UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

|X|   ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934

      FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003

|_|   TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
      OF 1934

      FOR THE TRANSITION PERIOD FROM ___________________ .


                          COMMISSION FILE NO.: 0-13117

                               ION NETWORKS, INC.
                 (Name of Small Business Issuer in Its Charter)


           DELAWARE                                         22-2413505
(State or Other Jurisdiction of                            (IRS Employer
 Incorporation or Organization)                        Identification Number)


                  120 CORPORATE BLVD., S. PLAINFIELD, NJ 07080
               (Address of Principal Executive Offices) (Zip Code)

                                 (908) 546-3900
                (Issuer's telephone number, including area code)

         SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:


                                                   Name of Each Exchange
Title of Each Class                                On Which Registered
-------------------                                -------------------
     NONE                                                NONE


         SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 |_|

Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. |_|

The issuer's revenues for its most recent twelve-month ended December 31, 2003
totaled $ 3,342,620

The aggregate market value of voting stock held by non-affiliates, based on the
closing price of the Common Stock, par value $0.001 (the "Common Stock") on
March 25, 2004 of $0.11, as reported on the OTC Bulletin Board was approximately
$2,237,760.14. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.

There were 24,875,500 shares of Common Stock outstanding as of March 15, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:  NONE

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE):

Yes |_|         No |X|

<PAGE>

                Information Regarding Forward-Looking Statements

A number of statements contained in this report are forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995 that
involve risks and uncertainties that could cause actual results to differ
materially from those expressed or implied in the applicable statements. These
statements include, but are not limited to, statements regarding the Company's
ability to gain further market recognition and the Company's cost reduction
efforts. These risks and uncertainties include, but are not limited to,
uncertainty as to the acceptance of the Company's products; risks related to
technological factors; potential manufacturing difficulties; uncertainty of
product development; uncertainty of obtaining or maintaining adequate financing;
dependence on third parties; dependence on key personnel and changes in the
Company's sales force and management; the risks associated with the expansion of
the Company's sales channels; competition; a limited customer base; risk of
system failure, security risks and liability risks; risk of requirements to
comply with government regulations; vulnerability to rapid industry change and
technological obsolescence; and general economic conditions. In some cases, you
can identify forward-looking statements by our use of words such as "may,"
"will," "should," "could," "expects," "plans," "intends," "anticipates,"
"believes," "estimates," "predicts," "potential," or "continue" or the negative
or other variations of these words, or other comparable words or phrases. Unless
otherwise required by applicable securities laws, the Company assumes no
obligation to update any such forward-looking statements, or to update the
reasons why actual results could differ from those projected in the
forward-looking statements.

PART I

Item 1: Description of Business

Overview

      ION Networks, Inc ("ION" or the "Company") designs, develops, manufactures
and sells network and information security and management products to
corporations, service providers and government agencies. The Company's hardware
and software products are designed to form a secure auditable portal to protect
IT and network infrastructure from internal and external security threats. ION's
network and information security solution operates in the IP, data center,
telecommunications and transport, and telephony environments and is sold by a
direct sales force and indirect channel partners mainly throughout North America
and Europe.

      As organizations become more interconnected and dependent on networks such
as the Internet, they are increasingly being exposed to a widening range of
cyber-threats. These attacks occur despite the wide spread deployment of
information security technologies, suggesting that it is not sufficient to only
protect the electronic perimeter of an organization. With the most damaging
security breaches increasingly appearing within the boundaries of organizations,
network and information security has become one of the newest components of
electronic security strategies. Network and information security focuses on
protecting the critical infrastructure devices that support the transfer,
storage, and processing of business applications and information. Network and
information security also provides a method by which the tools used to manage
these devices, and the administrators who keep these devices running smoothly,
are protected against the threat of attack from the outside.

      The ION Secure /TM/ product suite provides ION customers with secure
access, authentication, authorization, audit and administrative functions that
we believe form a highly scalable, robust, reliable, easy-to-use and
cost-effective comprehensive network and information security solution. ION
Secure solutions include ION Secure PRIISMS centralized management software;
2000, 3000 and 5000 Series security appliances and ION Secure Soft Tokens. These
solutions are based on ION proprietary software and hardware developed and
maintained by the Company. ION network and information security solutions use
the same single-purpose embedded ION Secure Operating System (ISOS) software on
all security appliance models, with the goal of simplifying the management of
thousands of IT and telecommunications infrastructure devices such as servers,
routers, LAN switches, PBXs, messaging systems and multiplexers. ION solutions
are designed to enable administrators to securely configure, troubleshoot and
manage geographically dispersed infrastructure devices from central operations
centers, reducing costly on-site visits, service disruptions and skilled
personnel requirements. ION network and information security solutions can be
used in a variety of networks including TCP/IP-data, PBX-telephony,
telecommunications and data centers ranging in size from one to thousands of
infrastructure devices. ION solutions are designed to be fully compatible with
information security solutions offered by, among others, Cisco, Check Point and
Nortel Networks.

      In addition to hardware/software products the Company offers an array of
repair and maintenance programs. Services revenue is typically generated from
integration and maintenance services in conjunction with the sale of ION
solutions.

      ION's network and information security solutions are distributed via three
distinct channels: (i) a direct sales force, (ii) indirect channels, such as
Value Added Resellers (VARs) and (iii) Original Equipment Manufacturers (OEMs).
In addition to these distribution channels, the Company further segments its
markets to (i) enterprises, (ii) service providers, and (iii) governmental
agencies. Each market segment has unique characteristics and provides
significant opportunities to grow the Company's business in the future.


                                       3
<PAGE>


      ION Networks, Inc. is a Delaware corporation founded in 1999 through the
combination of two companies, MicroFrame, Inc. (originally founded in 1982), a
New Jersey corporation and SolCom Systems Limited (originally founded in 1994),
a Scottish corporation located in Livingston, Scotland. In 1999, the Company
expanded its technology base through the purchase of certain assets of LeeMAH
DataCom Security Corporation. References in this document to "we," "our," "us,"
and "the Company" refer to ION Networks, Inc. Our principal executive offices
are located at 120 Corporate Blvd. South Plainfield, New Jersey 07080, and our
telephone number is (908) 546-3900.

Industry Background

Pervasive Use of Corporate Security to Protect Employees and Business Assets

      ION believes that a key factor to the long-term success and competitive
advantage of any business is its ability to protect its people and assets from
all types of security threats. Many businesses have implemented some type of
corporate security strategy that physically protects employees and business
assets from outsiders who may seek to harm individuals, steal proprietary
information, or disrupt the operations of an organization.

Wide Acceptance of Information Security to Protect Business Applications and
Information

      As organizations become more interconnected and dependent on networks such
as the Internet, they are increasingly being exposed to a widening range of
cyber-threats -- threats that we believe transcend the need for physical access
in order to cause damage to a business. To counter potential cyber-threats,
organizations are seeking to secure corporate user access, business applications
and information with information security strategies designed to protect the
electronic doorways into an organization. Increasingly, businesses are deploying
information security solutions that protect against outsiders -- people such as
hackers without any legitimate access -- through the use of security tokens for
user authentication, intrusion detection systems to identify attackers and
firewalls to restrict remote access to corporate networks and systems.

Growing Impact of Insider Security Threats

      While outsider threats present a significant challenge to organizations,
the Computer Security Institute and the Federal Bureau of Investigation have
reported that outsiders account for fewer than half of the reported information
security incidents in the United States, although the number of such incidents
continues to rise. These reports estimated the average cost of a successful
attack by outsiders to be $56,000. By contrast, the average cost of a malicious
act by insiders was estimated to be $2.7 million. Interestingly, these attacks
occurred despite the wide spread deployment of firewalls, intrusion detection
systems and anti-virus software, suggesting that simply protecting the
electronic perimeter of an organization has not slowed the pace of real losses
from security threats.

Increasing Need to Protect the "Electronic Interior" of Businesses -- Network
and Information Security

      We continue to believe that there is a growing trend of outsourcing IT
professionals for services that are not core to a business, thereby creating an
ever-changing climate where organizations know less and less about the
backgrounds and intentions of their IT administrators. Therefore, organizations
are increasingly exposed to potentially significant financial and productivity
losses unless the most empowered users with access to administrative functions
are adequately restricted and monitored. Information security strategies cannot
be effective unless administrative services are protected through the
implementation of infrastructure security strategies that safeguard
infrastructure devices such as servers, routers, LAN switches, PBXs, messaging
systems and multiplexers.

      We believe that many of today's most damaging security threats are
appearing within the boundaries of organizations, forcing organizations to
extend their security protection inward from the perimeter. Network Information
Security, focuses on protecting the critical infrastructure devices that support
the transfer, storage, and processing of business applications and information.

The ION Networks Solution

      The ION network and information security solution consists of ION Secure
PRIISMS software and ION Secure 2000, 3000 and 5000 series appliances for
centralized security policy management and distributed security policy
enforcement. Together, the PRIISMS single sign-on portal and the security
appliances form a secure management system to critical infrastructure devices.
ION solutions also provide a variety of management features for improving
administrator productivity and mediating alarms from these infrastructure
devices. ION Secure 2000, 3000 and 5000 series security appliances also support
management of discrete alarms for the physical environment surrounding
infrastructure devices such as doors, lighting, air conditioners or diesel
generators and monitoring environmental conditions including temperature,
humidity, fire and water conditions.


                                       4
<PAGE>


      The ION Secure Product Suite is Intended to Provide our Customers with the
following Key Benefits:

      A Complete Network and information security Solution. We believe ION
offers one of the most complete, commercially available solutions in our
industry for securely managing infrastructure devices. We have taken a broad
approach to network and information security and developed a product suite that
protects administrative interfaces with one unified solution by providing
secure:

o     Access -- ION solutions are designed so that administrators can only gain
      access to infrastructure devices through the network connectivity provided
      by ION Secure PRIISMS software and ION Secure 2000, 3000 and 5000 series
      security appliances that together form a secure and auditable environment.
      PRIISMS provides a single point of entry into the environment for
      administrators utilizing Secure Shell (SSH), Point-to-Point Tunneling
      Protocol (PPTP) and Telnet. Access to PRIISMS is only granted based on
      strong multi-factor authentication of administrators. PRIISMS servers are
      typically collocated in Network Operations Centers along with enterprise
      management and operational support systems. ION Secure 2000, 3000 and/or
      5000 series security appliances are deployed throughout an organization's
      network to protect against unauthorized access to infrastructure devices.
      ION Secure PRIISMS software and ION Secure 2000, 3000 and 5000 series
      security appliances provide infrastructure access protection by forcing
      all administrative traffic through a secure management network using one
      or both of the following methods: (i) `Inband' meaning TCP/IP based
      Virtual Private Networks (IP-VPNs) with dynamic firewall capabilities and
      encrypted IPSec tunnels and (ii) `Out-of-band' meaning via Virtual Private
      Dial-up Networks (VPDNs) or over public switched telephone networks.

o     Authentication -- ION network and information security solutions combine
      strong multi-factor authentication with "single sign-on" to the secure
      management environment. Administrative sessions require the use of ION
      Soft Tokens that use two-factor authentication. PRIISMS provides a single
      sign-on portal for all administrative applications. Single sign-on means
      that administrators need only log into PRIISMS once to easily gain secure
      access to the infrastructure devices they are tasked with managing. ION
      2000, 3000 and 5000 series security appliances support the same strong
      authentication mechanisms as PRIISMS. Whether connecting in or
      out-of-band, multi-factor authentication is required for administrators to
      communicate with every ION security appliance. Private key management
      services are integrated into ION network and information security
      solutions in order to ease deployment of PRIISMS and security appliances.

o     Authorization -- ION network and information security solutions provide
      extensive security policy management capabilities for controlling
      administrator actions. Policies are centrally managed via ION Secure
      PRIISMS software at the user or group level with distributed policy
      enforcement handled by the 2000, 3000 and 5000 Series security appliances.
      ION Secure PRIISMS multi-level authorization restricts administrator
      access to specific infrastructure devices, as well as prohibits the
      issuing of specific commands. Multi-level authorization services are
      intended to provide tight control over the specific commands that can be
      issued by administrators via command filtering.

o     Audit -- ION Secure PRIISMS software and 2000, 3000 and 5000 series
      security appliances are designed to maintain detailed audit trails on
      administrator activities, infrastructure devices and security appliance
      health. ION security appliances maintain extensive logs on administrative
      sessions including administrator authentication success, failure and
      connection histories. The entire history of each administrative session
      can be captured down to the characters entered by an administrator.
      Command filters can be utilized to restrict which commands an
      administrator may enter to control an infrastructure device. ION security
      appliance logs are protected from tampering and can maintain the history
      of administrative sessions.

o     Administration -- ION Secure PRIISMS software provides directory services
      for assigning authentication methods and privileges to users and groups
      and the logical partitioning of authorized infrastructure device views.
      Once authenticated into PRIISMS, administrators can only see and manage
      assigned infrastructure devices. In addition, centralized management of
      ION security appliances via PRIISMS simplifies the installation,
      configuration and upgrade of the ION Secure Operating System (ISOS) on
      remote ION security appliances. The ION Secure 2000, 3000 and 5000 Series
      appliances provide a wide range of site management services such as alarm
      mediation, remote diagnostics, and task automation. In addition, messages
      from non-standard managed infrastructure devices can be converted to
      Simple Network Management Protocol (SNMP) traps and sent to PRIISMS for
      centralized viewing and forwarding to third party enterprise management
      and operational support systems. Network and port-level diagnostic
      utilities can also be used by administrators to remotely troubleshoot
      infrastructure devices. The automation of administrative tasks can be
      implemented both in PRIISMS and ION Secure appliances. Action triggers can
      be set for automating common tasks such as event notification via SNMP
      trap, pager or e-mail, the power recycling of infrastructure devices, or
      the uploading of logs from ION security appliances. ION security
      appliances also provide a native scripting (computer programming) language
      and task scheduler that can run these scripts based on an alarm, date or
      time for custom automation requirements.


                                       5
<PAGE>


Low Total Cost of Ownership. The ION solution is designed to minimize the
purchase, installation and maintenance costs of Network Information Security.
The list prices for our network and information security appliances currently
begin at $1,250 and scale up with products and features that address a wide
array of customer requirements. Many studies have shown that the complex systems
integration of multiple security products is a significant component of the
total cost of implementing security solutions. We believe that our
cost-effective, integrated solution, consisting of easy-to-manage security
appliances and management software, enables customers to avoid the expense of
costly systems integration that may otherwise be required to implement and
maintain an effective network and information security solution.

Rapid Return on Investment. ION solutions help protect against the growing
threat of security breaches that can result in among other losses, significant
financial losses and legal liabilities, lost productivity, poor network
availability, brand defamation, and theft of proprietary information. ION
solutions enable customers to centrally perform administrative functions that
otherwise may require a dispatch of an administrator to a remote location. Fewer
service calls reduce the need for having costly technical personnel on staff.

Ease of Installation and Use. The ION Secure product family delivers
`plug-and-protect' appliances designed for easy installation and use.
Installation involves simply connecting an ION security appliance to the
network, and providing nothing more than a network address. Appliances can be
remotely configured through ION PRIISMS centralized management software,
including software upgrades and configuration of new software features.

ION Networks Products and Services

      ION Networks provides a complete network and information security solution
      that includes secure access, authentication, authorization, audit and
      administration functions that form a secure management environment for
      managing infrastructure devices. The ION Secure network and information
      security solution is based on centralized security policy management and
      distributed security policy enforcement. It consists of centralized ION
      Secure PRIISMS software and distributed ION Secure 2000, 3000 and 5000
      series security appliances forming a secure management network. We also
      provide training, consulting and support services to our customers and
      distribution partners.

      ION Secure PRIISMS Management Portal.

      Through its web-based user interface, PRIISMS provides connectivity to a
      wide-range of managed endpoints from a plethora of vendors and platforms.
      This scalable portal application enables authenticated administrators to
      configure, troubleshoot and manage geographically dispersed critical
      infrastructure devices from central operations centers within a secure
      environment. PRIISMS also provides centralized, 24x7 surveillance and
      provisioning across the entire suite of ION Secure 2000, 3000 and 5000
      security appliances.

      Key features include:

      o     Single Sign-on: Additional security is often thought of as an
            incremental step or process that ensures the validity of a user or
            process. PRIISMS however simplifies this process by requiring only a
            single authentication procedure to take place before presenting the
            user with a list of endpoints he or she is authorized to access.
            Username, password and authentication procedures are handled by
            PRIISMS. Administrators can securely log into PRIISMS once instead
            of logging into each individual appliance, expediting any urgent
            operations.

      o     Multi-factor Authentication: Utilize a number of security measures
            to protect infrastructure devices, including the ability to lock out
            a specific administrator across the network in seconds. This feature
            requires the use of ION Secure tokens or commercially available
            RADIUS token technology.

      o     Multi-level Authorization: Use flexible security policies to define
            and enforce strict control over administrators' actions when
            accessing infrastructure devices. Users can be restricted to only
            certain types or geographical location of managed endpoints. Further
            restrictions can be defined such as allowable commands/operations.

      o     Active and Passive auditing: Real-time monitoring of user operations
            can alert security staff in the event of suspicious activity. All
            operations are stored in tamper-proof files and available for
            post-breach forensic analysis

      o     Centralized Alarm Notification and Logging: Simultaneously view
            alarms and events within PRIISMS for ION security appliances and
            managed endpoints.

      o     Centralized Provisioning and Job Scheduling: Centrally manage the
            scheduling of jobs for managing configuration files and software
            updates to ION appliances.


                                       6
<PAGE>


      o     Automatic Backups: Automatically back up configuration files for all
            ION security appliances on the network to the PRIISMS server.

      o     Real-time Inventory and Status: Track system health to ensure that
            ION security appliances and infrastructure devices are running
            properly 24 x 7.

      ION Secure 2000 Series. The ION Secure 2500 security appliance combines
access, console, and alarm functions into a single centrally manageable
solution. With support for up to 2 physical `console' ports and up to 2 logical
IP endpoints, the 2000 series is targeted at small, remote branch office
locations with need for secure remote management.

      ION Secure 3000 Series. The ION Secure 3100, 3200, 3300 and 3500 security
appliances combine access, console, alarm and site management functions into a
single centrally manageable solution. With support for up to 28 physical
`console' ports and up to 32 logical IP endpoints, the 3000 series protects user
access and control for a wide variety of infrastructure devices requiring
in-band and out-of-band access.

      ION Secure 5000 Series. The ION Secure 5010 and 5500 supports the same
ISOS features as the 3000 series, providing support for up to 28 console ports
and 64 IP enabled endpoints. With a LINUX core and integrated VPN router
capabilities, the 5000 Series appliances are able to securely carry
administrative traffic through an intranet or a public network via IPSec tunnel.
The 5000 Series is specifically targeted at higher-end data center, server farm
and IP-rich environments.

      ION Secure Soft Tokens. ION Secure soft tokens are simple to use. Each
user may be assigned a `disposable' ION Secure Soft Token via email or web which
can be loaded onto a Windows(R), RIM(R) Blackberry(TM) or PalmOS(R) device. Each
time the user requests connectivity to PRIISMS they are challenged to enter
additional criteria generated by the token that will positively identify them to
the portal. ION Secure soft tokens utilize strong 3DES encryption and can be
quickly activated and deactivated through PRIISMS. Employees, business partners
and customers can use ION Secure tokens whether local, remote or mobile.

      Wide Range of Protected Infrastructure Devices

ION network and information security solutions protect a growing variety of
infrastructure devices provided by leading IT and telecommunications network and
system vendors, including vendors of:

<TABLE>
<CAPTION>
<S>                                          <C>
o    Access Servers                          o    Multi-Service Switches
o    Application Servers                     o    Optical Switches
o    Bus & Tag Channel Extenders             o    PBXs (Switched & IP)
o    Call Management Systems                 o    Power Protection Systems (UPS)
o    Carrier Grade Multi-Service Switches    o    Routers
o    Cellular Switches                       o    SONET Switches
o    CSU/DSUs                                o    SS7 Switches
o    Databases                               o    DSLAMs
o    Integrated Access Devices               o    Storage Area Networks
o    LAN Switches                            o    Terminal Servers
o    Mail Servers                            o    Various Types of PC Class Servers
o    Messaging Servers                       o    Various Types of UNIX Class Server
                                             o    Wireless Switches
</TABLE>


Strategy

      Our goal is to extend our market position to remain one of the industry
leaders for network and information security solutions for service providers,
corporations and government agencies. Key elements of our strategy include:

      Extend Our Market Position in Network Infomation Security. We believe that
we are establishing a growing market position as a provider of network and
information security solutions designed for our target markets by offering an
integrated, robust, reliable, easy-to-use suite of products at attractive
prices. We intend to continue to focus our product development efforts,
distribution strategies and marketing programs to satisfy the growing needs of
these markets. We believe that many of the current network and information
security offerings of other vendors are expensive, incomplete, technically
complex and generally unable to satisfy these target markets.

      Develop New Products and Reduce Manufacturing Costs. We intend to use our
product design and development expertise to expand our product offerings and
reduce our manufacturing costs. We believe that new product offerings and
associated cost reductions will strengthen our market position and assist us in
penetrating new markets.


                                       7
<PAGE>


      Establish the ION Networks Brand. We believe that strong brand recognition
in our target markets is important to our long-term success. We intend to
continue to strengthen our ION Networks TM and ION SecureTM brand names through
industry trade shows, our web site, advertising, direct mailings to both our
resellers and our end-users, and public relations. The continued development of
our reputation as a comprehensive, reliable, easy-to-use and cost effective
network and information security vendor will contribute to our sales efforts.

      Expand Our Direct Channel. We intend to continue to build and expand our
base of direct relationships with customers through additional marketing
programs and increased targeted advertising.

      Expand Our Indirect Channels. Our distribution channels are currently in
place to serve ION target markets. The Company's products have been implemented
in over 50 countries by partnering with value-added resellers who sell our
solutions. We intend to continue to build and expand our base of indirect
channel relationships through additional marketing programs and targeted
advertising.

      Expand Strategic Original Equipment Manufacturer Relationships. By
entering into original equipment manufacturer ("OEM") arrangements to sell our
products, we intend to build upon the brand awareness and worldwide channels of
major networking and telecommunications equipment suppliers to further penetrate
our target markets.

Customers

      During the year ended December 31,2003, 84 customers generated $3,342,620
in revenue from hardware, software, repairs and maintenance. Historically, our
largest customers have been service providers primarily in the United States and
in Europe. See also Risk Factors, "We rely on several key customers for a
significant portion of our business, the loss of which would likely
significantly decrease our revenues" on page 13. However, over the last year we
have begun to diversify away from our traditional customer base. ION has begun
to penetrate the corporate market and, in particular, the financial services
sector.


ION customers can be categorized based on three market segments: Enterprises,
Service Providers and Governmental Agencies:

      Enterprises. The Enterprise market consists of non-governmental
organizations that do not provide goods or services from a network
infrastructure, but rather use their network infrastructure as a platform to
provide their own goods or services. There are many sectors in the enterprise
market, including, but not limited to, banking, financial services, insurance,
energy, manufacturing, retailers, pharmaceuticals, healthcare, technology and
transportation.

      Service Providers. The service provider market consists of businesses that
use their network infrastructure to provide services to their customers,
including specific sectors such as (i) transport service providers that provide
voice, data, and long-distance transport of telephone and data services,
including ILECs, CLECs, long-distance carriers, cable telephony, and optical
network providers; (ii) managed service providers that provide network
infrastructure, managed services, and managed network services, including
Internet Data Centers, ISPs and ASPs; (iii) broadband service providers that
provide wire line-based broadband services to residential and business
customers. Broadband services include DSL, CATV, cable modems, VoD (Voice over
Data) and VoIP (Voice over IP) services; and (iv) wireless service providers
that provide wireless voice and data services. This includes mobile/cellular,
wireless data, satellite, and wireless LAN services.

      Governmental Agencies. The Government market consists of domestic and
foreign governmental agencies that do not provide services from a network
infrastructure, but rather use their network infrastructure as a platform to
provide their own goods and services. There are many sectors in the government
market, including, but not limited to, federal and national agencies, military,
state agencies, local agencies, police departments, fire departments, and
emergency services.

Sales and Marketing

      Our marketing programs promote ION Networks and ION Secure brand awareness
and reputation as a highly scalable, robust, reliable, easy-to-use and
cost-effective network and information security solution. During the year ended
December 31, 2003, the Company did not have the resources to adequately
strengthen our brand. ION attempted to repair damaged relationships by direct
executive communications with customers. The relative effectiveness of this
customer retention program should be demonstrated by improved operating results
in 2004. We intend to expand and strengthen our direct and indirect channel
relationships through additional marketing programs and staff, as well as
increased promotional activities as resources become available.


                                       8
<PAGE>


      We believe that ION solutions are suited for both direct sale to customers
and indirect channels where it is not economically efficient for us to sell
directly to the end users of our products.

      Direct Sales. On December 31, 2003, the Company's sales and marketing
headcount stood at 5. For the year ended December 31, 2003, approximately 37% of
ION revenue came from direct sales.

      Indirect Sales/Channel Partners. We also market and sell our solutions via
indirect channels through a distribution structure of Value Added Resellers
(VARs) or Channel Partners in the United States and in Europe. VARs accounted
for approximately 32% of our total revenue for the year ended December 31, 2003.
Our VAR partnerships are non-exclusive.

      Original Equipment Manufacturers (OEMs). We enter into select original
equipment manufacturer relationships in order to take advantage of the channels
of well-established companies that sell into our target markets. We believe
these channels expand our overall market while having a minor impact on our own
indirect channel sales. The terms of our agreements with these customers vary by
contract. These agreements can generally be terminated upon 30 days written
notice or if ION becomes insolvent. For the year ended December 31, 2003, our
original equipment manufacturer revenue accounted for approximately 31% of total
revenue.

      Geographic Distribution. We divide our sales organization regionally into
three territories: (1) the United States and Canada; (2) Europe, the Middle East
and Africa, and (3) other locations. Regional sales representatives manage our
relationships with our network of channel partners, sell to and support key
customer accounts, and act as a liaison between our indirect channels and our
marketing organization.

      For the year ended December 31, 2003, approximately 82% of ION's sales
were in the United States and Canada (Direct Sales -approximately 35%,
Indirect/Channel Partners -approximately 23%, and OEM - approximately 24% ) and
18% Europe, the Middle East, Africa and other locations (Direct Sales
-approximately 1.3%, Indirect/Channel Partners -approximately 8.9%, and OEM -
approximately 7.8% ). (Refer to Note 12 in the Company's Consolidated Financial
Statements.)

Customer Service and Technical Support

      We offer our customers a comprehensive range of support services under the
ION SecureCare brand that includes electronic support, product maintenance and
personalized technical support services on a worldwide basis. Our technical
support staff is located at our corporate headquarters in South Plainfield, New
Jersey.

      Our ION SecureCare offering includes ION 24x7 support. This support
offering provides replacement for failing hardware, telephone and/or web-based
technical support and software updates. Incentive programs are offered to ION
SecureCare customers to provide added benefits for upgrading to newer products.

Competition

      The market for network and information security solutions is worldwide and
highly competitive, and competition has begun to intensify. Competitors can be
generally categorized as either: (i) information security vendors who provide
high performance, security point products, or (ii) suppliers of network
management appliances that provide limited infrastructure security features.
Many of these solutions require additional security products in order to
implement a comprehensive network and information security solution. Current and
potential competitors in our markets include, but are not limited to the
following companies, all of which sell worldwide or have a presence in most of
the major markets for such products:

o     Security software vendors such as RSA Security, ActivCard, Check Point
      Software and Symantec;

o     Network equipment manufacturers such as Cisco Systems;

o     Operating system software vendors such as Microsoft and Novell;

o     Security solution suppliers such as Computer Associates, SafeNet and
      Network Associates;

o     Security appliance suppliers such as SonicWall and NetScreen Technologies;
      and

o     Low cost management-only appliance vendors, which may include limited
      infrastructure security functionality such as MRV Communications and
      Teltronics.

      Many of our competitors have generally targeted large organizations'
information security needs with VPN, firewall and 3A (Authorization,
Authentication and Audit) products that range in price from under one thousand
to hundreds of thousands of dollars. These offerings may increase competitive
pressure on some of our solutions, resulting in both lower prices and gross
margins. Many of our current or potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical, marketing and other resources than we do. Nothing
prevents or hinders these actual or potential competitors from entering our
target markets at any time. In addition, our competitors may bundle products
competitive to ours with other products that they may sell to our current or
potential customers. These customers may accept these bundled products rather
than separately purchasing our products. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business. See also Risk Factors, " We face
significant competition and if we do not compete successfully, our results of
operations may be adversely affected" on page 12.


                                       9
<PAGE>



Sources And Availability Of Materials

      The Company designs its security appliances utilizing readily available
parts manufactured by multiple suppliers and relies on and intends to continue
to rely on these suppliers. Our principal suppliers are Youngtron, Inc., TDK
Systems Europe Ltd., and EXP Computer, Inc. The Company has been and expects to
continue to be able to obtain the parts required to manufacture its products
without any significant interruption or sudden price increase, although there
can be no assurance that it will be able to continue to do so.

      The Company sometimes utilizes a component available from only one
supplier. If a supplier were to cease to supply this component, the Company
would most likely have to redesign a feature of the affected device. In these
situations, the Company maintains a greater supply of the component on hand in
order to allow the time necessary to effect a redesign or alternative course of
action should the need arise.

Dependence On Particular Customers

      Historically, the Company has been dependent on several large customers
each year, but they are not necessarily the same every year. In general, the
Company cannot predict with certainty, which large customers will continue to
order our products. The loss of any of these large customers, or the failure to
attract new large customers, could have a material adverse effect on the
Company's business.

Intellectual Property, Licenses And Labor Contracts

      The Company holds no patents on its technology. Although it licenses some
of its technology from third parties, the Company does not consider any of these
licenses to be critical to its operation.

      The Company has made a consistent effort to minimize the ability of
competitors to duplicate the software technology utilized in its solutions.
However, the possibility of duplication of its products remains, and competing
products have already been introduced.

Governmental Approvals And Effect Of Governmental Regulation

      The Company's solutions may be exported to any country in the world except
those countries restricted by the anti-terrorism controls imposed by the
Department of Commerce. These anti-terrorism controls prohibit the Company from
exporting some of its solutions to Cuba, Libya, Iran, Iraq, North Korea, Sudan
and Syria without a license. As with all U.S. origin items, the Company's
solutions are also subject to the Bureau of Export Administration's ten general
prohibitions that restrict exports to certain countries, organizations, and
persons.

      As required by law or demanded by customer contract, the Company obtains
approval of its solutions by Underwriters' Laboratories. Additionally, because
many of the products interface with telecommunications networks, the Company's
products are subject to several key Federal Communications Commission ("FCC")
rules requiring FCC approval.

      Part 68 of the FCC rules contains the majority of the technical
requirements with which telephone systems must comply in order to qualify for
FCC registration for interconnection to the public telephone network. Part 68
registration requires telecommunication equipment interfacing with the public
telephone network to comply with certain interference parameters and other
technical specifications. FCC Part 68 registration for ION's products has been
granted, and the Company intends to apply for FCC Part 68 registration for all
of its new and future products.

      Part 15 of the FCC rules requires equipment classified as containing a
Class A computing device to meet certain radio and television interference
requirements, especially as they relate to operation of such equipment in a
residential area. Certain of ION's products are subject to and comply with Part
15.


                                       10
<PAGE>


      The European Community has developed a similar set of requirements for its
members and the Company has begun the compliance process for its products in
Europe. Additionally, ION has certified certain of its products to the NEBS
(Network Equipment Business Specification) level of certification. This is a
certification that was developed by Bellcore (now Telcordia Technologies) and is
required by many of ION's telecommunications customers.

Research And Development Activities

      As of March 15, 2004, the Company had 5 R&D staff members devoting part of
their time to research and development activities. We believe the part time
effort of these employees will be minimally sufficient to allow the Company to
keep up with technology advances for the foreseeable future. However, the
Company intends to increase staff during 2004, as resources become available, in
order to more rapidly introduce new and improved products.

      The current R&D staff was primarily responsible for the successful
completion and release of the most recent ION Secure 2500 and 5500 security
appliances, ISOS software releases and enhancing ION Secure PRIISMS
functionality. These products provide ION Networks with the ability to address a
more diverse computing and IP based network market due to its ability to provide
connectivity across secure IP tunnels by utilizing integrated VPN router
technology.

Employees

      As of March 15, 2004, the Company had 21 employees, 19 are full-time
employees and 2 are part-time employees. The headcount includes 6 technical, 7
sales, marketing and support, 3 production, and 5 financial, administrative and
executive capacities. None of the Company's employees are represented by labor
unions. The Company considers it has generally satisfactory relations with its
employees.

RISK FACTORS

      We are vulnerable to technological changes, which may cause our products
and services to become obsolete which could materially and negatively impact our
cash flow.

      Our industry experiences rapid technological changes, changing customer
requirements, frequent new product introductions and evolving industry standards
that may render existing products and services obsolete. As a result, more
advanced products produced by competitors could erode our position in existing
markets or other markets that they choose to enter and prevent us from expanding
into existing markets or other markets. It is difficult to estimate the life
cycles of our products and services, and future success will depend, in part,
upon our ability to enhance existing products and services and to develop new
products and services on a timely basis. We might experience difficulties that
could delay or prevent the successful development, introduction and marketing of
new products and services. New products and services and enhancements might not
meet the requirements of the marketplace and achieve market acceptance. If these
things happen, they would materially and negatively affect cash flow, financial
condition and the results of operations.

Hardware and software incorporated in our products may experience bugs or
"errors" which could delay the commercial introduction of our products and
require time and money to alleviate.

      Due to the complex and sophisticated hardware and software that is
incorporated in our products, our products have in the past experienced errors
or "bugs" both during development and subsequent to commercial introduction. We
cannot be certain that all potential problems will be identified, that any bugs
that are located can be corrected on a timely basis or at all, or that
additional errors will not be located in existing or future products at a later
time or when usage increases. Any such errors could delay the commercial
introduction of new products, the use of existing or new products, or require
modifications in systems that have already been installed. Remedying such errors
could be costly and time consuming. Delays in debugging or modifying products
could materially and adversely affect our competitive position.

We have difficulty predicting our future operating results or profitability due
to the fluctuation in our quarterly and annual revenues.

      In the past, we experienced fluctuations in our quarterly and annual
revenues and we anticipate that such fluctuations will continue therefore making
it difficult for us to predict our future operating results or profitability.
Our quarterly and annual operating results may vary significantly depending on a
number of factors, including:

o     the timing of the introduction or acceptance of new products and services;

o     changes in the mix of products and services provided;

o     long sales cycles;

o     changes in regulations affecting our business;


                                       11
<PAGE>


o     increases in the amount of research and development expenditures necessary
      for new product development and innovation;

o     changes in our operating expenses;

o     uneven revenue streams;

o     volatility in general economic conditions;

o     volatility in the network and information security market; and

o     threats of terror and war.


      We cannot assure you that our revenues will not vary significantly among
quarterly periods or that in future quarterly periods our results of operations
will not be below prior results or the expectations of public market analysts
and investors. If this occurs, the price of our common stock could significantly
decrease. See also Risks Associated with Our Securities, "There is potential for
fluctuation in the market price of our securities" page 14.


In the past we have experienced significant losses and negative cash flows from
operations. If these trends continue in the future, it could adversely affect
our financial condition.

      We have incurred significant losses and negative cash flows from
operations in the past. For the year ended December 31, 2003 and the nine months
ended December 31, 2002, we experienced net losses of $603,792 and $5,628,522,
respectively, and negative cash flows from operations of $376,940 and
$2,972,337, respectively. These results have had a negative impact on our
financial condition. There can be no assurance that our business will become
profitable in the future and that additional losses and negative cash flows from
operations will not be incurred. If these trends continue in the future, it
could have a material adverse affect on our financial condition.

As of December 31, 2003, the Company continues to have a relatively low working
capital balance, which could inhibit future growth and impact the Company's
financial viability.

      Although the Company's working capital balance increased to $287,930 at
December 31, 2003 as compared to $184,689 as of December 31, 2002 this balance
is still lower than the Company's optimal requirements. This low working capital
balance while improving, may continue to impact the ability of the Company to
attract new customers and employees and could have a material adverse affect
upon our business.

We face significant competition and if we do not compete successfully, our
results of operations may be adversely affected.

      We are subject to significant competition from different sources for our
different products and services. We cannot assure you that the market will
continue to accept our hardware and software technology or that we will be able
to compete successfully in the future. We believe that the main factors
affecting competition in the network management business are:

o     the products' ability to meet various network management and security
      requirements;

o     the products' ability to conform to the network and/or computer systems;

o     the products' ability to avoid becoming technologically outdated;

o     the willingness and the ability of distributors to provide support
      customization, training and installation; and

o     the price.

      Although we believe that our present products and services are
competitive, we compete with a number of large data networking, network security
and enterprise management manufacturers which have financial, research and
development, marketing and technical resources far greater than ours. Our
competitors include, Cisco Systems, Network Associates, Cyclades, Digi, MRV
Communications, Teltronics and NetScreen Technologies. Such companies may
succeed in producing and distributing competitive products more effectively than
we can produce and distribute our products, and may also develop new products
which compete effectively with our products. Many of our current or potential
competitors have longer operating histories, greater name recognition, larger
customer bases and significantly greater financial, technical, marketing and
other resources than we do. Nothing prevents or hinders these actual or
potential competitors from entering our target markets at any time. In addition,
our competitors may bundle products competitive to ours with other products that
they may sell to our current or potential customers. These customers may accept
these bundled products rather than separately purchasing our products. If our
current or potential competitors were to use their greater financial, technical
and marketing resources in our target markets and if we are unable to compete
successfully, our business, financial condition and results of operations may be
materially and adversely affected.


                                       12
<PAGE>


We may be unable to protect our proprietary rights, permitting competitors to
duplicate our products and services, which could negatively impact our business
and operations.

      We hold no patents on any of our technology. If we are unable to license
any technology or products that we may need in the future, our business and
operations may be materially and adversely impacted. We have made a consistent
effort to minimize the ability of competitors to duplicate our software
technology utilized in our products. However, there remains the possibility of
duplication of our products, and competing products have already been
introduced. Any such duplication by our competitors could negatively impact our
business and operations.

We rely on several key customers for a significant portion of our business, the
loss of which would likely significantly decrease our revenues.

      Historically, we have been dependent on several large customers each year,
but they are not necessarily the same every year. For the year ended December
31, 2003, our most significant customers (stated as an approximate percentage of
revenue) were Avaya 18% and Siemens 12% compared to the nine months ended
December 31, 2002, of SBC 13%, Sprint 12%, Avaya 12%, and Siemens 11% In
general, we cannot predict with certainty which large customers will continue to
order. The loss of any of these large customers, or the failure to attract new
large customers would likely significantly decrease our revenues and future
prospects, which could materially and adversely affect our business, financial
condition and results of operations.

We depend upon key members of our employees and management, the loss of which
could have a material adverse effect upon our business, financial condition and
results of operations.

      Our business is greatly dependent on the efforts of our CEO, Mr. Norman E.
Corn, our Chief Financial Officer, Mr. Patrick E. Delaney, and our Chief
Technology Officer, Mr. Bill Whitney and other key employees, and on our ability
to attract key personnel. Other than with respect to Messrs. N. Corn, P.
Delaney, and W. Whitney, we do not have employment agreements with our other key
employees. Our success depends in large part on the continued services of our
key management, sales, engineering, research and development and operational
personnel and on our ability to continue to attract, motivate and retain highly
qualified employees and independent contractors in those areas. Competition for
such personnel is intense and we cannot assure you that we will successfully
attract, motivate and retain key personnel. While all of our employees have
entered into non-compete agreements, there can be no assurance that any employee
will remain with us. Our inability to hire and retain qualified personnel or the
loss of the services of our key personnel could have a material adverse effect
upon our business, financial condition and results of operations. Currently, we
do not maintain "key man" insurance policies with respect to any of our
employees.

We rely on several contract manufacturers to supply our products. If our product
manufacturers fail to deliver our products, or if we lose these suppliers, we
may be unable to deliver our product and our sales and revenues could be
negatively impacted.

      We rely on three contract manufacturers to supply our products: Youngtron,
Inc., TDK Systems Europe Ltd. and EXP Computer, Inc. If these manufacturers fail
to deliver our products or if we lose these suppliers and are unable to replace
them, then we would not be able to deliver our products to our customers. This
could negatively impact our sales and revenues and have a material adverse
affect on our business, financial condition and results of operations.

Our certificate of incorporation and bylaws contain limitations on the liability
of our directors and officers, which may discourage suits against directors and
executive officers for breaches of fiduciary duties.

      Our Certificate of Incorporation, as amended, and our Bylaws contain
provisions limiting the liability of our directors for monetary damages to the
fullest extent permissible under Delaware law. This is intended to eliminate the
personal liability of a director for monetary damages on an action brought by or
in our right for breach of a director's duties to us or to our stockholders
except in certain limited circumstances. In addition, our Certificate of
Incorporation, as amended, and our Bylaws contain provisions requiring us to
indemnify our directors, officers, employees and agents serving at our request,
against expenses, judgments (including derivative actions), fines and amounts
paid in settlement. This indemnification is limited to actions taken in good
faith in the reasonable belief that the conduct was lawful and in, or not
opposed to our best interests. The Certificate of Incorporation and the Bylaws
provide for the indemnification of directors and officers in connection with
civil, criminal, administrative or investigative proceedings when acting in
their capacities as agents for us. These provisions may reduce the likelihood of
derivative litigation against directors and executive officers and may
discourage or deter stockholders or management from suing directors or executive
officers for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise benefit our stockholders and directors and officers.


                                       13
<PAGE>

RISKS ASSOCIATED WITH OUR SECURITIES

We do not anticipate the payment of dividends.

      We have never declared or paid cash dividends on our common stock. We
currently anticipate that we will retain all available funds for use in the
operation of our business. Thus, we do not anticipate paying any cash dividends
on our common stock in the foreseeable future.

There is potential for fluctuation in the market price of our securities.

      Because of the nature of the industry in which we operate, the market
price of our securities has been, and can be expected to continue to be, highly
volatile. Factors such as announcements by us or others of technological
innovations, new commercial products, regulatory approvals or proprietary rights
developments, and competitive developments all may have a significant impact on
our future business prospects and market price of our securities.

Shares that are eligible for sale in the future may affect the market price of
our common stock.

      As of March 15, 2004, an aggregate of 5,423,675 of the outstanding shares
of our common stock are "restricted securities" as that term is defined in Rule
144 of the Securities Act of 1933 (Rule 144). These restricted shares may be
sold pursuant only to an effective registration statement under the securities
laws or in compliance with the exemption provisions of Rule 144 or other
securities law provisions. In addition, 4,987,580 shares are issuable pursuant
to currently exercisable options, 1,580,500 shares are issuable pursuant to
currently exercisable warrants, and 1,668,350 shares are issuable pursuant to
currently convertible preferred stock of 166,835 shares. Future sales of
substantial amounts of shares in the public market, or the perception that such
sales could occur, could negatively affect the price of our common stock.

Our common stock was delisted from Nasdaq.

On March 19, 2003, Nasdaq notified the Company that it has not regained
compliance with the minimum bid price requirement. Nasdaq determined that the
Company does not meet the initial listing requirements of the Nasdaq Small Cap
Market. Consequently, our Common Stock was delisted from the Nasdaq Small Cap
Market at the opening of business on March 28, 2003. The delisting of our Common
Stock from Nasdaq could negatively effect the prices of our stock, impair the
ability of holders to sell such stock, limit the coverage of our stock by
research analysts, adversely impact our efforts to secure financing, materially
and adversely affect our financial condition and results of operations and will
make us ineligible to register additional shares under a Form S-3.


We may be restricted from issuing new equity securities.

In September 2002, we issued shares of Series A Preferred Stock to several
investors. Under the terms of the preferred stock, any issuances of equity
securities or securities convertible into or exercisable for equity securities
require the prior approval of the holders of a majority of the outstanding
shares of Series A Preferred Stock. While two of our directors currently own
such a majority, there can be no assurance that they will remain directors or
that they will continue to own such a majority. If these two directors no longer
continue to remain directors, or no longer continue to own a majority of the
Series A Preferred Stock, or do not vote their shares of Series A Preferred
Stock to permit issuances of securities approved by the board of directors, the
Company would be prevented from issuing equity securities which would preclude
the Company from raising equity financing, utilizing equity based compensation
plans and from other actions requiring the issuance of equity securities.


We may be in default of certain registration rights obligations

      In February 2002, we issued a total of 4,000,000 shares and warrants to
purchase 1,200,000 shares for a total of $3,480,000 received from various
investors. In connection with this financing, we registered such securities for
resale on a form S-3 pursuant to a registration rights agreement which obligated
us to do so. Since our stock is no longer listed on NASDAQ, we are no longer
eligible to use a Form S-3 registration statement and we may be in default under
the registration rights agreement. This may render us liable for damages to the
holders of the registration rights for losses they may incur as a result of the
Company not maintaining an effective registration statement for their
securities.


                                       14
<PAGE>


ITEM 2: DESCRIPTION OF PROPERTY

The Company entered into a lease on August 1, 2003 for approximately 7,000
square feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003
through July 2006. The Company is also obligated to make additional payments to
the landlord relating to certain taxes and operating expenses.

As a result of the Company being notified by the landlord to cancel its lease
effective August 15, 2003, the Company no longer occupies the space at 1551 S.
Washington Avenue, Piscataway, New Jersey. The Company entered into the lease on
February 18, 1999 for approximately 26,247 square feet for its principal
executive offices at 1551 South Washington Avenue, Piscataway, New Jersey. On
March 17, 2003, the Company signed an amendment with the landlord reducing the
space from 26,247 to 12,722 square feet and the rent from $50,153.64 to
$20,143.17 per month effective March 1, 2003. The Company was also obligated to
make additional payments to the landlord relating to certain taxes and operating
expenses.

The Company abandoned the lease space at SolCom House, Meikle Road, Kirkton
Campus, Livingston EH547DE, Scotland. . As a result, the Company recorded a
charge of $508,458 in the quarter ended December 31, 2002 for the remainder of
the lease term that expires on August 31, 2011.

The Company abandoned the lease space at 48834 Kato Road, Fremont, California in
the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is
for a term of 60 months with monthly rent payable by the Company to the landlord
as follows: $7,360 per month for the first 12 months of the term; $7,590 per
month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for
months 37-48; and $8,280 per month for months 49-60. The Company entered into an
abandonment agreement with the landlord in March of 2003. As a result, the
Company recorded a one-time charge to SG&A expense of $ 139,610 in the quarter
ended March 31, 2003. This amount represents the total lease payments from
December 2002 to May 2004 offset by landlords stated sub-lease rental payments.
However, the Company and Landlord have no settlement agreement in place at this
time.

ITEM 3: LEGAL PROCEEDINGS

On or about June 12, 2002, Xetel Corporation ("Xetel") filed a petition (Xetel
Corporation vs. ION Networks Inc., Cause No.GN201901 in the 250th District Court
of Travis County, Texas) against the Company alleging that the Company owes
Xetel $243,070.19 in accounts receivable for finished assemblies shipped to and
accepted by the Company and $23,626.02 in purchased materials and inventory
being held in Xetel's warehouse pursuant to the Company's written instruction.
Xetel sought actual damages in the amount of $266,696.21, plus interest,
attorneys' fees and costs, and incidental damages as a result of the Company's
alleged breach. The Company successfully negotiated a settlement with Xetel
Corporation in the amount of $30,000 and forgiveness of debt for the remaining
amount. As a result, the Company recorded a one time credit of $213,071 in the
quarter ended September 30, 2003(see note 3).

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company did not hold an annual meeting of the stockholders during the year
ended December 31, 2003. The Company plans to hold an annual meeting during the
year ending December 31, 2004.


                                       15
<PAGE>


                                     PART II

ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

The Company's common stock, par value $.001 per share (the "Common Stock"), is
currently quoted on the OTC Bulletin board under the symbol "IONN.OB". The
following table sets forth the high ask and low bid prices of the Common Stock
for the periods indicated as reported on the NASDAQ National and Small Cap
Market.


Year Ended December 31, 2003 Quarter Ending                     HIGH        LOW
-------------------------------------------                     ----        ---

March 31, 2003                                                 $0.28       $0.05
June 30, 2003                                                   0.11        0.05
September 30, 2003                                              0.11        0.05
December 31, 2003                                               0.11        0.04


Year Ended December 31, 2002, Quarter Ending
--------------------------------------------

March 31, 2002                                                 $1.84       $0.65
June 30, 2002                                                   0.82        0.33
September 30, 2002                                              0.45        0.15
December 31, 2002                                               0.47        0.10



Recent Sales of Unregistered Securities

None.

Security Holders

As of February 27, 2004 there were 438 holders of record of the Common Stock

Dividends

The Company has not paid any cash dividends on its Common Stock during the year
ended December 31, 2003, and the nine-month ended December 31, 2002. The Company
presently intends to retain all earnings to finance its operations and therefore
does not presently anticipate paying any cash dividends in the foreseeable
future.

ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

Overview

ION Networks, Inc. (the "Company"), designs, develops, manufactures and sells
network and information security and management products to corporations,
service providers and government agencies. The Company's hardware and software
products are designed to form a secure auditable portal to protect IT and
network infrastructure from internal and external security threats. ION's
products operate in the IP, data center, telecommunications and transport, and
telephony environments and are sold by a direct sales force and indirect channel
partners mainly throughout North America and Europe.

The Company is a Delaware corporation founded in 1999 through the combination of
two companies - MicroFrame ("MicroFrame"), a New Jersey Corporation (the
predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited ("SolCom"), a Scottish corporation located in Livingston,
Scotland (originally founded in 1994), The Company's principal objective was to
address the need for security and network management and monitoring solutions,
primarily for the PBX-based telecommunications market, resulting in a
significant portion of our revenues being generated from sales to various
telecommunications companies.

During 2003, the Company stabilized its excessive negative cash flow and in fact
increased cash from a low of less than $100,000 at September 30, 2003 to
approximately $357,000 at December 31, 2003. The Company continues to have a
delicate cash position and while the future viability of the organization has
significantly improved, it is necessary for it to continue to strictly manage
expenditures and to increase revenues. In addition, it is the intention of the
new management team, hired in the quarter ended September 30, 2003, to secure
additional financing during 2004 to accelerate growth and insure long-term
viability.


                                       16
<PAGE>


Results Of Operations

EXPLANATORY NOTE

ON OCTOBER 25, 2002, ION NETWORKS, INC. CHANGED ITS FISCAL YEAR END FROM MARCH
31 TO DECEMBER 31. AS A RESULT, PURSUANT TO THE RULES OF THE SECURITIES AND
EXCHANGE COMMISSION, THIS ANNUAL REPORT ON FORM 10-KSB PRESENTS FINANCIAL
INFORMATION FOR THE YEAR ENDED DECEMBER 31, 2003 AS COMPARED TO A PROFORMA YEAR
ENDED DECEMBER 31, 2002(UNAUDITED).


The Year Ended December 31, 2003 Compared to the Year Ended December 31,
2002(Unaudited)

Revenues for the year ended December 31, 2003 were $3,342,620 as compared with
revenues of $5,411,357 for the year ended December 31, 2002, a decrease of
approximately 38% or $2,068,737. This decrease is attributable mainly to the
reduction in the number of units sold for the year 2003. The decline in revenues
was caused by several factors including a continued economic slump in the
telecommunication industry, the reduction of ION's sales force and lack of
resources for marketing activities. The Company's prices remained relatively
consistent throughout both periods. The Company's cost of goods sold decreased
to $892,373 or 26.7% for the year ended December 31, 2003 compared to $2,389,122
or 44.2% for the year ended December 31, 2002. The decrease is mainly due to
lower costs associated with manufacturing of the appliances and an increase in
the percentage of revenues relating to higher margins obtained from repair and
service activities.

Research and development expenses, net of capitalized software development,
decreased from $937,637 for the year ended December 31, 2002 to $503,146 for the
year ended December 31, 2003, a decrease of 46.3%. This decrease for research
and development expenditures was primarily due to the expense reduction of
related headcount from 11 to 5.

Selling, general and administrative expenses decreased 66.1% from $7,233,824 or
133.5% of revenue for the year ended December 31, 2002 to $2,452,031 or 73.3% of
revenue for the year ended December 31, 2003. This decline in expense was due
primarily to reduced headcount of 25 to 11, reduced salaries for the remaining
staff, and a sharp decrease in facilities expenditures due to certain cost
containment programs implemented by management.


Depreciation and amortization was $736,694 for the year ended December 31, 2003
compared to $1,102,124 for the year ended December 31, 2002, a decrease of
approximately 33.2%. The primary reason for this reduction in 2003 as compared
to 2002 was that the Company did not purchase depreciable fixed assets.

The Company acquired a corporation business tax benefit certificate pursuant to
New Jersey law which relates to the surrendering of unused net operating losses.
For the year ended December 31, 2003 and for the year ended December 31, 2002,
the Company received a benefit of $227,151 and $236,728, respectively.

During the year ended December 31, 2003 the Company recognized benefits from
restructuring in the amount of $405,402 compared to charges in the amount of
$835,315 for the year ended December 31, 2002. The bulk of this positive
variance, $1,016,916, was due to a charge of $508,458 for the abandonment of
space at SolCom House, Livingstion, Scotland for the year ended December 31,
2002. In the quarter ended June 30, 2003, the Company after analysis, under took
a voluntary liquidation of it subsidiary ION Networks, LTD., which resulted in
the reversal of the $508,458 charge.

The Company had a loss of $603,792 for the year ended December 31, 2003 compared
to a loss of $6,846,068 for the year ended December 31, 2002 or an improvement
of $6,242,276.

Financial Condition And Capital Resources

The Company's working capital balance as of December 31, 2003 was $287,930
compared to $184,689 as of December 31, 2002.

Net cash used in operating activities during the year ended December 31, 2003
was $376,940, compared to $4,201,040 in year ended December 31, 2002. The
decrease in net cash used was primarily a result of the decrease in net losses
of $6,242,276 for the year ended December 31, 2003 offset in part by non-cash
restructuring benefits of $1,240,717 and reduced depreciation and amortization
of $365,430.

Net cash used in investing activities during the year ended December 31, 2003
was $59,167, compared to net cash used of $286,951 in year ended December 31,
2002. Of the $59,167 of the net cash used in investing activities during the
year ended December 31, 2003, $214,996 was for capitalized software expenditures
offset in part by release of restricted cash of $125,700 and sale of certain
assets of $30,129. During the year ended December 31, 2002 net cash used was
$286,951, $505,936 was for capitalized software expenditures offset in part by
release of restricted cash of $249,300.


                                       17
<PAGE>


Net cash used for financing activities during the year ended December 31, 2003
was $85,135, used to repay debt, compared to $3,652,523 provided by capital
raising activities in year ended December 31, 2002. Financing activities during
the year ended December 31, 2002 include the sale of 4,000,000 unregistered
shares of the Company's common stock at $0.87 per share for a total
consideration of $3,480,000 and the sale of 166,835 unregistered shares of the
Company's Series A Preferred Stock ("Preferred Stock") at $1.80 per share for a
total consideration of $300,303.00 in private equity transactions offset in part
by repayment of debt and capital leases of $139,894.


Critical Accounting Policies

Use of Estimates -

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

The significant estimates include the allowance for doubtful accounts, allowance
for inventory obsolescence, capitalized software including estimates of future
gross revenues, and the related amortization lives, deferred tax asset valuation
allowance and depreciation and amortization lives.

Allowance for Doubtful Accounts Receivable -

Accounts receivable are reduced by an allowance to estimate the amount that will
actually be collected from our customers. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.

Inventory -

Inventories are stated at the lower of cost (average cost) or market. Reserves
for slow moving and obsolete inventories are provided based on historical
experience and current product demand. If our estimate of future demand is not
correct or if our customers place significant order cancellations, inventory
reserves could increase from our estimate. We may also receive orders for
inventory that has been fully or partially reserved. To the extent that the sale
of reserved inventory has a material impact on our financial results, we will
appropriately disclose such effects. Our inventory carrying costs are not
material; thus we may not physically dispose of reserved inventory immediately.

Capitalized Software -

The Company capitalizes computer software development costs in accordance with
the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize
computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.

We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.

Reclassifications -

Certain amounts in the financial statements for the nine months ending December
31, 2002 have been reclassified to conform to the presentation of the financial
statements for the year ended December 31, 2003.


ITEM 7: FINANCIAL STATEMENTS

The financial statements required hereby are located on pages 40 through 61.


                                       18
<PAGE>


ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES

The Company with the Approval of the Audit Committee of the Company's Board of
Directors appointed Deloitte & Touche LLP as the Company's independent public
accountants for the nine months ended December 31, 2002.

On November 11, 2003 the Company filed an 8-K/A announcing the appointment of
Marcum and Kliegman, LLC as the Company's independent public accountants for the
year ended December 31, 2003, effective as of October 7, 2003. The Board of
Directors formally approved the appointment at its October 16, 2003 meeting.

On November 11, 2003 the Company filed an 8-K/A announcing Deloitte & Touche
LLP declination to be reappointed as the Company's independent public
accountants. During the nine month period ended December 31, 2002 and the fiscal
year ended March 31,2002 and the subsequent interim period through October 06,
2003, there were no disagreements with Deloitte & Touche LLP regarding any
matters of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which disagreements, if not resolved to the
satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP
to make reference to the subject matter of the disagreement in their report on
the financial statements for such years. The Company requested that Deloitte &
Touche LLP furnish it with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the above statements. The letter,
dated October 31, 2003 has been filed as Exhibit 16.1 to the Company's Form
10KSB for the year ended December 31, 2003.

ITEM 8A: CONTROLS AND PROCEDURES

Prior to the filing date of this annual report, the Company's management, under
the supervision and with the participation of the Company's Chief Executive
Officer and Chief Financial Officer, performed an evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures as of the end of the period covered by this report. Based on that
evaluation, the Company's Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures were effective.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect internal controls subsequent to
their evaluation.


                                       19
<PAGE>


                                    PART III

ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(A) OF THE EXCHANGE ACT.

As of March 15, 2004 the directors and executive officers of the Company were as
follows:

     Name                      Age            Position Held with the Company
     ----                      ---            ------------------------------

Norman E. Corn                 57             Chief Executive Officer

Patrick E. Delaney             50             Chief Financial Officer


William Whitney                49             Chief Technology Officer and
                                              Vice President of Research and
                                              Development

Stephen M. Deixler             68             Chairman of the Board of
                                              Directors

Baruch Halpern                 53             Director

Frank S. Russo                 61             Director


NORMAN E. CORN has served as Chief Executive Officer since August 15, 2003.
Prior to joining ION, from 2000 until 2003, Mr. Corn was Executive Vice
President of Liquent, Inc., a Pennsylvania-based software company that provides
electronic publishing solutions, focused on the life sciences industry. Mr. Corn
has also served from 1994 to 2000 as CEO of TCG Software, Inc., an offshore
software services organization providing custom development to large corporate
enterprises in the US. Mr. Corn has led other companies, including Axiom Systems
Group, The Cobre Group, Inc., The Office Works, Inc. and Longview Results, Inc.,
having spent the early part of his career in sales, marketing and executive
positions in AT&T and IBM.

PATRICK E. DELANEY has served as Chief Financial Officer since September 15,
2003. Prior to joining ION, from 2000 until 2003, Mr. Delaney was the President
of Taracon, Inc. a privately owned independent consulting firm that provides
management consulting for early and mid-stage technology and financial services
companies. Mr. Delaney also served as Chief Financial Officer for two publicly
traded telecommunications providers, Pointe Communications Corporation from 1993
to 2000 and Advanced Telecommunications Corporation from 1986 to 1993. Mr.
Delaney has served other companies in executive capacities including: RealCom
Communications, Argo Communications and ACF Industries.

WILLIAM WHITNEY has served as Vice President of Research and Development since
March 2002 and Chief Technology Officer since October 1, 2002. Prior to joining
ION, from April 2000 to February 2002, Mr. Whitney served as the Vice President
of Development and Chief Technology Officer for Outercurve Technologies, a
provider of wireless application development and deployment solutions.
Previously from, May 1998 to March 2002, Mr. Whitney served as President of CTO
Systems.

STEPHEN M. DEIXLER has been Chairman of the Board of Directors since May 1982
and served as Chief Executive Officer of the Company from April 1996 to May
1997. He was President of the Company from May 1982 to June 1985 and served as
Treasurer of the Company from its formation in 1982 until September 1993. During
the period since March 2003 to September 2003, Mr. Deixler has served as the
interim Chief Financial Officer of the Company. He also serves as Chairman of
the Board of Trilogy Leasing Co., LLC and President of Resource Planning Inc.
Mr. Deixler was the Chairman of Princeton Credit Corporation until April 1995
and Chief Financial Officer of Multipoint Communications, LLC until November
2002.

BARUCH HALPERN has served as a director of the Company since October 1999. From
January 1995 to May 1999, Mr. Halpern was an institutional research analyst with
Goldsmith & Harris Incorporated, where he advised institutions about investment
opportunities. He was also an advisor in connection with a leveraged buy-out of
a public company and several private placements. In 1999, Mr. Halpern formed
Halpern Capital as a DBA entity under Goldsmith & Harris Incorporated. The DBA
was subsequently moved to Magna Securities (Member: NASD/SIPC) and then UVEST
Investment Services (Member: NASD/SIPC). In January 2003, Mr. Halpern formed his
own broker-dealer, Halpern Capital, Inc. Over the last few years Baruch
Halpern's entities were involved in numerous financings, having raised over $300
million in capital for several public entities.


                                       20
<PAGE>


FRANK RUSSO has served as a director of the Company since November 2000. Mr.
Russo was with AT&T Corporation from September 1980 to September 2000 and most
recently served as its Corporate Strategy and Business Development Vice
President. While at AT&T Solutions, Mr. Russo held a number of other positions
including that of General Manager, Network Management Services from which he
helped architect and launch AT&T's entry into the global network outsourcing and
professional services business. Mr. Russo retired from AT&T in 2000. Prior to
joining AT&T, Mr. Russo was employed by IBM Corporation in a variety of system
engineering, sales and sales management positions. Mr. Russo served on the Board
of Directors of Oak Industries, Inc., a manufacturer of highly engineered
components, from January1999 to February 2000, and currently serves on the Board
of Directors of Advance-com, a private e-commerce company headquartered in
Boston, Massachusetts.


Financial Expert

The Company's board of directors has determined that none of its current members
meets the standard of an audit committee "financial expert" as defined in the
Sarbanes-Oxley Act of 2002. The Company has determined that its current
financial position makes it impractical to obtain the services of an additional
director meeting this standard.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's directors, executive officers and
persons who own more than 10% of the Company's Common Stock (collectively,
"Reporting Persons") to file reports of ownership and changes in ownership of
the Company's Common Stock with the Securities and Exchange Commission and The
Nasdaq Stock Market, Inc. Copies of these reports are also required to be
delivered to the Company.

The Company believes, based solely on its review of copies of such reports
received or written representations from certain Reporting Persons, that during
the Company's fiscal year Messrs. Deixler, Russo and Halpern failed to file
various Forms 4s and 5s with respect to the reporting of various stock options
granted to them and Messrs. Corn and Delaney failed to file Forms 3s with
respect to becoming executive officers of the Company in August and September
2003, respectively.

The Company has a Code of Ethics in place for all of its employees. A copy of
the Company's Code of Ethics will be provided free of charge, upon written
request to ION Networks, Inc 120 Corporate Blvd., South Plainfield, NJ 07080


                                       21
<PAGE>


ITEM 10: EXECUTIVE COMPENSATION

The following table sets forth the compensation earned, whether paid or
deferred, by the Company's Chief Executive Officer, its other four most highly
compensated executive officers during the year ended December 31, 2003, and up
to four additional individuals for whom disclosure would have been provided but
for the fact that the individual was not serving as an executive officer at the
end of the year ended December 31, 2003 (the "Named Executive Officers") for
services rendered in all capacities to the Company.

<TABLE>
<CAPTION>

                           Summary Compensation Table

                                     Annual Compensation
                                     -------------------

Principal
Position                         Year Ending*        Salary($)          Bonus($)
------------------------------------------------------------------------------------
<S>                             <C>                 <C>               <C>
Current CEO and Executive Officers:

Norman E. Corn/(10)/             12/31/2003           60,000               --
Chief Executive Officer

Patrick E. Delaney/(11)/         12/31/2003           35,323               --
Chief Financial Officer

William Whitney/(4)(6)/          12/31/2003          117,692               --
Vice President &                 12/31/2002          112,500               --
Chief Technology                 03/31/2002            9,135               --
Officer


Former Executive Officers:

Kam Saifi/(2)(6)/(7)/            12/31/2003     163,570/(8)/               --
President & Chief                12/31/2002     273,300/(7)/               --
Executive Officer                03/31/2002     132,681/(9)/           50,000

Cameron Saifi/(3)(6)/(8)/        12/31/2003           85,130               --
Executive Vice President         12/31/2002          139,500               --
President & Chief                03/31/2002           90,519           25,000
Operating Officer

Ted I. Kaminer/(5)/(6)/          12/31/2003           14,145               --
Vice President &                 12/31/2002           90,625               --
Chief Financial Officer
</TABLE>

<TABLE>
<CAPTION>
                                    Summary Compensation Table

                                                       Long-term Compensation
                                                       ----------------------

                                             Awards                                            Payouts
                                             ------                                            -------

                                     Other
                                     Annual
                                     Compen-      Restricted      Securities                          All Other
Principal                            sation         Stock         Underying             LTIP            Compen-
Position                              ($)         Award(s)($)     Options (#)         Payouts($)     sation($)/(1)/
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>      <C>              <C>                  <C>              <C>
Current CEO and Executive Officers:

Norman E. Corn/(10)/                  --               --               --               --               --
Chief Executive Officer

Patrick E. Delaney/(11)/              --               --               --               --               --
Chief Financial Officer

William Whitney/(4)(6)/               --               --               --               --               --
Vice President &                      --               --               --               --               --
Chief Technology                      --               --    100,000/(12)/               --               --
Officer


Former Executive Officers:

Kam Saifi/(2)(6)/(7)/                 --               --               --               --               --
President & Chief                     --               --               --               --               --
Executive Officer                     --    260,000/(13)/               --               --            1,398

Cameron Saifi/(3)(6)/(8)/             --               --               --               --               --
Executive Vice President              --               --               --               --               --
President & Chief                     --    186,000/(14)/               --               --            1,641
Operating Officer


Ted I. Kaminer/(5)/(6)/               --               --               --               --               --
Vice President &                      --               --     200,000/(9)/               --               --
Chief Financial Officer
</TABLE>

----------------
*Please note that the 12/31/03 year end represents the twelve month period from
1/1/03 to 12/31/03 and the 12/31/02 year end represents the nine-month period
from 4/1/02 to 12/31/02.

(1)   Represents contribution of the Company under the Company's 401(k) Plan.

(2)   Mr. K. Saifi joined the Company on 10/1/01. Pursuant to his employment
      agreement, he received an annualized base salary of $350,000 for the
      nine-months ended December 31, 2002. Mr. K. Saifi separated from the
      Company on July 7, 2003.

(3)   Mr. C. Saifi joined the Company on 10/17/01. Pursuant to his employment
      agreement, he received an annualized base salary of $186,000. Mr. C. Saifi
      separated from the Company on July 7, 2003.


(4)   Mr. Whitney joined the Company on 3/11/02. Pursuant to his employment
      agreement, he receives an annualized base salary of $150,000.

(5)   Mr. Kaminer joined the Company on 5/20/02 and separated from the Company
      on 2/6/03.

(6)   Refer to the Employment Contracts, Termination of Employment and Change of
      Control Arrangements section below for a more detailed description of all
      consulting and employment agreements.


                                       22
<PAGE>


(7)   Includes $14,400 in auto allowance.

(8)   Includes $7,200 in auto allowance.

(9)   25,000 shares vested on May 20, 2002. The remaining shares vest as
      follows: 43,000 on May 20, 2003, and 16,500 at the end of each three month
      period, commencing with the period ending August 20,2003 and ending with
      the period ending May 20, 2005

(10)  Mr. N. Corn joined the Company on 08/15/03. Pursuant to his employment
      agreement, he receives an annualized base salary of $180,000 for the
      fiscal year ended December 31, 2003.

(11)  Mr. P. Delaney joined the Company on 09/15/03. Pursuant to his employment
      agreement, he receives an annualized base salary of $120,000 for the
      fiscal year ended December 31, 2003.

(12)  These shares vest as follows: 34,000 on March 11, 2003, and 8,250 at the
      end of each three month period, commencing with the period ending June 11,
      2003, and ending with the period ending March 11, 2005.

(13)  These shares vest as follows: 250,000 on October 4, 2001, 550,000 on
      September 30, 2002 and 150,000 at the end of each quarter, commencing with
      the quarter ended December 31, 2002, and ending with the quarter ending
      September 30, 2004, for a total of 1,200,000.

(14)  These shares vest as follows: 75,000 on October 17, 2001, 165,000 on
      September 30, 2002 and 45,000 at the end of each quarter, commencing with
      the quarter ended December 31, 2002, and ending with the quarter ending
      September 30, 2004, for a total of 360,000.


                                       23
<PAGE>


                 Option Grants for Year Ended December 31, 2003

During the year ended December 31, 2003 there were no option grants awarded to
any employees.

          Aggregated Option Exercises for Year Ended December 31, 2003
                          And Year Ended Option Values

The following table sets forth certain information concerning each exercise of
stock options during year ended December 31, 2003 by each of the Named Executive
Officers and the number and value of unexercised options held by each of the
Named Executive Officers on December 31, 2003.

<TABLE>
<CAPTION>
                                                                                                          Value of
                                                                        Number of                        Unexercised
                                                                   Securities Underlying                In-the-Money
                                 Shares                             Unexercised Options                  Options at
                               Acquired on         Value               at FY-End(#)                   FY-End($)/(1)/
Name                           Exercise (#)      Realized($)     Exercisable/Unexercisable      Exercisable/Unexercisable
----                           ------------      -----------     -------------------------      -------------------------
<S>                            <C>               <C>             <C>                            <C>
Current CEO and Executive Officers:

Norman E. Corn                      --               --                    --                                --

Patrick E. Delaney                  --               --                    --                                --

William Whitney                     --               --                    58,750/41,250                     --

Former Executive Officers:

Kam Saifi                           --               --                    --                                --

Cameron Saifi                       --               --                    --                                --

Ted Kaminer                         --               --                    --                                --
</TABLE>


(1) The average price for the Common Stock as reported by the Nasdaq Bulletin
Board on December 31, 2003, was $.04 per share. Value is calculated on the basis
of the difference between the option exercise price and $.04 multiplied by the
number of shares of Common Stock underlying the options.

Compensation of Directors

Standard Arrangements: During the year ended December 2003 no compensation was
paid to any Board member.

Employment Contracts, Termination of Employment and Change of Control
Arrangements

The Company entered into an employment agreement with Norman E. Corn dated
August 15, 2003. Pursuant to the agreement Mr. Corn shall serve as Chief
Executive Officer at the will of the Company. Mr. Corn's annual base salary as
of March 15, 2004 was $200,000.  In addition, he will receive a monthly car
allowance of $900 plus, reimbursement for additional life and disability
insurances. On January 28, 2004, the Company awarded Mr. Corn 1,550,000 options
to purchase common stock at $0.115 per share for 800,000 incentive stock options
and $0.07 per share for 750,000 non-incentive stock options. These options
vested immediately. If the Company terminates Mr. Corn's employment no severance
payment is contemplated by the contract.

The Company entered into an employment agreement with Patrick E. Delaney dated
September 15, 2003. Pursuant to the agreement Mr. Delaney shall serve as Chief
Financial Officer at the will of the Company. Mr. Delaney's annual base salary
as of March 15, 2004 was $170,000.In addition, he will receive a monthly car
allowance of $900 plus, reimbursement for additional life and disability
insurances. On January 28, 2004, the Company awarded Mr. Delaney 1,050,000
options to purchase common stock at $0.115 per share for 800,000 incentive stock
options and $0.045.per share for 250,000 non-incentive stock options. These
options vested immediately. If the Company terminates Mr. Delaney's employment
no severance payment is contemplated by the contract.

Effective July 7, 2003, Mr. Kam Saifi and Mr. Cameron Saifi ceased to be
employed by the Company. As of the date of this filing, neither Mr. Kam Saifi
nor Mr. Cameron Saifi has executed separation agreements. However, the parties
continue to negotiate and seek an appropriate settlement. Presented below are
these former executives employment disclosure from the period ended December 31,
2002 form 10KSB.


                                       24
<PAGE>


The Company entered into an employment agreement with Kam Saifi dated October 4,
2001. Pursuant to the agreement, Mr. Saifi served as Chief Executive Officer and
President commencing October 1, 2001 and continuing through July 7, 2003. Mr. K.
Saifi received a base salary at an annual rate of $250,000 during the period of
October 1, 2001 and ending March 31, 2002. He received a base salary at an
annual rate of $350,000 commencing April 1, 2002 and continuing through July 7,
2003. In addition he received a monthly car allowance of $1,200. Pursuant to the
agreement, Mr. K. Saifi was granted restricted stock consisting of 2,000,000
shares of the Company's Common Stock at a price of $0.13 per share. As of
December 31, 2003, all 2,000,000 shares were vested, but are subject to a loan
and pledge in favor of the Company.

The Company entered into an employment agreement with Cameron Saifi dated
October 17, 2001. Pursuant to the agreement, Mr. C. Saifi served as Chief
Operating Officer and Executive Vice President commencing October 17, 2001 and
continuing through July 7, 2003. Mr. C. Saifi received a base salary at an
annual rate of $186,000. In addition he received a monthly car allowance of
$600. Pursuant to the agreement, Mr. C. Saifi was granted restricted stock
consisting of 600,000 shares of the Company's Common Stock at a price of $0.31
per share. As of December 31, 2003, all 600,000 shares were vested, but are
subject to a loan and pledge in favor of the Company.

The Company entered into an employment agreement with William Whitney dated
March 11, 2002. Pursuant to the agreement, Mr. Whitney shall receive a base
salary at an annual rate of $150,000. Pursuant to the agreement, Mr. Whitney was
granted stock options consisting of 100,000 shares of the Company's Common Stock
at a price of $0.70 per share. These options vest as follows: 34,000 vest on
March 11, 2003, and 8,250 at the end of each three month period, commencing with
the period ending June 11, 2003, and ending with the period ending March 11,
2005. In the event of a change in control event (as described in the employment
agreement) all options will become immediately vested.

The Company entered into an employment agreement with Ted Kaminer dated May 20,
2002. Pursuant to the agreement, Mr. Kaminer was to serve as Chief Financial
Officer and Vice President commencing May 20, 2002 and continuing until June 30,
2005 unless earlier terminated as provided in the agreement. On February 6,
2003, Mr. Kaminer voluntarily separated employment from the Company and, as a
result, no severance was paid to him.


                                       25
<PAGE>


ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
         RELATED STOCKHOLDER MATTERS


                      Equity Compensation Plan Information
                             As of December 31, 2003


<TABLE>
<CAPTION>
                                                                                                            (c)
                                                                                                     Number of securities
                                                      (a)                          (b)               remaining available for
                                          Number of securities to           Weighted-average         future issuance under
                                          be issued upon exercise           exercise price of      equity compensation plans
                                          of outstanding options,           outstanding options,     (excluding securities
                                           warrants, and rights            warrants, and rights     reflecting in column (a))
                                           --------------------            --------------------     -------------------------
<S>                                       <C>                              <C>                     <C>
Plan Category

Equity compensation plans approved by          1,435,155                      1.62              1,176,426
security holders/(1)/

Equity compensation plans not approved           608,000                      1.22                               -
by security holders/(2)/

Total                                          2,043,155                      1.53              1,176,426
</TABLE>


 (1) Shareholder Approved Plans

In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002
Plan"). The 2002 Plan provides for the issuance of stock options, grants of
common stock and stock appreciation rights covering up to 1,250,000 shares of
common stock; provided, however, no more than 250,000 shares may be issued in
connection with awards or stock appreciation rights.  In January 2004, the
Company discovered that the 2002 Plan was improperly approved without regard to
rights granted to the holders of its Series A preferred stock which required
prior approval of the holders of majority of Series A preferred stock prior to
issuance or authorization of equity securities or instruments convertible into
or exercisable for equity securities. No awards were made under 2002 Plan. The
Company is taking the position that the 2002 Plan is invalid.


In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the year ended December 31, 2003 and the nine month period ended
December 31, 2002, the Company granted options to purchase zero and 838,000,
shares, respectively. As of December 31, 2003, 868,775 options were outstanding
under the 2000 Plan, of which 660,875 options were exercisable.

The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the year ended December 31, 2003 and
the nine months ended December 31, 2002, the Company granted no options to
purchase shares. As of December 31, 2003, 533,629 options were outstanding under
the 1998 Plan, of which 482,800 options were exercisable.


In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the year ended December 31, 2003 and the nine month ended December 31, 2002 ,
there were no option grants provided under the 1994 Plan. As of December 31,
2003, 32,751 options were outstanding under the 1994 Plan, of which 32,751
options were exercisable.

During the year ended December 31, 2003, and nine month period ended December
31, 2002, there were no options granted under the Company's Time Accelerated
Restricted Stock Award Plan ("TARSAP"). The options vest after seven years,
however, under the TARSAP, the vesting is accelerated to the last day of the
fiscal year in which the options are granted if the Company meets certain
predetermined sales targets. The Company did not meet the targets for 2001 and,
as such, all options granted under the TARSAP in 2001 will vest seven years from
the original date of grant.


(2) Non-Shareholder Approved Awards


                                       26
<PAGE>


The Company as of December 31, 2003 has granted options and warrants to purchase
608,000 shares of Common Stock outside of the shareholder approved plans. The
awards have been made to employees, directors and consultants, and except as
noted below, have been granted with an exercise price equal to the fair market
value of the Common Stock on the date of grant. The Company has not reserved a
specific number of shares for such awards. The non-shareholder approved awards
are more specifically described below.


During July 2001 in connection with services being performed by a consultant,
the Company issued warrants to purchase 48,000 shares of the Company's Common
Stock at $0.62 per share. The warrants vested immediately and expire five years
from the date of the grant.

During January 2002 in connection with services being performed by a consultant,
the Company issued warrants to purchase 100,000 shares of the Company's Common
Stock at $1.35 per share and 50,000 shares of Common Stock at $1.80 per share.
The warrants vested immediately and expire three years from the date of the
grant.

On March 19, 1999, the Company issued options to certain consultants and
employees to purchase an aggregate of 20,000 shares of the Company's Common
Stock, all of which vested on the first year anniversary of the date of grant.
The options expire six years from the date of grant. However, in the event of
(a) the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is $2.41 and equals to the
market value of the Company's Common Stock on the date of grant. At December 31,
2003, 10,000 options were outstanding and exercisable.

On September 25, 1996, the Company issued options to certain officers and
directors to purchase 400,000 shares of the Company's Common Stock, of which
200,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. The
options expire ten years from the date of grant. However, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is $1.156 and equals to
the market value of the Company's Stock on the date of grant. At December 31,
2003, 400,000 options were outstanding and exercisable.


                                       27
<PAGE>


                        Beneficial Ownership Information

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 28, 2004 by each person
(or group within the meaning of Section 13(d)(3) of the Securities Exchange Act
of 1934) known by the Company to own beneficially 5% percent or more of the
Company's Common Stock, and by the Company's directors and named executive
officers, both individually and as a group.

As used in this table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within sixty days from March 15, 2004 through the exercise of any
option, warrant or right. Shares of Common Stock subject to options, warrants or
rights (including conversion from Preferred Stock) which are currently
exercisable or exercisable within sixty days are deemed outstanding for
computing the ownership percentage of the person holding such options, warrants
or rights, but are not deemed outstanding for computing the ownership percentage
of any other person. The amounts and percentages are based upon 24,875,500
shares of Common Stock and 166,835 shares of Preferred Stock outstanding as of
February 28, 2004.


                                           Common Stock      Percent of Class
                                           ------------      ----------------
Current, Directors, CEO and
  Executive Officers:

Norman E. Corn                              1,565,000/(8)/        5.9%

Patrick E. Delaney                          1,050,000/(9)/        4.1%

Stephen M. Deixler                          1,457,772/(1)/        5.7%

Frank Russo                                 361,280/(2)/          1.4%

Baruch Halpern                              1,001,760/(3)/        3.9 %

William Whitney                             168,704(6)            *


Former Executive Officers:

Kam Saifi                                   2,308,890/(4)/        9.2%

Cameron Saifi                               685,000/(5)/          2.7%


5% or more beneficial owners:

AWM Investment Company                      2,731,000/(7)/        11.03%
153 East 53rd Street, 55th Floor
New York, NY 10022

Directors and Executive Officers as a       8,598,406             28.8%
group 8 persons)


(1) Does not include 220,000 shares of Common Stock owned by Mr. Deixler's wife,
mother, children and grandchildren as to which shares Mr. Deixler disclaims
beneficial ownership. Includes 480,560 shares of Common Stock subject to
conversion from 48,056 shares of Preferred Stock within 60 days of March 15,
2004 and 382,500 shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of March 15, 2004.

(2) Includes 277,780 shares of Common Stock subject to conversion from 27,778
shares of Preferred Stock within 60 days of March 15, 2004 and 83,500 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of March 15, 2004.

(3) Does not include 17,000 shares of Common Stock owned by Mr. Halpern's
daughter as to which Mr. Halpern disclaims beneficial ownership. Includes
480,560 shares of Common Stock subject to conversion from 48,056 shares of
Preferred Stock within 60 days of March 15, 2004, 287,500 shares of Common Stock
subject to options that are currently exercisable or exercisable within 60 days
of March 15, 2004 and 100,000 shares of Common Stock subject to warrants that
are currently exercisable or exercisable within 60 days of March 15, 2004.

(4) Includes 138,890 shares of Common Stock subject to conversion from 13,889
shares of Preferred Stock within 60 days of March 15, 2004.

(5) Includes 85,000 shares of Common Stock subject to conversion from 8,500
shares of Preferred Stock within 60 days of March 15, 2004.


                                       28
<PAGE>


(6) Includes 38,890 shares of Common Stock subject to conversion from 3,889
shares of Preferred Stock within 60 days of March 15, 2004 and 67,000 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of March 15, 2004.

(7) Based on American Stock and Transfer & Trust list of shareholders dated
February 27, 2004 plus 1,120,000 warrants to purchase common stock.

(8) Includes 15,000 shares of Common Stock and 1,550,000 shares of Common Stock
subject to options that are currently exercisable.

(9) Consists of 1,050,000 shares of Common Stock subject to options that are
currently exercisable.

(10) Unless otherwise noted, the address of each such person is c/o the Company,
120 Corporate Blvd., S. Plainfield, New Jersey 07080.

*Indicates ownership of Common Stock of less than one (1%) percent of the total
issued and outstanding Common Stock on March 15, 2004.

ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company entered into a definitive Sublease Agreement with Multipoint
Communications, LLC (the "Tenant") on April 17, 2002 to sublease approximately
5,400 square feet of its Piscataway, NJ facility for a period of 24 months. The
rental rate and the other material terms of the lease with Multipoint
Communications, LLC ("Multipoint") were negotiated through a real estate broker
and separate attorneys representing each party. The rental rate was established
by prorating the amount of space leased by Multipoint by the current rent paid
by the Company to its landlord. Given the current real estate market condition
in the area, the Company believes that the terms of the lease with Multipoint
are comparable to terms of leases that might have been obtained from a
non-affiliate. The rent will be $5,200 per month for the first nine months and
$10,400 per month for the last fifteen months, but with a 100% abatement for the
first three months. As part of the rental payment the Tenant was to issue shares
totaling the value of $77,400, which were to be based on the per share price of
the Tenant's common stock as priced in the first round of institutional
financing (the "Financing") which were to have closed on or before June 30,
2002. These shares were to have had the registration rights as other shares
issued in the Financing. Since the Financing did not close on or before June 30,
2002, the Tenant owes the Company additional rent in the amount of $4,300 per
month commencing on July 1, 2002. The Chairman of the Board of Directors of the
Company served as the Chief Financial Officer of the Tenant until November 2002.
On or about January 16, 2003, the Tenant filed for voluntary Ch. 7 bankruptcy
with the U.S. Bankruptcy Court for the District of New Jersey. As a result, the
Company wrote off an amount of $122,550 which is included in selling, general
and administrative expenses.

      During April 2000, the Company made a loan (the "Loan") to the former
Chief Executive Officer (the "Former CEO") of the Company in the amount of
$750,000. At the time that the Loan was made to the Former CEO in April 2000,
the Company was contemplating a secondary public offering and potential mergers
and acquisitions opportunities. As a result, the Company did not want the Former
CEO to exercise his stock options. In consideration for not exercising his stock
options at that time, the Company issued the Loan to him. At that time, the
Company had sufficient cash and it was contemplated that the Loan would be
repaid within one year. The Loan accrues interest at a rate of LIBOR plus 1%.
The LIBOR plus one percent interest rate in April 2000 was 7.197% as compared to
the first mortgage interest rate in April 2000 of 6.90% for a 1-year ARM, 7.97%
for a 15-year FRM and 8.30% for a 30-year FRM. This Loan had an original
maturity date of the earlier of April 2005 or thirty days after the Company for
any reason no longer employed the Former CEO. The Former CEO resigned his
position at the Company effective September 29, 2000. On October 5, 2000, the
Company entered into an agreement with the Former CEO pursuant to which the
$750,000 promissory note for the Loan was amended to extend the due date to
April 30, 2001, and to provide that interest on the note shall accrue through
September 29, 2000 (the "Separation and Forbearance Agreement"). The Loan is
collateralized by a first mortgage interest on the personal residence of the
Former CEO. The Company agreed to extend the repayment date of the Loan so that
the Former CEO would be able to repay the Loan to the Company by selling his
personal residence. In addition to the Loan, pursuant to the terms of the
Separation and Forbearance Agreement between the Company and the Former CEO, the
Former CEO also agreed to reimburse the Company for certain expenses totaling
$200,000, to be paid over a period of six months ending March 31, 2001. These
certain expenses were incurred by the Former CEO as part of his personal expense
account arrangement with the Company. During the year ended March 31, 2001,
$50,000 of the amounts owed to the Company by the Former CEO was repaid and
$22,000 has been recorded as a non-cash offset as a result of earned but unpaid
vacation owed to the Former CEO. During the year ended March 31, 2002, $813,593
was repaid which included proceeds in the amount of $777,713.48 received by the
Company on August 3, 2001 for the sale of the Former CEO's personal residence.
At December 31, 2003, the total amount owed to the Company by the Former CEO was
approximately $175,154, which includes interest accrued through December 31,
2003. The full amount has been recorded as a reserve against the note
receivable. Because these amounts were not paid by their respective maturity
dates, interest is accruing at the default interest rate of 12%. The Company
will continue to attempt to collect the note receivable.


                                       29
<PAGE>


Effective October 2001, the Company approved and granted 2,600,000 shares of
restricted stock to two executives: Messrs. Kam Saifi (2,000,000 shares at $0.13
per share), and Cameron Saifi, (600,000 shares at $0.31 per share) at fair
value. The restricted shares vest at the rate of 12.5% on the date of grant,
27.5% on September 30, 2002, and thereafter 7.5% at the end of each quarter
which commenced on December 31, 2002. These restricted shares were subject to a
repurchase right which permitted the Company to repurchase any shares which have
not yet vested at the effective date of termination of the officers' employment,
as defined in their employment agreements, for an amount equal to the purchase
price per share paid by the officers. The Company received a series of partial
recourse interest bearing (5.46% on an annual basis) promissory notes for the
value of the shares to be repaid by the officers. The notes are to be repaid by
the officers at the earlier of ten years or the date upon which the employees
dispose of their shares. As of December 31, 2003 Mr. Kam Saifi owes
approximately $290,718 (including approximately $32,718 of interest) for
2,000,000 Restricted Shares and; Mr. Cameron Saifi owes approximately $208,526
(including approximately $23,126 of interest) for 600,000 Restricted Shares. The
issuance of the restricted shares and the notes receivable due from the officers
is recorded in the Company's financial statements. The Company is continuing to
negotiate agreements relating to the disposition of the loans due to the
separation of the officers from the Company. As of December 31, 2003, all
2,600,000 shares were vested, but are subject to a loan and pledge in favor of
the Company.


                                       30
<PAGE>


ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

(a)   Exhibits:


Exhibit
No.            Description
-------        -----------

3.1            Certificate of Incorporation of the Company, as filed with the
               Secretary of State of the State of Delaware on August 5,
               1998./(2)/

3.2            Certificate of Amendment of the Certificate of Incorporation, as
               filed with the Secretary of State of the State of Delaware on
               December 11, 1998./(2)/

3.3            Certificate of Amendment of the Certificate of Incorporation, as
               filed with the Secretary of state of the State of Delaware an
               October 12, 1999./(3)/

3.4            By-Laws of the Company./(2)/

3.5            Form of Specimen Common Stock Certificate of the Company./(4)/

4.1            1994 Stock Option Plan of the Company. /(1)/

4.2            1998 Stock Option Plan of the Company./(2)/

4.3            1998 U.K. Sub-Plan of the Company, as amended./(2)/

4.4            Amended and Restated Certificate of Designation of Rights
               Preferences, Privileges and Restrictions of Series A Preferred
               Stock of ION Networks, Inc. /21/

4.5            2000 Stock Option Plan of the Company./(17)/

4.6            2002 Stock Option Plan of the Company./(19)/

4.7            Form of Warrant Agreement dated July 17, 2001./(13)/

4.8            Form of Warrant Agreement dated January 4, 2002./(13)/

4.9            Form of Non-Qualified Stock Option Agreement dated March 19, 1999
               by and between the Company's predecessor, Microframe, Inc. and
               its consultants./(13)/

4.10           Form of Non-Employee Director Stock Option Contract dated March
               10, 1998 between the Company's predecessor, Microframe, Inc. and
               its non-employee directors./(13)/

4.11           Form of Non-Employee Director Stock Option Contract dated
               September 17, 1997 by and between the Company's predecessor,
               Microframe, Inc. and its non-employee directors./(13/)

4.12           Form of Non-Qualified Stock Option Agreement dated September 25,
               1996 by and between the Company's predecessor, Microframe, Inc.
               and its employees./(13)/


                                       31
<PAGE>

Exhibit
No.            Description
-------        -----------
4.13           Amended and Restated Non-Qualified Stock Option Agreement dated
               May 19, 1997 by and between the Company's Predecessor,
               Microframe, Inc. and its employees./(9)/


10.3           Agreement dated as of December 19, 1994 by and between LeeMAH
               DataCom Security Corporation and Siemens Rolm Communications
               Inc./(4)/

10.4           Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by
               and between the Company and Siemens Credit Corporation./(4)/

10.5           Equipment Lease Agreement dated June 17, 1999 by and between the
               Company and Lucent Technologies./(4)/

10.6           (i) Non-negotiable Promissory Note in the principal amount of
               $750,000 issued by Stephen B. Gray to the Company./(5)/

               (ii) First Amendment to Promissory Note dated as of August 5,
               2000 by and between the Company and Stephen B. Gray./(5)/

10.7           Line of Credit Agreement with United Nations Bank dated September
               30, 1999./(5)/

10.8           (i) Separation and Forbearance Agreement made as of October 5,
               2000 between the Company and Stephen B. Gray./(7)/

               (ii)Promissory Note in the amount of $163,000 dated October 5,
               2000 made by Stephen B. Gray to the Company./(7)/

10.9           Materials and Services Contract dated January 16, 2001, between
               the Company and SBC Services, Inc./(8)/

10.10          Stock Purchase Agreement dated August 11, 2000 by and between the
               Company and the parties identified therein./(8)/

10.11          Purchase Agreement by and between the Company and the Selling
               Shareholders set forth therein dated February 7, 2002./(18)/


10.12          Employment Agreement dated October 4, 2001 between the Company
               and Kam Saifi./(11)/

10.13          Employment Agreement dated October 17, 2001 between the Company
               and Cameron Saifi./(12)/

10.14          Sublease Agreement dated April 17, 2002 between the Company and
               Multipoint Communications, LLC./(14)/



                                       32
<PAGE>


Exhibit
No.            Description
-------        -----------

10.15          Agreement and General Release dated August 15, 2002 between the
               Company and Ron Forster./(16)/

10.16          Rescission Agreement dated September 29, 2002 between the Company
               and David Arbeitel./(16)/

10.17          Separation Agreement and General Release dated October 31, 2002
               between the Company and David Arbeitel./(16)/

10.18          Employment Agreement dated May 20, 2002 between the Company and
               Ted Kaminer./(15)/

10.19          Employment Agreement dated February 25, 2002, between the Company
               and William Whitney./21/

10.20          Employment Agreement dated August 15, 2003, between the Company
               and Norman E. Corn./22/

10.21          Employment Agreement dated September 15, 2003, between the
               Company and Patrick E. Delaney./20/

10.22          Lease Agreement dated July 21, 2003 by and between the Company
               and 116 Corporate Boulevard, LLC, Inc.*

16.1           Letter dated October 31,2003, from Deloitte & Touche, LLP. to the
               Securities and Exchange Commission./(10)/

21.1           List of Subsidiaries./(14)/

31.1           Certification of CEO Pursuant to Section 302 of the Sarbanes
               Oxley Act of 2002.*

31.2           Certification of CFO Pursuant to Section 302 of the Sarbanes
               Oxley Act of 2002.*

32.1           Certification of CEO Pursuant to Section 906 of the Sarbanes
               Oxley Act of 2002.*

32.2           Certification of CFO Pursuant to Section 906 of the Sarbanes
               Oxley Act of 2002.*



(1)   Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on August 15, 1995.

(2)   Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on April 22, 1999.

(3)   Incorporated by reference to the Company's Registration Statement on Form
      S-8 filed on March 17, 2000.

(4)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended March 31, 1999.

(5)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      filed on June 28, 2000.

(6)   Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on March 12, 1999.

(7)   Incorporated by reference to the Company's Quarterly report on Form 10-QSB
      filed on November 14, 2000

(8)   Incorporated by reference to the Company's Annual report on Form 10-KSB
      filed on June 29, 2001.

(9)   Incorporated by reference to the Company's Registration Statement on Form
      S-8 filed on November 17, 2000.

(10)  Incorporated by reference to the Company's Annual report on Form 8-KSB
      filed on October 31, 2003.

(11)  Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on October 23, 2001.



                                       33
<PAGE>


(12)  Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on October 24, 2001.

(13)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended March 31, 2002, as filed on July 1, 2002.

(14)  Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
      Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
      August 2, 2002.

(15)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on August 14, 2002.

(16)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on November 14, 2002.

(17)  Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on January 11, 2002.

(18)  Incorporated by Reference to the Company's Registration Statement on Form
      S-3 filed on March 4, 2002.

(19)  Incorporated by Reference to the Company's Definitive Proxy Statement
      filed on September 16, 2002.

(20)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on November 17, 2003.

(21)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended December 31, 2002, as filed on April 15, 2003.

(22)  Incorporated by reference to the Company's Quarterly Report on Form 10QSB
      filed on September 12, 2003.

* Filed herewith

(b)   Reports on Form 8-K

On November 3, 2003, the Company filed a report on Form 8-K reporting the change
of its independent principal accountants.


ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

                                        YEAR ENDED          YEAR ENDED
                                    DECEMBER 31, 2003  DECEMBER 31, 2002

Audit Fees                                $116,870          $ 73,657

Audit Related Fees                               0                 0


Tax Fees (1)                              $ 15,000          $ 30,000

All Other Fees                                   0                 0

(1) Preparation of federal, state and local income and franchise taxes.


                                       34
<PAGE>


                                   SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: March 29, 2004


                                        ION NETWORKS, INC.

                                        By: /s/ Norman E. Corn
                                            ------------------------------
                                            Norman E. Corn
                                            Chief Executive Officer


In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated on
March 29, 2004:


          Signature                                     Title
          ---------                                     -----

     /s/ Norman E. Corn                      Chief Executive Officer
-------------------------------
     Norman E. Corn


     /s/ Patrick E. Delaney                  Chief Financial Officer
-------------------------------
     Patrick E. Delaney


     /s/ Stephen M. Deixler                  Chairman of the Board of Directors
-------------------------------
     Stephen M. Deixler


     /s/ Baruch Halpern                      Director
-------------------------------
     Baruch Halpern

     /s/ Frank Russo                         Director
-------------------------------
     Frank Russo



                                       35

<PAGE>



ION NETWORKS, INC. AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND NINE MONTHS ENDED DECEMBER 31, 2002




                                       36
<PAGE>



ION NETWORKS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2003 AND NINE MONTHS ENDED DECEMBER 31, 2002


<TABLE>
<CAPTION>
                                                                                              Page(s)
                                                                                              -------
<S>                                                                                           <C>
Independent Auditors' Report                                                                    38


Independent Auditors' Report                                                                    39


Financial Statements:

     Balance Sheet as of December 31, 2003                                                      40

     Consolidated Statements of Operations for the Year Ended December 31, 2003 and
     the Nine Months Ended December 31, 2002                                                    41

     Consolidated Statements of Cash Flows for the Year Ended December 31, 2003 and
     the Nine Months Ended December 31, 2002                                                    42

     Consolidated Statements of Stockholders' Equity for the Year Ended December 31, 2003
     and the Nine Months Ended December 31, 2002                                                43-44


Notes to Consolidated Financial Statements                                                      45-62
</TABLE>


                                       37
<PAGE>


                          INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
ION Networks, Inc.
South Plainfield, New Jersey

We have audited the accompanying balance sheet of ION Networks, Inc. as of
December 31, 2003, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ION Networks, Inc. as of
December 31, 2003, and the consolidated results of their operations and thier
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.


The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's recurring losses from operations and its
difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

/s/ Marcum & Kliegman LLP

New York, New York
February 19, 2004



                                       38
<PAGE>


INDEPENDENT AUDITORS' REPORT


To the Board of Directors and Stockholders of
ION Networks, Inc. and Subsidiaries
Piscataway, New Jersey

We have audited the consolidated balance sheet (not separately included herein)
of ION Networks, Inc. and subsidiaries (the "Company") as of December 31, 2002,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for the nine months ended December 31, 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2002,
and the results of its operations and its cash flows for the nine months ended
December 31, 2002, in conformity with accounting principles generally accepted
in the United States of America.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the 2002
financial statements, the Company's recurring losses from operations and its
difficulty in generating sufficient cash flow to meet its obligations and
sustain its operations raise substantial doubt about its ability to continue as
a going concern. Management's plans concerning these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.

As discussed in Note 1 to the financial statements, effective April 1, 2002, the
Company changed its fiscal year end from March 31 to December 31.

/s/ DELOITTE & TOUCHE LLP

March 11, 2003
Parsippany, New Jersey


                                       39
<PAGE>




                               ION NETWORKS, INC.

                                  BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                      December 31,
                                      ASSETS                                              2003
                                                                                    -----------------

Current assets
<S>                                                                                  <C>
   Cash and cash equivalents                                                         $    357,711
   Accounts receivable, less allowance for doubtful accounts of $66,549                   397,744
   Inventory, net                                                                         702,042
   Prepaid expenses and other current assets                                              128,138
                                                                                     ------------
     Total current assets                                                               1,585,635

   Property and equipment, net                                                             57,432
    Capitalized software, less accumulated amortization of $3,796,836                     448,288
    Other assets                                                                           13,301
                                                                                     ------------
   Total assets                                                                      $  2,104,656
                                                                                     ============

                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
    Current portion of capital leases                                                $     73,551
   Current portion of long-term debt                                                        2,202
   Accounts payable                                                                       340,740
   Accrued expenses                                                                       574,930
   Deferred income                                                                        200,305
   Sales tax payable                                                                       52,640
   Other current liabilities                                                               53,337
                                                                                     ------------
   Total current liabilities                                                         $  1,297,705
                                                                                     ------------

Long term debt, net of current portion                                                      9,441

Commitments and contingencies

Stockholders' Equity
   Preferred stock - par value $.001 per share; authorized 1,000,000 shares,
     200,000 shares designated Series A; 166,835 shares issued and outstanding
     (Aggregate Liquidation Preference $300,303)                                              167
   Common stock - par value $.001 per share; authorized 50,000,000 shares;
     24,875,500 shares issued and outstanding                                              24,876
     Additional paid-in capital                                                        44,585,740
   Notes receivable from former officers                                                 (486,535)
   Accumulated deficit                                                                (43,326,738)
                                                                                     ------------
Total stockholders' equity                                                                797,510

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

Total liabilities and stockholders' equity                                           $  2,104,656
                                                                                     ============
</TABLE>

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


                                       40
<PAGE>

                       ION NETWORKS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS


<TABLE>
<CAPTION>
                                                                   Year Ended       Nine Months Ended
                                                                   December 31,        December 31,
                                                                       2003                2002
                                                                   ------------        ------------
<S>                                                                <C>                 <C>
Net sales                                                          $  3,342,620        $  3,335,160

Cost of sales                                                           866,371           1,142,902
                                                                   ------------        ------------
                                                                      2,476,249           2,192,258
   Less inventory write downs                                            26,002             285,135
                                                                   ------------        ------------
   Gross Margin                                                       2,450,247           1,907,123
                                                                   ------------        ------------

Research and development expenses                                       503,146             766,521
Selling, general and administrative expenses                          2,452,031           5,519,665
Depreciation and amortization expenses                                  736,694             835,315
Restructuring, asset impairments and other (credits) charges           (405,402)            662,828
                                                                   ------------        ------------
   Loss from operations                                                (836,222)         (5,877,206)

   Interest income                                                       19,872              36,781
   Interest expense                                                     (14,593)            (19,524)
                                                                   ------------        ------------
                                                                       (830,943)         (5,859,949)
   Loss before income taxes

Income tax benefit                                                      227,151             231,427
                                                                   ------------        ------------

   Net loss                                                        $   (603,792)       $ (5,628,522)
                                                                   ============        ============


Per share data
   Basic and diluted                                               $      (0.03)       $      (0.25)

Weighted average number of common shares outstanding
   Basic and diluted                                                 23,900,500          22,843,009
</TABLE>

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


                                       41
<PAGE>


                       ION NETWORKS, INC. AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS


<TABLE>
<CAPTION>
                                                                                Year Ended     Nine Months Ended
                                                                               December 31,       December 31,
                                                                                  2003                 2002
                                                                               -----------        -----------
Cash flows from operating activities
<S>                                                                            <C>                <C>
     Net loss                                                                  $  (603,792)       $(5,628,522)

Adjustments to reconcile net loss to net cash from operating activities:
   Restructuring, asset impairments and other charges, non-cash                   (405,402)           508,458
   Depreciation and amortization                                                   736,694            835,315
   Provision for inventory obsolescence                                            (26,002)          (285,135)
   Non-cash stock-based compensation charge                                        (95,000)            95,000
   (Cancellation) of restricted stock                                                   --            (81,112)
   Notes receivable from officers                                                  (13,130)            64,245
   Reserve allowance of related party note receivable                                   --             83,657
   Deferred compensation                                                                --             62,893
   Changes in operating assets and liabilities:
     Accounts receivable                                                           164,018            959,468
     Inventory                                                                     583,228             49,993
     Prepaid expenses and other current assets                                      75,796            280,450
     Other assets                                                                    1,577                 --
     Accounts payable and other accrued expenses                                  (690,303)           301,107
     Accrued payroll and related liabilities                                       (82,543)          (168,232)
     Deferred income                                                                45,284             39,094
     Sales tax payable                                                             (31,385)          (104,410)
     Other current liabilities                                                     (35,980)            15,394
                                                                               -----------        -----------
       Net cash used in operating activities                                      (376,940)        (2,972,337)
                                                                               -----------        -----------

Cash flows from investing activities
   Acquisition of property and equipment                                                --            (40,702)
   Capitalized software expenditures                                              (214,996)          (339,688)
   Proceeds from sale of equipment                                                  30,129                 --
   Restricted cash                                                                 125,700                 --
                                                                               -----------        -----------
       Net cash used in investing activities                                       (59,167)          (380,390)
                                                                               -----------        -----------

Cash flows from financing activities
   Repayment of restricted stock note                                                   --             12,264
   Repayment of debt                                                               (85,135)           (88,678)
   Issuances of preferred stock, net                                                    --            285,303
                                                                               -----------        -----------
       Net cash (used in) provided by financing activities                         (85,135)           208,889
                                                                               -----------        -----------

Effect of exchange rates on cash                                                    13,269            (41,135)
                                                                               -----------        -----------

Net decrease in cash and cash equivalents                                         (507,973)        (3,184,973)

Cash and cash equivalents - beginning of period                                    865,684          4,050,657
                                                                               -----------        -----------

Cash and cash equivalents - end of period                                      $   357,711        $   865,684
                                                                               ===========        ===========

Supplemental information
   Cash paid during period for interest                                        $    13,650        $    19,553
                                                                               ===========        ===========
   Cash paid for taxes                                                         $         0        $   117,401
                                                                               ===========        ===========
</TABLE>

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


                                       42
<PAGE>


                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE NINE MONTHS ENDED DECEMBER 31, 2002 AND
                      FOR THE YEAR ENDED DECEMBER 31, 2003


<TABLE>
<CAPTION>
                            Preferred                   Common              Additional      Accumulated    Accumulated Other
                       ---------------------    ------------------------     Paid-In                         Comprehensive
                       Shares       Stock        Shares         Stock        Capital          Deficit           Income
                       --------    ---------    ----------    ----------    -----------    --------------    -------------
<S>                    <C>         <C>          <C>           <C>           <C>            <C>               <C>
Balance, March 31, 2002       -            -    25,138,000    $  25,138     $44,381,454     $(37,094,424)      $    27,866
                       --------    ---------    ----------    ----------    -----------    --------------    -------------

Comprehensive loss

   Net loss                                                                                  (5,628,522)

   Translation
   adjustments                                                                                                   (41,135)

   Total
   comprehensive loss

Issuances of
preferred stock        166,835          167                                    285,136

Cancellation of
restricted shares                               (262,500)         (262)       (80,850)

Notes receivable
from officers

Deferred compensation

Non-cash stock-based
compensation                                                                    95,000
                       --------    ---------    ----------    ----------    -----------    --------------    -------------

Balance, December                                                                                      $
31, 2002               166,835      $   167     24,875,500    $  24,876     $44,680,740     (42,722,946)     $   (13,269)
                       ========    =========    ==========    ==========    ===========    ==============    =============


Comprehensive loss
   Net loss                                                                                    (603,792)

   Translation
   adjustments                                                                                                     13,269

   Total
   comprehensive loss

Notes receivable
from officers

Non-cash stock-based
compensation                                                                  (95,000)
                       --------    ---------    ----------    ----------    -----------    --------------    -------------

Balance, December
31, 2003               166,835     $    167     24,875,500    $  24,876     $44,585,740    $ (43,326,738)    $           -
                       ========    =========    ==========    ==========    ===========    ==============    =============
</TABLE>

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


                                       43
<PAGE>


                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                 FOR THE NINE MONTHS ENDED DECEMBER 31, 2002 AND
                      FOR THE YEAR ENDED DECEMBER 31, 2003


<TABLE>
<CAPTION>
                             Notes
                           Receivable                                 Total
                          from former           Deferred          Stockholders'
                            Officers          Compensation            Equity
                         ---------------    -----------------    -----------------
<S>                      <C>                <C>                  <C>
Balance, March 31, 2002   $   (549,914)     $       (62,893)     $      6,727,227
                         ---------------    -----------------    -----------------

Comprehensive loss
   Net loss                                                           (5,628,522)
   Translation
   adjustments                                                           (41,135)
                                                                 -----------------

   Total
   comprehensive loss                                                 (5,669,657)

Issuances of
preferred stock                                                           285,303
Cancellation of
restricted shares                                                        (81,112)
Notes receivable
from officers                    76,509                                    76,509
Deferred compensation                                 62,893               62,893
Non-cash stock-based
compensation                                                               95,000
                         ---------------    -----------------    -----------------

Balance, December
31, 2002                  $   (473,405)                    -     $      1,496,163
                         ===============    =================    =================


Comprehensive loss
   Net loss                                                             (603,792)
   Translation
   adjustments                                                             13,269
                                                                 -----------------

   Total
   comprehensive loss                                                   (590,523)

Notes receivable
from officers                  (13,130)                                  (13,130)

Non-cash stock-based
compensation                                                             (95,000)
                         ---------------    -----------------    -----------------

Balance,
  December 31, 2002      $   (486,535)                    -       $      797,510
                         ===============    =================    =================
</TABLE>

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


                                       44
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.  ORGANIZATION AND BASIS OF PRESENTATION

The Company

ION Networks, Inc. (the "Company"), a Delaware corporation founded in 1999
through the combination of two companies -- MicroFrame, a New Jersey Corporation
(the predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited, a Scottish corporation located in Livingston, Scotland
(originally founded in 1994), designs, develops, manufactures and sells network
and information security and management products to corporations, service
providers and government agencies. The Company's hardware and software suite of
products are designed to form a secure auditable portal to protect IT and
network infrastructure from internal and external security threats. ION's
products operate in the IP, data center, telecommunications and transport, and
telephony environments and are sold by a direct sales force and indirect channel
partners mainly throughout North America and Europe.


Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern, which contemplates the realization and
satisfaction of liabilities and commitments in the normal course of business. At
December 31, 2003, we had an accumulated deficit of $43,326,738 and a working
capital position of $287,930. We also had net losses of $603,792 for the year
ended December 31, 2003 and $5,628,522 for the nine months ended December 31,
2002.

During 2003, the Company stabilized its excessive negative cash flow and in fact
increased its cash and cash equivalent position from a low of less than $100,000
at September 30, 2003 to approximately $357,000 at December 31, 2003. The
Company continues to have a delicate cash position and while the future
viability of the organization has significantly improved, it is necessary for it
to continue to strictly manage expenditures and to increase revenues. In
addition, it is the intention of the new management team, hired in the quarter
ended September 30, 2003, to secure additional financing during 2004 to
accelerate growth and insure long-term viability.


Basis of Presentation

Effective April 1, 2002, the Company changed its fiscal year end from March 31
to December 31. The consolidated financial statements include the presentation
of the transition period beginning April 1, 2002 and ending on December 31,
2002.


The following table presents certain financial information for the years ended
December 31, 2003 and 2002:

                                                 YEAR ENDED DECEMBER 31,
                                                 -----------------------

                                                  2003                2002
                                                  ----                ----
                                                                 (UNAUDITED)
Net Sales                                    $  3,342,260        $  5,411,357
Gross Margin                                    2,450,247           3,022,235
Loss from operations before income tax           (830,943)         (7,053,131)
Income tax benefit                                227,151             255,791
Net loss                                     $   (603,792)       $ (6,846,068)
Basic and Diluted earnings per share         $      (0.03)       $      (0.30)
Weighted average common shares                 23,900,500          22,843,009


2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation


The accompanying consolidated financial statements include the accounts of ION
Networks, Inc. and its subsidiaries (collectively, the "Company"). All material
inter-company balances and transactions have been eliminated in consolidation.

Due to cost containment in 2003, the Company ceased its operations in Belgium
and Scotland.


Use of Estimates

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


                                       45
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The significant estimates include the allowance for doubtful accounts, allowance
for inventory obsolescence, capitalized software including estimates of future
gross revenues, and the related amortization lives, deferred tax asset valuation
allowance and depreciation and amortization lives.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three
months or less at the time of purchase to be cash equivalents.

Allowance for Doubtful Accounts Receivable

Accounts receivable are reduced by an allowance to estimate the amount that will
actually be collected from our customers. Many of our customers have been
adversely affected by economic downturn in the telecommunications industry. If
the financial condition of our customers were to materially deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances could be required.


Inventory, net


Inventories are stated at the lower of cost (average cost) or market. Reserves
for slow moving and obsolete inventories are provided based on historical
experience and current product demand. If our estimate of future demand is not
correct or if our customers place significant order cancellations, inventory
reserves could increase from our estimate. We may also receive orders for
inventory that has been fully or partially reserved. To the extent that the sale
of reserved inventory has a material impact on our financial results, we will
appropriately disclose such effects. Our inventory carrying costs are not
material; thus we may not physically dispose of reserved inventory immediately.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the
straight-line method over the estimated useful lives of the assets, which are
generally two to five years. Expenditures for maintenance and repairs, which do
not extend the economic useful life of the related assets, are charged to
operations as incurred. Gains or losses on disposal of property and equipment
are reflected in the statements of operations in the period of disposal.

Capitalized Software

The Company capitalizes computer software development costs in accordance with
the provisions of Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize
computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be
recovered through future sales of the product. Management is required to use
professional judgment in determining whether development costs meet the criteria
for immediate expense or capitalization. These costs are amortized by the
greater of the amount computed using (i) the ratio that current gross revenues
from the sales of software bear to the total of current and anticipated future
gross revenues from the sales of that software, or (ii) the straight-line method
over the estimated useful life of the product. As a result, the carrying amount
of the capitalized software costs may be reduced materially in the near term.

We record impairment losses on capitalized software and other long-lived assets
used in operations when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Our cash flow estimates
are based on historical results adjusted to reflect our best estimate of future
market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. While we believe that our estimates of
future cash flows are reasonable, different assumptions regarding such cash
flows could materially affect our estimates.


The Company capitalized $214,996 and $339,688 of software development costs for
the year ended December 31, 2003 and the nine months ended December 31, 2002,
respectively. Amortization expense totaled $531,136 and $483,723 for the year
December 31, 2003 and for the nine months ended December 31, 2002, respectively.



                                       46
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Research and Development Costs

The Company charges all costs incurred to establish the technological
feasibility of a product or enhancement to research and development expense in
the period incurred.


Advertising Costs

The Company expenses advertising cost as incurred. The Company incurred
approximately $1,000 and $17,726 for the year ended December 31, 2003 and the
nine months ended December 31, 2002, respectively.


Revenue Recognition Policy

The Company recognizes revenue from product sales to end users, value-added
resellers (VARs) and original equipment manufacturers (OEMs) upon shipment if no
significant vendor obligations exist and collectibility is probable. We do not
offer our customers the right to return products, however the Company records
warranty costs at the time revenue is recognized. Management estimates the
anticipated warranty costs but actual results could differ from those estimates.
Maintenance contracts are sold separately and maintenance revenue is recognized
on a straight-line basis over the period the service is provided, generally one
year.


Shipping and Handling Costs

Shipping and handling costs incurred are billed to the customer and included as
part of cost of sales.


Fair Value of Financial Instruments

The carrying value of items included in working capital and debt approximates
fair value because of the relatively short maturity of these instruments.

Net Loss Per Share of Common Stock

Basic net loss per share excludes dilution for potentially dilutive securities
and is computed by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding during the period. Diluted
net loss per share reflects the potential dilution that could occur if
securities or other instruments to issue common stock were exercised or
converted into common stock. Potentially dilutive securities are excluded from
the computation of diluted net loss per share when their inclusion would be
antidilutive. A reconciliation between basic and diluted weighted average shares
outstanding is as follows:

<TABLE>
<CAPTION>

                                                  Year Ended      Nine Months Ended
                                              December 31, 2003   December 31, 2002
<S>                                           <C>                 <C>
Weighted average shares
outstanding, basic                                 23,900,500         22,843,009
Dilutive shares issuable in
connection with stock plans and
warrants granted                                           --            327,870
Conversion of preferred stock to
common stock                                        1,668,350            661,273
                                                   ----------         ----------

Weighted average shares
outstanding, diluted*                              25,568,850         23,832,152
                                                   ==========         ==========
</TABLE>


* Since there was a loss attributable to common shareholders in these periods,
the basic weighted average shares outstanding were used in calculating diluted
loss per share, as inclusion of the incremental shares shown in this calculation
would be antidilutive. Potential common shares of 3,115,155 and 989,143 for the
year ended December 31, 2003 and the nine month period ended December 31, 2002,
repectively, were excluded from the computation of diluted earnings per share.


                                       47
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Stock Compensation


 The Company records stock-based employee compensation arrangements in
accordance with provisions of Accounting Principals Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees", and complies with the disclosure
requirements of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" as amended by SFAS No. 148 "Accounting
for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB
Statement No. 123," issued in December 2002. Under APB Opinion No. 25,
compensation expense is based on the difference, if any, generally on the date
of grant, between the fair value of our stock and the exercise price of the
option. Equity instruments issued to non-employee vendors are recorded in
accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force
("EITF") Issue No. 96-18, "Accounting for Equity Instruments That are Issued to
Other Than Employees from Acquiring, or in Conjunction with Selling, Goods and
Services". All transactions in which goods or services are the consideration
received for the issuance of equity instruments are accounted for based on the
fair value of the consideration received or the fair value of the equity
instrument issued, whichever is more reliably measurable. The measurement date
of the fair value of the equity instrument issued is the date on which the
counter party's performance is complete.

During the year ended December 31, 2003 there were no options issued. The
weighted-average fair values at date of grant for options granted during the
nine months ended December 31, 2002 was $0.32. The fair value of each option
grant for the Company's common stock is estimated on the date of the grant using
the Black Scholes option pricing model.

                                                       December 31,
                                                          2002
                                                      ---------------
Expected Volatility                                       135.27%
Risk-free interest rate                                      3.96
Expected option lives                                  5.48 years


If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards. Compensation expense for the year ended
December 31, 2003 and the nine months ended December 31, 2002, consistent with
the provisions of SFAS No. 123, the Company's net loss and basic and diluted net
loss per share would have increased to the pro forma amounts indicated below: by
$217,158 and $.01 and $201,279 and $.01, respectively, for the year ended
December 31, 2003 and the nine months ended December 31, 2002.

<TABLE>
<CAPTION>
                                                     Year Ended        Nine months ended
                                                  December 31, 2003    December 31, 2002
                                                  -----------------    -----------------
<S>                                                   <C>                <C>
Net loss
              As reported                             $  (603,792)       $(5,628,522)
              Deduct: Stock based employee
              compensation determined under the
              fair value methods                          217,158            201,279
                                                      -----------        -----------
              Pro forma net loss                      $  (820,950)       $(5,829,801)
                                                      ===========        ===========

Basic and diluted net loss per share of
common stock

              As reported                                   (0.03)             (0.25)
              Pro forma                                     (0.03)             (0.26)
</TABLE>


Foreign Currency Translation


The financial statements of the foreign subsidiaries were prepared in local
currency and translated into U.S. dollars based on the current exchange rate at
the end of the period for the balance sheet and a weighted-average rate for the
period on the statement of operations. Translation adjustments are reflected as
foreign currency translation adjustments in stockholders' equity and,
accordingly, have no effect on net loss. Transaction adjustments for the foreign
subsidiaries are included in income and are not material. The Company ceased its
foreign operations during the year ended December 31, 2003.


Income Taxes

Deferred income tax assets and liabilities are computed annually based on
enacted tax laws and rates for temporary differences between the financial
accounting and income tax bases of assets and liabilities. A valuation allowance
is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.


                                       48
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Warranty Costs

The Company estimates its warranty costs based on historical warranty claim
experience. Future costs for warranties applicable to sales recognized in the
current period are charged to cost of sales. The warranty accrual is reviewed
quarterly to reflect the remaining obligation. Adjustments are made when actual
warranty claim experience differs from estimates. The warranty accrual included
in other current liabilities as of December 31, 2003 approximated $48,400.

Reclassifications

Certain amounts in the financial statements for the nine month period ended
December 31,2002 and year ended March 31, 2002 have been reclassified to conform
to the presentation of the financial statements for the year ended December 31,
2003.

3.  RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES

As a result of the Company being notified by the landlord to cancel its lease
effective August 15, 2003 at the Piscataway, NJ facility, the net book value of
leasehold improvements amounting to $28,955 were written-off. In addition, the
Company was required to sell property and equipment in order to move into its
smaller newly leased facility. At June 30, 2003 the Company recorded an
impairment of $163,662 which represents the difference between the cash proceeds
of the August 2003 sale and carrying value prior to the impairment.

During the quarter ended June 30, 2003, the Company completed its voluntary
liquidation of its UK subsidiary. As a result of the liquidation, the Company
reversed its prior restructuring accrual of $508,458, which was recorded in
fourth quarter 2002, related to the remaining long-term lease, and other
operating accruals of $294,704. These accruals were reflected in the
consolidated statement of operations as part of restructuring and SG&A expenses.


During the quarter ended September 30,2003 the Company successfully negotiated a
settlement of a $243,071 open payable due to Xetel for a payment of $30,000 and
a forgiveness of debt in the amount of $213,071.

The components of the restructuring, asset impairments and other charges are as
follows:

<TABLE>
<CAPTION>
                         Asset Impairment    Restructuring       Other Charges           Total
                         ----------------    -------------       -------------           -----
<S>                        <C>                <C>                 <C>                 <C>
First Quarter 2003
charges                    $         --       $    123,510        $         --        $    123,510

Second Quarter 2003
charges                         192,617           (508,458)                 --            (315,841)

Third Quarter 2003
charges                              --                 --            (213,071)           (213,071)

Fourth Quarter
2003 charges                         --                 --                  --                  --
                           ============       ============        ============        ============
               Total       $    192,617       $   (384,948)       $   (213,071)       $   (405,402)
                           ============       ============        ============        ============
</TABLE>


The Company is in negotiations with the landlord from the Fremont, California
location for the disposition of the reserved amount of $123,510. The Company has
not occupied the space since approximately March 2003 and the successful outcome
of the negotiations cannot be assured, however, the Company believes that the
amount should not exceed the reserved amount of $123,510.

During the quarter ended December 31, 2002 the Company separated with thirteen
employees which resulted in a restructuring charge during the quarter of
$154,370 in severance and other related matters, all of which has been paid
prior to December 31, 2002.

Also during the quarter ended December 31, 2002, the Company abandoned the space
at SolCom House, Livingston, Scotland that was leased by its subsidiary ION
Networks, Ltd. As a result, the Company recorded a charge of $508,458 in the
quarter ended December 31, 2002 for the remainder of the lease term that expires
on August 31, 2011.


                                       49
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


In January 2003, the Company's sub-tenant, Multipoint voluntarily filed for
Chapter 7 Bankruptcy with the U.S. Bankruptcy Court for the District of New
Jersey. As a result of consideration of Multipoint's financial condition,
culminating with the bankruptcy, the Company wrote-off an amount of $122,550 for
the unpaid balance of rent due from Multipoint which is included in selling and
general and administrative expenses.

4. INVENTORY

Inventory, net of reserves of $198,734, consists of the following:

                                                 December 31,
                                                    2003
                                                 ------------
Raw materials                                     $   62,851
Work-in-progress                                      47,044
Finished goods                                       592,147
                                                 ------------

Inventory , net                                   $  702,042
                                                 ============


Consistent with the downturn in markets served by us, we evaluated our inventory
levels in light of actual and forecasted revenue. As a result, we recorded a
charge of $26,002 and $285,135 to cost of sales for the year ended December 31,
2003 and the nine months ended December 31, 2002, respectively, related to
reserves for excess and obsolete inventory. We will continue to monitor our
excess reserves and to the extent that inventory that has been reserved as
excess is ultimately sold by us, such amounts will be disclosed in the future.


5.  PROPERTY AND EQUIPMENT, NET


Property and equipment consists of the following:

                                                          December 31,
                                                              2003
                                                         --------------
Computer and other equipment                               $   807,123
Furniture and fixtures                                          68,408
                                                         --------------

                                                               875,531
Less accumulated depreciation                                  818,099
                                                         --------------

Property and equipment, net                                $    57,432
                                                         ==============


Depreciation expense for property and equipment for the year ended December 31,
2003 and the nine months ended December 31, 2002, amounted to $205,558 and
$351,592. During the year ended December 31, 2003 and the nine months ended
December 31, 2002, the Company retired both fully and not fully depreciated
assets amounting to $1,730,369 and $847,785, respectively. During the year ended
December 31, 2003 the Company relocated it's headquarters and therefore,
recorded an asset impairment charge of $192,617 to recognize the retirement of
assets not fully depreciated.


6.  DEBT


In 1998, the Company entered into two equipment loan agreements for its Belgium
subsidiary. The first loan is for approximately $50,000, the loan was due July
2003 and bore an interest rate of 5.2%. The second loan was for approximately
$30,000, the loan was due February 2003 and bore an interest rate of 2.5%. At
December 31, 2003 there is no outstanding balance under either term loan. During
the year ended December 31, 2003, the Company ceased its operations in Belgium.


                                       50
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Due to the expiration of the Company's $1,500,000 line of credit on September
30, 2000, the Company pledged $375,000 on September 7, 2000 as collateral on an
outstanding letter of credit related to the required security deposit for the
Company's Piscataway, New Jersey corporate headquarters facility. On November 9,
2001, the Company entered into an agreement with the landlord for its
Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999.
The amendment allowed the Company to use $250,000 of its restricted cash from
the letter of credit towards the rent payments for 10 months starting January
2002. On January 10, 2002, the Landlord received the $250,000 from the letter of
credit per the above mentioned lease amendment. The Company agreed to replenish
the letter of credit by November 2003. On March 17, 2003 the Company entered
into an agreement with the landlord to amend the lease for its Piscataway, NJ
facility to reduce the letter of credit to $60,000 and to replenish it by
December 2003. The Company moved its corporate location as of August 15, 2003
from its Piscataway, NJ facility and no longer holds any obligations for a
security deposit.

7.  INCOME TAXES

As of December 31, 2003, the Company has available federal and state net
operating loss carry forwards of approximately $42,188,000 and $23,836,000,
respectively, to offset future taxable income. The federal net operating loss
carry forwards expire during the years 2011 through 2024. In addition, the
Company has investment credit and research and development credit carry forwards
aggregating approximately $405,000, which may provide future tax benefits,
expiring from 2008 through 2020.

The Company acquired a corporation business tax benefit certificate pursuant to
New Jersey law which relates to the surrendering of unused net operating losses.
For the year ended December 2003 and the nine months ended December 31, 2002,
the Company received a benefit of $227,151 and $236,728, respectively.

The components of the income tax benefit for the year ended December 31, 2003
and the nine months ended December 31, 2002 are as follows:


                                            December 31,       December 31,
                                                2003               2002
                                           ----------------    --------------
Current
     Federal                                    $  227,151        $ 236,728
     State                                              --               --
     Foreign                                            --           (5,301)
                                           ----------------    --------------
Subtotal                                        $  227,151        $ 231,427

Deferred
     Federal                                            --               --
     State                                              --               --
                                           ----------------    --------------

                                                $  227,151       $   231,427
                                           ================    ==============


The reasons for the difference between the Company's effective tax rate and the
United States federal statutory rate are as follows:

                                                     December 31, December 31,
                                                       2003          2002
                                                    ------------------------

Effective tax rate reconciliation
     Statutory federal tax rate                          (34)%         (34)%
     State taxes, net of federal benefit                  (6)           (6)
     Effect of recording valuation allowance
     on net operating loss carry forwards                 39            39
     Sale of state net operating losses and other          1            (8)
                                                    ------------------------

                                                          --            -9%
                                                    ========================


                                       51
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The tax effect of temporary differences which make up the significant components
of the net deferred tax asset and liability at December 31, 2003 and 2002 are as
follows:

<TABLE>
<CAPTION>
                                                                     December 31,        December 31,
                                                                        2003                2002
                                                                     ------------        ------------
<S>                                                                  <C>                 <C>
Current deferred tax assets
         Inventory reserves                                          $    132,850        $    367,511
         Accrued expenses                                                  36,610              71,102
         Allowance for doubtful accounts                                   60,100              69,671
                                                                     ------------        ------------
              Total current deferred tax assets                           229,560             508,284
       Valuation allowance                                               (229,560)           (508,284)
                                                                     ------------        ------------
              Net current deferred tax assets                                  --                  --
                                                                     ------------        ------------

       Noncurrent deferred tax assets
         Depreciation and amortization                                    250,000             250,000
         Net operating loss carry forwards                             14,343,920          16,304,184
         Research and development credit                                  405,078             254,523
         Alternative minimum tax credit                                        --              20,125
                                                                     ------------        ------------

              Total noncurrent deferred tax assets                     14,998,998          16,828,832
       Valuation allowance                                            (14,784,003)        (16,329,571)
                                                                     ------------        ------------
              Net noncurrent deferred tax assets                          214,995             499,261

       Noncurrent deferred tax liabilities
         Capitalized software                                            (214,995)           (499,261)
                                                                     ------------        ------------
              Total noncurrent deferred tax liabilities              $   (214,995)       $   (499,261)
                                                                     ------------        ------------
              Net noncurrent deferred tax (liabilities) assets       $         --        $         --
                                                                     ============        ============
</TABLE>


The Company has recorded a full valuation allowance against the deferred tax
assets, including the federal and state net operating loss carry forwards as
management believes that it is more likely than not that substantially all of
the deferred tax assets will not be realized.

8. STOCKHOLDERS' EQUITY

PREFERRED STOCK - On September 13, 2002 the Company received equity financing in
the amount of $300,303 ($285,303, net of issuance costs) for the issuance of
166,835 unregistered shares of the Company's preferred stock at $1.80 per share.
The Company has designated 200,000 of the 1,000,000 authorized shares of
preferred stock as Series A Preferred Stock ("Preferred Stock"). Each share of
Preferred Stock is convertible into 10 shares of the Company's common stock at
the conversion price of $0.18 per share of common stock, which was the closing
bid price of the Company's common stock on September 13, 2002. The Preferred
Stock is non-voting, has a standard liquidation preference equal to its purchase
price, and does not pay dividends. Proceeds of the equity financing will be used
for working capital and general corporate purposes. All of the shares of
Preferred Stock were purchased by directors and management of the Company.

RESTRICTED STOCK - Effective October 2001, the Company approved and granted
2,600,000 shares of restricted stock (the "Restricted Shares") to two executives
stockholders at fair value. The Restricted Shares are subject to a repurchase
right which will permit the Company to repurchase any shares which have not yet
vested at the effective date of termination of the officers' employment, as
defined in their employment agreements, for an amount equal to the purchase
price per share paid by the officers. The Company received a series of partial
recourse interest bearing (5.46% on an annual basis) promissory notes for the
value of the Restricted Shares to be repaid by the officers. As of December 31,
2003 Mr. Kam Saifi owes approximately $290,718 (including approximately $32,718
of interest) for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes
approximately $208,526 (including approximately $23,126 of interest) for 600,000
Restricted Shares.


The notes are to be repaid by the officers at the earlier of ten years or the
date upon which the employees dispose of their shares or under certain
circumstances, when the borrower's employment with the Company terminates for
any reason. The issuance of the restricted shares and the notes receivable due
from the former officers is recorded in the Company's financial statements. On
July 7, 2003, Mr. Kam Saifi and Mr. Cameron Saifi separated from the Company.
The Company is in the process of negotiating settlement agreements with the
former officers.

The variable accounting method used to account for the partial recourse
restricted stock granted to management resulted in a cashless charge of $95,000
for the period ended December 31, 2002. In accordance with accounting guidance
for the partial recourse restricted stock granted to management resulted in a
reversal of the cashless charge of $95,000 for the period ended December 31,
2003


                                       52
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


COMMON STOCK - On February 14, 2002 the Company sold 4,000,000 shares of common
stock at a price of $0.87 per share, for total consideration of $3,480,000. In
connection with this sale, warrants to purchase 1,120,000 shares of common stock
with an exercise price of $1.25 were issued. The warrants expire on February 14,
2007.

STOCK OPTION PLANS


In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002
Plan"). The 2002 Plan provides for the issuance of stock options, grants of
common stock and stock appreciation rights covering up to 1,250,000 shares of
common stock; provided, however, no more than 250,000 shares may be issued in
connection with awards or stock appreciation rights. In January 2004, the
Company discovered that the 2002 Plan was improperly approved without regard to
rights granted to the holders of its Series A preferred stock which required
prior approval of the holders of majority of Series A preferred stock prior to
issuance or authorization of equity securities or instruments convertible into
or exercisable for equity securities. No awards were made under 2002 Plan. The
Company is taking the position that the 2002 Plan is invalid.


In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the year ended December 31, 2003 and the nine month period ended
December 31, 2002, the Company granted options to purchase zero and 838,000,
shares, respectively. At December 31, 2003, 868,775 options were outstanding
under the 2000 Plan, of which 660,875 options were exercisable.

The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the year ended December 31, 2003 and
the nine months ended December 31, 2002, the Company granted no options to
purchase shares. At December 31, 2003, 533,629 options were outstanding under
the 1998 Plan, of which 482,800 options were exercisable.


In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one share of common stock on the date of
grant. During the year ended December 31, 2003 and the nine month period ended
December 31, 2002, there were no option grants provided under the 1994 Plan. At
December 31, 2003, 32,751 options were outstanding under the 1994 Plan, of which
32,751 options were exercisable.


WARRANTS


During July 2001 in connection with services being performed by a consultant,
the Company issued warrants to purchase 48,000 shares of the Company's common
stock at $0.62 per share, as of December 31, 2003 no warrants have been
exercised. The warrants vested immediately and expire five years from the date
of the grant. The Company recorded compensation expense of $13,199 based upon
the fair value of the vested warrants as determined using the Black Scholes
pricing model. In connection with the sale of common stock on February 14, 2003,
warrants to purchase 1,120,000 shares of common stock with an exercise price of
$1.25 were issued. The warrants expire on February 14, 2007.


During January 2002 in connection with services being performed by a consultant
through June 30, 2002, the Company issued warrants to purchase 100,000 shares of
the Company's common stock at $1.35 per share. Warrants to purchase an
additional 50,000 shares of common stock are exercisable at $1.80, and the
warrants vested immediately and expire three years from the date of the grant.
The Company recorded compensation expense of $62,893 based upon the fair value
of the vested warrants as determined using the Black Scholes pricing model.


                                       53
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


OTHER OPTIONS

During September 1996, the Company issued options to certain officers and
directors to purchase 620,000 shares of the Company's common stock, of which
420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. Options
expire ten years from the date of grant. The exercise price of the options is
equal to the market value of the Company's stock on the date of grant. There
were no stock option exercised during the year ended December 31, 2003 and the
nine months ended December 31, 2002. At December 31, 2003, 400,000 options were
outstanding and exercisable.

During March 1999, the Company issued options to certain employees and
consultants to purchase 20,000 shares of the Company's common stock, all of
which vested on the first year anniversary of the date of the grant. The options
expire six years from the date of the grant. The exercise price of the options
is equal to the market value of the Company's common stock on the date of the
grant. There were no stock options exercised during the year ended December 31,
2003 and the nine month period ended December 31, 2002. At December 31, 2003,
10,000 options were outstanding and exercisable.

ACCOUNTING FOR STOCK-BASED COMPENSATION

The Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its options. During the year ended December 31, 2003 and the nine
months ended December 31, 2002 the Company had recorded no compensation expense
as no options were granted to employees below market value.

Details of the options granted are as follows:

<TABLE>
<CAPTION>
                                                                                Weighted Average            Option Price
                                                               Shares          Exercise Price ($)          Per Share ($)
                                                          -----------------   ----------------------    ---------------------
<S>                                                       <C>                 <C>                       <C>
Options outstanding at March 31, 2002                            4,928,260                     1.92            0.12 to 36.44
     Granted                                                       838,000                     0.44             0.16 to 0.79
     Canceled                                                  (2,099,158)                     1.84            0.12 to 36.44
     Exercised                                                           -                        -                        -
                                                          -----------------   ----------------------    ---------------------

Options outstanding at December 31, 2002                         3,667,102                     1.62            0.12 to 35.03
                                                          -----------------   ----------------------    ---------------------
     Granted                                                             -                        -
     Canceled                                                  (1,821,947)                     3.55            0.12 to 33.44
     Exercised                                                           -                        -

Options outstanding at December 31, 2003                         1,845,155                     1.52            0.12 to 35.03
                                                          -----------------   ----------------------    ---------------------

Options exercisable at December 31, 2003                         1,586,426                     1.37       $    0.12 to 35.03
                                                          -----------------   ----------------------    ---------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                      Weighted
                                                        Weighted Average         Weighted                              Average
                                  Number               Remaining Years of         Average            Number           Exercise
    Range of Exercise          Outstanding              Contractual Life      Exercise Price       Exercisable          Price
<S>                         <C>                       <C>                     <C>                 <C>               <C>
$0.00 - 7.53                         1,774,990                         3.2             $ 0.98         1,549,826            $ 1.02
$7.54 - 15.06                           57,105                         4.0              11.60            24,100              8.83
$15.06 - 22.59                           3,000                        1.05              22.00             3,000             22.00
$22.59 - 30.12                           1,500                        1.26              29.25             1,500             29.25
$30.12 - 37.65                           8,560                        1.44              34.47             8,000             34.43
                            -------------------       ---------------------   ----------------    --------------    --------------

$0.00 - 37.65                        1,845,155                        3.21              $1.52         1,586,426             $1.37
                            ===================       =====================   ================    ==============    ==============
</TABLE>


                                       54
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


9. COMMITMENTS

Operating Leases

The Company entered into a lease on August 1, 2003 for approximately 7,000
square feet for its principal executive offices at 120 Corporate Blvd., South
Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003
through July 2006. The Company is also obligated to make additional payments to
the landlord relating to certain taxes and operating expenses.


As a result of the Company being notified by the landlord of their intent to
cancel its lease effective August 15, 2003, the Company no longer occupies the
space at 1551 S. Washington Avenue, Piscataway, New Jersey. The Company entered
into the lease on February 18, 1999 for approximately 26,247 square feet for its
principal executive offices. On March 17, 2003, the Company signed an amendment
with the landlord reducing the space from 26,247 to 12,722 square feet and the
rent from $50,153.64 to $20,143.17 per month effective March 1, 2003. The
Company was also obligated to make additional payments to the landlord relating
to certain taxes and operating expenses.


The Company abandoned the lease space at 48834 Kato Road, Fremont, California in
the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is
for a term of 60 months with monthly rent payable by the Company to the landlord
as follows: $7,360 per month for the first 12 months of the term; $7,590 per
month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for
months 37-48; and $8,280 per month for months 49-60. The Company entered into an
abandonment agreement with the landlord in March of 2003. As a result, the
Company recorded a one-time restructure charge of $ 139,610 in the quarter
Capital Leases Operating Leases ended March 31, 2003. This amount represents the
total lease payments from December 2002 to May 2004 offset by landlords stated
sub-lease rental payments. However, the Company and Landlord have no settlement
agreement in place at this time.

The Company leases certain equipment under agreements which are classified as
capital leases. Each of the capital lease agreements expire within five years
and have purchase options at the end of the lease term.

Future minimum payments, by year and in the aggregate, under non-cancelable
operating and capital leases as of December 31, 2003 are as follows:


                                              Capital Leases    Operating Leases
                                              ---------------   ----------------
Year ending December 31,
   2004                                        $      76,410      $     77,016
   2005                                                    -            77,016
   2006                                                    -            44,926
                                              ---------------    --------------

   Total minimum lease payments                 $     76,410      $    198,958
                                              ===============    ==============

Less amount representing interest                      2,859
                                              ---------------

Present value on net minimum lease payment      $     73,551
                                              ===============


Rent expense under operating leases for the year ended December 31, 2003 and the
nine months ended December 31, 2002 was $210,796 and $1,165,118 (including a
charge of $508,458 for abandoning the Livingston, Scotland lease), respectively.


10.  CONTINGENT LIABILITIES

In the normal course of business the Company and its subsidiaries may be
involved in legal proceedings, claims and assessments arising in the ordinary
course of business. Such matters are subject to many uncertainties, and outcomes
are not predictable with assurance.


                                       55
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


11.  EMPLOYEE BENEFIT PLANS


Effective April 1, 1993, the Company adopted a defined contribution savings
plan. The terms of the plan provide for eligible employees who have met certain
age and service requirements to participate by electing to contribute up to 15%
of their gross salary to the plan, as defined, with the Company matching 30% of
an employee's contribution in cash up to a maximum of 6% of gross salary, as
defined. Company contributions vest at the rate of 25% of the balance at each
employee's second, third, fourth, and fifth anniversary of employment. The
employees' contributions are immediately vested. The Company's contribution to
the savings plan for the nine months ended December 31, 2002 was $26,342. As of
January 1, 2003, the Company per the provisions of the plan decided not to make
discretionary contribution until further notice.


12.  GEOGRAPHIC INFORMATION

The Company's headquarters, physical production and shipping facilities are
located in the United States. The Company's domestic and foreign export sales
for the year ended December 31, 2003 and the nine months ended December 31, 2002
are as follows:


                              Year Ended              Nine Months Ending
                           December 31, 2003          December 31, 2002
                          ---------------------    -------------------------

United States                  $     2,743,170              $     2,811,899
Europe                                 477,153                      430,859
Pacific Rim                            122,188                       48,685
Other                                      109                       43,717
                          ---------------------    -------------------------

                               $     3,342,620              $     3,335,160
                          =====================    =========================


The Company sold a substantial portion of its products to four customers. Sales
to these customers amounted to $1,562,410 (46% of net sales) and $1,591,107 (48%
of net sales) for the year ended December 31, 2003 and the nine months ended
December 31, 2002, respectively. For the year ended December 31, 2003, our most
significant customers were Avaya, Inc. (18% of net sales), Siemens (12% of net
sales), Qwest (9% of net sales) and MCI Worldcom (7% of net sales). For the
nine-months ended December 31, 2002, our most significant customers were SBC
(13% of net sales), Sprint (12% of net sales) Avaya Inc.(12% of net sales) and
Siemens (11% of net sales).

The loss of any of these four customers or a significant decline in sales
volumes from any of these four customers could have a material adverse effect on
the Company's financial position, results of operations and cash flows.

13.  CONCENTRATION OF CREDIT RISK

The Company maintains deposits in a financial institution which is insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December
31, 2003 and periodically throughout 2003, the Company had deposits in this
financial institution in excess of the amount insured by the FDIC.

The Company designs its products utilizing readily available parts manufactured
by multiple suppliers and the Company currently relies on and intends to
continue to rely on these suppliers. The Company has been and expects to
continue to be able to obtain the parts generally required to manufacture its
products without any significant interruption or sudden price increase, although
there can be no assurance that the Company will be able to continue to do so.

The Company sometimes utilizes a component available from only one supplier. If
a supplier were to cease to supply this component, the Company would most likely
have to redesign a feature of the affected device. In these situations, the
Company maintains a greater supply of the component on hand in order to allow
the time necessary to effectuate a redesign or alternative course of action
should the need arise.


                                       56
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


14.  SUPPLEMENTAL CASH FLOW INFORMATION


<TABLE>
<CAPTION>
                                                                            Year Ended        Nine Months Ending
                                                                         December 31, 2003     December 31, 2002
                                                                        -------------------- ----------------------
<S>                                                                     <C>                   <C>
Other Non-Cash Investing and Financing Activities
   Options and warrants issued to consultants as non-cash compensation     $          --        $        62,893
    Non-cash stock-based compensation charge                               $     (95,000)       $        95,000
</TABLE>


15.  RELATED PARTY TRANSACTIONS

         During April 2000, the Company issued a loan (the "Loan") to the former
Chief Executive Officer (the "Former CEO") of the Company in the amount of
$750,000. The Loan accrues interest at a rate of LIBOR plus 1%. This Loan had an
original maturity date of the earlier of April 2005 or thirty days after the
Company for any reason no longer employed the Former CEO.


The Former CEO resigned his position at the Company effective September 29,
2000. On October 5, 2000, the Company entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note for the Loan was amended to
extend the due date to April 30, 2001, and to provide that interest on the note
shall accrue through September 29, 2000. Pursuant to the terms of the Separation
and Forbearance Agreement between the Company and the Former CEO, the Former CEO
also agreed to reimburse the Company for certain expenses totaling $200,000, to
be paid over a period of six months ending March 31, 2001. During the year ended
March 31, 2001, $50,000 of the amounts owed to the Company by the Former CEO was
repaid and $22,000 has been recorded as a non-cash offset as a result of earned
but unpaid vacation owed to the Former CEO. During the year ended March 31,
2002, $813,593 was repaid. At December 31, 2003, the total amount owed to the
Company by the Former CEO was approximately $175,154, which includes interest
accrued through December 31, 2003. The full amount has been recorded as a
reserve against the note receivable. The Company will continue to attempt to
collect the note receivable.


The Company entered into a definitive Sublease Agreement with Multipoint
Communications, LLC (the "Tenant") on April 17, 2002 to sublease approximately
5,400 square feet of its facility for a period of 24 months. As part of the
rental payment the Company was to be issued shares totaling the value of
$77,400, which shall be based on the per share price of the Tenant's common
stock as priced in the first round of institutional financing (the "Financing")
which was intended to close on or before June 30, 2002. The Financing did not
close by June 30, 2002, consequently, the Tenant was required to pay the Company
additional rent in the amount of $4,300 per month commencing on July 1, 2002.
The Chairman of the Board of Directors of the Company served as a Chief
Financial Officer of the tenant until November 2002. On or about January 16,
2003, the Tenant voluntarily filed for Chapter 7 bankruptcy with the U.S.
Bankruptcy Court for the District of New Jersey. As a result, the Company wrote
off an amount of $122,550 which is included in selling, general and
administrative expenses.

16.  NEW ACCOUNTING PRONOUNCEMENTS


In January 2003, the FASB issued Interpretation No. 46 ("FIN 46", "Consolidation
of Variable Interest Entities, an Interpretation of ARB No. 51." FIN 46 requires
certain variable interest entities to be consolidated by the primary beneficiary
of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
financial support from other parties. FIN 46 is effective for all new variable
interest entities created or acquired after January 31,2003. For variable
interest entities created or acquired prior to February 1, 2003, the provisions
of FIN 46 must be applied for the first interim or annual period beginning after
December 15, 2003. In December 2003, the FASB issued Interpretation No. 46R
("FIN 46") which revised certain provisions of FIN 46. Publicly reporting
entities that are small business issuers may apply FIN 46R to all entities
subject to FIN 46R no later than the end of the first reporting period that ends
after December 15, 2004 (as of December 31, 2004, for a calendar enterprise).
The effective date includes those entities to which FIN 46 had previously been
applied. However, prior to the application of FIN 46R, a public entity that is a
small business issuer shall apply FIN46 or FIN 46R to those entities that are
considered special-purpose entities no later than as of the end of the first
reporting period that ends after December 15, 2003(as of December 31, 2003 for
the calendar year).


In April 2003, SFAS 149, "Amendment of Statement 133 on Derivative Instruments
and Hedging Activities" (SFAS 149) was issued. SFAS 149 amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives) and for hedging activities under FASB statement No. 133 ("SFAS
133"), " Accounting for Derivative Instruments and Hedging Activities". This
statement is effective for contracts entered into or modified after June 30,
2003.


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<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


During 2003, SFAS150, "Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" ("SFAS 150") was issued. SFAS
150 establishes standards for classification and measurement of certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain cases). The provisions of SFAS 150 are
effective for instruments entered into or modified after May 31,2003 and
pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted
to indefinitely defer the effective date of SFAS 150 for mandatory redeemable
instruments as they relate to minority interests in consolidated finite-lived
entities through the issuance of FASB Staff Position 150-3.

In December 2003, a revision of SFAS 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued, revising disclosures about
pension loans and other post retirements benefits plans and requiring additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans.

The Company expects that the adoption of the new statements will not have a
significant impact on its financial statements.


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<PAGE>

                                  EXHIBIT INDEX
                                  -------------

Exhibit
No.           Description
-------       -----------

3.1            Certificate of Incorporation of the Company, as filed with the
               Secretary of State of the State of Delaware on August 5,
               1998./(2)/

3.2            Certificate of Amendment of the Certificate of Incorporation, as
               filed with the Secretary of State of the State of Delaware on
               December 11, 1998./(2)/

3.3            Certificate of Amendment of the Certificate of Incorporation, as
               filed with the Secretary of state of the State of Delaware an
               October 12, 1999./(3)/

3.4            By-Laws of the Company./(2)/

3.5            Form of Specimen Common Stock Certificate of the Company./(4)/

4.1            1994 Stock Option Plan of the Company. /(1)/

4.2            1998 Stock Option Plan of the Company./(2)/

4.3            1998 U.K. Sub-Plan of the Company, as amended./(2)/

4.4            Amended and Restated Certificate of Designation of Rights
               Preferences, Privileges and Restrictions of Series A Preferred
               Stock of ION Networks, Inc. /21/

4.5            2000 Stock Option Plan of the Company./(17)/

4.6            2002 Stock Option Plan of the Company./(19)/

4.7            Form of Warrant Agreement dated July 17, 2001./(13)/

4.8            Form of Warrant Agreement dated January 4, 2002./(13)/

4.9            Form of Non-Qualified Stock Option Agreement dated March 19, 1999
               by and between the Company's predecessor, Microframe, Inc. and
               its consultants./(13)/

4.10           Form of Non-Employee Director Stock Option Contract dated March
               10, 1998 between the Company's predecessor, Microframe, Inc. and
               its non-employee directors./(13)/

4.11           Form of Non-Employee Director Stock Option Contract dated
               September 17, 1997 by and between the Company's predecessor,
               Microframe, Inc. and its non-employee directors./(13/)

4.12           Form of Non-Qualified Stock Option Agreement dated September 25,
               1996 by and between the Company's predecessor, Microframe, Inc.
               and its employees./(13)/



                                       59
<PAGE>

Exhibit
No.           Description
-------       -----------

4.13           Amended and Restated Non-Qualified Stock Option Agreement dated
               May 19, 1997 by and between the Company's Predecessor,
               Microframe, Inc. and its employees./(9)/


10.3           Agreement dated as of December 19, 1994 by and between LeeMAH
               DataCom Security Corporation and Siemens Rolm Communications
               Inc./(4)/

10.4           Equipment Lease Agreements dated June 10, 1999 and May 5, 1999 by
               and between the Company and Siemens Credit Corporation./(4)/

10.5           Equipment Lease Agreement dated June 17, 1999 by and between the
               Company and Lucent Technologies./(4)/

10.6           (i) Non-negotiable Promissory Note in the principal amount of
               $750,000 issued by Stephen B. Gray to the Company./(5)/

               (ii) First Amendment to Promissory Note dated as of August 5,
               2000 by and between the Company and Stephen B. Gray./(5)/

10.7           Line of Credit Agreement with United Nations Bank dated September
               30, 1999./(5)/

10.8           (i) Separation and Forbearance Agreement made as of October 5,
               2000 between the Company and Stephen B. Gray./(7)/

               (ii)Promissory Note in the amount of $163,000 dated October 5,
               2000 made by Stephen B. Gray to the Company./(7)/

10.9           Materials and Services Contract dated January 16, 2001, between
               the Company and SBC Services, Inc./(8)/

10.10          Stock Purchase Agreement dated August 11, 2000 by and between the
               Company and the parties identified therein./(8)/

10.11          Purchase Agreement by and between the Company and the Selling
               Shareholders set forth therein dated February 7, 2002./(18)/


10.12          Employment Agreement dated October 4, 2001 between the Company
               and Kam Saifi./(11)/

10.13          Employment Agreement dated October 17, 2001 between the Company
               and Cameron Saifi./(12)/

10.14          Sublease Agreement dated April 17, 2002 between the Company and
               Multipoint Communications, LLC./(14)/



                                       60
<PAGE>


Exhibit
No.           Description
-------       -----------

10.15          Agreement and General Release dated August 15, 2002 between the
               Company and Ron Forster./(16)/

10.16          Rescission Agreement dated September 29, 2002 between the Company
               and David Arbeitel./(16)/

10.17          Separation Agreement and General Release dated October 31, 2002
               between the Company and David Arbeitel./(16)/

10.18          Employment Agreement dated May 20, 2002 between the Company and
               Ted Kaminer./(15)/

10.19          Employment Agreement dated February 25, 2002, between the Company
               and William Whitney./21/

10.20          Employment Agreement dated August 15, 2003, between the Company
               and Norman E. Corn./22/

10.21          Employment Agreement dated September 15, 2003, between the
               Company and Patrick E. Delaney./20/

10.22          Lease Agreement dated July 21, 2003 by and between the Company
               and 116 Corporate Boulevard, LLC, Inc.*

16.1           Letter dated October 31,2003, from Deloitte & Touche, LLP. to the
               Securities and Exchange Commission./(10)/

21.1           List of Subsidiaries./(14)/

31.1           Certification of CEO Pursuant to Section 302 of the Sarbanes
               Oxley Act of 2002.*

31.2           Certification of CFO Pursuant to Section 302 of the Sarbanes
               Oxley Act of 2002.*

32.1           Certification of CEO Pursuant to Section 906 of the Sarbanes
               Oxley Act of 2002.*

32.2           Certification of CFO Pursuant to Section 906 of the Sarbanes
               Oxley Act of 2002.*


(1)   Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on August 15, 1995.

(2)   Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on April 22, 1999.

(3)   Incorporated by reference to the Company's Registration Statement on Form
      S-8 filed on March 17, 2000.

(4)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended March 31, 1999.

(5)   Incorporated by reference to the Company's Annual Report on Form 10-KSB
      filed on June 28, 2000.

(6)   Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on March 12, 1999.

(7)   Incorporated by reference to the Company's Quarterly report on Form 10-QSB
      filed on November 14, 2000

(8)   Incorporated by reference to the Company's Annual report on Form 10-KSB
      filed on June 29, 2001.

(9)   Incorporated by reference to the Company's Registration Statement on Form
      S-8 filed on November 17, 2000.

(10)  Incorporated by reference to the Company's Annual report on Form 8-KSB
      filed on October 31, 2003.

(11)  Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on October 23, 2001.


                                       61
<PAGE>


(12)  Incorporated by Reference to the Company's Current Report on Form 8-K
      filed on October 24, 2001.

(13)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended March 31, 2002, as filed on July 1, 2002.

(14)  Incorporated by reference to the Company's Annual Report on Form 10-KSB/A,
      Amendment No.2, for the fiscal year ended March 31, 2002, as filed on
      August 2, 2002.

(15)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on August 14, 2002.

(16)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on November 14, 2002.

(17)  Incorporated by Reference to the Company's Registration Statement on Form
      S-8 filed on January 11, 2002.

(18)  Incorporated by Reference to the Company's Registration Statement on Form
      S-3 filed on March 4, 2002.

(19)  Incorporated by Reference to the Company's Definitive Proxy Statement
      filed on September 16, 2002.

(20)  Incorporated by reference to the Company's Quarterly Report on Form 10-QSB
      filed on November 17, 2003.

(21)  Incorporated by reference to the Company's Annual Report on Form 10-KSB
      for the fiscal year ended December 31, 2002, as filed on April 15, 2003.

(22)  Incorporated by reference to the Company's Quarterly Report on Form 10QSB
      filed on September 12, 2003.

* Filed herewith


                                       62