Edgar Filing: ION NETWORKS INC

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

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

For the quarterly period ended December 31, 2001

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

For the transition period from ____________ to ____________

Commission File No.: 0-13117

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

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

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

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

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

Yes X No ___
---

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

Transitional Small Business Disclosure Format:

Yes ___ No X
-----

FORM 10-QSB

FOR THE QUARTER ENDED DECEMBER 31, 2001

PART I. FINANCIAL INFORMATION PAGE
----
Item 1. Condensed Consolidated Financial Information 2

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

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

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

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

Notes to Condensed Consolidated Financial Statements (Unaudited) 7

Item 2. Management's Discussion and Analysis 12

PART II. OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K 18

SIGNATURES 19

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL INFORMATION

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

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

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

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

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

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

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

For the Three Months Ended For the Nine Months Ended
December 31, December 31,
2001 2000 2001 2000
---- ---- ---- ----

Revenue ............................................... $ 2,214,216 $ 3,432,572 $ 5,236,038 $ 8,304,574
Cost of sales ......................................... 1,092,872 1,610,796 2,523,047 4,738,864
------------ ------------ ------------ ------------
Gross margin .......................................... 1,121,344 1,821,776 2,712,991 3,565,710

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

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

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

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

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

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

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

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

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

Noncash stock-based
compensation 32,999 32,999

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

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

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

FOR THE NINE MONTHS ENDED
DECEMBER 31,
2001 2000

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.

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

Net loss $ (1,371,892) $ (4,940,362) $ (5,711,833) $(14,361,858)
Effect of foreign currency translation (1,267) (27,923) (14,144) (56,046)
------------ ------------ ------------ ------------
Comprehensive loss $ (1,373,159) $ (4,968,285) $ (5,725,977) $(14,417,904)
============ ============ ============ ============

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS

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

RESULTS OF OPERATIONS

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

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

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

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

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

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

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

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

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

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

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

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

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

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

FINANCIAL CONDITION AND CAPITAL RESOURCES

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

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

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

SIGNIFICANT ACCOUNTING POLICIES - The discussion and analysis of our financial
condition and results of operations are based upon our consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amount of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of our financial statements.
Actual results may differ from these estimates under different assumptions or
conditions.

Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and potentially result in materially
different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below.

REVENUE RECOGNITION - The Company recognizes revenue from product sales at the
time of shipment and passage of title. We do not offer our customers the right
to return products, however the Company records warranty costs at the time
revenue is recognized. Management estimates the anticipated warranty costs but
actual results could differ from those estimates. Maintenance contracts are sold
separately and maintenance revenue is recognized on a straight-line basis over
the period the service is provided, generally one year.

ALLOWANCE FOR DOUBTFUL ACCOUNTS RECEIVABLE - Accounts receivable are reduced by
an allowance to estimate the amount that will actually be collected from our
customers. Many of our customers have been adversely affected by economic
downturn in the telecommunications industry. If the financial condition of our
customers were to materially deteriorate, resulting in an impairment of their
ability to make payments, additional allowances could be required.

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

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

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

NEW ACCOUNTING PRONOUNCEMENTS

PART II. OTHER INFORMATION

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(c) On October 8, 2001, the Company issued 2,000,000 shares of Common Stock to
its CEO at a price of $.13 per share, in connection with the CEO's employment
agreement and pursuant to a restricted stock grant. The total aggregate purchase
price was $340,000, and was paid through the issuance of promissory notes by the
Company's CEO in favor of the Company The issuance of these shares was exempt
from registration pursuant to Rule 506 promulgated under Section 4(2) of the
Securities Act of 1933, as amended (the "Act").

On October 17, 2001, the Company issued 600,000 and 300,000 shares of
Common Stock to its COO and CTO, respectively, at a price of $.31 per share, in
connection with their respective employment agreements and pursuant to
restricted stock grants. The total aggregate purchase price was $186,000 and
$93,000, respectively, and was paid through the issuance of promissory notes by
the Company's COO and CTO, respectively, in favor of the Company. The issuance
of these shares was exempt from registration pursuant to Rule 506 promulgated
under Section 4(2) of the Act.

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

(a) Exhibits: None.

(b) Reports on Form 8-K:

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

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

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: June 20, 2002

ION NETWORKS, INC.

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