U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-KSB

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

         For the fiscal year ended March 31, 2000

                                       OR

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

         For the transition period from ____________ to ____________

                          Commission File No.: 0-13117

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

           Delaware                                     22-2413505
------------------------------             -----------------------------------
Incorporation or Organization             (IRS Employer Identification Number

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

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

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

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

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

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

The issuer's revenues for its most recent fiscal year totaled $22,668,833.

The aggregate market value of the voting stock held by  non-affiliates  computed
by  reference  to the  average of the bid and asked  prices as  reported  by the
Nasdaq Stock Market as of June 22, 2000 was approximately $86,618,805.

There were 15,621,862 shares of Common Stock outstanding as of June 22, 2000.

DOCUMENTS  INCORPORATED BY REFERENCE:  Portions of the issuer's Definitive Proxy
Statement  for the 2000  Annual  Meeting  of  Stockholders  of the  Company  are
incorporated by reference into Part III hereof.


<PAGE>



                                     PART I

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

GENERAL

         ION  Networks,  Inc.,  ("ION" or the  "Company"),  is a  developer  and
manufacturer  of software and hardware  solutions  for  monitoring  and managing
mission  critical  voice  and data  network  infrastructure.  ION is a  Delaware
corporation  founded in 1999 through the combination of two companies focused on
network  management  products - MicroFrame,  Inc., a New Jersey corporation (the
predecessor  entity to the  Company,  originally  founded  in 1982)  and  SolCom
Systems  Limited  ("SolCom"),  a Scottish  corporation  located  in  Livingston,
Scotland  (originally  founded  in 1994).  In 1999 ION  Networks  augmented  the
Company  through  the  purchase  of certain  assets of LeeMAH  DataCom  Security
Corporation  ("LeeMAH"),  a California  corporation.  The latter now constitutes
ION's Secur@ccess division.

         ION designs and  manufactures  next-generation  secure,  proactive  and
anticipatory network infrastructure  management products. ION's products monitor
applications  (computer  programs which people and businesses use),  devices and
links in a network to determine if a network is working properly.  The Company's
products  are used to  collect  and  analyze  data  about the  network  and make
meaningful  decisions about them. If the network is working  erratically,  ION's
products determine the cause of the problem and attempt to fix it automatically.
As  a  result,  ION's  products  improve  network  performance  and  assist  the
businesses or institutions that are dependent on networks to be more effective.

         ION's  customers  are  businesses  that provide  voice and data network
services to businesses and  consumers,  and large  enterprises  or  institutions
which need  networks  to manage  their  business  operations.  ION's  customers'
networks support a variety of uses, e.g., telecommunications,  email, accounting
and other financial  systems,  word processing,  engineering and  manufacturing,
e-commerce,  and various outsourced  services such as applications  services and
web-hosting. Today these customers constitute a market that is relatively small,
(approximately  $1 billion)  rapidly growing,  highly  fragmented and exhibiting
little direct competition among industry participants.

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



                                      -2-

<PAGE>

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

         ION's  PRIISMS suite  enhances the  performance  of existing  networks,
allowing  network  managers to defer or  sometimes  eliminate  the need to incur
significant  expense in  upgrading  their  networks.  Because  PRIISMS  Suite is
scalable,  provides predictive and real-time problem  identification (Root Cause
Analysis),  can act to diagnose and resolve  problems,  makes  efficient  use of
network  resources  and  bandwidth,  and can be  customized,  ION  believes  its
products enhance the economic value of its customers' networks. Because problems
are diagnosed and resolved  quickly,  service providers improve their quality of
service   and  limit  the  need  to  pay  refunds  to  their   customers.   User
dissatisfaction  and customer  defections are reduced.  Additionally,  expensive
visits by repair technicians to remote sites are limited,  because the expertise
of this scarce resource is extended throughout the network.

         ION has a well-recognized  customer base of more than 250 customers who
use  the  products  in  over  10,000  locations.  ION's  largest  customers  are
telecommunications  companies  of all kinds,  both in the  United  States and in
Europe, as well as large enterprises and institutions Approximately one-third of
ION's sales are made direct to customers such as AT&T,  Rhythms  NetConnections,
MCI and Intel  Corporation,  one-third go through  resellers such as KNP-Telecom
BV,  Sycamore  Networks,  Ameritech  and USWest,  and one-third are sold through
original equipment manufacturers (OEMs) Hewlett-Packard and Lucent Technologies.

THE PRODUCTS

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

ION'S DEVICES

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

 .        Secure Access - Only authorized  personnel can obtain information from
         or send instructions to ION's Devices or to network devices. Users can
         logon to one of ION's  Devices  and get a  real-time  view of  network
         functionality. Their actions are logged for later audit.


-----------------------------
1. Intelligent devices are those that contain programmable microproccessors
2. Procaticve, real-time, integrated, intelligent, secure, metric-based solution


                                      -3-

<PAGE>


 .        Alarm  Management - When a process  running on a network device exceeds
         preset thresholds,  the device generates an alarm. ION's Devices detect
         these  alarms  and  report  them,   and  also   generate   alarms  when
         unauthorized  access or power  loss  occurs.  All events and alarms are
         logged for later audit.
 .        Custom AMT Modules - Active Management Technology ("AMT") is the method
         whereby  ION's  Devices  capture  knowledge  from  network  experts and
         automate  their  analysis,  decision  making and  actions.  How network
         experts  analyze  data,  the  decisions  they  make  about the data and
         analyses,  and the  resulting  actions  they take can be  codified in a
         series of rules, or a "routine",  that ION's Devices can execute.  As a
         result,  the network  expert's  ability to identify  and solve  network
         problems can be implemented across the entire network. The routines can
         be executed automatically,  fixing many network faults without the need
         for human intervention.
 .        Data Buffering - Data  collected  from network  devices such as PBXs or
         servers  can  be  automatically  formatted  for  later  viewing  or for
         downloading to other applications such as billing systems.
 .        Environmental   Monitoring  -  Network  devices  can  be  impacted  by
         environmental  factors,  e.g., heat, water,  intruders.  ION's Devices
         detect and report various environmental changes.
 .        SNMP  Device   Monitoring  and  Management  -  SNMP  (Simple   Network
         Management Protocol) is a widely used standard method of communicating
         with many network  devices.  This standard also specifies what kind of
         information  is  available  about  the  network  device  and how it is
         collected.  ION's Devices can collect, report, and analyze information
         from any network  device that  conforms to this  standard.  In passive
         monitoring,  network  elements  notify ION's Devices of unusual events
         and action is taken. In active monitoring,  ION's Devices poll network
         devices  checking  for  changes  which  could  indicate  a  developing
         problem.  This allows ION's Devices to anticipate problems and to take
         action before problems become severe. o SNMP Traps - ION's Devices can
         collect  data from  network  devices  that do not  conform to the SNMP
         standard and convert the data into the SNMP standard. Then the network
         devices can take  advantage of the most advanced and powerful  network
         management  tools.  One  example of  non-SNMP  devices are some of the
         optical  switches,  those  network  devices  which  communicate  using
         photons  rather than  electrons,  and are  currently the most advanced
         switching technology commercially available.
 .        RMON  Monitoring  -  R(emote)  MON(itoring)  is a  standard  method for
         collecting  and analyzing  data from IP-based  network  devices and the
         links  between the devices.  RMON is an extension of SNMP that performs
         data  collection  and  analysis  about  network  performance  at remote
         locations.  Because information is not constantly reported to a central
         site, RMON uses less network capacity than does SNMP as it continuously
         collects fault, configuration, and performance data, as well as running
         diagnostics and logging performance.  RMON analyses the network traffic
         for each protocol used by the network and for each application  running
         on the network,  thereby producing  information about all levels of the
         network.
 .        "Out-of-the-Box" AMT - ION makes available a library of measurement and
         action routines for analyzing network data, making decisions and taking
         action.  These routines are much more  comprehensive than those in RMON
         and are  designed  to be  useful  to most  network  managers.  They are
         exception-based and report only the most important information from the
         remote  site,  making  the most  productive  use of  expensive  network
         bandwidth and of the network engineer's time.

         ION's Devices are based on a common  framework and offer subsets of the
capabilities  described  above so as to meet the  needs  of  different  customer
segments.  The most  economical  devices  provide only secure  access to network
devices and a log of any user  activities,  whereas the most  versatile  device,
NetwoRx,

                                      -4-



<PAGE>

manages an entire remote  location  providing a wide range of analyses
and anticipatory action to solve network problems before they become severe. The
capabilities of each device are described below:

<TABLE>
<CAPTION>


INTELLIGENT                                                         ENVIRON-             PASSIVE     ACTIVE              OUT-OF
DEVICES                   SECURE     ALARM      CUSTOM      DATA     MENTAL     SNMP       SNMP      SNMP               THE-BOX
                          ACCESS      MGMT       AMT     BUFFERING    MON       TRAPS      MON        MON       RMON       AMT
------------------------ ---------- --------- ---------- --------- ---------- ---------- --------- ---------- --------- ----------
<S>     <C>             <C>          <C>        <C>      <C>         <C>        <C>       <C>         <C>       <C>
 .        Secure@ccess:   X
         ------------
         TraqNet 2000 and
         FasTraq
 .        Secure          X          X
         Sentinel
 .        Sentinel 2000S  X          X         X          X         X          X          X
 .        Sentinel 2000   X          X         X          X         X          X          X
 .        NetwoRx-O -     X          X         X          X         X          X          X
         for Optical
         Technology
         Manufacturers
 .        NetwoRx-VT      X          X         X          X         X          X          X
         -for CLECs3
 .        NetwoRx         X          X         X          X         X          X                    X          X         X


</TABLE>

         The  Company  believes  these  products  have  valuable  distinguishing
capabilities that limit the level of direct  competition and have allowed ION to
develop  as  an   industry   leader  in   next-generation,   proactive   network
infrastructure management products.

ION's PRIISMS Suite:
 .        employs a distributed  architecture - Intelligent  hardware  devices at
         remote locations ensure that the system scales so it can monitor large,
         diverse or highly distributed networks without performance degradation.
         ION's  Devices poll  network  devices  every second so the  performance
         information  is collected in real-time.  Data  collection  and analysis
         occur at remote  locations  without  human  intervention,  resulting in
         considerable  savings  to the  customer.  In  addition,  this  type  of
         analysis  ensures  that  only true  problems  are  reported  (exception
         reporting) to the central manager  thereby  minimizing the system's use
         of the customer's valuable bandwidth.
 .        collects  and reports  information,  analyzes and  anticipates  network
         problems - Standardized network management data are collected: SNMP MIB
         data, SNMP Traps (alarms), RMON1, RMON2, console port data, ASCII, TL1,
         humidity,   temperature,  and  physical  intrusion.  Various  kinds  of
         analyses include:  translating between data types, creating Traps, RMON
         statistics, measurements of router health, measurements of Ethernet LAN
         health, measurements of PVC status and utilization, measurements of LAN
         switch  and port  health,  utilization  levels of  applications  and of
         protocols, and histories.
 .        recommends  and takes  action - ION's  unique AMT  automatically  takes
         action to resolve network problems.  For example,  ION's Devices can be
         programmed to reboot a device when a particular  condition is detected.
         In addition,  they can take a network  link up or down,  create a Trap,
         notify  a


-----------------------------
3  Competitive local exchange carriers, e.g. Rhythms NetConnections, Covad,
   PathNet

                                      -5-


<PAGE>


         person, collect many kinds of additional diagnostic information, etc.
 .        operates  during power or network  outage - ION's  Devices have battery
         back-up and secure  out-of-band  (dial-up)  access so they  continue to
         function  when network  devices are down.  As a result,  an  authorized
         network  engineer can  determine the cause of a problem and even repair
         it when other  network  management  systems,  which are  dependent on a
         functioning network, would be unable to operate.
 .        accommodates  secure  access and  communication  - ION's  Devices,  the
         central  servers which manage them,  and the network  devices which are
         being monitored will allow only authorized  users to access them. ION's
         system   conforms  to  Security   Industry   Standards   and   provides
         authentication, access control, authorization and an audit trail.
 .        can be customized to fit any  environment - All networks are different.
         A customer can  set/modify  thresholds  and  parameters  for any of the
         measurement and action routines which ION provides. In addition,  since
         all networks are different,  ION provides a scripting  capability which
         allows  customers,  or ION's  professional  services people, to develop
         customized routines.

PRIISMS MANAGER

         PRIISMS Manager  consolidates the information from multiple ION Devices
so  customers  have a picture of the  activity  on their  whole  network.  Today
PRIISMS  Manager  manages  all of the  ION's  Devices  except  TraqNet  2000 and
FasTraq,  ION Devices  produced by the Secur@ccess  Division.  These devices are
currently  being  integrated  and are scheduled to operate with PRIISMS  Manager
later this year. PRIISMS Manager:
 .         has a web-based  Graphical User Interface  (GUI) for navigating  among
          the devices and reporting exceptions sent by ION's Devices
 .         can  monitor  devices in  real-time  both using the  network and using
          dial-up (out-of-band) connections if the network has an outage
 .         establishes  passwords  for the  devices,  administers  and ages them,
          along  and  controls  the  criteria  for who can gain  access to ION's
          Devices and to the network devices that are being managed
 .         sets up and changes  the  configurations  of ION's  Devices and groups
          them so they can be managed in categories
 .         for NetwoRx,  the most capable ION device,  displays RMON  statistics,
          allows users to configure  thresholds  and  parameters  of the various
          Out-of-the-Box  AMT  routines,  and provides  information  from all of
          ION's Devices in the network, providing an enterprise-wide view.

OEM PRODUCTS

         In addition to ION's Devices,  ION sells custom versions of devices and
software  to OEMs who resell them under the OEM's  brand  name.  In FY2000,  ION
received  $1,596,000  from  Hewlett-Packard  Company and $2,199,000  from Lucent
Technologies,  Inc., for these customized products.  In addition,  during FY2000
the Company developed and licensed the rights to certain  customized  modules of
its software via a perpetual license agreement for approximately $3,244,000. The
development  and  licensing  had a positive  effect on the gross  margins of the
Company in FY2000.  The Company has no further  obligations to the customer with
respect to this development and the licensed software.


                                      -6-

<PAGE>

SUPPORT SERVICES

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

TARGET  MARKETS - DEFINITION AND DRIVERS

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

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

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

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

         To an enterprise or a service provider,  network  performance  problems
represent  real economic  loss.  For example,  according to one of the Company's
customers,  dispatching  a  technician  to reboot a router in the local



                                      -7-

<PAGE>

area can cost between $200 and $400; most  technicians are charged out at $250/
hour,  and their average job is $1,000.  The  cost  of  a  network  outage  can
raise  operating costs by 50% from  $1.00/hour/user  to  $1.50/hour/user.  Other
customers  have  described  a typical  repair  cycle for a large  network as: 20
minutes to detect a problem,  30-120 minutes to diagnose the problem, and 60-120
minutes to implement the solution.  An Internet Service Provider (ISP) with 1200
business customers who must return  $1000-2000/hour/customer  for an outage, can
incur as much as $10,000,000 in penalties in just four hours.

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

          Because of these  problems,  network mangers and users are starting to
demand network infrastructure management products that:
     .    are able to determine how network users are impacted by the underlying
          network problems.
     .    not only  deliver data to  engineers,  but also  automate  some of the
          engineer's analyses and activities, making him more productive.
     .    can identify network problems in real-time or even before they happen.
     .    can perform  sophisticated  analyses that send only the most important
          information  to  the  engineer.   The  information  should  be  easily
          understood, and the cause of the problem should be identified allowing
          engineers  to skip the  lengthy  diagnosis  phase.  Fixing the problem
          automatically is highly desirable.
     .    redirect  network  traffic  to  maximize  network  capacity  and avoid
          bottlenecks and network faults.
     .    provide business  solutions,  not just network  management  solutions,
          allowing the business to increase the returns it can earn.

         The market for these products is highly  fragmented and emerging,  and,
as such,  the size and growth rates are hard to quantify.  According to research
published by First Security Van Kasper ("FSVK"),  only 5% of potential customers
utilize  these  advanced  network  infrastructure   management  products.   FSVK
estimates the network infrastructure  management market at $2.7 billion in 1998,
growing to $10.4  billion in 2001,  representing  a compound  annual growth rate
(CAGR) of 57%.  Another study from 1998 conducted by Bear Stearns  estimated the
size and growth rates of several network infrastructure  management segments, as
follows:

     .    Performance analysis and reporting tools at $522MM in 2000 with an 80%
          CAGR
     .    End-user performance management at $413MM in 2000 with an 82% CAGR
     .    Public WAN data service level  management at $185MM in 2000 with a 51%
          CAGR.

         The Company  believes it products are uniquely suited to meet the needs
of this market.  Its  distributed  architecture  easily  scales to manage large,
diverse  and  highly  distributed  networks  while  performing   predictive  and
real-time  problem  identification.  ION's  Devices  have the  ability to act to
diagnose  and resolve  problems  even during power or network  outages.  Because
analysis and actions  occur at the  distributed  locations  ION's  products make
efficient use of network  resources and expensive  bandwidth while providing the
flexibility  for


                                      -8-

<PAGE>

customization   to  fit  any  network.   The  result  of  these characteristics
is  real  economic  benefit.   Quality  of service is increased and the time to
diagnose   and   resolve   problems  (mean-time  to  repair  (MTTR)) is reduced
thereby   limiting  service  providers'  need  to  make  refunds  to  customers.
End  user  and  customer   dissatisfaction   is  minimized   improving  employee
productivity  and  customer  loyalty.  Expensive  visits to  diverse  and remote
locations  are limited.  The Virtual  Network  Expert  extends the  expertise of
scarce  resources across the entire network and assists human engineers to solve
problems more effectively and efficiently.

MARKETING AND DISTRIBUTION

         In FY2000 the Company continued to expand its sales force, growing from
eight in FY1999 to 18  currently.  The  Company  goes to  market  through  three
channels:  direct sales, resellers,  and OEMs. In FY2000 direct sales were 38.5%
of revenues;  sales through  resellers were 30.0%, and OEM sales were 31.5%. ION
markets its products primarily in the United States and Europe. In FY2000 85% of
sales were in the United  States,  15% were in Europe and 5% were in the Pacific
Rim and South/Central America.

         In total,  ION has over 250 customers  with  products  deployed at more
than 10,000 locations worldwide.  ION's largest customers are telecommunications
service providers in the United States and Europe. Examples of those to whom ION
sells direct are: Rhythms NetConnections, Crown Castle USA, MCI Worldcom, Pointe
Communications Corporation,  FirstWorld Communications,  Sonera Systems Ltd, and
Concert.  Enterprise  and  institutional  customers  are,  among  others,  Intel
Corporation,  Entergy Corporation,  Fleet Boston Corporation, and Bay Area Rapid
Transit (BART). Some of ION's resellers are: Bomara Associates,  KPN Telecom BV,
Bluewater Networks, Inc., Alcatel Belgium, and NeMO GmbH.

COMPETITORS

         The table below shows the eight companies that the Company believes are
most likely to become ION competitors.  The table describes the core strength of
the  company,  its  current  products,  the  way  it  positions  itself  in  the
marketplace  and its most recent fiscal year revenues,  if available.  Currently
ION has little direct  competition,  and the market it addresses is emerging and
highly  fragmented  with many  companies  expanding  by  acquisition  from their
initial business to offer a more  comprehensive  solution.  An indication of the
emerging nature of the market ION addresses is the size of the companies in this
industry. None has yet reached $100 million in annual sales.

         While not direct competitors, many companies position themselves in the
marketplace  in much the same way as does  ION.  This can be very  confusing  to
potential customers, particularly in the emerging market. Customers are confused
because  industry  participants  with very  different  products claim to deliver
similar  benefits.  These companies claim similar  capabilities to ION's, and as
ION  executes  its  growth  strategy  and  the  industry   consolidates  through
acquisition, the number is likely to increase.

         Management  believes ION currently has a combination of  distinguishing
capabilities  which are valued by the  marketplace,  especially  the  ability to
proactively  anticipate network problems and take the actions required to repair
network problems even during power or network outages without using up expensive
network  bandwidth.  These  characteristics  provide genuine economic benefit to
customers  by  increasing  the quality of service  delivered  by the network and
reducing the time required to resolve problems.


                                       -9-
<PAGE>

<TABLE>
<CAPTION>

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

    COMPANY         CORE STRENGTH                PRODUCTS                      POSITIONING
---------------------------------------------------------------------------------------------------
<S>                 <C>               <C>                              <C>
    Applied            WAN/LAN        remote site monitoring for       AI products enable
   Innovation        measurement      analog and relay contact alarm   carriers to efficiently
                                      signals                          monitor & manage their
                                                                       networks

---------------------------------------------------------------------------------------------------
    Aprisma             Fault         fault management system with     A leader in e-business
                     management/-     monitoring and fault isolation   infrastructure management
                      monitoring                                       software
---------------------------------------------------------------------------------------------------
    Concord           Reporting       software product suite for       Market leader in
                                      real-time monitoring, alarm      next-generation management
                                      notifications & restart of       solutions that ensure
                                      failed processes, end-to-end     effective e-business
                                      view of application              performance
                                      availability & performance
---------------------------------------------------------------------------------------------------
   MicroMuse          Root cause      monitors large-scale networks    Leading provider of fault
                       analysis       in real-time to quickly          & service-level management
                     identify and address problems software

---------------------------------------------------------------------------------------------------
    NetScout       Hardware probes    comprehensive performance        Full-service provider of
                      for remote      management system from           network performance
                  monitoring & data   integration of probes and        management solutions)
                      collection      NextPoint application
                                      monitoring acquisition

---------------------------------------------------------------------------------------------------
   Riversoft          Root cause      maps and monitors the network    The only provider of
                       analysis       isolating the room cause of      'interventionless' network
                                      the problem                      management tools
---------------------------------------------------------------------------------------------------
     SMARTS           Root cause      pinpoints root cause of the      Real-time problem
                       analysis       problem, identifies impact and   diagnosis and impact
                                      automates response               analysis
---------------------------------------------------------------------------------------------------
Visual Networks    WAN Measurement;   monitor service level            Leading provider of
                    QoS; Reporting    agreements                       Service Management Systems
                                                                       for IP networks
---------------------------------------------------------------------------------------------------

</TABLE>

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


                                      -10-

<PAGE>

SOURCES AND AVAILABILITY OF MATERIALS

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

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

DEPENDENCE ON PARTICULAR CUSTOMERS

         The Company has  continued to expand its  customer  base and to broaden
its sales constituency. These efforts have resulted in the Company becoming less
reliant on any one particular customer. However, the Company sells a substantial
portion of its products to several  major  customers.  The top four  customers -
Rhythms   NetConnections,   Lucent   Technologies,   KPN  -  Telecom   BV,   and
Hewlett-Packard  -  accounted  for 38% of  revenues  in  FY2000.  The top  eight
customers,  which included MCI Worldcomm,  Crown Castle  International,  Siemens
USA, and AT&T, accounted for 56% of revenues in FY2000. Two of these customers -
Crown Castle  International  and Siemens  USA, - were new to the Company  during
FY2000.  The loss of any of these customers could have a material adverse effect
on the Company's business.

INTELLECTUAL PROPERTY, LICENSES AND LABOR CONTRACTS

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

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

         The  Secure  Sentinel  name is a  registered  trademark  filed with the
United  States  Patent and  Trademark  Office  ("PTO"),  as is  SAFECONNECT  and
NETREACH.  The Company also has trademark  applications pending with the PTO for
its  corporate  name,  ION  Networks,  Inc. The Company  anticipates  that these
trademarks  will be  registered,  but there can be no  assurance  that this will
occur. The Company plans to apply for other trademarks during the coming year.

GOVERNMENTAL APPROVALS AND EFFECT OF GOVERNMENT REGULATION

         Due to the sophistication of the technology employed in ION's products,
export of these products is subject to governmental regulation.  The Company has
obtained  licenses to export  certain of its products in


                                      -11-
<PAGE>

limited  quantities  to Sweden, Norway,  Switzerland,  South Africa, the United
Kingdom,  France, Italy, Germany, Australia and Singapore.

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

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

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

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

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

RESEARCH AND DEVELOPMENT ACTIVITIES

         During  FY2000  the  Company  expanded  its  research  and  development
activities   substantially.   The   Company   continued   development   of   its
next-generation  of products  and  introduced  three new ION  Devices:  NetwoRx,
NetwoRx - VT, and NetwoRx - O. Additionally, Release 1.1.1 of PRIISMS Manager is
entering (beta)-testing.  This release will manage products in both the Sentinel
and NetwoRx families.  Release 1.2 of PRIISMS Manager and NetwoRx will implement
AMT metrics and action  routines  and is  scheduled  for release in summer 2000.
Shortly  thereafter,  PRIISMS  Manager  will be extended  to manage  Secur@ccess
devices.  In order to  deliver  these new  products,  research  and  development
funding increased from $2,580,857 in FY1999 to $4,288,396 in FY2000.

         During FY2000 the research and  development  activities of  Microframe,
the predecessor to the Company,  and SolCom,  which was acquired in March, 1999,
were  integrated.  Four  categories  of product were being  developed at SolCom:
Modular  Products,  Sentinel  III,  NetworX,  and an ASIC  (Application-Specific
Integrated  Circuit).  During  FY2000  the  Modular  Products  continued  to  be
developed in  Livingston  Scotland and resulted in daughter  boards that provide
RMON monitoring for NetwoRx. The Company no longer sells



                                      -12-

<PAGE>


standalone  Modular  RMON  Products.   Sentinel  III  product  development  was
transferred  to  Piscataway,   New  Jersey,  and  integrated  into  the  NetworX
development  effort  which  resulted  in three new  intelligent  devices  during
FY2000.  The  hardware  portion  of the  NetworX  development  effort  was  also
transferred to Piscataway,  and the  centralized  software  manager  portion was
combined with Manager 2000, from MicroFrame, and developed into PRIISMS Manager.
The ASIC development  effort was reevaluated in light of new technologies on the
market and the  requirement  for continued  costly  development  and the Company
intends to complete  this effort as a series of FPGAs (field  programmable  gate
arrays) for monitoring  high-speed  network  protocols such as ATM (Asynchronous
Transfer Mode), gigabit Ethernet and OC-3 (Optical Carrier).

COSTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS

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

EMPLOYEES

         As of June 22,  2000,  the Company had 134  employees,  all of whom are
full-time employees,  and of which 37 are technical personnel,  54 are in sales,
marketing and support, 22 are in production, and 21 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.

ITEM 2.       DESCRIPTION OF PROPERTY.

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

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

         In addition, the Company leases 0.298 hectare of space at SolCom House,
Meikle Road, Kirkton Campus,  Livingston EH547DE, Scotland as well as 436 square
feet of space at 1801 Robert Fulton Drive, Suite 400, Reston,  Virginia 20191 in
connection with the operations of SolCom and SolCom Systems Inc., a wholly-owned
subsidiary of SolCom, respectively.  These leases provide for monthly rentals of
(pound)3,583  and  $3,675,  respectively,  and  expire  on August  31,  2011 and
February 28, 2000, respectively.

         The Company  also leases  approximately  5,600  square feet of space at
48834 Kato Road,  Fremont,

                                      -13-

<PAGE>

California in the Bedford Fremont Business Center in connection with its LeeMAH
division  located in Fremont,  California.  This lease commenced on June 1, 1999
and is for a term of 60 months with  monthly  rent payable by the Company to the
landlord  as  follows:  $7,360  per  month  for the first 12 months of the term;
$7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per
month for months 37-48; and $8,280 per month for months 49-60.

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

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

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

         None.


                                      -14-
<PAGE>


                                     PART II

ITEM 5.       MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
              ---------------------------------------------------------

MARKET INFORMATION

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

           Fiscal Year 2000                      HIGH                  LOW
           ----------------                      ----                  ---

           June 30                               5 1/16              2 1/8
           September 30                          8 3/4               3 13/16
           December 31                           22 1/2              5 7/16
           March 31                              44                  18 5/8

           Fiscal Year 1999

           June 30                               4 3/4               2 3/4
           September 30                         3 7/16               1 1/8
           December 31                          3  5/8               1 1/2
           March 31                                  3               1 3/4

RECENT SALES OF UNREGISTERED SECURITIES

         On March 31, 1999, the Company issued an aggregate of 2,200,233  shares
of Common Stock (the "SolCom  Shares") and options to purchase 451,188 shares of
Common Stock to the holders of SolCom in consideration of the acquisition by the
Company of all of the  outstanding  share  capital of SolCom.  The Company  also
granted to employees of SolCom  options to purchase up to an  additional  48,369
shares  of  Common   Stock.   In   addition,   the   Company   granted   300,000
performance-based  options to certain employees of SolCom, 150,000 of which have
terminated  for failure to achieve  certain  revenue  targets and the  remaining
150,000 of which have  terminated  due to the  termination  of employment of the
option  holders.  The SolCom Shares were issued pursuant to Section 4(2) of, and
Regulation S  promulgated  under,  the  Securities  Act of 1933, as amended (the
"Act"),  to shareholders of SolCom residing outside the United States and to one
accredited  investor  residing in the United  States.  The  options  granted are
exercisable  immediately and have exercise prices ranging from $0.4826 per share
to $1.8016 per share and expiration dates ranging from four to ten years.

         On February 25, 1999, the Company  acquired  certain selected assets of
LeeMAH in consideration of the delivery by the Company to LeeMAH of a promissory
note in the principal  amount of $1,000,000 with interest thereon at the rate of
six (6%)  percent  per annum,  payable  in one  balloon  payment  within 90 days
thereafter.  Effective  March 31, 1999,  the Note was terminated by agreement of
the parties in exchange for the  issuance to LeeMAH of 444,000  shares of Common
Stock, pursuant to Section 4(2) under the Act.



                                      -15-


<PAGE>

         On June 7, 1999, the Company issued an aggregate of 1,000,000 shares of
Common Stock and  warrants to purchase an aggregate of 500,000  shares of Common
Stock to Special Situations Private Equity Fund, L.P. ("Special Situations") and
certain affiliated  entities of Special Situations in consideration of an amount
equal to  $3,000,000,  pursuant to Section  4(2) under the Act. The terms of the
warrants are three years and the exercise prices thereof are $4.50 per share for
250,000 warrants and $6.00 per share for the remaining 250,000 warrants.

         On August 6, 1999, the Company issued an aggregate of 2,000,000  shares
of Common Stock at a price of $4.75 per share to a group of accredited investors
in  consideration  of an  amount  equal  to  $9,500,000,  pursuant  to Rule  506
promulgated under the Act.

         In  addition,  in  connection  with  the  June  1999  and  August  1999
financings, financial advisors were granted warrants to purchase an aggregate of
306,250 shares of Common Stock in consideration of financial  advisory  services
provided by them to the Company. An aggregate of 18,750 warrants are exercisable
for a period of three years from the date of grant and the remaining 287,500 are
exercisable  for a period of five  years  from the date of grant.  The  exercise
prices  thereof  are $4.75 per share for 250,000  warrants,  $3.00 per share for
37,500 warrants,  $4.50 per share for 9,375 warrants and $6.00 per share for the
remaining 9,375 warrants.

SECURITY HOLDERS

         As of June 22,  2000,  there  were 379  holders of record of the Common
Stock (not including beneficial owners of Common Stock held by brokers in street
name).

DIVIDENDS

         The Company has not paid any cash  dividends on its Common Stock during
the two fiscal  years  ended  March 31,  2000 and March 31,  1999.  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.

         Under the terms of the Company's  credit agreement with United National
Bank  ("United"),  the Company may not,  without  the prior  written  consent of
United,  declare or pay any  dividends in cash on any shares of capital stock of
the Company.

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

A number of statements  contained in this report are forward-looking  statements
within the meaning of the Private Securities  Litigation Reform Act of 1995 that
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those expressed or implied in the applicable  statements.  These
risks and uncertainties include, but are not limited to, the recent introduction
and the costs  associated  with,  a new family of  products;  dependence  on the
acceptance of this new family of products;  uncertainty  as to the acceptance of
the  Company's  products  generally;  risks  related to  technological  factors;
potential  manufacturing  difficulties;   uncertainty  of  product  development;
uncertainty of adequate  financing;  dependence on third parties;  dependence on
key personnel;  competition;  a limited  customer base;  risk of system failure,
security  risks  and  liability  risks;  risk of  requirements  to  comply  with
government regulations; vulnerability to rapid industry

                                      -16-


<PAGE>

change  and technological obsolescence;  and general economic conditions. Unless
otherwise  required  by  applicable  securities  laws,  the  Company  assumes no
obligation  to update  any such  forward-looking  statements,  or to update  the
reasons  why  actual   results   could  differ  from  those   projected  in  the
forward-looking statements.


OVERVIEW/PLAN OF OPERATION

          FY2000 was a year devoted to integrating  the disparate  product lines
and cultures of the three  companies  forming ION  Networks,  i.e.,  MicroFrame,
SolCom,  and LeeMAH  Datacomm  Systems.  The three companies have integrated the
operations, systems and product lines. The Company now sells various intelligent
hardware  devices  developed  from the three  companies  and managed by a single
central system, PRIISMS Manager.

         The integrated development efforts have resulted in the introduction of
three new NetwoRx intelligent devices:  NetwoRx, NetwoRx - O which was developed
to meet the needs of optical  technology  manufacturers,  and NetwoRx - VT which
was developed to meet the needs of CLECs. In addition,  the Secur@ccess products
have now been certified for operation in Europe. Sales of ION products increased
by 29% in Europe during FY2000.

         The Company's  employee base increased from 126 full-time  employees in
FY1999 to 134 in FY2000 as a result of internal  growth. A number of changes and
additions  were made in the  executive  team with new  personnel  being added in
Engineering,  Marketing and Business  Development,  Manufacturing,  Finance, and
Sales.  The sales force  increased  from eight to 18. The result of all of these
actions was 79% revenue growth from FY1999 to FY2000.

         During   FY2000  the  Company   maintained   relations   with   Rhythms
NetConnections,  Lucent Technologies,  KPN - Telecom BV, MCI Worldcomm and AT&T.
Several new important  relationships were formed during FY2000,  e.g.,  Sycamore
Networks, Intel Corporation, Hewlett-Packard, Crown Castle International, Bomara
Associates, FirstWorld Communications, and Siemens USA.

         During the next 12 months the Company plans to continue  developing its
PRIISMS Suite.  Upgrades to the Sentinel  family are already  underway as is the
final integration of Secur@ccess  products with PRIISMS Manager.  Additional AMT
routines for measurement,  diagnosis and action are planned. COGS (cost of goods
sold) reduction  programs are planned which include  redesign of systems as well
as  the  on-going  examination  of  the  cost  and  quality  of  ION's  contract
manufacturers.

         The Company will continue to look for attractive acquisition candidates
and to build the sales force. Additional expansion in Europe is anticipated as a
new Managing Director for the Livingston, Scotland facility starts in July 2000.



                                      -17-

<PAGE>




RESULTS OF OPERATIONS

              Fiscal Year 2000 Compared to Fiscal Year 1999

              Revenues  for the year ended  March 31, 2000 were  $22,668,833  as
compared  with  revenues of  $12,673,917  for the year ended March 31, 1999,  an
increase of approximately  79%. This increase was primarily due to a significant
increase  (approximately  93%)  in  shipments  of the  Company's  Sentinel  2000
product.  The Company  shipped  approximately  6,800 units of the Sentinel 2000,
generating net revenues of approximately $12,900,000, representing approximately
57% of overall revenue. During fiscal 1999,  approximately 3,200 such units were
sold,  generating net revenues of  approximately  $6,700,000,  or 53% of overall
revenue  for such year.  In  addition,  during  fiscal  year 2000,  the  Company
developed and licensed the rights to certain  customized modules of its software
via a perpetual license agreement to an existing customer for approximately $3.2
million.  This  development and licensing had a positive effect on the Company's
rate of revenue  growth and its gross  margin for the year.  The  Company has no
further  obligations with respect to this development and the licensed software.
The newly  introduced  NetwoRx  family of products  accounted for  $3,835,000 of
overall revenues, or 17%, in FY2000.

            The Company has approximately  $1.1 million of sales backlog that it
expects to record as revenue in the first half of fiscal 2001. From a geographic
standpoint,  the  Company's net revenue  increase was achieved  primarily on the
domestic  side.  Shipments to customers in the United States were  approximately
$19,200,000  (85% of total revenues) in fiscal 2000 as compared to approximately
$10,050,000 (79%) in fiscal 1999,  representing an increase of 91%. Shipments by
the Company to the European market, were approximately  $3,337,000 (14%) for the
year ended March 31, 2000  compared to  approximately  $2,580,000  (20%) for the
year ended March 31, 1999, an increase of 29%. It is the Company's  intention to
increase its presence in the European market.

              The Company's  cost of goods sold  increased to $8,409,068 for the
year ended March 31, 2000  compared to  $5,464,708  for the year ended March 31,
1999  as a  result  of  increased  shipment  levels.  Cost  of  goods  sold as a
percentage of sales decreased from 43% for the previous comparable fiscal period
to 37% for this fiscal  period,  primarily  due to product mix coupled  with the
software licenses discussed above.

              Research and  development  expenses,  net of capitalized  software
development,  increased  from  $2,580,857  in the year ended  March 31,  1999 to
$4,288,396  in the current  fiscal year,  an increase of 66%. As a percentage of
revenues,  research and development expenses decreased from approximately 20% to
19%. The internal research and development staff and related expenses  increased
significantly  during  Fiscal  2000 in order to  continue  to provide  increased
technical  functionality  and support to the Sentinel 2000 family of products as
well as to further the development of the Company's next generation of products.

              Selling,  general and  administrative  expenses increased 82% from
$6,114,218 for fiscal 1999 to $11,155,390  for the year ended March 31, 2000. As
a percentage of revenues, selling, general and administrative expenses increased
from  approximately  48% to 49%. This increase was primarily due to the




                                      -18-


<PAGE>

addition of sales personnel and administrative infrastructure to support the two
aforementioned  acquisitions  made in  fiscal  1999,  as  well as the  Company's
organic growth.

              Amortization  expense  for  capitalized  software  increased  from
$372,000 in fiscal  1999 to  $2,308,000  in fiscal  2000 due to the  increase in
capitalized  research and development  expense during the past two fiscal years.
The company  continued to invest in Research and Development  during fiscal 2000
in order to meet long term growth  objectives.  Also,  amortization  expense for
goodwill associated with the acquisitions of Solcom and certain assets of LeeMah
increased  significantly  in fiscal year 2000 to $966,000 from $38,000 in fiscal
1999. This increase was a result of the full year impact in fiscal 2000 compared
to 1999.

              The  Company had a loss before  taxes of  $4,995,248  for the year
ended March 31, 2000 compared to a loss before taxes of $5,764,764  for the year
ended March 31,  1999.  The March 31, 1999 loss  included a one-time  charge for
IPR&D of $3,490,177 in connection with the SolCom  acquisition.  The fiscal year
2000 loss was incurred due to the increase in research and development  expenses
as well as the expansion of the Company's infrastructure. The Company's tax rate
(benefit) was lower than the federal statutory tax rate (benefit)  primarily due
to the effect of recording a valuation allowance on certain of the Company's net
operating  loss  carryforwards  and other  deferred  tax  assets in fiscal  2000
coupled with the recording of a provision for foreign taxes in fiscal 2000.  The
increase in the valuation  allowance of approximately $2.3 million during fiscal
2000 is due  primarily to the fact that  management  believes  that at March 31,
2000, it is more likely than not that the net operating loss  carryforwards will
expire  unutilized.  At March 31,  2000,  the Company had  federal,  state,  and
foreign  tax-effected net operating loss  carryforwards  of  approximately  $3.8
million,  respectively.  The expiration dates for its net operating losses range
from the years 2011 through 2014. The net loss for the year ended March 31, 2000
was $5,259,738 compared to a net loss of $5,997,003 for the prior fiscal year.

IN-PROCESS RESEARCH AND DEVELOPMENT

         In connection  with the Company's  acquisition  of SolCom in the fourth
quarter of FY1999,  the  Company  allocated  $3,490,177  of the  purchase  price
thereof to purchased  IPR&D.  The following  provides an update on the status of
the projects included in the IPR&D analysis.

         NetworX is a new product line being  developed as part of the Company's
PRIISMS  Suite.  NetworX was  designed  to be the  industry's  first  integrated
platform for proactive,  remote,  real-time secure  management and monitoring of
voice and data networks.  It would use dial-up,  Telnet,  or SNMP connections to
allow  network  managers to monitor,  evaluate  and control all aspects of their
large,  distributed  networks from a single central point.  The first version of
this product has been released as NetwoRx,  and additional  releases are planned
for FY2001.

         Sentinel III products were designed to offer a range of  infrastructure
management tools for managing large distributed networks.  All Sentinel products
feature alarm and fault  management,  detection of unusual  calling  patterns on
PBXs which could indicate toll fraud,  environmental  monitoring and control, as
well as secure  access.  Sentinel  III was  described  at FY1999  year-end as an
intelligent  port controller  combining  remote  monitoring and Sentinel network
device management to deliver both network control and a comprehensive picture of
network activities.  The Company later elected to re-badge the Sentinel III as a
less expensive  version



                                      -19-


<PAGE>

of the NetworX  product.  Two  versions  have been  released as NetwoRx - O for
optical technology manufacturers, and NetwoRx - VT for CLECs.

         The  Company has been  developing  an ASIC which  incorporates  a large
portion of the hardware and software required to provide the functionality of an
intelligent device. As originally contemplated, the result of this effort has to
be a  substantial  increase in  processing  speed and a reduction in COGS if the
chip is produced in large  volumes.  Designing  the chip required the Company to
learn and apply a new  technology to develop first one and then a series of more
and more capable ASICs.  Consequently,  the Company put the ASIC project on hold
in order to focus all development  efforts on the projects  described  above. By
the end of FY2000, the ASIC project was 20% complete,  and the costs to complete
the work were estimated at $350,000.  As previously  reported,  in early FY2001,
Management decided to reevaluate the project in light of new technologies on the
market and the requirement for continued  costly  development.  The project will
now  incorporate a different chip  technology,  FPGAs (field  programmable  gate
arrays),  and will be completed as a series of arrays for monitoring  high-speed
network  protocols such as ATM, gigabit Ethernet and OC-3. After verifying these
designs in the field,  the gate arrays may,  depending on potential for economic
benefits, be converted to utilize ASIC technology.

              Analysis of Products/IPR&D

         The value allocated to acquired IPR&D for the SolCom  acquisition as of
the closing on March 31, 1999 was determined  utilizing the income  approach via
an excess  earnings  analysis.  This  methodology  requires  the  projection  of
revenues and expense that will arise as a result of the successful completion of
the IPR&D project.  The operating income  attributable to each IPR&D project was
calculated  as projected  revenues less the projected  operating  expenses.  Net
operating income is calculated  after applying the projected  effective tax rate
for the Company.

         A charge  was taken to reflect  the  economic  rent  related to the net
assets  required to run the business and support future  growth.  This return on
the  requisite  assets was based on industry  comparable  companies  and company
specific  information.  Where it was  determined  that  core  technology  of the
existing technology would be utilized by the IPR&D, a charge was applied against
IPR&D revenues.  Core technology was identified for all of the IPR&D projects. A
core  technology  charge of 30% of operating  profit was applied for each of the
IPR&D  projects.  The  charge for use of the core  technology  and the return on
requisite assets was subtracted from net income.

         The value  allocated to acquired  IPR&D was  determined  utilizing  the
Stage of Completion  methodology.  This methodology utilizes the same cash flows
as the excess earnings analysis,  but removes all research and development costs
to complete the identified project.  In addition,  the discounted value of these
cash flows is reduced to represent the  percentage of which the project has been
completed as of March 31, 1999. The determination of the percentage completed is
based  primarily  on the amount of effort  (cost or time)  expended  to date and
remaining until  completion.  Consideration  is also given to the amount of risk
and effort  incorporated in the development steps in relation to the development
steps remaining to complete the project.



                                      -20-

<PAGE>

LIQUIDITY AND CAPITAL RESOURCES


         During  fiscal  2000,  the  Company   significantly   strengthened  its
financial position. Total assets increased from $15,973,425 to $27,390,241 while
total liabilities  decreased from $9,572,437 to $ 5,994,304.  The primary reason
for the  improvement  was an increase in cash  provided by  issuances  of common
stock of  approximately  $20  million.  These  proceeds  were used to  liquidate
liabilities  and fund the  internal  operations  of the  Company and to purchase
various property and equipment.

         Net cash used in operating activities during fiscal 2000 was $4,971,783
compared to net cash used during  fiscal 1999 of  $553,688.  The use of cash was
primarily  attributable  to the  increase in accounts and other  receivables  of
approximately  $2.6  million,  the  decrease  in  accounts  payable  and accrued
expenses  of  approximately   $3.4  million,   the  decrease  in  other  current
liabilities due to the pay down of prior year transaction costs of approximately
$1.6  million,  partially  offset by the  increase in accrued  payroll and other
liabilities  of  approximately  $1.3  million and the decrease in inventory of
approximately $1.3 million.

         Net cash used by investing activities during fiscal 2000 was $2,493,986
as  compared to  $2,999,904  for the prior  fiscal  year.  Capital  expenditures
increased by $785,320 as the Company  continued  its  investment  in  computers,
other  equipment  and  expenditures  related to the  relocation of its principal
executive  offices in August 1999. Also, an additional  $214,828 of research and
development expenses were capitalized during fiscal 2000 as compared with fiscal
1999.  In fiscal  2000,  $356,414  of cash was  received  for the  amount of the
licensed  technology  discussed  above  which had been  recorded  on the balance
sheet.

         Net cash  provided by financing  activities  during the fiscal year was
$17,681,387 compared to $3,211,860 for the prior fiscal year. Issuance of Common
Stock of $12,500,000 and the exercise of options and warrants of $7,459,472 were
the primary reasons for the increase in net cash provided.

         Overall,  cash increased by  approximately  $10.2 million during fiscal
year 2000.

         In October 1998,  the Company  entered into a line of credit  agreement
with an available  balance of  $2,000,000  through July 30, 1999. In April 1999,
the line of credit was increased to  $2,250,000.  Prior to expiration  this line
was extended  through  September 30, 1999. On September 9, 1999, the outstanding
balance of $2,250,000 was paid down in full. The line was  collateralized by all
the business assets of the Company.

         In December 1998,  the Company  entered into a term loan agreement with
United National Bank in the principal  amount of $500,000 through December 2003.
At March 31, 2000, there were no borrowings  outstanding  under the term loan as
the balance was fully paid in March 2000.

         The  Company  expects  to  fund  the  expansion  of  its  business  and
operations and meet its short and long-term  liquidity needs from available cash
and cash flow,  working  capital and from funds  derived  from future  operating
revenues as well as through  additional  financing  from  outside  sources.  The
Company  currently  believes that it will have sufficient cash resources to meet
its operational needs over the next twelve months.

ACCOUNTING PRONOUNCEMENTS

         In June 1998, The Financial Accounting Standards Board issued SFAS 133,
"Accounting  for Derivative  Instruments  and Hedging  Activities."  Among other
provisions, it requires that entities recognize all derivatives



                                      -21-

<PAGE>

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

         In December 1999 the SEC issued Staff Accounting Bulletin (SAB) No. 101
"Revenue  Recognition  in Financial  Statements".  The SEC delayed the effective
date of this SAB from March 31,  2000 and now must be adopted by June 30,  2000.
The Company has assessed the impact of SAB 101 on its results of operations  and
believes that its results of  operations  for the year ended March 31, 2000 have
been presented in accordance with the provisions of the SAB.




                                      -22-

<PAGE>





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

         The  financial  statements  required  hereby  are  located on pages F-1
through F-23.

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

            None.


                                      -23-
<PAGE>


                                    PART III

         The information  called for by Part III (Items 9, 10, 11 and 12 of Form
10-KSB) is hereby  incorporated by reference to the Company's  Definitive  Proxy
Statement to be filed pursuant to Regulation 14A of the Securities  Exchange Act
of 1934, as amended,  in connection  with the Company's  2000 Annual  Meeting of
Stockholders.

ITEM 13.          EXHIBITS AND REPORTS ON FORM 8-K.
                  ---------------------------------


                 (a)    EXHIBITS
                        --------

            Exhibit

            No.                Description

          3.1*      Certificate of Incorporation  of the Company,  as filed with
                    the Secretary of State of the State of Delaware on August 5,
                    1998.

          3.2*      Certificate    of   Amendment   of   the    Certificate   of
                    Incorporation,  as filed with the  Secretary of State of the
                    State of Delaware on December 11, 1998.

          3.3       Certificate    of   Amendment   of   the    Certificate   of
                    Incorporation,  as filed with the  Secretary of state of the
                    State of  Delaware  an October  12,  1999  (Incorporated  by
                    reference   to  Exhibit  3.3  the   Company's   Registration
                    Statement on form S-8 filed on March 17, 2000).

          3.4*      By-Laws of the Company.

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

          4.1*      1998 Stock Option Plan of the Company.

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

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

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

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

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


                                      -24-

<PAGE>

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

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

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

            10.8*****   Employment  Agreement  dated as of April 1, 1998 between
                        the Company and Stephen B. Gray

            10.9******  Employment Agreement dated as of April 1, 1999 between
                        the Company and Stephen B. Gray.

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

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

            10.12**     Share  Purchase  Agreement,  as  amended,  dated  as  of
                        December  28,  1998 by and  among  the  Company,  SolCom
                        Systems Limited  ("SolCom"),  the shareholders of SolCom
                        and certain representatives of such shareholders.

            10.13***    Agreement  and Plan of Merger by and between the Company
                        and MicroFrame, Inc., a New Jersey corporation.

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

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

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

            23.1******  Consent of PricewaterhouseCoopers LLP

            27.1******  Financial Data Schedule

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

         **             Incorporated by Reference to Appendix A of the Company's
                        Definitive  Information  Statement on Schedule 14C filed
                        on March 11, 1999.


                                      -25-
<PAGE>

         ***            Incorporated by Reference to Appendix I of the Company's
                        Definitive  Information  Statement on Schedule 14C filed
                        on March 11, 1999.

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

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

         ******         Filed herewith.

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

                               None



                                      -26-
<PAGE>



                                   SIGNATURES

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

         DATED: June 28, 2000

                                             ION NETWORKS, INC.


                                             By: /s/ Stephen B. Gray
                                                 --------------------------
                                                 Stephen B. Gray, President


                       In accordance with the Exchange Act, this report has been
         signed below by the following  persons on behalf of the  registrant and
         in the capacities indicated on June 28, 2000:

                                 Signature Title

         /s/ Stephen B. Gray
         --------------------------------           President, Chief Executive
         Stephen B. Gray                            Officer and Director


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


         /s/ Alfred Leonardi
         --------------------------------           Principal Financial Officer
         Alfred Leonardi                            and Principal Accounting
                                                    Officer


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


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


         /s/ William Martin Ritchie                 Director
         --------------------------------
         William Martin Ritchie


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


                                      -27-

<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

Report of Independent Accountants                                           F-1


Consolidated Balance Sheets as of March 31, 2000
   and March 31, 1999                                                       F-2


Consolidated Statements of Operations for the Years
   Ended March 31, 2000 and 1999                                            F-3


Consolidated Statements of Cash Flows for the Years
   Ended March 31, 2000 and 1999                                            F-4


Consolidated Statements of Stockholders' Equity for
   the Years Ended March 31, 2000 and 1999                                  F-5


Notes to Consolidated Financial Statements                               F-6-23



<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS

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


In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations,  stockholders'  equity and of cash flows
present  fairly,  in  all  material  respects,  the  financial  position  of ION
Networks,  Inc. and Subsidiaries (the "Company") at March 31, 2000 and 1999, and
the results of their  operations  and their cash flows for each of the two years
in the period ended March 31, 2000, in  conformity  with  accounting  principles
generally  accepted in the United  States.  These  financial  statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these  financial  statements  based on our audits.  We conducted  our
audits of these  statements in  accordance  with  auditing  standards  generally
accepted in the United States,  which require that we plan and perform the audit
to obtain reasonable  assurance about whether the financial  statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and  disclosures in the financial  statements,  assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for the opinion expressed above.




/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP


June 8, 2000



                                      F-1

<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>
                                                                                        2000              1999
ASSETS

Current assets
<S>                                                                               <C>                   <C>
   Cash and cash equivalents                                                       $    10,381,612       $    165,994
   Accounts receivable, less allowance for doubtful accounts of $251,000 and
   $150,000, respectively                                                                4,569,546          3,092,867
Other receivables                                                                        1,560,697                  -
Inventory, net                                                                           1,924,671          2,554,643
Deferred tax assets                                                                              -            422,310
Prepaid expenses and other current assets                                                  602,874            433,031
                                                                                   ---------------    ---------------
     Total current assets                                                               19,039,400          6,668,845

Property and equipment, net                                                              2,146,956          1,010,369
Capitalized software, less accumulated amortization of
  $4,259,851 and $1,951,715, respectively                                                4,185,911          5,350,388
Goodwill and other acquisition - related intangibles, less
  accumulated amortization of $1,030,334 and $63,810, respectively                       1,938,716          2,905,240
Other assets                                                                                79,258             38,633
                                                                                   ---------------     --------------
     Total assets                                                                  $    27,390,241     $   15,973,475
                                                                                   ===============     ==============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Current portion of capital leases                                                $       67,900    $             -
   Current portion of long-term debt                                                        96,000            488,948
   Accounts payable and accrued expenses                                                 2,632,135          3,890,152
   Accrued payroll and related liabilities                                               2,139,524            813,266
   Deferred income                                                                         275,657            269,457
   Other current liabilities                                                               352,093          1,909,072
                                                                                   ---------------    ---------------
     Total current liabilities                                                           5,563,309          7,370,895
                                                                                   ---------------    ---------------

Noncurrent deferred tax liabilities, net                                                         -            188,276
Long-term portion of capital leases                                                        302,866
Long-term debt, net of current portion                                                     128,129          2,013,266

Commitments and contingencies (Notes 9 and 10)

Stockholders' equity
   Preferred stock - par value $.001 per share; authorized 1,000,000
     shares, none issued
   Common  stock - par value  $.001 per  share;  authorized
     50,000,000  shares; issued  15,111,617  shares and outstanding
     15,049,586  shares at March 31, 2000, issued 8,286,670 shares,
     outstanding 8,244,639 shares at March 31, 1999                                         15,112              8,287
Additional paid-in capital                                                              35,063,207         14,858,560
Accumulated deficit                                                                   (13,488,379)        (8,228,641)
Accumulated other comprehensive income (loss)                                               13,196           (29,969)
                                                                                   ---------------    ---------------
                                                                                        21,603,136          6,608,237
Less - Treasury stock, 62,031 shares, at cost at
  March 31, 2000 and 1999, respectively                                                  (207,199)          (207,199)
                                                                                   ---------------    ---------------
Total stockholders' equity                                                              21,395,937          6,401,038
                                                                                   ---------------    ---------------
Total liabilities and stockholders' equity                                          $   27,390,241     $   15,973,475
                                                                                   ===============     ==============
</TABLE>

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

                                      F-2
<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>
                                                                                        2000              1999

<S>                                                                                  <C>                <C>
Net sales                                                                            $  22,668,833      $  12,673,917

Cost of sales                                                                            8,409,068          5,464,708
                                                                                     -------------      -------------

     Gross margin                                                                       14,259,765          7,209,209

Research and development expenses                                                        4,288,396          2,580,857
Selling, general and administrative expenses                                            11,155,390          6,114,218
Depreciation and amortization expense                                                    3,902,331            731,160
In-process research and development charge                                                       -          3,490,177
                                                                                     -------------      -------------

     Loss from operations                                                              (5,086,352)        (5,707,203)

Interest income                                                                            315,467             43,012
Interest expense                                                                         (224,363)          (100,573)
                                                                                     -------------      -------------

     Loss before income taxes                                                          (4,995,248)        (5,764,764)

Income tax expense                                                                         264,490            232,239
                                                                                     -------------      -------------

     Net loss                                                                        $ (5,259,738)      $ (5,997,003)
                                                                                   ===============     ==============

Per share data

     Basic                                                                                 ($0.44)            ($1.09)
     Diluted                                                                               ($0.44)            ($1.09)

Weighted average number of common shares outstanding:

     Basic                                                                              12,063,709          5,499,556
                                                                                     -------------      -------------
     Diluted                                                                            12,063,709          5,499,556
                                                                                     -------------      -------------

</TABLE>


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


                                      F-3


<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>

                                                                                      2000              1999
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                                 <C>                <C>
     Net loss                                                                       $  (5,259,738)     $   (5,997,003)
     Adjustments to reconcile net loss to net cash
       used in operating activities
       In-process research and development charge                                                -          3,490,177
       Depreciation and amortization                                                     3,902,331            731,160
       Provision for doubtful accounts                                                     100,757             23,793
       Provision for inventory obsolescence                                                230,893                  -
       Noncash stock-based compensation charge                                             252,000            188,120
       Deferred tax provision                                                              234,034            232,239
       Changes in operating assets and liabilities, net of
         effects of acquisitions
         Accounts receivable                                                           (1,577,436)           (546,951)
         Other receivables                                                             (1,560,697)                  -
         Inventory                                                                        399,079            (786,783)
         Prepaid expenses and other current assets                                       (169,843)           (198,618)
         Other assets                                                                     (40,625)             (2,917)
         Accounts payable and accrued expenses                                         (1,258,017)          2,190,508
         Accrued payroll and related liabilities                                         1,326,258             52,967
         Deferred income                                                                     6,200            (35,394)
         Other current liabilities                                                     (1,556,979)            105,014
                                                                                     -------------      -------------
             Net cash used in operating activities                                     (4,971,783)           (553,688)
                                                                                     -------------      -------------

CASH FLOWS FROM INVESTING ACTIVITIES
     Capital expenditures                                                              (1,350,327)           (565,007)
     Capitalized software expenditures                                                 (1,500,073)         (1,285,245)
     Proceeds from the sales of software licenses                                         356,414
     Capitalized acquisition related expenditures, net of cash acquired                          -         (1,149,652)
                                                                                     -------------      -------------
             Net cash used in investing activities                                     (2,493,986)         (2,999,904)
                                                                                     -------------      -------------

CASH FLOWS FROM FINANCING ACTIVITIES
     Borrowings under line of credit                                                       253,711          2,196,280
     Proceeds from debt                                                                    450,000
     Repayments of the line of credit                                                   (2,250,000)
     Repayments of debt                                                                   (731,796)           (55,009)
     Issuances of common stock                                                          12,500,000            708,000
     Exercises of options and warrants                                                   7,459,472            362,589
                                                                                     -------------      -------------
             Net cash provided by financing activities                                  17,681,387          3,211,860
                                                                                     -------------      -------------

Net increase (decrease) in cash and cash equivalents                                    10,215,618          (341,732)

Cash and cash equivalents - beginning of period                                            165,994            507,726
                                                                                     -------------      -------------
Cash and cash equivalents - end of period                                            $  10,381,612       $    165,994
                                                                                     =============      =============
SUPPLEMENTAL INFORMATION
     Cash paid during period for interest                                            $     224,363       $    100,573
                                                                                     =============      =============

</TABLE>

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


                                   F-4

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                                                                                            ACCUMULATED
                                                                                               OTHER
                                                  ADDITIONAL       STOCK                    COMPREHENSIVE                  TOTAL
                                        COMMON     PAID-IN       SUBSCRIPTION   ACCUMULATED    INCOME     TREASURY     STOCKHOLDERS'
                            SHARES      STOCK      CAPITAL        RECEIVABLE     DEFICIT       (LOSS)      STOCK          EQUITY

<S>                         <C>        <C>         <C>           <C>            <C>          <C>          <C>          <C>
Balance, March 31, 1998     4,899,131   $ 4,899   $  6,345,613   $ (104,000)  $(2,231,638)  $   (7,920)   $(4,000)      $4,002,954

Net loss                                                                       (5,997,003)                              (5,997,003)

Issuances of common stock   3,327,539     3,328      8,279,887      104,000                                              8,387,215

Noncash stock-based
compensation                   60,000        60        233,060                                                             233,120

Acquisition of treasury
shares                                                                                                    (203,199)       (203,199)

Translation adjustments                                                                        (22,049)                     (22,049)
                            ----------   ---------   ----------    ----------  ----------    ----------   ---------     -----------
Balance, March 31, 1999     8,286,670     8,287     14,858,560                 (8,228,641)     (29,969)   (207,199)       6,401,038

Net loss                                                                       (5,259,738)                               (5,259,738)

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

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

Noncash stock-based
compensation                                           252,000                                                             252,000

Translation adjustments                                                                         43,165                      43,165
                            ----------   ---------   ----------    ----------  ----------    ----------   ---------     -----------
Balance, March 31, 2000    15,111,617   $15,112    $35,063,207   $         - $(13,488,379)  $   13,196   $(207,199)     $21,395,937
                            ----------   ---------   ----------    ----------  ----------    ----------   ---------     -----------


</TABLE>


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


                                      F-5
<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


1.       ORGANIZATION

         THE COMPANY
         ION Networks,  Inc. (the "Company"),  a Delaware corporation founded in
         1999 through the  combination  of two network  management  developers -
         MicroFrame,  a New Jersey  Corporation (the  predecessor  entity to the
         Company,  originally  founded in 1982), and SolCom Systems  Limited,  a
         Scottish  corporation  located  in  Livingston,   Scotland  (originally
         founded  in 1994),  designs,  develops  and  markets  a broad  range of
         security,  network management and remote maintenance products for voice
         and  data  communications  networks.  By  incorporating  a  variety  of
         hardware and software options for user  authentication,  these products
         can deter unauthorized dial-in access to both devices and systems (such
         as computers, local area networks and private branch exchange telephone
         switches), while allowing authorized personnel access to perform needed
         administration and maintenance of host devices and networks from remote
         locations.  The products  also provide alarm  monitoring  and reporting
         capabilities, a basis for remote network management and maintenance.

2.       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

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

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

         CAPITALIZED SOFTWARE
         The  Company  capitalizes   computer  software   development  costs  in
         accordance  with the  provisions  of Statement of Financial  Accounting
         Standards No. 86,  "Accounting for the Costs of Computer Software to be
         Sold, Leased or Otherwise  Marketed" ("SFAS 86"). SFAS 86 requires that



                                      F-6
<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

         the Company  capitalize  computer  software  development costs upon the
         establishment  of the  technological  feasibility of a product,  to the
         extent that such costs are  expected  to be  recovered  through  future
         sales of the product.

         The  Company   capitalized   $1,500,073   and  $1,285,229  of  software
         development costs for fiscal 2000 and 1999, respectively. Additionally,
         the Company  acquired  $3,855,000 of existing  technology in connection
         with an  acquisition  in  fiscal  1999 (see  Note 3).  These  costs are
         amortized  by the  greater of the amount  computed  using (i) the ratio
         that  current  gross  revenues  from the sales of software  bear to the
         total of current and  anticipated  future gross  revenues from sales of
         that  software,  or (ii) the  straight-line  method over the  estimated
         useful life of the product  (generally  three years).  It is reasonably
         possible  that those  current  estimates  of  anticipated  future gross
         revenues,  the remaining  estimated  economic  life of the product,  or
         both,  will  be  reduced   significantly  in  the  near  term  (due  to
         competitive  pressures).  As a  result,  the  carrying  amount  of  the
         capitalized  software costs may be reduced materially in the near term.
         Amortization  expense  totaled  $2,308,136 and $371,740 for fiscal 2000
         and fiscal 1999, respectively.

         GOODWILL AND OTHER ACQUISITION RELATED INTANGIBLES
         Goodwill  is the  excess of  purchase  price over the fair value of net
         assets  acquired in business  combinations  accounted for as purchases.
         The  Company  amortizes  goodwill  on a  straight-line  basis  over the
         periods   benefited,   ranging   from   three  to  ten   years.   Other
         acquisition-related intangibles includes customer lists ($300,000). The
         Company  amortizes other  acquisition-related  intangibles over periods
         not to exceed three years.

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

         REVENUE RECOGNITION POLICY
         The Company  records  revenue from product  sales upon  shipment to the
         customer if no significant  vendor obligations exist and collectibility
         is probable.  Generally,  no significant  vendor obligations exist upon
         shipment of the product.  Maintenance contracts are sold separately and
         maintenance  revenue is  recognized on a  straight-line  basis over the
         period the service is provided, generally one year.

         WARRANTY COSTS
         Estimated  warranty  costs  associated  with the sale of  hardware  and
         software are accrued at the time of sale. The warranty reserve included
         in other current liabilities as of March 31, 2000 and 1999 approximated
         $80,000 and $50,000, respectively.

         USE OF ESTIMATES
         The  preparation of financial  statements in conformity  with generally
         accepted  accounting  principles  requires management to make estimates
         and  assumptions  that  affect  the  reported  amounts  of  assets  and
         liabilities and disclosure of contingent  assets and liabilities at the
         date of the financial  statements and the reported  amounts of revenues
         and expenses  during the year.  Actual  results could differ from those
         estimates. The significant estimates include the allowance for doubtful
         accounts,  allowance for inventory  obsolescence,  capitalized software
         and the  related  amortization  lives,  deferred  tax  asset  valuation
         allowance and depreciation and amortization lives.



                                      F-7

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------



         FAIR VALUE OF FINANCIAL INSTRUMENTS
         The carrying value of cash and cash equivalents,  accounts  receivable,
         accounts  payable,  accrued payroll and related  liabilities,  deferred
         income and other current liabilities approximates fair value because of
         the relatively short maturity of these instruments.  The Company's line
         of credit and term loan have variable  interest rates which adjust with
         changes  in  market   interest   rates  and  the  book  value  of  such
         indebtedness is deemed to approximate fair value.

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

         PER SHARE DATA
         Earnings per share has been  calculated in accordance with Statement of
         Financial  Accounting  Standards  No.  128,  "Earnings  Per Share." The
         weighted average number of common shares outstanding during fiscal 2000
         and 1999  were  used to  compute  basic  earnings  per  share.  Diluted
         earnings per share is  initially  computed  using the weighted  average
         number of common shares  outstanding plus the dilutive potential common
         shares  outstanding.  Dilutive  potential  common shares are additional
         common  shares  assumed to be  exercised.  Potential  common  shares of
         3,422,687 and 1,040,000  were excluded from the  computation of diluted
         earnings  per share for  fiscal  2000 and 1999,  respectively,  because
         their inclusion  would have had an antidilutive  effect on earnings per
         share.

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

         INCOME TAXES
         The Company accounts for income taxes in accordance with the provisions
         of Statement of Financial Accounting Standards No. 109, "Accounting for
         Income Taxes" ("SFAS 109").  SFAS 109 requires  recognition of deferred
         tax liabilities and assets for the expected future tax  consequences of
         events  that have been  included  in the  financial  statements  or tax
         return.  Under this  method,  deferred tax  liabilities  and assets are
         determined based on the difference between the financial  statement and
         tax basis of assets and  liabilities  ("temporary  differences")  using
         enacted tax rates in effect for the year in which the  differences  are
         expected to reverse.  A deferred tax asset is  recognized if it is more
         likely than not that the asset will be realized in the future.

         RECLASSIFICATIONS
         The Company has reclassified certain prior year amounts to conform with
         the 2000 presentation.



                                      F-8

<PAGE>
ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


3.       ACQUISITIONS

         On March 31, 1999, the Company  acquired all the outstanding  shares of
         SolCom Systems  Limited  ("SolCom") in exchange for 2,200,233 of common
         shares  and  499,567  of  options,  which  had an  aggregate  value  of
         $6,211,880.  The Company also issued 300,000  performance-based options
         (see Note 8) which have not been reflected in the purchase  price.  The
         value of the options, if issued,  will be contingent  consideration and
         will be reflected as goodwill in the  Company's  financial  statements.
         This  acquisition  has been accounted for under the purchase  method of
         accounting.  Accordingly,  the accompanying  consolidated statements of
         operations  do not  include any  revenues  or expenses  related to this
         acquisition  prior to the closing date. The acquisition  resulted in an
         allocation  of  $1,869,034  to  goodwill  and  $3,855,000  to  existing
         technology.  The  amortization  periods for both the  goodwill  and the
         existing technology are three years.

         Included in the purchase price for the above  acquisition was purchased
         in-process  research  and  development,  which was a non cash charge to
         earnings as this technology had not reached  technological  feasibility
         and had no future  alternative  use. In  accordance  with  Statement of
         Financial  Accounting  Standards  No. 2  "Accounting  for  Research and
         Development  Costs," amounts assigned to purchased  in-process research
         and development  meeting the above criteria were charged to expense for
         $3,490,177.   This   technology   will   require   varying   additional
         development, coding and testing efforts, and other rework over the next
         year to determine technological feasibility.

         The value  allocated to purchased  in-process  research and development
         was  determined  utilizing an income  approach  that included an excess
         earnings  analysis  reflecting the appropriate  cost of capital for the
         investment.  Estimates of future cash flows  related to the  in-process
         research  and  development  were  made  for each  project  based on the
         Company's  estimates  of revenue,  operating  expenses and income taxes
         from  the  project.  The  valuation  included  a  state  of  completion
         adjustment,  which utilizes the same cash flows as the excess  earnings
         analysis,  but removes all research and  development  costs to complete
         the identified project.

         The discount  rates  utilized to discount the projected cash flows were
         based on  consideration  of the risk  profile  and the  nature  of each
         project and the market.  Other factors  considered in the determination
         of the  discount  rates  include the useful life of each  project,  the
         anticipated   profitability   of  each  project,   the  uncertainty  of
         technology  advances  that  were  known at the  time  and the  stage of
         completion of each project.




                                      F-9

<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------



          Following is a summary of the pro forma results of ION Networks,  Inc.
          as if the merger had closed effective April 1, 1998:


<TABLE>
<CAPTION>

                                                                                  FOR THE
                                                                                YEAR ENDED
                                                                                 MARCH 31,
                                                                                   1999
                                                                                (UNAUDITED)

<S>                                                                           <C>
Revenues                                                                      $   13,988,252
Net loss                                                                          (6,027,379)
Weighted-average common shares                                                     7,699,789
Weighted-average common shares and potential common shares                         7,699,789
Basic earnings per share                                                                (.78)
Diluted earnings per share                                                              (.78)

</TABLE>


         On February 25, 1999,  the Company  acquired  certain of the  operating
         assets of LeeMAH Datacom  Security  Corporation  ("LeeMAH") in exchange
         for 444,000 shares of the Company's common stock. The purchase price of
         approximately  $1 million has been reflected  primarily as goodwill and
         other  acquisition-related  intangibles,  mainly  customer  lists.  The
         acquired  entity had sales of $209,000  and income from  operations  of
         $149,000 for the period from the date of acquisition  through March 31,
         1999,  accordingly,  the  acquisition was not material to the Company's
         statement of operations, its cash flows or its financial position.

4.       INVENTORY

         Inventory,  net of reserve for obsolescence of $283,000 and $185,000 at
         March 31, 2000 and 1999, respectively, consists of the following:


<TABLE>
<CAPTION>

                                                                               2000                    1999

<S>                                                                        <C>                    <C>
Raw materials                                                              $    782,813           $    1,570,150
Work-in-process                                                                 259,180                  223,229
Finished goods                                                                  882,678                  761,264
                                                                            -----------           --------------
                                                                            $ 1,924,671           $    2,554,643
                                                                            ----------            --------------
</TABLE>




                                      F-10

<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


5.       PROPERTY AND EQUIPMENT

        At March 31, 2000 and 1999,  property  and  equipment  consists of the
        following:

<TABLE>
<CAPTION>


                                                                     2000                 1999
<S>                                                               <C>                   <C>
          Computer and other equipment                            $ 2,476,635           $ 1,725,901
          Furniture and fixtures                                      998,929               230,679
          Leasehold improvements                                      237,758                45,136
                                                             ----------------     -----------------

                                                                    3,713,322             2,001,716

          Less:  Accumulated depreciation                           1,566,366               991,347
                                                             ----------------     -----------------

          Property and equipment, net                             $ 2,146,956           $ 1,010,369
                                                             ----------------     -----------------

</TABLE>
         Depreciation  expense for  property and  equipment  for the years ended
         March  31,  2000  and  1999   amounted  to   $627,671   and   $321,740,
         respectively.  During  the years  ended  March 31,  2000 and 1999,  the
         Company  retired  fully  depreciated  assets  amounting  to $52,652 and
         $649,518, respectively.

6.       BANK BORROWINGS

         On September 30, 1999, the Company  entered into a $2,500,000 line of
         credit  agreement.  The line of credit is  available  through  July 31,
         2000. At March 31, 2000,  there were no borrowings  under the facility.
         Advances are payable at  maturity,  July 31,  2000,  and bear  variable
         interest at a prime rate,  as defined in the line of credit  agreement.
         The line is collateralized by all business assets of the Company.

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

         In October 1998,  the Company  entered into a line of credit  agreement
         with an available balance of $2,000,000 through July 30, 1999. In April
         1999,  the  line of  credit  was  increased  to  $2,250,000.  Prior  to
         expiration  this line was  extended  through  September  30,  1999.  On
         September 9, 1999, the outstanding  balance of $2,250,000 was paid down
         in full.  The line was  collateralized  by all  business  assets of the
         Company.

         In December 1998, the Company entered into a term loan agreement in the
         amount of $500,000 through December 2003. At March 31, 2000, there were
         no borrowings  outstanding under the term loan as the balance was fully
         repaid in March 2000.

         The agreements  described above contain various  restrictive  covenants
         that,  among  other  things,  limit the ability of the Company to incur
         additional  indebtedness,  create liens on assets,  make investments or
         acquisitions,  engage in mergers or consolidations,  dispose of assets,


                                      F-11


<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

         pay  dividends,  purchase  or retire any of the  Company's  outstanding
         shares or alter or amend the Company's capital structure.  In addition,
         the  Company is  required  to  maintain  certain  financial  covenants,
         including a debt to net worth ratio as well as limiting  borrowings  to
         75% of the aggregate  amount of accounts  receivable  (the  "collateral
         limit")  which are  outstanding  under 90 days. At certain times during
         fiscal 1999, the Company's  borrowings  exceeded the  collateral  limit
         noted  above.  In July  1999,  the  Company  received  a waiver of this
         covenant violation through April 1, 2000. The Company was in compliance
         with all financial covenants at March 31, 2000.

         At March 31, 2000,  contractual maturities of the outstanding term loan
         is as follows:


         2001                                                      $  96,000
         2002                                                        109,397
         2003                                                         18,732
                                                             ----------------
                                                                   $ 224,129
                                                             ----------------
                                                             ----------------

7.       INCOME TAXES

         As of March 31,  2000,  the Company has  available  federal,  state and
         foreign net operating loss  carryforwards of approximately  $8,116,688,
         $7,149,694,  and  $1,668,944,  respectively,  to offset future  taxable
         income. The federal net operating loss carryforwards  expire during the
         years 2011 through 2014. 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 2014.

         The  components  of the income tax  provision for the years ended March
         31, 2000 and 1999 are as follows:



                                                 2000              1999

         Current

              Federal                             $    -             $     -
              State                                    -                   -
              Foreign                             30,456                   -
                                           --------------     --------------

                                                  30,456                   -
                                           --------------     --------------

         Deferred

              Federal                            198,929             197,403
              State                               35,105              34,836
                                           --------------     --------------

                                                 234,034             232,239
                                           --------------     --------------

                                               $ 264,490           $ 232,239
                                           --------------     --------------
                                           --------------     --------------



                                      F-12


<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

<TABLE>
<CAPTION>

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

                                                                                                      MARCH 31,

                                                                                                   2000        1999
<S>                                                                                                <C>           <C>
           Effective tax rate reconciliation
               Statutory federal tax rate                                                          (34)  %       (34)%
               State taxes, net of federal benefit                                                  (6)           (6)
               Effect of in-process research and development write-off                                            24
               Foreign rate differential                                                             1            (1)
               Permanent difference (goodwill)                                                      13            -
               Effect of recording valuation allowance on net operating loss
                carryforwards                                                                       28            20
               Other                                                                                 3             1
                                                                                                   ----        ----
                                                                                                     5  %          4 %
                                                                                                   ----        ----
</TABLE>

         The tax effect of temporary  differences  which make up the significant
         components  of the net  deferred  tax asset and  liability at March 31,
         2000 and 1999 are as follows:
<TABLE>
<CAPTION>
                                                                                           2000               1999
<S>                                                                                         <C>               <C>
           Current deferred tax assets
             Inventory                                                                      $222,246          $ 224,000
             Accrued expenses                                                                216,028            118,393
             Allowance for doubtful accounts                                                 100,303             79,917

           Total current deferred tax assets                                                 538,577            422,310

           Valuation allowance                                                             (538,577)                  -
                                                                                       --------------     -------------

           Net current deferred tax assets                                                    $    -          $ 422,310
                                                                                       --------------     -------------

           Noncurrent deferred tax assets
             Depreciation and amortization                                                  $124,852            $     -
             Net operating loss carryforwards                                              3,817,178          1,867,600
             Research and development credit                                                 254,523            186,524
             Alternative minimum tax credit                                                   20,125              6,867
                                                                                       -------------    ---------------

           Total noncurrent deferred tax assets                                            4,216,678          2,060,991

           Valuation allowance                                                            (3,460,300)        (1,696,459)
                                                                                       --------------    ---------------

           Net noncurrent deferred tax assets                                              $ 756,378          $ 364,532
                                                                                       --------------    ---------------

           Noncurrent deferred tax liabilities
             Depreciation                                                                    $     -          $ (28,865)
             Capitalized software                                                           (756,378)          (523,943)
                                                                                       --------------    ---------------

           Total noncurrent deferred tax liabilities                                       $(756,378)        $ (552,808)
                                                                                       --------------    ---------------

           Net noncurrent deferred tax (liabilities) assets                                  $     -         $ (188,276)
                                                                                       --------------    ---------------
</TABLE>

                                      F-13

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------



         The Company has recorded a full valuation allowance against the federal
         and  state  net  operating  loss  carryforwards  and a  full  valuation
         allowance against the foreign net operating loss  carryforwards and the
         research and development credit as management  believes that it is more
         likely  than  not  that  substantially  all of the net  operating  loss
         carryforwards and credits will expire unutilized.

         The increase in the  valuation  allowance  is due  primarily to current
         year net operating loss  carryforwards  for federal and state purposes,
         $1,610,608,   tax  effected,  and  research  and  development  credits,
         $68,000,  offset by the  utilization  of a small portion of foreign net
         operating loss carryforwards,  ($12,752), tax effected, during the year
         ended March 31, 2000.  Approximately  $341,050 of the federal and state
         net operating losses,  if utilized,  will reverse through equity in the
         future.

8.       STOCKHOLDERS' EQUITY

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

         In June 1999,  the Company sold  1,000,000  shares of common stock to a
         Private  Equity Fund at $3.00 per share and  received  net  proceeds of
         $3,000,000.  In connection with this sale, warrants to purchase 250,000
         shares of common stock with an exercise  price of $4.50 and warrants to
         purchase 250,000 shares of common stock with an exercise price of $6.00
         were issued. During the year ended March 31, 2000, warrants to purchase
         500,000  shares  were  exercised  for  an  aggregate  consideration  of
         $2,625,000.

         During the year ended March 31, 1998, the Company  entered into a stock
         subscription  agreement  with one of its  directors,  under  which  the
         director agreed to acquire 50,000 shares of the Company's  common stock
         at $2.08 The shares  were  issued in fiscal year 1999 after the receipt
         of $104,000 from the director.

         During the years ended March 31, 2000 and 1999,  respectively,  options
         to  purchase  1,433,273  and 358,429  shares of common  stock under the
         Company's  stock  option  plans  were   exercised,   for  an  aggregate
         consideration  of $2,399,869 and $362,589.  During the year ended March
         31, 1999,  60,000  shares and 30,000  options were issued in connection
         with the  termination  of a  consulting  contract  (see  Note  9).  The
         aggregate  fair  value  of this  consideration  was  $171,120  of which
         $126,120 was provided for in prior years.

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



                                      F-14

<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


         During the discount period,  investors exercised 1,143,251 warrants and
         the Company received net proceeds of $1,618,544.  These warrants expire
         in April 2000. At March 31, 2000,  80,000  warrants  were  outstanding.
         These warrants expired unexercised.

         In April 1996,  the Company sold 241,467 shares of common stock to four
         current  shareholders  of  record  who  held the  contractual  right to
         maintain their share of ownership. The Company received net proceeds of
         $301,834.  In connection with this sale,  warrants to purchase  241,467
         shares of common stock with an exercise  price of $1.50 and warrants to
         purchase an additional  241,467 shares of common stock with an exercise
         price of $2.00  were  issued.  During the year  ended  March 31,  2000,
         warrants to purchase  364,422  shares were  exercised  for an aggregate
         consideration  of  $637,739.  There are no warrants  outstanding  as of
         March 31, 2000.

         WARRANTS
         During October 1995, in connection  with services being  performed by a
         consultant,  the Company issued  250,000  warrants to the consultant to
         purchase  shares of the Company's  common  stock.  Warrants to purchase
         50,000  shares of common stock at $3.25 per share  vested  immediately.
         Warrants to purchase each  additional  block of 50,000 shares of common
         stock are  exercisable  at  $3.75,  $4.25,  $4.75 and $5.25 per  share,
         respectively,  and shall vest on each three  month  anniversary  of the
         agreement. The warrants expire five years from the date of grant.

         STOCK OPTION PLANS
         The aggregate number of shares of common stock for which options may be
         granted  under  the  1998  Stock  Option  Plan  (the  "1998  Plan")  is
         3,000,000.  The  maximum  number of options  which may be granted to an
         employee during any calendar year under the 1998 Plan shall be 400,000.
         The term of these  non-transferable  stock  options  may not exceed ten
         years.  The exercise  price of these stock options may not be less than
         100%  (110% if the  person  granted  such  options  owns  more than ten
         percent of the outstanding common stock) of the fair value of one share
         of common stock on the date of grant.  During the years ended March 31,
         2000 and 1999, the Company  granted  options to purchase  2,328,791 and
         499,567,  respectively.  At March  31,  2000,  1,352,238  options  were
         outstanding  under  the  1998  Plan,  of  which  219,580  options  were
         exercisable.

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

         In August  1994,  the Company  adopted its 1994 Stock  Option Plan (the
         "1994 Plan"). The 1994 Plan, as amended, increased the number of shares
         of common  stock for  which  options  may be  granted  to a maximum  of
         1,250,000 shares. The term of these  non-transferable stock options may
         not exceed ten years. The exercise price of these stock options may not
         be less than 100% (110% if the person  granted  such  options owns more
         than ten percent of the  outstanding  common  stock) of the fair market
         value of one common  stock on the date of grant.  During the year ended
         March 31, 1999, the Company granted options to purchase  187,224 shares
         of its common  stock under the 1994 Plan.  At March 31,  2000,  770,286
         options were outstanding  under the 1994 Plan, of which 570,286 options
         were exercisable.

         Of the options  granted in fiscal 2000,  455,645 were granted under the
         Company's Time Accelerated Restricted Stock Award Plan ("TARSAP").  The
         options vest after seven years, however,  under the TARSAP, the vesting
         is  accelerated  to the  last  day of the  current  fiscal  year if


                                      F-15

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


         the    Company   meets   certain   predetermined  s ales  targets.  The
         Company did not meet the  targets  for 2000 and, as such,  all options
         granted  under  the  TARSAP in 2000 will  vest  seven  years  from the
         original date of grant.

         OTHER OPTIONS
         During the years  ended March 31,  2000 and 1999,  the  Company  issued
         7,500 and 70,000 options,  respectively,  to various  consultants.  The
         term of these options is five years from the date of grant.  During the
         years  ended  March  31,  2000 and 1999,  23,750  and  30,000  options,
         respectively  vested with 23,750 to vest in Fiscal 2001,  contingent on
         consulting services being provided in such year.  Compensation  expense
         of $50,400 and $62,000,  respectively, was recorded relative to vesting
         of options during 2000 and 1999.

         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 vest each April 1 of
         1998 and 1999.  Options  expire ten years  from the date of grant.  The
         exercise  price of the  options  is equal  to the  market  value of the
         Company's stock on the date of grant.  During the years ended March 31,
         2000,  and 1999,  90,000 and 130,000  options to  purchase  shares were
         exercised under this grant for an aggregate  consideration  of $104,400
         and $150,800,  respectively.  At March 31, 2000,  400,000  options were
         outstanding and exercisable.

         The Company also has issued outstanding options to certain directors to
         purchase 162,500 shares of the Company's stock. Options expire in terms
         ranging from 5 to 10 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. At March 31, 2000,  72,500 options were  outstanding
         and exercisable.

         ACCOUNTING FOR STOCK-BASED COMPENSATION
         The Company continues to apply Accounting  Principles Board Opinion No.
         25,   "Accounting   for  Stock   Issued  to   Employees"   and  related
         Interpretations  in accounting  for its options.  During the year ended
         March 31, 2000, the Company recorded  compensation  expense of $201,600
         related to options given to employees.

         The Company has adopted the disclosure-only  provisions of Statement of
         Financial  Accounting  Standards No. 123,  "Accounting  for Stock-Based
         Compensation"  ("SFAS  123").  If the Company had elected to  recognize
         compensation  costs  based on the fair  value at the date of grant  for
         awards in fiscal 2000 and 1999,  consistent with the provisions of SFAS
         No. 123, the Company's net loss and loss per share would have increased
         by  $1,239,998  and $.10 and $751,295 and $.14,  respectively,  for the
         years ended March 31, 2000 and 1999.

         The pro forma  effect on net loss for  fiscal  2000 and 1999 may not be
         representative  of the pro forma  effect  on net loss of  future  years
         because  the  SFAS  No.  123  method  of   accounting   for  pro  forma
         compensation  expense has not been applied to options  granted prior to
         April 1, 1995.


                                      F-16

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


         The  weighted-average  fair values at date of grant for options granted
         during  fiscal  2000 and 1999 were $4.08 and $1.64,  respectively.  The
         fair  value of each  option  grant for the  Company's  common  stock is
         estimated  on the date of the  grant  using the  Black  Scholes  option
         pricing model, with the following weighted average assumptions used for
         grants in fiscal 1999 and 1998:

<TABLE>
<CAPTION>

                                                                                    2000                  1999

<S>                                                                                     <C>                     <C>
          Expected volatility                                                           84%                     80%
          Risk-free interest rate                                                     5.32%                   5.12%
          Expected option lives                                                  4.00 years              5.87 years

</TABLE>

          Detail of options granted are as follows:

<TABLE>
<CAPTION>

                                                                                    WEIGHTED
                                                                                    AVERAGE
                                                                                    EXERCISE              OPTION PRICE
                                                                  SHARES            PRICE ($)             PER SHARE ($)
<S>                                                               <C>                       <C>              <C>     <C>

          Options outstanding at March 31, 1998                   1,794,796                 1.60             1.16 to 3.13

            Granted                                               1,282,067                 2.34             0.48 to 3.54
            Canceled                                                (25,596)                1.94             1.54 to 2.31
            Exercised                                              (358,429)                1.47             1.16 to 2.87
                                                            -----------------     --------------    ---------------------

          Options outstanding at March 31, 1999                   2,692,838                 1.52             0.48 to 3.54
                                                            -----------------     --------------    ---------------------

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

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

          Options exercisable at March 31, 2000                   1,281,366                 2.32            0.48 to 37.66
                                                            -----------------     --------------    ---------------------
</TABLE>



                                      F-17

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


<TABLE>
<CAPTION>


                                           WEIGHTED
                                            AVERAGE
                                           REMAINING       WEIGHTED                            WEIGHTED
      RANGE OF                              YEARS OF       AVERAGE                             AVERAGE
      EXERCISE             NUMBER         CONTRACTUAL      EXERCISE          NUMBER            EXERCISE
       PRICES            OUTSTANDING         LIFE            PRICE         EXERCISABLE           PRICE
<S>        <C>               <C>                 <C>   <C>                       <C>          <C>
       $0.48                  49,710             0.2   $         0.48             49,710      $        0.48
   $1.16 - $1.72             551,107             6.3   $         1.24            548,607      $        1.24
   $1.75 - $2.57           1,382,032             6.8   $         2.16            509,049      $        2.04
   $2.97 - $4.34             116,280             4.3   $         3.28             85,000      $        3.08
   $5.63 - $8.44             273,502             4.7   $         6.95             74,000      $        7.57
   $9.13 - $13.03             91,889             5.1   $         9.61                  -                  -
  $14.47 - $20.94            222,097             5.2   $        20.34                  -                  -
  $22.00 - $32.13             50,083             5.5   $        27.70              7,500      $       22.00
  $33.44 - $37.66             38,574             5.4   $        34.72              7,500      $       33.44
                      --------------  --------------   --------------     --------------     --------------
                           2,775,274             6.0   $         5.08          1,281,366      $        2.32
                      --------------  --------------   --------------     --------------     --------------
</TABLE>


9.       COMMITMENTS

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

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


                                      F-18

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

         Future  minimum  payments,   by  year  and  in  the  aggregate,   under
         non-cancellable  operating and capital  leases as of March 31, 2000 are
         as follows:

<TABLE>
<CAPTION>
                                                                                 CAPITAL                 OPERATING
                                                                                 LEASES                   LEASES
<S>                                                                      <C>                       <C>
Year ending March 31
   2001                                                                  $        97,949           $      769,184
   2002                                                                           97,949                  760,804
   2003                                                                           97,949                  802,206
   2004                                                                           97,949                  793,074
   2005                                                                           36,501                  679,478
   Thereafter                                                                          -                3,350,246
                                                                          --------------            -------------
   Total minimum lease payments                                           $      428,297            $   7,154,992
                                                                          --------------            -------------

   Less amount representing interest                                              57,531
                                                                          --------------

   Present value of net minimum lease payments                            $      370,766
                                                                          --------------

</TABLE>




         Computer and other equipment at March 31, 2000 includes  $390,638 under
         capital leases.  There were no assets under capital lease agreements at
         March 31, 1999.

         Rent expense under operating  leases for the years ended March 31, 2000
         and 1999 approximated $577,315 and $171,496, respectively.

         CONSULTING CONTRACT
         In connection with the acquisition of European Business Associates BVBA
         of Brussels,  Belgium,  the Company entered into a consulting agreement
         with a  former  principal  for a term of  five  years.  The  consulting
         agreement  provides  for an annual  consulting  fee of $75,000  with 5%
         annual increments, as well as reimbursement of certain expenses. During
         February  1999,  the  Company  and the  consultant  mutually  agreed to
         terminate  the  above  consulting  contract.  In  connection  with  the
         termination  the  consultant  received  60,000 common shares and 30,000
         options.  Compensation  expense of approximately  $126,120 was recorded
         during  fiscal  1999,  in  connection  with this  issue of  shares  and
         options.

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.





                                      F-19


<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

11.      EMPLOYEE BENEFIT PLANS

         Effective  April 1, 1993,  the Company  adopted a defined  contribution
         savings plan. The terms of the plan provide for eligible  employees who
         have  met  certain  age and  service  requirements  to  participate  by
         electing to  contribute up to 15% of their gross salary to the plan, as
         defined, with the Company matching 30% of an employee's contribution in
         cash  up to a  maximum  of 6% of  gross  salary,  as  defined.  Company
         contributions vest at the rate of 25% of the balance at each employee's
         second,  third,  fourth,  and  fifth  anniversary  of  employment.  The
         employees'   contributions  are  immediately   vested.   The  Company's
         contribution to the savings plan for the years ended March 31, 2000 and
         1999 was $49,732 and $37,058, respectively.

12.      SALES

         The Company,  which  operates in a single  industry  segment,  designs,
         develops and markets a broad range of security,  network management and
         remote maintenance products for voice and data communications networks.
         The Company's headquarters, physical production and shipping facilities
         are  located in the United  States.  The  Company's  local and  foreign
         export  sales  for the  years  ended  March  31,  2000  and 1999 are as
         follows:




                                                   2000             1999

United States                                     $ 19,228,324      $ 10,054,769
Europe                                               3,336,517         2,583,040
Pacific Rim                                             11,950                 -
Other                                                   92,042            36,108
                                                  ------------      ------------
                                                  $ 22,668,833      $ 12,673,917
                                                  ------------      ------------


         The  Company  sold a  substantial  portion  of  its  products  to  four
         customers.  Sales to these customers amounted to $8,606,173 (38% of net
         sales)   and   $6,914,525   (55%  of  net  sales)  in  2000  and  1999,
         respectively.  At March  31,  2000 and  1999,  amounts  due from  these
         customers  included  in  accounts   receivable,   were  $2,104,050  and
         $1,362,061,  respectively. The loss of any of these four customers or a
         significant  decline in sales volumes from any of these four  customers
         could  have  a  material  adverse  effect  on the  Company's  financial
         position and results of operations. Additionally, during the year ended
         March 31, 2000, the Company  licensed the rights to certain  customized
         modules of its  software  via a perpetual  license  agreement  with one
         customer and recorded approximately $3.2 million in revenue which had a
         positive  effect on the  Company's  rate of  revenue  growth  and gross
         margin.

13.      CONCENTRATION OF CREDIT RISK

         The Company  maintains  deposits in a  financial  institution  which is
         insured by the Federal  Deposit  Insurance  Corporation  ("FDIC") up to
         $100,000.  At March 31, 2000 and periodically  throughout  fiscal 2000,
         the Company had deposits in this financial institution in excess of the
         amount insured by the FDIC.



                                      F-20


<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------

         The Company sells the majority of its products to customers  within the
         telecommunications    industry.    The    Company's    three    largest
         telecommunications  customers  and one  other  customer  accounted  for
         approximately  46% of net accounts  receivable  at March 31, 2000.  The
         Company provides for allowances for doubtful  accounts which management
         believes are adequate to cover potential credit risk losses.

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

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

14.      OTHER RECEIVABLES

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

15.      OTHER CURRENT LIABILITIES

         At March  31,  1999,  other  current  liabilities  consisted  mainly of
         additional  liabilities  assumed by the Company in connection  with the
         acquisition of SolCom.  These  liabilities  relate to professional fees
         incurred  by  SolCom  and  its  directors  for  services   provided  in
         conjunction with the acquisition.  These  liabilities have been paid in
         full at March 31, 2000.


                                      F-21

<PAGE>

ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


16.      SUPPLEMENTAL CASH FLOW INFORMATION

<TABLE>
<CAPTION>

                                                                                      2000              1999


Non-cash acquisition of SolCom System Limited
  Operating activities

<S>                                                                                                    <C>
     Accounts receivable                                                                               $    422,423
     Inventory                                                                                              342,509
     Prepaid expenses and other current assets                                                               81,652
     Accounts payable                                                                                       788,801
     Accrued payroll and related liabilities                                                                411,902
     Deferred income                                                                                        123,278
     Other current liabilities                                                                            1,398,796
  Investing and financing activities
     Property and equipment, net                                                                            388,712
     Capitalized software, net                                                                              185,532
     Borrowings                                                                                              30,935
     Common stock and options issued in connection
       with the purchase acquisition                                                                      6,211,880

Other Non-Cash Investing and Financing Activities
  Common stock issued in connection with the
     purchase acquisition of LeeMAH
     Datacom Security Corporation                                                                         1,000,000
  Acquisition of treasury shares                                                                            203,199
  Common stock and options issued in connection with
     termination of consulting contract                                                                     126,120
  Options issued to consultants as non-cash compensation                             $     50,400            62,000
  Assets acquired by assuming capital lease obligations                                   370,766
  Compensation charge from employee options                                               201,600

</TABLE>


17.      RELATED PARTY TRANSACTIONS

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

         The  Company  issued  advances  to two  officers  of the Company in the
         amount of  $50,000  each on August  31,  1998.  These  advances  accrue
         interest at the prime rate plus 1%. These  advances are due and payable
         in full upon the officers  cessation of employment  with the Company or
         August 31, 2000,  whichever is earlier.  During fiscal 2000, one of the
         officers,  who has terminated  employment with the Company,  repaid his
         outstanding balance in full.


                                      F-22

<PAGE>


ION NETWORKS, INC. AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED MARCH 31, 2000 AND 1999
-------------------------------------------------------------------------------


18.      NEW ACCOUNTING PRONOUNCEMENT

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

         In December 1999, the SEC issued Staff Accounting  Bulletin ("SAB") No.
         101, "Revenue Recognition in Financial Statements". The SEC delayed the
         effective  date of this SAB from March 31,  2000,  so that the SAB must
         now be adopted by June 30, 2000. The Company has assessed the impact of
         SAB 101 on its results of  operations  and believes that its results of
         operations  for the year ended  March 31, 2000 have been  presented  in
         accordance with the provisions of the SAB.

19.      SUBSEQUENT EVENTS

         During  April 2000,  the Company  issued a loan to the Chief  Executive
         Officer  of the  Company in the amount of  $750,000.  The loan  accrues
         interest  at a rate of LIBOR plus 1%.  This loan is due and  payable on
         June 27, 2005. If the Chief Executive  Officer leaves the employ of the
         Company or is terminated  from his  employment,  with or without cause,
         the  principal  and  accrued  interest  will be due and payable in full
         within 30 days of such termination.


                                      F-23
<PAGE>

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

         Exhibit        Description
         -------        -----------

           10.9         Employment Agreement dated as of April 1, 1999 between
                        the Company and Stephen B. Gray.

           10.10        Non-negotiable  Promissory Note in the principal  amount
                        of $750,000 issued by Stephen B. Gray to the Company.

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

           23.1         Consent of PricewaterhouseCoopers LLP

           27.1         Financial Data Schedule