U.S. 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 March 31, 2001

                                       OR

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

         For the transition period from ____________ to ____________

                          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 Identification Number
    Incorporation or Organization

1551 South Washington Avenue, Piscataway                     08854
---------------------------------------   --------------------------------------
(Address of Principal Executive Offices)                   (Zip Code)

Issuer's telephone number, including area code:  (732) 529-0100
                                                 --------------

Securities registered under Section 12(b) of the Exchange Act:  None
                                                                ----

Securities registered under Section 12(g) of the
Exchange Act:                                      Common Stock, $.001 par value
                                                   -----------------------------

|X|    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.

[ ]    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 fiscal year totaled $11,676,547.

The aggregate market value of the voting stock held by non-affiliates computed
by reference to the average of the bid and asked prices as reported by the
Nasdaq Stock Market as of June 25, 2001 was approximately $10,501,434.

There were 18,203,302 shares of Common Stock outstanding as of June 25, 2001.

DOCUMENTS INCORPORATED BY REFERENCE: Portions of the issuer's Definitive Proxy
Statement for the 2001 Annual Meeting of Stockholders of the Company are
incorporated by reference into Part III hereof.

<PAGE>

                                     PART I

ITEM 1.         DESCRIPTION OF BUSINESS
                -----------------------

GENERAL

         ION Networks, Inc., ("ION" or the "Company") is a developer and
manufacturer of software and hardware solutions for monitoring and managing
mission critical voice and data network infrastructure. ION is a Delaware
corporation founded in 1999 through the combination of two companies focused on
network management products - MicroFrame, Inc., 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). In 1999 the Company expanded its
technology base through the purchase of certain assets of LeeMAH DataCom
Security Corporation ("LeeMAH"), a California corporation.

         ION designs and manufactures next-generation secure, proactive and
anticipatory network infrastructure management products. ION's products monitor
and analyze the performance of a wide range of devices, e.g. PBXs, routers,
Digital Subscriber Line Access Multiplexers (DSLAMS), and links in a network to
determine if a network is working properly. The Company's products are used to
collect and analyze data about the network and make meaningful decisions about
them. If the network is working erratically, ION's products are often able to
determine the cause of the problem and attempt to fix it automatically. As a
result, ION's products improve network performance and assist the businesses or
institutions that are dependent on networks to be more effective.

         ION's customers are businesses that provide voice and data network
services to businesses and consumers, and large enterprises or institutions
which need networks to manage their business operations. ION's customers'
networks support a variety of uses, e.g., telecommunications, email, accounting
and other financial systems, word processing, engineering and manufacturing,
e-commerce, and various outsourced and managed network services. Today these
customers constitute two market segments which ION addresses:

o    alarming and translation, a relatively small segment of about $400 million
     per year requiring secure access into the console ports of network devices
     for the purpose of maintenance, intelligent alarm management, or the
     translation of proprietary alarms into recognized standards

o    performance analysis and restoration, a larger (approximately $1 billion)
     rapidly growing market for the proactive and anticipatory analysis and
     automated restoration of degraded performance in data networks.

         The Company believes that a variety of factors will drive significant
growth in these markets. Because the number of business functions carried over
communications networks has greatly expanded in recent years, businesses are now
dependent on networks to support their most critical functions. The number of
tasks that networks are used for and the volume of data that networks handle has
increased network complexity exponentially. To manage this complexity, many
enterprises have outsourced their network operations to service providers.
However, to gain outsourcing contracts, service providers must guarantee a
certain level of performance and return some payments if the guarantees are not
met. Accordingly, both enterprises and service providers are demanding products
that can prevent networks from suffering expensive and disruptive "down time"

                                      -2-
<PAGE>

or from reducing employee productivity through long response times.

         To meet these demands, ION offers a family of next-generation network
infrastructure management products called PRIISMS Suite. PRIISMS Suite is an
integrated suite of hardware and software for end-to-end network infrastructure
management that captures knowledge from network experts and automates their
analysis, decision making and actions, in effect making PRIISMS Suite a Virtual
Network Expert(TM). PRIISMS Suite consists of various intelligent devices1
("ION's Devices") for remote monitoring and management of network devices and
links, and a central server, PRIISMS2 Manager, which manages the devices and
monitors the network from end-to-end.

         ION's PRIISMS Suite enhances the performance of existing networks,
allowing network managers to defer or sometimes eliminate the need to incur
significant expense in upgrading their networks. ION's products work with many
types of network devices and with devices from many different vendors. Because
PRIISMS Suite is scalable, provides predictive and real-time problem
identification (Root Cause Analysis), can act to diagnose and resolve problems,
makes efficient use of network resources and bandwidth, and can be customized,
ION believes its products enhance the economic value of its customers' networks.
Because problems are diagnosed and resolved quickly, service providers improve
their quality of service and limit the need to pay refunds to their customers.
User dissatisfaction and customer defections are reduced. Additionally,
expensive visits by repair technicians to remote sites are limited, because the
expertise of this scarce resource is extended throughout the network. In
addition, ION Devices provide uncompromised security for themselves and for the
network devices being managed, thereby protecting the maintenance ports of these
devices which are often unsecured and vulnerable to unauthorized access by
hackers.

         ION has a well-recognized customer base of more than 150 customers who
use the products in over 10,000 locations. ION's largest customers are
telecommunications companies of all kinds, primarily in the United States and in
Europe, as well as large enterprises and institutions. The Company's products
are sold direct to service providers and enterprises, through resellers, and
through networking original equipment manufacturers (OEMs).

THE PRODUCTS

         All of ION's products fall within the PRIISMS Suite, an integrated
suite of hardware and software products for end-to-end network performance
monitoring and management that captures knowledge from network experts and
automates their analysis, decision making and actions. Currently, the PRIISMS
Suite consists of various different intelligent devices and a centralized
software manager, called the PRIISMS Manager.

ION'S DEVICES

         One of ION's core product strategies is to offer a family of Devices
that match customers' requirements over a range of capabilities from simple
alarm detection and reporting to sophisticated analyses which determine the
cause of a network problem and attempt to fix it immediately. ION's Devices have
the following capabilities:

------------------------------------
1   Intelligent devices are those that contain programmable microprocessors
2   Proactive, real-time, integrated, intelligent, secure, metric-based solution

                                      -3-
<PAGE>

o    Intrusion Prevention - DES-encrypted challenge-response authentication
     ensures that only authorized personnel can obtain information from or send
     instructions to ION's Devices or to the network devices they manage. Users
     can logon to one of ION's Devices and get a real-time view of network
     functionality as well as perform maintenance/upgrade activities. Their
     actions are logged for later audit.

o    Alarm Management - When a process running on a network device exceeds
     preset thresholds, the device generates an alarm. ION's Devices detect
     these alarms, sort and analyze them using AMT (see below), take appropriate
     action in response, and report them to the Network Operations Center. ION's
     Devices also generate alarms when unauthorized access or power loss occurs.
     All events and alarms are logged for later audit.

o    Custom AMT Modules - Active Management Technology ("AMT") is the method
     whereby ION's Devices capture knowledge from network experts and automate
     their analysis, decision making and actions. How network experts analyze
     data, the decisions they make about the data and analyses, and the
     resulting actions they take can be codified in a series of rules, or a
     "routine", that ION's Devices can execute. As a result, the network
     expert's ability to sort and handle alarms and to identify and solve
     network problems can be implemented across the entire network. The routines
     can be executed automatically, fixing many network faults without the need
     for human intervention.

o    Data Buffering - Data collected from network devices such as PBXs or
     servers can be automatically formatted for later viewing or for downloading
     to other applications such as billing systems.

o    Environmental Monitoring - Network devices can be impacted by environmental
     factors, e.g., heat, water, intruders. ION's Devices detect and report
     various environmental changes.

o    SNMP Device Monitoring and Management - SNMP (Simple Network Management
     Protocol) is a widely used standard method of communicating with many
     network devices. This standard also specifies what kind of information is
     available about the network device and how it is collected. ION's Devices
     can collect, report, and analyze information from any network device that
     conforms to this standard. In passive monitoring, network devices notify
     ION's Devices of unusual events, and action is taken. In active monitoring,
     ION's Devices poll network devices checking for changes which could
     indicate a developing problem. This allows ION's Devices to anticipate
     problems and to take action before problems become severe.

o    SNMP Traps - ION's Devices can collect data from network devices that do
     not conform to the SNMP standard and convert the data into SNMP, the
     standard for Internet Protocol (IP) networks. Then the network devices can
     take advantage of the most advanced and powerful network management tools.
     One example of non-SNMP devices are some of the optical switches, those
     network devices which communicate using photons rather than electrons, and
     are currently the most advanced switching technology commercially
     available.

o    RMON Monitoring - R(emote) MON(itoring) is a standard method for collecting
     and analyzing data from IP-based network devices and the links between the
     devices. RMON is an extension of SNMP that performs data collection and
     analysis about network performance at remote locations.

                                      -4-
<PAGE>

     Because information is not constantly reported to a central site, RMON uses
     less network capacity than does SNMP as it continuously collects fault,
     configuration, and performance data, as well as running diagnostics and
     logging performance information. RMON analyses the network traffic for each
     protocol used by the network and for each application running on the
     network, thereby producing information about all levels of the network.

o    "Out-of-the-Box" AMT - ION makes available a library of measurement and
     action routines for analyzing network data, making decisions and taking
     action. These routines are much more comprehensive than those in RMON and
     are designed to be useful to most network managers. They are
     exception-based and report only the most important information from the
     remote site, making the most productive use of expensive network bandwidth
     and of the network engineer's time. Among the available routines are
     products which analyze the performance of routers, LANs, LAN Switch ports,
     and WANS and which perform translations and mappings of various network
     management protocols/systems from one to another.

         ION's Devices are based on a common framework and offer subsets of the
capabilities described above so as to meet the needs of different customer
segments. The most economical devices provide only secure access to network
devices and a log of any user activities, whereas the most versatile device,
NetwoRx, manages an entire remote location providing a wide range of analyses
and anticipatory action to solve network problems before they become severe. The
Company believes these products have valuable distinguishing capabilities that
limit the level of direct competition.

ION's PRIISMS Suite:

o    employs a distributed architecture - Intelligent hardware devices at remote
     locations ensure that the system scales so it can monitor large, diverse or
     highly distributed networks without performance degradation. ION's Devices
     poll network devices every five seconds so the performance information is
     collected in real-time. Data collection and analysis occur at remote
     locations without human intervention, resulting in considerable savings to
     the customer. In addition, this type of analysis ensures that only true
     problems are reported (exception reporting) to the central manager, thereby
     minimizing the system's use of the customer's valuable bandwidth.

o    collects and reports information, analyzes and anticipates network problems
     - Standardized network management data are collected: SNMP MIB data, SNMP
     Traps (alarms), RMON1, RMON2, console port data, ASCII, TL1, humidity,
     temperature, and physical intrusion. Various kinds of analyses include:
     translating between data types, creating Traps, RMON statistics,
     measurements of router health, measurements of Ethernet LAN health,
     measurements of PVC status and utilization, measurements of LAN switch and
     port health, utilization levels of applications and of protocols, and
     histories.

o    recommends and takes action - ION's unique AMT automatically takes action
     to resolve network problems. For example, ION's Devices can be programmed
     to reboot a device when a particular condition is detected. In addition,
     they can take a network link up or down, create a Trap, notify a person,
     collect many kinds of additional diagnostic information, etc.

                                      -5-
<PAGE>

o    operates during power or network outage - ION's Devices have battery
     back-up and secure out-of-band (dial-up) access so they continue to
     function when network devices are down. As a result, an authorized network
     engineer can determine the cause of a problem and even repair it when other
     network management systems, which are dependent on a functioning network,
     would be unable to operate.

o    provides secure access and communication - ION's Devices, the central
     servers which manage them, and the network devices which are being
     monitored will allow only authorized users to access them. ION's system
     conforms to Security Industry Standards and provides authentication, access
     control, authorization and an audit trail.

o    can be customized to fit any environment - All networks are different. A
     customer can set/modify thresholds and parameters for any of the
     measurement and action routines which ION provides. In addition, since all
     networks are different, ION provides a scripting capability which allows
     customers, or ION's professional services employees, to develop customized
     routines.

PRIISMS Manager

         PRIISMS Manager consolidates the information from multiple ION Devices
so customers have a picture of the activity on their whole network. PRIISMS
Manager manages all of ION's Devices, and, because ION's Devices can manage many
types of network devices, PRIISMS Manager provides a centralized system for
management of multi-element, multi-vendor networks. PRIISMS Manager is a
centralized navigation, configuration and alarm handling tool which:

o    has a web-based Graphical User Interface (GUI) for navigating among the
     devices and managing alarms and events

o    polls the devices to determine their state and monitors devices in
     real-time both using the network and using dial-up (out-of-band)
     connections if the network has an outage

o    manages the database of users and access levels by establishing passwords
     for the devices, administering and aging them, and controlling the criteria
     for who can gain access to ION's Devices and to the network devices that
     are being managed

o    sets up and changes the configurations of ION's Devices, groups them so
     they can be managed in categories, and stores configurations for re-load if
     necessary

o    remotely upgrades software releases on the ION devices

o    for NetwoRx, the most capable ION device, displays RMON statistics, allows
     users to configure thresholds and parameters of the various Out-of-the-Box
     AMT routines, and provides information from all of ION's Devices in the
     network, providing an enterprise-wide view.

                                      -6-
<PAGE>

SUPPORT SERVICES

         In addition to hardware and software products, ION provides a full
range of support services including software and hardware maintenance
agreements, on-site and in-house training, product installation and
configuration, customization, technical support and a help desk.

TARGET  MARKETS - DEFINITION AND DRIVERS

         Today most businesses cannot operate effectively or efficiently without
their networks, and some businesses cannot operate at all. This dependency on
networks began to develop in the mid-1980s as advances in technology made
networking devices affordable to large enterprises and institutions. These same
advances began to render obsolete the network devices used by network services
providers, such as telephone and cable companies. The result was billions of
dollars were spent on networking devices and on connecting them together.

         The availability of reliable, affordable networks encouraged the
development of enterprise-wide computing systems and of network-based
applications such as integrated finance-manufacturing-human-resources systems,
relational databases, e-mail, intranets, data-mining, customer relationship
management, and others. Also, new kinds of networking service providers emerged
such as web-hosting companies, Internet service providers (ISPs), application
service providers (ASPs), and PBX/LAN managed service providers.

         Businesses such as those described above cannot run without their
networks because their most critical activities are dependent on the network. As
a result of their dependency on networks, many businesses experience
considerable expense. If the network is not running properly, employee
productivity can be reduced, as employees are unable to do their jobs
effectively. Many businesses suffer loss of revenues as customers using the
network seek elsewhere for their goods and services. Infonetics, a technology
market research company, estimates that the average Fortune 1000 company loses
$5.5 million in revenues and $8.7 million in employee productivity each year due
to LAN or WAN downtime or degraded performance. Network managers scramble to fix
ill defined problems as users wait for the network to recover and as their
well-trained engineers leave for better jobs in the highly competitive career
marketplace. Service providers with contractual commitments to provide certain
levels of network availability to their customers are forced to return payments
to customers. Entire operations come to a halt as network security is breached,
and systems stop functioning or are reconfigured by unauthorized personnel.

         These problems only become more difficult when the network must deliver
functionality to globally distributed workers, applications, supply chains and
enterprises. As new network technologies are developed, enterprises implement
them to achieve better performance and cost savings. This is a constant process
which increases the complexity of the network and of the problems that can
occur. To alleviate the pressure of dealing with these issues, large enterprises
and institutions are outsourcing more and more of their network and
applications. However, the businesses that provide these services must meet
negotiated contractual commitments for performance (Service Level Agreements or
SLAs), and, to the extent they are not met, must refund payments.

                                      -7-
<PAGE>

         To an enterprise or a service provider, network performance problems
represent real economic loss. For example, according to one of the Company's
customers, dispatching a technician to reboot a router in the local area can
cost between $200 and $400; most technicians are charged out at $250/hour, and
their average job is $1,000. The cost of a network outage can raise operating
costs by 50% from $1.00/hour/user to $1.50/hour/user. Other customers have
described a typical repair cycle for a large network as: 20 minutes to detect a
problem, 30-120 minutes to diagnose the problem, and 60-120 minutes to implement
the solution. An Internet Service Provider (ISP) with 1200 business customers
who must return $1000-2000/hour/customer for an outage, can incur as much as
$10,000,000 in penalties in just four hours.

         To reduce the impact of dependency and economic loss, most networks
employ some form of network management. However, most of these solutions have
limitations. Most deliver technical data in large quantity. Often the data reach
the network engineer after a problem has occurred and without identifying its
cause, which must still be determined by the network engineer before he can fix
it. Determining the root cause of the problem can take up to 75% of the
engineer's time, from when a problem is identified until it is fixed. When
mission-critical applications are unavailable, this delay is very apparent to
network users trying to conduct business. More problematic is how many
potentially revenue-producing customers could not get onto the network and took
their business elsewhere.

         Because of these problems, network mangers and users are starting to
demand network infrastructure management products that:

o    are able to determine how network users are impacted by the underlying
     network problems.

o    not only deliver data to engineers, but also automate some of the
     engineer's analyses and activities, making him more productive.

o    can identify network problems in real-time or even before they happen.

o    can perform sophisticated analyses that send only the most important
     information to the engineer. The information should be easily understood,
     and the cause of the problem should be identified allowing engineers to
     skip the lengthy diagnosis phase. Fixing the problem automatically is
     highly desirable.

o    redirect network traffic to maximize network capacity and avoid bottlenecks
     and network faults.

o    provide business solutions, not just network management solutions, allowing
     the business to increase the returns it can earn.

         The market for these products is segmented, and the segments have
somewhat different characteristics. ION addresses two of these, which, based on
market research conducted in the summer of 2000 by Enterprise Management
Associates and supplemented by research from International Data Corporation, can
be described as follows:

o    alarming and translation: approximately $200-400 million a year with a
     growth rate of approximately 7-8% per year on a worldwide basis

                                      -8-
<PAGE>

o    performance analysis and restoration: approximately $1.1 billion a year
     with a growth rate of 30% per year on a worldwide basis.

         The Company believes it products are uniquely suited to meet the needs
of these market segments. Its distributed architecture easily scales to manage
large, diverse and highly distributed networks while performing predictive and
real-time problem identification. ION's Devices have the ability to act to
diagnose and resolve problems even during power or network outages. Because
analysis and actions occur at the distributed locations, ION's products make
efficient use of network resources and expensive bandwidth while providing the
flexibility for customization to fit any network. The result of these
characteristics is real economic benefit. Quality of service is increased and
the time to diagnose and resolve problems (mean-time to repair or MTTR) is
reduced thereby limiting service providers' need to make refunds to customers.
End user and customer dissatisfaction is minimized improving employee
productivity and customer loyalty. Expensive visits to diverse and remote
locations are limited. The Virtual Network Expert extends the expertise of
scarce resources across the entire network and assists human engineers to solve
problems more effectively and efficiently.

         MARKETING AND DISTRIBUTION

         On March 31, 2001, the Company's sales force stood at seventeen (17).
The Company goes to market through three channels: direct sales, resellers, and
OEMs. In FY2001 approximately 57% of sales were direct to customers such as SBC,
Worldcom Inc, Rhythms NetConnections and Oracle Corporation. Approximately 22%
went through resellers such as Siemens of North America and Celestica, Inc. An
additional 15% were employed by managed service providers such as KPN - Telecom
BV and Qwest, while 6% were to OEMs such as Avaya.

         In FY2001, ION had over 150 customers with products deployed at more
than 10,000 locations worldwide. ION's largest customers are telecommunications
service providers primarily in the United States and Europe. Approximately 85%
of sales were in the United States and 15% elsewhere, although many of the
customers are multi-nationals who employ the products around the world.

COMPETITORS

         The table below shows the eight companies that the Company believes are
most likely to become ION competitors. The table describes the core strength of
the company, its current products, the way it positions itself in the
marketplace. Currently ION has little direct competition, and the market it
addresses is emerging and both highly fragmented, with many new entrants, and
converging, with many companies expanding by acquisition from their initial
business to offer a more comprehensive solution. An indication of the emerging
nature of the market ION addresses is the size of the companies in this
industry. None has yet reached $125 million in annual sales.

         While not direct competitors, many companies position themselves in the
marketplace in much the same way as does ION. This can be very confusing to
potential customers because industry participants with very different products
claim to deliver similar benefits. Management believes ION currently has a
combination of distinguishing capabilities which are valued by the marketplace,
especially its uncompromised security, the ability to proactively anticipate
network

                                      -9-
<PAGE>

problems, and the ability to take the actions required to repair network
problems even during power or network outages without using up expensive network
bandwidth. These characteristics provide genuine economic benefit to customers
by increasing the quality of service delivered by the network and reducing the
time required to resolve problems.
<TABLE>
<CAPTION>
----------------- ------------------- -------------------------------- ----------------------------
    COMPANY         CORE STRENGTH                PRODUCTS                      POSITIONING
----------------- ------------------- -------------------------------- ----------------------------
<S>                <C>               <C>                              <C>
    Applied         Central Office    remote site monitoring for       AI products enable
   Innovation       mediation and     analog and relay contact alarm   carriers to efficiently
                    consolidation     signals                          monitor & manage their
                                                                       networks
----------------- ------------------- -------------------------------- ----------------------------
    Aprisma             Fault         fault management system with     A leader in e-business
                     management/-     monitoring and fault isolation   infrastructure management
                      monitoring                                       software
----------------- ------------------- -------------------------------- ----------------------------
    Concord           Reporting       software product suite for       Market leader in
Communi-cations     real-time and     real-time monitoring, alarm      next-generation management
                       historic       notifications & restart of       solutions that ensure
                     information      failed processes, end-to-end     effective e-business
                                      view of application              performance
                                      availability & performance
----------------- ------------------- -------------------------------- ----------------------------
   MicroMuse         Event/fault      monitors large-scale networks    Leading provider of fault
                      Management      in real-time to quickly          & service-level management
                     identify and address problems software
----------------- ------------------- -------------------------------- ----------------------------
    NetScout         Applications     comprehensive performance        Full-service provider of
                     performance      management system from           network performance
                   management using   integration of probes and        management solutions)
                   hardware probes    NextPoint application
                                      monitoring acquisition
----------------- ------------------- -------------------------------- ----------------------------
   Riversoft          Root cause      maps and monitors the network    The only provider of
                       analysis       isolating the room cause of      'interventionless' network
                                      the problem                      management tools
----------------- ------------------- -------------------------------- ----------------------------
     SMARTS           Root cause      pinpoints root cause of the      Real-time problem
                       analysis       problem, identifies impact and   diagnosis and impact
                                      automates response               analysis
----------------- ------------------- -------------------------------- ----------------------------
Visual Networks    WAN Measurement;   monitor service level            Leading provider of
                    QoS; Reporting    agreements                       Service Management Systems
                                                                       for IP networks
----------------- ------------------- -------------------------------- ----------------------------
</TABLE>

         There can be no assurance that the Company's PRIISMS Suite will
continue to enjoy acceptance or that the Company will be able to compete
successfully on an on-going basis. The Company believes that the principal
factors affecting competition in the network infrastructure management business
are (1) having a unique offering that provides demonstrable economic benefit to
the customer, (2) ease of use, including the level of internal integration which
supports efficient use by network personnel and of external integration,
partnerships and associations which allow the system to work with other network
management tools, (3) the flexibility to rapidly incorporate additional features
and customize products to unique needs of individual infrastructures, and (4)
for the low end of the product line, price. Although the Company believes that
its present products and services are competitive, the Company competes with a
number of companies with substantially larger financial, research and
development, marketing and technical resources. Such companies may succeed in
producing and distributing competitive products more effectively than the
Company and may also develop new products which compete effectively with those
of the Company.

                                      -10-
<PAGE>

SOURCES AND AVAILABILITY OF MATERIALS

         The Company designs its products utilizing readily available parts
manufactured by multiple suppliers and 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 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

         The Company has continued to expand its customer base and to broaden
its sales constituency. These efforts have resulted in the Company becoming less
reliant on any one particular customer. However, the Company sells a substantial
portion of its products to several major customers. The top two customers - SBC
Communications and Worldcom, Inc- accounted for 27.7% of revenues in FY2001. The
top six customers, which included Rhythms NetConnections, Celestica Inc, KPN -
Telecom BV, and Oracle Corporation, accounted for 51.2% of revenues in FY2001.

         Two of these largest customers - Celestica Inc and Oracle Corporation,
- were new to the Company during FY2001, and a large majority of the SBC
revenues were from a division which had not previously been a customer. The
Company issued a press release in January 2001 concerning significant new orders
from SBC's Advanced Solutions Inc. subsidiary, and these orders are part of the
results reported during FY2001, although the press release noted the expectation
of a greater number of orders. However, based on SBC's current requirements, the
Company does not anticipate any further orders from this particular subsidiary.

         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. 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 products.
However, the possibility of duplication of its products remains, and competing
products have already been introduced.

                                      -11-
<PAGE>

         The Company has trademark applications pending with the United States
Patent and Trademark Office for its corporate logo, ION Networks, Inc, it's
about availability. The Company anticipates that these trademarks will be
registered, but there can be no assurance that this will occur.

GOVERNMENTAL APPROVALS AND EFFECT OF GOVERNMENT REGULATION

         The Company's products 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 products to Cuba, Libya, Iran, Iraq, North Korea, Sudan
and Syria without a license. As with all U.S. origin items, the Company's
products 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 products 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 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.

         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.

         Although the Company has not experienced any difficulties obtaining
such approvals, failure to obtain approval for new and future products could
have a material adverse effect on the Company's business.

RESEARCH AND DEVELOPMENT ACTIVITIES

         During FY2001 the Company reduced its research and development
activities. After a restructuring in late November, 2000 designed to improve
operating performance, the R&D staff was reduced, primarily through the
elimination of the engineering department in Livingston, Scotland. Because the
Company had completed the development and released PRIISMS Suite 1.2, the
Company believes the current staff will be sufficient to allow it to keep up
with technology advances for the foreseeable future. The current staff has
completed and released PRIISMS Manager 1.3 in

                                      -12-
<PAGE>

June of 2001. This product extends the management capabilities described above
to all ION Devices. As a result of the changes, research and development funding
was reduced from $4,288,396 in FY2000 to $3,297,897 in FY2001.

         In conjunction with the restructuring of the Company and the
elimination of the engineering staff in Livingston, Scotland, the Company
recorded an impairment charge during the third quarter of FY2001 of
approximately $1,950,000 primarily relating to the abandonment of capitalized
core technology from the Solcom acquisition in 1999. Included in this charge was
the remainder of the Solcom-initiated development project Sentinel III which the
Company had re-badged and released in two versions - NetwoRx - O for optical
technology companies and NetwoRx - VT for CLECs - early in FY 2001.

         During the quarter ended September 30, 2000 the Company discontinued
the Solcom ASIC development project resulting in a write down of assets acquired
in the SolCom merger of $217,295. At the same time the Company also discontinued
several products acquired in the SolCom merger. The Company no longer sells
standalone probes or RMON engines, although the technology was integrated into
the NetwoRx product described above. The discontinuation resulted in a further
write down of the technology assets acquired in the merger of $271,010.

         The Solcom NetworX development project evolved into NetwoRx and was
included in the second release of the PRIISMS Suite in September 2000. NetwoRx
is ION's integrated platform for proactive, remote, real-time secure management
and monitoring of voice and date networks. The Company has discontinued early
versions of this product developed at Solcom resulting in a writedown of
approximately $643,000 of capitalized software during the quarter ended March
31, 2001.

COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

         The Company's business activities do not generally fall under
applicable regulations involving discharge of materials into the environment.

EMPLOYEES

         As of June 25, 2001, the Company had 65 employees, all of whom are
full-time employees, and of which 10 are technical personnel, 29 are in sales,
marketing and support, 13 are in production, and 13 are in executive, financial
and administrative capacities. None of the Company's employees are represented
by labor unions. The Company considers its relations with its employees to be
satisfactory.

RISK FACTORS

         In addition to those described above, the Company's business and
securities have certain risks associated with them including those described
below:

o    The Company's business is vulnerable to technological changes. Its markets
     experience rapid technological change, 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 the Company's position in

                                      -13-
<PAGE>

     existing markets or other markets that it chooses to enter. It is difficult
     to estimate the life cycles of ION's products and services, and future
     success will depend, in part, upon the Company's ability to enhance
     existing products and services and to develop new products and services on
     a timely basis. The Company 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
     flows, financial condition and the results of operations.

o    The Company cannot be certain about product development. It is common for
     hardware and software as complex and sophisticated as that incorporated in
     ION's products to experience errors or "bugs" both during development and
     subsequent to commercial introduction. The Company 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 the Company's competitive position.

o    The Company's quarterly and annual operating results - both revenues and
     income - may fluctuate. In the past, the Company has experienced
     fluctuations in quarterly and annual operating results, and these may
     continue. The Company has incurred significant losses and negative cash
     flows from operations, and these may continue. In future quarterly periods
     results of operations may be below prior results or below the expectations
     of public market analysts and investors. If this occurs, the price of the
     Company's common stock could significantly decrease.

o    The Company may need to raise money in the future. ION's business plan and
     growth strategy are dependent on its working capital. To the extent that
     expected revenue assumptions are not achieved, the Company will have to
     raise additional equity or debt financing and/or curtail certain
     expenditures contained in the current operating plans. There can be no
     assurance that additional financing will be available on acceptable terms
     or at all. If the Company is not able to secure additional financing on
     acceptable terms, the business may be negatively impacted, and the Company
     may not be able to execute its business and growth strategies.

o    The Company may be unable to protect its proprietary rights, permitting
     competitors to duplicate its products and services. ION Networks holds no
     patents on its technology. The Company has made a consistent effort to
     minimize the ability of competitors to duplicate the software technology
     utilized in its products. However, there remains the possibility of
     duplication, and competing products have already been introduced. Any such
     duplication by our competitors could negatively impact on our business and
     operations.

o    The Company's results depend on large orders from a changing group of
     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. The loss of any of these large customers, or the

                                      -14-
<PAGE>

     failure to attract new large customers would likely significantly decrease
     the Company's revenues and future prospects.

o    The Company depends upon key employees and members of management. Success
     depends in large part on their continued services. Competition for such
     personnel is intense, and the Company may not successfully attract,
     motivate and retain key personnel. The inability to hire and retain
     qualified personnel or the loss of the services of key personnel could have
     a material adverse effect upon the business, financial condition and
     results of operations. Currently, the Company does not maintain "key man"
     insurance policies for any employee.

o    The Company may have difficulty complying with government regulation. Due
     to the sophistication of the technology employed in ION's hardware, export
     of its products is subject to governmental regulation. As required by law
     or demanded by customer contract, the Company routinely obtains approval of
     products by Underwriters' Laboratories. Additionally, because many of the
     Company's products interface with telecommunications networks, Federal
     Communications Commission ("FCC") approval is necessary as well. The
     European Community is developing a similar set of requirements for its
     members, and the Company has begun the process of compliance for Europe.

o    There are limitations on the liability of ION's directors and officers. The
     Company's Certificate of Incorporation, as amended, and its Bylaws limits
     the liability of 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 for
     breach of a director's duties to the Company or to its stockholders except
     in certain limited circumstances. The Certificate of Incorporation, as
     amended, and the Bylaws also require the Company to indemnify its
     directors, officers, employees and agents serving at its 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, the Company's best interests. 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 the
     Company and its stockholders.

o    The Company does not anticipate the payment of dividends. It has never
     declared or paid cash dividends on its common stock and currently
     anticipates retaining all available funds for use in the operations of the
     business. The Company does not anticipate paying any cash dividends on
     common stock in the foreseeable future.

o    There is potential for fluctuation in the market price of the Company's
     securities. Because of the nature of the industry in which ION operates,
     the market price of its securities has been, and can be expected to
     continue to be, highly volatile. Factors such as announcements by ION or
     others of technological innovations, new commercial products, regulatory
     approvals, proprietary rights, or other competitive developments all may
     have a significant impact on the Company's future business prospects and
     the market price of its securities.

o    Shares that are eligible for sale in the future may affect the market price
     of the Company's

                                      -15-
<PAGE>

     common stock. As of June 25, 2001, an aggregate of 4,454,371 of the
     outstanding shares of common stock are "restricted securities" as that term
     is defined in Rule 144 under the federal securities laws. 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, 2,378,999 shares
     are issuable pursuant to currently exercisable options, and 306,250 shares
     are issuable pursuant to currently exercisable warrants, which may be
     exercised for shares that may be restricted or registered, further adding
     to the number of outstanding 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 the Company's common stock.

o    The Company's common stock may be delisted from Nasdaq. The National
     Association of Securities Dealers, Inc. has established certain standards
     for the continued listing of a security on the Nasdaq National Market and
     the Nasdaq SmallCap Market. The standards include, among other things, that
     the minimum bid price for the listed securities be at least $1.00 per
     share. A deficiency in the bid price maintenance standard will be deemed to
     exist if the issuer fails the individual stated requirement for thirty
     consecutive trading days, with a 90-day cure period. From November 2000
     through June 2001 the Company's common stock has sometimes traded below
     $1.00 per share. On June 27, 2001, the Company exceeded the 30-day standard
     and will be required to achieve a $1.00 minimum price for 10 consecutive
     trading days during the 90-day cure period. There can be no assurance that
     the Company will continue to satisfy the requirements for maintaining a
     Nasdaq National Market or SmallCap listing. If excluded, the prices of the
     common stock and the ability of holders to trade such stock could be
     adversely affected, and the Company would have to meet Nasdaq's initial
     listing requirements to be relisted.

o    The Company's common stock may become subject to the SEC's penny stock
     rules. If the Company's common stock is excluded from Nasdaq and the price
     per share is below $5.00, the Company must satisfy certain net asset and
     revenue tests or become subject to the SEC's "penny stock" rules.
     Application of these rules may adversely impact both the market price of
     these shares and the ability of owners to resell them. Prior to a
     transaction, these rules require a broker-dealer in a penny stock to
     deliver a standardized risk disclosure document prepared by the SEC to
     inform buyers about penny stocks and the nature and level of risks in the
     penny stock market. The broker-dealer also must provide current bid and
     offer quotations, the compensation of the broker-dealer and its salesperson
     in the transaction, and monthly account statements showing the market value
     of each penny stock held in the customer's account. In addition, the
     broker-dealer must make a special written determination of the suitability
     of the investor purchasing the penny stock.

                                      -16-
<PAGE>

ITEM 2     DESCRIPTION OF PROPERTY
           -----------------------

         The Company leases 26,247 square feet of space at 1551 South Washington
Avenue, Piscataway, New Jersey, for its principal executive offices. This lease,
which commenced on February 18, 1999, is for a term of ten (10) years with
monthly rent payable by us to the landlord as follows: $511,816.56 for the first
two years of the term; $551,187 for the next year of the term; $557,748.72 for
the next year of the term; $610,242.72 for the next three years of the term; and
$662,242.72 for the remaining three years of the term. In accordance with the
lease, the Company is also obligated to make additional payments to the landlord
relating to certain taxes and operating expenses.

         The Company also leases 245 square meters of office space in Antwerp,
Belgium for its European operating headquarters. This lease provides for a
monthly rental of 81,083 Belgian Francs per month (US$2,316.00 at an exchange
rate of 35BEF of 1US$) and expires on July 31, 2005, with an option by the
Company to terminate the lease on either July 31, 1999 or July 31, 2002, as
applicable.

         In addition, the Company leases 0.298 hectare of space at SolCom House,
Meikle Road, Kirkton Campus, Livingston EH547DE, Scotland. This lease provides
for monthly rentals of (pound)3,583 and expires on August 31, 2011.

         The Company also leases approximately 5,600 square feet of space at
48834 Kato Road, Fremont, California in the Bedford Fremont Business Center in
connection with its Secur@ccess division which was previously located in
Fremont, California. 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.

ITEM 3     LEGAL PROCEEDINGS
           -----------------

         There are no material pending legal proceedings to which the Company is
a party or to which any of its properties are subject.

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

         The Company did not sumbit any matters to a vote of the security
holders during the fourth quarter of FY2001.


                                      -17-
<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 listed on the NASDAQ National Market under the symbol "IONN". 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 Market.

               Fiscal Year 2001, Quarter Ending            HIGH            LOW
               --------------------------------            ----            ---

               June 30, 2000                                 31              2
               September 30, 2000                          5.94              2
               December 31, 2000                           3.06            .28
               March 31, 2001                                 3            .38

               Fiscal Year 2000, Quarter Ending

               June 30, 1999                               5.06           2.12
               September 30, 1999                          8.75           3.81
               December 31, 1999                           22.5           5.44
               March 31, 2000                                44          18.63

RECENT SALES OF UNREGISTERED SECURITIES

         On August 18, 2000, the Company issued an aggregate of 2,857,142 shares
of Common Stock at a price of $1.75 per share, for an aggregate total
consideration of $5,000,000. The shares were issued to a group of accredited
investors pursuant to Rule 506 promulgated under the Act.

SECURITY HOLDERS

         As of June 25, 2001, there were 398 holders of record of the Common
Stock (not including beneficial owners of Common Stock held by brokers in street
name).

DIVIDENDS

         The Company has not paid any cash dividends on its Common Stock during
the two fiscal years ended March 31, 2001 and March 31, 2000. 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.

                                      -18-
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

         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 risks and uncertainties include, but are not limited to, the recent
introduction and the costs associated with, a new family of products; dependence
on the acceptance of this new family of products; uncertainty as to the
acceptance of the Company's products generally; risks related to technological
factors; potential manufacturing difficulties; uncertainty of product
development; uncertainty of adequate financing; dependence on third parties;
dependence on key personnel; 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. 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.

OVERVIEW/PLAN OF OPERATION

         FY2001 was a year marked by significant changes and a major
restructuring as the Company endeavored to refocus its strategy in the face of
reduced revenues from many of its larger customers. Following the resignation of
Stephen B. Gray, the Company named Ronald Sacks as its new Chief Executive
Officer. Under the direction of Mr. Sacks, the Company undertook a comprehensive
review of operations that led to a restructuring plan that was announced late in
the third quarter.

         The restructuring plan resulted in approximately $353,000 in severance
and other employee related charges, and approximately $3.4 million for the
write-down of goodwill and capitalized software. In addition, at various points
in the year, provisions were established to recognize slow moving inventory and
the elimination of several products acquired in the SolCom merger. As a result
of the Company's restructuring efforts, operating expenses, excluding
depreciation, amortization and other charges, showed a reduction of more than
$2,406,121 or 49% in the quarter ended March 31, 2001, as compared to the
previous year.

         The Company's employee base also decreased from 134 full-time employees
in FY2000 to 67 in FY2001 as a result of restructuring. The Engineering staff
was the most significantly impacted, shrinking from 35 in FY2000 to 8 in FY2001.
Despite this reduction, the Company believes the current staff will be
sufficient to allow it to keep up with technology advances for the foreseeable
future. The Sales force also experienced significant changes in personnel during
the year, with headcount falling as low as 10 before a focused hiring program
brought it back to its current level of 17.

         During FY2001, the Company maintained key relations with Worldcom,
Rhythms NetConnections, KPN - Telecom BV and SBC Communications. Several new
important relationships were also formed during the year with Oracle Corporation
and Celestica Inc.

         During the next 12 months the Company plans to seek greater penetration
in the market areas

                                      -19-
<PAGE>

of Secure Port Management and Protocol Mediation. It will also continue to seek
other available options to increase revenue growth, including evaluating
acquisition and merger candidates. In addition, the Company will continue to
pursue reductions in the cost of goods sold to provide improvement in product
margins. This could include the redesign of systems as well as the on-going
examination of the cost and quality of ION's contract manufacturers.

RESULTS OF OPERATIONS

Fiscal Year 2001 Compared to Fiscal Year 2000

         Revenues for the year ended March 31, 2001 were $11,676,547 as compared
with revenues of $22,668,833 for the year ended March 31, 2000, a decrease of
approximately 48%. This decrease was attributable to reduced order activity,
significant turnover in the Company's Sales force and the general economic
downturn impacting the telecommunications industry. In addition, the Company
sold a perpetual technology license for approximately $3.2 million in fiscal
2000 for which there was no revenue to be recorded in fiscal 2001. Since hitting
a low point in the first quarter of with revenues of $2,083,504, the Company has
seen a growth in its sales pipeline, recording revenues of $2,788,497,
$3,432,572 and $3,371,973 in the three subsequent quarters, respectively.

         The Company's cost of goods sold decreased to $7,184,666 for the year
ended March 31, 2001 compared to $8,409,068 for the year ended March 31, 2000.
Cost of goods sold as a percentage of sales increased from 37.1% for the
previous comparable fiscal period to 61.5% for this fiscal period. The increase
is due to the impact of certain fixed manufacturing costs that are spread over a
decreased revenue base resulting in a deterioration of product margins as well
as the margin contribution from the non-recurring sale of a perpetual technology
license in the previous year. In addition, cost of sales included charges for
additional provisions of approximately $1,549,099 that were established at
various points in the year, to recognize slow moving inventory. Without these
reserves, cost of goods sold would have been 48.3% of sales in fiscal 2001.

         Research and development expenses, net of capitalized software
development, decreased from $4,288,396 in the year ended March 31, 2000 to
$3,297,897 in the current fiscal year, a decrease of 23.1%. As a percentage of
revenues, research and development expenses increased from approximately 19% to
28%. The increase in the percentage of research and development to revenue was
primarily caused by lower sales volume, as research and development expenses
have been reduced on a quarter to quarter basis throughout the fiscal year,
reflecting the completed development of the Company's next generation product
release, NetwoRx-PRIISMS Integration 1.2 and a resizing of the R&D staff as a
result of the Company's restructuring activities.

         Selling, general and administrative expenses decreased 4.1% from
$11,155,390 for fiscal 2000 to $10,698,612 for the year ended March 31, 2001. As
a percentage of revenues, selling, general and administrative expenses increased
from approximately 49% to 92%, due primarily to lower sales volume. Because of
the Company's focused efforts to increase sales volumes, the headcount of the
sales staff has increased during the last fiscal quarter from 11 to 17 and
remained relatively flat as compared to a year ago. Despite this, overall SG&A
expenses have been reduced on a quarter to quarter basis throughout the fiscal
year again, as a result of the Company's restructuring efforts.

         Depreciation and amortization was $3,742,450 for FY2001 compared to
$3,902,331 for

                                      -20-
<PAGE>

FY2000, a decrease of approximately 4%. Amortization expense for capitalized
software decreased from $2,308,136 in fiscal 2000 to $2,138,707 in fiscal 2001,
primarily as a result of management's decision during previous quarters of
fiscal 2001 to abandon certain of the products and technology associated with
the SolCom acquisition. The decision resulted in write-offs of $2,332,120
relating to this technology thereby decreasing the amortization expense for
future periods. The Company continued to invest in research and development
during fiscal 2001 to complete the NetwoRx-PRIISMS Integration 1.2, but at
reduced levels relative to a year ago.

         As a result of the Company's operating performance during the first six
months of fiscal 2001 as compared to the prior year, the Company evaluated its
business and product strategy and, in the Company's third fiscal quarter,
implemented a business restructuring plan which was intended to focus the
Company's product offerings on those believed to have the greatest potential to
generate further, near-term market penetration and positive operating
contribution. As a result of this plan and subsequent related actions, ION
Networks recorded $3,763,612 of restructuring, asset impairments and other
charges.

         As part of this plan, the Company recorded a charge of approximately
$353,000 for severance, termination benefits and other exit costs associated
with the separation of approximately 38 employees during the third and forth
fiscal quarters. Termination benefits of $342,234 were paid during these two
quarters. All of the affected employees have left the Company as of March 31,
2001.

         The Company also made strategic decisions to abandon certain products
and technologies including those that were acquired in the acquisition of SolCom
Systems, Ltd. on March 31, 1999. The Company also closed down the research and
development efforts at SolCom Systems, Ltd. and centralized the research and
development functions at the New Jersey headquarters. As a result of the above
decisions, the Company recorded an impairment charge of approximately $2,332,000
primarily relating to abandonment of the capitalized core technology from this
acquisition and other existing capitalized software. An additional impairment
charge of approximately $870,000 was recorded on the remaining goodwill from the
Company's acquisition of SolCom Systems, Ltd. in March 1999 that was being
amortized over a three year period. There remains no meaningful goodwill related
to this acquisition at March 31, 2001. Additionally, the Company recorded an
impairment in the amount of approximately $209,000 on fixed assets previously
used in the manufacturing process at SolCom Systems, Ltd. that were abandoned
and disposed of during the year ended March 31, 2001.

         The Company had a loss before taxes of $16,669,098 for the year ended
March 31, 2001 compared to a loss before taxes of $4,995,248 for the year ended
March 31, 2000. At March 31, 2001, the Company had federal, state, and foreign
tax-effected net operating loss carryforwards of approximately $8.3 million. The
expiration dates for its net operating losses range from the years 2011 through
2021. The net loss for the year ended March 31, 2001 was $16,676,666 compared to
a net loss of $5,259,738 for the prior fiscal year.

FINANCIAL CONDITION AND CAPITAL RESOURCES

        During FY2001, the Company's working capital position continued to
deteriorate as the Company's reduced revenues combined with continuing
expenditure levels utilized significant operating cash. This cash utilization
was offset partially by $5,000,000 raised through the issuance of

                                      -21-
<PAGE>

new shares in a private placement of 2,857,142 shares of Common Stock at a price
of $1.75 per share. Working capital at March 31, 2001 decreased $6,558,034 to
$6,918,057 from $13,476,091 at March 31, 2000.

        Net cash used in operating activities during the twelve months ending
March 31, 2001 was $7,086,246 compared to net cash used during the same period
of the previous twelve months of $4,971,783. The increase in net cash used
resulted primarily from the build-up of inventory due to lower than expected
revenues, the payment of accounts payable and accrued expenses, and the
significant increase in the net loss, offset by reductions in accounts and other
receivables.

        Net cash used in investing activities during FY2001 was $3,213,835
compared to net cash used during the same period in FY2000 of $2,493,986.
Investing activities during the year ending March 31, 2001 include the
restriction of $375,000 in cash relating to the Piscataway, New Jersey operating
lease and certain notes receivable issued to the Former CEO in the amount of
$897,250. This use of cash was offset partially by the decrease in expenditures
for property and equipment.

        Net cash provided by financing activities during FY2001 was $5,149,302
compared to net cash provided during the same period in FY2000 of $17,681,387.
Financing activities during the year ended March 31, 2001 include the sale of
2,857,142 shares of Common Stock at a price of $1.75 per share, for total
consideration of $5,000,000 in a private equity transaction. Financing
activities during the year ended March 31, 2000 included the sale of 3,000,000
shares of common stock for proceeds of $12,500,00 and proceeds from the exercise
of stock options and warrants of approximately $7,500,000.

        On September 30, 1999, the Company entered into a $2,500,000 line of
credit agreement. The line of credit was available through July 15, 2000. This
line of credit has been terminated and effectively replaced with the $1,500,000
line as noted below.

        On July 15, 2000, the Company entered into a line of credit agreement
for $1,500,000. The line of credit was available through September 30, 2000. The
line of credit expired on September 30, 2000 with no amounts having been drawn
down on such line. The Company does not have any lines of credit available at
March 31, 2001.

        The Company's current operating plan includes certain assumptions, the
most important of which is the attainment of future revenues significantly in
excess of those in FY 2001. To the extent that revenues in FY2002 fall below
those of FY2001, the management of the Company will have to modify its operating
plan and scale back its expenditures for personnel and other operating costs in
order to preserve its cash. If necessary, management is committed to executing
this contingency plan, which it believes will preserve approximately $800,000 of
cash during FY2002. Based on achieving revenues equal to or greater than those
of FY2001 and management's contingency plan, the Company believes that it will
have sufficient cash to fund its operations for the next twelve months. In
addition, the Company is presently evaluating the need to raise additional debt
or equity financing to grow its business through expansion and/or through
acquisitions. There can be no assurance that management will be successful in
raising this additional financing on terms acceptable to the Company, if at all.

                                      -22-
<PAGE>

ACCOUNTING PRONOUNCEMENTS

         In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." Among other
provisions, it requires that entities recognize all derivatives as either assets
or liabilities in the statement of financial position and measure those
instruments at fair value. Gains and losses resulting from changes in the fair
values of those derivatives would be accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting. This standard, as
amended by SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No. 133, an
Amendment of FASB Statement No. 133", is effective for fiscal years beginning
after June 15, 2000, though earlier adoption is encouraged and retroactive
application is prohibited. For the Company, this means the standard must be
adopted no later than April 1, 2001. Management, based on its current
operations, does not expect the adoption of this standard to have a material
impact on the Company's results of operations, financial position or cash flows.

         In December 1999, the SEC issued Staff Accounting Bulletin ("SAB")
No.101 Revenue Recognition in Financial Statements. SAB No.101 did not have an
impact on the Company's revenues for any of the years presented in the financial
statements.

ITEM 7     FINANCIAL STATEMENTS.
           ---------------------

         The financial statements required hereby are located on pages F-1
through F-21.

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

         On June 27, 2001, PricewaterhouseCoopers LLP ("PwC") indicated that
upon completion of their audit of the financial statements for the year ended
March 31, 2001, it would decline to stand for re-election as Ion Networks, Inc's
independent accountant for the fiscal year ending March 31, 2002. PwC completed
their audit on June 28, 2001. PwC's reports on the consolidated financial
statements of the Company for fiscal years 2001 and 2000 did not contain any
adverse opinion or a disclaimer of opinion, and were not qualified or modified
as to uncertainty, audit scope or accounting principles. During fiscal years
2001 and 2000 and the subsequent interim period through June 28, 2001, there
were no disagreements with PwC 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 PwC, would have caused PwC
to make reference to the subject matter of the disagreement in their report on
the financial statements for such years. The Company requested that PwC furnish
it with a letter addressed to the Securities and Exchange Commission stating
whether it agrees with the above statements. The letter, dated June 28, 2001 has
been filed as Exhibit 16.1 to this annual report on Form 10-KSB.


                                      -23-
<PAGE>

                                    PART III

         The information called for by Part III (Items 9, 10, 11 and 12 of Form
10-KSB) is hereby incorporated by reference to the Company's Definitive Proxy
Statement to be filed pursuant to Regulation 14A of the Securities Exchange Act
of 1934, as amended, in connection with the Company's 2001 Annual Meeting of
Stockholders.

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.

            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.

            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.

            3.4*        By-Laws of the Company.

            3.5***      Form of Specimen Common Stock Certificate of the
                        Company.

            4.1*        1998 Stock Option Plan of the Company.

            4.2*        1998 U.K. Sub-Plan of the Company, as amended.

            10.1***     Lease Agreement dated February 18, 1999 by and between
                        the Company and Washington Plaza Associates, L.P., as
                        landlord.

            10.2***     Business Park Gross Lease dated May 17, 1999 by and
                        between the Company and Bedford Property Investors, Inc.

            10.3***     Supply Agreement dated October 20, 1998 by and between
                        the Company and Lucent Technologies.

            10.4***     OEM Purchase Agreement dated April 13, 1999 by and
                        between the Company and the Hewlett-Packard Company.

            10.5***     Agreement dated as of December 19, 1994 by and between
                        LeeMAH DataCom Security Corporation and Siemens Rolm
                        Communications Inc.

            10.6***     Equipment Lease Agreements dated June 10, 1999 and May
                        5, 1999 by and between the Company and Siemens Credit
                        Corporation.

                                      -24-
<PAGE>

            10.7***     Equipment Lease Agreement dated June 17, 1999 by and
                        between the Company and Lucent Technologies.

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

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

            10.9****    Line of Credit Agreement with United Nations Bank dated
                        September 30, 1999.

            10.10*****  Asset Purchase Agreement dated as of February 25, 1999
                        by and among the Registrant, LeeMAH and the Parent.

            10.11*****  Assignment of Patents of LeeMAH dated February 25, 1999.

            10.12*****  Assignment of Trademarks of LeeMAH dated February 25,
                        1999.

            10.13****** (i) Separation and Forebearance Agreement made as of
                        October 5, 2000 between the Company and Stephen B. Gray.

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

            10.14****** Consulting Agreement entered into September 18, 2000
                        between the Company and Venture Consulting Group, Inc.

            10.15(1)    Materials and Services Contract dated January 16, 2001,
                        between the Company and SBC Services, Inc.

            10.16(1)    Stock Purchase Agreement dated August 11, 2000 by and
                        between the Company and the parties identified therein.

            16.1(1)     Letter dated June 28, 2000, from PricewaterhouseCoopers
                        LLP to the Securities and Exchange Commission.

            23.1(1)     Consent of PricewaterhouseCoopers LLP

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

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

         ***           Incorporated by reference to the Company's Annual Report
                       on form 10-KSB for the fiscal year ended March 31, 1999.

                                      -25-
<PAGE>

         ****          Incorporated by reference to the Company's Annual Report
                       on form 10-KSB filed on June 28, 2000.

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

         ******         Incorporated by reference to the Company's quarterly
                        report on Form 10-QSB filed on November 14, 2000.

            (1)         filed herewith

            (B)         REPORTS ON FORM 8-K
                        -------------------

On January 16, 2001, the Company filed a report on form 8-k reporting the
issuance of two press releases; the first, relating to the Company's
restructuring plan and the second, relating to the signing of a customer
contract with SBC Communications, Inc.

                                      -26-
<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: June 28, 2001

                                     ION NETWORKS, INC.

                                     By: /s/ Ronald C. Sacks
                                        ----------------------------------------
                                        Ronald C. Sacks, Chief Executive Officer
                                        and Interim Principal Financial 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 June 28, 2001:
<TABLE>
<CAPTION>

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

<S>                                                              <C>
         /s/ Ronald C. Sacks                                      Chief Executive Officer and Interim  Principal  Financial
         -------------------------------                          Officer
         Ronald C. Sacks

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


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


         /s/ Alexander C. Stark                                   Director
         -------------------------------
         Alexander C. Stark


         ----------------------------
         William Martin Ritchie                                   Director


         ----------------------------
         Alan Hardie                                              Director


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

</TABLE>



                                      -27-
<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE FISCAL YEARS ENDED MARCH 31, 2001 AND 2000



<PAGE>
<TABLE>
<CAPTION>


ION NETWORKS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2001 AND 2000

-------------------------------------------------------------------------------------------------------------------
                                                                                                           Page(s)
<S>                                                                                                            <C>
Report of Independent Accountants                                                                            F-1

Financial Statements:

   Consolidated Balance Sheets as of March 31, 2001 and
     March 31, 2000                                                                                          F-2

   Consolidated Statements of Operations for the Years Ended
     March 31, 2001 and 2000                                                                                 F-3

   Consolidated Statements of Cash Flows for the Years Ended
     March 31, 2001 and 2000                                                                                 F-4

   Consolidated Statements of Stockholders' Equity for the Years
     Ended March 31, 2001 and 2000                                                                           F-5

Notes to Consolidated Financial Statements                                                               F-6 - F-21
</TABLE>



<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


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


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of ION
Networks, Inc. and Subsidiaries (the "Company") at March 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the two years
in the period ended March 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. 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 audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP

Florham Park, New Jersey
June 28, 2001


                                       F-1
<PAGE>
<TABLE>
<CAPTION>
ION NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2001 AND 2000
-----------------------------------------------------------------------------------------------------------------
                                                                                       2001              2000
<S>                                                                                  <C>              <C>
ASSETS
    Current assets
      Cash and cash equivalents                                                      $  5,230,833     $  10,381,612
      Accounts receivable, less allowance for doubtful accounts of
        $161,000 and $251,000, respectively                                             2,796,531         4,569,546
      Other receivables                                                                    13,497         1,560,697
      Inventory, net                                                                    1,139,448         1,924,671
      Prepaid expenses and other current assets                                           205,829           602,874
      Related party notes receivable                                                      897,250                 -
                                                                                 ----------------- ------------------

        Total current assets                                                           10,283,388        19,039,400

    Restricted cash                                                                       375,000                 -
    Property and equipment, net                                                         1,467,766         2,146,956
    Capitalized software, less accumulated amortization of $2,390,041 and
       $4,259,851, respectively                                                         1,241,495         4,185,911
    Goodwill and other acquisition - related intangibles, less accumulated
       amortization of $694,444 and $1,030,334, respectively                              305,556         1,938,716
    Other assets                                                                           22,683            79,258
                                                                                 ----------------- ------------------

        Total assets                                                                $  13,695,888     $  27,390,241
                                                                                 ================= ==================


LIABILITIES AND STOCKHOLDERS' EQUITY
    Current liabilities
      Current portion of capital leases                                                 $  74,426         $  67,900
      Current portion of long-term debt                                                   107,026            96,000
      Accounts payable and accrued expenses                                             2,279,072         2,632,135
      Accrued payroll and related liabilities                                             416,093         2,139,524
      Deferred income                                                                     178,737           275,657
      Other current liabilities                                                           309,977           352,093
                                                                                 ----------------- ------------------

        Total current liabilities                                                       3,365,331         5,563,309
                                                                                 ----------------- ------------------

    Long-term portion of capital leases                                                   220,966           302,866
    Long-term debt, net of current portion                                                 18,732           128,129

    Commitments and contingencies (Notes 9 and 10)

    Stockholders' equity
      Preferred stock - par value $.001 per share; authorized 1,000,000 shares,                 -                 -
         none issued
      Common stock - par value $.001 per share; authorized 50,000,000 shares;
         issued 18,203,301 shares and outstanding 18,203,301 shares at March 31,
         2001, issued 15,224,911 shares and outstanding 15,162,880 shares
         at March 31, 2000                                                                 18,203            15,225
      Additional paid-in capital                                                       40,191,346        35,063,094
      Accumulated deficit                                                             (30,165,045)      (13,488,379)
      Accumulated other comprehensive income                                               46,355            13,196
                                                                                 ----------------- ------------------

                                                                                       10,090,859        21,603,136

    Less: Treasury stock,  62,031 shares, at cost at March 31, 2000                             -          (207,199)
                                                                                 ----------------- ------------------

        Total stockholders' equity                                                     10,090,859        21,395,937
                                                                                 ----------------- ------------------

           Total liabilities and stockholders' equity                                $ 13,695,888      $ 27,390,241
                                                                                 ----------------- ------------------

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

                                                       F-2
<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2001 AND 2000
-----------------------------------------------------------------------------------------------------------------

                                                                                    2001                2000

Net sales                                                                       $  11,676,547       $  22,668,833

Cost of sales                                                                       7,184,666           8,409,068
                                                                              -----------------   -----------------

  Gross margin                                                                      4,491,881          14,259,765

Research and development expenses                                                   3,297,897           4,288,396
Selling, general and administrative expenses                                       10,698,612          11,155,390
Depreciation and amortization expense                                               3,742,450           3,902,331
Restructuring, asset impairments and other charges                                  3,763,612                   -
                                                                              -----------------   -----------------

  Loss from operations                                                            (17,010,690)         (5,086,352)

Interest income                                                                       389,359             315,467
Interest expense                                                                      (47,767)           (224,363)
                                                                              -----------------   -----------------

  Loss before income taxes                                                        (16,669,098)         (4,995,248)

Income tax expense                                                                      7,568             264,490
                                                                              -----------------   -----------------

  Net loss                                                                      $ (16,676,666)       $ (5,259,738)
                                                                              =================   =================


PER SHARE DATA
  Basic                                                                                ($0.98)             ($0.44)
  Diluted                                                                              ($0.98)             ($0.44)

WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
  Basic                                                                            17,064,620          12,063,709
                                                                              -----------------   -----------------
  Diluted                                                                          17,064,620          12,063,709
                                                                              -----------------   -----------------

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

                                                       F-3
<PAGE>

ION Networks, Inc. and Subsidiaries

Consolidated Statements of Cash Flows
For the Years Ended March 31, 2001 and 2000
----------------------------------------------------------------------------------------------------------------

                                                                                    2001                2000
CASH FLOWS FROM OPERATING ACTIVITIES
  Net loss                                                                       $ (16,676,666)     $   (5,259,738)
  Adjustments to reconcile net loss to net cash used in operating
    activities
    Restructuring, asset impairments and other charges, non-cash                     3,421,378                   -
    Depreciation and amortization                                                    3,742,450           3,902,331
    Provision for doubtful accounts                                                          -             100,757
    Provision for inventory obsolescence                                             1,549,099             230,893
    Noncash stock-based compensation charge                                             15,382             252,000
    Deferred tax provision                                                                   -             234,034
    Changes in operating assets and liabilities
      Accounts receivable                                                            1,773,015          (1,577,436)
      Other receivables                                                              1,547,200          (1,560,697)
      Inventory                                                                       (763,876)            399,079
      Prepaid expenses and other current assets                                        397,045            (169,843)
      Other assets                                                                      56,575             (40,625)
      Accounts payable and accrued expenses                                           (353,063)         (1,258,017)
      Accrued payroll and related liabilities                                       (1,655,749)          1,326,258
      Deferred income                                                                  (96,920)              6,200
      Other current liabilities                                                        (42,116)         (1,556,979)
                                                                              -----------------   -----------------

        Net cash used in operating activities                                       (7,086,246)         (4,971,783)
                                                                              -----------------   -----------------

CASH FLOWS FROM INVESTING ACTIVITIES
   Capital expenditures                                                               (415,174)         (1,350,327)
   Capitalized software expenditures                                                (1,526,411)         (1,500,073)
   Proceeds from the sales of software licenses                                              -             356,414
   Related party notes receivable, net of repayments                                  (897,250)                  -
   Restricted cash                                                                    (375,000)                  -
                                                                              -----------------   -----------------

        Net cash used in investing activities                                       (3,213,835)         (2,493,986)
                                                                              -----------------   -----------------

CASH FLOWS FROM FINANCING ACTIVITIES
   Borrowings under line of credit                                                           -             253,711
   Proceeds from debt                                                                        -             450,000
   Repayments of the line of credit                                                          -          (2,250,000)
   Repayments of debt                                                                 (173,745)           (731,796)
   Issuances of common stock                                                         5,000,000          12,500,000
   Exercises of options and warrants                                                   323,047           7,459,472
                                                                              -----------------   -----------------

        Net cash provided by financing activities                                    5,149,302          17,681,387
                                                                              -----------------   -----------------

Net (decrease) increase in cash and cash equivalents                                (5,150,779)         10,215,618

Cash and cash equivalents - beginning of period                                     10,381,612             165,994
                                                                              -----------------   -----------------

Cash and cash equivalents - end of period                                       $    5,230,833       $  10,381,612
                                                                              -----------------   -----------------

SUPPLEMENTAL INFORMATION
   Cash paid during period for interest                                        $        47,767     $       224,363
                                                                              -----------------   -----------------

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



                                                       F-4
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2001 AND 2000
-----------------------------------------------------------------------------------------------------------------------------------
                                                                                          Accumulated
                                                              Additional                     Other                       Total
                                                    Common     Paid-In    Accumulated    Comprehensive   Treasury     Stockholders'
                                     Shares          Stock     Capital      Deficit         Income         Stock         Equity

Balance, March 31, 1999               8,399,964     $ 8,400  $14,858,447  $(8,228,641)   $    (29,969)   $(207,199)   $ 6,401,038

COMPREHENSIVE INCOME
   Net loss                                                                (5,259,738)                                 (5,259,738)
   Translation adjustments                                                                     43,165                      43,165
                                                                                                                      -------------

   Total comprehensive income                                                                                          (5,216,573)

Issuances of common stock             3,000,000       3,000   12,497,000                                               12,500,000

Exercise of options and warrants      3,824,947       3,825    7,455,647                                                7,459,472

Noncash stock-based compensation                                 252,000                                                  252,000

                                  -------------- ----------- ------------ -------------  --------------  ----------   -------------
Balance, March 31, 2000              15,224,911      15,225   35,063,094  (13,488,379)         13,196     (207,199)    21,395,937

Comprehensive income
   Net loss                                                               (16,676,666)                                (16,676,666)
   Translation adjustments                                                                     33,159                      33,159
                                                                                                                      -------------

   Total comprehensive income                                                                                         (16,643,507)

Issuances of common stock             2,857,142       2,857    4,789,944                                   207,199      5,000,000

Exercise of options and warrants        121,248         121      322,926                                                  323,047

Noncash stock-based compensation                                  15,382                                                   15,382
                                  -------------- ----------- ------------ -------------  --------------  ----------   -------------

Balance, March 31, 2001              18,203,301    $ 18,203   40,191,346 $(30,165,045)   $     46,355    $       -    $10,090,859
                                  -------------- ----------- ------------ -------------  --------------  ----------   -------------

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

                                                                F-5
</TABLE>
<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 network management developers -
         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 and markets a broad range of
         security, network management and remote maintenance products for voice
         and data communications networks. By incorporating a variety of
         hardware and software options for user authentication, these products
         can deter unauthorized dial-in access to both devices and systems (such
         as computers, local area networks and private branch exchange telephone
         switches), while allowing authorized personnel access to perform needed
         administration and maintenance of host devices and networks from remote
         locations. The products also provide alarm monitoring and reporting
         capabilities, a basis for remote network management and maintenance.

         The accompanying consolidated financial statements include the accounts
         of ION Networks, Inc. and its subsidiaries (collectively, the
         "Company") and have been prepared on the accrual basis of accounting.
         All material intercompany balances and transactions have been
         eliminated in consolidation.

         The Company's current operating plan includes certain assumptions the
         most significant of which relates to the attainment of significant
         increases in future revenues in excess of recorded fiscal 2001
         revenues. To the extent that revenue in fiscal 2002 falls below fiscal
         2001 revenue, the management of the Company will have to modify its
         current operating plan to scale back its expenditures for personnel and
         other operating costs in order to preserve operating cash. If
         necessary, management is committed to execute this contingency plan
         which it believes will preserve approximately $800,000 of cash during
         fiscal 2002 for the Company. Based on achievable revenue targets and
         management's contingency plan, the Company believes that it will have
         sufficient cash to fund its operations for the next twelve months. In
         addition, the Company is presently evaluating the need to raise
         additional debt or equity financing to grow its business either through
         expansion or acquisitions, or combinations of both. There can be no
         assurance that management will be successful in raising this additional
         financing on terms acceptable to the Company, if at all.


2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         CASH AND CASH EQUIVALENTS
         The Company considers all highly liquid investments with an original
         maturity of three months or less at the time of purchase to be cash
         equivalents.

         INVENTORY
         Inventory is stated at the lower of cost (average cost) or market, and
         consists of hardware and software components designed to interface with
         network communications environments. The markets for the Company's
         products are characterized by rapidly changing technology and the
         consequential obsolescence of relatively new products. The Company has
         recorded estimated allowances against inventories related to
         technological obsolescence.

                                      F-6
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         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 three 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 86"). SFAS 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.

         The Company capitalized $1,526,411 and $1,500,073 of software
         development costs for fiscal 2001 and 2000, respectively. 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 sales of
         that software, or (ii) the straight-line method over the estimated
         useful life of the product (generally three years). It is reasonably
         possible that those current estimates of anticipated future gross
         revenues, the remaining estimated economic life of the product, or
         both, may be reduced significantly in the near term (due to competitive
         pressures). As a result, the carrying amount of the capitalized
         software costs may be reduced materially in the near term. The Company
         wrote-off $2,332,120 of software development costs during fiscal 2001
         (see Note 3). Amortization expense totaled $2,138,707 and $2,308,136
         for fiscal 2001 and 2000, respectively.

         GOODWILL AND OTHER ACQUISITION RELATED INTANGIBLES
         Goodwill is the excess of purchase price over the fair value of net
         assets acquired in business combinations accounted for as purchases.
         The Company amortizes goodwill on a straight-line basis over the
         periods benefited, ranging from three to ten years. Other
         acquisition-related intangibles includes customer lists. The Company
         amortizes other acquisition-related intangibles over periods not to
         exceed three years.

         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.

         REVENUE RECOGNITION POLICY
         The Company records revenue from product sales upon shipment to the
         customer if no significant vendor obligations exist and collectibility
         is probable. Generally, no significant vendor obligations exist upon
         shipment of the product. 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.

         In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") No.
         101, "Revenue Recognition in Financial Statements". SAB 101 did not
         have an impact on the Company's revenues for any of the years
         presented.

                                      F-7
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         WARRANTY COSTS
         Estimated warranty costs associated with the sale of hardware and
         software are accrued at the time of sale. The warranty accrual included
         in other current liabilities as of March 31, 2001 and 2000 approximated
         $91,200 and $80,000, respectively.

         USE OF ESTIMATES
         The preparation of financial statements in conformity with generally
         accepted accounting principles 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.

         FAIR VALUE OF FINANCIAL INSTRUMENTS
         The carrying value of cash and cash equivalents, accounts receivable,
         accounts payable, accrued payroll and related liabilities, deferred
         income and other current liabilities approximates fair value because of
         the relatively short maturity of these instruments.

         VALUATION OF LONG-LIVED ASSETS
         Long-lived assets such as property and equipment, goodwill, customer
         lists and capitalized software are reviewed for impairment whenever
         events or changes in circumstances indicate that the carrying amount
         may not be recoverable. If the total of the expected future
         undiscounted cash flows is less than the carrying amount of the asset,
         a loss is recognized for the difference between the fair value and
         carrying value of the asset.

         PER SHARE DATA
         Earnings per share has been calculated in accordance with Statement of
         Financial Accounting Standards No. 128, "Earnings Per Share." The
         weighted average number of common shares outstanding during fiscal 2001
         and 2000 were used to compute basic earnings per share. Diluted
         earnings per share is initially computed using the weighted average
         number of common shares outstanding plus the dilutive potential common
         shares outstanding. Dilutive potential common shares are additional
         common shares assumed to be exercised. Potential common shares of
         1,429,301 and 3,422,687 were excluded from the computation of diluted
         earnings per share for fiscal 2001 and 2000, respectively, because
         their inclusion would have had an antidilutive effect on earnings per
         share.

         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.

         INCOME TAXES
         The Company accounts for income taxes in accordance with the provisions
         of Statement of Financial Accounting Standards No. 109, "Accounting for
         Income Taxes" ("SFAS 109"). SFAS 109 requires

                                      F-8
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         recognition of deferred tax liabilities and assets for the expected
         future tax consequences of events that have been included in the
         financial statements or tax return. Under this method, deferred tax
         liabilities and assets are determined based on the difference between
         the financial statement and tax basis of assets and liabilities
         ("temporary differences") using enacted tax rates in effect for the
         year in which the differences are expected to reverse. A deferred tax
         asset is recognized if it is more likely than not that the asset will
         be realized in the future.

3.       RESTRUCTURING, ASSET IMPAIRMENTS AND OTHER CHARGES

         During the year ended March 31, 2001, the Company recorded $3,763,612
         of restructuring, asset impairments and other charges.

         As a result of the Company's operating performance during the first six
         months of fiscal 2001 as compared to the prior year, the Company's new
         management evaluated the Company's business and product strategy and,
         in the Company's fiscal third quarter, implemented a business
         restructuring plan which is intended to increase the Company's
         operating cash flows and focus its product offerings on those believed
         to have the greatest potential to generate further, near-term market
         penetration and positive operating contribution. As of March 31, 2001,
         all restructuring activities had been completed.

         Included in the exit costs were approximately $353,000 of cash
         severance and termination benefits associated with the separation of
         approximately 38 employees. All of these affected employees have left
         the Company as of March 31, 2001. Termination benefits of approximately
         $342,000 were paid during the third and fourth quarters of fiscal 2001.

         In addition, the Company has made strategic decisions to abandon
         certain products and technologies, including those which were acquired
         in the acquisition of SolCom Systems, Ltd. on March 31, 1999. The
         Company also closed down the research and development efforts at SolCom
         Systems, Ltd. and centralized the research and development functions at
         the New Jersey headquarters. As a result of the above decisions, the
         Company recorded an impairment charge of approximately $2,332,000
         primarily relating to the abandonment of the capitalized core
         technology from this acquisition and other existing capitalized
         software. An additional impairment charge of approximately $870,000 has
         been recorded on the remaining goodwill from the Company's acquisition
         of SolCom Systems, Ltd. in March 1999, to fully write-off the remaining
         unamortized balance which was being amortized over a three-year period.
         Additionally, the Company recorded an impairment charge in the amount
         of approximately $209,000 on fixed assets previously used in the
         manufacturing process at SolCom Systems, Ltd.

4.       INVENTORY

         Inventory, net of reserve for obsolescence of $1,571,388 and $283,000
         at March 31, 2001 and 2000, respectively, consists of the following:

                                                 2001              2000

           Raw materials                       $ 690,566         $ 782,813
           Work-in-process                        18,440           259,180
           Finished goods                        430,442           882,678
                                          ---------------   ---------------
                                              $1,139,448        $1,924,671
                                          ---------------   ---------------

                                      F-9
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         During fiscal 2001, the Company increased its reserves for certain raw
         materials and finished goods to reflect the slow moving status of
         certain product lines.

5.       PROPERTY AND EQUIPMENT

         At March 31, 2001 and 2000, property and equipment consists of the
following:

                                                 2001              2000

           Computer and other equipment       $  2,655,786      $  2,476,635
           Furniture and fixtures                  747,203           998,929
           Leasehold improvements                  160,341           237,758
                                             --------------   ---------------

                                                 3,563,330         3,713,322

           Less:  Accumulated depreciation       2,095,564         1,566,366
                                             --------------   ---------------

             Property and equipment, net      $  1,467,766      $  2,146,956
                                             --------------   ---------------

         Depreciation expense for property and equipment for the years ended
         March 31, 2001 and 2000 amounted to $897,263 and $627,671,
         respectively. During the years ended March 31, 2001 and 2000, the
         Company retired fully depreciated assets amounting to $490,488 and
         $52,652, respectively.

6.       BANK BORROWINGS

         On September 30, 1999, the Company entered into a $2,500,000 line of
         credit agreement. The line of credit was available through July 15,
         2000. At March 31, 2000, there were no borrowings under the facility.
         Advances were payable at maturity and bore variable interest at a prime
         rate, as defined in the line of credit agreement. This line of credit
         was terminated and effectively replaced with the $1,500,000 line as
         noted below. The line was collateralized by all business assets of the
         Company.

         On July 15, 2000, the Company entered into a line of credit agreement
         for $1,500,000. The line of credit was available through September 30,
         2000. The line of credit expired on September 30, 2000 with no amounts
         having been drawn down on such line.

         Due to the expiration of the Company's $1.5 million 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. Accordingly, $375,000 has been
         reflected as restricted cash as a noncurrent asset at March 31, 2001.

                                      F-10
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         On May 5, 1999, the Company entered into a $300,000 term loan
         agreement. The term loan is due May 2002 and bears interest at a fixed
         rate of 8.50%. The term loan is collateralized by certain property and
         equipment of the Company. At March 31, 2001 and 2000, $125,758 and
         $224,129, respectively, is outstanding under the term loan.

         The agreements described above contain various restrictive covenants
         that, among other things, limit the ability of the Company to incur
         additional indebtedness, create liens on assets, make investments or
         acquisitions, engage in mergers or consolidations, dispose of assets,
         pay dividends, purchase or retire any of the Company's outstanding
         shares or alter or amend the Company's capital structure. The Company
         was in compliance with all covenants at March 31, 2001.

         At March 31, 2001, contractual maturities of the outstanding term loan
is as follows:

         2002                        $ 107,026
         2003                           18,732
                                ---------------

                                     $ 125,758
                                ---------------

7.       INCOME TAXES

         As of March 31, 2001, the Company has available federal, state and
         foreign net operating loss carryforwards of approximately $19,213,968,
         $18,302,460, and $1,668,944, respectively, to offset future taxable
         income. The federal net operating loss carryforwards expire during the
         years 2011 through 2021. In addition, the Company has investment credit
         and research and development credit carryforwards aggregating
         approximately $254,523, which may provide future tax benefits, expiring
         from 2008 through 2020.

         The components of the income tax provision for the years ended March
         31, 2001 and 2000 are as follows:

                                            2001            2000

           Current
             Federal                          $     -         $     -
             State                                  -               -
             Foreign                            7,568          30,456
                                       ---------------  --------------

                                                7,568          30,456
                                       ---------------  --------------

           Deferred
             Federal                                -         198,929
             State                                  -          35,105
                                       ---------------  --------------

                                                    -         234,034
                                       ---------------  --------------
                                             $  7,568       $ 264,490
                                       ---------------  --------------

                                      F-11
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


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

                                                               March 31,
                                                          2001          2000
           Effective tax rate reconciliation
             Statutory federal tax rate                     (34)%        (34)%
             State taxes, net of federal benefit             (6)          (6)
             Foreign rate differential                        -            1
             Permanent difference (goodwill)                  7           13
             Effect of recording valuation allowance
               on net operating loss carryforwards           32           28
             Other                                            1            3
                                                        ----------    ----------
                                                               -%          5%
                                                        ----------    ----------

         The tax effect of temporary differences which make up the significant
         components of the net deferred tax asset and liability at March 31,
         2001 and 2000 are as follows:
<TABLE>
<CAPTION>

                                                                    2001              2000
<S>                                                             <C>               <C>
           Current deferred tax assets
             Inventory                                          $     879,367     $    222,246
             Accrued expenses                                         265,609          216,028
             Allowance for doubtful accounts                           64,580          100,303
                                                                --------------   ---------------

               Total current deferred tax assets                    1,209,556          538,577

           Valuation allowance                                     (1,209,556)        (538,577)
                                                                --------------   ---------------

               Net current deferred tax assets                              -                -
                                                                --------------   ---------------

           Noncurrent deferred tax assets
             Depreciation and amortization                            251,839          124,852
             Net operating loss carryforwards                       8,257,819        3,817,178
             Research and development credit                          254,523          254,523
             Alternative minimum tax credit                            20,125           20,125
                                                                --------------   ---------------

               Total noncurrent deferred tax assets                 8,784,306        4,216,678

           Valuation allowance                                     (8,253,458)      (3,460,300)
                                                                --------------   ---------------

               Net noncurrent deferred tax assets                     530,848          756,378
                                                                --------------   ---------------
           Noncurrent deferred tax liabilities
             Capitalized software                                    (530,848)        (756,378)
                                                                --------------   ---------------

               Total noncurrent deferred tax liabilities          $  (530,848)    $   (756,378)
                                                                --------------   ---------------

               Net noncurrent deferred tax (liabilities) assets   $         -      $         -
                                                                --------------   ---------------
                                      F-12
</TABLE>
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------


         The Company has recorded a full valuation allowance against the
         defferred tax assets, including the federal, state and foreign net
         operating loss carryforwards 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

         On August 18, 2000, the Company sold 2,857,142 shares of common stock
         at a price of $1.75 per share, for total consideration of $5,000,000.

         In August 1999, the Company sold 2,000,000 shares of common stock in a
         private financing and received net proceeds of $9,500,000. In
         connection with this sale, warrants to purchase 250,000, 37,500, 9,375
         and 9,375 shares of common stock with an exercise price of $4.75,
         $3.00, $4.50 and $6.00, respectively, were issued. An aggregate of
         18,750 warrants expire in August 2002 with the remaining 287,500
         warrants expiring in August 2004.

         In June 1999, the Company sold 1,000,000 shares of common stock to a
         private equity fund at $3.00 per share and received net proceeds of
         $3,000,000. In connection with this sale, warrants to purchase 250,000
         shares of common stock with an exercise price of $4.50 and warrants to
         purchase 250,000 shares of common stock with an exercise price of $6.00
         were issued. During the year ended March 31, 2000, warrants to purchase
         500,000 shares were exercised for an aggregate consideration of
         $2,625,000. There were no warrants outstanding at March 31, 2001.

         In April 1996, the Company sold 860,000 shares of common stock to
         unrelated investors, at $1.25 per share and received net proceeds of
         approximately $1,023,559. In conjunction with this sale, warrants to
         purchase 860,000 shares of common stock with an exercise price of $1.50
         and warrants to purchase additional 860,000 shares of common stock with
         an exercise price of $2.00 were issued. During the year ended March 31,
         1999, warrants to purchase 376,000 shares were exercised for an
         aggregate consideration of $604,000. In April 1999, the Company offered
         a discount on the warrants. These warrants, initially issued at $1.50
         and $2.00, were reduced in price to $1.25 and $1.50, respectively. The
         discount carried an expiration date of June 30, 1999. During the
         discount period, investors exercised 1,143,251 warrants and the Company
         received net proceeds of $1,618,544. At March 31, 2000, 80,000 warrants
         were outstanding. These warrants expired unexercised in April 2000.

         In April 1996, the Company sold 241,467 shares of common stock to four
         current shareholders of record who held the contractual right to
         maintain their share of ownership. The Company received net proceeds of
         $301,834. In connection with this sale, warrants to purchase 241,467
         shares of common stock with an exercise price of $1.50 and warrants to
         purchase an additional 241,467 shares of common stock with an exercise
         price of $2.00 were issued. During the year ended March 31, 2000,
         warrants to purchase 364,422 shares were exercised for an aggregate
         consideration of $637,739.

                                      F-13
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         There are no warrants outstanding as of March 31, 2000.

         STOCK OPTION PLANS
         During the years ended March 31, 2001 and 2000, respectively, options
         to purchase 45,948 and 1,433,273 shares of common stock under the
         Company's stock option plans were exercised, for an aggregate
         consideration of $99,483 and $2,399,869, respectively.

         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 shall be 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 March 31, 2001, the
         Company granted options to purchase 1,724,500 shares. At March 31,
         2001, 1,433,625 options were outstanding under the 2000 Plan, of which
         239,992 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 shall be 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 years ended March 31,
         2001 and 2000, the Company granted options to purchase 1,596,078 and
         2,328,791 shares, respectively. At March 31, 2001, 1,832,795 options
         were outstanding under the 1998 Plan, of which 818,041 options were
         exercisable.

         In connection with the Company's acquisition of SolCom, the Company
         granted 300,000 performance-based options to certain holders of SolCom
         options. At March 31, 2000, all 300,000 options were forfeited due to
         the termination of employment of the option holders.

         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 years ended
         March 31, 2001 and 2000, there were no option grants provided under the
         1994 Plan. At March 31, 2001, 639,347 options were outstanding under
         the 1994 Plan, of which 597,237 options were exercisable.

         Of the options granted in fiscal 2001 and 2000, 578,528 and 455,645,
         respectively, were 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 current fiscal year if the Company meets certain
         predetermined sales targets. The Company did not meet the targets for
         2001 and 2000 and, as such, all options granted under the TARSAP in
         2001 and 2000 will vest seven years from the original date of grant.

         OTHER OPTIONS

                                      F-14
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         In connection with a consulting agreement with Venture Consulting
         Group, Inc. ("VCGI") (see Note 9), consultants were issued options to
         purchase 240,000 shares of common stock. Such options vested 25% during
         December 2000 with the remaining vesting ratably monthly from January
         through September 2001. The Company will record compensation expense
         based upon the fair value of the options during each reporting period
         beginning in October 2000 in connection with the one-year vesting
         period. The Company has recorded compensation expense of $22,326 for
         the year ended March 31, 2001.

         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. During the year ended March 31, 2000,
         90,000 options to purchase shares were exercised under this grant for
         an aggregate consideration of $104,400. There were no stock option
         exercises during fiscal 2001. At March 31, 2001, 400,000 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 years ended
         March 31, 2001 and 2000, the Company recorded compensation (benefit)
         expense of ($6,944) and $201,600, respectively, related to options
         given to employees. The Company recorded a compensation benefit in
         fiscal 2001 due to employee forfeitures of unvested stock options as
         certain employees left the Company during the current fiscal year.

         The Company has adopted the disclosure-only provisions of Statement of
         Financial Accounting Standards No. 123, "Accounting for Stock-Based
         Compensation" ("SFAS 123"). If the Company had elected to recognize
         compensation costs based on the fair value at the date of grant for
         awards in fiscal 2001 and 2000, consistent with the provisions of SFAS
         123, the Company's net loss and loss per share would have increased by
         $1,277,425 and $.07 and $1,239,998 and $.10, respectively, for the
         years ended March 31, 2001 and 2000.

         The pro forma effect on net loss for fiscal 2001 and 2000 may not be
         representative of the pro forma effect on net loss of future years
         because the SFAS 123 method of accounting for pro forma compensation
         expense has not been applied to options granted prior to April 1, 1995.

         The weighted-average fair values at date of grant for options granted
         during fiscal 2001 and 2000 were $3.02 and $4.08, respectively. 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, with the following weighted average assumptions used for
         grants in fiscal 2001 and 2000:

                                                       2001           2000

           Expected volatility                             110%            84%
           Risk-free interest rate                        5.88%          5.32%
           Expected option lives                     3.53 years     4.00 years

                                      F-15
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

         Details of options granted are as follows:

                                                                                    WEIGHTED
                                                                                     AVERAGE            OPTION
                                                                                    EXERCISE           PRICE PER
                                                                     SHARES         PRICE ($)          SHARE ($)
<S>                                                                  <C>                   <C>          <C>     <C>
           Options outstanding at March 31, 1999                     2,692,838             1.52         0.48 to 3.54

             Granted                                                 2,272,291             6.30        2.28 to 37.66
             Canceled                                                 (756,582)            3.03        1.75 to 30.81
             Exercised                                              (1,433,273)            1.67         0.48 to 5.05
                                                                ----------------- --------------   ------------------

           Options outstanding at March 31, 2000                     2,775,274             5.08        0.48 to 37.66
                                                                ----------------- --------------   ------------------

             Granted                                                 3,320,578             3.84        1.03 to 29.25
             Canceled                                               (1,734,137)            5.80        0.48 to 37.66
             Exercised                                                 (45,948)            2.17         1.38 to 2.97
                                                                ----------------- --------------   ------------------

           Options outstanding at March 31, 2001                     4,315,767           $ 3.88      $1.03 to $36.44
                                                                ----------------- --------------   ------------------

           Options exercisable at March 31, 2001                     2,065,270           $ 2.94      $1.03 to $36.44
                                                                ----------------- --------------   ------------------

                                                      WEIGHTED
                                                       AVERAGE
                                                      REMAINING     WEIGHTED                            WEIGHTED
              RANGE OF                                YEARS OF      AVERAGE                             AVERAGE
            EXERCISABLE              NUMBER          CONTRACTUAL    EXERCISE          NUMBER            EXERCISE
               PRICES              OUTSTANDING          LIFE         PRICE          EXERCISABLE          PRICE
              $1.03-1.52           2,089,433              8.3        $1.16             774,115            $1.17
              $1.59-2.39           1,273,167              4.1        $1.97           1,007,880            $1.95
              $2.41-3.16             126,192              5.0        $2.90              47,382            $2.85
              $3.69-4.08              39,634              5.0        $3.84              20,000            $3.86
              $5.84-8.44             207,196              4.2        $6.74             114,148            $7.16
             $9.13-13.69             335,827              7.9       $12.81              14,999            $9.42
            $13.81-15.69               4,878              2.9       $14.38               1,666           $15.25
            $20.94-30.81             222,018              4.0       $22.15              74,581           $22.03
            $33.44-36.44              17,422              4.2       $34.70              10,499           $34.07
                                 ------------     -------------  -------------     ----------------  -----------
             $1.03-36.44           4,315,767              6.5        $3.88           2,065,270            $2.94
                                 ------------     -------------  -------------     ----------------  -----------

                                      F-16
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

9.       COMMITMENTS

         OPERATING LEASES
         During March 1999, the Company entered into an operating lease to
         consolidate their office and manufacturing facilities, which had a
         commencement date of July 31, 1999. This lease expires in June 2009.
         The Company also leases office space for its European operation in
         Antwerp, Belgium and Livingston, Scotland. In addition, the Company's
         California division currently leases office facilities.

         CAPITAL LEASES
         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-cancellable operating and capital leases as of March 31, 2001 are
         as follows:

                                                                CAPITAL         OPERATING
                                                                 LEASES          LEASES

           Year ending March 31
             2002                                             $     97,961        $ 760,816
             2003                                                   97,961          802,210
             2004                                                   97,961          793,074
             2005                                                   51,930          679,478
             2006                                                        -          714,470
             Thereafter                                                  -        2,589,878
                                                              --------------  --------------
               Total minimum lease payments                    $   345,813       $6,339,926
                                                                              --------------
             Less amount representing interest                      50,421
                                                              --------------

               Present value of net minimum lease payments     $   295,392
                                                              --------------
</TABLE>

         Computer and other equipment at March 31, 2001 and 2000 includes
         $390,638 under capital leases.

         Rent expense under operating leases for the years ended March 31, 2001
         and 2000 approximated $759,989 and $577,315, respectively.

         CONSULTING CONTRACTS
         On October 5, 2000, the Company entered into a consulting agreement
         with VCGI whereby VCGI is to provide the services of Ronald C. Sacks as
         Chief Executive Officer of the Company, and the services of three
         additional consultants functioning in various capacities for the
         Company. The fees for the consultants' services are $500,000 over a
         one-year period. In addition, the individual consultants from VCGI,
         including Ronald C. Sacks, were issued options to purchase 240,000
         shares of common stock (see Note 8).

                                      F-17
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

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. In the
         opinion of management, the outcome of such current legal proceedings,
         claims and assessments will not have a material effect on the Company's
         financial position, results of operations or cash flows.


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 years ended March 31, 2001 and
         2000 was $60,671 and $49,732, respectively.


12.      SALES

         The Company, which operates in a single industry segment, designs,
         develops and markets a broad range of security, network management and
         remote maintenance products for voice and data communications networks.
         The Company's headquarters, physical production and shipping facilities
         are located in the United States. The Company's local and foreign
         export sales for the years ended March 31, 2001 and 2000 are as
         follows:

                                              2001               2000

           United States                 $    9,937,107       $  19,228,324
           Europe                             1,686,932           3,336,517
           Pacific Rim                            7,196              11,950
           Other                                 45,312              92,042
                                        -----------------  -----------------

                                          $  11,676,547       $  22,668,833
                                        -----------------  -----------------

         The Company sold a substantial portion of its products to four
         customers. Sales to these customers amounted to $4,871,198 (42% of net
         sales) and $8,606,173 (38% of net sales) in 2001 and 2000,
         respectively. At March 31, 2001 and 2000, amounts due from these
         customers included in accounts receivable, were $1,799,041 and
         $2,104,050, respectively. 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 and results of operations. Additionally, during the year ended
         March 31, 2000, the Company licensed the rights to certain customized
         modules of its software

                                      F-18
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         via a perpetual license agreement with one customer and recorded
         approximately $3.2 million in revenue which had a positive effect on
         the Company's reported revenues and gross margin.

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 March 31, 2001 and periodically throughout fiscal 2001,
         the Company had deposits in this financial institution in excess of the
         amount insured by the FDIC.

         The Company sells the majority of its products to customers within the
         telecommunications industry. The Company's two largest
         telecommunications customers and one other customer accounted for
         approximately 64% of net accounts receivable at March 31, 2001. The
         Company provides for allowances for doubtful accounts which are
         intended to cover potential credit risk losses.

         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.

14.      OTHER RECEIVABLES

         Other receivables at March 31, 2000 consists of amounts due from
         foreign employees related to withholding taxes. Included within accrued
         payroll and related liabilities at March 31, 2000 is an offsetting
         liability due from the Company to the United Kingdom tax authorities.
         The receivables were substantially collected during fiscal 2001 and
         have been remitted to the appropriate United Kingdom tax authorities.

15.      SUPPLEMENTAL CASH FLOW INFORMATION
<TABLE>
<CAPTION>

                                                                           2001            2000
<S>                                                                   <C>                 <C>
           Other Non-Cash Investing and Financing Activities
             Options issued to consultants as non-cash compensation   $     22,326        $ 50,400
             Assets acquired by assuming capital lease obligations               -         370,766
             Compensation (benefit) charge from employee options            (6,944)        201,600

                                      F-19
</TABLE>
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

16.      RELATED PARTY TRANSACTIONS

         During April 2000, the Company issued a 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 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 loan
         is collateralized by a first mortgage interest on the personal
         residence of the Former CEO. Pursuant to this agreement, 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 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. At March 31, 2001, the amount owed to
         the Company from the Former CEO approximated $897,250, and is
         classified as a related party notes receivable on the Company's
         consolidated balance sheet. The Former CEO has not paid the amounts due
         as specified in the agreement. The Company has been advised that the
         Former CEO has sold the residence and based on an anticipated closing
         date in late July, 2001, $750,000 of the amounts due from the Former
         CEO are expected to be repaid from the proceeds of the sale of the
         residence.

         On June 29, 2000, the Company made an advance of $135,000 to the Former
         CEO. The advance was subsequently repaid in full on July 26, 2000.

         The Company borrowed funds from a director of the Company in the amount
         of $150,000 on April 14, 1999. This amount was fully repaid along with
         a market rate of interest during June 1999. The amount of interest
         expense was not material to the Company.

         The Company issued advances to two officers of the Company in the
         amount of $50,000 each on August 31, 1998. These advances accrued
         interest at the prime rate plus 1%. These advances were due and payable
         in full upon the officers cessation of employment with the Company or
         August 31, 2000, whichever is earlier. The advances were repaid in full
         prior to August 31, 2000.

17.      NEW ACCOUNTING PRONOUNCEMENTS

         In June 1998, the Financial Accounting Standards Board issued SFAS No.
         133, "Accounting for Derivative Instruments and Hedging Activities."
         Among other provisions, it requires that entities recognize all
         derivatives as either assets or liabilities in the statement of
         financial position and measure those instruments at fair value. Gains
         and losses resulting from changes in the fair values of those
         derivatives would be accounted for depending on the use of the
         derivative and whether it qualifies for hedge accounting. This
         standard, as amended by SFAS No. 137, "Accounting for Derivative
         Instruments and Hedging Activities - Deferral of the Effective Date of
         FASB Statement No. 133, an Amendment of FASB Statement No. 133", is
         effective for fiscal years beginning after

                                      F-20
<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

         June 15, 2000, though earlier adoption is encouraged and retroactive
         application is prohibited. For the Company this means the standard must
         be adopted no later than April 1, 2001. Management, based on its
         current operations, does not expect the adoption of this standard to
         have a material impact on the Company's results of operations,
         financial position or cash flows.


                                      F-21
<PAGE>

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

             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.

            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.

            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.

            3.4*        By-Laws of the Company.

            3.5***      Form of Specimen Common Stock Certificate of the
                        Company.

            4.1*        1998 Stock Option Plan of the Company.

            4.2*        1998 U.K. Sub-Plan of the Company, as amended.

            10.1***     Lease Agreement dated February 18, 1999 by and between
                        the Company and Washington Plaza Associates, L.P., as
                        landlord.

            10.2***     Business Park Gross Lease dated May 17, 1999 by and
                        between the Company and Bedford Property Investors, Inc.

            10.3***     Supply Agreement dated October 20, 1998 by and between
                        the Company and Lucent Technologies.

            10.4***     OEM Purchase Agreement dated April 13, 1999 by and
                        between the Company and the Hewlett-Packard Company.

            10.5***     Agreement dated as of December 19, 1994 by and between
                        LeeMAH DataCom Security Corporation and Siemens Rolm
                        Communications Inc.

            10.6***     Equipment Lease Agreements dated June 10, 1999 and May
                        5, 1999 by and between the Company and Siemens Credit
                        Corporation.

            10.7***     Equipment Lease Agreement dated June 17, 1999 by and
                        between the Company and Lucent Technologies.

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

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

<PAGE>

            10.9****    Line of Credit Agreement with United Nations Bank dated
                        September 30, 1999.

            10.10*****  Asset Purchase Agreement dated as of February 25, 1999
                        by and among the Registrant, LeeMAH and the Parent.

            10.11*****  Assignment of Patents of LeeMAH dated February 25, 1999.

            10.12*****  Assignment of Trademarks of LeeMAH dated February 25,
                        1999.

            10.13****** (i) Separation and Forebearance Agreement made as of
                        October 5, 2000 between the Company and Stephen B. Gray.

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

            10.14****** Consulting Agreement entered into September 18, 2000
                        between the Company and Venture Consulting Group, Inc.

            10.15(1)    Materials and Services Contract dated January 16, 2001,
                        between the Company and SBC Services, Inc.

            10.16(1)    Stock Purchase Agreement dated August 11, 2000 by and
                        between the Company and the parties identified therein.

            16.1(1)     Letter dated June 28, 2000, from PricewaterhouseCoopers
                        LLP to the Securities and Exchange Commission.

            23.1(1)     Consent of PricewaterhouseCoopers LLP

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

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

         ***           Incorporated by reference to the Company's Annual Report
                       on form 10-KSB for the fiscal year ended March 31, 1999.

         ****          Incorporated by reference to the Company's Annual Report
                       on form 10-KSB filed on June 28, 2000.

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

         ******         Incorporated by reference to the Company's quarterly
                        report on Form 10-QSB filed on November 14, 2000.

            (1)         filed herewith