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

                                  FORM 10-KSB/A
                                 Amendment No. 3

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

For the fiscal year ended December 31, 2004
                          -----------------

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

For the transition period from .

                          Commission File No.: 0-13117

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

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

          120 Corporate Blvd., S. Plainfield, NJ            07080
       (Address of Principal Executive Offices)          (Zip Code)

                                 (908) 546-3900
                (Issuer's telephone number, including area code)
         Securities registered under Section 12(b) of the Exchange Act:

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

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

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

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

Yes   X           No
    -----            -----

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

The issuer's revenues for its most recent  twelve-months ended December 31, 2004
totaled $ 3,616,261.

The aggregate market value of voting stock held by non-affiliates,  based on the
closing price of the Common Stock, par value $0.001 (the "Common Stock") on July
27, 2005 of $0.16, as reported on the OTC Bulletin Board was $4,328,007.  Shares
of Common Stock held by each officer and director and by each person who owns 5%
or more of the outstanding  Common Stock have been excluded in that such persons
may be deemed to be affiliates.  This  determination  of affiliate status is not
necessarily a conclusive determination for any other purpose.

There were 27,050,044 shares of Common Stock outstanding as of July 29, 2005.


<PAGE>


                                EXPLANATORY NOTE

This  Amendment No. 3 on Form 10-KSB/A to ION Networks,  Inc. (the  "Company" or
the  "Registrant")  Annual Report on Form 10-KSB for the year ended December 31,
2004 (the  "Original  Filing")  which was filed with the Securities and Exchange
Commission  on March 24, 2005,  and amended on April 22, 2005 and July 12, 2005,
is being filed to amend the Original Filing as follows:

     o    Note 2.  Summary of  Significant  Accounting  Policies  to reflect the
          change in disclosure of Revenue Recognition Policy.

Except for the amendments described above, this Form 10-KSB/A does not modify or
update other  disclosures  in, or exhibits to, the Original Filing as previously
amended.


<PAGE>


Item 7: Financial Statements


ION Networks, Inc. and Subsidiary

Index to Consolidated Financial Statements
For the Year Ended December 31, 2004 and 2003
---------------------------------------------

<TABLE>
<CAPTION>

                                                                                                                 Page(s)
<S>                                                                                                                <C>

Report of Independent Registered Public Accounting Firm                                                            37

Consolidated Financial Statements:

     Consolidated Balance Sheet as of December 31, 2004                                                            38

     Consolidated Statements of Operations for the Years Ended December 31, 2004 and 2003                          39

     Consolidated Statements of Cash Flows for the Years Ended December 31, 2004 and 2003                          40

     Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2004 and 2003                41-42

Notes to Consolidated Financial Statements                                                                         43-54

</TABLE>


<PAGE>


             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

We have audited the accompanying consolidated balance sheet of ION Networks,
Inc. and Subsidiary as of December 31, 2004, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
years ended December 31, 2004 and 2003. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also 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, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of ION
Networks, Inc. and Subsidiary as of December 31, 2004, and the consolidated
results of their operations and their cash flows for each of the years ended
December 31, 2004 and 2003 in conformity with accounting principles generally
accepted in the United States of America.

/s/ Marcum & Kliegman LLP


New York, New York
February 11, 2005 (Except for Note 16(b), as to which the date is March 31,
2005).


<PAGE>


                        ION Networks, Inc. and Subsidiary
                           Consolidated Balance Sheet

<TABLE>
<CAPTION>

                                                                                      December 31,
                                      Assets                                              2004
                                                                                    -----------------
<S>                                                                                           <C>
Current assets
   Cash and cash equivalents                                                            $    287,437
   Accounts receivable, less allowance for doubtful accounts of
     $16,923                                                                                 578,491
   Inventory, net                                                                            511,426
   Prepaid expenses and other current assets                                                  78,436
                                                                                    -----------------
     Total current assets                                                                  1,455,790

   Property and equipment, net                                                                11,847
   Capitalized software, net                                                                 406,351
   Other assets                                                                               12,836
                                                                                    -----------------
   Total assets                                                                        $   1,886,824
                                                                                    =================

                  Liabilities and Stockholders' Equity
Current liabilities
   Current portion of long-term debt                                                           2,311
   Accounts payable                                                                          354,602
   Accrued expenses                                                                          549,730
   Deferred income                                                                           160,212
   Sales tax payable                                                                           6,074
   Other current liabilities                                                                  10,000
                                                                                    -----------------
   Total current liabilities                                                           $   1,082,929
                                                                                    -----------------

Convertible debenture - related party                                                        204,167
Long term debt, net of current portion                                                         6,942
                                                                                    -----------------
     Total liabilities                                                                 $   1,294,038
                                                                                    -----------------


Commitments and contingencies

Stockholders' equity
     Preferred stock - par value $.001 per share; authorized 1,000,000 shares,
     200,000 shares designated Series A; 158,335 shares issued and outstanding
     (Aggregate Liquidation Preference $285,003)                                                 158
     Common stock - par value $.001 per share; authorized 50,000,000 shares;
     22,610,500 shares issued and outstanding                                                 22,611
     Additional paid-in capital                                                           44,146,595
        Accumulated deficit                                                              (43,576,578)
                                                                                    -----------------
Total stockholders' equity                                                                   592,786
                                                                                    -----------------
Total liabilities and stockholders' equity                                             $   1,886,824
                                                                                    =================

</TABLE>



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


<PAGE>


                        ION Networks, Inc. and Subsidiary
                      Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                                               Years Ended December 31,
                                                                             2004                  2003
                                                                       ------------------    -----------------
<S>                                                                         <C>                  <C>
Net sales                                                                   $  3,616,261         $  3,342,620

Cost of sales                                                                  1,417,603            1,423,509
                                                                       ------------------    -----------------
   Gross margin                                                                2,198,658            1,919,111

Research and development expenses                                                598,012              503,146
Selling, general and administrative expenses, including $58,750 and
$(95,000) of non-cash stock based compensation/(recovery) for the
years ended December 31, 2004 and 2003, respectively                           2,314,834            2,452,031
Depreciation  expenses                                                            57,325              205,558
Restructuring, asset impairments and other credits                              (180,533)            (405,402)
                                                                       ------------------    -----------------
   Loss from operations                                                         (590,980)            (836,222)

   Interest income                                                                25,810               19,872
   Interest income/(expense)- related party                                       (4,167)                   -
   Interest income/(expense)                                                      (3,334)             (14,593)
                                                                       ------------------    -----------------
                                                                                (572,671)            (830,943)
   Loss before income taxes

Income tax benefit                                                               322,831              227,151
                                                                       ------------------    -----------------

   Net loss                                                                  $  (249,840)          $ (603,792)
                                                                       ==================    =================


Per share data

   Basic and diluted                                                         $     (0.01)          $    (0.03)
                                                                       ==================    =================

Weighted average number of common shares outstanding
   Basic and diluted                                                          23,294,325           23,900,500
                                                                       ==================    =================

</TABLE>

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


<PAGE>


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

<TABLE>
<CAPTION>

                                                                                       Years Ended December 31,
                                                                                     2004                    2003
                                                                              --------------------    --------------------
<S>                                                                                       <C>                     <C>
Cash flows from operating activities
     Net loss                                                                        $   (249,840)           $   (603,792)

Adjustments to reconcile net loss to net cash from operating activities:
   Restructuring, asset impairments and other charges, non-cash                          (180,533)               (405,402)
   Depreciation and amortization                                                          409,485                 736,694
   Provision for inventory reserves                                                       (48,880)                (26,002)
   Other                                                                                  (39,171)                      -
   Non-cash stock-based compensation charge (credit)                                       58,750                 (95,000)
   Non-cash interest income from notes receivable from officers                           (24,884)                (13,130)
   Changes in operating assets and liabilities:
     Accounts receivable, net                                                            (180,747)                164,018
     Inventory                                                                            239,496                 583,228
     Prepaid expenses and other current assets                                             49,702                  75,796
     Other assets                                                                             465                   1,577
     Accounts payable                                                                     126,723                (690,303)
     Accrued expenses                                                                      20,714                 (82,543)
     Deferred income                                                                      (40,093)                 45,284
     Sales tax payable                                                                    (32,908)                (31,385)
     Other current liabilities                                                                  -                 (35,980)
                                                                              --------------------    --------------------
       Net cash provided by (used in) operating activities                                108,279                (376,940)
                                                                              --------------------    --------------------

Cash flows from investing activities
   Acquisition of property and equipment                                                  (11,740)                      -
   Capitalized software expenditures                                                     (310,223)               (214,996)
   Proceeds from sale of equipment                                                              -                  30,129
   Restricted cash                                                                              -                 125,700
                                                                              --------------------    --------------------
       Net cash used in investing activities                                             (321,963)                (59,167)
                                                                              --------------------    --------------------

Cash flows from financing activities
   Principal  payments on debt and capital leases                                         (67,840)                (85,135)
    Issuance of convertible debenture                                                     200,000                       -
    Proceeds from the exercise of stock options                                            11,250                       -
                                                                              --------------------    --------------------
       Net cash provided by (used in) financing activities                                143,410                 (85,135)
                                                                              --------------------    --------------------

Effect of exchange rates on cash                                                                -                  13,269
                                                                              --------------------    --------------------

Net decrease in cash and cash equivalents                                                 (70,274)               (507,973)

Cash and cash equivalents - beginning of year                                             357,711                 865,684
                                                                              --------------------    --------------------

Cash and cash equivalents - end of year                                              $    287,437            $    357,711
                                                                              ====================    ====================

Supplemental information
   Cash paid during period for interest                                               $     3,334            $     13,650
                                                                              ====================    ====================

</TABLE>

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


<PAGE>


                        ION Networks, Inc. and Subsidiary
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2004 and 2003

<TABLE>
<CAPTION>

                                                                                                               Accumulated
                                          Preferred               Common          Additional                      Other
                                                                                   Paid-In     Accumulated     Comprehensive
                                       Shares     Stock     Shares      Stock      Capital        Deficit      Income (Loss)
                                     ---------- --------- ----------- ---------- ------------ --------------- ---------------
<S>                                    <C>        <C>     <C>          <C>       <C>           <C>               <C>
Balance, December 31, 2002             166,835    $  167  24,875,500   $ 24,876  $ 44,680,740  $ (42,722,946)    $   (13,269)

Comprehensive loss
 Net loss                                                                                           (603,792)

 Translation adjustments                                                                                              13,269

 Total comprehensive loss

Notes receivable from officers
 -accrued interest

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

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

Net loss                                                                                            (249,840)

Conversion of preferred stock to
 common stock                           (8,500)       (9)     85,000         85          (76)

Issuances of common stock upon
 exercise of options                                         250,000        250       11,000

Notes receivable from officers -
 accrued interest

Cancellation of restricted shares
 from former officers                                     (2,600,000)    (2,600)    (508,819)

Non-cash stock-based compensation
 issued to officers                                                                   58,750
                                     ---------- --------- ----------- ---------- ------------ --------------- ---------------

Balance, December 31, 2004             158,335    $  158   22,610,500  $ 22,611  $ 44,146,595  $ (43,576,578)    $         -
                                     ========== ========= =========== ========== ============ =============== ===============

</TABLE>

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


<PAGE>


                        ION Networks, Inc. and Subsidiary
                 Consolidated Statements of Stockholders' Equity
                 For the Years Ended December 31, 2004 and 2003


                             Notes
                           Receivable            Total
                          from former        Stockholders'
                            Officers             Equity
                         ---------------    -----------------
Balance, December         $   (473,405)     $      1,496,163
31, 2002


Comprehensive loss
   Net loss                                         (603,792)

   Translation
   adjustments                                        13,269
                                            -----------------

   Total
   comprehensive loss                               (590,523)

Notes receivable
from officers -
accrued interest               (13,130)              (13,130)

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

Balance, December
31, 2003                  $   (486,535)       $      797,510

Net loss                                            (249,840)

Conversion of
preferred stock to
common stock                                               -

Issuances of common
stock upon exercise
of options                                            11,250

Notes receivable
from officers -
accrued interest               (24,884)              (24,884)

Cancellation of
restricted shares
from former officers           511,419                     -

Non-cash stock-based
compensation issued
to officers                                           58,750
                         ---------------    -----------------

Balance, December
31, 2004                     $        -       $      592,786
                         ===============    =================


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


<PAGE>


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

1.   Organization and Basis of Presentation

The Company

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

2.   Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying  consolidated  financial statements include the accounts of ION
Networks, Inc. and a single Subsidiary in 2004 and two subsidiaries in 2003. All
material  inter-company  balances  and  transactions  have  been  eliminated  in
consolidation. Due to Management's cost containment programs, the Company ceased
its operations in Belgium and Scotland in 2003.

Use of Estimates

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

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

Cash and Cash Equivalents

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

Allowance for Doubtful Accounts Receivable

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

Inventory, net

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

Property and Equipment

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


<PAGE>


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

Capitalized Software

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

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

The Company capitalized  $310,223 and $214,996 of software development costs for
the year ended December 31, 2004 and 2003,  respectively.  Amortization  expense
totaled  $352,160  and  $531,136  and is  included in Cost of sales for the year
December 31, 2004 and 2003, respectively.

Research and Development Costs

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

Advertising Costs

The  Company  incurred  approximately  $30,000  and  $1,000  for the year  ended
December 31, 2004 and 2003, respectively.

Revenue Recognition Policy

The Company  recognizes  revenue from product  sales of hardware and software to
end-users,  value added resellers  (VARs) and original  equipment  manufacturers
(OEMs)  upon  shipment  if  no   significant   vendor   obligations   exist  and
collectibility  is probable.  The Company does not offer  customers the right to
return products,  however the Company records warranty costs at the time revenue
is recognized.  Management  estimates the anticipated  warranty costs but actual
results could differ from those estimates.

In  addition,  the  Company  sells  internally  developed  stand-alone  finished
software  packages  ("PRIISMS  Software"),  which  permit  end-users to monitor,
secure and  administer  voice and data  communications  networks.  The  software
packages  permit the  customer to utilize the PRIISMS  software  pursuant to the
terms of the license.  Other than during an initial  ninety-day  warranty period
from   the   date   of   shipment,    the   purchaser   is   not   entitled   to
upgrades/enhancements  or services that can be  attributable  to a multi-element
arrangement.  In addition,  the customer does not have any rights to exchange or
return  the  software.   Since  the  software  package  sale  does  not  require
significant  production,  modification or customization,  the Company recognizes
revenue at such time the  product is shipped and  collectibility  is probable in
accordance  with the  accounting  guidance of under  Statement of Position 97-2,
"Software Revenue Recognition".

The Company  sells  separate  customer  maintenance  contracts  and  maintenance
revenue is  recognized on a  straight-line  basis over the period the service is
provided,  generally one year. On some  occasions,  maintenance is provided on a
time and material basis in which case revenue is recognized upon shipment of the
repaired item.

Shipping and Handling Costs

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

Fair Value of Financial Instruments

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


<PAGE>


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

Net Loss Per Share of Common Stock

Basic net loss per share excludes dilution for potentially  dilutive  securities
and is computed by dividing net loss attributable to common  shareholders by the
weighted average number of common shares outstanding during the period.  Diluted
net  loss  per  share  reflects  the  potential  dilution  that  could  occur if
securities  or other  instruments  to  issue  common  stock  were  exercised  or
converted into common stock.  Potentially  dilutive  securities of 9,327,672 and
4,783,505  at December 31, 2004 and 2003 are excluded  from the  computation  of
diluted net loss per share as their inclusion would be antidilutive.

Stock Compensation

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

The Company  issued certain stock options in 2004. 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. The assumptions used to value the 2004
options issued are as follows:


Expected Volatility                                      214.97%
Risk-free interest rate                                     4.00
Expected option lives                                 5.00 years


During the year ended  December 31, 2003,  the Company  issued no stock options.
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.  If the
Company had elected to recognize  compensation  costs based on the fair value at
the date of grant for awards,  consistent  with the  provisions of SFAS No. 123,
the  Company's  net loss and basic and  diluted  net loss per share  would  have
increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                                                                      Years Ended December 31,
                                                                                       2004              2003
                                                                                   --------------     ------------
<S>                                                                                      <C>             <C>
        Net loss as reported                                                          $(249,840)       $(603,792)

        Add: Stock based compensation expense (recovery) included in net loss            58,750          (95,000)

        Deduct: Stock based employee compensation determined under the fair            (454,493)        (217,158)
        value method
                                                                                   --------------     ------------
        Pro forma net loss                                                            $(645,583)       $(915,950)
                                                                                   ==============     ============

        Basic and diluted net loss per share of common stock
        As reported                                                                       (0.01)           (0.03)
                                                                                   ==============     ============
        Pro forma                                                                         (0.03)           (0.04)
                                                                                   ==============     ============

</TABLE>

Foreign Currency Translation

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


<PAGE>


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

Income Taxes

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

Warranty Costs

The Company  estimates  its warranty  costs based on historical  warranty  claim
experience.  Future costs for warranties  applicable to sales  recognized in the
current  period are charged to cost of sales.  Adjustments  are made when actual
warranty claim experience differs from estimates.  The warranty accrual included
in other current liabilities as of December 31, 2004 is $10,000.

<TABLE>
<CAPTION>

                                                                      For the years ended
                                                         December 31, 2004           December 31, 2003
                                                      -------------------------    -----------------------
<S>                                                                <C>                   <C>
   Balance at beginning of the year                        $   48,388                    $  48,388
   Change in liability due to preexisting warranty            (38,388)                           -
                                                      -------------------------    -----------------------
   Balance at the end of the year                          $   10,000                    $  48,388
                                                      =========================    =======================

</TABLE>

Reclassifications

Certain  amounts in the  consolidated  financial  statements  for the year ended
December 31, 2003 have been  reclassified to conform to the  presentation of the
consolidated financial statements for the year ended December 31, 2004.

3.   Restructuring, Asset Impairments and Other Credits

The  components  of the  restructuring,  asset  impairments  and  other  credits
recorded in 2004 and 2003 are as follows:

<TABLE>
<CAPTION>

                                                Asset Impairment        Restructuring        Other Credits           Total
                                             -----------------------  -------------------  ------------------  -------------------
<S>                                                    <C>                    <C>                <C>                  <C>
First Quarter 2004 charges                                $       -           $        -          $        -           $        -
Second Quarter 2004 charges (reversals)                           -                    -             (59,570)             (59,570)
Third Quarter 2004 charges (reversals)                            -              (63,716)                  -              (63,716)
Fourth Quarter 2004 charges (reversals)                           -                    -             (57,247)             (57,247)
                                             =======================  ===================  ==================  ===================
                                      Total               $       -           $  (63,716)         $ (116,817)          $ (180,533)
                                             =======================  ===================  ==================  ===================

First Quarter 2003 charges                                $       -           $  123,510          $        -           $  123,510
Second Quarter 2003 charges (reversals)                     192,617             (508,458)                  -             (315,841)
Third Quarter 2003 charges (reversals)                            -                    -            (213,071)            (213,071)
Fourth Quarter 2003 charges                                       -                    -                   -                    -
                                             =======================  ===================  ==================  ===================
                                      Total               $ 192,617           $ (384,948)         $ (213,071)          $ (405,402)
                                             =======================  ===================  ==================  ===================

</TABLE>

The total amount of  restructuring,  asset impairments and other credits for the
year ended December 31, 2004 was $180,533.  This amount consisted of three items
for which the  Company  recognized  credits;  $67,671  for  forgiveness  of debt
related  to  legal,  taxes  and loan  amounts;  $63,716  related  to a change in
management  estimate reducing potential liability for damages previously accrued
for related to the  abandonment  of an office  lease and $49,146  related to the
write-off  of  certain  payables  for which  management  believes  are not valid
liabilities.

As a result of the Company  being  notified by the  landlord to cancel its lease
effective August 15, 2003 at the Piscataway,  NJ facility, the net book value of
leasehold improvements  amounting to $28,955 were written-off.  In addition, the
Company was required to sell  property  and  equipment in order to move into its
smaller  newly  leased  facility.  At June 30,  2003  the  Company  recorded  an
impairment  loss of $163,662 which  represents  the difference  between the cash
proceeds of the August  2003 sale and  carrying  value prior to the  impairment.
There is no balance remaining at December 31, 2004.

The Company  reserved an estimate of $508,458 in the quarter ended  December 31,
2002 for the total potential remaining lease payments.  During the quarter ended
June  30,  2003,  the  Company  completed  a  voluntary  liquidation  of  its UK
subsidiary,  which by court action abated all future liabilities,  and therefore
the  Company  reversed  the  original  accrual  estimate.  There  is no  balance
remaining at December 31, 2004.


<PAGE>


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

During the period from March 2002  through May 2002,  the Company was billed and
it booked accounts payable invoices  totaling  $243,071 from Xetel.  Xetel filed
for  bankruptcy and ION settled the entire balance during the third quarter 2003
for a payment  in the  amount  of  $30,000.  There is no  balance  remaining  at
December 31, 2004.

The Company is in  negotiations  with the landlord from the Fremont,  California
location  for the  disposition  of the reserved  amount of $123,510  recorded in
2003. The Company has not occupied the space since  approximately March 2003. In
2004, Management re-evaluated the current status of the ongoing negotiations and
reversed its prior reserve amount by $63,716. Management believes that the final
settlement amount should not exceed the reserved amount of $60,000..This  amount
is included in accrued expenses as of December 31, 2004.

The Company has recorded certain liabilities that may, in the future,  result in
additional  restructuring  credits.  The Company  recorded  accounts payable for
invoices rendered primarily for professional  services in the amount of $153,687
and accrued expenses in the amount of $178,671 based on invoices rendered offset
by certain credits for such services.  These entries arose from alleged services
provided to the Company between November 2002 through August 2003.The Company is
disputing these amounts with the vendors however, at the present time management
is unable to estimate the final outcome of these  disputes but believes that the
final settlement  amount should not exceed the total of the above amounts.  This
amount is included in accrued expenses as of December 31, 2004.

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

4.   Inventory

Inventory, net of reserves of $149,853, consists of the following:

                                                     December 31,
                                                         2004
                                                  ----------------

Finished goods                                         $  448,742
Raw materials                                              61,844
Work-in-progress                                              840
                                                  ----------------

Inventory, net                                         $  511,426
                                                  ================

The Company evaluates the inventory  reserves on a quarterly basis. In 2004, the
Company  adjusted its inventory  reserves which resulted in a benefit of $48,880
and this  amount  was  included  as part of cost of  sales  in its  consolidated
statements of operations.  In 2003, the Company  recorded a charge of $26,002 to
cost of sales related to reserves for excess and obsolete inventory.

5.   Property and Equipment, net

Property and equipment consists of the following:

                                                       December 31,
                                                           2004
                                                    ------------------

Computer and other equipment                              $   764,900
Furniture and fixtures                                         68,408
                                                    ------------------
                                                              833,308

Less accumulated depreciation                               (821,461)
                                                    ------------------

Property and equipment, net                               $    11,847
                                                    ==================

Depreciation  expense for property and equipment for the year ended December 31,
2004 and 2003, amounted to $57,325 and $205,558,  respectively.  During the year
ended December 31, 2004 and 2003,  the Company  retired both fully and not fully
depreciated assets amounting to $53,963 and $1,730,369, respectively. During the
year ended  December  31,  2003,  the Company  relocated  its  headquarters  and
therefore,  recorded an asset  impairment  charge of $192,617 to  recognize  the
retirement of assets not fully depreciated (see Note 3).


<PAGE>


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

6.   Debt - Related Party

On August 5,  2004,  the  Company  issued,  for  $200,000  cash,  a  convertible
debenture  (the  "Debenture")  to  Stephen  M.  Deixler,  one of  the  Company's
directors.  The Debenture  matures on August 5, 2008 and bears  interest at five
(5%)  percent  per  annum,  compounded  annually.  The  principal  amount of the
Debenture is convertible  into shares of the Company's  common stock,  $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion  Price"),
which  is  equal  to the ten  (10) day  average  of the  closing  prices  of the
Company's  common stock, as quoted on the OTC Bulletin Board during the five (5)
trading  days  immediately  prior to and  subsequent  to  August  5,  2004.  The
principal  amount of the Debenture is convertible at the Conversion Price at the
option of the holder,  or after  August 5, 2005 at the  Company's  option if the
Company's  common  stock  trades at a price of at least  $0.166 for twelve  (12)
trading  days in any  fifteen  (15)  trading  day  period.  The  Company is also
entitled  to prepay the  principal  amount of the  Debenture,  at any time after
August 5, 2005,  but shall be required  to pay a premium of two (2%)  percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for  prepayments  made during  that  period.  The  Company  has granted  certain
"piggyback"  registration rights to the holder to register for resale the shares
issuable upon conversion of the Debenture.  In 2004, the Company recorded $4,167
of related party interest expense as part of the statement of operations.

7.   Income Taxes

As of  December  31,  2004,  the  Company  has  available  federal and state net
operating  loss carry forwards of  approximately  $42,773,686  and  $26,340,185,
respectively,  to offset future taxable  income.  The federal net operating loss
carry  forwards  expire  during the years 2011 through  2024.  In addition,  the
Company has investment credit and research and development credit carry forwards
aggregating  approximately  $405,000,  which may  provide  future tax  benefits,
expiring from 2008 through 2020. The Internal  Revenue Code contains  provisions
which will limit the net operating  loss carry forward  available for use in any
given year if significant changes in ownership interest of the Company occur.

The Company obtained a corporation  business tax benefit certificate pursuant to
New Jersey law which allows the sale of unused state net operating  losses.  For
the years  ended  December  2004 and 2003,  the  Company  received  a benefit of
$322,831 and $227,151, respectively.

The tax effect of temporary differences which make up the significant components
of the net deferred tax asset and liability at December 31, 2004 are as follows:

<TABLE>
<CAPTION>

                                                                                     December 31,
                                                                                         2004
                                                                                   ---------------
<S>                                                                                        <C>
       Current deferred tax assets
                   Inventory reserves                                                 $    88,727
                      Accrued expenses                                                    196,526
                      Allowance for doubtful accounts                                      85,239
                                                                                   ---------------
                     Total current deferred tax assets                                    370,492
                Valuation allowance                                                      (370,492)
                                                                                   ---------------
                     Net current deferred tax assets                                            -
                                                                                   ---------------
       Noncurrent deferred tax assets
                Depreciation and amortization                                             245,425
                Net operating loss carry forwards                                      16,103,494
                Research and development credit                                           405,078
                                                                                   ---------------
                     Total noncurrent deferred tax assets                              16,753,997
                  Valuation allowance                                                 (16,591,457)
                                                                                   ---------------
                     Net noncurrent deferred tax assets                                   162,540

       Noncurrent deferred tax liabilities
                Capitalized software                                                     (162,540)
                                                                                   ---------------
                     Total noncurrent deferred tax liabilities                           (162,540)
                                                                                   ---------------
                     Net noncurrent deferred tax (liabilities) assets                  $        -
                                                                                   ===============


</TABLE>

The Company has  recorded a full  valuation  allowance  against the deferred tax
assets,  including  the federal and state net operating  loss carry  forwards as
management  believes that it is more likely than not that  substantially  all of
the deferred tax assets will not be realized. During the year ended December 31,
2004, the Company had an annual change in the valuation allowance of $1,948,386.


<PAGE>


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

8.   Stockholders' Equity

Preferred Stock - On September 13, 2002 the Company received equity financing in
the amount of $300,303  ($285,303,  net of issuance  costs) for the  issuance of
166,835 unregistered shares of the Company's preferred stock at $1.80 per share.
The  Company  has  designated  200,000  of the  1,000,000  authorized  shares of
preferred stock as Series A Preferred Stock ("Preferred  Stock").  Each share of
Preferred Stock is convertible  into 10 shares of the Company's  common stock at
the conversion  price of $0.18 per share of common stock,  which was the closing
bid price of the  Company's  common stock on September  13, 2002.  The Preferred
Stock is non-voting, has a standard liquidation preference equal to its purchase
price, and does not pay dividends. Proceeds of the equity financing will be used
for  working  capital  and  general  corporate  purposes.  All of the  shares of
Preferred  Stock were purchased by directors and  management of the Company.  On
December 27, 2004 8,500 of  preferred  stock was  converted to 85,000  shares of
common stock.

Restricted  Stock - Effective  October  2001,  the Company  approved and granted
2,600,000 shares of restricted stock (the "Restricted Shares") to two executives
stockholders  at fair value.  The Restricted  Shares are subject to a repurchase
right which will permit the Company to repurchase  any shares which have not yet
vested at the effective  date of  termination  of the officers'  employment,  as
defined in their  employment  agreements,  for an amount  equal to the  purchase
price per share paid by the officers.  The Company  received a series of partial
recourse  interest  bearing (5.46% on an annual basis)  promissory notes for the
value of the Restricted Shares to be repaid by the officers.  As of December 31,
2003 Mr. Kam Saifi owes approximately $282,618 (including  approximately $24,618
of  interest)  for  2,000,000  Restricted  Shares and;  Mr.  Cameron  Saifi owes
approximately $203,917 (including approximately $18,517 of interest) for 600,000
Restricted Shares.

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

On March 29, 2004, the Company agreed to a final  separation  agreement with its
former  President and Chief  Executive  Officer.  As part of the agreement,  the
Company agreed to accept the return of 2,000,000  shares of the Company's common
stock as full payment for the former officers' total indebtedness to the Company
of  $294,493.  In  addition,  the former  officer  released the Company from any
obligations,  which may have arisen from the  separation of the officer from the
Company.

On October 14, 2004, the Company agreed to a final separation agreement with its
former  Executive Vice  President and Chief  Operating  Officer.  As part of the
agreement,  the  Company  agreed to accept the  return of 600,000  shares of the
Company's   common  stock  as  full  payment  for  the  former  officers'  total
indebtedness  to the  Company of  $216,926.  In  addition,  the  former  officer
released  the  Company  from  any  obligations  for  the sum of  $8,000  as full
compensation for said release.

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

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

Stock Option Plans

In  November  2000,  the Company  adopted its 2000 Stock  Option Plan (the "2000
Plan").  The aggregate number of shares of common stock for which options may be
granted  under the 2000 Plan is 3,000,000.  The maximum  number of options which
may be granted to an employee  during any  calendar  year under the 2000 Plan is
400,000.  The term of these  non-transferable  stock  options may not exceed ten
years. The exercise price of these stock options may not be less than 100% (110%
if the person granted such options owns more than ten percent of the outstanding
common  stock) of the fair  value of one  share of  common  stock on the date of
grant.  During the year ended  December 31, 2004 and 2003,  the Company  granted
options to purchase 2,048,000 and zero shares, respectively.  As of December 31,
2004, 2,626,000 options were outstanding under the 2000 Plan, of which 1,544,750
options were exercisable.


<PAGE>


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

The aggregate  number of shares of common stock for which options may be granted
under the 1998 Stock  Option Plan (the "1998  Plan") is  3,000,000.  The maximum
number of options  which may be granted to an employee  during any calendar year
under the 1998 Plan is 400,000. The term of these non-transferable stock options
may not exceed ten years.  The exercise  price of these stock options may not be
less than 100%  (110% if the  person  granted  such  options  owns more than ten
percent  of the  outstanding  common  stock)  of the fair  value of one share of
common stock on the date of grant.  During the year ended  December 31, 2004 and
2003,  the  Company  granted  options to  purchase  1,285,000  and zero  shares,
respectively.  As of December 31, 2004, 1,556,629 options were outstanding under
the 1998 Plan, of which 1,020,900 options were exercisable.

In August  1994,  the  Company  adopted  its 1994 Stock  Option  Plan (the "1994
Plan").  The 1994 Plan,  as  amended,  increased  the number of shares of common
stock for which  options may be granted to a maximum of  1,250,000  shares.  The
term of these  non-transferable  stock  options  may not exceed  ten years.  The
exercise  price of these  stock  options  may not be less than 100% (110% if the
person granted such options owns more than ten percent of the outstanding common
stock) of the fair market value of one common stock on the date of grant. During
the year ended December 31, 2004 and 2003,  there were no option grants provided
under the 1994 Plan. As of December 31, 2004,  25,000  options were  outstanding
and exercisable under the 1994 Plan.

Warrants

In  connection  with the sale of common stock on February 14, 2002,  warrants to
purchase  1,120,000  shares of common  stock  with an  exercise  price of $1.25,
subject to certain  adjustments,  were issued. As of March 18, 2005 the exercise
price is $1.08. The warrants expire on February 14, 2007.

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

During January 2002 in connection  with services being performed by a consultant
through June 30, 2002, the Company issued warrants to purchase 100,000 shares of
the  Company's  common  stock  at $1.35  per  share.  Warrants  to  purchase  an
additional  50,000 shares of common stock are exercisable at $1.80.  All 150,000
warrants expired in January 2005.

Other Options

On  September  25,  1996,  the Company  issued  options to certain  officers and
directors to purchase  620,000  shares of the Company's  Common Stock,  of which
420,000  vested  immediately  and 100,000  vested on April 1, 1998 and 1999. The
options  expire ten years from the date of grant.  However,  in the event of (a)
the  liquidation  or  dissolution  of the  Company  or (b) a merger in which the
Company  is not the  surviving  corporation  or a  consolidation  involving  the
Company,  the options  shall  terminate,  unless other  provision is made in the
transaction. There were no stock option exercised during the year ended December
31, 2004 and 2003. The exercise price of the options is $1.156 and equals to the
market value of the Company's  Stock on the date of grant. At December 31, 2004,
400,000 options were outstanding and exercisable.

During  March  1999,  the  Company  issued  options  to  certain  employees  and
consultants  to purchase  20,000  shares of the Company's  common stock,  all of
which vested on the first year anniversary of the date of the grant. The options
expire six years from the date of the grant.  The exercise  price of the options
is equal to the market  value of the  Company's  common stock on the date of the
grant.  There were no stock options exercised during the year ended December 31,
2004 and 2003.  At December  31,  2004,  10,000  options  were  outstanding  and
exercisable.

In January  2004,  the Company  issued  options to certain  officers to purchase
1,000,000 shares of the Company's common stock,  which vested  immediately.  The
exercise  price of the below market  options  ranged from $0.045 to $0.06 on the
date of  grant.  The  Company  recorded  a stock  based  compensation  charge of
$58,750. At December 31, 2004, 750,000 options were outstanding and exercisable.


<PAGE>


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

Accounting for Stock-Based Compensation

The Company  continues  to apply  Accounting  Principles  Board  Opinion No. 25,
"Accounting  for Stock  Issued to  Employees"  and  related  Interpretations  in
accounting for its options. During the year ended December 31, 2004 and 2003 the
Company has recorded  compensation  expense  (benefit) of $58,750 and ($95,000),
respectively.

Details of the options granted are as follows:

<TABLE>
<CAPTION>

                                                                                     Weighted Average
                                                                 Shares              Exercise Price ($)
<S>                                                              <C>                             <C>
Options outstanding at December 31, 2002                           3,667,102                     1.62
                                                          -------------------

     Granted                                                               -                        -
     Canceled                                                    (1,821,947)                     3.55
     Exercised                                                             -                        -

                                                          -------------------
Options outstanding at December 31, 2003                           1,845,155                     1.59

     Granted                                                       4,333,000                     0.15
     Expired                                                        (73,250)                     5.63
     Canceled                                                      (487,276)                     1.16
     Exercised                                                     (250,000)                    0..05
                                                          -------------------

Options outstanding at December 31, 2004                           5,367,629                     0.51
                                                          ===================

Options exercisable at December 31, 2004                           3,750,650                     0.50
                                                          ===================

</TABLE>

<TABLE>
<CAPTION>

                                                                                                                      Weighted
                                                        Weighted Average         Weighted                              Average
                                  Number               Remaining Years of         Average            Number           Exercise
    Range of Exercise          Outstanding              Contractual Life      Exercise Price       Exercisable          Price
<S>                                      <C>                           <C>              <C>               <C>               <C>
$0.00 - 7.53                         5,320,694                        4.67             $ 0.36         3,737,550            $ 0.40
$7.54 - 15.06                           36,605                        4.85              13.62             3,600             13.62
$15.06 - 22.59                           1,500                         .05              22.00             1,500             22.00
$22.59 - 30.12                           1,500                         .25              29.25             1,500             29.25
$30.12 - 37.65                           7,060                         .49              34.69             6,500             34.66
                            -------------------       ---------------------   ----------------    --------------    --------------

$0.00 - 37.65                        5,367,629                        4.67              $0.51         3,750,650             $0.50
                            ===================       =====================   ================    ==============    ==============

</TABLE>

9.   Commitments

Operating Leases

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

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

The Company 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.


<PAGE>


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

Future  minimum  payments,  by year and in the aggregate,  under  non-cancelable
capital and operating leases as of December 31, 2004 are as follows:

<TABLE>
<CAPTION>

                                                       Capital Leases          Operating Leases
                                                    ---------------------    ---------------------
<S>                                                         <C>                      <C>
Year ending December 31,
   2005                                                     $      2,691             $     77,016
   2006                                                            2,691                   44,926
   2007                                                            2,691                        -
   2008                                                            2,243                        -
                                                    ---------------------    ---------------------

   Total minimum lease payments                             $     10,316             $    121,942
                                                    =====================    =====================

Less amount representing interest                                  1,063
                                                    ---------------------

Present value on net minimum lease payment                   $     9,253
                                                    =====================

</TABLE>

Rent expense  under  operating  leases for the year ended  December 31, 2004 and
2003 was approximately $74,500 and $210,800 , respectively.

Employment Contracts

The Company has entered into certain employment contracts with various officers.
Included in these contracts is a provision for severance, where by such officers
if terminated without cause as defined in the agreement is entitled to severance
ranging in terms of three to eighteen  months.  At December 31, 2004 the Company
had a potential loss for severance costs of  approximately  $735,000 under these
employment contracts.

10.  Contingent Liabilities

In the normal course of business the Company and its  Subsidiary 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.

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 a discretionary contribution
by 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.
As of January 1, 2003, the Company per the provisions of the plan decided not to
make discretionary contributions until further notice.

12.  Geographic Information

The Company's  headquarters,  physical  production  and shipping  facilities are
located in the United  States.  The Company's  domestic and foreign export sales
for each of the years ended December 31, 2004 and 2003 are as follows:

                               Year Ended                Year Ended
                            December 31, 2004         December 31, 2003
                          -----------------------------------------------
United States                   $     2,875,996          $     2,743,170
Europe                                  723,222                  477,153
Pacific Rim                              16,657                  122,188
Other                                       386                      109
                          -----------------------------------------------
                                $     3,616,261          $     3,342,620
                          ===============================================


<PAGE>


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

Historically,  we have been dependent on several large  customers each year, but
they are not  necessarily  the same every year.  For the year ended December 31,
2004, our most  significant  customers  (stated as an approximate  percentage of
revenue)  were Avaya 38% and MCI 9%,  with  remaining  accounts  receivables  of
$275,662  and  $20,170,  respectively,  compared to the year ended  December 31,
2003, of Avaya 18%,  Siemens 12%.  Qwest 8% and MCI 7% with  remaining  accounts
receivables of $80,929, $0, $0, $176,947,  respectively..  In general, we cannot
predict with certainty,  which large customers will continue to order.  The loss
of any of these large  customers,  or the failure to attract new large customers
would likely  significantly  decrease our revenues and future  prospects,  which
could  materially  and adversely  affect our business,  financial  condition and
results of operations.

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

13.  Concentration of Credit Risk

The Company  maintains  deposits in a financial  institution which is insured by
the Federal Deposit Insurance  Corporation ("FDIC") up to $100,000.  At December
31, 2004 and  periodically  throughout  2004,  the Company had  deposits in this
financial institution in excess of the amount insured by the FDIC.

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

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

14.  Supplemental Cash Flow Information

In 2004 the Company  converted  8,500 shares of  preferred  stock into 85,000 of
common stock.

15.  New Accounting Pronouncements


During  2003,  SFAS 150,  "Accounting  for Certain  Financial  Instruments  with
Characteristics  of both  Liabilities and Equity" ("SFAS 150") was issued.  SFAS
150  establishes   standards  for  classification  and  measurement  of  certain
financial  instruments with  characteristics  of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in certain  cases).  The  provisions of SFAS 150 are
effective  for  instruments  entered  into or  modified  after May  31,2003  and
pre-existing instruments as of July 1, 2003. On October 29, 2003, the FASB voted
to  indefinitely  defer the effective date of SFAS 150 for mandatory  redeemable
instruments as they relate to minority  interests in  consolidated  finite-lived
entities through the issuance of FASB Staff Position 150-3. The adoption of SFAS
No. 150 did not have a material impact on the Company's results of operations or
financial position.

In December 2003, a revision of SFAS 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits" was issued, revising disclosures about
pension loans and other post retirements benefits plans and requiring additional
disclosures about the assets, obligations, cash flows, and net periodic benefit
cost of defined benefit pension plans and other defined benefit postretirement
plans. The adoption of SFAS No. 132 did not have a material impact on the
Company's results of operations or financial position.

In December  2004,  the FASB issued SFAS No. 123R "Shared Based  Payment."  This
statement is a revision of SFAS Statement No. 123,  "Accounting  for Stock-Based
Compensation" and supersedes APB Opinion No. 25, "Accounting for Stock Issued to
Employees,"  and its related  implementation  guidance.  SFAS 123R addresses all
forms of shared based  payment  ("SBP")  awards,  including  shares issued under
employee  stock  purchase  plans,  stock  options,  restricted  stock  and stock
appreciation  rights.  Under SFAS 123R, SBP awards result in a cost that will be
measured at fair value on the awards' grant date,  based on the estimated number
of awards that are expected to vest and will be reflected as  compensation  cost
in the historical financial  statements.  This statement is effective for public
entities that file as small business  issuers - as of the beginning of the first
interim or annual  reporting  period that begins after  December  15, 2005.  The
Company is in the  process of  evaluating  whether the SFAS No. 123R will have a
significant  impact on the Company's  overall results of operations or financial
position.


<PAGE>


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

16.  Subsequent Events

(a)  Subsequent  to  December  31, 2004 the Company  converted  2,778  shares of
preferred stock into 27,780 of common stock.

(b)  On March 31, 2005, we completed a private  placement of 4,411,764 shares of
common stock and warrants to purchase an additional  2,205,882  shares of common
stock.  The total offering  price was $750,000.  The shares of common stock were
issued at $0.17 cents per share and the warrants are  exercisable  at a price of
$0.23 per share subject to certain anti-dilution adjustments.  The warrants will
expire on expire March 31, 2010.  The Company has the right to call the warrants
in the event that its common stock trades at a price  exceeding  $0.69 per share
for twenty (20)  consecutive  trading  sessions and certain other conditions are
met.  The Company  also agreed to register for resale the shares of common stock
as well as the shares issued upon exercise of the warrants.


<PAGE>


Item 13. Exhibits and Reports on Form 8-K

(a)  Exhibits:

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

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

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

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

                 (iv)Amended and Restated Certificate of Designation of Rights
                 Preferences, Privileges and Restrictions of Series A
                 Preferred Stock of ION Networks, Inc. /15/

      3.2        By-Laws of the Company./(19)/

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

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

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

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

      4.4        2000 Stock Option Plan of the Company./(12)/+

      4.5        Form of Warrant Agreement dated July 17, 2001./(11)/+

      4.6        Form of Warrant Agreement dated February 14, 2002./(11)/

      4.7        Convertible Debenture dated August 5, 2004./19/

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

      10.4       Equipment Lease Agreements dated October 29, 2003
                 by and between the Company and GE Capital
                 Corporation. /(21)/

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

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


<PAGE>


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


      10.6       (i) Separation and Forbearance Agreement made as of October
                 5, 2000 between the Company and Stephen B. Gray./(6)/

                 (ii)Promissory Note in the amount of $163,000 dated October
                 5, 2000 made by Stephen B. Gray to the Company./(6)/

      10.7       Materials and Services Contract dated January 16, 2001,
                 between the Company and SBC Services, Inc./(7)/

      10.8       Stock Purchase Agreement dated August 11, 2000 by and
                 between the Company and the parties identified therein./(7)/

      10.9       Purchase Agreement by and between the Company and the
                 Selling Shareholders set forth therein dated February 7,
                 2002./(13)/


      10.10      Employment Agreement dated October 4, 2001 between the Company
                 and Kam Saifi./(9)/+

      10.11      Employment Agreement dated October 17, 2001 between the
                 Company and Cameron Saifi./(10)/+

      10.12      Employment Agreement dated February 25, 2002, between the
                 Company and William Whitney./15/+

      10.13      Amended and Restated Employment Agreement dated August 15,
                 2003, between the Company and Norman E. Corn./16/+

      10.14      Employment Agreement dated September 15, 2003, between the
                 Company and Patrick E. Delaney./14/+

      10.15      Lease Agreement dated July 21, 2003 by and between the Company
                 and 116 Corporate Boulevard, LLC, Inc. /(17)/

      10.16      Separation Agreement dated March 29, 2004 between the Company
                 and Kam Saifi. /(21)/

      10.17      Separation Agreement dated October 14, 2004 between the Company
                 and Cameron Saifi. /(21)/

      10.18      First Amendment to the Amended and Restated Employment
                 Agreement dated September 8, 2003 by and between the Company
                 and Norman E. Corn dated November 10, 2004 /(21)/+

      10.19      First Amendment to the Employment Agreement dated September 15,
                 2003 by and between the Company and Patrick E. Delaney dated
                 November 10, 2004. /(21)/+

      10.20      Employment Agreement dated August 31, 2004 by and between the
                 Company and Henry A. Hill. /20/+

      10.21      Severance Agreement dated September 2, 2004 by and between the
                 Company and William Whitney. /(21)/+

      10.22      Severance Agreement dated September 2, 2004 by and between the
                 Company and Henry Gold. /(21)/+


<PAGE>


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

      10.23      Option Agreement dated January 28, 2004 by and between the
                 Company and Norman E. Corn. /(21)/+

      10.24      Option Agreement dated January 28, 2004 by and between the
                 Company and Patrick E. Delaney. /(21)/+

      10.25      Agreement dated February 25, 2005 by and between the Company
                 and Sprint/Untied Management Company. /(21)/

      10.26      Agreement dated October 28, 2004 by and between the Company and
                 General Dynamics Network Systems. /(21)/

      16.1       Letter dated October 31,2003, from Deloitte & Touche, LLP.
                 To the Securities and Exchange Commission./(8)/

      21.1       List of Subsidiaries./(21)/

      23.1       Independent Auditors Consent.*

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

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

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

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


(1)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on August 15, 1995.
(2)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on April 22, 1999.
(3)  Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on March 17, 2000.
(4)  Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended March 31, 1999.
(5)  Incorporated  by reference to the  Company's  Annual  Report on Form 10-KSB
     filed on June 28, 2000.
(6)  Incorporated by reference to the Company's  Quarterly report on Form 10-QSB
     filed on November 14, 2000
(7)  Incorporated  by reference to the  Company's  Annual  report on Form 10-KSB
     filed on June 29, 2001.
(8)  Incorporated  by reference  to the  Company's  Annual  report on Form 8-KSB
     filed on October 31, 2003.
(9)  Incorporated by reference to the Company's Current Report on Form 8-K filed
     on October 23, 2001.
(10) Incorporated by reference to the Company's Current Report on Form 8-K filed
     on October 24, 2001.
(11) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended March 31, 2002, as filed on July 1, 2002.
(12) Incorporated by reference to the Company's  Registration  Statement on Form
     S-8 filed on January 11, 2002.
(13) Incorporated by reference to the Company's  Registration  Statement on Form
     S-3 filed on March 4, 2002.
(14) Incorporated by reference to the Company's  Quarterly Report on Form 10-QSB
     filed on November 17, 2003.
(15) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended December 31, 2002, as filed on April 15, 2003.
(16) Incorporated by reference to the Company's  Quarterly  Report on Form 10QSB
     filed on September 12, 2003.
(17) Incorporated  by reference to the  Company's  Annual  Report on Form 10-KSB
     filed for the year ended December 31, 2003.
(18) Incorporated by reference to the Company's  Annual Report on Form 10-KSB/A,
     Amendment  No.2,  for the fiscal  year ended  March 31,  2002,  as filed on
     August 2, 2002.
(19) Incorporated by reference to the Company's  Quarterly  Report on Form 10QSB
     filed on August 13, 2004.
(20) Incorporated by reference to the Company's  Quarterly  Report on Form 10QSB
     filed on November 15, 2004.
(21) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
     the fiscal year ended December 31, 2004, as filed on March 24, 2005.


<PAGE>


* Filed herewith
+ Management contract for compensatory plan or arrangement


(b)  Reports on Form 8-K


On  November  8, 2004,  the Company  filed a report on Form 8-K,  reporting  the
appointment of Mr. Harry Immerman to the Board of Directors.

On November  12, 2004,  the Company  filed a report on Form 8-K,  reporting  the
award of a contract by General Dynamics.


<PAGE>


                                   SIGNATURES

In  accordance  with  Section 13 or 15(d) of the Exchange  Act,  the  registrant
caused  this  amendment  No.3 to Form  10-KSB to be signed on its  behalf by the
undersigned, thereunto duly authorized.

Dated: July 29, 2005

                                           ION NETWORKS, INC.

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