|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 March 31,2005                                           
|                                                                                       
|OR                                                                                     
|                                                                                       
|o 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)  |  |                                     

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|120 Corporate Boulevard, South Plainfield, NJ 07080                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(Address of Principal Executive Offices)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(908) 546-3900                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|(Issuers telephone number, including area code)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|Indicate by check mark whether the registrant (1) has filed all reports required to be filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the proceeding
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 o.
There were 27,050,044 shares of Common Stock outstanding as of May 12, 2005.
Transitional Small Business Disclosure Format:
Yes  o  No  x

|
|



|ION NETWORKS, INC. AND SUBSIDIARY
FORM 10-QSB
FOR THE QUARTER ENDED March 31, 2005
PART I. FINANCIAL INFORMATION
|----------------------------------------------------------------------------------------------------------------
|                                                                                                                

|                                                                     | Page                                                                                                  
|-------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------
|Item 1.  Condensed Consolidated Financial Statements (Unaudited)     | 2                                                                                                     
|                                                                     |                                                                                                       
|                                                                     | Condensed Consolidated Balance Sheet as of March 31, 2005                                             
|                                                                     |                                                                                                       
|                                                                     | Condensed Consolidated Statements of Operations for the Three Months ended 
   March 31, 2005 and 2004
|                                                                     |                                                                                                       
|                                                                     | Condensed Consolidated Statements of Cash Flows for the Three Months ended
   March 31, 2005 and 2004 
|                                                                     |                                                                                                       
|                                                                     | Notes to Condensed Consolidated Financial Statements                                                  
|                                                                     |                                                                                                       
|Item 2. Managements Discussion and Analysis or Plan of Operation    | 9                                                                                                     
|                                                                     |                                                                                                       
|Item 3. Controls and Procedures                                      | 11                                                                                                    
|                                                                     |                                                                                                       
|PART II. OTHER INFORMATION                                           |                                                                                                       
|                                                                     |                                                                                                       
|Item 1.  Legal Proceedings                                           | 12                                                                                                    
|                                                                     |                                                                                                       
|Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds | 12                                                                                                    
|                                                                     |                                                                                                       
|Item 3.  Defaults Upon Senior Securities                             | 12                                                                                                    
|                                                                     |                                                                                                       
|Item 4.  Submission of Matters to a Vote of Security Holders         | 12                                                                                                    
|                                                                     |                                                                                                       
|Item 5.  Other Information                                           | 12                                                                                                    
|                                                                     |                                                                                                       
|Item 6.  Exhibits and Reports on Form 8-K                            | 13                                                                                                    
|                                                                     |                                                                                                       
|SIGNATURES                                                           | 14                                                                                                    

|1
|-



|PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 accounting principles generally accepted in the United States of America have been
condensed or omitted pursuant to such rules and regulations. It is suggested that these financial
statements be read in conjunction with the audited financial statements and the notes thereto included
in the registrants Report on Form 10-KSB for the year ended December 31, 2004.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2
|-



|ION NETWORKS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED BALANCE SHEET
As of March 31, 2005
(Unaudited)
|------------------------------------------------------------------------------------------------------
|                                                                                                      

|Assets                                                                                                                                                 |   |             |  
|------------------------------------------------------------------------------------------------------------------------------------------------------ | - | ----------- | -
|                                                                                                                                                      
|Current assets                                                                                                                                        
|Cash and cash equivalents                                                                                                                              | $ | 549,039     |  
|Accounts receivable, less allowance for doubtful accounts of $16,923                                                                                   |   | 684,302     |  
|Inventory, net                                                                                                                                         |   | 575,186     |  
|Prepaid expenses and other current assets                                                                                                              |   | 76,703      |  
|                                                                                                                                                       |   |            
|Total current assets                                                                                                                                   |   | 1,885,230   |  
|                                                                                                                                                       |   |            
|Non-current assets                                                                                                                                    
|Property and equipment, net                                                                                                                            |   | 20,002      |  
|Capitalized software, net                                                                                                                              |   | 551,791     |  
|Other assets                                                                                                                                           |   | 12,836      |  
|                                                                                                                                                       |   |            
|Total assets                                                                                                                                           | $ | 2,469,859   |  
|                                                                                                                                                       |   |            
|Liabilities and Stockholders Equity                                                                                                                   |   |            
|Current liabilities                                                                                                                                    |   |            
|Current portion of long-term debt                                                                                                                      | $ | 2,526       |  
|Accounts payable                                                                                                                                       |   | 345,015     |  
|Accrued expenses                                                                                                                                       |   | 379,564     |  
|Accrued payroll and related liabilities                                                                                                                |   | 191,143     |  
|Deferred income                                                                                                                                        |   | 111,088     |  
|Sales tax payable                                                                                                                                      |   | 2,303       |  
|Other current liabilities                                                                                                                              |   | 10,000      |  
|                                                                                                                                                       |   |            
|Total current liabilities                                                                                                                              |   | 1,041,639   |  
|                                                                                                                                                       |   |            
|Long term liabilities                                                                                                                                 
|Convertible debenture                                                                                                                                  |   | 206,384     |  
|Long term debt, net of current portion                                                                                                                 |   | 6,349       |  
|                                                                                                                                                       |   |            
|Total long term liabilities                                                                                                                            |   | 212,733     |  
|                                                                                                                                                       |   |            
|                                                                                                                                                       |   |             |  
|Commitments and contingencies                                                                                                                          |   |             |  
|                                                                                                                                                       |   |             |  
|Stockholders Equity                                                                                                                                   |   |             |  
|Preferred stock - par value $.001 per share; authorized 1,000,000 shares; 200,000
   shares designated Series A; 155,557 shares issued and outstanding |   | 156         |  
|Common stock - par value $.001 per share; authorized 50,000,000 shares; 27,050,044 shares
   issued and outstanding                                    |   | 27,051      |  
|Additional paid-in capital                                                                                                                             |   | 44,877,158  |  
|Accumulated deficit                                                                                                                                    |   | (43,688,878 | )
|                                                                                                                                                       |   |            
|Total stockholders equity                                                                                                                             |   | 1,215,487   |  
|                                                                                                                                                       |   |            
|                                                                                                                                                       |   |             |  
|Total liabilities and stockholders equity                                                                                                             | $ | 2,469,859   |  
|                                                                                                                                                       |   |            

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

|3
|-



|ION NETWORKS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|--------------------------------------------------------------------------------------------
|                                                                                            

|                                                                                                                                                     | Three Months
      Ended
          
      March 31,
      2005 |            | Three Months
      Ended
          
      March 31, 
      2004 |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- | ---------- | --------------------------------------------------------------- | -
|
|                                                                                                                                                    
|Net sales                                                                                                                                            | $                                                              | 932,431    |                                                                 | $
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Cost of sales                                                                                                                                        |                                                                | 213,736    |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Gross margin                                                                                                                                         |                                                                | 718,695    |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Research and development expenses                                                                                                                    |                                                                | 154,069    |                                                                 |  
|Selling, general and administrative expenses, including $58,750 of
   non-cash stock based compensation for the three months
   ended March 31, 2004 |                                                                | 656,427    |                                                                 |  
|Depreciation and amortization expenses                                                                                                               |                                                                | 33,413     |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Total operating expenses                                                                                                                             |                                                                | 843,909    |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Loss from operations                                                                                                                                 |                                                                | (125,214   | )                                                               |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Other income                                                                                                                                         |                                                                | 15,339     |                                                                 |  
|Interest (expense)/income- related party                                                                                                             |                                                                | (2,287     | )                                                               |  
|Interest income/(expense)                                                                                                                            |                                                                | 134        |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Loss before income taxes                                                                                                                             |                                                                | (112,028   | )                                                               |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Income tax expense                                                                                                                                   |                                                                | 272        |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Net loss                                                                                                                                             | $                                                              | (112,300   | )                                                               | $
|                                                                                                                                                     |                                                                |            |                                                                 |  
|                                                                                                                                                     |                                                                |            |                                                                 |  
|Per share data                                                                                                                                       |                                                                |            |                                                                 |  
|Net loss per share                                                                                                                                   |                                                                |            |                                                                 |  
|Basic
      and diluted                                                                                                                              | $                                                              | (0.01      | )                                                               | $
|                                                                                                                                                    
|Weighted average number of common shares outstanding
   Basic and diluted                                                                            |                                                                | 22,670,940 |                                                                 |  

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

|4
|-



|ION NETWORKS, INC. AND SUBSIDIARYCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|--------------------------------------------------------------------------------------------
|                                                                                            

|                                                                            | For the Three Months Ended March 31, 
      2005 |          | For the Three 
      Months Ended March 31, 
      2004 |  
|--------------------------------------------------------------------------- | ------------------------------------------------ | -------- | ------------------------------------------------------- | -
|                                                                           
|Cash flows from operating activities                                        |                                                  |          |                                                         |  
|Net loss                                                                    | $                                                | (112,300 | )                                                       | $
|                                                                            |                                                  |          |                                                         |  
|Adjustments to reconcile net loss to net cash used in operating activities: |                                                  |          |                                                         |  
|Depreciation and amortization                                               |                                                  | 33,413   |                                                         |  
|Non-cash stock-based compensation                                           |                                                  |         |                                                         |  
|Notes receivable from officers                                              |                                                  |         |                                                         |  
|Interest on convertible debt                                                |                                                  | 2,217    |                                                         |  
|Changes in operating assets and liabilities:                                |                                                  |          |                                                         |  
|Accounts receivable                                                         |                                                  | (107,911 | )                                                       |  
|Other receivables                                                           |                                                  | 2,100    |                                                         |  
|Inventory                                                                   |                                                  | (63,760  | )                                                       |  
|Prepaid expenses and other current assets                                   |                                                  | 1,733    |                                                         |  
|Other assets                                                                |                                                  |         |                                                         |  
|Accounts payable and other accrued expenses                                 |                                                  | (9,588   | )                                                       |  
|Accrued expenses                                                            |                                                  | (10,332  | )                                                       |  
|Accrued payroll and related liabilities                                     |                                                  | 31,309   |                                                         |  
|Deferred income                                                             |                                                  | (49,124  | )                                                       |  
|Sales tax payable                                                           |                                                  | (3,772   | )                                                       |  
|                                                                            |                                                  |          |                                                         |  
|Net cash (used in) provided by operating activities                         |                                                  | (286,015 | )                                                       |  
|                                                                            |                                                  |          |                                                         |  
|                                                                           
|Cash flows from investing activities                                        |                                                  |          |                                                         |  
|Acquisition of property and equipment                                       |                                                  | (10,686  | )                                                       |  
|Capitalized software expenditures                                           |                                                  | (176,321 | )                                                       |  
|                                                                            |                                                  |          |                                                         |  
|Net cash used in investing activities                                       |                                                  | (187,007 | )                                                       |  
|                                                                            |                                                  |          |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|Cash flows from financing activities                                        |                                                  |          |                                                         |  
|Principal payments on debt and capital leases                               |                                                  | (376     | )                                                       |  
|Advances from related parties                                               |                                                  | 110,500  |                                                         |  
|Repayment of advances from related parties                                  |                                                  | (110,500 | )                                                       |  
|Proceeds from issuance of common stock                                      |                                                  | 735,000  |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|Net cash provided by (used in) financing activities                         |                                                  | 734,624  |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|Net increase in cash and cash equivalents                                   |                                                  | 261,602  |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|Cash and cash equivalents - beginning of period                             |                                                  | 287,437  |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|                                                                            |                                                  |          |                                                         |  
|Cash and cash equivalents - end of period                                   | $                                                | 549,039  |                                                         | $
|                                                                            |                                                  |          |                                                         |  

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

|5
|-



|ION NETWORKS, INC. AND SUBSIDIARYNOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
March 31, 2005
(Unaudited)
NOTE 1 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
ION Networks, Inc (ION or the Company) designs, develops, manufactures and

sells security solutions that protect enterprise network administrative interfaces from improper,

unauthorized or otherwise undesirable access from external and internal sources. Administrative
interfaces
are the network access points used by highly trained technical individuals who are charged
with the
responsibilities of maintaining and supporting the networks and devices employed within
the networks
such as servers, routers, PBXs and similar network equipment. These technicians may
be employees
of the enterprise or employed by third parties such as managed service providers,
consultants, device
vendors or application developers. In all cases, they are considered trusted
insiders
since in order to perform their jobs; permission to enter and work within the network
must be granted.
The Companys solution, comprised of centralized management and control software,
administrative
security appliances and soft tokens, are designed to provide secure, auditable access
to all administrative
interfaces and monitored security once working within the network. Service
Providers, Enterprises
and Governmental Agencies utilize the ION solution globally in their voice,
data and converged environments,
to establish and maintain security policies while providing the
support and maintenance required
of networks and their devices.
The Company is a Delaware corporation founded in 1999 through the combination of two companies - MicroFrame

(MicroFrame), a New Jersey Corporation (the predecessor entity to the Company, originally

founded in 1982), and SolCom Systems Limited (SolCom), a Scottish corporation located

in Livingston, Scotland (originally founded in 1994). The Scottish corporation was dissolved in
2003.
The Companys principal objective was to address the need for security and network management

and monitoring solutions, primarily for the PBX-based telecommunications market, resulting in a
significant
portion of our revenues being generated from sales to various telecommunications companies.
The condensed consolidated balance sheet as of March 31, 2005, the condensed consolidated statements
of operations for the three month periods ended March 31, 2005 and 2004 and the consolidated statements
of cash flows for the three month periods ended March 31, 2005 and 2004, have been prepared by the
Company without audit. In the opinion of management, all adjustments (which include normal recurring
adjustments) necessary to make the Companys financial position, results of operations and cash
flows at March 31, 2005 and 2004 not misleading have been made. The results of operation for the
three months ended March 31, 2005 and 2004 are not indicative of a full year or any other interim period.
Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been
condensed or omitted. It is suggested that these financial statements be read in conjunction with
the audited financial statements and notes there to included in the report on Form 10-KSB for the
year ended December 31, 2004.
At March 31, 2005, the Company had an accumulated deficit of $43,688,878 and positive working capital
of $843,591. The Company also realized net loss of $112,300 for the three months ended March 31,
2005. While the Companys cash position has improved from $287,437 at December 31,2004 to $549,039
as of March 31,2005, the Company continues to have a delicate cash position and while the future
viability of the organization has significantly improved, it is necessary for it to continue to strictly
manage expenditures and to increase product revenues despite the cash infusion of $750,000 (less
approximately $15,000 for expenses related to the transaction) on March 31, 2005 from the sale of
4,411,765 shares of common stock and warrants to purchase an additional 2,205,882 shares of common stock.
NOTE 2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of ION Networks,
Inc. and a single Subsidiary in 2005 and 2004. 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.
Capitalized Software
The Company capitalizes computer software development costs in accordance with the provisions of Statement
of Financial Accounting Standards No. 86, Accounting for the Costs of Computer Software to
be Sold, Leased or Otherwise Marketed (SFAS No. 86). SFAS No. 86 requires that
the Company capitalize computer software development costs upon the establishment of the technological
feasibility of a product, to the extent that such costs are expected to be recovered through future
sales of the product. Management is required to use professional judgment in determining whether
development costs meet the criteria for immediate expense or capitalization. These costs are amortized
by the greater of the amount computed using (i) the ratio that current gross revenues from the sales of software bear to the total of current and anticipated future gross
revenues from the sales of that software, or (ii) the straight-line method over the estimated useful
life of the product. As a result, the carrying amount of the capitalized software costs may be reduced
materially in the near term.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|6
|-



|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.
Amortization expense totaled $30,881 and $90,483 for the three month periods ending March 31, 2005
and 2004, respectively
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 12,766,522 and 6,247,380 at March 31, 2005 and 2004 are excluded
from the computation of diluted net loss per share as their inclusion would be antidilutive.
Stock Compensation
The Company accounts for stock-based employee compensation arrangements in accordance with provisions
of Accounting Principals Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and 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. We account for equity instruments issued to non-employee vendors in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue No. 96-18,
Accounting for Equity Instruments That are Issued to Other Than Employees from Acquiring, or
in Conjunction with Selling, Goods and Services. All transactions in which goods or services
are the consideration received for the issuance of equity instruments are accounted for based on
the fair value of the consideration received or the fair value of the equity instrument issued, whichever
is more reliably measurable. The measurement date of the fair value of the equity instrument issued
is the date on which the counter partys performance is complete.
If the Company had elected to recognize compensation costs based on the fair value at the date of grant
for awards for the three months ended March 31, 2005 and 2004, consistent with the provisions of
SFAS No. 123, the Companys net loss and basic and diluted net loss per share for the three
month period ended March 31, 2005 and 2004 would have increased to the pro forma amounts indicated
below:
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|                                                                                 | Three months ended 
      March 31, 2005
      (Unaudited) |          | Three months ended
      March 31, 2004 
      (Unaudited) |  
|-------------------------------------------------------------------------------- | ---------------------------------------------------------- | -------- | ---------------------------------------------------------- | -
|                                                                                 |                                                            |          |                                                            |  
|Net loss as reported                                                             | $                                                          | (112,300 | )                                                          | $
|Add: Stock based compensation expense included in net loss                       |                                                            |         |                                                            |  
|Deduct: Stock based employee compensation determined 
   under fair value method |                                                            | (26,436  | )                                                          |  
|                                                                                 |                                                            |          |                                                            |  
|Pro forma net loss                                                               | $                                                          | (138,736 | )                                                          | $
|                                                                                 |                                                            |          |                                                            |  
|                                                                                 |                                                            |          |                                                            |  
|Basic and diluted net loss per share of common stock                             |                                                            |          |                                                            |  
|                                                                                 |                                                            |          |                                                            |  
|As reported                                                                      |                                                            |          |                                                            |  
|Basic and diluted                                                                | $                                                          | (0.01    | )                                                          | $
|Pro forma                                                                       
|Basic and diluted                                                                | $                                                          | (0.01    | )                                                          | $
|                                                                                 |                                                            |         

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Income Taxes
Deferred income tax assets and liabilities are computed annually based on enacted tax laws and rates
for temporary differences between the financial accounting and income tax bases of assets and liabilities.
A valuation allowance is established, when necessary, to reduce deferred income tax assets to the
amount that is more likely than not to be realized.
Warranty Costs
The Company estimates its warranty costs based on historical warranty claim experience. Future costs
for warranties applicable to sales recognized in the current period are charged to cost of sales.
The warranty accrual is reviewed quarterly to reflect the remaining obligation. Adjustments are made when actual warranty claim experience differs from estimates. The
warranty accrual included in other current liabilities as of March 31, 2005 is $10,000.

|7
|-



|NOTE 3 - INVENTORY
Inventory, net of allowance for obsolescence of $145,031, at March 31, 2005 consists of the following:
|-------------------------------------------------------------------------------------------------------------------------
|                                                                                                                         

| | Raw materials    | $ | 189,213 | 
| | ---------------- | - | ------- | 
| | Work-in-progress |   | 466     | 
| | Finished goods   |   | 385,507 | 
| |                  |   |        
| |                  |   |         | 
| |                  | $ | 575,186 | 
| |                  |   |        

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|NOTE 4  STOCKHOLDERS EQUITY
On February 22, 2005, the Company converted 2,778 shares of preferred stock into 27,780 of common stock.
On March 31, 2005, the Company 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 proceeds from the
sale was $750,000 less approximately $15,000 for expenses related to the transaction. 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. The registration statement must be declared
effective no later than the earlier of five business days after the SEC determines that no review
of the registration statement will be made and 120 days after March 30, 2005. If the Company fails
to meet these registration obligations or to maintain the effectiveness of the registration statement
as required under the terms of the Agreements, the Company will be obligated to make certain cash
liquidated damage payments to the investors.

|8
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|ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
OVERVIEW
ION Networks, Inc (ION or the Company) designs, develops, manufactures and

sells security solutions that protect enterprise network administrative interfaces from improper,

unauthorized or otherwise undesirable access from external and internal sources. Administrative
interfaces
are the network access points used by highly trained technical individuals who are charged
with the
responsibilities of maintaining and supporting the networks and devices employed within
the networks
such as servers, routers, PBXs and similar network equipment. These technicians may
be employees
of the enterprise or employed by third parties such as managed service providers,
consultants, device
vendors or application developers. In all cases, they are considered trusted
insiders
since in order to perform their jobs; permission to enter and work within the network
must be granted.
The Companys solution, comprised of centralized management and control software,
administrative
security appliances and soft tokens, are designed to provide secure, auditable access
to all administrative
interfaces and monitored security once working within the network. Service
Providers, Enterprises
and Governmental Agencies utilize the ION solution globally in their voice,
data and converged environments,
to establish and maintain security policies while providing the
support and maintenance required
of networks and their devices.
The Company is a Delaware corporation founded in 1999 through the combination of two companies - MicroFrame

(MicroFrame), a New Jersey Corporation (the predecessor entity to the Company, originally

founded in 1982), and SolCom Systems Limited (SolCom), a Scottish corporation located

in Livingston, Scotland (originally founded in 1994). The Scottish corporation was dissolved in
2003.
The Companys principal objective was to address the need for security and network management

and monitoring solutions, primarily for the PBX-based telecommunications market, resulting in a
significant
portion of our revenues being generated from sales to various telecommunications companies.
RESULTS OF OPERATIONS
For the three months ended March 31, 2005 compared to the same period in 2004
Net sales for the three month period ended March 31, 2005, was $932,431 compared to net sales of $904,961
for the same period in 2004, an increase of $27,470 or 3.04%. The increase in sales is primarily
attributable to billings for hardware, software and professional services from certain government
contracts in the three month period ended March 31, 2005 which were not billed in the same period
of the prior year.
Cost of sales for the three month period ended March 31, 2005 was $213,736 compared to $297,152 for
the same period in 2004. Cost of sales as a percentage of net sales for the three months ended March
31, 2005 decreased to 22.9% from 32.8% for the same period in 2004, resulting therefore in gross
margins increasing to 77.1% from 67.2% as compared to the prior year. The decrease in cost of sales
and the increase in gross margin in the first quarter of 2005 is mainly due to increase in the sales
mix of high margin professional services, software, repair and maintenance revenues rather than lower
margined appliance products which were a much higher component of the sales mix in the same period
last year.
Research and development expense, net of capitalized software development, for the three month period
ended March 31, 2005 was $154,069 compared to $120,269 for the same period in 2004 or an increase
of $33,800. The increase is due to headcount additions from 7 to 10 and outside services for development
activities related to the Companys new products.
Selling, general and administrative (SG&A) expenses for the three months ended March
31, 2005 were $656,427 compared to $712,537 for the same period in 2004, a decrease of $56,110.
The decline in SG&A expenses is due primarily to reduced overhead items such as, insurance and
professional services offset in part by higher payroll related expenses. In addition, there was a
charge to SG&A expenses during the three month period ended March 31, 2004 for $58,750 to account
for stock compensation for options granted and no such charge in the three month period ended March
31, 2005.
Depreciation and amortization expenses was $33,413 for the three months ended March 31, 2005 compared
to $115,728 in the same period in 2004. The decrease was due to a reduction of capitalized software
and other intangibles subject to amortization in the three month period ended March 31, 2005 as compared
to the same period in 2004.
Net loss for the three months ended March 31, 2005 was $112,300 compared to $322,808 for the three
months ended March 31, 2004. The reduced loss of $210,508 is primarily due the higher gross margins
earned from the product mix, and reduced operating expenses.
FINANCIAL CONDITION AND CAPITAL RESOURCES
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|The Companys working capital balance as of March 31, 2005 was $843,591 compared to $372,861 at December 31, 2004. The increase was due primarily to cash realized from the sale of 4,411,764 shares of common stock and warrants to purchase an additional 2,205,882 shares of common stock for $750,000 on March 31, 2005.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|Net cash used by operating
activities during the three months ended March 31, 2005 was $286,015 compared to net cash provided
during the same period in 2004 of $189,463 or a difference of $475,478. This difference was due primarily
to increases in inventory, accounts receivable, deferred income and decreases in non-cash items such
as stock based compensation, depreciation and amortization.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

|9
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|Net cash used in investing activities during the three months ended March 31, 2005 was $187,007 compared
to net cash used during the same period in 2004 of $42,950. This increase of $144,057 was primarily
due to increased capitalized software expenditures from $37,905 the three months ended March 31,
2004 to $176,321 for the same period in 2005.
Net cash provided by financing activities during the three months ended March 31, 2005 was $734,624
compared to net cash used during the same period in 2004 of $23,554, or an increase of $58,178. The
increase was due primarily to cash realized from the sale of 4,411,764 shares of common stock and
warrants to purchase an additional 2,205,882 shares of common stock for $750,000 (less approximately
$15,000 for expenses related to the transaction) by the Company on March 31, 2005.
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10
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|ITEM 3. CONTROLS AND PROCEDURES
Prior to the filing of this report, the Companys management carried out an evaluation, under
the supervision and with the participation of its Chief Executive Officer and the Chief Financial
Officer, of the effectiveness of the design and operation of the Companys disclosure controls
and procedures as of the end of the period covered by this report. Based on this evaluation, the
Chief Executive Officer and the Chief Financial Officer concluded that the Companys controls
and procedures were effective to ensure that information required to be disclosed by the Company
in the reports filed by it under the Securities and Exchange Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the SECs rules and
forms, and include controls and procedures designed to ensure that information required to be disclosed
by the Company in such reports is accumulated and communicated to the Companys management,
including the Chief Executive Officer and Chief Financial Officer of the Company, as appropriate
to allow timely decisions regarding required disclosure.
There has been no significant change in the companys internal control over financial reporting
that occurred during the Companys most recent fiscal quarter that has materially affected or
is reasonably likely to affect its internal control over financial reporting.
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|11
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|PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
While the Company is occasionally involved in various claims and legal actions in the ordinary course
of business, it is not currently involved in any legal proceedings.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12
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|ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
|-----------------------------------------
|                                         

| | Exhibit
    No. |  | Description                                               
| | --------------- |  | ----------------------------------------------------------
| |                 |  |                                                           
| |                 |  |                                                           
| | 31.1            |  | Section 302 Certification of the Chief Executive Officer.*
| |                 |  |                                                           
| | 31.2            |  | Section 302 Certification of the Chief Financial Officer.*
| |                 |  |                                                           
| | 32.1            |  | Section 906 Certification of the Chief Executive Officer.*
| |                 |  |                                                           
| | 32.2            |  | Section 906 Certification of the Chief Financial Officer.*
| |                 |  |                                                           

|* Filed herewith
|----------------

|13
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|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: May 12, 2005
ION NETWORKS, INC.
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                     

| |                                            
| | -------------------------------------------
| | /s/ Norman E. Corn                         
| |                                            
| | Norman E. Corn, Chief Executive Officer    
| |                                            
| |                                            
| | s/ Patrick E. Delaney                      
| |                                            
| | Patrick E. Delaney, Chief Financial Officer

|14
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|Exhibit Index
|-------------
|             

| | Exhibit 
    No. |  | Description                                               
| | ---------------- |  | ----------------------------------------------------------
| |                  |  |                                                           
| |                  |  |                                                           
| | 31.1             |  | Section 302 Certification of the Chief Executive Officer.*
| |                  |  |                                                           
| | 31.2             |  | Section 302 Certification of the Chief Financial Officer.*
| |                  |  |                                                           
| | 32.1             |  | Section 906 Certification of the Chief Executive Officer.*
| |                  |  |                                                           
| | 32.2             |  | Section 906 Certification of the Chief Financial Officer.*
| |                  |  |                                                           

|* Filed herewith
|----------------

|15
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