lease termination agreement 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 July 31, 2003 and 2002. At January 31, 2003, our deferred income tax assets consist of net operating loss carry forwards. At July 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 $3.7 million at July 31, 2003, an increase of $1.3 million from the $2.4 million at July 31, 2002. Cash flow provided from operations was $301,000 during the six months ended July 31, 2003 compared with $46,000 for the six months ended July 31, 2002. The increase in cash flows provided by operations reflects a reduction in operating costs reflected in lower payments for accrued expenses, a decrease in accounts receivable partly offset by a decrease in our net income from operations after adjustment for non-cash expenses including depreciation, amortization, reserves and valuation allowances. During the six months ended July 31, 2003, operating cash flow reflects cash used for accounts payables, accrued expenses and in other current liabilities offset by a decrease in inventories. During the same six months ended July 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 next twelve months 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 July 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 at a fair market 10 day average price 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 $126,677.





Page 15




Our financing activities during the six months ended July 31, 2003 used cash flows of $128,000, primarily in connection with repayment of capital lease obligations and short-term debt. During the six months ended July 31, 2002, $130,000 was used primarily in conjunction with repayment of capital lease obligations and short-term debt.




Our Silicon Valley Bank credit facility has a maximum limit of $2.0 million, subject to a limitation equal to 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 July 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 will expire on October 31, 2003. We are in compliance with our bank line of credit covenants as of July 31, 2003.




The covenant regarding tangible net worth requires us to maintain that measure to be at least $3.4 million plus 50% of any new equity we raise. 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 $0.4 million at July 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.








During the quarter ended July 31, 2003, the restricted cash letter of credit for $300,000 was cancelled. With the funds, we prepaid $200,000 of rent on our 12 Morgan facility and deposited the remaining to our cash accounts. The prepayment of rent on our 12 Morgan facility eliminates most of our future facility payments to the end of the lease in August 2004.





While we anticipate an operating loss for the next quarter based on the loss of revenues from Cisco, 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 July 31, 2003, our obligations and commitments to make future payments under contracts and contingent commitments.


**Payment Due by Period as of July 31, 2003**Contractual Obligations





Less than


**1-3**


**4-5**


**After 5**(In thousands)

**Total**
**1Year**

**Years**


**Years**


YearsShort Term Debt

$
398

$
398

$
-

$
-

$
-Capital Lease Obligations


16


16


-


-


-Total Contractual Cash Obligations

$
414

$
414

$
-

$
-

$
-








Page 16




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





****
**Plan category**


****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)**Equity Compensation Plans Approved by Security Holders


2,915,100

$
1.13


1,407,914Equity Compensation Plans Not Approved by Security Holders*


75,757

$
3.30


-Total


2,990,857

$
1.18


1,407,914





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





Our product backlog on July 31, 2003, was approximately $0.33 million. In addition to this, our service commitments on July 31, 2003 were approximately $0.4 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.





Page 17




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.








Page 18




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





These factors are discussed generally in greater detail under the caption "Risk Factors" in our Annual Report on Form 10-K, filed April 30, 2003.





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.





Page 19







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 from a relatively limited number of customers. In fact, during the three months ended July 31, 2003, Cisco Systems, accounted for approximately 46.9% of our consolidated net revenues and during the six months ended July 31, 2003, Cisco Systems, accounted for approximately 56.9% of our consolidated net revenues.





Cisco has 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.








IF WE ARE UNABLE TO FULFILL BACKLOG ORDERS DUE TO CIRCUMSTANCES INVOLVING US OR ONE OR MORE OF OUR CUSTOMERS, OUR ANTICIPATED RESULTS OF OPERATIONS AND CASH FLOWS WILL SUFFER.





As of July 31, 2003, we had approximately $0.7 million in backlog orders for our products and services. These orders were due in large part to our adapter card products. The amount of backlog orders represents revenue that we anticipate recognizing in the future, as evidenced by purchase orders and other purchase commitments received from customers, but on which work has not yet been initiated or with respect to which work is currently in progress. Approximately 55% of the backlog is from service contracts that are for a year or more. The typical duration from receipt of a purchase order or other purchase commitment to shipment of the products ordered to the customer ranges from three to ten weeks depending upon the product mix and the size of the order. However, we cannot assure you that we will be successful in fulfilling orders and commitments in a timely fashion or that we will ultimately recognize as revenue the amounts reflected as backlog.





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.





Page 20




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 July 31, 2003, the high and low closing sale prices of our common stock were $0.37 and $0.19, 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.





Page 21




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 August 19, 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 July 31, 2003, we also had outstanding options and warrants that were exercisable for or convertible into approximately 2,180,915 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





1. Exhibits

10.11 Chippawa Limited Partnership "Lease Termination Agreement" dated July 31, 2003










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


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


Our From 8-K filed August 22, 2003 providing our Q2 FY2004 earnings release for the period ended July 31, 2004





(c)


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.





Page 22




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: September 15, 2003





Page 23








SUBSIDIARIARIES OF THE REGISTRANT


Rixon Networks, Inc., a Delaware corporation


Sync Research, Inc., a Delaware corporation


Torrey Pines Networks, Inc., a Delaware corporation





Page 24