U.S. SECURITIES AND EXCHANGE COMMISSION

                             WASHINGTON, D.C. 20549

                                   FORM 10-QSB

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

         For the quarterly period ended December 31, 2000

                                       OR

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

         For the transition period from ____________ to ____________

                          Commission File No.: 0-13117

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

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

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

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


                   21 Meridian Road, Edison, New Jersey 08820
                   ------------------------------------------
                 (Former Address of Principal Executive Offices)

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

Yes  X                       No ___
    ---

There were 18,133,635 shares of Common Stock outstanding as of January 30, 2001.

Transitional Small Business Disclosure Format:

Yes ___                      No   X
                                -----

<PAGE>


                       ION NETWORKS, INC. AND SUBSIDIARIES

                                   FORM 10-QSB

                     FOR THE QUARTER ENDED DECEMBER 31, 2000
<TABLE>
<CAPTION>
PART I.  FINANCIAL INFORMATION                                                                  PAGE
                                                                                                ----
<S>            <C>                                                                                <C>
Item 1.           Condensed Consolidated Financial Information                                    2

                  Condensed Consolidated Balance Sheets as of December 31, 2000
                      and March 31, 2000 (Unaudited)                                              3

                  Condensed Consolidated Statements of Operations for the Three
                      and Nine Months ended December 31, 2000 and December 31, 1999
                      (Unaudited)                                                                 4

                  Condensed Consolidated Statement of Stockholders' Equity
                      for the Nine Months ended December 31, 2000 (Unaudited)                     5

                  Condensed Consolidated Statements of Cash Flows for the Nine
                      Months ended December 31, 2000 and December 31, 1999                        6

                  Notes to Condensed Consolidated Financial Statements (Unaudited)                7

Item 2.           Management's Discussion and Analysis                                            11

PART II. OTHER INFORMATION

Item 4.           Submission of Matters to a Vote of Security Holders                             17

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

SIGNATURES                                                                                        18
</TABLE>

<PAGE>

                          PART I. FINANCIAL INFORMATION

ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL INFORMATION
         --------------------------------------------

         The condensed  consolidated  financial  statements included herein have
been  prepared  by the  registrant  without  audit  pursuant  to the  rules  and
regulations of the Securities and Exchange  Commission.  Although the registrant
believes that the disclosures are adequate to make the information presented not
misleading,  certain information and footnote  disclosures  normally included in
financial  statements  prepared in accordance with generally accepted accounting
principles   have  been  condensed  or  omitted   pursuant  to  such  rules  and
regulations.  It is suggested that these condensed financial  statements be read
in  conjunction  with the audited  financial  statements  and the notes  thereto
included  in the  registrant's  Annual  Report on Form 10-KSB for the year ended
March 31, 2000.


<PAGE>
                       ION NETWORKS, INC. AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                     December 31,              March 31,
                                                                                         2000                     2000
                                                                               ---------------------     ------------------
ASSETS
Current assets:
<S>                                                                            <C>                       <C>
    Cash and cash equivalents...............................................   $           6,032,849     $       10,381,612
    Accounts receivable, net of allowance for doubtful
      accounts of $162,408 and $283,607, respectively.......................               1,992,967              4,569,546
    Other receivables ......................................................                       -              1,560,697
    Inventory, net..........................................................               2,712,897              1,924,671
    Prepaid expenses and other current assets...............................                 195,094                602,874
                                                                               ---------------------     ------------------
             Total current assets...........................................              10,933,807             19,039,400
Restricted cash.............................................................                 375,000                      -
Property and equipment at cost, net of accumulated
    depreciation of $1,935,560 and $1,381,601, respectively.................               1,552,269              2,146,956
Capitalized software, less accumulated amortization of $5,590,484
    and $4,259,851, respectively............................................               1,778,170              4,185,911
Goodwill and other acquisition - related intangibles, less accumulated
    amortization of $1,705,744 and $795,226, respectively...................                 388,889              1,938,716
Related party notes receivable..............................................                 912,250                      -
Other assets................................................................                  82,280                 79,258
                                                                               ---------------------     ------------------
         Total assets ......................................................   $          16,022,665     $       27,390,241
                                                                               =====================     ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
    Current portion of capital leases.......................................   $              67,900     $           67,900
    Current portion of long-term debt.......................................                  96,000                 96,000
    Accounts payable and accrued expenses...................................               1,960,949              2,632,135
    Accrued payroll and related liabilities.................................                 802,785              2,139,524
    Deferred income.........................................................                 114,210                275,657
    Other current liabilities...............................................                 373,982                352,093
                                                                               ---------------------     ------------------
         Total current liabilities..........................................               3,415,826              5,563,309
Long-term portion of capital leases.........................................                 263,019                302,866
Long-term debt, net of current portion......................................                  47,758                128,129
Commitments and contingencies (Note 11)
Stockholders' equity:
    Preferred stock, par value $.001 per share; authorized 1,000,000
        shares, none issued.................................................                       -                      -
    Common stock, par value $.001 per share; authorized 50,000,000
        shares,  issued and outstanding  18,077,210 shares at December 31, 2000;
        issued 15,111,617 shares and outstanding 15,049,586 shares at
        March 31, 2000......................................................                  18,077                 15,112
    Additional paid-in capital..............................................              40,171,072             35,063,207
    Accumulated deficit.....................................................             (27,850,237)           (13,488,379)
    Accumulated other comprehensive (loss) income...........................                 (42,850)                13,196
                                                                               ---------------------     ------------------
                                                                                          12,296,062             21,603,136
Less-Treasury stock 62,031 shares, at cost at
     March 31, 2000.........................................................                       -               (207,199)
                                                                               ---------------------     ------------------
Total stockholders' equity..................................................              12,296,062             21,395,937
                                                                               ---------------------     ------------------
Total liabilities and stockholders' equity..................................   $          16,022,665     $       27,390,241
                                                                               =====================     ==================
</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       3
<PAGE>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (Unaudited)
<TABLE>
<CAPTION>

                                                                 For the Three Months Ended              For the Nine Months Ended
                                                                         December 31,                           December 31,
                                                                   2000              1999               2000                1999
                                                                   ----              ----               ----                ----
<S>                                                      <C>                 <C>               <C>                <C>
Revenue................................................  $       3,432,572   $     6,338,988   $      8,304,574   $      17,020,334
Cost of sales..........................................          1,610,796         2,376,852          4,738,864           6,032,612
                                                         -----------------   ---------------   ----------------    ----------------
Gross margin...........................................          1,821,776         3,962,136          3,565,710          10,987,722

     Research and development expenses.................            707,408         1,251,498          2,973,966           2,991,365
     Selling, general and administration...............          2,211,994         2,549,829          8,545,715           7,569,472
     Restructuring, asset impairments and other charges          2,961,125                 -          3,449,420                   -
     Depreciation and amortization.....................            949,787         1,016,833          3,175,999           2,956,653
                                                         -----------------   ---------------   ----------------    ----------------
Loss from operations...................................         (5,008,538)         (856,024)       (14,579,390)         (2,529,768)
Interest income........................................             91,756            75,020            311,172             123,679
Interest (expense).....................................            (12,289)          (17,938)           (40,621)           (171,446)
                                                         -----------------   ---------------   ----------------    ----------------
Loss before income tax expense.........................         (4,929,071)         (798,942)       (14,308,839)         (2,577,535)
                                                         -----------------   ---------------   ----------------    ----------------
Income tax expense.....................................             11,291               ---             53,019                 ---
                                                         -----------------   ---------------   ----------------    ----------------
Net loss...............................................  $      (4,940,362)  $     (798,942)        (14,361,858)   $     (2,577,535)
                                                         =================   ===============   ================    ================

PER SHARE DATA
Net loss per share

     Basic.............................................  $         (0.27)  $           (0.06)  $           (0.87)  $          (0.22)
     Diluted...........................................  $         (0.27)  $           (0.06)  $           (0.87)  $          (0.22)

Weighted average number of common
shares outstanding:

     Basic.............................................       18,077,210          13,378,574          16,598,179         11,499,791
     Diluted...........................................       18,077,210          13,378,574          16,598,179         11,499,791
</TABLE>

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

                                       4
<PAGE>


                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
                   FOR THE NINE MONTHS ENDED DECEMBER 31, 2000
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                      Accumulated
                                                       Additional                        Other                          Total
                                                        Paid-in      Accumulated     Comprehensive     Treasury     Stockholders'
                               Shares     Par Value     Capital        Deficit       (Loss) Income       Stock         Equity
                             ----------   ---------   ------------  -------------   -------------    -----------    ------------
<S>                          <C>          <C>         <C>           <C>             <C>              <C>            <C>
Balance March 31, 2000       15,111,617   $  15,112   $ 35,063,207  $ (13,488,379)  $      13,196    $  (207,199)   $ 21,395,937

Net loss                                                              (14,361,858)                                   (14,361,858)

Exercise of stock options
  and warrants                  108,451         108        322,939                                                       323,047

Issuances of common stock     2,857,142       2,857      4,789,944                                       207,199       5,000,000

Noncash stock-based
  compensation                        -           -         (5,018)                                                       (5,018)

Translation adjustments                                                                   (56,046)                       (56,046)

                             ----------   ---------   ------------  -------------   -------------    -----------    ------------
Balance December 31, 2000    18,077,210   $  18,077   $ 40,171,072  $ (27,850,237)  $     (42,850)   $         -    $ 12,296,062
                             ==========   =========   ============  =============   =============    ===========    ============
</TABLE>
  The accompanying notes are an integral part of these condensed consolidated
                             financial statements.

                                       5
<PAGE>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (Unaudited)
<TABLE>
<CAPTION>
                                                                                 FOR THE NINE MONTHS ENDED
                                                                                       DECEMBER 31,
                                                                                2000                  1999
                                                                        ------------------    ------------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                     <C>                   <C>
Net loss.............................................................   $      (14,361,858)   $       (2,577,535)
Adjustments to reconcile net (loss) to net cash used
in operating activities:
    Depreciation and amortization....................................            3,175,999             2,956,653
    Restructuring, asset impairments and other charges...............            3,449,420                     -
    Provision for doubtful accounts..................................                    -               133,607
    Provision for inventory obsolescence.............................              530,542                     -
    Provision for product warranty...................................                    -                30,000
    Noncash stock-based compensation charges.........................               (5,018)              144,000

Changes in operating assets and liabilities:

  (Increase) decrease in
    Accounts receivable..............................................            2,576,579            (1,097,774)
    Other receivables................................................            1,560,697                     -
    Inventory........................................................           (1,318,768)              965,299
    Prepaid expenses and other current assets........................              197,737               279,627
    Other assets.....................................................               (3,022)                6,640

  Increase (decrease) in
    Accounts payable and accrued expenses............................             (694,157)           (1,697,758)
    Accrued payroll and related liabilities..........................           (1,734,116)             (262,832)
    Deferred income..................................................             (161,447)              (92,136)
    Other current liabilities........................................               21,889            (1,521,639)
                                                                        ------------------    ------------------
Net cash used in operating activities................................           (6,765,523)           (2,733,848)

CASH FLOWS FROM INVESTING ACTIVITIES

    Acquisition of property and equipment............................             (329,759)           (1,043,336)
    Capitalized software.............................................           (1,169,060)           (1,113,662)
    Proceeds from the sales of software licenses                                         -               285,414
    Related party notes receivable, net of repayments................             (912,250)                    -
    Restricted cash..................................................             (375,000)                    -
                                                                        ------------------    ------------------
Net cash used in investing activities................................           (2,786,069)           (1,871,584)

CASH FLOWS FROM FINANCING ACTIVITIES

    Borrowings on revolving line of credit...........................                    -               253,720
    Proceeds from debt...............................................                    -               450,000
    Principal payments on debt and capital leases....................             (120,218)           (2,541,560)
    Proceeds from sales of common stock / exercise of stock options
    and warrants.....................................................            5,323,047            18,131,596
                                                                        ------------------    ------------------
Net cash provided by financing activities............................            5,202,829            16,293,756
                                                                        ------------------    ------------------
Net (decrease) increase in cash......................................           (4,348,763)           11,688,324
Cash and cash equivalents, beginning of year.........................           10,381,612               165,994
                                                                        ------------------    ------------------
Cash and cash equivalents, end of period.............................   $        6,032,849    $       11,854,318
                                                                        ==================    ==================
</TABLE>

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

                                       6
<PAGE>

                       ION NETWORKS, INC. AND SUBSIDIARIES
                         NOTES TO CONDENSED CONSOLIDATED
                              FINANCIAL STATEMENTS
                                DECEMBER 31, 2000
                                   (Unaudited)

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

The condensed  consolidated balance sheets as of December 31, 2000 and March 31,
2000, the condensed consolidated statements of operations for the three and nine
month periods  ended  December 31, 2000 and for the same periods in 1999 and the
condensed consolidated  statements of cash flows for the nine month periods then
ended  have been  prepared  by the  Company  without  audit.  In the  opinion of
management,  all adjustments  (which include only normal recurring  adjustments)
necessary for the fair presentation of the Company's financial position, results
of operations and cash flows at December 31, 2000 and 1999 have been made.

Certain  information  and footnote  disclosures  normally  included in financial
statements prepared in accordance with generally accepted accounting  principles
have  been  condensed  or  omitted.   It  is  suggested  that  these   condensed
consolidated  financial  statements  be read in  conjunction  with  the  audited
financial  statements  and notes  thereto  included in the annual report on Form
10-KSB for the year ended March 31, 2000.

During the third  quarter of fiscal 2001,  the Company  initiated a  significant
restructuring  plan to reduce operating  expenses and take the actions necessary
to ultimately  reach  profitability.  As a result of the  implementation  of the
plan, the Company expects to improve and stabilize  operating  performance as it
moves forward. Based upon this, together with current revenue assumptions in its
operating  plan, the Company  believes that it has  sufficient  cash to meet its
operating  requirements  over the next  twelve  months.  To the extent  that the
Company's  revenue  assumptions  included in its operating plan are not met, the
Company may have to raise additional equity and/or debt financing,  and may have
to curtail other  expenditures.  There can be no assurance that the Company will
be able to obtain any such financing on acceptable terms, if at all.


                                       7
<PAGE>

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

Due to the  expiration of the Company's $1.5 million line of credit on September
30, 2000, the Company pledged  $375,000 on September 7, 2000 as collateral on an
outstanding  letter of credit related to the required  security  deposit for the
Company's Piscataway, New Jersey facility.

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

Inventory,  net of  allowance  for  obsolescence  of  $813,542  and  $283,000 at
December 31, 2000 and March 31, 2000, respectively, consists of the following:

                                December 31, 2000              March 31, 2000
                                -----------------              --------------

Raw materials                         $ 990,044                     $ 782,813
Work in process                         116,827                       259,180
Finished goods                        1,606,026                       882,678
                                      ---------                       -------
Total                               $ 2,712,897                   $ 1,924,671
                                    ===========                   ===========

The Company  increased  its  allowance  for obsolete  inventory  during the nine
months to reflect a build up of certain raw materials that the Company  believes
are slow moving based on current  sales  projections  of the  ultimate  finished
products.

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

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

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

                                            Three Months      Three Months       Nine Months       Nine Months
                                               Ended             Ended              Ended             Ended
                                              12/31/00          12/31/99          12/31/00           12/31/99
                                              --------          --------          --------           --------
<S>                                          <C>              <C>                <C>               <C>
Weighted Average # of Shares                 18,077,210       13,378,574         16,598,179        11,499,791
Outstanding

Incremental Shares for Common                   132,310        3,237,113          1,283,290         3,422,688
Equivalents                                   ---------        ---------         ----------         ---------

Diluted Shares Outstanding                   18,209,520       16,615,687         17,881,469        14,922,479
                                             ==========       ==========        ===========        ==========
</TABLE>
The potential  incremental  common shares were excluded from the  computation of
diluted  earnings per share for all periods  presented,  because their inclusion
would have had an antidilutive effect on earnings per share due to the Company's
net loss for each respective period.

                                       8
<PAGE>

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

The Company adopted  Statement of Financial  Accounting  Standards  ("SFAS") No.
130,  "Reporting   Comprehensive  Income".  The  following  table  reflects  the
reconciliation  between net loss per the financial  statements and comprehensive
loss.
<TABLE>
<CAPTION>
                                                          Three            Three
                                                          Months           Months          Nine Months         Nine Months
                                                          Ended            Ended              Ended               Ended
                                                         12/31/00         12/31/99           12/31/00           12/31/99
                                                         --------         --------           --------           --------
<S>                                                    <C>                 <C>           <C>                  <C>
Net loss                                               $(4,940,362)        $(798,942)    $(14,361,858)        $(2,577,535)

Effect of foreign currency translation                     (27,923)          (18,156)         (56,046)              2,802
                                                           --------          --------        ---------              -----
Comprehensive loss                                     $(4,968,285)        $(817,098)    $(14,417,904)        $(2,574,733)
                                                       ============        ==========    =============        ============
</TABLE>

Note 6 - Stockholders' Equity
-----------------------------

On August 18, 2000, the Company sold 2,857,142 shares of Common Stock at a price
of $1.75 per share,  for total  consideration  of  $5,000,000.  Pursuant  to the
transaction, the Company has registered these shares of Common Stock for resale.

In connection with the Company's  restructuring  plans which were implemented in
the third fiscal quarter, remaining employees were issued options to purchase in
excess of 1.7 million shares of common stock at $1.125, the fair market value on
the date of the grant, November 28, 2000.

Note 7 - Restructuring, asset impairments and other charges
-----------------------------------------------------------

During the three and nine months ended December 31, 2000,  the Company  recorded
$2,961,125 and $3,449,420, respectively, of restructuring, asset impairments and
other charges.

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

As a result of the  Company's  initiatives,  the  Company  recorded  a charge of
approximately  $420,000 for restructuring  and exit costs.  Included in the exit
costs were  approximately  $397,000 of cash severance and  termination  benefits
associated  with the  separation of  approximately  38  employees.  All of these
affected  employees will have left their  positions as of January 31, 2001, with
36 employees having left the payroll by December 31, 2000.  Termination benefits
of $201,698  were paid during the third quarter of fiscal 2001 with the majority
of the balance to be paid in the fourth quarter of fiscal 2001.

In  addition,  the  Company  has made  strategic  decisions  to abandon  certain
products and

                                       9
<PAGE>

technologies  including  those which were acquired in the  acquisition of SolCom
Systems,  Ltd. on March 31, 1999.  The Company also closed down the research and
development  efforts at SolCom  Systems,  Ltd. and  centralized the research and
development  functions at the New Jersey headquarters.  As a result of the above
decisions, the Company recorded an impairment charge of approximately $1,950,000
primarily  relating to the abandonment of the  capitalized  core technology from
this  acquisition  and  other  existing  capitalized   software.  An  additional
impairment  charge of approximately  $870,000 has been recorded on the remaining
goodwill from the Company's  acquisition of SolCom  Systems,  Ltd. in March 1999
which was being depreciated over a three year period. Additionally,  the Company
recorded an impairment in the amount of  approximately  $209,000 on fixed assets
previously used in the manufacturing process at SolCom Systems, Ltd.

The  following  table  displays the  activity and balances of the  restructuring
reserve account from March 31, 2000 to December 31, 2000:
<TABLE>
<CAPTION>
------------------------- ----------------- ------------------ -------------------- -------------------
Type of Cost                   March 31,                                                   December 31,
                                    2000         Additions          Deductions                     2000
                                Balance                                                         Balance
------------------------- ----------------- ------------------ -------------------- -------------------
<S>                       <C>               <C>                <C>                  <C>
Employee Separations      $           -     $      397,377     $         201,698    $        195,679
------------------------- ----------------- ------------------ -------------------- -------------------
Facilities cost                       -             22,971                     -              22,971
------------------------- ----------------- ------------------ -------------------- -------------------
Total                     $           -     $      420,348     $         201,698    $        218,650
------------------------- ----------------- ------------------ -------------------- -------------------
</TABLE>

Note 8 - Income Taxes:
----------------------

The Company's  valuation  allowance  against its federal,  state and foreign net
operating loss carryforwards and its research and development  credits increased
by $4,072,421  during the nine months ended  December 31, 2000.  The Company has
recorded a full valuation  allowance against the federal and state net operating
loss  carryforwards  and a full  valuation  allowance  against  the  foreign net
operating loss  carryforwards  and the research and  development  credit because
management currently believes that it is more likely than not that substantially
all of the net operating loss carryforwards and credits will expire unutilized.

Note 9 -  New Accounting Pronouncements:
----------------------------------------

In December  1999,  the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 101,
"Revenue  Recognition  in Financial  Statements."  The SEC delayed the effective
date of this SAB from June 30, 2000 to the fourth quarter of fiscal 2001 for the
Company.  The  Company  has  assessed  the  impact of SAB 101 on its  results of
operations  and believes  that its results of  operations  for the quarter ended
December 31, 2000 have been  presented in accordance  with the provisions of the
SAB. The adoption of the SAB will not have an effect on the Company's  financial
statements.

                                       10
<PAGE>

Note 10 - Related Party Transactions:
-------------------------------------

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

The Former CEO  resigned  his position at the Company  effective  September  29,
2000. On October 5, 2000, the Company  entered into an agreement with the Former
CEO pursuant to which the $750,000 promissory note was amended to extend the due
date to April 30, 2001,  and to provide  that  interest on the note shall accrue
through September 29, 2000. The loan is collateralized by the receipt of a first
mortgage interest on the personal  residence of the Former CEO. Pursuant to this
agreement,  the Former CEO also  agreed to  reimburse  the  Company  for certain
expenses totaling $200,000,  to be paid over a period of six months ending March
31, 2001.  During the quarter  ended  December 31, 2000,  $35,000 was repaid and
$22,000 has been recorded as a non-cash  offset as a result of earned but unpaid
vacation  owed to the Former  CEO.  The  remaining  receivable  of  $143,000  at
December 31, 2000 is classified  within  related  party notes  receivable on the
Company's consolidated balance sheet.

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

Note 11 - Commitments:
----------------------

On October 5, 2000, the Company entered into a consulting agreement with Venture
Consulting  Group,  Inc.  ("VCGI")  whereby  VCGI is to provide the  services of
Ronald C. Sacks as Chief Executive  Officer of the Company,  and the services of
three  additional  consultants.  The  fees  for the  consultants'  services  are
$500,000 over a one-year period.  In addition,  the individual  consultants were
issued  options to purchase  240,000  shares of common  stock at the fair market
value on the date of grant.  Such options vest 25% during December 2000 with the
remaining  vesting  ratably  monthly from January  through  September  2001. The
Company  will  record  compensation  expense  based  upon the fair  value of the
options  during each  reporting  period  beginning in October 2000 in connection
with the one-year vesting period. The Company has recorded  compensation expense
of $1,926 for the quarter  ended  December 31, 2000 based upon the black scholes
fair value model for the vested options as of December 31, 2000.

ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS
          ------------------------------------

A number of statements  contained in this report are forward-looking  statements
within the meaning of the Private Securities  Litigation Reform Act of 1995 that
involve  risks and  uncertainties  that  could  cause  actual  results to differ
materially from those expressed or implied in the applicable  statements.  These
risks and uncertainties include, but are not limited to, the recent introduction
of,  and the costs  associated  with,  a new  product  line;  dependence  on the
acceptance  of this new  family of  products;  risks  related  to  technological
factors;  potential manufacturing  difficulties;  dependence on third parties; a
limited customer base; and liability risks.

                                       11
<PAGE>

RESULTS OF OPERATIONS

For the three months ended December 31, 2000 compared to the same period in 1999

Revenue for the three months ended December 31, 2000, was $3,432,572 compared to
revenue of  $6,338,988  for the same period in 1999, a decrease of $2,906,416 or
45.8%.  The decrease in revenue was  primarily  due to reduced  order  activity,
relative to the Company's peak quarter of a year ago which included revenue from
a non-recurring  sale of a perpetual  technology license to an existing customer
of approximately $1.5 million. The Company has continued to experience increased
activity  and order levels for both new and existing  customers,  recording  its
second sequential quarter of revenue growth.

Cost of goods sold for the three months ended  December 31, 2000 was  $1,610,796
compared  to  $2,376,852  for the same  period in 1999.  Cost of goods sold as a
percentage of revenue for the three months ended  December 31, 2000 increased to
46.9% from 37.5% for the same period in 1999.  The increase is due to the impact
of certain fixed  manufacturing  costs that are spread over a decreased  revenue
base resulting in a deterioration  of product margins as well as the significant
margin  contribution  from  the  non-recurring  sale of a  perpetual  technology
license in the previous year's quarter.

Research and development expense, net of capitalized software  development,  for
the three months ended December 31, 2000 was $707,408 compared to $1,251,498 for
the same period in 1999.  As a percentage of revenue,  research and  development
expenses  were 20.6%  compared to 19.7% for the same period in 1999.  The slight
increase in the percentage of research and  development to revenue was primarily
caused by lower sales  volume,  as research and  development  expenses have been
reduced from the previous two quarters as a result of completing  development of
the Company's next generation product release, NetwoRx-PRIISMS Integration 1.2.

Selling, general and administrative expenses ("SG&A") for the three months ended
December 31, 2000 were $2,211,994  compared to $2,549,829 for the same period in
1999. As a percentage of revenue,  SG&A increased to 64.4% compared to 40.2% for
the same  period in 1999,  due  primarily  to lower  sales  volume.  In absolute
dollars,  the SG&A  expenses for the quarter  ended  December 31, 2000 reflect a
reduction  from the  previous  quarter due in part to employee  attrition  and a
focus  on  reducing  general  and  administrative  expenses.   Depreciation  and
amortization expenses - amortization of capitalized software, goodwill and other
acquisition related  intangibles,  and depreciation on equipment,  furniture and
fixtures - was $949,787 for the three months ended December 31, 2000 compared to
$1,016,833 in the same period in 1999.  The decreased  expense was primarily the
result of  management's  decision  during the second  quarter of fiscal  2001 to
abandon  certain  of the  products  and  technology  associated  with the SolCom
acquisition which resulted in related impairment charges.

As a result of the Company's  operating  performance during the first six months
of fiscal 2001 as compared to the prior year,  the Company's new  management has
evaluated  the  Company's  business and product  strategy  and, in the Company's
third  fiscal  quarter,  implemented  a  business  restructuring  plan  which is
intended to enable the Company to reach a position  of positive  operating  cash
flows and focus its product  offerings  on those  believed to have the  greatest

                                       12
<PAGE>

potential  to  generate  further,  near-term  market  penetration  and  positive
operating  contribution.  As a  result  of  this  plan,  ION  Networks  recorded
$2,961,125 of  restructuring,  asset  impairments  and other charges  during the
quarter.

As part of this plan, the Company  recorded a charge of  approximately  $420,000
for restructuring  and exit costs.  Included in the exit costs was approximately
$397,000  of  cash  severance  and  termination  benefits  associated  with  the
separation of approximately 38 employees.  All of these affected  employees will
have left their positions as of January 31, 2001, with 36 employees  having left
the payroll by December 31,  2000.  Termination  benefits of $201,698  were paid
during the third  quarter of fiscal 2001 with the  majority of the balance to be
paid in the fourth quarter of fiscal 2001.

In  addition,  the  Company  has made  strategic  decisions  to abandon  certain
products and technologies including those which were acquired in the acquisition
of SolCom  Systems,  Ltd. on March 31,  1999.  The Company  also closed down the
research and  development  efforts at SolCom  Systems,  Ltd. and centralized the
research and development  functions at the New Jersey headquarters.  As a result
of  the  above  decisions,   the  Company  recorded  an  impairment   charge  of
approximately  $1,461,000  primarily  relating to abandonment of the capitalized
core technology from this acquisition and other existing  capitalized  software.
An additional  impairment charge of approximately  $870,000 has been recorded on
the remaining goodwill from the Company's acquisition of SolCom Systems, Ltd. in
March 1999 which was being  depreciated over a three year period.  Additionally,
the Company  recorded an impairment in the amount of  approximately  $209,000 on
fixed assets  previously  used in the  manufacturing  process at SolCom Systems,
Ltd.

Income tax  provision  for the three months ended  December 31, 2000 was $11,291
compared  to $0 at  December  31,  1999 due to the  required  provision  for the
reported taxable earnings of the Company's UK subsidiary.

Net loss for the three months ended December 31, 2000 was $4,940,362 compared to
a loss of $798,942  for the same  period in 1999 based on the factors  discussed
above.

For the nine months ended December 31, 2000 compared to the same period in 1999

Revenue for the nine months ended December 31, 2000, was $8,304,574  compared to
revenue of $17,020,334  for the same period in 1999, a decrease of $8,715,760 or
51.2%.  The decrease in revenue was primarily due to reduced  orders,  delays in
the  introduction  of an  updated  version  of PRIISMS  Manager,  a slower  than
anticipated ramp-up of new sales personnel, and the non-recurring realization of
revenue from a sale of a perpetual technology license to an existing customer in
1999.  With a  projected  sales  cycle of six to nine  months,  initial  revenue
associated  with the September 2000 PRIISMS release is anticipated in the second
calendar quarter of 2001.

Cost of goods sold for the nine months ended  December  31, 2000 was  $4,738,864
compared to $6,032,612  for the same period in 1999, a decrease of $1,293,748 or
21.4%,  due to lower sales volume.  Included in the $4,738,864 is an approximate
$530,000 reserve created during the nine months for raw materials  inventory the
Company  believed to be slow moving based on sales  projections  of the ultimate
finished product. Without this reserve, the decrease would have been 30.2%. Cost
of goods sold as a percentage of revenue  increased to 57.1% for the nine months

                                       13
<PAGE>

ended  December  31,  2000 as  compared  to 35.4%  for the same  period in 1999.
Without  the  reserve,  the  percentage  is 50.7%  because  lower  sales  volume
increased  the negative  impact that certain  fixed  manufacturing  costs had on
product margins.

Research and development expenses, net of capitalized software development,  for
the nine months ended  December 31, 2000 was  $2,973,966  compared to $2,991,365
for  the  same  period  in  1999.  As a  percentage  of  revenue,  research  and
development expenses increased to 35.8% compared to 17.6% for the same period in
1999, due primarily to lower sales volume.

SG&A  expenses  for the nine months  ended  December  31,  2000 were  $8,545,715
compared to $7,569,472  for the same period in 1999. As a percentage of revenue,
SG&A expenses  increased to 102.9% compared to 44.5% for the same period in 1999
due  primarily  to lower  sales  volume.  The  increased  expenditures  resulted
primarily from the Company's  aggressive  growth plans and associated  sales and
marketing support.

Depreciation  and amortization  expenses - amortization of capitalized  software
goodwill  and  other  acquisition  related  intangibles,   and  depreciation  on
equipment,  furniture  and fixtures - was  $3,175,999  for the nine months ended
December  31, 2000  compared  to  $2,956,653  for the same  period in 1999.  The
increased expense was primarily the result of depreciation on higher capitalized
software  costs over the past year due to the Company's  increased  research and
development activities to pursue its growth strategy.

During the nine months ended December 31, 2000, the Company recorded  $3,449,420
of restructuring, asset impairments and other charges.

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

As a result of the  Company's  initiatives,  the  Company  recorded  a charge of
approximately  $420,000 for restructuring  and exit costs.  Included in the exit
costs was  approximately  $397,000 of cash  severance and  termination  benefits
associated  with the  separation of  approximately  38  employees.  All of these
affected  employees will have left their  positions as of January 31, 2001, with
36 employees having left the payroll by December 31, 2000.  Termination benefits
of $201,698  were paid during the third quarter of fiscal 2001 with the majority
of the balance to be paid in the fourth quarter of fiscal 2001.

In  addition,  the  Company  has made  strategic  decisions  to abandon  certain
products and technologies including those which were acquired in the acquisition
of SolCom  Systems,  Ltd. on March 31,  1999.  The Company  also closed down the
research and  development  efforts at SolCom  Systems,  Ltd. and centralized the
research and development  functions at the New Jersey headquarters.  As a result
of  the  above  decisions,   the  Company  recorded  an  impairment   charge  of
approximately   $1,950,000   primarily   relating  to  the  abandonment  of  the
capitalized core technology from this acquisition and other existing capitalized
software.  An additional

                                       14
<PAGE>

impairment  charge of approximately  $870,000 has been recorded on the remaining
goodwill from the Company's  acquisition of SolCom  Systems,  Ltd. in March 1999
which was being depreciated over a three year period. Additionally,  the Company
recorded an impairment in the amount of  approximately  $209,000 on fixed assets
previously used in the manufacturing process at SolCom Systems, Ltd.

Income tax  provision  for the nine months  ended  December 31, 2000 was $53,019
compared  to $0 at  December  31,  1999 due to the  required  provision  for the
reported taxable earnings of the Company's United Kingdom subsidiary.

Net loss for the nine months ended December 31, 2000 was $14,361,858 compared to
a loss of $2,577,535 for the same period in 1999, based on the factors discussed
above.

FINANCIAL CONDITION AND CAPITAL RESOURCES

During the first nine months  ended  December 31, 2000,  the  Company's  working
capital position  deteriorated as the Company's  reduced revenues  combined with
continuing  expenditure  levels utilized  significant  operating cash. This cash
utilization was offset  partially by the $5,000,000  raised through the issuance
of new shares in a private  placement.  Working  capital at  December  31,  2000
decreased $5,958,110 to $7,517,981 from $13,476,091 at March 31, 2000.

Net cash used in operating  activities during the nine months ended December 31,
2000 was $6,765,523 compared  to net cash used during the same period in 1999 of
$2,733,848.  The increase in net cash used resulted  primarily from the build-up
of inventory due to lower than expected sales,  the payment of accounts  payable
and accrued expenses, and the significant increase in the net loss offset by the
reduction in accounts receivable and other receivables.

Net cash used in investing  activities during the nine months ended December 31,
2000 was $2,786,069 compared  to net cash used during the same period in 1999 of
$1,871,584.  Investing activities during the nine months ended December 31, 2000
include the  restriction  of $375,000 in cash  relating to the  Piscataway,  New
Jersey  operating  lease and the loan  issued to the Former CEO in the amount of
$885,000 as well as the agreed upon reimbursement by the Former CEO of $200,000.
These  amounts were offset by the  repayment of $170,000 by the Former CEO. This
use of cash was offset  partially by the decrease in  expenditures  for property
and equipment in connection with efforts to limit spending activity.

Net cash provided by financing  activities during the nine months ended December
31, 2000 was $5,202,829  compared to net cash provided during the same period in
1999 of $16,293,756.  Financing activities during the nine months ended December
31, 2000  include the sales of  2,857,142  shares of Common  Stock at a price of
$1.75 per share,  for total  consideration  of  $5,000,000  in a private  equity
transaction.  Pursuant to the  transaction,  the Company  has  registered  these
shares of Common Stock for resale.

During the third  quarter of fiscal 2001,  the Company  initiated a  significant
restructuring  plan to reduce operating  expenses and target steps to ultimately
reach profitability. As a result of the implementation of this plan, the Company
expects to improve and  stabilize  operating  performance  as it moves  forward.
Based upon this,  together  with current  revenue  assumptions  in

                                       15
<PAGE>

its operating plan, the Company believes that it has sufficient cash to meet its
operating  requirements  over the next  twelve  months.  To the extent  that the
Company's  revenue  assumptions  included in its operating plan are not met, the
Company may have to raise additional equity and/or debt financing,  and may have
to curtail other  expenditures.  There can be no assurance that the Company will
be able to obtain any such financing on acceptable terms, if at all.

In December  1999,  the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 101,
"Revenue  Recognition  in Financial  Statements."  The SEC delayed the effective
date of this SAB from June 30, 2000 to the fourth quarter of fiscal 2001 for the
Company.  The  Company  has  assessed  the  impact of SAB 101 on its  results of
operations  and believes  that its results of  operations  for the quarter ended
December 31, 2000 have been  presented in accordance  with the provisions of the
SAB. The adoption of the SAB will not have an effect on the Company's  financial
statements.


                                       16
<PAGE>

PART II.  OTHER INFORMATION

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

         On  November  20,  2000,  the Company  held its 2000 Annual  Meeting of
Stockholders (the "2000 Meeting").

At the 2000 Meeting,  the Company's  Stockholders elected six directors to serve
until the 2001 Annual Meeting of Stockholders  and until their  successors shall
be  elected  and  qualified.  The vote  with  respect  to the  election  of such
directors was as follows:

                 NAME                          FOR                    AGAINST
                 ----                          ---                    -------

(a)      Stephen M. Deixler                14,447,317                 576,397
(b)      Baruch Halpern                    14,447,317                 576,397
(c)      Frank S. Russo                    14,447,317                 576,397
(d)      Alexander S. Stark, Jr.           14,447,317                 576,397
(e)      Alan Hardie                       14,447,317                 576,397
(f)      William Martin Ritchie            14,447,317                 576,397

In addition to electing  the  directors,  the  Company's  Stockholders  voted to
approve the  Company's  2000 Stock Option Plan (the "Plan")  including  the 2000
U.K.  Sub-Plan,  providing for, among other things, the reservation of 3,000,000
shares of Common Stock for issuance under the Plan. 5,338,093 votes were cast in
favor of the approval of the Plan, representing  approximately 86% of the shares
of Common  Stock  present at the meeting and entitled to vote  thereon.  850,407
votes were cast in opposition to such  approval and 24,703 votes  abstained.  In
addition, there were 8,810,511 broker non-votes with respect to this proposal.

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

(a)      Exhibits:

                  27.  Financial Data Schedule

(b)      Reports on Form 8-K:

                  No Reports on Form 8-K were filed during the quarter.


                                       17
<PAGE>



SIGNATURES
----------

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

DATE:  February 1, 2001



                                    ION NETWORKS, INC.


                                    /s/ Ronald C. Sacks
                                    --------------------------------------------
                                    Ronald C. Sacks, Chief Executive Officer and
                                    Interim Principal Financial Officer

                                       18