U.S. SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB
 ---
/ X /      QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----       ACT OF 1934

           For the quarterly period ended December 31, 2001

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

           For the transition period from ____________ to ____________

                          Commission File No.: 0-13117

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

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

            1551 South Washington Avenue Piscataway, New Jersey 08854
            ---------------------------------------------------------
                    (Address of Principal Executive Offices)

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

     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 ___
    ---

There were 21,138,001 shares of Common Stock outstanding as of January 22, 2002.

Transitional Small Business Disclosure Format:

Yes ___                          No   X
                                    -----


<PAGE>


                                   FORM 10-QSB

                     FOR THE QUARTER ENDED DECEMBER 31, 2001


<TABLE>
<CAPTION>

PART I.    FINANCIAL INFORMATION                                                PAGE
                                                                                ----
<S>       <C>                                                                    <C>
Item 1.   Condensed Consolidated Financial Information                           2

          Condensed Consolidated Balance Sheets as of December 31, 2001
               and March 31, 2001 (Unaudited)                                    3

          Condensed Consolidated Statements of Operations for the Three
                and Nine Months ended December 31, 2001 and 2000                 4
               (Unaudited)

          Condensed Consolidated Statement of Stockholders' Equity
               for the Nine Months ended December 31, 2001 (Unaudited)           5

          Condensed Consolidated Statements of Cash Flows for the Nine
               Months ended December 31, 2001 and 2000 (Unaudited)               6

Notes to Condensed Consolidated Financial Statements (Unaudited)                 7

Item 2.              Management's Discussion and Analysis                       12

PART II.   OTHER INFORMATION

Item 6.              Exhibits and Reports on Form 8-K                           17

SIGNATURES                                                                      18

</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION


ITEM 1.    CONDENSED CONSOLIDATED FINANCIAL INFORMATION

     The condensed  consolidated  financial statements included herein have been
prepared by the registrant  without audit pursuant to the rules and  regulations
of the Securities and Exchange Commission. Although the registrant believes that
the disclosures  are adequate to make the information  presented not misleading,
certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have been  condensed or omitted  pursuant to such rules and  regulations.  It is
suggested that these condensed financial  statements be read in conjunction with
the  audited  financial  statements  and  the  notes  thereto  included  in  the
registrant's Annual Report on Form 10-KSB for the year ended March 31, 2001.



<PAGE>

<TABLE>
<CAPTION>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)

                                                                                      December 31,         March 31,
                                                                                          2001               2001
                                                                                      ------------         ---------
<S>                                                                                      <C>             <C>
ASSETS
Current assets:
     Cash and cash equivalents .......................................................   $  1,746,632    $  5,230,833
     Accounts receivable, net of allowance for doubtful
       accounts of $148,781 and $161,000 respectively ................................      1,475,021       2,796,531
     Other receivables ...............................................................             --          13,497
     Inventory, net ..................................................................      1,436,102       1,139,448
     Prepaid expenses and other current assets .......................................        255,609         205,829
     Related party notes receivable ..................................................         98,537         897,250
                                                                                         ------------    ------------
              Total current assets ...................................................      5,011,901      10,283,388
Restricted cash ......................................................................        375,000         375,000
Property and equipment at cost, net of accumulated
     depreciation of $2,612,357 and $2,095,564 respectively ..........................        948,248       1,467,766
Capitalized software, less accumulated amortization of $3,197,791
     and $2,585,607, respectively ....................................................        967,120       1,241,495
Goodwill and other acquisition - related intangibles, less accumulated amortization of
     $963,021 and $694,444 respectively ..............................................         63,523         305,556
Other assets .........................................................................         19,588          22,683
                                                                                         ------------    ------------
           Total assets ..............................................................   $  7,385,380    $ 13,695,888
                                                                                         ============    ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
     Current portion of capital leases ...............................................   $     74,426    $     74,426
     Current portion of long-term debt ...............................................         61,320         107,026
     Accounts payable ................................................................      1,128,145       1,716,212
     Accrued expenses ................................................................        397,035         562,860
     Accrued payroll and related liabilities .........................................        668,625         416,093
     Deferred income .................................................................        179,381         178,737
     Other current liabilities .......................................................        296,782         309,977
                                                                                         ------------    ------------
           Total current liabilities .................................................      2,805,714       3,365,331
Long-term portion of capital leases ..................................................        165,775         220,966
Long-term debt, net of current portion ...............................................          8,702          18,732
Commitments and contingencies (Note 10)
Stockholders' equity:
     Preferred stock, par value $.001 per share; authorized 1,000,000
         shares, none issued .........................................................             --              --
     Common stock, par value $.001 per share; authorized 50,000,000
         shares, issued and outstanding 21,124,801 at December 31, 2001; issued and
         outstanding 18,203,301 shares at March 31, 2001 .............................         21,125          18,203
     Additional paid-in capital ......................................................     40,764,831      40,191,346
     Notes receivable from officers ..................................................       (536,100)             --
     Accumulated deficit .............................................................    (35,876,878)    (30,165,045)
     Accumulated other comprehensive income ..........................................         32,211          46,355
                                                                                         ------------    ------------
Total stockholders' equity ...........................................................      4,405,189      10,090,859
                                                                                         ------------    ------------
Total liabilities and stockholders' equity ...........................................   $  7,385,380    $ 13,695,888
                                                                                         ============    ============

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                       3
<PAGE>

<TABLE>
<CAPTION>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)

                                                           For the Three Months Ended         For the Nine Months Ended
                                                                   December 31,                      December 31,
                                                               2001            2000            2001             2000
                                                               ----            ----            ----             ----
<S>                                                       <C>             <C>             <C>             <C>
Revenue ...............................................   $  2,214,216    $  3,432,572    $  5,236,038    $  8,304,574
Cost of sales .........................................      1,092,872       1,610,796       2,523,047       4,738,864
                                                          ------------    ------------    ------------    ------------
Gross margin ..........................................      1,121,344       1,821,776       2,712,991       3,565,710

     Research and development expenses ................        211,929         468,539         720,426       1,987,673
     Selling, general and administration ..............      1,870,157       2,450,863       6,405,442       9,532,008
     Restructuring, asset impairments and other charges        217,467       2,961,125         217,467       3,449,420
     Depreciation and amortization ....................        468,830         949,787       1,412,794       3,175,999
                                                          ------------    ------------    ------------    ------------
Loss from operations ..................................     (1,647,039)     (5,008,538)     (6,043,138)    (14,579,390)
Other income ..........................................        264,725              --         264,725              --
Interest income .......................................         17,932          91,756          91,714         311,172
Interest expense ......................................         (7,510)        (12,289)        (25,134)        (40,621)
                                                          ------------    ------------    ------------    ------------
Loss before income tax expense ........................     (1,371,892)     (4,929,071)     (5,711,833)    (14,308,839)
Income tax expense ....................................             --          11,291              --          53,019
                                                          ------------    ------------    ------------    ------------
Net loss ..............................................   $ (1,371,892)   $ (4,940,362)   $ (5,711,833)   $(14,361,858)
                                                          ============    ============    ============    ============

PER SHARE DATA
Net loss per share
     Basic ............................................   $      (0.07)   $      (0.27)   $      (0.31)   $      (0.87)
     Diluted ..........................................   $      (0.07)   $      (0.27)   $      (0.31)   $      (0.87)
Weighted average number of common
shares outstanding:
     Basic ............................................     18,542,991      18,077,210      18,316,943      16,598,179
     Diluted ..........................................     18,542,991      18,077,210      18,316,943      16,598,179

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                       4
<PAGE>

<TABLE>
<CAPTION>

                       ION NETWORKS, INC. AND SUBSIDIARIES
            CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   FOR THE NINE MONTHS ENDED DECEMBER 31, 2001
                                   (Unaudited)
                                                                                           Accumulated
                                                              Additional                      Other         Notes          Total
                                                               Paid-in       Accumulated   Comprehensive  Receivable   Stockholders'
                               Shares           Par Value      Capital         Deficit       Income      from Officers    Equity
                               ------           ---------      -------         -------       ------      -------------    ------

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

Net loss                                                                      (5,711,833)                              (5,711,833)

Exercise of stock options           21,500              22           4,386                                                  4,408
and warrants

Issuance of restricted shares    2,900,000           2,900         536,100                                                539,000

Notes receivable from officers                                                                          (536,100)        (536,100)

Noncash stock-based
   compensation                                                     32,999                                                 32,999

Translation adjustments                                                                      (14,144)                     (14,144)
                                ----------    ------------    ------------  ------------    --------   ----------    ------------
Balance December  31, 2001      21,124,801    $     21,125    $ 40,764,831  $(35,876,878)   $ 32,211   $ (536,100)   $  4,405,189
                                ==========    ============    ============  ============    ========   ==========    ============


The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>


                                       5
<PAGE>

<TABLE>
<CAPTION>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)

                                                                                        FOR THE NINE MONTHS ENDED
                                                                                               DECEMBER 31,
                                                                                      2001                     2000
<S>                                                                                 <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ........................................................................   $ (5,711,833)   $(14,361,858)
Adjustments to reconcile net loss to net cash used
in operating activities:
     Depreciation and amortization ..............................................      1,412,794       3,175,999
     Provision for inventory obsolescence .......................................         75,953         530,542
     Other charges ..............................................................         (9,052)      3,449,420
     Noncash stock-based compensation charges ...................................         32,999          (5,018)
Changes in operating assets and liabilities:
   (Increase) decrease in
     Accounts receivable ........................................................      1,321,510       2,576,579
     Other receivables ..........................................................         13,497       1,560,697
     Inventory ..................................................................       (372,607)     (1,318,768)
     Prepaid expenses and other  assets .........................................        (46,685)        194,715
   Increase (decrease) in
     Accounts payable and accrued expenses ......................................       (753,892)       (694,157)
     Accrued payroll and related liabilities ....................................        252,532      (1,734,116)
     Deferred income ............................................................            644        (161,447)
     Other current liabilities ..................................................        (13,195)         21,889
                                                                                    ------------    ------------
Net cash used in operating activities ...........................................     (3,797,335)     (6,765,523)

CASH FLOWS FROM INVESTING ACTIVITIES
     Acquisition of property and equipment ......................................        (30,776)       (329,759)
     Capitalized software .......................................................       (334,140)     (1,169,060)
     Related party notes receivable, net of repayments ..........................        798,713        (912,250)
     Increase in restricted cash ................................................             --        (375,000)
                                                                                    ------------    ------------
Net cash provided by (used in) investing activities .............................        433,797      (2,786,069)

CASH FLOWS FROM FINANCING ACTIVITIES
     Principal payments on debt and capital leases ..............................       (110,927)       (120,218)
     Proceeds from sales of common stock / exercise of stock options and warrants          4,408       5,323,047
                                                                                    ------------    ------------
Net cash (used in) provided by financing activities .............................       (106,519)      5,202,829
Effects of exchange rates on cash ...............................................        (14,144)             --
                                                                                    ------------    ------------
Net decrease in cash ............................................................     (3,484,201)     (4,348,763)
Cash and cash equivalents, beginning of year ....................................      5,230,833      10,381,612
                                                                                    ------------    ------------
Cash and cash equivalents, end of period ........................................   $  1,746,632    $  6,032,849
                                                                                    ============    ============

The accompanying notes are an integral part of these condensed consolidated financial statements.
</TABLE>

                                       6
<PAGE>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                         NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS
                                DECEMBER 31, 2001
                                   (Unaudited)


Note 1 - Condensed Consolidated Financial Statements:
-----------------------------------------------------

The condensed  consolidated balance sheets as of December 31, 2001 and March 31,
2001, the condensed consolidated statements of operations for the three and nine
month  periods  ended  December 31, 2001 and 2000,  the  condensed  consolidated
statements of cash flows for the nine month periods ended  December 31, 2001 and
2000 and the condensed  consolidated  statement of stockholders'  equity for the
nine month period ended  December  31, 2001,  have been  prepared by the Company
without audit. In the opinion of management, all adjustments (which include only
normal  recurring  adjustments)  necessary  for  the  fair  presentation  of the
Company's financial  position,  results of operations and cash flows at December
31, 2001 and 2000 have been made.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have  been  condensed  or  omitted.   It  is  suggested  that  these   condensed
consolidated  financial  statements  be read in  conjunction  with  the  audited
financial  statements  and notes  thereto  included in the annual report on Form
10-KSB for the year ended March 31, 2001.

During the second  quarter of fiscal 2002,  the Company  initiated an aggressive
plan to increase its revenue and reduce its  expenditures  and  operating  costs
significantly.  The Company's operating plan included certain  assumptions,  the
most  important  of which is the  attainment  of future  revenues  in the twelve
months  ending  September 30, 2002  equivalent to those  attained in fiscal year
2001 of  approximately  $11  million.  Based on its  performance  in the quarter
ending  December 31,  2001,  analysis of its sales  pipeline  and the  Company's
expectation of sequential continued growth, the Company believes it is on target
to achieve such revenues.  As a result,  the Company  believes that it will have
sufficient cash to fund its operations for the next twelve months.  However,  to
the extent that revenues in the next 12 months fall below those  achieved in all
of fiscal year 2001,  the Company may have to (i) modify its operating  plan and
scale back its  expenditures for personnel and other operating costs in order to
preserve  cash;  and/or (ii) raise  additional  funds through equity and/or debt
financing.  In addition,  the Company is presently  evaluating the need to raise
additional  funds through debt or equity  financing to grow its business through
expansion  and/or  through  acquisitions.  There  can be no  assurance  that the
Company  will be able to obtain  any such  financing,  or that  such  additional
financing can be obtained on terms acceptable to the Company.


                                       7
<PAGE>

Note 2 - Restricted Cash:
-------------------------

Due to the  expiration of the Company's $1.5 million line of credit on September
30, 2000, the Company pledged  $375,000 on September 7, 2000 as collateral on an
outstanding  letter of credit related to the required  security  deposit for the
Company's  Piscataway,  New  Jersey  facility.  Accordingly,  $375,000  has been
reflected  as  restricted  cash  and is  classified  as a  non-current  asset at
December 31, 2001 and March 31, 2001.

Note 3 - Inventory:
-------------------

Inventory,  net of allowance for  obsolescence  of $1,647,342  and $1,571,388 at
December 31, 2001 and March 31, 2001, respectively, consists of the following:

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

Raw materials                         $  341,039               $  690,566
Work in process                            4,107                   18,440
Finished goods                         1,090,956                  430,442
                                      ----------               ----------
Total                                 $1,436,102               $1,139,448
                                      ==========               ==========


Note 4 - Earnings Per Share:
----------------------------

The  computation  of Basic  Earnings Per Share is based on the weighted  average
number of common shares  outstanding for the period.  Diluted Earnings Per Share
is based on the weighted  average  number of common shares  outstanding  for the
period  plus the  dilutive  effect of common  stock  equivalents,  comprised  of
outstanding stock options and warrants.

The following is a reconciliation  of the denominator used in the calculation of
basic and diluted earnings per share:
<TABLE>
<CAPTION>

                                               Three Months   Three Months   Nine Months    Nine Months
                                                  Ended          Ended          Ended          Ended
                                                12/31/01       12/31/00       12/31/01      12/31/00
                                               ------------   ------------   -----------    -----------

<S>                                            <C>            <C>            <C>            <C>
Weighted Average No. of Shares Outstanding     18,542,991     18,077,210     18,316,943     16,598,179
Incremental Shares for Common Equivalents         643,046        132,310        220,302      1,283,290
                                               ----------     ----------     ----------     ----------

Diluted Shares Outstanding                     19,186,037     18,209,520     18,537,245     17,881,469
                                               ==========     ==========     ==========     ==========
</TABLE>

The potential incremental common shares above were excluded from the computation
of diluted earnings per share for all periods presented, because their inclusion
would have had an antidilutive effect on earnings per share due to the Company's
net loss for each respective period.


                                       8
<PAGE>

Note 5- Comprehensive Income:
-----------------------------

The Company adopted  Statement of Financial  Accounting  Standards  ("SFAS") No.
130,  "Reporting   Comprehensive  Income".  The  following  table  reflects  the
reconciliation  between net loss per the financial  statements and comprehensive
loss.
<TABLE>
<CAPTION>

                                            Three Months      Three Months       Nine Months     Nine Months
                                                Ended             Ended             Ended           Ended
                                              12/31/01          12/31/00           12/31/01        12/31/00
                                            ------------      ------------       -----------     -----------
<S>                                        <C>               <C>               <C>               <C>
Net loss                                   $ (1,371,892)     $ (4,940,362)     $ (5,711,833)     $(14,361,858)
Effect of foreign currency translation           (1,267)          (27,923)          (14,144)          (56,046)
                                           ------------      ------------      ------------      ------------
Comprehensive loss                         $ (1,373,159)     $ (4,968,285)     $ (5,725,977)     $(14,417,904)
                                           ============      ============      ============      ============
</TABLE>

Note 6 - Restructuring, asset impairments and other charges
-----------------------------------------------------------

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

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

Included in the exit costs were  approximately  $353,000 of cash  severance  and
termination   benefits  associated  with  the  separation  of  approximately  38
employees.  All of these  affected  employees  left the  company as of March 31,
2001. All termination benefits were paid as of June 30, 2001.

In addition,  the Company made strategic  decisions to abandon certain  products
and  technologies  including  those which were  acquired in the  acquisition  of
SolCom  Systems,  Ltd.  on March 31,  1999.  The  Company  also  closed down the
research and  development  efforts at SolCom  Systems,  Ltd. and centralized the
research and development  functions at its New Jersey headquarters.  As a result
of  the  above  decisions,   the  Company  recorded  an  impairment   charge  of
approximately   $2,332,000   primarily   relating  to  the  abandonment  of  the
capitalized core technology from this acquisition and other existing capitalized
software. An additional impairment charge of approximately $870,000 was recorded
to write-off the remaining  goodwill  from the Company's  acquisition  of SolCom
Systems,  Ltd. in March 1999 which was being amortized over a three year period.
Additionally,  the Company recorded an impairment in the amount of approximately
$209,000 on fixed assets previously used in the manufacturing  process at SolCom
Systems,  Ltd.  As of  March  31,  2001,  all  of the  restructuring  activities
described above were completed.

In addition to the  implementation  of the above  restructuring  plan,  in early
October 2001, the Company announced the layoff of 17 employees in order to bring
its  expenses  in line  with its  anticipated  revenues.  The  Company  recorded
$217,467 of severance and  termination  related


                                       9
<PAGE>

costs.  Termination  benefits of $178,624  were paid during the third quarter of
fiscal 2002 with the balance to be paid in the fourth quarter of fiscal 2002.

Note 7 - Income Taxes:
----------------------

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

Note 8 -  New Accounting Pronouncements:
----------------------------------------

In June 1998,  The  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities."  Among other provisions,  it requires that
entities  recognize  all  derivatives  as either  assets or  liabilities  in the
statement of financial  position and measure  those  instruments  at fair value.
Gains and losses resulting from changes in the fair values of those  derivatives
would be accounted  for  depending on the use of the  derivative  and whether it
qualifies  for hedge  accounting.  This  standard,  as amended by SFAS No.  137,
"Accounting for Derivative  Instruments and Hedging  Activites - Deferral of the
Effective  Date of FASB  Statement No. 133, and Amendment of FASB  Statement No.
133",  is  effective  for the  Company as of April 1, 2001.  The  Company has no
transition adjustment as a result of adopting the standard.

In  July  2001,  the  Financial  Accounting  Standards  Board  ("FASB"),  issued
Statement  of  Financial   Accounting  Standards  ("SFAS")  No.  141,  "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". Statement No.
141 requires that all business  combinations  initiated  after June 30, 2001, be
accounted for using the purchase method of accounting.  In addition,  it further
clarifies the criteria for  recognition  of intangible  assets  separately  from
goodwill. Statement No. 142 establishes new standards for goodwill acquired in a
business  combination  and  eliminates  the  amortization  of goodwill  over its
estimated  useful  life.  Rather,  goodwill  will now be tested  for  impairment
annually, or more frequently if circumstances indicate potential impairment,  by
applying a fair value based test. The Company expects to adopt these  statements
during the first  quarter of fiscal 2003.  Management  does not believe that the
adoption  of these  standards  will  have a  material  impact  on the  Company's
financial position or results of operations.

The  Company is  currently  evaluating  the impact of  adopting  SFAS Nos.  143,
"Accounting  for Asset  Retirement  Obligations"  and 144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets" which were recently  issued by the
FASB.  These  pronouncements  will be adopted by the Company  during fiscal year
2003.

Note 9 - Related Party Transactions:
------------------------------------

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



                                       10
<PAGE>

The Former CEO  resigned  his position at the Company  effective  September  29,
2000. On October 5, 2000, the Company  entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note was amended to extend the due
date to April 30, 2001,  and to provide  that  interest on the note shall accrue
through  September  29, 2000.  The loan was  collateralized  by the receipt of a
first mortgage interest on the personal residence of the Former CEO. Pursuant to
this agreement,  the Former CEO also agreed to reimburse the Company for certain
expenses totaling $200,000,  to be paid over a period of six months ending March
31, 2001.  During the fiscal year ended March 31,  2001,  $50,000 was repaid and
$22,000  was  recorded  as a  non-cash  offset as a result of earned  but unpaid
vacation  owed to the Former CEO.  During the quarter  ended June 30,  2001,  an
additional  $15,000 was repaid.  On August 3, 2001, the Company  received a cash
payment of $777,713  from the Former CEO, in partial  payment of the  promissory
notes. The Company received two additional  payments of $3,000 each in September
and October 2001.

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

Note 10 - Commitments:
----------------------

On October 5, 2000, the Company entered into a consulting agreement with Venture
Consulting  Group, Inc. ("VCGI") whereby VCGI provided the services of Ronald C.
Sacks as Chief  Executive  Officer of the  Company,  and the  services  of three
additional  consultants.  The fees for the  consultants'  services were $500,000
over a one-year  period.  In addition,  the individual  consultants  were issued
options to purchase  240,000  shares of common stock at the fair market value on
the date of  grant.  Such  options  vested  25%  during  December  2000 with the
remaining  vesting ratably monthly from January 2001 through September 2001. The
Company recorded  compensation  expense based upon the fair value of the options
during each reporting  period  beginning in October 2000 in connection  with the
one-year vesting period.  The Company recorded  compensation  expense of $19,800
for the nine  months  ended  December  31, 2001 based upon the fair value of the
vested  options as of September 30, 2001 as  determined  using the Black Scholes
option pricing model.

Note 11 - Equity:
-----------------

Effective  October 2001, the Company  approved and granted  2,900,000  shares of
restricted stock to three  executives at fair value.  The restricted  shares are
subject to a repurchase  right which will permit the Company to  repurchase  any
shares which have not yet vested at the  effective  date of  termination  of the
employees' employment, as defined in their employment agreements,  for an amount
equal to the purchase  price per share paid by the  employees.  The Company will
receive  a series  of  interest  bearing  promissory  notes for the value of the
shares  to be  repaid  by the  employees.  The  notes  are to be  repaid  by the
employees  at the  earlier  of ten  years or the date upon  which the  employees
dispose of their  shares.  The issuance of the  restricted  shares and the notes
receivable  due  from the  employees  is  recorded  in the  Company's  financial
statements  during the quarter ended December 31, 2002.  Only the vested portion
of the shares has been included in earnings per share at December 31, 2001.



                                       11
<PAGE>

Note 12 - Subsequent Events:
----------------------------

On November 9, 2001, the Company entered into an agreement with the landlord for
its Piscataway, NJ facility to amend the Lease Agreement dated February 18, 1999
as follows:

The Company will use $250,000 of its  restricted  cash from the letter of credit
(see Note 2) towards the rent payments for 10 months starting  January 2002. The
Company will pay the remaining 50% of its rent from its general cash reserves on
a monthly  basis for this 10 month  period.  On January 10,  2002,  the Landlord
received the $250,000  from the letter of credit per the above  mentioned  lease
amendment.  The  Company  agreed to  replenish  the letter of credit by November
2003.

As of January 1, 2002, the Company entered into a memorandum of understanding to
sublease approximately 5,400 square feet of its facility to a third party tenant
for a period of 24 months.  The rent will be $5,200 per month for the first nine
months  and  $10,400  per month  for the last  fifteen  months,  but with a 100%
abatement for the first three months.  As part of the rental payment,  the third
party  tenant  will issue to the  Company  warrants  to  purchase  approximately
$77,400 worth of its common stock at an exercise  price  equivalent to the price
of the common stock in its first round of financing.


ITEM 2.     MANAGEMENT'S DISCUSSION AND ANALYSIS

A number of statements  contained in this report are forward-looking  statements
within the meaning of the Private Securities  Litigation Reform Act of 1995 that
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those expressed or implied in the applicable  statements.  These
risks and uncertainties  include, but are not limited to, those described in the
Company's  filings with the Securities and Exchange  Commission  included in its
annual report Form 10-KSB, for the fiscal year ended March 31, 2001.


                                       12
<PAGE>


RESULTS OF OPERATIONS

FOR THE THREE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SAME PERIOD IN 2000

Revenue for the three months ended December 31, 2001, was $2,214,216 compared to
revenue of  $3,432,572  for the same period in 2000, a decrease of $1,218,356 or
35.5%.  The  decrease  in revenue  was due to  reduced  order  activity  in part
attributable to the severe economic  downturn  impacting the  telecommunications
industry  as well as  continuing  residual  affects of the  September  11,  2001
tragedy.  In response to this decline in revenue,  the Company continues to take
steps to strengthen its sales force,  build sales momentum and improve its sales
pipeline.   Although  the  Company  cannot  guarantee  that  the   opportunities
identified in the pipeline will translate to increased revenue in the future, it
believes the current  level of activity in the three  months ended  December 31,
2001 is a positive sign.

Cost of sales  for the three  months  ended  December  31,  2001 was  $1,092,872
compared  to  $1,610,796  for the  same  period  in  2000.  Cost of  sales  as a
percentage of revenue for the three months ended  December 31, 2001 increased to
49.4% from 46.9% for the same period in 2000 due to an increase of approximately
$127,000 (net of write-offs) to the reserve for obsolete inventory.

Research  and  development   ("R&D")  expense,   net  of  capitalized   software
development,  for the three months ended December 31, 2001 was $211,929 compared
to  $468,539  for the same  period in 2000.  As a  percentage  of  revenue,  R&D
expenses were 9.6%  compared to 13.6% for the same period in 2000.  The decrease
in the percentage of R&D to revenue primarily reflects the completed development
of the Company's next scheduled product release and a reduction of the R&D staff
as a result of the Company's restructuring activities.

Selling, general and administrative expenses ("SG&A") for the three months ended
December 31, 2001 were $1,870,157  compared to $2,450,863 for the same period in
2000. As a percentage of revenue, SG&A is higher at 84.5% from 71.4% experienced
in the same  period  in 2000,  primarily  due to  reduced  sales  volumes.  This
reduction in expenses in dollar terms is primarily  the result of the  Company's
restructuring efforts implemented during fiscal 2001.

Depreciation and amortization  expenses - amortization of capitalized  software,
goodwill  and  other  acquisition  related  intangibles,   and  depreciation  on
equipment,  furniture  and  fixtures - was  $468,830  for the three months ended
December 31, 2001 compared to $949,787 in the same period in 2000. The decreased
expense was primarily the result of management's  decision during fiscal 2001 to
abandon  certain  of the  products  and  technology  associated  with the SolCom
acquisition.

Net loss for the three months ended December 31, 2001 was $1,371,892 compared to
a loss of $4,940,362 for the same period in 2000.  This represents a significant
year over year  improvement  despite the reduction in revenue seen this quarter.
This is  attributable  to the  Company's  focused  efforts  to reduce  expenses,
improve  operating  margins and stabilize the business  environment in line with
current market conditions.



                                       13
<PAGE>

FOR THE NINE MONTHS ENDED DECEMBER 31, 2001 COMPARED TO THE SAME PERIOD IN 2000

Revenue for the nine months ended December 31, 2001, was $5,236,038  compared to
revenue of  $8,304,574  for the same period in 2000, a decrease of $3,068,536 or
37.0%.  The  decrease in revenue  was due to reduced  order  activity  primarily
attributable to the severe economic  downturn  impacting the  telecommunications
industry  compounded  by the  September  11, 2001  tragedy.  In response to this
decline in revenue,  the Company continues to take steps to strengthen its sales
force, build sales momentum and improve its sales pipeline. Although the Company
cannot  guarantee  that  the  opportunities  identified  in  the  pipeline  will
translate to increased  revenue in the future,  it believes the current level of
activity in the three months ended December 31, 2001 is a positive sign.

Cost of  sales  for the nine  months  ended  December  31,  2001 was  $2,523,047
compared  to  $4,738,864  for the  same  period  in  2000.  Cost of  sales  as a
percentage of revenue for the nine months ended  December 31, 2001  decreased to
48.2% from  57.1% for the same  period in 2000 due to  ongoing  improvements  in
inventory management and general cost containment  strategies implemented during
the past 12 months. Included in cost of sales for the nine months ended December
31,  2001 was  approximately  $127,000  (net of  write-offs)  to the reserve for
obsolete inventory.

Research  and  development   ("R&D")  expense,   net  of  capitalized   software
development,  for the nine months ended December 31, 2001 was $720,426  compared
to  $1,987,673  for the same period in 2000.  As a  percentage  of revenue,  R&D
expenses were 13.8%  compared to 23.9% for the same period in 2000. The decrease
in the percentage of R&D to revenue primarily reflects the completed development
of the Company's next scheduled product release and a reduction of the R&D staff
as a result of the Company's restructuring activities.

Selling,  general and administrative expenses ("SG&A") for the nine months ended
December 31, 2001 were $6,405,442  compared to $9,532,008 for the same period in
2000.  As a  percentage  of  revenue,  SG&A is  higher  at  122.3%  from  114.8%
experienced in the same period in 2000,  primarily due to reduced sales volumes.
This  reduction  in  expenses  in dollar  terms is  primarily  the result of the
Company's restructuring efforts implemented during fiscal 2001.

Depreciation and amortization  expenses - amortization of capitalized  software,
goodwill  and  other  acquisition  related  intangibles,   and  depreciation  on
equipment,  furniture  and fixtures - was  $1,412,794  for the nine months ended
December  31,  2001  compared  to  $3,175,999  in the same  period in 2000.  The
decreased  expense was  primarily  the result of  management's  decision  during
fiscal 2001 to abandon  certain of the products and technology  associated  with
the SolCom acquisition.

Net loss for the nine months ended December 31, 2001 was $5,711,833  compared to
a loss of $14,361,858 for the same period in 2000. This represents a significant
year over year  improvement  despite the reduction in revenue seen this quarter.
This is  attributable  to the  Company's  focused  efforts  to reduce  expenses,
improve  operating  margins and stabilize the business  environment in line with
current market conditions.


                                       14
<PAGE>


FINANCIAL CONDITION AND CAPITAL RESOURCES

Net cash used in operating  activities during the nine months ended December 31,
2001 was $3,797,335  compared to net cash used during the same period in 2000 of
$6,765,523.  The net cash  used for the nine  months  ended  December  31,  2001
resulted  primarily  from the build-up of inventory  due to lower than  expected
revenues,  the payment of accounts payable, and the net loss incurred during the
quarter.

Net cash provided by investing  activities during the nine months ended December
31, 2001 was  $433,797  compared to net cash used during the same period in 2000
of  ($2,786,069).  The majority of this was the  collection of the related party
receivable.

Net cash used in financing  activities during the nine months ended December 31,
2001 was ($106,519) compared to net cash provided during the same period in 2000
of $5,202,829.

During the second  quarter of fiscal 2002,  the Company  initiated an aggressive
plan to increase its revenue and reduce its  expenditures  and  operating  costs
significantly.  The Company's operating plan included certain  assumptions,  the
most  important  of which is the  attainment  of future  revenues  in the twelve
months  ending  September 30, 2002  equivalent to those  attained in fiscal year
2001 of  approximately  $11  million.  Based on its  performance  in the quarter
ending  December 31,  2001,  analysis of its sales  pipeline  and the  Company's
expectation of sequential continued growth, the Company believes it is on target
to achieve such revenues.  As a result,  the Company  believes that it will have
sufficient cash to fund its operations for the next twelve months.  However,  to
the extent that revenues in the next 12 months fall below those  achieved in all
of fiscal year 2001,  the Company may have to (i) modify its operating  plan and
scale back its  expenditures for personnel and other operating costs in order to
preserve  cash;  and/or (ii) raise  additional  funds through equity and/or debt
financing.  In addition,  the Company is presently  evaluating the need to raise
additional  funds through debt or equity  financing to grow its business through
expansion  and/or  through  acquisitions.  There  can be no  assurance  that the
Company  will be able to obtain  any such  financing,  or that  such  additional
financing can be obtained on terms acceptable to the Company.

NEW ACCOUNTING PRONOUNCEMENTS

In June 1998,  The  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards  ("SFAS") No. 133,  "Accounting  for Derivative
Instruments and Hedging  Activities."  Among other provisions,  it requires that
entities  recognize  all  derivatives  as either  assets or  liabilities  in the
statement of financial  position and measure  those  instruments  at fair value.
Gains and losses resulting from changes in the fair values of those  derivatives
would be accounted  for  depending on the use of the  derivative  and whether it
qualifies  for hedge  accounting.  This  standard,  as amended by SFAS No.  137,
"Accounting for Derivative  Instruments and Hedging  Activites - Deferral of the
Effective  Date of FASB  Statement No. 133, and Amendment of FASB  Statement No.
133",  is  effective  for the  Company as of April 1, 2001.  The  Company has no
transition adjustment as a result of adopting the standard.

In  July  2001,  the  Financial  Accounting  Standards  Board  ("FASB"),  issued
Statement  of  Financial   Accounting  Standards  ("SFAS")  No.  141,  "Business
Combinations" and No. 142, "Goodwill and Other Intangible Assets". Statement No.
141 requires that all business


                                       15
<PAGE>

combinations  initiated after June 30, 2001, be accounted for using the purchase
method of  accounting.  In  addition,  it further  clarifies  the  criteria  for
recognition of intangible  assets  separately  from goodwill.  Statement No. 142
establishes  new standards for goodwill  acquired in a business  combination and
eliminates the amortization of goodwill over its estimated useful life.  Rather,
goodwill  will now be tested for  impairment  annually,  or more  frequently  if
circumstances  indicate  potential  impairment,  by  applying a fair value based
test. The Company expects to adopt these statements  during the first quarter of
fiscal 2003.  Management  does not believe that the adoption of these  standards
will have a material  impact on the Company's  financial  position or results of
operations.

The  Company is  currently  evaluating  the impact of  adopting  SFAS Nos.  143,
"Accounting  for Asset  Retirement  Obligations"  and 144,  "Accounting  for the
Impairment or Disposal of Long-Lived  Assets" which were recently  issued by the
FASB.  These  pronouncements  will be adopted by the Company  during fiscal year
2003.


                                       16
<PAGE>


PART II.  OTHER INFORMATION


ITEM 6.   EXHIBITS AND REPORTS ON FORM 8-K.


(a)    Exhibits:  None.

(b)    Reports on Form 8-K:

     (i)  On October 23, 2001,  the Company filed a current  report on Form 8-K,
          reporting  the issuance of a press  release  relating to the hiring of
          Kam Saifi as its new President and CEO.

     (ii) On October 24, 2001,  the Company filed a current  report on Form 8-K,
          reporting  the issuance of a press  release  relating to the hiring of
          Cameron  Saifi  and  David  Arbeitel,  as the  Company's  COO and CTO,
          respectively.


                                       17
<PAGE>


                                   SIGNATURES

     In accordance  with the  requirements  of the Exchange Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

DATE:  January 23, 2002


                                 ION NETWORKS, INC.


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


                                       18