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 September 30, 2004

                                       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)


               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 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 __.


There were  22,525,500  shares of Common  Stock  outstanding  as of November 10,
2004.

TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT:

                                   YES __ NO _X_

<PAGE>





                               ION NETWORKS, INC.

                                   FORM 10-QSB

                    FOR THE QUARTER ENDED SEPTEMBER 30, 2004




                          PART I. FINANCIAL INFORMATION


                                                                       PAGE

ITEM 1. CONDENSED FINANCIAL STATEMENTS (UNAUDITED)                        3

Condensed Balance Sheet as of September 30, 2004                          4

Condensed Statements of Operations for the Three and Nine Months
ended September 2004 and 2003 (Consolidated)                              5

Condensed Statements of Cash Flows for the Nine Months ended
September 30, 2004 and 2003 (Consolidated)                                6

Notes to Condensed Financial Statements                                   7

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION        11

ITEM 3. CONTROLS AND PROCEDURES                                          13


                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS                                               14

ITEM 2.  CHANGES IN SECURITIES                                           14

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                 14

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             14

ITEM 5.  OTHER INFORMATION                                               15

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K                                 16


SIGNATURES                                                               17


                                       2
<PAGE>


                          PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED FINANCIAL STATEMENTS

The condensed  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, 2003.


                                       3
<PAGE>


                               ION NETWORKS, INC.
                             CONDENSED BALANCE SHEET
                            As of September 30, 2004
                                   (Unaudited)

<TABLE>
<CAPTION>


                                     ASSETS
                                     ------

Current assets
<S>                                                                                                   <C>
   Cash and cash equivalents                                                                          $    140,138
   Accounts receivable, less allowance for doubtful accounts of $43,974                                    522,734
   Inventory, net                                                                                          482,502
   Prepaid expenses and other current assets                                                                75,156
                                                                                                      ------------
     Total current assets                                                                                1,220,530

Property and equipment, net                                                                                  8,963
Capitalized software, less accumulated amortization of $4,063,481                                          355,147
Other assets                                                                                                12,836
                                                                                                      ------------
     Total assets                                                                                     $  1,597,476
                                                                                                      ============

                      LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
   Current portion of capital leases                                                                  $      8,102
   Current portion of long-term debt                                                                         2,287
   Accounts payable                                                                                        390,592
   Accrued expenses                                                                                        349,248
   Accrued payroll and related liabilities                                                                 176,076
   Deferred income                                                                                         178,853
   Sales tax payable                                                                                         9,367
   Other current liabilities                                                                                53,337
                                                                                                      ------------
     Total current liabilities                                                                           1,167,862
                                                                                                      ------------
Long term liabilities
   Convertible debenture                                                                                   200,000
   Long-term debt, net of current portion                                                                    7,528
                                                                                                      ------------
     Total long term liabilities                                                                           207,528
                                                                                                      ------------
Commitments and contingencies

Stockholders' Equity
   Preferred  stock - par value  $.001 per  share;  authorized                                           1,000,000
      shares; 200,000 shares designated Series A; 166,835 shares issued
      and outstanding (aggregate liquidation preference $300,303)                                              167
   Common stock - par value $.001 per share; authorized 50,000,000 shares;
      23,125,500 shares issued and outstanding                                                              23,126
   Additional paid-in capital                                                                           44,362,997
   Notes receivable from former officer (see note 5)                                                      (211,295)
   Accumulated deficit                                                                                 (43,952,909)
                                                                                                      ------------
     Total stockholders' equity                                                                            222,086
                                                                                                      ------------
     Total liabilities and stockholders' equity                                                       $  1,597,476
                                                                                                      ============


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

</TABLE>

                                       4
<PAGE>


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

<TABLE>
<CAPTION>
                                                   Three Months        Three Months         Nine Months        Nine Months
                                                       Ended              Ended               Ended               Ended
                                                    September 30,      September 30,       September 30,       September 30,
                                                       2004                2003                2004                2003
                                                   ------------        ------------        ------------        ------------
<S>                                                <C>                 <C>                 <C>                 <C>
Net sales                                          $  1,047,054        $    888,324        $  2,558,315        $  2,527,643

Cost of sales                                           306,200             214,535             793,954             689,374
                                                   ------------        ------------        ------------        ------------
   Gross margin                                         740,854             673,789           1,764,361           1,838,269
                                                   ------------        ------------        ------------        ------------
Research and development expenses                       167,247             116,080             427,525             377,834
Selling, general and administrative expenses            530,768             454,509           1,721,400           1,937,370
Restructuring, asset impairment and other               (63,716)           (213,071)
 charges                                                (63,716)           (405,402)
Depreciation and amortization expenses                  100,617             163,597             322,061             604,025
                                                   ------------        ------------        ------------        ------------
   Total operating expenses                             734,916             521,115           2,407,270           2,513,827
                                                   ------------        ------------        ------------        ------------
   Income(loss) from operations                           5,938             152,674            (642,909)           (675,558)
   Other income                                            --                 3,465                --                 4,120
   Interest income                                          257               4,308              19,962              15,633
   Interest expense                                        (496)             (1,681)             (3,224)            (11,708)
                                                   ------------        ------------        ------------        ------------
   Net income(loss)                                $      5,699        $    158,766        $   (626,171)       $   (667,513)
                                                   ============        ============        ============        ============
Per share data
Net income(loss) per share
   Basic                                           $       0.00        $       0.01        $      (0.03)       $      (0.03)
   Diluted                                         $       0.00        $       0.01        $      (0.03)       $      (0.03)

Weighted average number of common shares
 outstanding
   Basic                                             22,883,652          23,900,500          23,527,872          23,900,500
   Diluted                                           27,633,535          25,581,263          23,527,872          23,900,500



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


                                       5
<PAGE>


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

<TABLE>
<CAPTION>
                                                                     For the Nine Months   For the Nine Months
                                                                      Ended September 30,  Ended September 30,
                                                                            2004                   2003
                                                                      ----------------     ------------------

Cash flows from operating activities
<S>                                                                      <C>                    <C>
     Net loss                                                            $(626,171)             $(667,513)

Adjustments  to  reconcile  net  loss  to  net  cash  used  in
operating activities:
   Restructuring, asset impairments and other charges,
   non-cash                                                                 63,716               (528,912)
   Depreciation and amortization                                           322,061                604,025
   Non-cash stock-based compensation                                        58,750                (95,000)
   Interest income from notes receivable from former officers              (19,253)               (13,130)
   Changes in operating assets and liabilities:
     Accounts receivable                                                  (126,992)                30,288
     Inventory                                                             219,540                402,584
     Prepaid expenses and other current assets                              54,984                 67,616
     Other assets                                                              465                 (4,831)
     Accounts payable and other accrued expenses                          (136,731)              (352,261)
     Accrued payroll and related liabilities                                73,261               (122,514)
     Deferred income                                                       (21,452)                42,073
     Sales tax payable                                                     (43,273)               (12,878)
     Other current liabilities                                                --                  (29,452)
                                                                         ---------              ---------
       Net cash used in operating activities                              (181,095)              (679,905)
                                                                         ---------              ---------
Cash flows from investing activities
   Acquisition of property and equipment                                    (6,947)                  --
   Capitalized software expenditures                                      (173,504)              (184,671)
   Proceeds from the sale of fixed assets                                     --                   30,129
   Restricted cash                                                            --                  125,700
                                                                         ---------              ---------
       Net cash used in investing activities                              (180,451)               (28,842)
                                                                         ---------              ---------
Cash flows from financing activities
   Principal payments on debt and capital leases                           (67,277)               (66,918)
   Issuance of convertible debenture                                       200,000                   --
   Proceeds from the exercise of stock options                              11,250                   --
                                                                         ---------              ---------
       Net cash provided by (used in) financing activities                 143,973                (66,918)
                                                                         ---------              ---------
Effect of exchange rates on cash                                              --                     (905)
                                                                         ---------              ---------
Net decrease in cash and cash equivalents                                 (217,573)              (776,570)

Cash and cash equivalents - beginning of period                            357,711                865,684
                                                                         ---------              ---------
Cash and cash equivalents - end of period                                        $                      $
                                                                           140,138                 89,114
                                                                         =========              =========

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

</TABLE>
                                        6

<PAGE>



                               ION NETWORKS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 2004
                                   (Unaudited)

NOTE 1 - CONDENSED FINANCIAL STATEMENTS

ION Networks, Inc ("ION" or the "Company") designs,  develops,  manufactures and
sells infrastructure  security and management products to corporations,  service
providers and government agencies.  The Company's hardware and software products
are  designed  to form a secure  auditable  portal  to  protect  IT and  network
infrastructure from internal and external security threats. ION's infrastructure
security  solution operates in the IP, data center,  and telephony  environments
and is sold by a  direct  sales  force  and  indirect  channel  partners  mainly
throughout North America and Europe.

The condensed  balance sheet as of September 30, 2004, the condensed  statements
of operations for the three and nine month periods ended  September 30, 2004 and
2003 (consolidated), and the statements of cash flows for the nine month periods
ended  September  30, 2004 and 2003  (consolidated),  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 September 30, 2004 and 2003
not  misleading  have been made. The results of operation for the three and nine
months ended  September  30, 2004 and 2003 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, 2003.

The  Company's  financial  statements  have been  prepared on the basis that the
Company will continue as a going concern,  which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business.  At September  30,  2004,  the Company had an  accumulated  deficit of
$43,952,909  and a working  capital of $52,668.  The Company  also  realized net
income of $5,699 and net loss of $626,171  for the three and nine month  periods
ended September 30, 2004,  respectively.  The Company  continues to experience a
shortfall in the cash necessary to expand  operations.  Management and the Board
of Directors are exploring  various  alternatives to secure funding necessary to
meet its cash  requirements.  These  factors raise  substantial  doubt about the
entity's ability to continue as a going concern. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

The  accompanying  condensed  financial  statements  include the accounts of ION
Networks, Inc. and its subsidiaries (collectively,  the "Company") and have been
prepared on the accrual  basis of  accounting.  All  inter-company  balances and
transactions  have been  eliminated  in  consolidation.  During  the year  ended
December 31, 2003, the Company ceased the operation of its subsidiaries.

                                       7
<PAGE>



                               ION NETWORKS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 2004
                                   (Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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 are excluded from
the  computation  of diluted  net loss per share when their  inclusion  would be
antidilutive.  Potentially  dilutive  securities  of  the  Company  include  the
following:

<TABLE>
<CAPTION>

                                           ----------------------------------------------------------------------
                                                For the three months ended           For the nine months ended
                                           ----------------------------------------------------------------------
                                           Sept, 30,2004      Sept. 30, 2003      Sept. 30, 2004   Sept. 30, 2003
                                            (Unaudited)**     (Unaudited)**       (Unaudited)*      (Unaudited)*
                                           ----------------------------------------------------------------------
<S>                                        <C>                 <C>               <C>               <C>
Weighted average shares
outstanding, basic                         22,883,652          23,900,500          23,527,872          23,900,500
Incremental shares of common stock
equivalents                                 1,731,076              12,413                --                  --
Conversion of preferred stock to
common stock                                1,668,350           1,668,350                --                  --
Conversion of convertible debenture
to common stock                             1,350,457                --                  --                  --
                                           ----------------------------------------------------------------------
      Weighted average shares
        outstanding, diluted               27,633,535          25,581,263          23,527,872          23,900,500
                                           ======================================================================
</TABLE>

*    Since  there was a loss  attributable  to common  shareholders  in the nine
     months ended September 30, 2004 and 2003, the basic weighted average shares
     outstanding  were used in  calculating  diluted  loss per share.  Potential
     common  shares  of  10,193,618  and  7,327,037  for the nine  months  ended
     September  30,  2004  and  2003,   respectively   were  excluded  from  the
     computation of diluted earnings per share.

**   Potential  common  shares of 3,484,811  and  5,031,187 for the three months
     ended  September  30, 2004 and 2003,  respectively  were  excluded from the
     computation of diluted earnings per share.


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 comply 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.  The Company  accounts  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.


                                       8
<PAGE>

                               ION NETWORKS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 2004
                                   (Unaudited)

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

STOCK COMPENSATION (CONTINUED)

If the  Company had elected to  recognize  compensation  costs based on the fair
value at the date of grant for awards for the three and nine month periods ended
September 30, 2004 and 2003, consistent with the provisions of SFAS No. 123, the
Company's  net  income(loss)  and basic and diluted net  income(loss)  per share
would have increased to the pro forma amounts indicated below:

<TABLE>
<CAPTION>

                                    Three months   Three months   Nine months  Nine months
                                          ended         ended        ended         ended
                                    September 30,  September 30, September 30, September 30,
                                          2004          2003         2004          2003
                                      (Unaudited)   (Unaudited)  (Unaudited)   (Unaudited)
                                       ---------     ---------    ----------   ----------
Net income (loss)
<S>                                    <C>           <C>          <C>           <C>
  As reported                          $   5,699     $ 158,766    $(626,171)    $(667,513)
  Add back (Deduct): Stock
    based employee
    compensation
determined
    under fair value
methods for
    all awards granted                   (26,948)       41,746     (367,252)     (135,761)
                                       ---------     ---------    ---------     ---------
Pro forma net income (loss)            $ (21,249)    $ 200,512    $(993,423)    $(803,274)
                                       =========     =========    =========     =========

Basic and diluted net income (loss)
per share
  of common stock
    As reported                        $    0.00     $    0.01    $   (0.03)    $   (0.03)
    Pro forma                          $    0.00     $    0.01    $   (0.04)    $   (0.03)

</TABLE>

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 September 30, 2004 approximated $48,000.

NOTE 3 - INVENTORY

Inventory,  net of allowance for obsolescence of $167,829 at September 30, 2004,
consists of the following:


          Raw materials                              $  63,487
          Work-in-progress                               4,355
          Finished goods                               414,660
                                                     ----------
                                                     $ 482,502
                                                     ==========


                                        9
<PAGE>

                               ION NETWORKS, INC.
                     NOTES TO CONDENSED FINANCIAL STATEMENTS
                               September 30, 2004
                                   (Unaudited)

NOTE 4 - COMMITMENTS AND CONTINGENCIES

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

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

NOTE 5 - SUBSEQUENT EVENT

On October 14, 2004, the Company agreed to a final separation agreement with its
former  President and Chief  Operating  Officer.  As part of the agreement,  the
Company  agreed to accept the return of 600,000  shares of the Company's  common
stock as full payment for the former officers' total indebtedness to the Company
of  $216,926.  In  addition,  the former  officer  released the Company from any
obligations,  other than the sum of $8,000 to cover certain expenses,  which may
have arisen from the separation of the officer from the Company.


                                       10
<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

OVERVIEW

ION Networks, Inc. (the "Company"),  designs,  develops,  manufactures and sells
infrastructure  security  and  management  products  to  corporations,   service
providers and government agencies.  The Company's hardware and software products
are  designed  to form a secure  auditable  portal  to  protect  IT and  network
infrastructure  from  internal and external  security  threats.  ION's  products
operate in the IP, data center,  telecommunications and transport, and telephony
environments  and are sold by a direct sales force and indirect channel partners
mainly throughout North America and Europe.

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 Company  liquidated  operations in
Scotland during the quarter ended June 30, 2003.

RESULTS OF OPERATIONS

FOR THE THREE MONTHS  ENDED  SEPTEMBER  30, 2004  COMPARED TO THE SAME PERIOD IN
2003:

Net sales for the three month period ended  September 30, 2004,  were $1,047,054
compared  to net sales of $888,324  for the same period in 2003,  an increase of
$158,730 or 17.9%.  Revenues for the third quarter of 2004 were higher  compared
to the same quarter of 2003  primarily  due to increased  volume and a change in
the product sales mix,  with more revenue  coming from high-end 5500 products as
compared to the same period last year.

Cost of sales for the three month period ended  September  30, 2004 was $306,200
compared to $214,535 for the same period in 2003.  Cost of sales as a percentage
of net sales for the three months ended  September  30, 2004  increased to 29.3%
from 24.2% for the same period in 2003, resulting in gross margins decreasing to
70.7% from 75.8% as compared to the prior year.  Comparing  the third quarter of
2004 to the same period 2003,  the cost of sales has  declined;  however,  sales
prices  have  declined  more  rapidly  resulting  in  lower  gross  margin  as a
percentage of revenue.

Research and development expenses for the three month period ended September 30,
2004  was  $167,247  compared  to  $116,080  for the same  period  in 2003 or an
increase of $51,167. The increase was attributable primarily to the cost related
to increased  employee  headcount from 5 on September 30, 2003 to 7 on September
30,  2004 and  expanded  utilization  of  outside  consultants  for new  product
development and conversion to standards based platform.

Selling, general and administrative expenses ("SG&A") for the three months ended
September  30, 2004 were  $530,768  compared to $454,509  for the same period in
2003, an increase of $76,259. The increase in SG&A expenses was due primarily to
increased  employee  headcount  from 18 on September 30, 2003 to 22 on September
30, 2004, offset in part by cost containment programs implemented by management.

Restructuring,  asset  impairment  and other  charges for the three months ended
September 30, 2004 were a credit of $63,716 compared to a credit of $213,071 for
the  same  period  in  2003.  In 2003  the  Company  successfully  negotiated  a
settlement  of a $243,071 due to a vendor for the payment of $30,000,  resulting
in a forgiveness of debt in the amount of $213,071.

Depreciation  and  amortization  expenses for  depreciation  of fixed assets and
amortization  of  capitalized  software  was $100,617 for the three months ended
September 30, 2004 compared to $163,597 in the same period in 2003. The decrease
was due to lower depreciable assets and capitalized software balances subject to
amortization.

Net income for the three months ended  September  30, 2004 and 2003  amounted to
$5,699 and  $158,766,  respectively.  The decrease of net income of $153,067 was
due  primarily  to the  positive  impact on the third  quarter  2003  results of
$213,071 related to a non-recurring  reduction of certain expenses  reflected in
restructuring, asset impairment and other charges.

FOR THE NINE MONTHS  ENDED  SEPTEMBER  30,  2004  COMPARED TO THE SAME PERIOD IN
2003:

Net sales for the nine months ended September 30, 2004, were $2,558,315 compared
to net sales of  $2,527,643  for the same period in 2003, an increase of $30,672
or 1.2%.  This slight  increase for the nine months ended September 30, 2004 was
due  primarily to increased  volume  offset in part by lower  selling  prices as
compared to the same period last year.

Cost of sales for the nine month  period ended  September  30, 2004 was $793,954
compared to $689,374 for the same period in 2003.  Cost of sales as a percentage
of net sales for the nine months  ended  September  30, 2004  increased to 31.0%
from 27.3% for the same period in 2003,  resulting  therefore  in gross  margins
decreasing  to 69.0% from 72.7% as compared to the prior year.  The  decrease in
gross margin as a  percentage  of revenue is due  primarily  to increased  sales
volume on a lower margin  product in the current  period as compared to the same
period last year.


                                       11
<PAGE>

Research and development  expenses for the nine month period ended September 30,
2004  was  $427,525  compared  to  $377,834  for the same  period  in 2003 or an
increase of $49,691.  The increase was due primarily to expense increases in the
quarter ended September 30, 2004 of employee headcount and expanded  utilization
of outside  consultants for new product  development and conversion to standards
based platform.

Selling,  general and administrative expenses ("SG&A") for the nine months ended
September 30, 2004 were $1,721,400 compared to $1,937,370 for the same period in
2003, a decrease of $215,970.  The decline in SG&A expenses are due primarily to
sharply  reduced   executive   compensation,   steep  reductions  in  facilities
expenditures, including rent, sales and marketing and other overhead items under
management instituted cost containment programs. These reductions were partially
offset by stock compensation  expense for options granted during the three month
period ended June 30, 2004.

Restructuring,  asset  impairment  and other  charges for the nine months  ended
September 30, 2004 were a credit of $63,716 compared to a credit of $405,402 for
the  same  period  in  2003.  In 2003  the  Company  successfully  negotiated  a
settlement  of a $243,071 due to a vendor for the payment of $30,000,  resulting
in a  forgiveness  of debt in the amount of $213,071 and the reversal of certain
liabilities of $508,458 upon the liquidation of a foreign subsidiary.  Partially
offset  by the  Company  incurring  an asset  impairment  charge  for  leasehold
improvements and furniture of $192,617.

Depreciation  and  amortization  expenses for  depreciation  of fixed assets and
amortization  of  capitalized  software  was  $322,061 for the nine months ended
September 30, 2004 compared to $604,025 in the same period in 2003. The decrease
was due to lower depreciable  assets,  capitalized  software balances subject to
amortization  in the nine month period ended  September  30, 2004 as compared to
the same period in 2003.

Net loss for the nine  months  ended  September  30,  2004 and 2003  amounted to
$626,171 and $667,513,  respectively an improvement of $41,342. This improvement
was due  primarily  to lower  selling,  general and  administrative  expenses of
$215,970 and lower depreciation and amortization expenses of $281,964, offset in
part by lower gross  margins of $73,909,  and  positive  restructuring  items of
$405,402 for the nine month period ended September 30, 2003.

FINANCIAL CONDITION AND CAPITAL RESOURCES

The  Company's  financial  statements  have been  prepared on the basis that the
Company will continue as a going concern,  which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of
business.  At  September  30,  2004 the Company  had an  accumulated  deficit of
$43,952,909  and a working  capital of $52,668.  The Company also realized a net
loss of $626,171 for the nine month period ended September 30, 2004. The Company
continues to experience a shortfall in the cash necessary to expand  operations.
Management  and the Board of Directors are  exploring  various  alternatives  to
secure funding  necessary to meet its cash  requirements.  Any future operations
are dependent  upon the Company's  ability to obtain  additional  debt or equity
financing,  and  its  ability  to  generate  revenues  sufficient  to  fund  its
operations.  There can be no  assurances  that the Company will be successful in
its  attempts  to  generate  positive  cash  flows or raise  sufficient  capital
essential  to its  survival.  Additionally,  even  if  the  Company  does  raise
operating  capital,  there can be no  assurances  that the net proceeds  will be
sufficient  enough to enable it to develop its business to a level where it will
generate profits and positive cash flows.  These matters raise substantial doubt
about the  Company's  ability  to  continue  as a going  concern.  However,  the
accompanying  financial  statements have been prepared on a going concern basis,
which  contemplates the realization of assets and satisfaction of liabilities in
the normal  course of  business.  The  financial  statements  do not include any
adjustments  relating  to  the  recorded  assets  or the  classification  of the
liabilities  that might be necessary should the Company be unable to continue as
a going concern.

Net cash used in operating activities during the nine months ended September 30,
2004 was  $181,095  compared  to net cash used during the same period in 2003 of
$679,905.  The net cash used in operating  activities  was $498,810 less for the
nine months ended  September 30, 2004 compared to the same period in 2003 due to
the absence of  approximately  $350,000 of non-cash items.  The remainder of the
variance was due to the positive  impact of changes in working  capital items of
approximately $137,000 in the nine months ended September 30, 2004 when compared
to the same period in 2004

Net cash used in investing activities during the nine months ended September 30,
2004 was $180,451  compared to $28,842 in the same period in 2003. This increase
in cash used of $151,609 was primarily due to the release of restricted  cash of
$125,700 during the nine months ended September 30, 2003.

Net cash  provided  from  financing  activities  during  the nine  months  ended
September 30, 2004 was $143,973 compared to net cash used during the same period
in 2003 of $66,918.  The increase of $210,891 was  primarily due to the issuance
of a $200,000 convertible debenture in the third quarter of 2004.




                                       12
<PAGE>




ITEM 3. CONTROLS AND PROCEDURES


Prior to the filing of this  report,  the  Company's  management  carried out an
evaluation,  under  the  supervisions  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 have 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.



                                       13
<PAGE>


                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.


ITEM 2. UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS

          On  August  5,  2004,  the  Company  issued,   for  $200,000  cash,  a
convertible  debenture  (the  "Debenture")  to  Stephen M.  Deixler,  one of the
Company's directors.  The Debenture matures on August 5, 2008 and bears interest
at five (5%) percent per annum, compounded annually. The principal amount of the
Debenture is convertible  into shares of the Company's  common stock,  $.001 par
value at a conversion price equal to $0.083 per share (the "Conversion  Price"),
which  is  equal  to the ten  (10) day  average  of the  closing  prices  of the
Company's  common stock, as quoted on the OTC Bulletin Board during the five (5)
trading  days  immediately  prior to and  subsequent  to  August  5,  2004.  The
principal  amount of the Debenture is convertible at the Conversion Price at the
option of the holder,  or after  August 5, 2005 at the  Company's  option if the
Company's  common  stock  trades at a price of at least  $0.166 for twelve  (12)
trading  days in any  fifteen  (15)  trading  day  period.  The  Company is also
entitled  to prepay the  principal  amount of the  Debenture,  at any time after
August 5, 2005,  but shall be required  to pay a premium of two (2%)  percent in
the second year after issuance of the Debenture of the principal amount prepaid,
for  prepayments  made during  that  period.  The  Company  has granted  certain
"piggyback"  registration rights to the holder to register for resale the shares
issuable  upon  conversion of the  Debenture.  The issuance of the Debenture was
pursuant to an exemption  granted under Rule 506 of  Regulation  D,  promulgated
under the Securities Act of 1933, as amended, in that the purchaser  represented
his status as an  accredited  investor,  and that he was acquiring the Debenture
for  investment  purposes  and not with a view to any sale or  distribution.  In
addition,  the  Debenture  bore a  restrictive  legend,  which  stated  that the
Debenture  was a  "restricted  security"  under the  Securities  Act of 1933, as
amended,  and a similar  legend is required to be placed on any shares issued on
conversion of the  Debenture.  A copy of the Debenture is filed as an exhibit to
Form 10-QSB filed on August 13,2004.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.


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

On August 27,  2004,  the Company held its 2004 Annual  Meeting of  Stockholders
(the "2004 Meeting").

At the 2004 Meeting,  the Company's  stockholders elected two directors to serve
until the 2005 Annual Meeting of Stockholders  and until their  successors shall
be elected and qualified.

The vote with respect to the election of directors was as follows:

                     Name              For          Authority Withheld
(a)      Stephen M. Deixler         19,382,623            111,725
(b)      Frank S. Russo             19,400,463             93,885


                                       14
<PAGE>


ITEM 5. OTHER INFORMATION

On November  10,  2004,  the Company and its Chief  Executive  Officer and Chief
Financial Officer, Norman E. Corn and Patrick E. Delaney, respectively,  entered
into  an  amendment  to each  of  their  respective  employment  contracts.  The
amendments  provide for a lump-sum  severance  payment upon termination  without
"Cause" or due to a "Change in Control",  by adding the  following  provision to
each such respective employment agreement.

SEVERANCE.  Executive's  employment may be terminated,  at any time  immediately
upon written notice by the Company,  without "Cause". If Executive is terminated
without "Cause",  or effectively  terminated pursuant to a Change in Control for
any reason  other than for  "Cause,"  Executive  shall be entitled to a lump sum
severance  payment  equal to eighteen (18) months of base salary in effect as of
the  termination  date,  less  withholdings  and  deductions  required  by  law.
Executive and Company agree that such  severance  payment shall also  constitute
liquidated damages and is a reasonable  approximation of Employee's damages as a
result of such termination.

"Cause" is defined as  termination of Executive by the Company for the following
infractions  by  the  Executive:   gross   negligence,   felony  conviction  and
significant breach of Executive's duties pursuant to this agreement.

A Change in Control is defined as (i) a sale of all or substantially  all of the
assets or all of the  outstanding  equity of the  Company  or (ii) the merger or
consolidation  of the Company with or into another entity or any other corporate
reorganization  if persons who were not shareholders of the Company  immediately
prior to such merger, consolidation or reorganization own immediately after such
merger, consolidation or other reorganization fifty percent (50%) or more of the
voting powers of the  outstanding  securities  of each of (A) the  continuing or
surviving  entity  and (B) any direct or  indirect  parent  corporation  of such
continuing or surviving entity.

On August 31, 2004, the Company entered into an employment offer with Henry Hill
(a copy of which is attached as an exhibit to this  report).  Under the terms of
the  employment  offer,  Mr.  Hill is  employed  as the  Company's  Senior  Vice
President,  Technical Services,  and is to be paid a base salary of $150,000 per
year. Mr. Hill's employment can be terminated by the Company at any time without
"cause",  provided  that in such event Mr.  Hill would be entitled to a one-time
lump-sum  payment  equal to 6 months of his base salary.  In addition,  Mr. Hill
received stock options to purchase 500,000 shares of the Company's common stock.

                                       15
<PAGE>

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





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

10.1     Employment Agreement dated August 31, 2004 by
         and between the Company and Henry A. Hill

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



                                       16
<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: November 15, 2004



                                ION NETWORKS, INC.







                                /s/ Norman E. Corn
                                ------------------------------------------

                                Norman E. Corn, Chief Executive Officer










                                /s/ Patrick E. Delaney
                                ------------------------------------------

                                Patrick E. Delaney, Chief Financial Officer

                                       17
<PAGE>

                                  EXHIBIT INDEX



Exhibit
No.           Description
-------       -----------
10.2     Employment Agreement dated August 31, 2004 by
         and between the Company and Henry A. Hill

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



                                       18