<PAGE>




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

                                   FORM 10-KSB

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

For the fiscal year ended _______________

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

For the transition period from April 1, 2002 to December 31, 2002

                          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)

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

         Securities registered under Section 12(b) of the Exchange Act:

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

         Securities registered under Section 12(g) of the Exchange Act:

                          Common Stock, $.001 par value
                                (Title of Class)

Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.

Yes [X]  No [ ]

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

The issuer's revenues for the nine-months ended December 31, 2002
totaled $3,335,160.

The aggregate market value of voting stock held by non-affiliates, based on the
closing price of the Common Stock, par value $0.001 (the "Common Stock") on
March 28, 2003 of $0.07, as reported on the OTC Bulletin Board was approximately
$1,351,139.44. Shares of Common Stock held by each officer and director and by
each person who owns 5% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination for any other
purpose.



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There were 24,875,500 shares of Common Stock outstanding as of March 28, 2003.

DOCUMENTS INCORPORATED BY REFERENCE:  None

Transitional Small Business Disclosure Format (check one):

Yes [  ]    No   [X]



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                Information Regarding Forward-Looking Statements

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

PART I

Item 1: Description of Business

Overview

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

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

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

         ION's infrastructure security solutions are distributed via three
distinct channels: (i) a direct sales force, (ii) indirect channels, such as
Value Added Resellers (VARs) and (iii) Original Equipment Manufacturers (OEMs).
Services revenue is typically generated from integration and maintenance
services in conjunction with the sale of ION solutions. As of December 31, 2002,
ION has sold approximately 50,000 infrastructure security appliances worldwide
since its inception.




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         ION Networks, Inc. is a Delaware corporation founded in 1999 through
the combination of two companies, MicroFrame, Inc. (originally founded in 1982),
a New Jersey corporation and SolCom Systems Limited (originally founded in
1994), a Scottish corporation located in Livingston, Scotland. In 1999, the
Company expanded its technology base through the purchase of certain assets of
LeeMAH DataCom Security Corporation. References in this document to "we," "our,"
"us," and "the Company" refer to ION Networks, Inc. Our principal executive
offices are located at 1551 South Washington Avenue, Piscataway, New Jersey
08854, and our telephone number is (732) 529-0100.

Industry Background

Pervasive Use of Corporate Security to Protect Employees and Business Assets

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

Wide Acceptance of Information  Security to Protect  Business  Applications  and
Information

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

Growing Impact of Insider Security Threats

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

Increasing  Need  to  Protect  the   "Electronic   Interior"  of  Businesses  --
Infrastructure Security

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

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

         We estimate the number of potentially vulnerable infrastructure devices
that may require protection by an infrastructure security solution across our
addressable markets to be in excess of 100 million worldwide. This largely
untapped need to protect infrastructure devices provides ION with what we
estimate to be a significant market opportunity.

The ION Networks Solution

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

         The ION Secure product suite is intended to provide our customers with
the following key benefits:

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

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

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

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

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

o        Administration -- ION Secure PRIISMS software provides directory
         services for assigning authentication methods and privileges to users
         and groups and the logical partitioning of authorized infrastructure
         device views. Once authenticated into PRIISMS, administrators can only
         see and manage assigned infrastructure devices. In addition,
         centralized management of ION security appliances via PRIISMS
         simplifies the installation, configuration and upgrade of the ION
         Secure Operating System (ISOS) on remote ION security appliances. The
         ION Secure 2000, 3000 and 5000 Series appliances provide a wide range
         of site management services such as alarm mediation, remote
         diagnostics, and task automation. In addition, messages from
         non-standard managed infrastructure devices can be converted to Simple
         Network Management Protocol (SNMP) traps and sent to PRIISMS for
         centralized viewing and forwarding to third party enterprise management
         and operational support systems. Network and port-level diagnostic
         utilities can also be used by administrators to remotely troubleshoot
         infrastructure devices. The automation of administrative tasks can be

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         implemented both in PRIISMS and ION Secure appliances. Action triggers
         can be set for automating common tasks such as event notification via
         SNMP trap, pager or e-mail, the power recycling of infrastructure
         devices, or the uploading of logs from ION security appliances. ION
         security appliances also provide a native scripting (computer
         programming) language and task scheduler that can run these scripts
         based on an alarm, date or time for custom automation requirements.

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

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

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

ION Networks Products and Services

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

       ION Secure PRIISMS Management Portal.

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

       Key features include:

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

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

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

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


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

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

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

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


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

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

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

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

Wide Range of Protected Infrastructure Devices

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

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

Strategy

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



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

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

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

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

         Expand Our Indirect Channels. Our distribution channels are currently
in place to serve ION target markets. We have begun to penetrate these markets
by partnering with value-added resellers who sell our solutions in seven
countries. We intend to continue to build and expand our base of indirect
channel relationships through additional marketing programs and increased
targeted advertising.

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

Customers

         85 customers purchased ION Secure solutions during the nine-months
ended December 31, 2002 and our products are now deployed in over 10,000
locations. As of December 31, 2002, ION has sold approximately 50,000
infrastructure security appliances since its inception. Historically, our
largest customers have been service providers primarily in the United States and
in Europe. See also Risk Factors, "We rely on several key customers for a
significant portion of our business, the loss of which would likely
significantly decrease our revenues" on page 14. However, over the last year we
have begun to diversify away from our traditional customer base and continue to
introduce products that lend themselves to the evolving needs of an expanding
number of markets. ION has begun to penetrate the corporate market and, in
particular, the financial services sector. We believe our success in penetrating
the financial services sector is evidence of the flexibility of ION Secure
solutions.

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

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

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

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




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Sales and Marketing

         Our sales and marketing efforts focus on penetrating the corporate,
service provider and government agency markets. Our marketing programs promote
ION Networks and ION Secure brand awareness and reputation as a highly scalable,
robust, reliable, easy-to-use and cost-effective infrastructure security
solution. We try to strengthen our brand through a variety of marketing programs
which include on-going public relations, our web site, advertising, direct mail,
industry and regional trade shows and seminars. We intend to continue expanding
and strengthening our direct and indirect channel relationships through
additional marketing programs, additional marketing staff and increased
promotional activities.

         Direct Sales. On December 31, 2002, the Company's sales force stood at
12. In the nine-months ended December 31, 2002, ION had 85 new customers with
products located at thousands of locations worldwide. We believe that ION
solutions are ideally suited for both direct sale to customers and indirect
channels where it is not economically efficient for us to sell directly to the
end users of our products. For the nine-months ended December 31, 2002,
approximately 46% of ION revenue came from direct sales.

         Indirect Sales/Channel Partners. We also market and sell our solutions
via indirect channels through a distribution structure of Value Added Resellers
(VARs) or Channel Partners in the United States and in Europe. VARs accounted
for approximately 42% of our total revenue for the nine-months ended December
31, 2002. Our VAR partnerships are non-exclusive.

         We support our international distributors by offering customizable
marketing materials, sales tools, leads, co-operative marketing funds, joint
advertising, discounted demonstration units and training.

         Original Equipment Manufacturers (OEMs). We enter into select original
equipment manufacturer relationships in order to take advantage of the channels
of well-established companies that sell into our target markets. We believe
these channels expand our overall market while having a minor impact on our own
indirect channel sales. The terms of our agreements with these customers vary by
contract. These agreements can generally be terminated upon 30 days written
notice or if ION becomes insolvent. For the nine months ended December 31, 2002,
our original equipment manufacturer revenue accounted for approximately 12% of
total revenue.

         Geographic Distribution. We divide our sales organization regionally
into three territories: (1) the United States and Canada; (2) Europe, the Middle
East and Africa, and (3) other locations. Regional sales representatives manage
our relationships with our network of channel partners, sell to and support key
customer accounts, and act as a liaison between our indirect channels and our
marketing organization. We also have an internal sales staff that supports the
indirect channel, and a dedicated business development organization whose
primary responsibilities are identifying, promoting and managing strategic
relationships to sell our solutions with industry leaders and original equipment
manufacturers.

For the nine months ended December 31, 2002, approximately 91% of ION's sales
were in the United States and Canada (Direct Sales -approximately 43%,
Indirect/Channel Partners -approximately 37%, and OEM - approximately 11% ) and
9% Europe, the Middle East, Africa and other locations (Direct Sales
-approximately 2.2%, Indirect/Channel Partners -approximately 5.5%, and OEM -
approximately 1.3% ). (Refer to Note 12 in the Company's Consolidated Financial
Statements.)

Customer Service and Technical Support

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

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

Competition

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



                                       9
<PAGE>

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

o        Network equipment manufacturers such as Cisco Systems;

o        Operating system software vendors such as Microsoft and Novell;

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

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

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

         Many of our competitors have generally targeted large organizations'
information security needs with VPN, firewall and 3A (Authorization,
Authentication and Audit) products that range in price from under one thousand
to hundreds of thousands of dollars. These offerings may increase competitive
pressure on some of our solutions, resulting in both lower prices and gross
margins. Many of our current or potential competitors have longer operating
histories, greater name recognition, larger customer bases and significantly
greater financial, technical, marketing and other resources than we do. Nothing
prevents or hinders these actual or potential competitors from entering our
target markets at any time. In addition, our competitors may bundle products
competitive to ours with other products that they may sell to our current or
potential customers. These customers may accept these bundled products rather
than separately purchasing our products. If these companies were to use their
greater financial, technical and marketing resources in our target markets, it
could adversely affect our business. See also Risk Factors, " We face
significant competition and if we do not compete successfully, our results of
operations may be adversely affected" on page 13.

Sources And Availability Of Materials

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

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

Dependence On Particular Customers

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

Intellectual Property, Licenses And Labor Contracts

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

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

Governmental Approvals And Effect Of Governmental Regulation

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



                                       10
<PAGE>

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

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

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

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

Research And Development Activities

         As of March 28, 2003, the Company had 11 full-time R&D staff devoted to
research and development activities and believes these employees will be
sufficient to allow it to keep up with technology advances for the foreseeable
future.

         The current staff has successfully completed and released the new ION
Secure 2500 and 5500 security appliances and ISOS software releases. In addition
ION Secure PRIISMS functionality has been greatly enhanced. These products
provide ION Networks with the ability to address a more diverse computing and IP
based network market due to its ability to provide connectivity across secure IP
tunnels by utilizing integrated VPN router technology.

Employees

         As of March 28, 2003, the Company had 33 employees, all of whom are
full-time employees, and of which 11 are technical personnel, 12 are in sales,
marketing and support, 3 are in production, and 7 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

If we fail to raise additional capital we will not be able to continue as a
going concern after May 2003.

         Our business plan and growth strategy are dependent on our working
capital. We have been aggressively seeking to raise additional capital through
selling our equity since August 2002 and have been unable to secure such
financing other than the $300,303 raised from the sale of our preferred stock in
September 2002. Currently, we are seeking to raise approximately $1.5 million of
additional capital through selling securities. Because of the weak financial
condition of the company we expect that it will be necessary to issue securities
having a valuation and terms that are far more favorable to investors than
securities ION has previously issued. In order to induce investors to provide
capital to ION at this time, it may be necessary to pledge all of the assets of
the Company as collateral for such securities, provide liquidation preferences
at a multiple of the purchase price of the securities, provide favorable
conversion premiums to investors and other similar terms which could have a
negative effect on the value of our common stock and rights of our equity
shareholders upon liquidation or other circumstances. There is no assurance we
can raise the needed $1.5 million or any additional capital on any terms
reasonably acceptable to the Company. If the Company is unable to secure such
financing, we expect our cash on hand and cash equivalents to meet our working
capital and capital expenditure needs through May 2003.


         If we are successful in securing the capital, but fail to achieve the
expected revenue assumptions, we will have to raise further equity or debt
financing and/or curtail certain expenditures contained in the current operating
plans. We can not assure that our sales efforts or expense reduction programs
will be successful, or that any additional financing will be available to us,
or, if available, that the terms will be satisfactory to us. If we are not
successful in raising additional equity capital to generate sufficient cash
flows to meet our obligations as they come due, our financial condition and
results of operations will be materially and adversely affected and we will not
be able to continue to operate as a going concern beyond May 2003. If we are
successful in raising additional capital but fail to increase our revenue or
reduce our expenses, our financial condition and results of operations may be
materially and adversely affected and we will not be able to continue to operate
as a going concern. Our financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
to amounts and classification of liabilities that may be necessary should we be
unable to continue as a going concern.


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

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

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

         Due to the complex and sophisticated hardware and software that is
incorporated in our products, our products have in the past experienced errors
or "bugs" both during development and subsequent to commercial introduction. We
cannot be certain that all potential problems will be identified, that any bugs
that are located can be corrected on a timely basis or at all, or that
additional errors will not be located in existing or future products at a later
time or when usage increases. Any such errors could delay the commercial
introduction of new products, the use of existing or new products, or require
modifications in systems that
                                       11
<PAGE>

have already been installed. Remedying such errors could be costly and time
consuming. Delays in debugging or modifying products could materially and
adversely affect our competitive position.

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

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

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

o        changes in the mix of products and services provided;

o        long sales cycles;

o        changes in regulations affecting our business;

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

o        changes in our operating expenses;

o        uneven revenue streams;

o        volatility in general economic conditions;

o        volatility in the infrastructure security market; and

o        threats of terror and war.


         We cannot assure you that our revenues will not vary significantly
among quarterly periods or that in future quarterly periods our results of
operations will not be below prior results or the expectations of public market
analysts and investors. If this occurs, the price of our common stock could
significantly decrease. See also Risks Associated with Our Securities, "There is
potential for fluctuation in the market price of our securities" page 15.

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

         We have incurred significant losses and negative cash flows from
operations in the past. For the nine-months ended December 31, 2002 and the
fiscal years ended March 31, 2002 and 2001, we experienced net losses of
$5,628,522, $6,929,379, and $16,676,666, respectively, and negative cash flows
from operations of $2,972,337, $5,026,038 and $7,086,246, respectively. These
results have had a negative impact on our financial condition. There can be no
assurance that our business will become profitable in the future and that
additional losses and negative cash flows from operations will not be incurred.
If these trends continue in the future, it could have a material adverse affect
on our financial condition.




                                       12
<PAGE>

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

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

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

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

o        the products' ability to avoid becoming technologically outdated;

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

o        the price.

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

We have undergone a change in our marketing position, and introduced new
products that we expect to account for a significant portion of our revenues. If
the market does not accept this product, our revenues and results of operations
could be materially adversely affected.

         We recently changed our marketing position and focus from that of
network management monitoring to that of network security. In connection with
this change, we introduced three new products, the ION Secure 5010 in early
February 2002, ION Secure 2500 in December 2002 and ION Secure 5500 in January
2003. To date, we have only sold limited amounts of these new products and have
not yet achieved marketplace acceptance. While we still generate revenues from
our previously existing products, our continued revenue growth depends largely
on the success of our new marketing position and product offerings. Therefore,
if these new products do not gain marketplace acceptance, our revenues could be
negatively impacted, which in turn is likely to materially and adversely affect
our business, financial condition and results of operations.

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

         We hold no patents on any of our technology. If we are unable to
license any technology or products that we may need in the future, our business
and operations may be materially and adversely impacted. We have made a
consistent effort to



                                       13
<PAGE>

minimize the ability of competitors to duplicate our software technology
utilized in our products. However, there remains the possibility of duplication
of our products, and competing products have already been introduced. Any such
duplication by our competitors could negatively impact our business and
operations.

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

         Historically, we have been dependent on several large customers each
year, but they are not necessarily the same every year. For the nine-months
ended December 31, 2002, our most significant customers were SBC (approximately
13% of revenues), Sprint (approximately 12% of revenues) Avaya (approximately
12% of revenues), Siemens (approximately 11% of revenues) and Qwest
(approximately 6% of revenues).

         For the fiscal year ended March 31, 2002, our most significant
customers were AT&T (approximately 15% of revenues), Avaya (approximately 12% of
revenues), SBC (approximately 12% of revenues), Nortel (approximately 10% of
revenues). In general, we cannot predict with certainty which large customers
will continue to order. The loss of any of these large customers, or the failure
to attract new large customers would likely significantly decrease our revenues
and future prospects, which could materially and adversely affect our business,
financial condition and results of operations.

All of our key customers are telecommunications companies. If the
telecommunications industry continues to experience significant economic
downturn, our sales could be adversely impacted.

         A significant portion of our revenues is generated from sales of our
products and services to various telecommunications companies. During the last
twelve to eighteen months, the telecommunications industry has endured a
significant economic downturn. Telecommunications service providers have
typically reduced planned capital spending, have reduced staff, and sought
bankruptcy proceedings and/or ceased operations. Consequently, the spending
cutback of these organizations has affected the Company through reduced product
orders. The decline in product orders negatively impacted our revenues,
resulting in significant operating losses and negative cash flows. If the
telecommunications industry experiences further economic downturns, this could
negatively impact our sales and revenue generation, and consequently have a
material adverse effect on our business, financial condition and results of
operations.

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

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

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

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

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

         Our Certificate of Incorporation, as amended, and our Bylaws contain
provisions limiting the liability of our directors for monetary damages to the
fullest extent permissible under Delaware law. This is intended to eliminate the
personal liability of a director for monetary damages on an action brought by or
in our right for breach of a director's duties to us or to our stockholders
except in certain limited circumstances. In addition, our Certificate of
Incorporation, as amended, and our Bylaws contain provisions requiring us to
indemnify our directors, officers, employees and agents serving at our request,
against expenses,


                                       14
<PAGE>

judgments (including derivative actions), fines and amounts paid in settlement.
This indemnification is limited to actions taken in good faith in the reasonable
belief that the conduct was lawful and in, or not opposed to our best interests.
The Certificate of Incorporation and the Bylaws provide for the indemnification
of directors and officers in connection with civil, criminal, administrative or
investigative proceedings when acting in their capacities as agents for us.
These provisions may reduce the likelihood of derivative litigation against
directors and executive officers and may discourage or deter stockholders or
management from suing directors or executive officers for breaches of their
fiduciary duties, even though such an action, if successful, might otherwise
benefit us and our stockholders.

RISKS ASSOCIATED WITH OUR SECURITIES

We do not anticipate the payment of dividends.

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

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

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

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

         As of March 28, 2003, an aggregate of 5,476,175 of the outstanding
shares of our common stock are "restricted securities" as that term is defined
in Rule 144 of the Securities Act of 1933 (Rule 144). These restricted shares
may be sold pursuant only to an effective registration statement under the
securities laws or in compliance with the exemption provisions of Rule 144 or
other securities law provisions. In addition, 3,319,268 shares are issuable
pursuant to currently exercisable options, 1,580,500 shares are issuable
pursuant to currently exercisable warrants, and 1,668,350 shares are issuable
pursuant to currently convertible preferred stock of 166,835 shares. Future
sales of substantial amounts of shares in the public market, or the perception
that such sales could occur, could negatively affect the price of our common
stock.

Our common stock was delisted from Nasdaq.

         On March 19, 2003, Nasdaq notified the Company that it has not regained
compliance with the minimum bid price requirement and is not eligible for an
additional 90-day cure period because Nasdaq determined that the Company does
not meet the initial listing requirements of the Nasdaq SmallCap Market.
Consequently, our Common Stock was delisted from the Nasdaq SmallCap Market at
the opening of business on March 28, 2003. The delisting of our Common Stock
from Nasdaq could negatively effect the prices of our stock, impair the ability
of holders to sell such stock, limit the coverage of our stock by research
analysts, adversely impact our efforts to secure financing, materially and
adversely affect our financial condition and results of operations and will make
us ineligible to register additional shares under a Form S-3.

Item 2: Description of Property

The Company entered into a lease on February 18, 1999 for approximately 26,247
square feet for its principal executive offices at 1551 South Washington Avenue,
Piscataway, New Jersey. On March 17, 2003, the Company signed an amendment with
the landlord reducing the space from 26,247 to 12,722 square feet and the rent
from $50,153.64 to $20,143.17 per month effective March 1, 2003. The Company is
also obligated to make additional payments to the landlord relating to certain
taxes and operating expenses.

In addition, the Company abandoned the 0.298 hectare of space at SolCom House,
Meikle Road, Kirkton Campus, Livingston EH547DE, Scotland that it leased. As a
result, the Company recorded a charge of $508,458 in the quarter ended December
31, 2002 for the remainder of the lease term that expires on August 31, 2011.

The Company also leases approximately 5,600 square feet of space at 48834 Kato
Road, Fremont, California in the Bedford Fremont Business Center. This lease
commenced on June 1, 1999 and is for a term of 60 months with monthly rent
payable by the Company to the landlord as follows: $7,360 per month for the
first 12 months of the term; $7,590 per month for months 13-24; $7,820 per month
for months 25-36; $8,050 per month for months 37-48; and $8,280 per month for
months 49-60. The Company entered into an abandonment agreement with the
landlord in March of 2003. As a result, the Company will be incurring a one-time
charge of $ 139,610 in the quarter ending March 31, 2003. This amount represents
the remaining obligation under the lease.



                                       15
<PAGE>

Item 3: Legal Proceedings

On or about June 12, 2002, Xetel Corporation ("Xetel") filed a petition (Xetel
Corporation vs. ION Networks Inc., Cause No.GN201901 in the 250th District Court
of Travis County, Texas) against the Company alleging that the Company owes
Xetel $243,070.19 in accounts receivable for finished assemblies shipped to and
accepted by the Company and $23,626.02 in purchased materials and inventory
being held in Xetel's warehouse pursuant to the Company's written instruction.
Xetel seeks actual damages in the amount of $266,696.21, plus interest,
attorneys' fees and costs, and incidental damages as a result of the Company's
alleged breach.

Item 4: Submission of Matters to a Vote of Security Holders

On October 17, 2002, the Company held its 2002 Annual Meeting of Stockholders
(the "2002 Meeting").

At the 2002 Meeting, the Company's Stockholders elected six directors to serve
until the 2003 Annual Meeting of Stockholders and until their successors shall
be elected and qualified. The vote with respect to the election of such
directors was as follows:

<TABLE>
<CAPTION>
     NAME                      FOR                AUTHORITY WITHHELD      ABSTENTION        BROKER NON-VOTES
     ----                      ---                ------------------      ----------        -----------------
<S>                            <C>                <C>                     <C>               <C>
(a)  Stephen M. Deixler        17,985,231         369,723                 0                 0
(b)  Baruch Halpern            17,985,431         369,523                 0                 0
(c)  Alexander S. Stark, Jr    17,985,431         369,523                 0                 0
(d)  Frank S. Russo            17,985,431         369,523                 0                 0
(e)  Kam Saifi                 17,985,431         369,523                 0                 0
(f)  Vincent Curatolo          17,985,431         369,523                 0                 0
</TABLE>


In addition to electing the directors, the Company's Stockholders voted to
approve an amendment to the Company's Certificate of Incorporation, as amended,
to effect a reverse stock split of all of the outstanding shares of common stock
at a ratio between one-to-two and one-to-ten, to be determined at the discretion
of the Board of Directors. 17,986,291 votes were cast in favor of the approval
of such amendment, 351,956 votes were cast in opposition to such approval,
16,707 votes abstained and there were no broker non-votes.

The Company's Stockholders also voted to approve the adoption of the 2002 Stock
Incentive Plan. 17,570,813 votes were cast in favor of the approval of the 2002
Stock Incentive Plan, 752,282 votes were cast in opposition to such approval,
31,859 votes abstained and there were no broker non-votes.

The Company's Stockholders also voted to approve the ratification of the
selection of Deloitte and Touche LLP as the Company's independent auditors.
18,265,262 votes were cast in favor of the ratification and selection of
Deloitte and Touche LLP as the Company's independent auditors, 60,700 votes were
cast in opposition to such approval, 28,992 votes abstained and there were no
broker non-votes.

The Company's Stockholders also voted to approve the amendment to the Company's
Certificate of Incorporation, as amended, to increase the number of shares of
common stock that the Company is authorized to issue from 50,000,000 to
100,000,000, which would become effective upon the filing of a Certificate of
Amendment of Amended and Restated Certificate of Incorporation with the Delaware
Secretary of State. 17,718,156 votes were cast in favor of the approval of such
amendment, 612,134 votes were cast in opposition to such approval, 24,664 votes
abstained and there were no broker non-votes.

The Company's Stockholders also voted to approve the issuance of up to
35,000,000 shares of common stock or securities convertible into or exercisable
for up to 35,000,000 shares of common stock (such as convertible preferred stock
or warrants) or any of the foregoing in combination, at such prices and on such
terms as may be approved by the Board of Directors; provided that such
issuance(s) would (i) generate gross proceeds to the Company in an aggregate
amount not to exceed $7,000,000, (ii) occur within three months of the date that
the proposal was approved by our stockholders, and (iii) be sold at market value
or, if market conditions warrant, at prices no lower than (or having an exercise
price no lower than) a 20% discount to the last bid price of the common stock on
the day prior to the date that a binding agreement is entered into for the sale
of such securities. 17,718,156 votes were cast in favor of the approval of such
issuance, 628,152 votes were cast in opposition to such approval, 23,754 votes
abstained and there were 12,495,713 broker non-votes.



                                       16
<PAGE>

                                     PART II

Item 5: Market For Common Equity and Related Stockholder Matters

Market Information

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

<TABLE>
<CAPTION>
    Nine-month Ended December 31, 2002, Quarter Ending                       HIGH                             LOW
    --------------------------------------------------                       ----                             ---

<S>                                                                           <C>                             <C>
    June 30, 2002                                                             $0.82                           $0.33
    September 30, 2002                                                         0.45                            0.15
    December 31, 2002                                                          0.47                            0.10


    Fiscal Year Ended March 31, 2002, Quarter Ending
    ------------------------------------------------

    June 30, 2001                                                             $1.15                           $0.57
    September 30, 2001                                                         0.79                            0.16
    December 31, 2001                                                          0.85                            0.08
    March 31, 2002                                                             1.84                            0.65

    Fiscal Year Ended March 31, 2001, Quarter Ending
    ------------------------------------------------

    June 30, 2000                                                            $31.00                           $2.00
    September 30, 2000                                                         5.94                            2.00
    December 31, 2000                                                          3.06                            0.28
    March 31, 2001                                                             3.00                            0.38
</TABLE>


Recent Sales of Unregistered Securities

None.

Security Holders

As of March 28, 2003 there were 326 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
nine-month ended December 31, 2002 and the two full fiscal years ended March 31,
2002 and March 31, 2001. The Company presently intends to retain all earnings to
finance its operations and therefore does not presently anticipate paying any
cash dividends in the foreseeable future.

Item 6: Management's Discussion and Analysis or Plan of Operation

Overview

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

The Company is a Delaware corporation founded in 1999 through the combination of
two companies - MicroFrame ("MicroFrame"), a New Jersey Corporation (the
predecessor entity to the Company, originally founded in 1982), and SolCom
Systems Limited ("SolCom"), a Scottish corporation located in Livingston,
Scotland (originally founded in 1994). From the time


                                       17
<PAGE>

of the merger in 1999 through the quarter ended December 31, 2001, the Company's
principal objective was to address the need for security and network management
and monitoring solutions, primarily for the PBX-based telecommunications market,
resulting in a significant portion of our revenues being generated from sales to
various telecommunications companies. During the quarter ended December 31,
2001, a new management team joined the Company and evaluated ION's revenue and
expenditures, exiting product suite, present customer base and evolving
addressable market. As a result of this evaluation, the Company refocused its
product line from that of network management monitoring to that of
infrastructure security, which was the original focus of MicroFrame prior to the
merger with Solcom. We also added significant network features to the product to
broaden the scope of the potential customer base, emphasizing infrastructure
security. We identified additional enterprise markets that extend beyond the
telecommunications industry and believe that successfully penetrating these
additional markets could positively impact revenue, although there can be no
assurance that these efforts will be successful. Despite these efforts, during
the last two years, the telecommunications industry has endured a significant
economic downturn. Telecommunications service providers have generally reduced
planned capital spending, have reduced staff, and, in some cases, sought
bankruptcy proceedings and/or ceased operations. Consequently, the spending
cutback of the organizations has affected the Company through reduced product
orders. The decline in product orders negatively impacted our revenues,
resulting in significant operating losses and negative cash flows.

As a result, it is imperative for us to be successful in increasing our revenue,
reducing costs, and/or securing additional funding in fiscal 2003 in order to
continue operating as a going concern. If we are not successful in raising
additional equity capital, to generate sufficient cash flows to meet our
obligations as they come due, our financial condition and results of operations
may be materially and adversely affected and we will not be able to continue to
operate as a going concern beyond May 2003. If we are successful in raising
additional capital but fail to increase our revenue or reduce our expenses, our
financial condition and results of operations may be materially and adversely
affected and we may not be able to continue to operate as a going concern.
During the nine-months ended December 31, 2002, the Company reduced headcount by
thirteen employees thereby reducing costs while retaining enough staff to
sufficiently maintain the Company's existing technology and capitalize on new
technological developments.

Results Of Operations

Explanatory Note

On October 25, 2002, ION Networks, Inc. changed its fiscal year end from March
31 to December 31. As a result, pursuant to the rules of the Securities and
Exchange Commission, this Transition Report on Form 10-KSB presents financial
information for the nine-month period ending December 31, 2002. The results of
operations and cash flows of the Company for the nine-months ended December 31,
2002 contained 275 days compared to 365 days for the twelve months ended March
31, 2002 and 2001.

Nine-months Ended December 31, 2002 Compared to Nine-months Ended December 31,
2001

Revenues for the nine-months ended December 31, 2002 were $3,335,160 as compared
with revenues of $5,236,038 for the nine-months ended December 31, 2001, a
decrease of approximately 36%. This decrease is attributable mainly to the
reduction in the number of units sold in the nine-month period ended December
31, 2002. The Company's unit sales volumes decreased by approximately 1,100
units which contributed to approximately $1.9 million of the revenue decrease
period over period. The Company sold mostly the ION Secure 3000 series security
appliances (formerly called the Sentinel 2000) in both periods so there was no
impact on revenue from a change in product mix. The overall downturn impacting
the information technology and the telecommunications industry caused companies
to severely cut capital expenditures during the year 2002. The Company's
business historically has been dependent upon the expansion of these company's
networks and therefore the decrease in revenues is a direct reflection of the
environment in the information technology and telecommunications industries. The
Company's prices remained relatively consistent throughout both periods. The
Company's cost of goods sold decreased to $1,428,037 for the nine-months ended
December 31, 2002 compared to $2,523,047 for the nine-months ended December 31,
2001. Cost of goods sold as a percentage of sales decreased from 48.2% for the
previous comparable fiscal period to 42.8% for this fiscal period. The decrease
is mainly due to lowering the costs associated with manufacturing of the
appliances.

Research and development expenses, net of capitalized software development,
increased from $720,426 for the nine-months ended December 31, 2001 to $766,521
for the nine-months ended December 31, 2002, an increase of 6.4%. The increase
of research and development expenditures for the nine-months ended December 31,
2002 as compared to the nine-months ended December 31, 2001 was primarily due to
the expenses related to testing the new 2500 and 3500 appliances.

Selling, general and administrative expenses decreased 13.8% from $6,405,442 for
the nine-months ended December 31, 2001 to $5,519,665 for the nine-months ended
December 31, 2002. Overall, as a result of the Company's cost reduction efforts,
selling, general and administrative expenses have been reduced on a
quarter-to-quarter basis throughout the nine-months ended December 31, 2002.



                                       18
<PAGE>

Depreciation and amortization was $835,315 for the nine-months ended December
31, 2002 compared to $1,412,794 for the nine-months ended December 31, 2001, a
decrease of approximately 40.9%. This decrease is primarily due to fully
amortizing the goodwill from the acquisition of LeeMAH Datacom Security
Corporation in February of 1999 and fully depreciating the fixed assets in the
nine-month period ended December 31, 2001.

The Company acquired a corporation business tax benefit certificate pursuant to
New Jersey law which relates to the surrendering of unused net operating losses.
For the nine months ended December 31, 2002 and for the year ended March 31,
2002, the Company received a benefit of $236,728 and $264,725, respectively.

During the quarter ended December 31, 2002 the Company separated with thirteen
employees which resulted in a restructuring charge during the quarter of
$154,370 in severance and other related matters, all of which has been paid
prior to December 31, 2002. Also during the quarter ended December 31, 2002, the
Company abandoned the space at SolCom House, Livingston, Scotland that was
leased by its subsidiary ION Networks, Ltd. As a result, the Company recorded a
charge of $508,458 in the quarter ended December 31, 2002 for the remainder of
the lease term that expires on August 31, 2011.

The Company had a loss before income tax benefit of $5,859,949 for the
nine-months ended December 31, 2002 compared to a loss before income tax benefit
of $5,952,194 for the nine-months ended December 31, 2001. Considering the lower
revenues in the nine-months ended December 31, 2002, the loss before taxes
decreased primarily as a result of the Company's continuing cost reduction
efforts.

Fiscal Year Ended March 31, 2002 ("FY2002") Compared to Fiscal Year Ended March
31, 2001("FY2001")

Revenues for FY2002 were $7,312,235 as compared with revenues of $11,676,547 for
FY 2001, a decrease of approximately 37%. This decrease is attributable mainly
to the reduction in the number of units sold in FY2002. The Company sold mostly
the ION Secure 3000 series security appliances (formerly called the Sentinel
2000) in both periods so there was no impact on revenue from a change in product
mix. The overall downturn impacting the information technology and the
telecommunications industry caused companies to severely cut capital
expenditures during FY2002. The Company's business historically has been
dependent upon the expansion of these company's networks and therefore the
decrease in revenues is a direct reflection of the environment in the
industries. The Company's unit sales volumes decreased by approximately 1,100
units which contributed to approximately $2.5 million of the revenue decrease
year over year. The Company's prices remained relatively consistent throughout
most of FY2002 as compared to FY2001. The Company's cost of goods sold decreased
to $3,484,132 for FY2002 compared to $7,184,666 for FY2001. Cost of goods sold
as a percentage of sales decreased from 61.5% for FY2001 to 47.6% for FY2002.
The decrease is due to the impact of additional provisions of approximately
$1,549,099 that were established at various points during FY2001, to recognize
slow moving inventory. Without these reserves, cost of goods sold would have
been 48.3% of sales in FY2001.

Research and development expenses, net of capitalized software development,
decreased from $2,126,246 for FY2001 to $891,542 for FY2002, a decrease of 58%.
The decrease of research and development expenditures in FY2002 as compared to
FY2001 was a result of a significant headcount reduction during FY2001, from a
high of 35 people at the beginning of FY2001 to 8 at the end of FY2001. FY2002
reflects the impact of this reduction for a full year. A substantial amount of
the reduction was a result of stopping the research and development efforts on
the discontinued products as well as the reduction in research and development
activities that resulted from the completion of the development cycle on certain
products. The Company believes that the annual research and development
expenditures were reduced to an amount sufficient to support new releases and
product updates for our existing product lines.

Selling, general and administrative expenses decreased 31.6% from $11,870,263
for FY2001 to $8,119,601 for FY2002. Overall selling, general and administrative
expenses have been reduced on a quarter-to-quarter basis throughout FY2002, as a
result of the Company's cost reduction efforts.

Depreciation and amortization was $1,852,090 for FY2002 compared to $3,742,450
for FY2001, a decrease of approximately 50.5%. Amortization expense for
capitalized software decreased from $2,138,707 in FY2001 to $828,032 in FY2002,
primarily as a result of management's decision during FY2001 to abandon the
products and the 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. As a result of the
Company's operating performance during the first six months of FY2002, the
Company, during the third quarter of FY2002, announced the layoff of 17
employees to reduce its overhead expenses. The Company recorded approximately
$217,467 of severance and termination related costs. Termination benefits of
approximately $214,000 were paid during the third and fourth quarters of FY2002.
All of the affected employees have left the Company as of March 31, 2002. As of
April 30, 2002 the remaining termination benefits of $3,467 were paid.
                                       19
<PAGE>

The Company had a loss before taxes of $7,169,740 for FY2002 compared to a loss
before taxes of $16,669,098 for FY2001. The loss before taxes improved primarily
as a result of the Company's cost reduction efforts and management's decision
during FY2001 to abandon certain products and technology associated with the
SolCom acquisition. At March 31, 2002 and March 31, 2001 the Company had federal
and state net operating loss carryforwards of approximately $35.5 million and
$27.4 million respectively. The expiration dates for its net operating losses
range from the years 2011 through 2022. The net loss for the year ended March
31, 2002 was $6,929,379 compared to a net loss of $16,676,666 for the prior
fiscal year.

Financial Condition And Capital Resources

The Company's working capital balance as of December 31, 2002 was $184,689,
compared to $5,040,922 at March 31, 2002 and $6,918,057 at March 31, 2001. This
decline in working capital was due to continued operating losses generated
throughout the nine-months ended December 31, 2002. If we are not successful in
raising additional equity capital to generate sufficient cash flows to meet our
obligations as they come due, our financial condition and results of operations
will be materially and adversely affected and we will not be able to continue to
operate as a going concern beyond May 2003.

Net cash used in operating activities during the nine-months ended December 31,
2002 was $2,972,337, compared to $5,026,038 in FY2002 and $7,086,246 in FY2001.
The decrease in net cash used is primarily as a result of the decrease in
operating losses in the nine-months ended December 31, 2002. The reduction in
operating losses was partially offset by the reduction in certain non-cash
expenses primarily due to selling, general and administrative expense.

Net cash used in investing activities during the nine-months ended December 31,
2002 was $380,390, compared to net cash provided of $527,236 in FY2002 and net
cash used of $3,213,835 in FY2001. Of the $380,390 of the net cash used in
investing activities during the nine-months ended December 31, 2002, $339,688
was for capitalized software expenditures related to the development of our
PRIISMS product and the balance remaining was for acquisition of property
equipment.

Net cash provided by financing activities during the nine-months ended December
31, 2002 was $208,889, compared to $3,337,115 in FY2002 and $5,149,302 in
FY2001. Financing activities during the nine-months ended December 31, 2002
include the sale of 166,835 unregistered shares of the Company's Series A
Preferred Stock ("Preferred Stock") at $1.80 per share for a total consideration
of $300,303.00 in a private equity transaction and repayment of capital leases
of $88,678.

Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern, which contemplates the realization and
satisfaction of liabilities and commitments in the normal course of business. At
December 31, 2002, we had an accumulated deficit of $42,722,946 and working
capital of $184,689. We also realized net losses of $5,628,522 for the
nine-months ended December 31, 2002, $6,929,379 for FY2002 and $16,676,666 for
FY2001. Our existing working capital will not be sufficient to sustain our
operations beyond May 2003.

Our business plan and growth strategy are dependent on our working capital. We
have been aggressively seeking to raise additional capital through selling our
equity since August 2002 and have been unable to secure such financing other
than the $300,303 raised from the sale of our preferred stock in September 2002.
Currently, we are seeking to raise approximately $1.5 million of additional
capital through selling securities. Because of the weak financial condition of
the company we expect that it will be necessary to issue securities having a
valuation and terms that are far more favorable to investors than securities ION
has previously issued. In order to induce investors to provide capital to ION at
this time, it may be necessary to pledge all of the assets of the Company as
collateral for such securities, provide liquidation preferences at a multiple of
the purchase price of the securities, provide favorable conversion premiums to
investors and other similar terms which could have a negative effect on the
value of our common stock and rights of our equity shareholders upon liquidation
or other circumstances. There is no assurance we can raise the needed $1.5
million or any additional capital on any terms reasonably acceptable to the
Company. If the Company is unable to secure such financing, we expect our cash
on hand and cash equivalents to meet our working capital and capital expenditure
needs through May 2003.

If we are successful in securing the capital, but fail to achieve the expected
revenue assumptions, we will have to raise further equity or debt financing
and/or curtail certain expenditures contained in the current operating plans. We
can not assure that our sales efforts or expense reduction programs will be
successful, or that any additional financing will be available to us, or, if
available, that the terms will be satisfactory to us. If we are not successful
in raising additional equity capital to generate sufficient cash flows to meet
our obligations as they come due, our financial condition and results of
operations will be materially and adversely affected and we will not be able to
continue to operate as a going concern beyond May 2003. If we are successful in
raising additional capital but fail to increase our revenue or reduce our
expenses, our financial condition and results of operations may be materially
and adversely affected and we may not be able to continue to operate as a going
concern. Our financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should we be unable to
continue as a going concern.



                                       20
<PAGE>

Significant Accounting Policies

Principles of Consolidation -
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 inter-company balances
and transactions have been eliminated in consolidation.

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

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

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.

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

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

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

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

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



                                       21
<PAGE>

The Company capitalized $339,689, $500,388 and $1,526,411 of software
development costs for the nine months ended December 31, 2002, and for the
fiscal years ended March 31, 2002 and 2001, respectively. The Company wrote-off
$5,387 and $2,332,120 of software development costs for fiscal years ended March
31, 2002 and 2001 (see Note 3). Amortization expense totaled $483,723, $828,032,
and $2,138,707 for the nine-months ended December 31, 2002, and for the fiscal
years ended March 31, 2002, and 2001, respectively.

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

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

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

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

If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards for the nine months ended December 31,
2002 and for the fiscal years ended March 31, 2002 and 2001, consistent with the
provisions of SFAS No. 123, the Company's net loss and basic and diluted net
loss per share would have increased to the pro forma amounts indicated below: by
$201,279 and $.01, $460,532 and $.02 and $2,129,042 and $.12, respectively, for
the nine-months ended December 31, 2002 and the years ended March 31, 2002 and
2001.

The weighted-average fair values at date of grant for options granted during the
nine months ended December 31, 2002 and the fiscals year ending March 31, 2002
and 2001 were $0.32, $0.26 and 3.02, 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 the nine months ended December 31, 2002 and
fiscal 2002:

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.



                                       22
<PAGE>

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

Warranty Costs -
The Company estimates its warranty costs based on historical warranty claim
experience. Future costs for warranties applicable to sales recognized in the
current period are charged to cost of sales. The warranty accrual is reviewed
quarterly to reflect the remaining obligation. Adjustments are made when actual
warranty claim experience differs from estimates.

Goodwill -
Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is amortized over an estimated useful life of five years. In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from an amortization method to
an impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon adoption of this statement
on January 1, 2002.

Reclassifications -
Certain amounts in the financial statements for the year ended March 31, 2002
and 2001 have been reclassified to conform to the presentation of the financial
statements for the nine month period ended December 31, 2002.

Accounting Pronouncements

In July 2001, the FASB issued SFAS No.141 "Business Combinations" and SFAS
No.142 "Goodwill and Other Intangible Assets." SFAS No.141 requires use of the
purchase method of accounting for business combinations initiated after June 30,
2001. SFAS No.142, which is effective for the Company beginning April 1, 2002,
requires that the amortization of goodwill and certain other intangible assets
cease and that the related asset values be reviewed annually for impairment. The
adoption of SFAS No. 141 and 142 had no impact on the Company' consolidated
financial statements for the nine months ended December 31, 2002.

In July 2001, the FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company is currently evaluation the impact that
adoption of this standard will have on its consolidated financial statements.

In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect that the adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flow.


In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the Company's
consolidated financial statements will depend upon whether the Company enters
into or modifies any material guarantee arrangements. We have complied with
disclosure provision of this interpretation as of December 31, 2002.


In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the Company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the Company will hold a
significant variable



                                       23
<PAGE>

interest in, or have significant involvement with, an existing VIE. The Company
does not have any entities that require disclosure or new consolidation as a
result of adopting the provisions of FIN 46.


Item 7: Financial Statements

The financial statements required hereby are located on pages 44 through 69.

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 the Company's Form 10KSB for the year ending March
31, 2001.

The Company with the Approval of the Audit Committee of the Company's Board of
Directors appointed Deloitte & Touche LLP as the Company's independent public
accountants for the fiscal year ended March 31, 2002, effective as of August 13,
2001.





                                       24
<PAGE>

                                    Part III

Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance
With Section 16(a) of the Exchange Act.

As of March 28, 2003 the directors and executive officers of the Company were as
follows:

<TABLE>
<CAPTION>
             Name                    Age     Position Held with the Company
             ----                    ---     ------------------------------
<S>                                  <C>     <C>
Kam Saifi*(5)                        42      Chief Executive Officer,
                                             President and Director

Cameron Saifi*(5)                    41      Chief Operating Officer,
                                             Executive Vice President and
                                             Secretary

William Whitney                      48      Chief Technology Officer and
                                             Vice President of Research and Development

Stephen M. Deixler(1)(2)(3)(4)(5)    67      Chairman of the Board of
                                             Directors and Interim Chief Financial Officer
Baruch Halpern                       52      Director

Frank S. Russo(1)(2)(3)(4)(5)        60      Director

Vincent Curatolo(3)(4)(5)            43      Director

Christopher Corrado(3)(5)            43      Director
</TABLE>


--------------
(1) Member of Compensation/Stock Option Committee
(2) Member of Nominating Committee
(3) Member of Audit Committee
(4) Member of Strategic Steering Committee
(5) Member of Strategic Development Committee * Mr. Kam Saifi and Mr. Cameron
    Saifi are brothers.

KAM SAIFI has served as Chief Executive Officer, President and Director of the
Company since October 2001. Prior to joining ION, from November 2000 to August
2001, Mr. Saifi served as the Chairman of the Board of Directors and Chief
Executive Officer of Internet Refinery, a provider of collaborative commerce and
business intelligence solutions. From June 2000 to August 2000, Mr. Saifi served
as Vice Chairman and Executive Vice President of Visual Networks, Inc. which
merged with Avesta Technologies, Inc., a New York-based software company
focusing on managing Internet infrastructure. Mr. Saifi was the Founder,
Chairman of the Board of Directors, Chief Executive Officer and President of
Avesta Technologies, Inc. from October 1996 to May 2000. He has also served as a
member of the Board of Directors for MetaMatrix from 1998 to September 2000.

CAMERON SAIFI has served as Chief Operating Officer and Executive Vice President
of the Company since October 2001 and Secretary of the Company since December
2001. Prior to joining ION, from October 2000 to October 2001, Mr. Saifi served
as the President, Chief Operating Officer and Co-Founder of Internet Refinery, a
provider of collaborative commerce and business intelligence technology for
Business-to-Business applications. Previously, from January 1997 to June 2000,
Mr. Saifi served as Senior Vice President and Chief Operating Officer for Avesta
Technologies, Inc.

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

STEPHEN M. DEIXLER has been Chairman of the Board of Directors since May1982 and
served as Chief Executive Officer of the Company from April 1996 to May 1997. He
was President of the Company from May 1982 to June 1985 and served as



                                       25
<PAGE>

Treasurer of the Company from its formation in 1982 until September 1993. Since
March 2003, Mr. Deixler has served as the interim Chief Financial Officer of the
Company. He also serves as Chairman of the Board of Trilogy Leasing Co., LLC and
President of Resource Planning Inc.. Mr. Deixler was the Chairman of Princeton
Credit Corporation until April 1995 and Chief Financial Officer of Multipoint
Communications, LLC until November 2002.

BARUCH HALPERN has served as a director of the Company since October 1999. From
January 1995 to May 1999, Mr. Halpern was an institutional research analyst with
Goldsmith & Harris Incorporated, where he advised institutions about investment
opportunities. He was also an advisor in connection with a leveraged buy-out of
a public company and several private placements. In 1999, Mr. Halpern formed
Halpern Capital as a DBA entity under Goldsmith & Harris Incorporated. The DBA
was subsequently moved to UVEST Investment Services, a member of NASD/SIPC. In
January 2003, Mr. Halpern formed his own broker-dealer, Halpern Capital, Inc.
Over the last two years Baruch Halpern's entities were involved in numerous
financings, having raised over $225 million in capital for several public
entities.

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

VINCENT CURATOLO has served as director of the Company since March 2002. Mr.
Curatolo has held several executive positions at Cisco Systems since May 1998.
He is currently the Senior Director of Business Development for the Global
Service Provider Business Unit of Cisco Systems. Prior to that position, he
served as the Senior Director and Director of Cisco Systems in the areas of
field operations and technical field operations.

CHRISTORPHER CORRADO has served as director of the Company since November 2002.
Since December 2002, Mr. Corrado serve as the Chief Executive of Securities for
Wipro Technologies. Prior to that, he was the Chief Technology Officer of
Merrill Lynch from March 1999 to June 2002, and Chief Technology Officer of
Deutsche Bank from March 1997 to March 1999.

Section 16(a) Beneficial Ownership Reporting Compliance

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

The Company believes, based solely on its review of the copies of such reports
received or written representations from certain Reporting Persons, that during
the nine-month ended December 31, 2002, Mr. Martin Ritchie was inadvertently
late in filing a Form 4 to report one transaction of 1,500 options granted to
him on September 12, 2002. Mr. Vincent Curatolo and Mr. Baruch Halpern were each
inadvertently late in filing their Form 4s to report a transaction of 1,500
options granted to each of them on October 17, 2002. Mr. Frank Russo and Mr.
Stephen Deixler were each inadvertently late in filing their Form 4s to report a
transaction of 1,500 options granted to each of them on November 8, 2002. Mr.
William Whitney was inadvertently late in filing a Form 3 on October 1, 2002 to
report his appointment to the position of Chief Technology Officer and ownership
of 62,814 shares of Common Stock, 3,889 shares of Preferred Stock and 100,000
options. All such inadvertent late filings have been filed and reported by the
Reporting Persons on the applicable Form 3 or Form 4.




                                       26
<PAGE>

Item 10: Executive Compensation

The following table sets forth the compensation earned, whether paid or
deferred, by the Company's Chief Executive Officer, its other four most highly
compensated executive officers during the nine-months ended December 31, 2002
and up to two additional individuals for whom disclosure would have been
provided but for the fact that the individual was not serving as an executive
officer at the end of the nine-month period ended December 31, 2002 (the "Named
Executive Officers") for services rendered in all capacities to the Company.

<TABLE>
<CAPTION>
                                                     Summary Compensation Table

                         Annual Compensation                                   Long-term Compensation
                         -------------------                                   ----------------------
                                                                              Awards                            Payouts
                                                                              ------                            -------
                                                                       Other
                                                                       Annual
                                                                       Compen-   Restricted    Securities             All Other
Principal                                                              sation      Stock       Underying     LTIP       Compen-
Position                 Year Ending*     Salary($)      Bonus($)       ($)      Award(s)($)   Options (#) Payouts($) sation($)/(1)/
--------                 ------------     ---------      --------       ---      -----------   -------------------------------------
Current CEO and Executive Officers:

<S>                       <C>             <C>             <C>          <C>     <C>              <C>        <C>         <C>
Kam Saifi/(2)(7)/         12/31/2002      273,300/(8)/        --         --         --             --           --            --
President & Chief         03/31/2002      132,681/(9)/    50,000         --     240,000/(10)/      --           --         1,398
Executive Officer

Cameron Saifi/(3)(7)/     12/31/2002      139,500             --         --         --             --           --            --
Executive Vice            03/31/2002      90,519          25,000         --     186,000/(11)/      --           --         1,641
President & Chief
Operating Officer

William Whitney/(4)(7)/   12/31/2002      112,500             --         --          --            --           --            --
Vice President &          03/31/2002      9,135               --         --          --       100,000/(13)/     --            --
Chief Technology
Officer

Former Executive Officers:

Ted I. Kaminer/(5)/(7)/   12/31/2002      90,625              --         --          --       200,000/(14)/     --            --
Vice President &
Chief Financial
Officer

David Arbeitel/(6)/(7)/   12/31/2002      74,000              --        23,034       --            --           --            --
Vice President &          03/31/2002      72,231          12,500         --     93,000/(12)/       --           --            --
Chief Technology
Officer
</TABLE>


---------------
*Please note that the 12/31/02 year end represents the nine-month period from
4/1/02 to 12/31/02, and the 3/31/02 year end represents the prior fiscal year
end of the 12-month period from 4/1/01 to 3/31/02.

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

(2)   Mr. K. Saifi joined the Company on 10/1/01. Pursuant to his employment
      agreement, he receives an annualized base salary of $250,000 for the
      fiscal year ended March 31, 2002 and an annualized base salary of $350,000
      for the nine-months ended December 31, 2002.

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

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

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

(6)   Mr. Arbeitel joined the Company on 10/17/01 and separated from the Company
      on 9/29/02. Mr. Arbeitel received a one-time severance payment of $14,800.
      Mr. Arbeitel also received payment of $8,234 for accrued and unused
      vacation time.



                                       27
<PAGE>

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

(8)   Includes $10,800 in auto allowance.

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

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

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

(12)  These shares vest as follows: 37,500 on October 17, 2001, 82,500 on
      September 30, 2002 and 22,500 at the end of each quarter, commencing with
      the quarter ended December 31, 2002, and ending with the quarter ending
      September 30, 2004, for a total of 180,000.

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

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


              Option Grants for Nine-Months Ended December 31, 2002

The following table sets forth certain information concerning stock option
grants during the nine-months ended December 31, 2002 to the Named Executive
Officers:

<TABLE>
<CAPTION>
                                                                          Individual Grants

                                                                 Percent
                                           Number of             of Total
                                          Securities             Options                 Exercise
                                          Underlying            Granted to               or Base
                                            Options            Employees in               Price                 Expiration
  Name                                     Granted(#)          Fiscal Year               ($/Sh)                     Date
  ----                                     ----------          -----------               ------                     ----

Current CEO and Executive Officers:
<S>                                        <C>                 <C>                      <C>                     <C>
Kam Saifi                                         --

Cameron Saifi                                     --

William Whitney                                   --

Former and Executive Officers:

Ted Kaminer                                 200,000(1)/(2)           24%                  .450                     5/07/03

David Arbeitel                                    --
</TABLE>



(1)  Represents options granted upon hire as part of an Employment Agreement
     dated May 20, 2002.
(2)  25,000 options vested on May 20, 2002, 43,000 options vest on May 20, 2003
     and 16,500 options vest every 3 months thereafter. As a result of Mr.
     Kaminer's separation from the Company on February 6, 2003, the unvested
     portion of his options were cancelled and the vested portion of his options
     will expire on May 7, 2003.

                                       28
<PAGE>


       Aggregated Option Exercises for Nine-Months Ended December 31, 2002
                       And Nine-Months Ended Option Values

The following table sets forth certain information concerning each exercise of
stock options during nine-months ended December 31, 2002 by each of the Named
Executive Officers and the number and value of unexercised options held by each
of the Named Executive Officers on December 31, 2002.

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

Cameron Saifi                       --               --                    --                                --

William Whitney                     --               --                    0/100,000                        0/0

Former Executive Officers:

Ted Kaminer                         --               --                  25,000/175,000                     0/0

David Arbeitel                      --               --                      --                               --
</TABLE>



(1) The average price for the Common Stock as reported by the Nasdaq Stock
Market on December 31, 2002, was $.25 per share. Value is calculated on the
basis of the difference between the option exercise price and $.25 multiplied by
the number of shares of Common Stock underlying the options.

Compensation of Directors

Standard Arrangements: For the nine-month period ended December 31, 2002, each
of the members of the Board of Directors who is not also an employee of the
Company ("Non-Employee Directors") received fully vested options to purchase
10,000 shares of Common Stock at exercise prices per share equal to the fair
market value of the Common Stock on the date of grant on an annual basis.
Non-Employee Directors were also granted fully vested options to purchase an
additional 1,500 shares of Common Stock for each meeting of the Board of
Directors attended by such Non-Employee Director at exercise prices per share
equal to the fair market value of the common stock on the date of the grant.
Non-Employee Directors serving on committees of the Board of Directors were
granted, on an annual basis, fully vested options to purchase 1,500 shares of
Common Stock for each committee served thereby at exercise prices per share
equal to the fair market value of the common stock on the date of the grant. In
addition, the Company reimburses all Non-Employee Directors traveling more than
fifty miles to a meeting of the Board of Directors for all reasonable travel
expenses.

Employment Contracts, Termination of Employment and Change of Control
Arrangements

The Company entered into an employment agreement with Kam Saifi dated October 4,
2001. Pursuant to the agreement, Mr. Saifi shall serve as Chief Executive
Officer and President commencing October 1, 2001 and continuing until September
30, 2004 unless earlier terminated as provided in the agreement. Mr. K. Saifi
will receive a base salary at an annual rate of $250,000 during the period of
October 1, 2001 and ending March 31, 2002, or total compensation for the
six-month period of $125,000. He will receive a base salary at an annual rate of
$350,000 during the period of April 1, 2002 and ending September 30, 2002, or
total compensation for the six-month period of $175,000. In addition he will
receive a monthly car allowance of $1,200. Mr. K. Saifi will also receive a
quarterly bonus payment of $50,000 each time the Company achieves its gross
sales target in such fiscal quarter. Pursuant to the agreement, Mr. K. Saifi was
granted restricted stock consisting of 2,000,000 shares of the Company's Common
Stock at a price of $0.13 per share. These shares vest as follows: 250,000 on
execution of the agreement, 550,000 on September 30, 2002 and 150,000 at the end
of each quarter, commencing with the quarter ended December 31, 2002, and ending
with the quarter ending September 30, 2004, for a total of 1,200,000. In the
event of a change in control event (as described in the employment agreement)
all shares will become immediately vested. If Mr. K. Saifi's employment is
terminated by the Company for other than "Cause", Mr. K. Saifi shall be entitled
to a severance payment equal to the lesser of the remaining salary due for the
balance of the contract or payment of salary for the next six months as if the
Agreement had not been terminated.

The Company entered into an employment agreement with Cameron Saifi dated
October 17, 2001. Pursuant to the agreement, Mr. C. Saifi shall serve as Chief
Operating Officer and Executive Vice President commencing October 17, 2001 and
continuing until September 30, 2004 unless earlier terminated as provided in the
agreement. Mr. C. Saifi will receive a base salary at an


                                       29
<PAGE>

annual rate of $186,000. Mr. C. Saifi will also receive a quarterly bonus
payment of $25,000 each time the Company achieves its gross sales target in such
fiscal quarter. Pursuant to the agreement, Mr. C. Saifi was granted restricted
stock consisting of 600,000 shares of the Company's Common Stock at a price of
$0.31 per share. These shares vest as follows: 75,000 on execution of the
agreement, 165,000 on September 30, 2002 and 45,000 at the end of each quarter,
commencing with the quarter ended December 31, 2002, and ending with the quarter
ending September 30, 2004, for a total of 360,000. In the event of a change in
control event (as described in the employment agreement) all shares will become
immediately vested. If Mr. C. Saifi's employment is terminated by the Company
for other than "Cause", Mr. Saifi shall be entitled to a severance payment equal
to the lesser of the remaining salary due for the balance of the contract or
payment of salary for the next three months as if the Agreement had not been
terminated.

The Company entered into an employment agreement with William Whitney dated
March 11, 2002. Pursuant to the agreement, Mr. Whitney shall receive a base
salary at an annual rate of $150,000. Pursuant to the agreement, Mr. Whitney was
granted stock options consisting of 100,000 shares of the Company's Common Stock
at a price of $0.70 per share. These options vest as follows: 34,000 vest on
March 11, 2003, and 8,250 at the end of each three month period, commencing with
the period ending June 11, 2003, and ending with the period ending March 11,
2005. In the event of a change in control event (as described in the employment
agreement) all options will become immediately vested. If Mr. Whitney's
employment is terminated by the Company for other than "Cause" prior to the
completion of 24 months service, Mr. Whitney shall be entitled to a severance
payment equal to three months salary.

The Company entered into an employment agreement with David Arbeitel dated
October 17, 2001. Pursuant to the agreement, Mr. Arbeitel shall serve as Chief
Technology Officer and Vice President commencing October 17, 2001 and continuing
until September 30, 2004 unless earlier terminated as provided in the agreement.
Mr. Arbeitel will receive a base salary at an annual rate of $148,000. Mr.
Arbeitel will also receive a quarterly bonus payment of $12,500 each time the
Company achieves its gross sales target in such fiscal quarter. Mr. Arbeitel was
granted restricted stock consisting of 300,000 shares of the Company's Common
Stock at a price of $0.31 per share. These shares vest as follows: 37,500 on
execution of the agreement, 82,500 on September 30, 2002 and 22,500 at the end
of each quarter, commencing with the quarter ended December 31, 2002, and ending
with the quarter ending September 30, 2004, for a total of 180,000. In the event
of a change in control event (as described in the employment agreement) all
shares will become immediately vested. If Mr. Arbeitel's employment is
terminated by the Company for other than "Cause", Mr. Arbeitel shall be entitled
to a severance payment equal to the lesser of the remaining salary due for the
balance of the contract or payment of salary for the next three months as if the
Agreement had not been terminated. On September 29, 2002, Mr. Arbeitel separated
employment from the Company. As a result, the Company entered into a Separation
Agreement and General Release dated October 31, 2002 with Mr. Arbeitel and paid
him a severance of $14,800.

The Company entered into an employment agreement with Ted Kaminer dated May 20,
2002. Pursuant to the agreement, Mr. Kaminer was to serve as Chief Financial
Officer and Vice President commencing May 20, 2002 and continuing until June 30,
2005 unless earlier terminated as provided in the agreement. On February 6,
2003, Mr. Kaminer voluntarily separated employment from the Company and, as a
result, no severance was paid to him. Mr. Kaminer received a base salary at an
annual rate of $145,000. Mr. Kaminer was to also receive a quarterly bonus
payment of $12,500 each time the Company achieves its gross sales target in such
fiscal quarter. Pursuant to the employment agreement, Mr. Kaminer was granted
stock options consisting of 200,000 shares of the Company's Common Stock at a
price of $0.45 per share. Only 25,000 of these options vested prior to Mr.
Kaminer's resignation on February 6, 2003 and may be exercised by Mr. Kaminer
within 90 days of his resignation. On February 6, 2003, 175,000 unvested options
were cancelled as a result of Mr. Kaminer's resignation on such date.





                                       30
<PAGE>

Item 11: Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters

<TABLE>
<CAPTION>
                                                               Equity Compensation Plan Information*


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

Plan Category
<S>                                         <C>                           <C>                             <C>
Equity compensation plans approved by
security holders/(1)/                          3,207,102                           1.68                        3,545,238

Equity compensation plans not approved
by security holders/(2)/                         658,000                           1.28                               --

Total                                          3,865,102                           1.61                        3,545,238
</TABLE>

* Due to the Company's change in fiscal year end, the information provided is as
of December 31, 2002.

(1) Shareholder Approved Plans

In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002
Plan"). The 2002 Plan provides for the issuance of stock options, grants of
common stock and stock appreciation rights covering up to 1,250,000 shares of
common stock; provided, however, no more than 250,000 shares may be issued in
connection with awards or stock appreciation rights. The maximum number of
options which may be granted to an employee during any fiscal year under the
2002 Plan shall be 300,000. The term of these non-transferable stock options may
not exceed ten years (or five years in the case of incentive stock options
granted to any grantee who owns stock representing more than 10% of the combined
voting power of the Company's stock or the stock of a parent company or
subsidiary). The exercise price of these stock options may not be less than 100%
(110% in the case of incentive stock options granted to any grantee who owns
stock representing more than 10% of the combined voting power of the Company's
stock or the stock of a parent company or subsidiary) of the fair market value
of one share of common stock on the date of grant. During the nine-month ended
December 31, 2002, the Company granted options to purchase zero shares. As of
December 31, 2002, zero options were outstanding under the 2002 Plan.

In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the nine-month period ended December 31, 2002 and the full fiscal
years ended March 31, 2002 and 2001, the Company granted options to purchase
838,000, 1,854,000 and 1,724,500 shares, respectively. As of December 31, 2002,
1,991,550 options were outstanding under the 2000 Plan, of which 879,850 options
were exercisable.

The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the nine-month ended December 31, 2002
and the full fiscal years ended March 31, 2002 and 2001, the Company granted
options to purchase zero, 463,800 and 1,596,078 shares, respectively. As of
December 31, 2002, 1,120,951 options were outstanding under the 1998 Plan, of
which 966,380 options were exercisable.

In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the nine-month ended December 31, 2002 and the full fiscal years ended March 31,
2002 and 2001, there were no option grants provided under the 1994 Plan. As of
December 31, 2002, 94,601 options were outstanding under the 1994 Plan, of which
71,241 options were exercisable.



                                       31
<PAGE>

Of the options granted in the nine-month ended December 31, 2002, and full
fiscal years ended March 31, 2002 and 2001, zero, zero and 578,528,
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 fiscal year in which
the options are granted if the Company meets certain predetermined sales
targets. The Company did not meet the targets for 2001 and, as such, all options
granted under the TARSAP in 2001 will vest seven years from the original date of
grant.

(2) Non-Shareholder Approved Awards

The Company has granted options and warrants to purchase 918,000 shares of
Common Stock outside of the shareholder approved plans. The awards have been
made to employees, directors and consultants, and except as noted below, have
been granted with an exercise price equal to the fair market value of the Common
Stock on the date of grant. The Company has not reserved a specific number of
shares for such awards. The non-shareholder approved awards are more
specifically described below.

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

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

On March 19, 1999, the Company issued options to certain consultants and
employees to purchase an aggregate of 20,000 shares of the Company's Common
Stock, all of which vested on the first year anniversary of the date of grant.
The options expire six years from the date of grant. However, in the event of
(a) the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is $2.41 and equals to the
market value of the Company's Common Stock on the date of grant. At December 31,
2002, 10,000 options were outstanding and exercisable.

During September 1997 and March 1998, the Company issued options to certain
officers and directors to purchase an aggregate of 80,000 shares of the
Company's Common Stock, 25,000 of which vested on the date of grant, 7,500 of
which vested three months from the date of grant, 7,500 of which vested six
months from the date of grant, 7,500 of which vested nine-months from the date
of grant and 32,500 of which vested on the first year anniversary of the date of
grant. The 55,000 options expire five years from the date of grant and 25,000
options expire six years from the date of grant. However, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is equal to the market
value of the Company's Common Stock on the date of grant and ranges from $1.47
to $2.06. At December 31, 2002, 50,000 options were outstanding and exercisable.

On September 25, 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. The
options expire ten years from the date of grant. However, in the event of (a)
the liquidation or dissolution of the Company or (b) a merger in which the
Company is not the surviving corporation or a consolidation involving the
Company, the options shall terminate, unless other provision is made therefore
in the transaction. The exercise price of the options is $1.156 and equals to
the market value of the Company's Stock on the date of grant. At December 31,
2002, 400,000 options were outstanding and exercisable.





                                       32
<PAGE>

                        Beneficial Ownership Information

The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 28, 2003 by each person (or
group within the meaning of Section 13(d)(3) of the Securities Exchange Act of
1934) known by the Company to own beneficially 5% percent or more of the
Company's Common Stock, and by the Company's directors and named executive
officers, both individually and as a group.

As used in this table, "beneficial ownership" means the sole or shared power to
vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within sixty days from March 28, 2003 through the exercise of any
option, warrant or right. Shares of Common Stock subject to options, warrants or
rights (including conversion from Preferred Stock) which are currently
exercisable or exercisable within sixty days are deemed outstanding for
computing the ownership percentage of the person holding such options, warrants
or rights, but are not deemed outstanding for computing the ownership percentage
of any other person. The amounts and percentage are based upon 24,875,500 shares
of Common Stock and 166,835 shares of Preferred Stock outstanding as of March
28, 2003.

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

Stephen M. Deixler                          1,457,772/(1)/        5.9%

Frank Russo                                 361,280/(2)/          1.5%

Vincent Curatolo                            58,000/(3)/           *

Baruch Halpern                              1,001,760/(4)/        4.0 %

Christopher Corrado                         16,000/(5)/           *

Kam Saifi                                   2,308,890/(6)/        9.3%

Cameron Saifi                               685,000/(7)/          2.8%

William Whitney                             135,704(8)            *

Former Executive Officers:

David Arbeitel                              37,500/(9)/           *

Ted Kaminer                                 25,000/(10)/          *

5% or more beneficial owners:

AWM Investment Company                      3,132,282/(11)/       12.6%
153 East 53rd Street, 55th Floor
New York, NY 10022

Directors and Executive Officers as a       6,086,906             24.5%
group (10 persons)


(1) Does not include 220,000 shares of Common Stock owned by Mr. Deixler's wife,
mother, children and grandchildren as to which shares Mr. Deixler disclaims
beneficial ownership. Includes 480,560 shares of Common Stock subject to
conversion from 48,056 shares of Preferred Stock within 60 days of March 28,
2003 and 382,500 shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of March 28, 2003.

 (2) Includes 277,780 shares of Common Stock subject to conversion from 27,778
shares of Preferred Stock within 60 days of March 28, 2003 and 83,500 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of March 28, 2003.

(3) Includes 58,000 shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of March 28, 2003.

(4) Does not include 17,000 shares of Common Stock owned by Mr. Halpern's
daughter as to which Mr. Halpern disclaims beneficial ownership. Includes
480,560 shares of Common Stock subject to conversion from 48,056 shares of
Preferred Stock within 60 days of March 28, 2003, 287,500 shares of Common Stock
subject to options that are currently exercisable or exercisable within 60 days
of March 28, 2003 and 100,000 shares of Common Stock subject to warrants that
are currently exercisable or exercisable within 60 days of March 28, 2003.



                                       33
<PAGE>

(5) Includes 16,000 shares of Common Stock subject to options that are currently
exercisable or exercisable within 60 days of March 28, 2003.

(6) Includes 1,050,000 restricted shares of Common Stock that have not vested
and 138,890 shares of Common Stock subject to conversion from 13,889 shares of
Preferred Stock within 60 days of March 28, 2003.

(7) Includes 315,000 restricted shares of Common Stock that have not vested and
85,000 shares of Common Stock subject to conversion from 8,500 shares of
Preferred Stock within 60 days of March 28, 2003.

(8) Includes 38,890 shares of Common Stock subject to conversion from 3,889
shares of Preferred Stock within 60 days of March 28, 2003 and 34,000 shares of
Common Stock subject to options that are currently exercisable or exercisable
within 60 days of March 28, 2003.

(9) Includes 37,500 restricted shares of Common Stock that may be sold within 60
days of March 28, 2003.

(10) Includes 25,000 shares of Common Stock subject to options that are
currently exercisable or exercisable within 60 days of March 28, 2003.

(11) Based on Schedule 13D as filed by such beneficial owner with the Securities
and Exchange Commission on February 13, 2003.

(12) Unless otherwise noted, the address of each such person is c/o the Company,
1551 S. Washington Avenue, Piscataway, New Jersey 08854.

*Indicates ownership of Common Stock of less than one (1%) percent of the total
issued and outstanding Common Stock on March 28, 2003.

Item 12: Certain Relationships and Related Transactions

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

         The Company paid the Chairman of the Board of Directors of the Company,
$132,000 in the year ended March 31, 2002 for executive search and mergers and
acquisitions services provided to the Company from June through October 2001.

         During April 2000, the Company made a loan (the "Loan") to the former
Chief Executive Officer (the "Former CEO") of the Company in the amount of
$750,000. At the time that the Loan was made to the Former CEO in April 2000,
the Company was contemplating a secondary public offering and potential mergers
and acquisitions opportunities. As a result, the Company did not want the Former
CEO to exercise his stock options. In consideration for not exercising his stock
options at that time, the Company issued the Loan to him. At that time, the
Company had sufficient cash and it was contemplated that the Loan would be
repaid within one year. The Loan accrues interest at a rate of LIBOR plus 1%.
The LIBOR plus one percent interest rate in April 2000 was 7.197% as compared to
the first mortgage interest rate in April 2000 of 6.90% for a 1-year ARM, 7.97%
for a 15-year FRM and 8.30% for a 30-year FRM. This Loan had an original
maturity date of the earlier of April 2005 or thirty days after the Company for
any reason no longer employed the Former CEO. The Former CEO resigned his
position at the Company effective



                                       34
<PAGE>

September 29, 2000. On October 5, 2000, the Company entered into an agreement
with the Former CEO pursuant to which the $750,000 promissory note for the Loan
was amended to extend the due date to April 30, 2001, and to provide that
interest on the note shall accrue through September 29, 2000 (the "Separation
and Forbearance Agreement"). The Loan is collateralized by a first mortgage
interest on the personal residence of the Former CEO. The Company agreed to
extend the repayment date of the Loan so that the Former CEO would be able to
repay the Loan to the Company by selling his personal residence. In addition to
the Loan, pursuant to the terms of the Separation and Forbearance Agreement
between the Company and the Former CEO, the Former CEO also agreed to reimburse
the Company for certain expenses totaling $200,000, to be paid over a period of
six months ending March 31, 2001. These certain expenses were incurred by the
Former CEO as part of his personal expense account arrangement with the Company.
During the year ended March 31, 2001, $50,000 of the amounts owed to the Company
by the Former CEO was repaid and $22,000 has been recorded as a non-cash offset
as a result of earned but unpaid vacation owed to the Former CEO. During the
year ended March 31, 2002, $813,593 was repaid which included proceeds in the
amount of $777,713.48 received by the Company on August 3, 2001 for the sale of
the Former CEO's personal residence. At December 31, 2002, the total amount owed
to the Company by the Former CEO was approximately $156,388, which includes
interest accrued through December 31, 2002. The full amount has been recorded as
a reserve against the note receivable. Because these amounts were not paid by
their respective maturity dates, interest is accruing at the default interest
rate of 12%. The Company will continue to attempt to collect the note
receivable.

Effective October 2001, the Company approved and granted 2,900,000 shares of
restricted stock to three executives: Messrs. Kam Saifi (2,000,000 shares at
$0.13 per share), Cameron Saifi, (600,000 shares at $0.31 per share) and David
Arbeitel (300,000 shares at $0.31 per share) at fair value. The restricted
shares vest at the rate of 12.5% on the date of grant, 27.5% on September 30,
2002, and thereafter 7.5% at the end of each quarter commencing on December 31,
2002. These restricted shares are subject to a repurchase right which will
permit the Company to repurchase any shares which have not yet vested at the
effective date of termination of the officers' employment, as defined in their
employment agreements, for an amount equal to the purchase price per share paid
by the officers. Upon Mr. Arbeitel's separation from the Company on September
29, 2002, the Company elected not to repurchase these shares. The Company
received a series of full recourse interest bearing (5.46% on an annual basis)
promissory notes for the value of the shares to be repaid by the officers. The
notes are to be repaid by the officers at the earlier of ten years or the date
upon which the employees dispose of their shares. As a result of Mr. Arbeitel's
separation from the Company on September 29, 2002, the note relating to Mr.
Arbeitel's 37,500 vested Restricted Shares became due and payable and as of
September 30, 2002, Mr. Arbeitel owed approximately $12,190 (including
approximately $602 of interest) with respect to such vested shares. On November
11, 2002, Mr. Arbeitel paid the Company $12,264 (including accrued interest of
$676) in satisfaction of the note for the 37,500 vested shares. The Company and
Mr. Arbeitel agreed to rescind the stock purchase transaction with respect to
262,500 of the unvested Restricted Shares thereby canceling the unpaid portion
of the notes in an amount of $ 85,322 (including accrued interest of $4,210)
relating to such unvested shares. As of December 31, 2002 Mr. Kam Saifi owes
approximately $275,699 (including approximately $17,668 of interest) for
2,000,000 Restricted Shares and; Mr. Cameron Saifi owes approximately $197,716
(including approximately $12,316 of interest) for 600,000 Restricted Shares. The
issuance of the restricted shares and the notes receivable due from the officers
is recorded in the Company's financial statements. Only the vested portion of
the shares has been included in the weighted average number of common shares
outstanding at December 31, 2002.




                                       35
<PAGE>

Item 13. Exhibits and Reports on Form 8-K

(a) Exhibits:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       36
<PAGE>


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

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

10.1     Lease Agreement dated February 18, 1999 by and between the Company and
         Washington Plaza Associates, L.P., as landlord. /(4)/

10.2     Business Park Gross Lease dated May 17, 1999 by and between the Company
         and Bedford Property Investors, Inc./(4)/

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

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

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

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

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

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

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

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

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

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

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


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

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

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



                                       37
<PAGE>

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

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

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

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

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

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

16.1     Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the
         Securities and Exchange Commission./(10)/

21.1     List of Subsidiaries./(14)/

23.1     Consent of Deloitte & Touche LLP.*

23.2     Consent of PricewaterhouseCoopers LLP.*

99.1     Section 906 Certification of the Chief Executive Officer.*

99.2     Section 906 Certification of the Chief Financial Officer.*

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

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

(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Filed herewith


(b) Reports on Form 8-K

On November 5, 2002, the Company filed a report on Form 8-K reporting the change
of its fiscal year end from March 31, to December 31.



                                       38
<PAGE>

On November 14, 2002, the Company filed a report on Form 8-K reporting the
issuance of a press release announcing the its financial results for the quarter
ended September 30, 2002.


Item 14.  Controls and Procedures


The Company's management, under the supervision and with the participation of
the Company's Chief Executive Officer and Chief Financial Officer, performed an
evaluation of the effectiveness of the design and operation of the Company's
disclosure controls and procedures within 90 days before the filing date of this
quarterly report. Based on that evaluation, the Company's Chief Executive
Officer and Chief Financial Officer concluded that the Company's disclosure
controls and procedures were effective. There have been no significant changes
in the Company's internal controls or in other factors that could significantly
affect internal controls subsequent to their evaluation.




                                       39
<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: April 15, 2003
                             ION NETWORKS, INC.

                             By: /s/ Kam Saifi
                                 -----------------------------------------------
                                 Kam Saifi
                                 Chief Executive Officer, President and Director



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
April 15, 2003:

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

/s/ Kam Saifi                   Chief Executive Officer, President and Director
------------------------------
Kam Saifi

/s/ Stephen M. Deixler          Chairman of the Board of Directors and Interim
------------------------------  Chief Financial Officer
Stephen M. Deixler

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

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

                                Director
------------------------------
Vincent Curatolo


/s/ Christopher Corrado         Director
------------------------------
Christopher Corrado




                                       40
<PAGE>

                                 CERTIFICATIONS




I, Kam Saifi, certify that:

         1.       I have reviewed this transition report on Form 10-KSB for ION
                  Networks, Inc.;

         2.       Based on my knowledge, this transition report does not contain
                  any untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  transition report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this transition report,
                  fairly present in all material respects the financial
                  condition, results of operations and cash flows of the
                  registrant as of, and for, the periods presented in this
                  transition report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in the Exchange Act Rules
                  13a-14 and 15d-14) for the registrant and have:

                  a)       Designed such disclosure controls and procedures to
                           ensure that material information relating to the
                           registrant, including its consolidated subsidiaries,
                           is made known to us by others within those entities,
                           particularly during the period in which this
                           transition report is being prepared;

                  b)       Evaluated the effectiveness of the registrant's
                           disclosure controls and procedures as of a date
                           within in 90 days prior to the filing date of this
                           transition report (the "Evaluation Date"); and

                  c)       Presented in this transition report our conclusions
                           about the effectiveness of the disclosure controls
                           and procedures based on our evaluation as of the
                           Evaluation Date;

         5.       The registrant's other certifying officers and I have
                  disclosed, based on our most recent evaluation, to the
                  registrant's auditors and the audit committee of registrant's
                  board of directors (or persons performing the equivalent
                  functions):

                  a)       All significant deficiencies in the design or
                           operation of internal controls which could adversely
                           affect the registrant's ability to record, process,
                           summarize and report financial data and have
                           identified for the registrant's auditors any material
                           weaknesses in internal controls; and

                  b)       Any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal controls; and

         6.       The registrant's other certifying officers and I have
                  indicated in this transition report whether or not there were
                  any significant changes in internal controls or in other
                  factors that could significantly affect internal controls
                  subsequent to the date of our most recent evaluation,
                  including any corrective actions with regard to significant
                  deficiencies and material weaknesses.



Date: April 15, 2003
      --------------


By: /s/ Kam Saifi
    ----------------------------------------------------------
    Kam Saifi, Chief Executive Officer, President and Director




                                       41
<PAGE>


I, Stephen M. Deixler, certify that:

         1.       I have reviewed this transition report on Form 10-KSB for ION
                  Networks, Inc.;

         2.       Based on my knowledge, this transition report does not contain
                  any untrue statement of a material fact or omit to state a
                  material fact necessary to make the statements made, in light
                  of the circumstances under which such statements were made,
                  not misleading with respect to the period covered by this
                  transition report;

         3.       Based on my knowledge, the financial statements, and other
                  financial information included in this quarterly report,
                  fairly present in all material respects the financial
                  condition, results of operations and cash flows of the
                  registrant as of, and for, the periods presented in this
                  transition report;

         4.       The registrant's other certifying officers and I are
                  responsible for establishing and maintaining disclosure
                  controls and procedures (as defined in the Exchange Act Rules
                  13a-14 and 15d-14) for the registrant and have:

                  a)       Designed such disclosure controls and procedures to
                           ensure that material information relating to the
                           registrant, including its consolidated subsidiaries,
                           is made known to us by others within those entities,
                           particularly during the period in which this
                           transition report is being prepared;

                  b)       Evaluated the effectiveness of the registrant's
                           disclosure controls and procedures as of a date
                           within in 90 days prior to the filing date of this
                           transition report (the "Evaluation Date"); and

                  c)       Presented in this transition report our conclusions
                           about the effectiveness of the disclosure controls
                           and procedures based on our evaluation as of the
                           Evaluation Date;

         5.       The registrant's other certifying officers and I have
                  disclosed, based on our most recent evaluation, to the
                  registrant's auditors and the audit committee of registrant's
                  board of directors (or persons performing the equivalent
                  functions):

                  d)       All significant deficiencies in the design or
                           operation of internal controls which could adversely
                           affect the registrant's ability to record, process,
                           summarize and report financial data and have
                           identified for the registrant's auditors any material
                           weaknesses in internal controls; and

                  e)       Any fraud, whether or not material, that involves
                           management or other employees who have a significant
                           role in the registrant's internal controls; and

         6.       The registrant's other certifying officers and I have
                  indicated in this transition report whether or not there were
                  any significant changes in internal controls or in other
                  factors that could significantly affect internal controls
                  subsequent to the date of our most recent evaluation,
                  including any corrective actions with regard to significant
                  deficiencies and material weaknesses.



Date: April 15, 2003
      --------------



By: /s/ Stephen M. Deixler
    ---------------------------------------------
    Stephen M. Deixler, Chairman of the Board and
     Interim Chief Financial Officer



                                       42
<PAGE>

ION Networks, Inc. and Subsidiaries Consolidated Financial Statements
For the  Nine-months  Ended  December  31, 2002 and Fiscal Years Ended March 31,
2002 and 2001






                                       43
<PAGE>

ION Networks, Inc. and Subsidiaries

Index to Consolidated Financial Statements
For the Nine Months Ended December 31, 2002 and Years Ended March 31, 2002 and
2001

<TABLE>
<CAPTION>
                                                                                                                 Page(s)
<S>                                                                                                                <C>
Independent Auditors' Report                                                                                       45

Reports of Independent Accountants                                                                                 46

Financial Statements:

     Consolidated Balance Sheets as of December 31, 2002 and March 31, 2002                                        47

     Consolidated Statements of Operations for the Nine Months Ended December 31, 2002
       and for the Years Ended March 31, 2002 and 2001                                                             48

     Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2002 and
        for the Years Ended March 31, 2002 and 2001                                                                49

     Consolidated Statements of Stockholders' Equity for Nine Months Ended December 31, 2002 and for
        the Years Ended March 31, 2002 and 2001                                                                    50-51

Notes to Consolidated Financial Statements                                                                         52-69
</TABLE>




                                       44
<PAGE>

                          INDEPENDENT AUDITORS' REPORT


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


We have audited the accompanying consolidated balance sheets of ION Networks,
Inc. and subsidiaries (the "Company") as of December 31, 2002 and March 31,
2002, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the nine months ended December 31, 2002 and for the
year ended March 31, 2002. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

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

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

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

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


/s/ DELOITTE & TOUCHE LLP


March 11, 2003
Parsippany, New Jersey




                                       45
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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

In our opinion, the accompanying consolidated statements of operations,
stockholders' equity and cash flows present fairly, in all material respects,
the results of the operations and the cash flows of ION Networks, Inc. and
Subsidiaries (the "Company") for the year 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 audit. We conducted our audit 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 audit provides a
reasonable basis for our opinion.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP


Florham Park, New Jersey
June 28, 2001




                                       46
<PAGE>

                       ION Networks, Inc. and Subsidiaries

                           Consolidated Balance Sheets

<TABLE>
<CAPTION>
                                                                                    December 31,        March 31,
                                   Assets                                               2002               2002
                                                                                    ------------       ------------
Current assets
<S>                                                                                 <C>                <C>
   Cash and cash equivalents                                                        $    865,684       $  4,050,657
   Accounts receivable, less allowance for doubtful accounts of
     $90,521, and $149,999, respectively                                                 561,762          1,521,230
   Other receivables                                                                          --                 --
   Inventory, net                                                                      1,259,268          1,024,126
   Prepaid expenses and other current assets                                             203,934            492,609
   Related party notes receivable                                                             --             83,657
                                                                                    ------------       ------------
     Total current assets                                                              2,890,648          7,172,279

   Restricted cash                                                                       125,700            125,700
   Property and equipment, net                                                           485,735            796,625
Capitalized software, less accumulated amortization of $3,920,223, and
 $3,412,040, respectively                                                                764,429            908,464
   Goodwill and other acquisition related intangibles, less accumulated
     amortization of $1,000,000, and $1,000,000, respectively                                 --                 --
   Other assets                                                                           14,878              6,653
                                                                                    ------------       ------------
     Total assets                                                                   $  4,281,390       $  9,009,721
                                                                                    ============       ============

                       Liabilities and Stockholders' Equity
Current liabilities
   Current portion of capital leases                                                $     87,057       $     74,426
   Current portion of long-term debt                                                       4,004             33,444
   Accounts payable                                                                    1,195,023            917,846
   Accrued expenses                                                                      906,154            373,766
   Accrued payroll and related liabilities                                               185,358            353,590
   Deferred income                                                                       155,021            115,927
   Sales tax payable                                                                      84,025            188,435
   Other current liabilities                                                              89,317             73,923
                                                                                    ------------       ------------
     Total current liabilities                                                      $  2,705,959       $  2,131,357
                                                                                    ------------       ------------

Long term portion of capital leases                                                       73,551            146,540
Long term debt, net of current portion                                                     5,717              4,597

Commitments and contingencies (Notes 9 and 10)

Stockholders' Equity
   Preferred stock - par value $.001 per share; authorized 1,000,000 shares at
     December 31, 2002, and March 31, 2002; 200,000 shares designated Series A
     at December 31, 2002, and none at March 31, 2002; 166,835 shares issued
     and outstanding at December 31, 2002 and none issued March 31, 2002                     167                 --
   Common stock - par value $.001 per share; authorized 50,000,000 shares at
     December 31, 2002 and March 31, 2002;
     24,875,500 shares issued and outstanding at December 31, 2002
     25,138,000 shares issued and outstanding at March 31, 2002                           24,876             25,138
   Additional paid-in capital                                                         44,680,740         44,381,454
   Notes receivable from officers                                                       (473,405)          (549,914)
   Deferred compensation                                                                      --            (62,893)
   Accumulated deficit                                                               (42,722,946)       (37,094,424)
    Accumulated other comprehensive (loss) income                                        (13,269)            27,866
                                                                                    ------------       ------------
   Total stockholders' equity                                                          1,496,163          6,727,227
                                                                                    ------------       ------------

     Total liabilities and stockholders' equity                                     $  4,281,390       $  9,009,721
                                                                                    ============       ============
</TABLE>



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

                                       47
<PAGE>



                       ION Networks, Inc. and Subsidiaries
                      Consolidated Statements of Operations


<TABLE>
<CAPTION>
                                                          Nine Months
                                                             Ended
                                                           December 31,           Years Ended March 31,
                                                              2002               2002               2001
                                                          ------------       ------------       ------------
<S>                                                       <C>                <C>                <C>
Net sales                                                 $  3,335,160       $  7,312,235       $ 11,676,547

Cost of sales                                                1,428,037          3,484,132          7,184,666
                                                          ------------       ------------       ------------
   Gross Margin                                              1,907,123          3,828,103          4,491,881
                                                          ------------       ------------       ------------

Research and development expenses                              766,521            891,542          2,126,246
Selling, general and administrative expenses                 5,519,665          8,119,601         11,870,263
Depreciation and amortization expenses                         835,315          1,852,090          3,742,450
Restructuring, asset impairments and other charges             662,828            217,467          3,763,612
                                                          ------------       ------------       ------------
   Loss from operations                                     (5,877,206)        (7,252,597)       (17,010,690)

   Interest income                                              36,781            114,638            389,359
   Interest expense                                            (19,524)           (31,781)           (47,767)
                                                          ------------       ------------       ------------
                                                            (5,859,949)        (7,169,740)       (16,669,098)
   Loss before income taxes

Income tax benefit (expense)                                   231,427            240,361             (7,568)
                                                          ------------       ------------       ------------

   Net loss                                               $ (5,628,522)      $ (6,929,379)      $(16,676,666)
                                                          ============       ============       ============


Per share data

   Basic and diluted                                      $      (0.25)      $      (0.37)      $      (0.98)

Weighted average number of common shares outstanding
   Basic and diluted                                        22,843,009         18,890,609         17,064,620
</TABLE>



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


                                       48
<PAGE>



                       ION Networks, Inc. and Subsidiaries
                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>
                                                                                Nine Months
                                                                                    Ended
                                                                                 December 31,            Years Ended March 31,
                                                                                     2002               2002               2001
                                                                                 ------------       ------------       ------------

Cash flows from operating activities
<S>                                                                              <C>                <C>                <C>
     Net loss                                                                    $ (5,628,522)      $ (6,929,379)      $(16,676,666)

Adjustments to reconcile net loss to net cash used in operating activities:
   Restructuring, asset impairments and other charges, non-cash                       508,458             (2,930)         3,421,378
   Depreciation and amortization                                                      835,315          1,852,090          3,742,450
   Provision for inventory obsolescence                                              (285,135)          (565,481)         1,549,099
   Non-cash stock-based compensation charge                                            95,000             32,999             15,382
   (Cancellation) issuances of restricted stock                                       (81,112)           539,000                 --
   Notes receivable from officers                                                      64,245           (549,914)                --
   Reserve of related party note receivable                                            83,657
   Deferred compensation                                                               62,893             62,893                 --
   Changes in operating assets and liabilities:
     Accounts receivable                                                              959,468          1,275,301          1,773,015
     Other receivables                                                                     --             13,497          1,547,200
     Inventory                                                                         49,993            680,803           (763,876)
     Prepaid expenses and other current assets                                        280,450           (270,750)           397,045
     Other assets                                                                          --                 --             56,575
     Accounts payable and other accrued expenses                                      301,107           (987,460)          (353,063)
     Accrued payroll and related liabilities                                         (168,232)           (66,278)        (1,655,749)
     Deferred income                                                                   39,094            (62,810)           (96,920)
     Sales tax payable                                                               (104,410)            46,544            (59,109)
     Other current liabilities                                                         15,394            (94,163)            16,993
                                                                                 ------------       ------------       ------------
       Net cash used in operating activities                                       (2,972,337)        (5,026,038)        (7,086,246)
                                                                                 ------------       ------------       ------------

Cash flows from investing activities
   Acquisition of property and equipment                                              (40,702)           (35,269)          (415,174)
   Capitalized software expenditures                                                 (339,688)          (500,388)        (1,526,411)
   Related party notes receivable                                                          --            813,593           (897,250)
   Restricted cash                                                                         --            249,300           (375,000)
                                                                                 ------------       ------------       ------------
       Net cash (used in) provided by investing activities                           (380,390)           527,236         (3,213,835)
                                                                                 ------------       ------------       ------------

Cash flows from financing activities
   Repayment of restricted stock note                                                  12,264                 --                 --
   Repayment of debt                                                                  (88,678)          (162,143)          (173,745)
   Issuances of common stock and warrants                                                  --          3,480,000          5,000,000
   Issuances of preferred stock, net                                                  285,303                 --                 --
   Exercises of options and warrants                                                       --             19,258            323,047
                                                                                 ------------       ------------       ------------
       Net cash provided by financing activities                                      208,889          3,337,115          5,149,302
                                                                                 ------------       ------------       ------------

Effect of exchange rates on cash                                                      (41,135)           (18,489)                --
                                                                                 ------------       ------------       ------------

Net decrease in cash and cash equivalents                                          (3,184,973)        (1,180,176)        (5,150,779)

Cash and cash equivalents - beginning of period                                     4,050,657          5,230,833         10,381,612
                                                                                 ------------       ------------       ------------

Cash and cash equivalents - end of period                                        $    865,684       $  4,050,657       $  5,230,833
                                                                                 ============       ============       ============

Supplemental information
   Cash paid during period for interest                                          $     19,553       $     31,781       $     47,767
                                                                                 ============       ============       ============
   Cash paid for taxes                                                           $    117,401       $     37,359       $      7,058
                                                                                 ============       ============       ============
</TABLE>


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


                                       49
<PAGE>

                       ION Networks, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
            For the Nine Months Ended December 31, 2002, and for the
                      Years Ended March 31, 2002 and 2001

<TABLE>
<CAPTION>
                                                                                                         Accumulated
                            Preferred                 Common              Additional                         Other
                                                                           Paid-In        Accumulated    Comprehensive    Treasury
                        Shares       Stock     Shares         Stock        Capital          Deficit         Income          Stock
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------
<S>                    <C>           <C>      <C>           <C>           <C>            <C>              <C>             <C>
Balance, April 1, 2000       -       $    -   15,224,910    $  15,225     $35,063,094    $(13,488,379)    $    13,196     $(207,199)

 Comprehensive loss
   Net loss                                                                               (16,676,666)

   Translation
   adjustments                                                                                                 33,159

   Total
   comprehensive loss

   Exercise of stock
   options and
   warrants                                     121,248           121        322,926

   Issuance of
   common stock                               2,857,142         2,857      4,789,944                                        207,199

   Non-cash
   stock-based
   compensation                                       -             -         15,382
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------
Balance, March 31, 2001       -            -   18,203,300       18,203     40,191,346      (30,165,045)         46,355             -
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------

 Comprehensive loss
   Net loss                                                                                (6,929,379)

   Translation
   adjustments                                                                                               (18,489)

   Total
   comprehensive loss

Issuances of common
stock and warrants                            4,000,000         4,000      3,476,000

Issuances of
restricted shares                             2,900,000         2,900        536,100

Notes receivable
from officers

Deferred compensation                                                        125,786

Exercise of options                              34,700            35         19,223

Non-cash stock-based
compensation                                                                  32,999
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------

Balance, March 31,
2002                         -            -   25,138,000    $  25,138     $44,381,454    $(37,094,424)   $     27,866             -
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------

Comprehensive loss
   Net loss                                                                                (5,628,522)

   Translation
   adjustments                                                                                               (41,135)

   Total
   comprehensive loss

Issuances of
preferred stock        166,835          167                                  285,136

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

Notes receivable
from officers

Deferred compensation

Non-cash stock-based
compensation                                                                  95,000
                       --------    ---------  ----------    ----------    -----------    --------------  -------------    ----------
Balance, December
31, 2002               166,835      $   167   24,875,500    $  24,876     $44,680,740    $ (42,722,946)  $   (13,269)             -
                       ========    =========  ==========    ==========    ===========    ==============  =============    ==========
</TABLE>

   The accompanying notes are an integral part of these financial statements.
                                       50
<PAGE>

                       ION Networks, Inc. and Subsidiaries
                 Consolidated Statements of Stockholders' Equity
            For the Nine Months Ended December 31, 2002, and for the
                      Years Ended March 31, 2002 and 2001

<TABLE>
<CAPTION>
                             Notes                                    Total
                           Receivable           Deferred          Stockholders'
                         from Officers        Compensation            Equity
                         ---------------    -----------------    ---------------
<S>                     <C>                 <C>                 <C>
Balance, April 1, 2000                                          $     21,395,937

 Comprehensive Loss
   Net loss                                                          (16,676,666)

   Translation
   adjustments                                                            33,159
                                                                 ---------------
   Total                                                             (16,643,507)
   comprehensive loss

   Exercise of
   options and
   warrants                                                              323,047

   Issuance of
   common stock                                                        5,000,000

   Non-cash
   stock-based
   compensation                                                           15,382
                         ---------------    -----------------    ---------------
Balance, March 31, 2001               -                    -          10,090,859
                         ---------------    -----------------    ---------------

 Comprehensive loss
   Net loss                                                           (6,929,379)

   Translation
   adjustments                                                           (18,489)
                                                                 ---------------

   Total
   comprehensive loss                                                 (6,947,868)

Issuances of common
stock and warrants                                                     3,480,000

Issuances of
restricted shares                                                        539,000

Notes receivable
from officers                 (549,914)                                 (549,914)

Deferred compensation                               (62,893)              62,893

Exercise of options                                                       19,258

Non-cash stock-based
compensation                                                              32,999
                         ---------------    -----------------    ---------------

Balance, March 31,
2002                      $   (549,914)     $       (62,893)     $     6,727,227
                         ---------------    -----------------    ---------------

Comprehensive loss
   Net loss                                                           (5,628,522)

   Translation
   adjustments                                                           (41,135)
                                                                 ---------------

   Total
   comprehensive loss                                                 (5,669,657)

Issuances of
preferred stock                                                          285,303

Cancellation of
restricted shares                                                        (81,112)

Notes receivable
from officers                    76,509                                   76,509

Deferred compensation                                 62,893              62,893

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

Balance, December
31, 2002                  $   (473,405)                    -     $     1,496,163
                         ===============    =================    ===============
</TABLE>


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


                                       51
<PAGE>


ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

1.  Organization and Basis of Presentation

The Company

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

Our consolidated financial statements have been prepared on the basis that we
will continue as a going concern, which contemplates the realization and
satisfaction of liabilities and commitments in the normal course of business. At
December 31, 2002, we had an accumulated deficit of $42,722,946 and working
capital of $184,689. We also realized net losses of $5,628,522 for the nine
months ended December 31, 2002, $6,929,379 for the year ended March 31, 2002,
and $16,676,666 for the year ended March 31, 2001.

Our business plan and growth strategy are dependent on our working capital. We
have been aggressively seeking to raise additional capital through selling our
equity since August 2002 and have been unable to secure such financing other
than the $300,303 raised from the sale of our preferred stock in September 2002.
Currently, we are seeking to raise approximately $1.5 million of additional
capital through selling securities. If the Company is unable to secure such
financing, we expect our cash on hand and cash equivalents to meet our working
capital and capital expenditure needs through May 2003.

If we are successful in securing the capital, but fail to achieve the expected
revenue assumptions, we will have to raise further equity or debt financing
and/or curtail certain expenditures contained in the current operating plans. We
can not assure that our sales efforts or expense reduction programs will be
successful, or that any additional financing will be available to us, or, if
available, that the terms will be satisfactory to us. If we are not successful
in raising additional equity capital to generate sufficient cash flows to meet
our obligations as they come due, our financial condition and results of
operations will be materially and adversely affected and we will not be able to
continue to operate as a going concern beyond May 2003. If we are successful in
raising additional capital but fail to increase our revenue or reduce our
expenses, our financial condition and results of operations may be materially
and adversely affected and we may not be able to continue to operate as a going
concern. Our financial statements do not include any adjustments relating to the
recoverability and classification of recorded asset amounts or to amounts and
classification of liabilities that may be necessary should we be unable to
continue as a going concern.

Basis of Presentation

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




                                       52
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


The following table presents certain financial information for the nine months
ended December 31, 2002, 2001 and 2000, respectively:

<TABLE>
<CAPTION>

                                    NINE MONTHS ENDED DECEMBER 31,

                                                             2002         2001          2000
                                                                       (UNAUDITED)   (UNAUDITED)
                                                          -----------  -----------  ------------
<S>                                                          <C>          <C>          <C>
Net sales                                                  3,335,160    5,236,038     8,304,574
Gross Margin                                               1,907,123    2,712,991     3,565,710
Loss from operations before interest and income tax
 benefit (expense)                                        (5,877,206)  (6,018,774)  (14,579,390)
Loss from operations before income tax benefit (expense)  (5,859,949)  (5,952,194)  (14,308,839)
Income tax benefit (expense)                                 231,427      240,361       (53,019)
Net loss                                                  (5,628,522)  (5,711,833)  (14,361,858)

Diluted earnings per share                                     (0.25)       (0.31)        (0.87)
Weighted average number of common shares outstanding
 Basic and diluted                                        22,843,009   18,316,943    16,598,179

</TABLE>


2. Summary of Significant Accounting Policies

Principles of Consolidation

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

Use of Estimates

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

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

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.

Allowance for Doubtful Accounts Receivable

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

Inventory

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




                                       53
<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 two to five years. Expenditures for maintenance and repairs, which do
not extend the economic useful life of the related assets, are charged to
operations as incurred. Gains or losses on disposal of property and equipment
are reflected in the statements of operations in the period of disposal.

Capitalized Software

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

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

The Company capitalized $339,689, $500,388 and $1,526,411 of software
development costs for the nine months ended December 31, 2002, and for the
fiscal years ended March 31, 2002 and 2001, respectively. The Company wrote-off
$5,387 and $2,332,120 of software development costs for fiscal years ended March
31, 2002 and 2001 (see Note 3). Amortization expense totaled $483,723, $828,032,
and $2,138,707 for the nine-months ended December 31, 2002, and for the fiscal
years ended March 31, 2002, and 2001, respectively.

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

Fair Value of Financial Instruments

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




                                       54
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


Net Loss Per Share of Common Stock

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

<TABLE>
<CAPTION>
                                      Nine Months Ended      Year ended        Year Ended
                                      December 31, 2002    March 31, 2002    March 31, 2001
<S>                                      <C>                <C>                <C>
Weighted average shares                  22,843,009         18,890,609         17,064,620
outstanding, basic
Dilutive shares issuable in
connection with stock plans and             327,870            452,906          1,429,301
warrants granted
Conversion of preferred stock to            661,273                 --                 --
common stock
Weighted average shares                  23,832,152         19,343,515         18,493,921
outstanding, diluted*
</TABLE>


* Since there was a loss attributable to common shareholders in these periods,
the basic weighted average shares outstanding were used in calculating diluted
loss per share, as inclusion of the incremental shares shown in this calculation
would be antidilutive. Potential common shares of 989,143 at December 31, 2002,
452,906 at March 31, 2002 and 1,429,301 at March 31, 2001 were excluded from the
computation of diluted earnings per share.

Stock Compensation

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




                                       55
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


If the Company had elected to recognize compensation costs based on the fair
value at the date of grant for awards for the nine months ended December 31,
2002 and for the fiscal years ended March 31, 2002 and 2001, consistent with the
provisions of SFAS No. 123, the Company's net loss and basic and diluted net
loss per share would have increased to the pro forma amounts indicated below: by
$201,279 and $.01, $460,532 and $.02 and $2,129,042 and $.12, respectively, for
the nine-months ended December 31, 2002 and the years ended March 31, 2002 and
2001.

<TABLE>
<CAPTION>
                                                         Nine months         Year ended          Year ended
                                                         ended December      March 31,           March 31,
                                                         31, 2002            2002                2001
Net loss
<S>                                                      <C>                 <C>                 <C>
              As reported                                $ 5,628,522         $ 6,929,379         $16,676,666
              Deduct: Stock based employee
              compensation determined under fair
              value methods for all awards                   201,279             460,532           2,129,042
              granted since 1994 (inception)
              Pro forma                                  $ 5,829,801         $ 7,389,911         $18,805,708

Basic and diluted net loss per share of common
stock
              As reported                                $      0.25         $      0.37         $      0.98
              Pro forma                                  $      0.26         $      0.39         $      1.10
</TABLE>


The weighted-average fair values at date of grant for options granted during the
nine months ended December 31, 2002 and the fiscal years ending March 31, 2002
and 2001 were $0.32, $0.26 and 3.02, 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 the nine months ended December 31, 2002 and
fiscal 2002:

                                December 31,                March 31,
                                   2002             2002               2001
                                ----------       ----------         ----------

Expected Volatility                 135.27%             110%               110%
Risk-free interest rate               3.96             3.43%              5.88%
Expected option lives           5.48 years       2.91 years         3.53 years


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

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




                                       56
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


Warranty Costs

The Company estimates its warranty costs based on historical warranty claim
experience. Future costs for warranties applicable to sales recognized in the
current period are charged to cost of sales. The warranty accrual is reviewed
quarterly to reflect the remaining obligation. Adjustments are made when actual
warranty claim experience differs from estimates. The warranty accrual included
in other current liabilities as of December 31, 2002, March 31, 2002 and 2001
approximated $48,400, $55,000 and $91,200, respectively.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets
acquired. Goodwill is amortized over an estimated useful life of five years. In
June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets".
SFAS No. 142 changed the accounting for goodwill from an amortization method to
an impairment-only approach. Amortization of goodwill, including goodwill
recorded in past business combinations, ceased upon adoption of this statement
on January 1, 2002.

Reclassifications

Certain amounts in the financial statements for the year ended March 31, 2002
and 2001 have been reclassified to conform to the presentation of the financial
statements for the nine month period ended December 31, 2002.

3. Restructuring, Asset Impairments and Other Charges

As a result of the Company's operating performance during the first six months
of Fiscal Year ended March 31, 2001 ("FY2001") as compared to the Fiscal Year
ended March 31, 2000 ("FY2000"), the Company's management evaluated the
Company's business and product strategy and, in the quarter ended December 31,
2000, implemented a business restructuring plan which was 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. 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 and all amounts have been
paid.

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, in the FY2001, 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 was also recorded in the FY2001 for 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, in FY2001, 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.

As a result of the Company's continued disappointing operating performance
during the first six months of Fiscal Year ended March 31, 2002 ("FY2002"), in
early October 2001, the Company announced the separation with seventeen
employees in order to bring its expenses in line with its anticipated revenues.
The Company recorded approximately $217,467 of severance and termination related
costs which were subsequently paid.



                                       57
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


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

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

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

4. Inventory

Inventory, net of reserve for obsolescence of $720,772, and $1,005,907 at
December 31, 2002, and March 31, 2002, respectively, consists of the following:


                         December 31,        March 31,
                            2002               2002
                         ----------         ----------

Raw materials            $  195,283         $  265,725
Work-in-progress             84,231              2,161
Finished goods              979,755            756,240
                         ----------         ----------

                         $1,259,268         $1,024,126
                         ==========         ==========

Consistent with the downturn in markets served by us, we evaluated our inventory
levels in light of actual and forecasted revenue. As a result, we recorded a
charge of approximately $285,135, $565,481 and $1,288,388 to cost of sales for
the nine months ended December 31, 2002 and for the years ended March 31, 2002
and 2001, respectively, related to reserves for excess and obsolete inventory.
We will continue to monitor our excess reserves and to the extent that inventory
that has been reserved as excess is ultimately sold by us, such amounts will be
disclosed in the future.

5.  Property and Equipment

At December 31, 2002, March 31, 2002 and 2001, property and equipment consists
of the following:

<TABLE>
<CAPTION>
                                         December 31,                  March 31,
                                            2002               2002               2001
                                         ----------         ----------         ----------
<S>                                      <C>                <C>                <C>
Computer and other equipment             $1,749,848         $2,573,597         $2,655,786
Furniture and fixtures                      781,549            746,753            747,203
Leasehold improvements                       74,504            160,427            160,341
                                         ----------         ----------         ----------

                                          2,605,901          3,480,777          3,563,330
   Less accumulated depreciation          2,120,166          2,684,152          2,095,564
                                         ----------         ----------         ----------

   Property and equipment, net           $  485,735         $  796,625         $1,467,766
                                         ==========         ==========         ==========
</TABLE>



Depreciation expense for property and equipment for the nine months ended
December 31, 2002, and for the years ended March 31, 2002, and 2001 amounted to
$351,592, $700,335, and $897,263, respectively. During the nine months ended
December 31, 2002 and for the years ended March 31, 2002 and 2001, the Company
retired fully depreciated assets amounting to $847,785, $113,768, and $490,488,
respectively.



                                       58
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


6.  Debt

In 1998, the Company entered into two equipment loan agreements for its Belgium
subsidiary. The first loan is for approximately $50,000, the loan is due July
2003 and bears an interest rate of 5.2%. The second loan is for approximately
$30,000, the loan is due February 2003 and bears an interest rate of 2.5%. At
December 31, 2002 a total of $9,721 is still outstanding under both term loans.

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 $1,500,000 line of credit on September
30, 2000, the Company pledged $375,000 on September 7, 2000 as collateral on an
outstanding letter of credit related to the required security deposit for the
Company's Piscataway, New Jersey corporate headquarters facility. On November 9,
2001, the Company entered into an agreement with the landlord for its
Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999.
The amendment allowed the Company to use $250,000 of its restricted cash from
the letter of credit towards the rent payments for 10 months starting January
2002. On January 10, 2002, the Landlord received the $250,000 from the letter of
credit per the above mentioned lease amendment. The Company agreed to replenish
the letter of credit by November 2003. Accordingly, $125,700, which includes
interest, has been reflected as restricted cash as a non-current asset at
December 31, 2002 and March 31, 2002. On March 17, 2003 the Company entered into
an agreement with the landlord to amend the lease for its Piscataway, NJ
facility to reduce the letter of credit to $60,000 and to replenish it by
December 2003.

On May 5, 1999, the Company entered into a $300,000 term loan agreement. The
term loan was due May 2002 and bore interest at a fixed rate of 8.50%. The term
loan was repaid in full in May 2002. The term loan was collateralized by certain
property and equipment of the Company.

7.  Income Taxes

As of December 31, 2002 and March 31, 2002, the Company has available federal
and state net operating loss carryforwards of approximately $40,604,000 and
$24,860,000, respectively, to offset future taxable income. The federal net
operating loss carryforwards expire during the years 2011 through 2023. 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 Company acquired a corporation business tax benefit certificate pursuant to
New Jersey law which relates to the surrendering of unused net operating losses.
For the nine months ended December 31, 2002 and for the year ended March 31,
2002, the Company received a benefit of $236,728 and $264,725, respectively from
the sale of net operating losses.

The components of the income tax provision for the nine months ended December
31, 2002 and for the fiscal years ended March 31, 2002 and 2001 are as follows:

                    December 31,               March 31,
                       2002             2002             2001
                     --------         --------         --------
Current
     Federal         $236,728         $264,725         $     --
     State                 --               --               --
     Foreign           (5,301)         (24,364)           7,568
                     --------         --------         --------

Deferred
     Federal               --               --               --
     State                 --               --               --
                     --------         --------         --------
                     $231,427         $240,361         $  7,568
                     ========         ========         ========




                                       59
<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:

<TABLE>
<CAPTION>
                                                                              December 31,                 March 31,
                                                                                  2002              2002             2001
                                                                            ----------------    -------------    ------------
Effective tax rate reconciliation
<S>                                                                                   <C>              <C>             <C>
     Statutory federal tax rate                                                       (34)%             (34)%           (34)%
     State taxes, net of federal benefit                                                (6)              (6)             (6)
     Foreign rate differential                                                           -                -               -
     Permanent difference (goodwill)                                                     -                2               7
     Effect of recording valuation allowance on net operating loss
     carryforwards                                                                      39               37              32
     Sale of net operating losses and other                                             (8)              (8)              1
                                                                            ----------------    -------------    ------------
                                                                                        (9)%             (9)%             -%
                                                                            ================    =============    ============
</TABLE>


The tax effect of temporary differences which make up the significant components
of the net deferred tax asset and liability at December 31, 2002, March 31, 2002
and 2001 are as follows:

<TABLE>
<CAPTION>
                                                                       December 31,                       March 31,
                                                                           2002                  2002                  2001
                                                                       ------------          ------------          ------------
Current deferred tax assets
<S>                                                                    <C>                   <C>                   <C>
     Inventory                                                         $    367,511          $    402,363          $    879,367
         Accrued expenses                                                    71,102                75,717               265,609
         Allowance for doubtful accounts                                     69,671                60,000                64,580
                                                                       ------------          ------------          ------------
              Total current deferred tax assets                             508,284               538,080             1,209,556
       Valuation allowance                                                 (508,284)             (538,080)           (1,209,556)
                                                                       ------------          ------------          ------------
              Net current deferred tax assets                                    --                    --                    --
                                                                       ------------          ------------          ------------

       Noncurrent deferred tax assets
         Depreciation and amortization                                      250,000               275,000               251,839
         Net operating loss carryforwards                                16,304,184            14,206,787             8,257,819
         Research and development credit                                    254,523               254,523               254,523
         Alternative minimum tax credit                                      20,125                20,125                20,125
                                                                       ------------          ------------          ------------
              Total noncurrent deferred tax assets                       16,828,832            14,756,435             8,784,306
       Valuation allowance                                              (16,329,571)          (14,393,049)           (8,253,458)
                                                                       ------------          ------------          ------------
              Net noncurrent deferred tax assets                            499,261               363,386               530,848

       Noncurrent deferred tax liabilities
         Capitalized software                                              (499,261)             (363,386)             (530,848)
                                                                       ------------          ------------          ------------
              Total noncurrent deferred tax liabilities                $   (499,261)         $   (363,386)         $   (530,848)
                                                                       ------------          ------------          ------------
              Net noncurrent deferred tax (liabilities) assets         $         --          $         --          $         --
                                                                       ============          ============          ============
</TABLE>


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

Preferred Stock - On September 13, 2002 the Company received equity financing in
the amount of $300,303 ($285,303, net of issuance costs) for the issuance of
166,835 unregistered shares of the Company's preferred stock at $1.80 per share.
The Company has designated 200,000 of the 1,000,000 authorized shares of
preferred stock as Series A Preferred Stock ("Preferred Stock"). Each share of
Preferred Stock is convertible into 10 shares of the Company's common stock at
the conversion price of $0.18 per share of common stock, which was the closing
bid price of the Company's common stock on September 13, 2002. The Preferred
Stock is non-voting, has a standard liquidation preference equal to its purchase
price, and does not pay dividends. Proceeds of the equity financing will be used
for working capital and general corporate purposes. All of the shares of
Preferred Stock were purchased by directors and management of the Company. The
purpose of the Preferred Stock Financing was to enable the Company to comply
with the Nasdaq SmallCap Market's initial listing requirement of a minimum of
$5,000,000 of stockholders' equity so that the Company was eligible for an
additional 180-day grace period to attempt to regain compliance with the $1.00
minimum bid price requirement of the Nasdaq SmallCap Market (based on
stockholders equity of $5,004,215 at June 30, 2002, adjusted on a pro forma
basis for the equity financing). The preferred stock is recorded in
stockholders' equity, net of issuance costs.




                                       60
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Restricted Stock - Effective October 2001, the Company approved and granted
2,900,000 shares of restricted stock (the "Restricted Shares") to three
executives at fair value. The Restricted Shares are subject to a repurchase
right which will permit the Company to repurchase any shares which have not yet
vested at the effective date of termination of the officers' employment, as
defined in their employment agreements, for an amount equal to the purchase
price per share paid by the officers. The Company received a series of partial
recourse interest bearing (5.46% on an annual basis) promissory notes for the
value of the Restricted Shares to be repaid by the officers. As of December 31,
2002 Mr. Kam Saifi owes approximately $275,669 (including approximately $17,669
in interest) for 2,000,000 Restricted Shares and; Mr. Cameron Saifi owes
approximately $197,716 (including approximately $12,316 in interest) for 600,000
Restricted Shares.

The notes are to be repaid by the officers at the earlier of ten years or the
date upon which the employees dispose of their shares or under certain
circumstances, when the borrower's employment with the Company terminates for
any reason. The issuance of the restricted shares and the notes receivable due
from the officers is recorded in the Company's financial statements. Only the
vested portion of the shares has been included in the weighted average number of
common shares outstanding at December 31, 2002 and March 31, 2002. On September
29, 2002, Mr. David Arbeitel separated employment from the Company. As a result,
the note relating to Mr. Arbeitel's 37,500 vested Restricted Shares became due
and payable and as of September 30, 2002, Mr Arbeitel owed approximately $12,190
(including approximately $602 of interest) with respect to such vested shares.
On November 11, 2002, Mr. Arbeitel paid the Company $12,264 (including accrued
interest of $676) in satisfaction of the note for the 37,500 vested shares. The
Company and Mr. Arbeitel agreed to rescind the stock purchase transaction with
respect to 262,500 of the unvested Restricted Shares thereby canceling the
unpaid portion of the notes in an amount of $ 85,322 (including accrued interest
of $4,210) relating to such unvested shares.

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

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

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 expired in August 2002 with the
remaining 287,500 warrants expiring in August 2004.

Stock Option Plans

During the nine-month ended December 31, 2002, and fiscal years ended March 31,
2002 and 2001, respectively, options to purchase zero, 34,700 and 45,948 shares
of common stock under the Company's stock option plans were exercised, for an
aggregate consideration of $0, $19,258 and $99,843, respectively.

In June 2002, the Company adopted its 2002 Stock Incentive Plan (the "2002
Plan"). The 2002 Plan provides for the issuance of stock options, grants of
common stock and stock appreciation rights covering up to 1,250,000 shares of
common stock; provided, however, no more than 250,000 shares may be issued in
connection with awards of stock appreciation rights. The maximum number of
options which may be granted to an employee during any fiscal year under the
2002 Plan is 300,000. The term of these non-transferable stock options may not
exceed ten years (or five years in the case of incentive stock options granted
to any grantee who owns stock representing more than 10% of the combined voting
power of the Company's stock or the stock of a parent company or subsidiary).
The exercise price of these stock options may not be less than 100% (110% in the
case of incentive stock options granted to any grantee who owns stock
representing more than 10% of the combined voting power of the Company's stock
or the stock of a parent company or subsidiary) of the fair market value of one
share of common stock on the date of grant. During the nine-month ended December
31, 2002, the Company did not grant options to purchase shares. At December 31,
2002, no options were outstanding under the 2002 Plan.



                                       61
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000
Plan"). The aggregate number of shares of common stock for which options may be
granted under the 2000 Plan is 3,000,000. The maximum number of options which
may be granted to an employee during any calendar year under the 2000 Plan is
400,000. The term of these non-transferable stock options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common stock) of the fair value of one share of common stock on the date of
grant. During the nine-month period ended December 31, 2002 and the full fiscal
year ended March 31, 2002 and 2001, the Company granted options to purchase
838,000, 1,854,000 and 1,724,500 shares, respectively. At December 31, 2002,
1,991,550 options were outstanding under the 2000 Plan, of which 879,850 options
were exercisable.

The aggregate number of shares of common stock for which options may be granted
under the 1998 Stock Option Plan (the "1998 Plan") is 3,000,000. The maximum
number of options which may be granted to an employee during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years. The exercise price of these stock options may not be
less than 100% (110% if the person granted such options owns more than ten
percent of the outstanding common stock) of the fair value of one share of
common stock on the date of grant. During the nine-month period ended December
31, 2002 and the full fiscal year ended March 31, 2002 and 2001, the Company
granted options to purchase zero, 463,800 and 1,596,078 shares, respectively. At
December 31, 2002, 1,120,951 options were outstanding under the 1998 Plan, of
which 966,380 options were exercisable.

In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994
Plan"). The 1994 Plan, as amended, increased the number of shares of common
stock for which options may be granted to a maximum of 1,250,000 shares. The
term of these non-transferable stock options may not exceed ten years. The
exercise price of these stock options may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the nine-month period ended December 31, 2002 and the full fiscal year ended
March 31, 2002 and 2001, there were no option grants provided under the 1994
Plan. At December 31, 2002, 94,601 options were outstanding under the 1994 Plan,
of which 71,241 options were exercisable.

Of the options granted during the nine months ended December 31, 2002 and fiscal
years ended March 31, 2002 and 2001, zero, zero and 578,528, 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 fiscal year in which the options
are granted if the Company meets certain predetermined sales targets. The
Company did not meet the targets for 2001 and, as such, all options granted
under the TARSAP in 2001 will vest seven years from the original date of grant.

Warrants

During July 2001 in connection with services being performed by a consultant,
the Company issued warrants to purchase 48,000 shares of the Company's common
stock at $0.62 per share. The warrants vested immediately and expire five years
from the date of the grant. The Company recorded compensation expense of $13,199
based upon the fair value of the vested warrants as determined using the Black
Scholes pricing model.

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

Other Options

In connection with a consulting agreement with Venture Consulting Group, Inc.
("VCGI") (see Note 9), consultants were issued options on October 5, 2000 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 recorded 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 $19,800 and $22,326 for the years ended March 31, 2002 and March 31, 2001,
respectively.




                                       62
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


During September 1996, the Company issued options to certain officers and
directors to purchase 620,000 shares of the Company's common stock, of which
420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. Options
expire ten years from the date of grant. The exercise price of the options is
equal to the market value of the Company's stock on the date of grant. There
were no stock option exercised during the nine months ended December 31, 2002
and the fiscal years ended March 31, 2002 and 2001. At December 31, 2002,
400,000 options were outstanding and exercisable.

During September 1997 and March 1998, the Company issued options to certain
officers and directors to purchase 80,000 shares of the Company's common stock,
25,000 of which vested on the date of grant, 7,500 of which vested three months
from the date of the grant, 7,500 of which vested six months from the date of
the grant, 7,500 of which vested nine-months from the date of the grant and
32,500 of which vested on the first year anniversary of the date of the grant.
The 55,000 options expire five years from the date of grant and 25,000 options
expire six years from date of grant. The exercise price of the options is equal
to the market value of the Company's common stock on the date of grant. There
were no stock option exercised since granted. At December 31, 2002, 50,000
options were outstanding and exercisable.

During March 1999, the Company issued options to certain employees and
consultants to purchase 20,000 shares of the Company's common stock, all of
which vested on the first year anniversary of the date of the grant. The options
expire six years from the date of the grant. The exercise price of the options
is equal to the market value of the Company's common stock on the date of the
grant. There were zero, 10,000 and zero stock options exercised during the nine
month period ended December 31, 2002 and during the fiscal years ended March 31,
2002 and 2001, respectively. At December 31, 2002, 10,000 options were
outstanding and exercisable.

Accounting for Stock-Based Compensation

The Company continues to apply Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related Interpretations in
accounting for its options. During the nine months ended December 31, 2002 and
for the year ended March 31, 2002 the Company had recorded no compensation
expense as no options were granted to employees below market value. During the
year ended March 31, 2001, the Company recorded compensation benefit of $6,944,
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.




                                       63
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements

Details of the options granted are as follows:

<TABLE>
<CAPTION>
                                                                                  Weighted Average           Option Price
                                                               Shares            Exercise Price ($)          Per Share ($)
                                                          -----------------    ---------------------     -------------------
<S>                                                              <C>                           <C>             <C>
Options outstanding at March 31, 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
     Granted                                                     2,317,800                     0.41             0.12 to 1.20
     Canceled                                                  (1,670,607)                     4.98           0.175 to 28.56
     Exercised                                                    (34,700)                     0.55           0.205 to 1.125
                                                          -----------------    ---------------------     -------------------

Options outstanding at March 31, 2002
                                                                 4,928,260                     1.92            0.12 to 36.44
     Granted                                                       838,000                     0.44             0.16 to 0.79
     Canceled                                                  (2,099,158)                     1.84            0.12 to 36.44
     Exercised                                                           -                        -                        -
                                                          -----------------    ---------------------     -------------------

Options outstanding at December 31, 2002                         3,667,102                     1.62       $    0.12 to 35.03
                                                          -----------------    ---------------------     -------------------

Options exercisable at December 31, 2002                         2,377,471                     1.62       $    0.12 to 35.03
                                                          -----------------    ---------------------     -------------------
</TABLE>




<TABLE>
<CAPTION>
                                                                                                                      Weighted
                                                        Weighted Average         Weighted                              Average
                                  Number               Remaining Years of         Average            Number           Exercise
    Range of Exercise          Outstanding              Contractual Life      Exercise Price       Exercisable          Price
                            -------------------       ---------------------   ----------------    --------------    --------------
<S>                                    <C>                             <C>             <C>              <C>                <C>
$0.12 - 0.18                           602,100                         4.1             $ 0.17           227,900            $ 0.17
$0.19 - 0.28                           142,500                         3.9             $ 0.21           112,500            $ 0.21
$0.30 - 0.37                           213,000                         3.3             $ 0.33           206,400            $ 0.34
$0.45 - 0.68                           212,000                         6.2             $ 0.46            37,000            $ 0.52
$0.68 - 1.01                           417,600                         3.8             $ 0.77            84,300            $ 0.92
$1.08 - 1.59                         1,090,051                         4.7             $ 1.15           896,973            $ 1.15
$1.63 - 2.41                           752,218                         2.2             $ 1.89           678,551            $ 1.87
$2.50 - 3.73                            21,859                         2.8             $ 3.12            18,500            $ 3.01
$3.83 - 4.05                             6,000                         2.1             $ 3.88             6,000            $ 3.88
$5.94 - 8.44                            88,062                         2.0             $ 7.18            76,781            $ 7.25
$9.70 - 13.81                          101,152                         6.3             $13.21            15,233            $11.66
$22.00 - 30.38                           9,000                         1.8             $24.60             8,000            $23.95
$33.44 - 35.03                          11,560                         2.1             $34.20             9,333            $34.01
                            -------------------       ---------------------   ----------------    --------------    --------------
$0.12 - 35.03                        3,667,102                         3.9              $1.62         2,377,471             $1.62
                            ===================       =====================   ================    ==============    ==============
</TABLE>


9. Commitments

Operating Leases

The Company entered into a lease on February 18, 1999 for approximately 26,247
square feet for its principal executive offices at 1551 South Washington Avenue,
Piscataway, New Jersey. On March 17, 2003, the Company signed an amendment with
the landlord reducing the space from 26,247 to 12,722 square feet and the rent
from $50,153.64 to $20,143.17 per month effective March 1, 2003. The Company is
also obligated to make additional payments to the landlord relating to certain
taxes and operating expenses.

In addition, during the quarter ended December 31, 2002, the Company abandoned
the 0.298 hectare of space at SolCom House, Meikle Road, Kirkton Campus,
Livingston EH547DE, Scotland that it leased. As a result, the Company recorded a
charge of $508,458 in the quarter ended December 31, 2002 for the remainder of
the lease term that expires on August 31, 2011.



                                       64
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


entered into an abandonment agreement with the landlord in March of 2003. As a
result, the Company will incur a one-time charge of $ 139,610 in the quarter
ending March 31, 2003.

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-cancelable
operating and capital leases in effect at December 31, 2002 are as follows:

<TABLE>
<CAPTION>
                                                      Capital Leases          Operating Leases
                                                   ---------------------    ---------------------
Year ending December 31,
<S>                                                <C>                      <C>
   2003                                            $             97,950     $            776,452
   2004                                                          76,410                  731,890
   2005                                                               -                  642,054
   2006                                                               -                  632,118
   2007                                                               -                  662,736
Thereafter                                                            -                1,104,560
                                                   ---------------------    ---------------------

   Total minimum lease payments                    $            174,360     $          4,549,810
                                                   =====================    =====================

Less amount representing interest                                13,752
                                                   ---------------------

Present value on net minimum lease payment         $            160,608
                                                   =====================
</TABLE>


Rent expense under operating leases for the nine-months ended December 31, 2002
and the years ended March 31, 2002 and 2001 approximated $1,165,118 (including a
charge of $508,458 for abandoning the Livingston, Scotland lease), $801,581 and
$759,989, 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 were $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).

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.


                                       65
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


11.  Employee Benefit Plans

Effective April 1, 1993, the Company adopted a defined contribution savings
plan. The terms of the plan provide for eligible employees who have met certain
age and service requirements to participate by electing to contribute up to 15%
of their gross salary to the plan, as defined, with the Company matching 30% of
an employee's contribution in cash up to a maximum of 6% of gross salary, as
defined. Company contributions vest at the rate of 25% of the balance at each
employee's second, third, fourth, and fifth anniversary of employment. The
employees' contributions are immediately vested. The Company's contribution to
the savings plan for the nine-months ended December 31, 2002 and the years ended
March 31, 2002 and 2001 was $26,342, $42,630 and $60,671, respectively.

12.  Geographic Information

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

<TABLE>
<CAPTION>
                                          Nine Months Ending             Years Ended March 31,
                                          December 31, 2002             2002              2001
                                        -----------------------    ---------------    --------------
<S>                                     <C>                            <C>               <C>
United States                           $            2,811,899         $5,293,473        $9,937,107
Europe                                                 430,859          1,794,569         1,686,932
Pacific Rim                                             48,685            140,249             7,196
Other                                                   43,717             83,944            45,312
                                        -----------------------    ---------------    --------------

                                        $            3,335,160         $7,312,235       $11,676,547
                                        =======================    ===============    ==============
</TABLE>


The Company sold a substantial portion of its products to four customers. Sales
to these customers amounted to $1,591,107 (48% of net sales), $3,571,788 (49% of
net sales) and $4,871,198 (42% of net sales) for the nine-months ended December
31, 2002, and for the years ended March 31, 2002 and 2001, respectively. For the
nine-months ended December 31, 2002, our most significant customers were SBC
(13% of net sales), Sprint (12% of net sales) Avaya Inc.(12% of net sales) and
Siemens (11% of net sales). For the fiscal year ended March 31, 2002 our most
significant customers were AT&T (approximately 15% of revenues), Avaya (12% of
revenues), SBC (12% of revenues), and Nortel (10% of revenues). For the fiscal
year ended March 31, 2001, our most significant customers were SBC (16% of net
sales), Worldcom (12% of net sales) Rhythms (8% of net sales) and Celestica (6%
of net sales). At December 31, 2002, March 31, 2002 and 2001, amounts due from
these customers included in accounts receivable, were $219,215, $1,095,673 and
$1,799,041, 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, results of operations and cash flows.

13.  Concentration of Credit Risk

The Company maintains deposits in a financial institution which is insured by
the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December
31, 2002 and periodically throughout fiscal 2002, the Company had deposits in
this financial institution in excess of the amount insured by the FDIC.

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

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




                                       66
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


14.  Supplemental Cash Flow Information

<TABLE>
<CAPTION>
                                                                         Nine Months Ending            Years Ending March 31,
                                                                          December 31, 2002            2002              2001
                                                                        ----------------------    ---------------    --------------

Other Non-Cash Investing and Financing Activities
<S>                                                                     <C>                           <C>               <C>
   Options and warrants issued to consultants as non-cash compensation  $         62,893              $   95,892        $  22,326
   Compensation (benefit) charge from employee options                                --                      --           (6,944)
    Non-cash stock-based compensation charge                                      95,000                      --               --
</TABLE>



15. Related Party Transactions

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

The Former CEO resigned his position at the Company effective September 29,
2000. On October 5, 2000, the Company entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note for the Loan was amended to
extend the due date to April 30, 2001, and to provide that interest on the note
shall accrue through September 29, 2000. Pursuant to the terms of the Separation
and Forbearance Agreement between the Company and the Former CEO, the Former CEO
also agreed to reimburse the Company for certain expenses totaling $200,000, to
be paid over a period of six months ending March 31, 2001. During the year ended
March 31, 2001, $50,000 of the amounts owed to the Company by the Former CEO was
repaid and $22,000 has been recorded as a non-cash offset as a result of earned
but unpaid vacation owed to the Former CEO. During the year ended March 31,
2002, $813,593 was repaid. At December 31, 2002, the total amount owed to the
Company by the Former CEO was approximately $156,388 (including accrued
interest) has been fully reserved. The Company will continue to attempt to
collect the note receivable.

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

The Company paid the Chairman of the Board of Directors of the Company, $132,000
in the year ended March 31, 2002 for executive search and mergers and
acquisitions services provided to the Company from June through October 2001.

16.  New Accounting Pronouncements

In July 2001, the FASB issued SFAS No.141 "Business Combinations" and SFAS
No.142 "Goodwill and Other Intangible Assets." SFAS No.141 requires use of the
purchase method of accounting for business combinations initiated after June 30,
2001. SFAS No.142, which is effective for the Company beginning April 1, 2002,
requires that the amortization of goodwill and certain other intangible assets
cease and that the related asset values be reviewed annually for impairment. The
adoption of SFAS No. 141 and 142 had no impact on the Company' consolidated
financial statements for the nine months ended December 31, 2002.

In July 2001, the FASB also issued SFAS No.143, "Accounting for Asset Retirement
Obligations," which requires that the fair value of a liability for an asset
retirement obligation be recognized in the period in which it is incurred and
the associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset. SFAS No. 143 is effective for years beginning
after June 15, 2002. The Company is currently evaluation the impact that
adoption of this standard will have on its consolidated financial statements.




                                       67
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements


In April 2002, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets," which requires all long-lived assets classified
as held for sale to be valued at the lower of their carrying amount of fair
value less cost to sell and which broadens the presentation of discontinued
operations to include more disposal transactions. The Company adopted this
standard on April 1, 2002. There was no effect upon adoption on the Company's
consolidated financial statements.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities," which requires that a liability for costs
associated with an exit or disposal activity be recognized when the liability is
incurred. This differs from prior guidance, which required the liability to be
recognized when a commitment plan was put into place. SFAS No. 146 also
establishes that fair value is the objective for initial measurement of the
liability. This statement is effective for exit or disposal activities that are
initiated after December 31, 2002. The Company does not expect that the adoption
of this standard will have a material impact on its financial position, results
of operations, or cash flow.


In November 2002, the FASB issued Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others," which addresses the disclosures to be
made by a guarantor in its interim and annual financial statements about its
obligations under guarantees. FIN 45 also requires the recognition of a
liability by a guarantor at the inception of certain guarantees that are entered
into or modified after December 31, 2002. The impact of FIN 45 on the Company's
consolidated financial statements will depend upon whether the Company enters
into or modifies any material guarantee arrangements. We have complied with
disclosure provision of this interpretation as of December 31, 2002.


In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities," which addresses consolidation by business
enterprises of variable interest entities that either: (1) do not have
sufficient equity investment at risk to permit the entity to finance its
activities without additional subordinated financial support, or (2) the equity
investors lack an essential characteristic of a controlling financial interest.
FIN 46 requires disclosure of Variable Interest Entities (VIEs) in financial
statements issued after January 31, 2003, if it is reasonably possible that as
of the transition date: (1) the Company will be the primary beneficiary of an
existing VIE that will require consolidation or, (2) the Company will hold a
significant variable interest in, or have significant involvement with, an
existing VIE. The Company does not have any entities that require disclosure or
new consolidation as a result of adopting the provisions of FIN 46.




                                       68
<PAGE>

ION Networks, Inc. and Subsidiaries
Notes to Consolidated Financial Statements



17. Quarterly Information (UNAUDITED)

         The following is a summary of certain unaudited quarterly financial
information:

<TABLE>
<CAPTION>
                                                     Quarter              Quarter             Quarter              Quarter
                                                      Ended                Ended               Ended                Ended
                                                     June 30,           September 30,        December 31           March 31,
                                                     --------           -------------        -----------           ---------
Nine Months Ended December  31, 2002
<S>                                               <C>                  <C>                  <C>
    Net Sales                                     $   960,132          $ 1,522,336          $   852,691                  N/A
    Gross Profit                                      603,627              964,772              338,723                  N/A
    Research and development expenses                 235,309              280,893              250,320                  N/A
    Selling, general and administrative             2,136,968            1,614,473            1,768,224                  N/A
    expenses
    Depreciation and amortization expense             281,971              281,596              271,748                  N/A
    Restructuring, asset impairments and                   --              154,370              508,458                  N/A
    other charges
    Net loss                                       (2,051,634)          (1,357,152)          (2,219,736)                 N/A
Net loss per share - basic and diluted                  (0.09)               (0.06)               (0.10)                 N/A

Year Ended March 31,2002
    Net Sales                                     $ 1,933,442          $ 1,088,380          $ 2,214,216          $ 2,076,197
    Gross Profit                                    1,075,842              515,804            1,121,344            1,115,113
    Research and development expenses                 479,784              158,622              211,929               41,207
    Selling, general and administrative             2,155,114            2,250,262            1,870,157
    expenses                                        1,844,068
    Depreciation and amortization expense             471,276              472,688              468,830              439,296
    Restructuring, asset impairments and                   --                   --              217,467
    other charges                                           0
    Net loss                                       (1,991,916)          (2,348,026)          (1,371,892)          (1,217,545)

Net loss per share - basic and diluted                  (0.11)               (0.13)               (0.07)               (0.06)

Year Ended March  31, 2001
    Net Sales                                     $ 2,083,504          $ 2,788,497          $ 3,432,572          $ 3,371,974
    Gross Profit                                      926,402              816,019            1,821,776              927,684
    Research and development expenses                 866,557              664,388              468,539              126,762
    Selling, general and administrative             3,690,429            3,370,494            2,450,863            2,358,477
    expenses
    Depreciation and amortization expense           1,090,325            1,624,508              949,787               77,830
    Restructuring, asset impairments and                   --                   --            2,961,125              802,487
    other charges
    Net loss                                       (4,635,239)          (4,780,065)          (4,940,362)          (2,321,000)

Net loss per share - basic and diluted                  (0.31)               (0.29)               (0.27)               (0.14)
</TABLE>




                                       69
<PAGE>

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                       70
<PAGE>


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

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

10.1     Lease Agreement dated February 18, 1999 by and between the Company and
         Washington Plaza Associates, L.P., as landlord. /(4)/

10.2     Business Park Gross Lease dated May 17, 1999 by and between the Company
         and Bedford Property Investors, Inc./(4)/

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

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

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

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

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

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

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

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

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

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

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


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

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

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



                                       71
<PAGE>

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

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

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

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

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

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

16.1     Letter dated June 28, 2001, from PricewaterhouseCoopers LLP to the
         Securities and Exchange Commission./(10)/

21.1     List of Subsidiaries./(14)/

23.1     Consent of Deloitte & Touche LLP.*

23.2     Consent of PricewaterhouseCoopers LLP.*

99.1     Section 906 Certification of the Chief Executive Officer.*

99.2     Section 906 Certification of the Chief Financial Officer.*



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

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

(3) Incorporated by reference to the Company's Registration Statement on Form
S-8 filed on March 17, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the fiscal year ended March 31, 1999.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Filed herewith



                                       72



<PAGE>
                                   EXHIBIT 4.4

                              AMENDED AND RESTATED
                           CERTIFICATE OF DESIGNATION
                                       OF
                RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS
                                       OF
                            SERIES A PREFERRED STOCK
                                       OF
                               ION NETWORKS, INC.


         The undersigned officer of ION Networks, Inc., a corporation organized
and existing under the General Corporation Law of Delaware (the "Company"), does
hereby certify:

         That, pursuant to the authority conferred upon the Board of Directors
of the Company by its Certificate of Incorporation, as amended, and pursuant to
the provisions of Section 151 of the General Corporation Law of Delaware, the
Board of Directors, at a duly constituted meeting, adopted the following
recitals and resolution, which resolution remains in full force and effect on
the date hereof:

         WHEREAS, the Certificate of Incorporation of the Company, as amended,
provides for a class of stock designated "Preferred Stock";

         WHEREAS, the Certificate of Incorporation of the Company, as amended,
provides that the Preferred Stock may be issued from time to time in one or more
series and authorizes the Board of Directors of the Company to fix and determine
or alter the powers, designations, preferences and relative, participating,
optional and other rights and qualifications, limitations and restrictions
granted to or imposed upon any wholly unissued series of Preferred Stock and to
fix the number of shares constituting any such series and the designation
thereof;

         WHEREAS, the Board of Directors, pursuant to its authority as
aforesaid, has provided for a series of Preferred Stock of the Company
consisting of 200,000 shares designated as "Series A Preferred Stock" and has
fixed and determined the powers, designations, preferences and relative,
participating, optional and other rights and qualifications, limitations and
restrictions thereof and other matters relating to the Series A Preferred Stock
by previously filing a Certificate of Designation of Rights, Preferences,
Privileges and Restrictions of Series A Preferred Stock; and

         WHEREAS, the Corporation wishes to amend and restate such powers,
designations, preferences and relative, participating, optional and other rights
and qualifications, limitations and restrictions of the Series A Preferred Stock
and other matters relating to the Series A Preferred Stock;

         NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
amend and restate the Certificate of Designation of Rights, Preferences,
Privileges and Restrictions of Series A Preferred Stock as follows:

         1. DIVIDEND PROVISIONS. No dividends shall be paid to the holders of
Series A Preferred Stock.

         2. LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holders of
Series A Preferred Stock shall be entitled to receive, prior and in preference
to any distribution of any of the assets of the Company to the holders of Common
Stock by reason of their ownership thereof, an amount per share equal to One
Dollar and Eighty Cents ($1.80) (the "Original Series A Issue Price"). If upon
the occurrence of such event, the assets and funds thus distributed among the
holders of the Series A Preferred Stock shall be insufficient to permit the
payment to such holders of the full aforesaid preferential amounts, then the
entire assets and funds of the Company legally available for distribution to
stockholders shall be distributed ratably among the holders of the Series A
Preferred Stock in proportion to the full preferential amount each such holder
is otherwise entitled to receive under this paragraph.


<PAGE>

         3. REDEMPTION. Neither the Company nor the holders of Series A
Preferred Stock shall have the unilateral right to call or redeem or cause to
have called or redeemed any shares of the Series A Preferred Stock.

         4. CONVERSION. The holders of the Series A Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):

                  (a) RIGHT TO CONVERT.

                           (i) Each share of Series A Preferred Stock, at the
option of the holder thereof, at any time after the date
of issuance of such share at the office of the Company or any transfer agent for
such stock, shall convert into such number of fully paid and nonassessable
shares of Common Stock as is determined by dividing the Original Series A Issue
Price by the Conversion Price applicable to such share, determined as hereafter
provided, in effect on the date the certificate is surrendered for conversion.

                           (ii) The Conversion Price per share for shares of
Series A Preferred Stock shall be eighteen cents ($0.18);
provided, however, that the Conversion Price for the Series A Preferred Stock
shall be subject to adjustment as set forth below.

                  (b) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, the holder shall surrender the certificate or certificates therefore,
duly endorsed, at the office of the Company or of any transfer agent for the
Series A Preferred Stock, and shall give written notice to the Company at its
principal corporate office, of the election to convert the same and shall state
therein the name or names in which the certificate or certificates for shares of
Common Stock are to be issued. The Company shall, as soon as practicable
thereafter, issue and deliver at such office to such holder of Series A
Preferred Stock, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. Such conversion shall be deemed to have been made
immediately prior to the close of business on the date of such surrender of the
shares of Series A Preferred Stock to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock as of such date. If the conversion is in connection with an
underwritten offering of securities registered pursuant to the Securities Act of
1933, as amended, the conversion may, at the option of any holder tendering
Series A Preferred Stock for conversion, be conditioned upon the closing with
the underwriters of the sale of securities pursuant to such offering, in which
event the persons entitled to receive the Common Stock upon conversion of the
Series A Preferred Stock shall not be deemed to have converted the Series A
Preferred Stock until immediately prior to the closing of such sale of
securities.

                  (c) CONVERSION PRICE ADJUSTMENTS OF SERIES A PREFERRED STOCK.
The Conversion Price of the Series A Preferred Stock shall be subject to
adjustment from time to time as follows:

                           (i) No adjustment of the Conversion Price for any
series of Preferred Stock shall be made in an amount less
than one cent per share, provided that any adjustments that are not required to
be made by reason of this sentence shall be carried forward and shall be either
taken into account in any subsequent adjustment made prior to three (3) years
from the date of the event giving rise to the adjustment being carried forward,
or shall be made at the end of three (3) years from the date of the event giving
rise to the adjustment being carried forward. Except to the limited extent
provided for below, no adjustment of such Conversion Price pursuant to this
Section shall have the effect of increasing the Conversion Price above the
Conversion Price in effect immediately prior to such adjustment.

                           (ii) In the event the Company should at any time or
from time to time after the applicable Purchase Date
fix a record date for the effectuation of a split or subdivision of the
outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as "Common Stock Equivalents")
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof), then, as of such
record date (or the date of such dividend distribution, split or subdivision if
no record date is fixed), the Conversion Price of the Series A Preferred Stock
shall be appropriately decreased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be increased in
proportion to such increase in the aggregate number of shares of Common Stock
outstanding and those issuable with respect to such Common Stock Equivalents.

                           (iii) If the number of shares of Common Stock
outstanding at any time after the applicable Purchase Date is
decreased by a reverse stock split or other combination of the outstanding
shares of Common Stock, then, following the record date of such combination, the
Conversion Price for the Series A Preferred Stock shall be appropriately
increased so that the number of shares of Common Stock issuable on conversion of
each share of such series shall be decreased in proportion to such decrease in
outstanding shares.

                  (d) OTHER DISTRIBUTIONS. In the event the Company shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Company or other persons, assets (excluding cash
dividends) or options or rights, then, in each such case for the purpose of this
Section 4(d), the holders of the Series A Preferred Stock shall be entitled to a
proportionate share of any such distribution as though they were the holders of
the number of shares of Common Stock of the Company into which their shares of
such series of Preferred Stock are convertible as of the record date fixed for
the determination of the holders of Common Stock of the Company entitled to
receive such distribution.

                  (e) RECAPITALIZATIONS. If at any time or from time to time
there shall be a recapitalization of the Common Stock (other than a subdivision,
combination or merger or sale of assets transaction provided for elsewhere in
Section 4(c)), provision shall be made so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of such
series of Preferred Stock the number of shares of stock or other securities or
property of the Company or otherwise, to which a holder of the number of shares
of Common Stock deliverable upon conversion of the Preferred Stock held by such
holder would have been entitled on such recapitalization. In any such case,
appropriate adjustment shall be made in the application of the provisions of
Section 4(c) with respect to the rights of the holders of the Series A Preferred
Stock after the recapitalization to the end that the provisions of Section 4(c)
(including adjustment of the Conversion Price then in effect and the number of
shares purchasable upon conversion of such series of Preferred Stock) shall be
applicable after that event as nearly equivalent as may be practicable.

                  (f) NO IMPAIRMENT. The Company will not, by amendment of its
Amended Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of Section 4(c) and in the taking of all such
action as may be necessary or appropriate in order to protect the Conversion
Rights of the holders of Series A Preferred Stock against impairment.


<PAGE>
                  (g) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.

                           (i) No fractional shares shall be issued upon the
conversion of any share or shares of Series A Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be
entitled, the Company shall pay cash equal to such fraction multiplied by the
then fair market value of a share of Common Stock as determined in good faith by
the Board of Directors. The number of shares of Common Stock to be issued upon
such conversion shall be determined on the basis of the total number of shares
of Series A Preferred Stock the holder is at the time converting into Common
Stock and the number of shares of Common Stock issuable upon such aggregate
conversion.

                           (ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of Series A Preferred Stock
pursuant to Section 4(c), the Company, at its expense, shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
prepare and furnish to each record holder of Series A Preferred Stock a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of any holder of Series A Preferred
Stock, furnish or cause to be furnished to such holder a like certificate
setting forth (A) such adjustment and readjustment, (B) the Conversion Price for
Series A Preferred Stock at the time in effect, and (C) the number of shares of
Common Stock and the amount, if any, of other property that at the time would be
received upon the conversion of a share of Series A Preferred Stock.

                  (h) NOTICES OF RECORD DATE. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend) or other distribution, any right to subscribe for,
purchase or otherwise acquire any shares of stock of any class or any other
securities or property, or to receive any other right, the Company shall mail to
each record holder of Series A Preferred Stock, at least twenty (20) days prior
to the date specified therein, a notice specifying the date on which any such
record is to be taken for the purpose of such dividend, distribution or right,
and the amount and character of such dividend, distribution or right.

                  (i) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of Series A Preferred Stock, such number of its shares of Common
Stock as shall from time to time be sufficient to effect the conversion of all
outstanding shares of Series A Preferred Stock; and if at any time the number of
authorized but unissued shares of Common Stock shall not be sufficient to effect
the conversion of all then outstanding shares of Series A Preferred Stock, in
addition to such other remedies as shall be available to the holder of the
Series A Preferred Stock, the Company will take such corporate action as may, in
the opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to its Amended
Certificate of Incorporation.




<PAGE>


                  (j) NOTICES. Any notice required by the provisions of Section
4(c) to be given to the holders of shares of Series A Preferred Stock shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Company.

         5. VOTING RIGHTS. Except as specifically provided in Section 6, the
Series A Preferred Stock shall not have voting rights.

         6.       PROTECTIVE PROVISIONS.

                  (a) Subject to the rights of series of Preferred Stock which
may from time to time come into existence, so long as any shares of Series A
Preferred Stock are outstanding, the Company shall not without first obtaining
the approval (by vote or written consent, as provided by law) of the holders of
at least a majority of the then outstanding shares of Series A Preferred Stock
voting separately as a single class:

                           (i) alter or change the rights, preferences or
privileges of the shares of Series A Preferred Stock so as
to affect adversely such shares of Series A Preferred Stock;

                           (ii) increase or decrease (other than by redemption
or conversion) the total number of authorized shares of
Series A Preferred Stock;

                           (iii) authorize or issue, or obligate itself to
issue, any equity security (other than Series A Preferred
Stock), including any other security convertible into or exercisable for any
equity security, having a preference over, or being on a parity with, the Series
A Preferred Stock with respect to dividends, liquidation, redemption or voting;
or

                           (iv) effect any reclassification or recapitalization
of the Series A Preferred Stock.

         7. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of
Series A Preferred Stock shall be converted as provided for herein, the shares
so redeemed or converted shall be cancelled and shall not be issuable by the
Company. IN WITNESS WHEREOF, ION Networks, Inc. has caused this Amended and
Restated Certificate of Designation of Rights, Preferences, Privileges and
Restrictions of Series A Preferred Stock to be executed by its duly authorized
officer this 13th day of September, 2002.



                                               /S/  KAM SAIFI
                                          ----------------------------------
                                          Name:  Kam Saifi
                                          Title: Chief Executive Officer




<PAGE>



                                  EXHIBIT 10.19

February 25, 2002

Bill Whitney
330 Benson Place
Westfield, NJ  07090

Dear Bill:

We are pleased to extend this offer to you for the position of VP OF RESEARCH
AND DEVELOPMENT & CHIEF ARCHITECT, reporting to Cameron Saifi, EVP & COO.
Details are outlined below. Please indicate your acceptance by signing and
returning a copy of this letter and the Non-Disclosure Agreement on or before
February 27, 2002, the date this offer expires.

o    Your start date will be no later than March 11, 2002.

o    You will receive an  annualized  base salary of $150,000 (one hundred fifty
     thousand dollars), paid semi-monthly.

o    You will receive a one-time award of 100,000 Stock Options pending approval
     by the Board of  Directors.  The strike price of these  options will be the
     market value on your start date.  The term of these options is 5 years with
     vesting  over 3 years as  follows:  34% of the number of shares  subject to
     each option shall vest 12 months from date of grant,  and the remaining 66%
     shall vest at a rate of 8.25% at the end of every 3 month period  following
     the 12 month  anniversary of the grant. In the event of a transaction which
     constitutes a Change in Control of the Company, any unvested portion of the
     option  granted  hereby  (whether  or not such  options  are assumed by the
     successor or surviving entity of such transaction,  as provided below) will
     accelerate and become immediately vested so that this option shall, 10 days
     before the effective date of the event  constituting the Change in Control,
     become exercisable for all the Shares subject to this option.

o    In the  event  that  your  employment  with  ION  terminates  prior  to the
     completion  of 24 months  service,  The Company will pay to you a severance
     benefit  of 3 months  of your  base  salary  in  effect  as of your date of
     separation,  less withholdings and deductions  required by law, UNLESS such
     termination   is  by   reason   of  your   total   disability   or   death,
     non-performance,  termination  by  the  Company  for  cause,  or  voluntary
     resignation.

o    Benefit  coverage  commencing  the  first  day  of  employment  includes  a
     medical/dental/vision  plan, life insurance with an AD&D provision and long
     term and short term disability insurance. You will be eligible to enroll in
     our 401(k) plan after 30 days of employment.

o    You will receive two weeks' paid  vacation  annually,  as per the Company's
     policy.  Vacation is accrued on a monthly  basis and will be pro-rated  for
     your first calendar year of employment.

ION NETWORKS, INC. IS AN "AT WILL" EMPLOYER AND AS A RESULT THE EMPLOYMENT
RELATIONSHIP WILL BE "AT WILL", AND MAY BE TERMINATED BY EITHER THE EMPLOYEE OR
THE COMPANY AT ANY TIME, WITH OR WITHOUT CAUSE, UNLESS A SPECIFIC WRITTEN
AGREEMENT, APPROVED BY THE PRESIDENT OF ION NETWORKS, INC. IS SUBSEQUENTLY
ENTERED INTO WITH YOU. IT SHOULD ALSO BE UNDERSTOOD THAT THIS LETTER DOES NOT
CONSTITUTE A CONTRACT OF EMPLOYMENT OR AN AGREEMENT OF EMPLOYMENT FOR ANY
SPECIFIC PERIOD OF TIME.

          We are delighted at the prospect of your joining our team here at ION
Networks, Inc. and look forward to establishing what I am sure will be a
mutually rewarding business relationship. Should you have any questions
regarding the specifics of this offer, please do not hesitate to call me.

Sincerely,

/s/ Terri Rogers                            ACCEPTED
Terri Rogers                               /S/ BILL WHITNEY
                                           ---------------------------------
Human Resources Manger                      BILL WHITNEY                DATE

                                            3/11/02
                                           -----------
                                            Start Date
Enc.:    Non-Disclosure Agreement


<PAGE>



                                  EXHIBIT 23.1

                          INDEPENDENT AUDITORS' CONSENT


We consent to the  incorporation  by reference in  Registration  Statement  Nos.
333-09507,  333-85693,  333-50246,  and  333-83686  of ION  Networks,  Inc.  and
subsidiaries on Form S-3 and Registration  Statement Nos. 333-61837,  333-14681,
333-76809,  333-76604,  333-76568,  and  333-102254  of ION  Networks,  Inc. and
subsidiaries  on Form S-8 of our report dated March 11, 2003,  appearing in this
Annual Report on Form 10-KSB of ION Networks, Inc. and subsidiaries for the nine
months ended December 31, 2002.


/s/DELOITTE & TOUCHE LLP

Parsippany, New Jersey
April 15, 2003



<PAGE>



                                  EXHIBIT 23.2

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements of ION Networks, Inc. and Subsidiaries (the "Company") on Forms S-3
(File Nos. 333-09507, 333-85693, 333-50246 and 333-83686) and Forms S-8 (File
Nos. 333-102254, 333-61837, 333-14681, 333-76809, 333-76604 and 333-76568) of
our report dated June 28, 2001, relating to the consolidated statements of
operations, stock holders' equity and cash flows for the year ended March 31,
2001, which appears in the Company's Annual Report on Form 10-KSB for the nine
month period ended December 31, 2002.

/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP


Florham Park, New Jersey
April 15, 2003


<PAGE>



                                  EXHIBIT 99.1

                               ION NETWORKS, INC.

                                  CERTIFICATION
                                  -------------

In connection with the periodic report of ION Networks, Inc. (the "Company") on
Form 10-KSB for the transition period from April 1, 2002 to December 31, 2002 as
filed with the Securities and Exchange Commission (the "Report"), I, Kam Saifi,
Chief Executive Officer of the Company, hereby certify as of the date hereof,
solely for purposes of Title 18, Chapter 63, Section 1350 of the United States
Code, that to the best of my knowledge:

              (1) the Report fully complies with the requirements of Section
              13(a) or 15(d), as applicable, of the Securities Exchange Act of
              1934, and

              (2) the information contained in the Report fairly presents, in
              all material respects, the financial condition and results of
              operations of the Company at the dates and for the periods
              indicated.




Date: April 15, 2003                   /S/  KAM SAIFI
                                       -----------------------------------------
                                       Kam Saifi
                                       Executive Officer, President and Director



<PAGE>



                                  EXHIBIT 99.2

                               ION NETWORKS, INC.

                                  CERTIFICATION

In connection with the periodic report of ION Networks, Inc. (the "Company") on
Form 10-KSB for the transition period from April 1, 2002 to December 31, 2002 as
filed with the Securities and Exchange Commission (the "Report"), I, Stephen M.
Deixler, Interim Chief Financial Officer of the Company, hereby certify as of
the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of
the United States Code, that to the best of my knowledge:

              (1) the Report fully complies with the requirements of Section
              13(a) or 15(d), as applicable, of the Securities Exchange Act of
              1934, and

              (2) the information contained in the Report fairly presents, in
              all material respects, the financial condition and results of
              operations of the Company at the dates and for the periods
              indicated.




Date: April 15, 2003                        /S/  STEPHEN M. DEIXLER
                                            ------------------------------------
                                            Stephen M. Deixler
                                            Interim Chief Financial Officer





<PAGE>