10KSB

U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-KSB

|X| ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

                                                        For the fiscal year ended December 31, 2005

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

                                            For the transition period from                                         .

Commission File No.: 0-13117

ION NETWORKS, INC.

(Name of Small Business Issuer in Its Charter)

Delaware

(State or Other Jurisdiction of                         

22-2413505

Incorporation or Organization)               (IRS Employer Identification Number)

                        120 Corporate Blvd., S. Plainfield, NJ 07080

(Address of Principal Executive Offices)              

(908) 546-3900

(Issuer's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act:

Name of Each Exchange

Title of Each Class

On Which Registered

None

None

Securities registered under Section 12(g) of the Exchange Act:  

Common Stock, $.001 par value

(Title of Class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. |_|

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  

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. |_|  

Indicate by checkmark if the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes  __

No  X

The issuer's revenues for the year ended December 31, 2005 totaled $ 4,557,764.

The aggregate market value of voting stock held by non-affiliates, based on the closing price of the Common Stock, par value $0.001 (the "Common Stock") on February 28, 2006 of $0.18, as reported on the OTC Bulletin Board was $3,443,073. Shares of Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for any other purpose.

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There were 27,050,044 shares of Common Stock outstanding as of February 28, 2006.

DOCUMENTS INCORPORATED BY REFERENCE:  None

Transitional Small Business Disclosure Format (check one):

Yes   No    X  

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Information Regarding Forward-Looking Statements

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. You can identify forward-looking statements by our use of words such as "may", "will", "should", "could", "expects", "plans", "intends", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative or other variations of these words, or other comparable words or phrases. These statements include, but are not limited to, statements regarding the Company’s ability to gain further market recognition and the Company’s cost reduction efforts. These risks and uncertainties includ e, but are not limited to, uncertainty as to the acceptance of the Company's products; risks related to technological factors; potential manufacturing difficulties; uncertainty of product development; uncertainty of obtaining or maintaining adequate financing; dependence on third parties; dependence on key personnel and changes in the Company’s sales force and management; the risks associated with the expansion of the Company's sales channels; competition; a limited customer base; risk of system failure, security risks and liability risks; risk of requirements to comply with government regulations; vulnerability to rapid industry change and technological obsolescence; and general economic conditions. Unless otherwise required by applicable securities laws, the Company assumes no obligation to update any such forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements.

PART I

Item 1: Description of Business

Overview

ION Networks, Inc and Subsidiary ("ION" or the "Company") designs, develops, manufactures and sells security solutions that protect enterprise network administrative interfaces from improper, unauthorized or otherwise undesirable access from external and internal sources. Administrative interfaces are the network access points used by highly trained technical individuals who are charged with the responsibilities of maintaining and supporting the networks and devices employed within the networks such as servers, routers, PBXs and similar types of equipment. These technicians may be employees of the enterprise or employed by third parties such as managed service providers, consultants, device vendors or application developers. In all cases, they are considered “trusted insiders” since in order to perform their jobs; permission to enter and work within the network must be gran ted. The Company’s solution, comprised of centralized management and control software, administrative security appliances and soft tokens, is designed to provide secure, auditable access to all administrative interfaces and monitored security once working within the network. Service Providers, Enterprises and Governmental Agencies utilize the ION solution globally in their voice, data and converged environments, to establish and maintain security policies while providing the support and maintenance required of networks and their devices.

As network complexity continues to rise, particularly with the growing movement toward IP (internet protocol) based networks (converged environments,) security implications for both enterprises and their service providers are growing even more rapidly. The significant growth in outsourcing of network and device support and maintenance functions has required an increasing level of ‘trust’ between enterprise and service provider as well as heightened the level of competition between managed service providers. New compliance and privacy legislation and regulations are having an equally broad impact. Management and control requirements have escalated with the advent of Sarbanes-Oxley, Basel II and the numerous privacy laws such as Gramm-Leach-Bliley, HIPAA, California SB 1386, etc.

Service providers are struggling to maintain expertise throughout their geographic footprint. They are faced with an expanding deployment of enterprise security strategies and an inability to implement security solutions independently. On the other side, enterprises have become more cost conscious, working to extend the life of their legacy devices and aggregate network connections through the Internet. With all this movement, there is little consistency or standards regarding security and service delivery as the number of trusted insiders increases dramatically. The implications are enormous, particularly when understanding that the average cost of a network breach, reported by the 2003 CSI/FBI Security Survey, is $56,000 when it occurs from external sources (through the perimeter of the network) and in excess of $2.5 Million when it is caused by an “insider.” There are many effective and popular ‘security solu tions’ that address the perimeter, such as Firewalls, Intrusion Detection Systems, Virtual Private Networks and anti-virus software, providing protection from the typical hacker as well as end users. However, little attention has been paid to securing administrative interfaces where either maliciously or inadvertently, information and data can be easily compromised or destroyed. This is the arena in which ION focuses.

ION’s solution provides customers with secure access as well as forensic security within their owned and managed networks. It is a robust solution that is highly scalable, reliable, simple to use and cost effective. The solution also provides monitoring and alarming of the environment such as temperature and contact closures, forensics and buffering, and security logging of all activities down to the keystroke level. Due to the fact it is vendor agnostic, broad connectivity to virtually all network devices is guaranteed. The combination of ION’s single sign-on centralized management and control software, PRIISMS, our administrative security appliances and our two factor authentication tokens, mitigates the impact of potential

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network breaches. These breaches would likely cause financial losses to the enterprise due to lost revenue and lost intellectual property; plummeting customer satisfaction, and corporate embarrassment with most consumers attuned to security issues and where reputations cannot be quickly rebuilt; extensive physical and environmental damage as well as data corruption; and the difficult and costly tasks of detection and recovery. ION’s solutions are used in small, remote branch locations, medium to large local and global networks as well as data centers, ranging from a few to thousands of devices.

Though the Company’s focus is providing hardware and software solutions, ION also offers support and maintenance programs. Services revenue is typically generated from systems engineering and maintenance services in conjunction with the sale of our solutions.

ION's solutions are distributed via three channels: (i) a direct sales force, (ii) indirect channels such as service providers and original equipment manufacturers (OEM) and (iii) resellers both domestically and internationally. In addition to these distribution channels, the company segments its target markets by (i) enterprises, (ii) service providers and (iii) governmental agencies. Each market segment has unique characteristics and provides significant opportunities for future growth.

ION Networks, Inc. is a Delaware corporation founded in 1999 through the combination of two companies, MicroFrame, Inc. (originally founded in 1982), a New Jersey corporation and SolCom Systems Limited (originally founded in 1994), a Scottish corporation located in Livingston, Scotland. The Scottish corporation was dissolved in 2003. The Company's principal objective was to address the need for security and network management and monitoring solutions, primarily for the PBX-based telecommunications market, resulting in a significant portion of our revenues being generated from sales to various telecommunications companies.  In 1999, the Company expanded through the purchase of certain assets of LeeMAH DataCom Security Corporation. The Company currently has over 300 customers located in 35 countries and more than 50,000 appliances and devices currently in use. References in this document to "we," "our," "us," and "the Company" refer to ION Networks, Inc. Our principal executive offices are located at 120 Corporate Blvd. South Plainfield, New Jersey 07080, and our telephone number is (908) 546-3900.

 Market Background

The Exposure  

Accelerated growth of market factors such as increasing network complexity and expansion of network management outsourcing has resulted in a far greater need for security of network administrative interfaces. These interfaces are used for network and device management, maintenance and repair, as well as updates and changes. The administrative ‘sessions’ are active in all types of networks including voice networks, data networks and networks supporting critical infrastructure such as electronic distribution. To perform these functions effectively and efficiently, both local and remote access is required.

The “Inside” Threat is Real  

Enterprises and service providers alike must consider the human element in performing network support and maintenance. In addition to the outsourcing of many IT functions, employee turnover at both the enterprise and service provider plays a key role in secure access and network security. Today, the ‘insider’ is everywhere, even outside. The technical environment poses additional challenges. Remote access is necessary to maintain any semblance of cost controls and access is quite simple. The risk of a security breach has never been higher. The ‘trusted’ community is large, knowledgeable and potentially motivated. Inconsistent, ineffective, and non-existent security practices exist in far too many places. An inadvertent breach is as costly as a malicious attack. According to The National Strategy to Secure Cyberspace (part of The President’s Critical Infrastructure Protection Board,) “approximately 70 percent of all cyber attacks on enterprise systems are believed to be perpetrated by trusted insiders.” The former Director of Security Strategies of The Hurwitz Group stated, “For every in-house attack reported, there could be as many as 50 that go either unreported or undetected.” Newspapers, magazines and government publications are littered with articles about security breaches such as the US Department of Justice press release on November 26, 2001 where, “former (network hardware vendor) accountants sentenced for unauthorized access to computer systems to illegally issue almost $8 Million in company stock to themselves” and the US Department of Justice press release on December 18, 2003, where a “Milford man pleads guilty to intrusion and theft of data costs company $5.8 Million.”

To Make Matters Worse . . .  

Federal regulations are stringent and increasing while new legislation from States has already begun. Fines for mismanagement have been greatly increased. Penalties, formerly just at the corporate level are now targeted at individuals as well. Executives are now personally responsible and liable for fines, incarceration and professional sanctions. Fragile customer trust is fueling negative publicity while legal costs are rising. In an effort to combat these realities, organizations have learned that compliance is not simple. Regulations are sweeping, yet vague. Implications are felt across all departments and ignorance is no longer an accepted excuse. ION’s solutions help mitigate these risks.

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The ION Networks Solution

At the core of enterprise networks is proprietary data and information. It is typically accessed by its end user population through the perimeter of the network to applications that massage and organize the data and information. In order to gain access, users have to go through firewalls, intrusion detection systems, anti-virus software and other tools. The overall enterprise contains many different networks such as a Data Network with routers and switches, a Voice Network with PBXs and voicemail, an IT Network with servers and network attached storage, and middleware such as databases and applications. In order to maintain and support the various enterprise networks and their devices, internal network support staff along with equipment vendors, managed service providers, IT consultants, etc., must have access.  ION’s integrated solution includes PRIISMS, which provides controlled centralized access and administrativ e management access; a family of administrative security appliances, which provide local security for remote access sessions and include encryption, strong authentication and environmental monitoring; and 3DES soft tokens with two factor authentication, which can be used from a Windows PC, Palm or Blackberry.  

The Value Equation  

The value of ION’s solution can be viewed through the eyes of the Company’s Enterprise customers, Service Provider customers, and in many cases, both. A sample of elements that provide value to both include:  

·

Scalable across thousands of distributed locations and tens of thousands of protected endpoints. The modular hardware design and robust software allow the solution to be easily expanded.

·

Reduces knowledge of inner workings of networks by masking routes to equipment preventing endpoints from being accessed independently.

·

Provides audit and forensic data through the real-time monitoring of administrative sessions, instantly identifying incorrect network administration as well as a tool for fault diagnostics.

·

Provides alarms for network and device outages, vulnerabilities and environmental events through polling to accelerate fault identification and resolution while allowing immediate response to an impending breach.

·

Provides high availability with both in-band and out-of-band secure access

A few elements of the value equation that address enterprise concerns include:

·

Regulatory compliance support by encrypting, recording and reporting all device management activities, controlling access to information and maintaining privacy.

·

Reduces internal and external threats since access to information is approved or denied at a central point and monitoring of user activity and endpoints is accomplished in real-time.

·

Provides a mechanism to implement and maintain enterprise-wide security policies

·

Provides investment protection with full security and monitoring for legacy devices

A few of the value elements that address the many challenges facing service providers include:

·

Increased margins through more efficient management and a central point of control

·

Reduced costs since less headcount and fewer ‘truck rolls’ are required

·

Enhanced ability to meet their customers’ security policies and service level agreements

·

Differentiated and expanded service offerings

·

Reduced downstream liability due to increased audit controls

·

Lower cost of ownership by providing multiple functions in a single solution along with ease of device management.

ION Networks Products and Services

ION Networks provides a complete network and information security solution that provides secure access to enterprise networks through administrative interfaces as well as secure access to devices within the network. The specific devices the technical users may access and work upon, as well as what actions may be performed on those devices, can be controlled from a central point using ION’s PRIISMS software. Once authorization is granted and user authentication completed, the users’ activities can be monitored and tracked, down to the keystroke level. Should the technical user attempt to perform an action without permission, an alarm can be broadcast, preventing a breach before it occurs. Additionally, the environment and devices may be monitored with specific alarms that are sent due to water, heat or other damaging factors, including disconnecting of lines or devices or doors left ajar.  The ION security solut ion is based on centralized security policy management and distributed security policy enforcement. It consists of ION’s Administrative Security Gateway, PRIISMS for centralized management and control, and ION’s Administrative Security Appliances for distributed secure access and monitoring.  ION also provides training, consulting and support services to our customers and partners.

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ION PRIISMS  - Administrative Security Gateway  

Through its web-based user interface, PRIISMS provides connectivity to a vast array of managed endpoints from nearly every vendor covering a variety of platforms. This administrative security gateway enables authenticated administrators and technicians to configure, troubleshoot and manage geographically dispersed network devices from a central operations center within a secure environment. PRIISMS also provides centralized, 24x7 surveillance and provisioning across the entire suite of ION Administrative Security Appliances.

Key Capabilities include:

§

Single Sign-On Environment for Local and Remote Access.

Multi-factor authentication via ION soft tokens or 3^rd party vendor hard tokens

Support for in-band and out-of-band connectivity

Control of all device access information

Masking of IP addresses and phone numbers

Point and click access to all authorized devices

§

Secure Environment for all Administrative Access

Instant VPN tunneling for automatic encrypted sessions

HTTPS or SSH connections for all users

§

Centralized Administration for large Device Networks

User management of access to each device

Centralizes alarm notification, logging and consolidation

Device polling

Real-time, forensic monitoring and control of user sessions to the keystroke level

§

Scalable, Web-Based Architecture

Easily manage large (5000+) device communities

Easily handle great number of concurrent users

ION Administrative Security Appliances

ION appliances provide a connection point for secure, authorized access, and also act as a barrier to access by unauthorized systems and individuals. ION appliances integrate secure connectivity, monitoring, alarming and event logging of administrator level users into a single appliance, providing simplified and cost effective protection against unintentional or malicious security threats. ION’s suite of appliances support 2, 4, 16 or 28 serial ports, 1 or 2 modems, up to 2 Ethernet ports, multifactor authentication, and environmental sensor inputs including up to 144 contact closures, 2 relay connectors, 2 temperature sensor inputs and 1 analog input. In addition, the majority of ION appliances include support for encrypted sessions and a firewall.

Key Capabilities include:

§

Connectivity

Serial and Ethernet Connectivity

Built-in VPN, Router, Firewall capability

§

Security

Appliance logs

Logging of All Sessions – Distribution over Dial-up, Ethernet or via PRIISMS

PBX, VM, Router Monitoring (ASCII, PING)

Control of external devices for Device Reboot (intelligent power controller)

§

Monitoring and Alarming

Environment

Hi Temperature, Low Temperature

Water, Humidity

Contact Closures – Monitor UPS, Doors, Motion

Relays – Remotely Open Doors, Turn on Fan, Turn on Alarm or Flashing Light

Access – Notification of Login Success, Failure

Cables – Notification of Device Disconnect or Failure

Multiple Delivery Methods, Locations (SNMP, SMTP, Pager, ASCII)

§

Buffering / Forensics

Session Buffering

Host Port Buffering

Core Dump

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During 2005, the Company introduced new products, the first additions to ION’s product portfolio in many years. The Company introduced the first two models of the new 5600 product line and the new Secure Modem. The new products have been purchased by both existing as well as new customers and have been certified for use by ION’s current service providers.

ION Soft Tokens

ION soft tokens are simple to use. Each user may be assigned a ‘disposable’ ION soft token via email or the web which can be loaded onto a Windows®, RIM® Blackberry™ or PalmOS® device. Each time the user requests connectivity to PRIISMS or an appliance, they are challenged to enter additional criteria generated by the token that will positively identify them. ION soft tokens utilize strong 3DES encryption and can be quickly activated and deactivated through PRIISMS.  

Wide Range of Protected Infrastructure Devices

ION network and information security solutions protect a growing variety of infrastructure devices provided by leading IT and telecommunications network and system vendors, including vendors of:

o

Access Servers

o

Multi-Service Switches

o

Routers

o

Optical Switches

o

VoIP Platforms

o

PBXs (Switched & IP)

o

Call Management Systems

o

Power Protection Systems (UPS)

o

Carrier Grade Multi-Service Switches

o

Application Servers

o

Cellular Switches

o

SONET Switches

o

CSU/DSUs

o

SS7 Switches

o

Databases

o

DSLAMs

o

Integrated Access Devices

o

Storage Area Networks

o

LAN Switches

o

Terminal Servers

o

Mail Servers

o

UNIX Servers

o

Messaging Servers

o

Wireless Switches

Strategy

 The Company’s primary strategic goal is to concentrate on providing secure administrative access to enterprise networks while delivering a full security solution to our target markets. We will continue to focus on providing value to Service Providers, Enterprises and Government agencies rather than simply our technology. Key items of value include:

§

Scalability across thousands of distributed locations and tens of thousands protected endpoints

Modular hardware design and robust centralized management and control software

Easily expandable solutions

§

Reduction in the knowledge of the inner workings of networks

Routes to devices and information are masked

Endpoints cannot be independently accessed

§

Provision of audit and forensic data and real-time monitoring of administrative sessions

Identifying incorrect network administration

Providing a tool for fault diagnosis

§

Providing alarms to devices and environmental elements through polling

Mechanism for fault identification and resolution

Provide for immediate response to an impending breach

§

Enabling compliance with current legislation

Providing control over access to information

Maintaining privacy

§

Reduction of internal and external threats

Approval or denial, at a central point, of access to information

Monitoring user activities and endpoints in real-time

§

Reduction of costly administrative activities

Providing a single sign-on, central point of administration

Eliminating time and costs associated with password changes

Significantly reducing the requirement for on-site support

§

Continuing to be completely vendor agnostic

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§

Providing high availability through secure in-band and out-of-band access

One of our goals for 2006 is to build on the progress we made during 2005 in becoming recognized by our target markets as an industry leader and a standard by which secure access and network security solutions are measured.  Key elements of our strategy include:

Increase Percent of Value Delivered through Software. Continuing upon the direction of providing most of our new and enhanced value through our software technology, changing the hardware / software mix of the ION solution and enabling the Company to deliver greater value more rapidly.

Expand, Update Product Line, Develop New Products, and Reduce Manufacturing Costs. The Company continues its strategy of leveraging the open source development community and intends to expand its current offerings at both the entry and top end of its product offerings. During 2005 the Company developed and launched three new product offerings including both a two and four port next generation appliances and a lower cost solution for out of band management with the Secure Modem product. The Company intends to work on better aligning its solutions with its target markets, recognizing the different value equations for each. Having successfully reduced manufacturing costs during 2005 for both legacy and new products the Company will endeavor to maintain its margins while addressing the price pressures of the market.

Establish the ION Networks Brand. We believe that strong brand recognition in our target markets is important to our long-term success. We intend to continue to strengthen our brand names through increased corporate marketing, a newly refreshed web site, direct mailings to customers in all our target markets and public relations. The positioning of our solutions and the value they provide will contribute both our direct and more importantly, our indirect sales efforts.

Expand Indirect Channels. Our strategy is to build and expand our base of indirect channel partners domestically and internationally through new marketing programs and by leveraging current relationships. During 2005 and continuing in 2006 the Company has executed several reseller agreements including, but not limited to, new partners in the United Kingdom, Germany, Sweden, Finland, the Middle East, and the United States and other locations.

Expand Strategic Original Equipment Manufacturer Relationships. By entering into original equipment manufacturer ("OEM") arrangements to sell our products, we intend to leverage our sales capabilities and expand penetration of our target markets.  

Customers

During 2005, 49 customers generated $4,557,764 in revenue from hardware, software, services, maintenance and repairs. Historically, our largest customers have been service providers primarily in the United States and in Europe. See also “Risk Factors - We rely on several key customers for a significant portion of our business, the loss of which would likely significantly decrease our revenues" on page 13. While ION has begun to penetrate the corporate market and, in particular, the financial services sector, the majority of revenues continue to come from our traditional customer base, which consist primarily of service providers, resellers and OEM’s.

ION customers can be categorized based on three target markets: Enterprises, Service Providers and Governmental Agencies:

Enterprises. The Enterprise target market consists of non-governmental organizations that use their network infrastructure as a platform to provide their own goods or services. There are many sectors in the enterprise market, including, but not limited to, banking, financial services, insurance, energy, manufacturing, retailers, pharmaceuticals, healthcare, technology and transportation.

Service Providers. The service provider target market consists of businesses that use their network infrastructure to provide services to their customers and provide managed services to enterprises, supporting their networks and devices. It also includes resellers of solutions such as ION’s, who provide complementary services to their customer base.

Governmental Agencies. The Government target market consists of domestic and foreign governmental agencies that provide internal services to their constituencies. Particular emphasis is placed on agencies within the Department of Defense and the Department of Energy.

Sales and Marketing

Our marketing programs are intended to promote ION Networks and brand awareness to build our reputation as a supplier of highly scalable, robust, reliable, easy-to-use and cost-effective secure access and network security solutions. Following years of being unable to adequately promote and strengthen our brand due to the lack of financial resources, during the

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year ended December 31, 2005, the Company’s marketing efforts resulted in the development of all new sales collaterals for both our internal sales people and resellers, the placement of product advertising after an absence of many years, and a significant update to our web site.  We intend to expand and strengthen our customer and channel relationships through additional marketing programs and staff, as well as increased promotional activities in the future.  

While we believe ION solutions are suited for both direct sale to customers and indirect channels where it is not economically efficient for us to sell directly to end user organizations, we are focusing on the opportunity to leverage the sales forces of our service provider customers and resellers.  During the year ended December 31, 2005, the Company signed new, long-term agreements with three of its largest service provider customers. Three year agreements were signed with Sprint and Verizon and a two-year agreement was signed with Qwest Communications The Company also signed 3 new agreements with resellers in the US.

Direct Sales. On December 31, 2005, the Company's sales and marketing headcount stood at 6, up from 4 at December 31, 2004. For the year ended December 31, 2005, approximately 11% of ION’s revenue came from direct sales.

Indirect Sales/Channel Partners. We also market and sell our solutions via indirect channels through Service providers and reseller partners in the United States and in Europe.  During the latter half of the year ended December 31, 2005, the Company re-entered the European market with the addition of a full-time sales consultant. Four new resellers have been added to the Company’s portfolio of channel partners during the last year.  Indirect sales accounted for approximately 65% of our total revenue for the year ended December 31, 2005, an increase of 13% from the prior year. Our channel partnerships are non-exclusive.

Original Equipment Manufacturers (OEMs). We enter into select original equipment manufacturer relationships in order to take advantage of well-established companies that sell into our target markets. We believe these relationships expand our overall market penetration. The terms of our agreements with these customers vary by contract, but have typically been for three year terms. For the year ended December 31, 2005, our original equipment manufacturer revenue accounted for approximately 24% of total revenue.

Geographic Distribution. We divide our sales organization regionally into three territories: (1) the United States and Canada, (2) Europe, the Middle East and Africa, and (3) other locations.

For the year ended December 31, 2005, approximately 79% of ION's sales were shipped tothe United States and Canada and 21% Europe, the Middle East, Africa and other locations.  (Refer to Note 13 in the Company's Consolidated Financial Statements.)

Technical Services

We offer our customers a range of support services that includes technical support either by phone or electronically, product maintenance and repair, custom development and professional support services.  Our technical services staff, including quality assurance, is located at our corporate headquarters in South Plainfield, New Jersey.

Competition

The market for secure network access and security solutions is worldwide, highly competitive, and growing rapidly.  Competitors can be generally categorized as either: (i) vendors who provide high performance, security point products, or (ii) suppliers of network management appliances that provide limited security features. Many of these individual solutions require additional products in order to implement a comprehensive network access and security solution. Current and potential competitors in our markets include, but are not limited to the following companies, all of which sell worldwide or have a presence in most of the major markets for such products:

o    

Alarm and Buffer Box vendors  such as: Data Track, Teltronics, OmniTronics;

o    

Network vendors  such as: Cisco, Juniper ;

o    

Terminal Server vendors such as: MRV, Cyclades, Digi;

o   

Secure Modem vendors  such as: US Robotics, Multitech.

Many competitors have generally targeted large organizations' perimeter security needs with VPN, firewall and intrusion detection systems that range in price from under one thousand to hundreds of thousands of dollars. These offerings may increase competitive pressure on some of our solutions, resulting in both lower prices and gross margins. Many of our current or potential competitors have greater name recognition, larger customer bases and significantly greater financial, technical, marketing and

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other resources than ION. Nothing prevents or hinders these actual or potential competitors from entering our target markets at any time. In addition, our competitors may bundle products competitive to ours with other products that they may sell to our current or potential customers. These customers may accept these bundled products rather than separately purchasing our products. If these companies were to use their greater financial, technical and marketing resources in our target markets, it could adversely affect our business.  See also “Risk Factors - We face significant competition and if we do not compete successfully, our results of operations may be adversely affected" on page 12.

Sources And Availability Of Materials

The Company designs its security appliances utilizing readily available parts manufactured by multiple suppliers and relies on and intends to continue to rely on these suppliers. Our principal suppliers are Arrow Electronics, Inc., PPI Time Zero, Ituner Networks Corp., AVNET, Inc. and ACE Electronics, Inc. The Company has been and expects to continue to be able to obtain the parts required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that it will be able to continue to do so.

The Company sometimes utilizes a component available from only one supplier. If a supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. In these situations, the Company maintains a greater supply of the component on hand in order to allow the time necessary to effect a redesign or alternative course of action should the need arise.

Dependence On Particular Customers

Historically, the Company has been dependent on several large customers each year, but they are not necessarily the same every year. In general, the Company cannot predict with certainty, which large customers will continue to order our products. The loss of any of these large customers, or the failure to attract new large customers, could have a material adverse effect on the Company's business.

Intellectual Property, Licenses And Labor Contracts

The Company holds no patents on its technology. Although it licenses some of its technology from third parties, the Company does not consider any of these licenses to be critical to its operation.

The Company has made a consistent effort to minimize the ability of competitors to duplicate the software technology utilized in its solutions. However, the possibility of duplication of its products remains, and competing products have already been introduced.

Governmental Approvals And Effect Of Governmental Regulation

The Company's solutions may be exported to any country in the world except those countries restricted by the anti-terrorism controls imposed by the Department of Commerce. These anti-terrorism controls prohibit the Company from exporting some of its solutions to Cuba, Libya, Iran, North Korea, Sudan and Syria without a license. As with all U.S. origin items, the Company's solutions are also subject to the Bureau of Export Administration's ten general prohibitions that restrict exports to certain countries, organizations, and persons.

As required by law or demanded by customer contract, the Company obtains approval of its solutions by Underwriters' Laboratories. Additionally, because many of the products interface with telecommunications networks, the Company's products are subject to several key Federal Communications Commission ("FCC") rules requiring FCC approval.

Part 68 of the FCC rules contains the majority of the technical requirements with which telephone systems must comply in order to qualify for FCC registration for interconnection to the public telephone network. Part 68 registration requires telecommunication equipment interfacing with the public telephone network to comply with certain interference parameters and other technical specifications. FCC Part 68 registration for ION's existing products has been granted, and the Company intends to apply for FCC Part 68 registration for all of its new and future products.

Part 15 of the FCC rules requires equipment classified as containing a Class A computing device to meet certain radio and television interference requirements, especially as they relate to operation of such equipment in a residential area. Certain of ION's products are subject to and comply with Part 15.

The European Community has developed a similar set of requirements for its members and the Company has begun the compliance process for its products in Europe. Additionally, ION has certified certain of its products to the NEBS (Network Equipment Business Specification) level of certification. This is a certification that was developed by Bellcore (now Telcordia

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Technologies) and is required by many of ION's telecommunications customers.

Research And Development Activities

As of December 31, 2005, the Company had 6 staff members devoting part of their time to research and development activities. We believe the effort of these employees will be minimally sufficient to allow the Company to keep up with technology advances for the foreseeable future. However, the Company currently intends to increase staff during 2006, as resources become available, in order to more rapidly introduce new and enhanced products. In 2005 and 2004, the Company incurred a charge of $523,060 and $598,012, respectively for Research and Development (“R&D”) activities.

The current R&D staff was primarily responsible for the successful completion and delivery of the most recent ISOS software releases and enhancing PRIISMS functionality. They also enhanced the code base to meet major customer requirements and significantly reduced the number of product issues affecting our customers. In addition, the quality assurance function was reestablished and has designed a new QA lab for product testing.  

Employees

As of December 31, 2005, the Company had 25 full-time employees and 1 part-time employee. This headcount includes 13 technical and production, 7 sales, marketing and support, and 6 financial, administrative and executive capacities. None of the Company's employees are represented by labor unions. The Company believes it has generally satisfactory relations with its employees.

RISK FACTORS

We are vulnerable to technological or regulatory changes, which may cause our products and services to become obsolete or to fail to comply with new regulatory requirements, which could materially and negatively impact our cash flow.

Our industry experiences rapid technological changes, changing customer requirements, frequent new product introductions and evolving industry standards that may render existing products and services obsolete or out of compliance with certain countries regulatory requirements. As a result, more advanced products produced by competitors could erode our position in existing markets or other markets that they choose to enter and prevent us from expanding into existing markets or other markets. It is difficult to estimate the life cycles of our products and services, and future success will depend, in part, upon our ability to enhance existing products and services and to develop new products and services on a timely basis. We might experience difficulties that could delay or prevent the successful development, introduction and marketing of new products and services. New products and services and enhancements might not meet the re quirements of the marketplace and achieve market acceptance. The introduction of new environmental regulations for the member countries of the European Union may require significant re-engineering of the Company’s current products during 2006 in order to make the products comply with the new RoHS/WEEE standards. If ION fails to maintain its technological relevance or fails to comply with the new environmental standards, it could materially and negatively affect its cash flow, financial condition and the results of operations.

Hardware and software incorporated in our products may experience bugs or "errors" which could delay the commercial introduction of our products and require time and money to alleviate.

Due to the complex and sophisticated hardware and software that is incorporated in our products, our products have in the past experienced errors or "bugs" both during development and subsequent to commercial introduction. We cannot be certain that all potential problems will be identified, that any bugs that are located can be corrected on a timely basis or at all, or that additional errors will not be located in existing or future products at a later time or when usage increases. Any such errors could delay the commercial introduction of new products, the use of existing or new products, or require modifications in systems that have already been installed. Remedying such errors could be costly and time consuming. Delays in debugging or modifying products could materially and adversely affect our competitive position.

We have difficulty predicting our future operating results or profitability due to the fluctuation in our quarterly and annual revenues.

In the past, we experienced fluctuations in our quarterly and annual revenues and we anticipate that such fluctuations will continue therefore making it difficult for us to predict our future operating results or profitability. Our quarterly and annual operating results may vary significantly depending on a number of factors, including:

o    

the timing of the introduction or acceptance of new products and services;

o

changes in the mix of products and services provided;

11

o

long sales cycles;

o

changes in regulations affecting our business;

o    

increases in the amount of research and development expenditures necessary for new product development and innovation;

o

changes in our operating expenses;

o

uneven revenue streams;

o

volatility in general economic conditions;

o

volatility in the network  security market; and

o

threats of terror and war.

We cannot assure you that our revenues will not vary significantly among quarterly periods or that in future quarterly periods our results of operations will not be below prior results or the expectations of public market analysts and investors. If this occurs, the price of our common stock could significantly decrease. See also “Risks Associated with Our Securities - There is potential for fluctuation in the market price of our securities" page 14.

In the past we have experienced significant losses and negative cash flows from operations. If this trend reoccurs in the future, it could adversely affect our financial condition.

ION incurred significant, though declining, losses for several years prior to 2005. For the year ended December 31, 2005, ION posted net income of $182,271 compared to a 2004 annual net loss of $249,840.  Despite the Company's improvement in profitability from 2004 to 2005 cash flows from operations were negative $81,590 for the current year compared to a positive cash flow in 2004 of  $108,279. This was due primarily to the large receivables generated in December of 2005 when revenues for the month exceeded $800,000. The positive result in earnings for 2005 is no assurance that our business will continue to be profitable in the future. If the Company returns to prior trends of losses and negative cash flows from operations, it could have a material adverse affect on our financial condition.

As of December 31, 2005 the Company continues to have a marginal working capital balance, which could inhibit future growth and impact the Company’s financial viability.

Although the Company’s working capital balance increased to $679,515 at December 31, 2005 as compared to $372,861 at December 31, 2004 this balance is still lower than the Company’s optimal requirements. This low working capital balance, while continuing to improve, may impact the ability of the Company to attract new customers and qualified employees and could have a material adverse affect upon our business.

We face significant competition and if we do not compete successfully, our results of operations may be adversely affected.

We are subject to significant competition from different sources for our different products and services. We cannot assure you that the market will continue to accept our hardware and software technology or that we will be able to compete successfully in the future. We believe that the main factors affecting competition in the network security business are:

o    

the products' ability to meet various network  security requirements;

o    

the products' ability to conform to the network and/or computer systems;

o   

 the products' ability to avoid becoming technologically outdated;

o    

the willingness and the ability of distributors to provide support customization, training and installation; and

o

the price.

Although we believe that our present products and services are competitive, we compete with a number of large data networking, network security and network device manufacturers which have financial, research and development, marketing and technical resources far greater than ours.  Our competitors may succeed in producing and distributing competitive products more

12

effectively than we can produce and distribute our products, and may also develop new products which compete effectively with our products. Many of our current or potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical, marketing and other resources than we do. Nothing prevents or hinders these actual or potential competitors from entering our target markets at any time. In addition, our competitors may bundle products competitive to ours with other products that they may sell to our current or potential customers. These customers may accept these bundled products rather than separately purchasing our products. If our current or potential competitors were to use their greater financial, technical and marketing resources in our target markets and if we are unable to compete successfully, our business, financial condition and re sults of operations may be materially and adversely affected.

We may be unable to protect our proprietary rights, permitting competitors to duplicate our products and services, which could negatively impact our business and operations.

We hold no patents on any of our technology. If we are unable to license any technology or products that we may need in the future, our business and operations may be materially and adversely impacted. We have made a consistent effort to minimize the ability of competitors to duplicate our software technology utilized in our products. However, there remains the possibility of duplication of our products, and competing products have already been introduced. Any such duplication by our competitors could negatively impact our business and operations.

We rely on several key customers for a significant portion of our business, the loss of which would likely significantly decrease our revenues.

Historically, we have been dependent on several large customers each year, but they are not necessarily the same every year. For the year ended December 31, 2005, our most significant customers (stated as an approximate percentage of revenue) were Avaya 33% and Sprint 22% compared to the year ended December 31, 2004, of Avaya 38% and MCI 9%. In general, we cannot predict with certainty, which large customers will continue to order. The loss of any of these large customers, or the failure to attract new large customers would likely significantly decrease our revenues and future prospects, which could materially and adversely affect our business, financial condition and results of operations.

We depend upon key members of our employees and management, the loss of which could have a material adverse effect upon our business, financial condition and results of operations.

Our business is greatly dependent on the efforts of the Chief Executive Officer, Mr. Norman E. Corn, Chief Financial Officer, Mr. Patrick E. Delaney, Chief Technology Officer, Mr. William Whitney, and Senior Vice President of Technical Services, Mr. Henry Hill and other key employees, and on our ability to attract key personnel. Other than with respect to Messrs. Corn, Delaney, and Whitney, we do not have employment agreements with our other key employees. Our success depends in large part on the continued services of our key management, sales, engineering, research and development and operational personnel and on our ability to continue to attract, motivate and retain highly qualified employees and independent contractors in those areas. Competition for such personnel is intense and we cannot assure you that we will successfully attract, motivate and retain key personnel. While all of our employees have entered into non-compe te agreements, there can be no assurance that any employee will remain with us. Our inability to hire and retain qualified personnel or the loss of the services of our key personnel could have a material adverse effect upon our business, financial condition and results of operations. Currently, we do not maintain "key man" insurance policies with respect to any of our employees.

We rely on several contract manufacturers to supply our products. If our product manufacturers fail to deliver our products, or if we lose these suppliers, we may be unable to deliver our product and our sales could be negatively impacted.

We rely on several primary contract manufacturers to supply our products including: PPI Time Zero, CaseTronic Engineering Group, and ACE Electronics, Inc. If these manufacturers fail to deliver our products or if we lose these suppliers and are unable to replace them, then we would not be able to deliver our products to customers. This could negatively impact our sales and have a material adverse affect on our business, financial condition and results of operations.

Our certificate of incorporation and bylaws contain limitations on the liability of our directors and officers, which may discourage suits against directors and executive officers for breaches of fiduciary duties.

Our Certificate of Incorporation, as amended, and our Bylaws contain provisions limiting the liability of our directors for monetary damages to the fullest extent permissible under Delaware law. This is intended to eliminate the personal liability of a director for monetary damages on an action brought by or in our right for breach of a director's duties to us or to our stockholders except in certain limited circumstances. In addition, our Certificate of Incorporation, as amended, and our Bylaws contain provisions requiring us to indemnify our directors, officers, employees and agents serving at our request, against expenses, judgments (including derivative actions), fines and amounts paid in settlement. This indemnification is limited to actions taken in good faith in the reasonable belief that the conduct was lawful and in, or not opposed to our best interests. The Certificate of

13

Incorporation and the Bylaws provide for the indemnification of directors and officers in connection with civil, criminal, administrative or investigative proceedings when acting in their capacities as agents for us. These provisions may reduce the likelihood of derivative litigation against directors and executive officers and may discourage or deter stockholders or management from suing directors or executive officers for breaches of their fiduciary duties, even though such an action, if successful, might otherwise benefit our stockholders and directors and officers.

RISKS ASSOCIATED WITH OUR SECURITIES

We do not anticipate the payment of dividends.

We have never declared or paid cash dividends on our common stock. We currently anticipate that we will retain all available funds for use in the operation of our business. Thus, we do not anticipate paying any cash dividends on our common stock in the foreseeable future.

There is potential for fluctuation in the market price of our securities.

Because of the nature of the industry in which we operate, the market price of our securities has been, and can be expected to continue to be, highly volatile. Factors such as announcements by us or others of technological innovations, new commercial products, regulatory approvals or proprietary rights developments, and competitive developments all may have a significant impact on our future business prospects and market price of our securities.

Shares that are eligible for sale in the future may affect the market price of our common stock.

These shares consist of 3,998,990 shares issuable pursuant to currently exercisable options, 4,049,969 shares issuable pursuant to currently exercisable warrants, 1,555,570 shares issuable pursuant to currently convertible preferred stock of 155,557 shares and 2,409,639 shares are issuable pursuant to a convertible debenture. Future sales of substantial amounts of shares in the public or private equity markets, or the perception that such sales could occur, could negatively affect the price of our common stock.

We may be restricted from issuing new equity securities.

In September 2002, we issued shares of Series A Preferred Stock to several investors. Under the terms of the preferred stock, any issuances of equity securities or securities convertible into or exercisable for equity securities require the prior approval of the holders of a majority of the outstanding shares of Series A Preferred Stock. While two of our directors currently own a significant   portion (48.8 %) they do not own a majority of the preferred stock. While the Company has been successful in obtaining the consent of a majority of the Series A Preferred Stock when the Board of Directors has requested, there can be no assurance that the Company will continue to be able to obtain such consent. If the Company is unable to obtain this approval, the Company would be prevented from issuing equity securities which would preclude the Company from raising equity financing, utilizing equity based compensation plans and from other action s requiring the issuance of equity securities. In addition, the consent of certain of our existing investors (which consent may not be unreasonably withheld or delayed) is required in connection with certain financings involving (subject to certain exclusions) the issuance of securities in which the purchase price, number of securities, exercise price or conversion rate are subject to future adjustments. Failure to obtain such consent could restrict the Company's ability to avail itself of the benefits of such financings.

14

Item 2: Description of Property

The Company entered into a lease on August 1, 2003 for approximately 7,000 square feet for its principal executive offices at 120 Corporate Blvd., South Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003 through July 2006. The Company is also obligated to make additional payments to the landlord relating to certain taxes and operating expenses.

The Company abandoned the lease space at 48834 Kato Road, Fremont, California in the Bedford Fremont Business Center. This lease commenced on June 1, 1999 and is for a term of 60 months with monthly rent payable by the Company to the landlord as follows: $7,360 per month for the first 12 months of the term; $7,590 per month for months 13-24; $7,820 per month for months 25-36; $8,050 per month for months 37-48; and $8,280 per month for months 49-60. The Company entered into an abandonment agreement with the landlord in March of 2003. As a result, the Company recorded a one-time charge to Restructuring of $123,510 in the quarter ended March 31, 2003. This amount represents the total lease payments from December 2002 to May 2004 offset by landlords stated sub-lease rental payments.  The Company has not occupied the space since approximately March 2003. In 2004, Management revaluated the status of the then ongoing negotiations and reduced its prior reserve amount by approximately $63,716. Management believes that due to the fact that the landlord leased the property to another tenant and has not responded to the Company’s request for additional information that the final settlement amount will be negligible and therefore wrote off the remaining accrual of  $59,908 at December 31, 2005. However, the Company and Landlord have no settlement agreement in place at this time.

Item 3: Legal Proceedings

None

Item 4: Submission of Matters to a Vote of Security Holders  

None

15

PART II

Item 5: Market For Common Equity and Related Stockholder Matters

Market Information

The Company's common stock, par value $.001 per share (the "Common Stock"), is currently quoted on the OTC Bulletin Board under the symbol "IONN.OB". The following table sets forth the high ask and low bid prices of the Common Stock for the periods indicated as quoted on the OTC Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.  

 Year Ended December 31, 2005, Quarter Ended

          HIGH

     LOW

March 31, 2005

          $0.27

     $0.17

June 30, 2005

            0.19

       0.09

September 30, 2005

            0.19

       0.11

December 30, 2005

            0.17

       0.07

Year Ended December 31, 2004, Quarter Ended

March 31, 2004

          $0.20

     $0.04

June 30, 2004

            0.14

       0.05

September 30, 2004

            0.37

       0.06

December 30, 2004

            0.44

       0.19

Small Business Issuer Purchases of Equity Securities  

The Company did not purchase any of its equity securities during the fourth quarter of 2005.

Security Holders

As of February 28, 2006 there were 403 holders of record of the Common Stock.  

Dividends

The Company has not paid any cash dividends on its Common Stock during the years ended December 31, 2005 and December 31, 2004.  The Company presently intends to retain all earnings to finance its operations and therefore does not presently anticipate paying any cash dividends in the foreseeable future.

Unregistered Shares

On September 9, 2005 in connection with services performed by a consultant, the Company issued fully vested warrants to purchase 326,087 shares of the Company’s Common Stock at $0.23 per share. The warrants will expire on September 9, 2008.

On December 1, 2005 in connection with services performed by a consultant, the Company issued warrants to purchase 350,000 shares of the Company’s Common Stock at $0.11 per share, which will expire on November 30, 2007. As of December 31, 2005 all shares were fully vested.

Item 6: Management's Discussion and Analysis or Plan of Operation

Overview

The Company’s financial condition improved significantly in 2005 with the Company returning to profitability for the first year since fiscal year 1998. Sales increased 26% to $4,557,764 in 2005 from $3,616,261 in 2004, while net income for 2005 was $182,271 compared to a net loss of $ 249,840 for 2004. Despite the Company's improvement in profitability from 2004 to 2005 cash flows from operations were negative $81,590 for the current year compared to a positive cash flow in 2004 of  $108,279. During 2005, the Company invested over $600,000 in new products, which it expects to fully roll out in 2006.  The Company’s working capital at December 31, 2005 was $306,654 higher than at December 31, 2004 due primarily to a sharp increase in accounts receivable generated by significant sales late in the fourth quarter. The Company continues to have a delicate cash position and while the future viability of the organization has significantly improved, it is necessary for it to continue to strictly manage expenditures and to increase product revenues.

16

Results Of Operations

Explanatory Note

2005 Compared to 2004

The Company had net income of $182,271 in 2005 compared to a net loss of $249,840 in 2004, for an improvement of $432,111. The improvement was due primarily to an increase in gross margin of $816,711 offset in part by increased operating expenses of $336,529, increased financing costs of $20,882 and reduced income tax benefit of $23,824.

Revenues for 2005 were $4,557,764 as compared to $3,616,261 for 2004, an increase of approximately 26% or $941,503. This increase is attributable mainly to the growth in hardware sales of $610,912 due to the introduction of new products during 2005 which amounted to $808,463 offset in part by the discontinuance of certain legacy products resulting in a $293,990 decline in those product sales compared to 2004. Software and professional services sales increased by $206,974 and $172,354, respectively, and were offset in part by a $76,704 decline in repair and maintenance sales. The Company's increase in gross margin as a percentage of revenue from 60.8% in 2004 to 66.2% in 2005 was due primarily to a $236,812 reduction in the amount of amortization of capitalized software costs.

Research and development expenses, net of capitalized software development, decreased to $523,060 for 2005 from $598,012 for 2004, a decrease of 12.5% or $74,952. This decrease was primarily due to increased capitalized software expenditures of $229,303 offset in part by increased salary and salary related expenses of $218,744 and decreased professional services expenses of $55,140.

Selling, general and administrative (“SG&A”) expenses increased 14.6% from $2,314,834 in 2004 to $2,653,865 in 2005, due primarily to increased salary and salary related expenses of $456,278 and increases for marketing related expenses for outside services of $29,724.  The SG&A salary related expense increase was due primarily to the transfer of one executive from R&D (an increase of $172,500), $112,200 in increased sales commissions, a headcount increase of $110,000 for marketing and salary increases of $61,578. These increases were offset in part by decreases to legal fees of $88,757 and insurance expense of $87,764.

Depreciation was $9,872 for 2005 compared to $57,325 for 2004, a decrease of $47,453 primarily because the Company did not purchase depreciable fixed assets at a rate equal to prior periods for communications and computer equipment.

The Company acquired a corporation business tax benefit certificate pursuant to New Jersey law, which relates to the surrendering of unused net operating losses. For 2005 and 2004, the Company received a benefit of $299,007 and $322,831, respectively.

During 2005 the Company recognized benefits from restructuring in the amount of $59,908 compared to $180,533 for 2004.  

Financial Condition And Capital Resources

The Company's working capital balance as of December 31, 2005 was $679,515 compared to $372,861 as of December 31, 2004.

Net cash used in operating activities during 2005 was $81,590, compared to net cash provided by in operating activities of $108,279 during 2004. This $189,869 difference was due primarily to a $264,676 increase in accounts receivable and a $284,265 reduction in depreciation and amortization, offset by a $432,111 increase in net income between 2004 and 2005.

Net cash used in investing activities during 2005 was $627,991 compared to net cash used of $321,963 in 2004. The increase of $306,028 was due to an increase of capitalized software expenditures in 2005 to $600,673 compared to $310,223 in 2004 for new products expected to be fully rolled out in 2006

Net cash provided by financing activities during 2005 was $618,486, compared to $143,410 provided during 2004. The increase was primarily related to the sale of common stock and warrants to purchase common stock in 2005, for which the Company received net proceeds of $657,659.

Off-Balance Sheet Arrangements

As of February 22, 2006, we did not have any off-balance sheet debt nor did we have any transactions, arrangements, obligations (including contingent obligations) or other relationships with any unconsolidated entities or other persons that may have a material current or future effect on financial conditions, changes in financial conditions, result of operations, liquidity, capital expenditures, capital resources, or significant components of revenue or expenses.

17

Critical Accounting Policies  

Use of Estimates -

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.

The significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, capitalized software including estimates of future gross revenues, and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives.

Allowance for Doubtful Accounts Receivable -

Accounts receivable are reduced by an allowance to estimate the amount that will actually be collected from our customers. 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.

Inventories, net -

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 its 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. Our inventory carrying costs are not material; thus we may not physically dispose of reserved inventory immediately.

Capitalized Software -

The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Capitalized costs are amortized to cost of sales 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 straig ht-line method over the estimated useful life of the product. As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term.  There was no adjustment in the amount of amortization expense in 2005.

The Company records 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.

Item 7: Financial Statements

The financial statements required hereby are located on pages 36 through 53.

Item 8: Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

None

Item 8A: Controls and Procedures

Prior to the filing date of this annual report, the Company's management, under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, performed an evaluation 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 that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

18

Item 8B: Other Information

None

19

Part III

Item 9: Directors, Executive Officers, Promoters and Control Persons; Compliance With Section 16(a) of the Exchange Act.

The directors and executive officers of the Company are as follows:

Name

Age

Position Held with the Company

Norman E. Corn

59

Chief Executive Officer and Director

Patrick E. Delaney

52

Chief Financial Officer

William Whitney

51

Chief Technology Officer and

Vice President of Research and Development

Stephen M. Deixler

70

Chairman of the Board of

Directors

Harry F. Immerman

62

Director

Frank S. Russo

63

Director

Henry A. Hill

46

Senior Vice President of Technical Services

NORMAN E. CORN has served as Chief Executive Officer since August 15, 2003. Prior to joining ION, from 2000 until 2003, Mr. Corn was Executive Vice President of Liquent, Inc., a Pennsylvania-based software company that provides electronic publishing solutions, focused on the life sciences industry. Mr. Corn has also served from 1994 to 2000 as CEO of TCG Software, Inc., an offshore software services organization providing custom development to large corporate enterprises in the US.

Mr. Corn has led other companies, including Axiom Systems Group, The Cobre Group, Inc., The Office Works, Inc. and Longview Results, Inc., having spent the early part of his career in sales, marketing and executive positions in AT&T and IBM.

PATRICK E. DELANEY has served as Chief Financial Officer since September 15, 2003. Prior to joining ION, from 2000 until 2003, Mr. Delaney was the President of Taracon, Inc. a privately owned independent consulting firm that provides management consulting for early and mid-stage technology and financial services companies. Mr. Delaney also served as Chief Financial Officer for two publicly traded telecommunications providers, Pointe Communications Corporation from 1993 to 2000 and Advanced Telecommunications Corporation from 1986 to 1993. Mr. Delaney has served other companies in executive capacities including RealCom Communications, Argo Communications and ACF Industries.

WILLIAM WHITNEY has served as Vice President of Research and Development since March 2002 and Chief Technology Officer since October 1, 2002.  Prior to joining ION, from April 2000 to February 2002, Mr. Whitney served as the Vice President of Development and Chief Technology Officer for Outercurve Technologies, a provider of wireless application development and deployment solutions.  Previously from, May 1998 to March 2002, Mr. Whitney served as President of CTO Systems.

STEPHEN M. DEIXLER has been Chairman of the Board of Directors since May 1982 and served as Chief Executive Officer of the Company from April 1996 to May 1997. He was President of the Company from May 1982 to June 1985 and served as Treasurer of the Company from its formation in 1982 until September 1993. During the period since March 2003 to September 2003, Mr. Deixler served as the interim Chief Financial Officer of the Company. He also serves as Chairman of the Board of Trilogy Leasing Co., LLC and President of Resource Planning Inc. Mr. Deixler was the Chairman of Princeton Credit Corporation until April 1995.

HARRY F. IMMERMAN joined the ION Network Board of Directors in October, 2004. Mr. Immerman retired from PricewaterhouseCoopers LLP (“PwC”) in July, 2003, having worked at the firm since July, 1966. He became a partner in the firm on October 1, 1973.  During his career with PwC, he served in several management and client service positions. Mr. Immerman served as the Global Tax Leader for the Pharmaceutical Industry Sector from 1999 to 2003, the National Director of Industry Programs from 1996 to 1999 and as the Partner-in-Charge of the New York Metro Region and New York office tax department from 1983 to 1993. From 1983 to 1995, he also was a member of the Firm Council, the partner group responsible for management

20

oversight and governance. Mr. Immerman served as the client service tax partner on large multinational companies pharmaceutical and telecommunication enterprises.

FRANK S. RUSSO has served as a director of the Company since November 2000. Mr. Russo was with AT&T Corporation from September 1980 to September 2000 and most recently served as its Corporate Strategy and Business Development Vice President. While at AT&T, Mr. Russo held a number of other management positions including that of General Manager, Network Management Services from which he helped architect and launch AT&T's entry into the global network outsourcing and professional services business. Mr. Russo retired from AT&T in 2000. Prior to joining AT&T, Mr. Russo was employed by IBM Corporation in a variety of system engineering, sales and sales management positions. Mr. Russo served on the Board of Directors of Oak Industries, Inc., a manufacturer of highly engineered components, from January 1999 to February 2000, and currently serves on the Board of Directors of Retail Solutions, a private e-comme rce company headquartered in Waltham, Massachusetts.

HENRY A. HILL has served as Senior Vice President of Technical Services since August 31, 2004. Prior to joining ION, from 200X to 2004 Mr. Hill was Vice President of Client Services and Operations at Fast Track Systems, Inc., a Pennsylvania-based global provider of protocol design and clinical trial software for the pharmaceutical industry. Mr. Hill served as Chief Operating Officer at both Liquent, Inc., a software company that provides electronic publishing solutions and TCG Software, Inc., an offshore software services organization providing custom development to large corporate enterprises in the US. Mr. Hill has also held client services, operations, and technology management positions with global organizations including Accenture and Sea-Land Service.

Financial Expert

The Company's Board of Directors has determined that none of its current members meets the standard of an audit committee "financial expert" as defined in the Sarbanes-Oxley Act of 2002. The Company has determined that its current financial position makes it impractical to obtain the services of an additional director meeting this standard.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities and Exchange Act of 1934, as amended (the "Exchange Act"), requires the Company's directors, executive officers and persons who own more than 10% of the Company's Common Stock (collectively, "Reporting Persons") to file reports of ownership and changes in ownership of the Company's Common Stock with the Securities and Exchange Commission. Copies of these reports are also required to be delivered to the Company.

The Company believes, based solely on its review of copies of such reports received or written representations from certain Reporting Persons, that during 2005 Mr. Deixler failed to file Forms 4s with respect to the reporting of various stock options granted to him and with respect to the issuance of a convertible debenture to him and Mr. Russo and Mr. Whitney failed to file various Forms 4s with respect to the reporting of various stock options granted to them.

Code of Ethics

The Company has a Code of Ethics in place for all of its employees. A copy of the Company's Code of Ethics will be provided free of charge, upon written request to ION Networks, Inc 120 Corporate Blvd., South Plainfield, NJ 07080.

21

Item 10: Executive Compensation

The following table sets forth the compensation earned, whether paid or deferred, by the Company's Chief Executive Officer and its other two most highly compensated executive officers during the year ended December 31, 2005 (the "Named Executive Officers") for services rendered in all capacities to the Company.

Summary Compensation Table

                                   Annual Compensation

               Long-term Compensation

                              Awards

Payouts

Other

Annual

Compen-

Securities

All Other

Principal

sation

Underlying

Compen-

Position

Year

Salary($)

Bonus($)

($)

Options (#)

sation($)/

Norman E. Corn/                2005

235,800/(1)

30,000

9,296

      --  --

Chief Executive

2004

217,400/(1)

20,000

1,723

1,550,000

--

Officer

Patrick E. Delaney             2005

210,800/(1)

27,500

4,500

    --

--

Chief Financial

2004

181,400/(1)              10,000

4,125

800,000

Officer

William Whitney     

2005

155,000

12,500

--

    --

--

Vice President &

2004      

150,000

--

--

400,000

--

Chief Technology

Henry A. Hill

2005

150,000

12,500

--

    --

--

2004

50,577(2)

   --

--

500,000

14,000

(1) Includes $10,800 in auto allowance.

(2) Mr. Hill joined the Company on 8/31/04. Pursuant to his employment agreement, he received a base salary of $150,000 for the year ended December 31, 2004.

22

Option Grants for the Year Ended December 31, 2005

No stock options were granted during 2005 to the Named Executive Officers:

Aggregated Option Exercises for Year Ended December 31, 2005

And Year Ended Option Values

No stock options were exercised during 2005 by any of the Named Executive Officers. The following table sets forth the number and value of unexercised options held by each of the Named Executive Officers on December 31, 2005.

Value of

Number of

Unexercised

Securities Underlying

In-the-Money

Unexercised Options

Options at

at FY-End (#)

FY-End($)/(1)/

Name

Exercisable/Unexercisable

Exercisable/Unexercisable

Norman E. Corn

1,550,000/0

126,500/0

Patrick E. Delaney

800,000/0

44,000/0

William Whitney

500,000/214,500

11,000/0

Henry A. Hill

211,250/288,750

2,113/2,887

(1) The average price for the Common Stock as reported by the OTC Bulletin Board on December 31, 2005, was $0.17 per share. Value is calculated on the basis of the difference between the option exercise price and $0.17 multiplied by the number of shares of Common Stock underlying the options.

Compensation of Directors

Each year, Directors who are not also employees of the Company ("Non-Employee Directors") receive fully vested options to purchase 10,000 shares of Common Stock. Non-Employee Directors are also granted fully vested options to purchase an additional 1,500 shares of Common Stock for each meeting they attend of the Board or of a Board committee on which they serve. Options are granted at exercise prices per share equal to the fair market value of the common stock on the date of the grant.  In addition, the Company reimburses all Non-Employee Directors traveling more than fifty miles to a meeting of the Board of Directors for all reasonable travel expenses

Employment Contracts, Termination of Employment and Change of Control Arrangements

The Company is party to an employment agreement with Norman E. Corn dated August 15, 2003, as amended effective November 10, 2004, which has no specific stated termination date. Pursuant to the agreement Mr. Corn serves as Chief Executive Officer at the will of the Company. Mr. Corn’s annual base salary during 2005 was $225,000. In addition, he receives a monthly car allowance of $900 plus reimbursement for life and disability insurance. On January 28, 2004, the Company awarded Mr. Corn 800,000 fully vested incentive stock options to purchase common stock at $0.115 per share and 750,000 fully vested non-qualified stock options to purchase common stock at $0.06 per share. If the Company terminates Mr. Corn’s employment it is obligated to make a severance payment equal to 18 months of his then current annual salary.

The Company is party to an employment agreement with Patrick E. Delaney dated September 15, 2003, as amended effective November 10, 2004, which has no specific stated termination date. Pursuant to the agreement Mr. Delaney serves as Chief Financial Officer at the will of the Company. Mr. Delaney’s annual base salary during 2005 was $200,000. In addition, he receives a monthly car allowance of $900 plus reimbursement for life and disability insurance. On January 28^, 2004, the Company awarded Mr. Delaney 800,000 fully vested incentive stock options to purchase common stock at $0.115 per share and 250,000 fully vested non-qualified stock options to purchase common stock at $0.045 per share. If the Company terminates Mr. Delaney’s employment, it is obligated to make a severance payment equal to 18 months of his then current annual salary.

The Company is party to an employment agreement with William Whitney dated March 11, 2002, which has no specific stated termination date..  Pursuant to the agreement, Mr. Whitney receives a base salary of $155,000 per year. Pursuant to the agreement, Mr. Whitney was granted incentive stock options at the time the agreement was entered into, entitling him to purchase 100,000 shares of the Company's Common Stock at $0.70 per share, and he was made eligible to participate thereafter in the Company’s stock option plans.  The initial options granted pursuant to the agreement vested as follows: 34,000 on March 11, 2003 and 8,250 at the end of each three month period thereafter, with the last options vesting on March 11, 2005. If the Company

23

terminates Mr. Whitney’s employment, it is obligated to make a severance payment equal to six months of his then current annual salary.

The Company entered into an employment agreement with Henry A. Hill dated August 31, 2004, which has no specific stated termination date..  Pursuant to the agreement, Mr. Hill receives a base salary of $150,000 per year. Pursuant to the agreement, Mr. Hill was granted incentive stock options to purchase 500,000 shares of the Company's Common Stock at $0.16 per share.  These options vested as follows: 170,000 on August 30, 2005 and 41,250 at the end of each three month period thereafter, with the last options vesting on August 30, 2007.  If the Company terminates Mr. Hill’s employment, it is obligated to make a severance payment equal to six months of his then current annual salary. Effective January 1, 2006 Mr. Hill receives a monthly car allowance of $600.

24

Item 11: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Equity Compensation Plan Information

As of December 31, 2005

(c)

Number of securities

(a)

(b)

remaining available for

Number of securities to

Weighted-average

future issuance under

be issued upon exercise

exercise price of

equity compensation plans

of outstanding options,

outstanding options,

(excluding securities

warrants, and rights

warrants, and rights

reflected in column (a))

Plan Category

Equity compensation plans approved by

4,139,831

0.27

1,752,169

security holders/(1)/

Equity compensation plans not approved

1,349,087

0.7

-

by security holders/(2)/

Total

5,488,918

0.48

1,752,169

 (1) Shareholder Approved Plans

In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2000 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2000 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During 2005 and 2004, the Company granted options to purchase 170,000 and zero shares, respectively, under the 2000 Plan. As of December 31, 2005, 2,736,000 options were outstanding under the 2000 Plan, of which 2,062,750 options were exercisable.

In June 1998, the Company adopted its 1998 Stock Option Plan (the "1998 Plan"). The aggregate number of shares of common stock for which options may be granted under the 1998 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 1998 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During 2005 and 2004, the Company granted options to purchase 62,500 and zero shares, respectively, under the 1998 Plan. As of December 31, 2005, 1,378,831 options were outstanding under the 1998 Plan, of which 1,033,000 options were exercisable. On January 23, 2006 the Company granted 1,335,000 shares under the 1998 Plan. As of February 28, 2006, 2,710,831 options were outstanding under the 1998 Plan, of which 1,375,831 options were exercisable.

In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The aggregate number of shares of common stock for which options may be granted under the 1994 Plan, as amended, is 1,250,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one common stock on the date of grant. During 2005 and 2004, there were no option grants provided under the 1994 Plan. As of December 31, 2005, 25,000 options were outstanding and exercisable under the 1994 Plan.

During the years ended 2005 and 2004, there were no options granted under the Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The options vest after seven years, however, under the TARSAP, the vesting is accelerated to the last day of the fiscal year in which the options are granted if the Company meets certain predetermined sales targets. The Company did not meet the targets for 2001 and, as such, all options granted under the TARSAP in 2001 will vest seven years from the original date of grant.

(1)

Non-Shareholder Approved Plans and Awards

During 2005 the Company granted warrants to purchase 676,087 shares of Common Stock outside of the shareholder approved plans. The awards have been made to employees, directors and consultants, and except as noted below, have been granted with an exercise price equal to the fair market value of the Common Stock on the date of grant. The Company has not reserved a specific number of shares for such awards. The non-shareholder approved awards are more specifically described below.

On January 23, 2006, the Company adopted its 2006 Stock Option Plan (the "2006 Plan"). The aggregate number of shares of

25

common stock for which options may be granted under the 2006 Plan is 4,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2006 Plan is 300,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. On January 23, 2006 the Company granted 1,335,000 shares under the 2006 Plan, subject to shareholder approval at the next shareholder meeting. As of February 28, 2006, 1,335,000 options were outstanding under the 2006 Plan, none of which were exercisable.

On September 9, 2005 in connection with services performed by a consultant, the Company issued fully vested warrants to purchase 326,087 shares of the Company’s Common Stock at $0.23 per share. The warrants will expire on September 9, 2008.

On December 1, 2005 in connection with services performed by a consultant, the Company issued warrants to purchase 350,000 shares of the Company’s Common Stock at $0.11 per share, which will expire on November 30, 2007. As of December 31, 2005 all options were fully vested.

In January 2004, the Company issued options to certain officers to purchase 1,000,000 shares of the Company’s Common Stock, which vested immediately. The exercise price of the options ranged from $0.045 to $0.06. At December 31, 2005, 750,000 options were outstanding and exercisable.

During July 2001 in connection with services being performed by a consultant, the Company issued warrants to purchase 48,000 shares of the Company's Common Stock at $0.62 per share. The warrants vested immediately and expire five years from the date of the grant.

During January 2002 in connection with services being performed by a consultant, the Company issued warrants to purchase 100,000 shares of the Company's Common Stock at $1.35 per share and 50,000 shares of Common Stock at $1.80 per share. The warrants vested immediately and expired in January 2005.

On March 19, 1999, the Company issued options to certain consultants and employees to purchase an aggregate of 20,000 shares of the Company's Common Stock, all of which vested on the first year anniversary of the date of grant.  A balance of 10,000 options expired unexercised on March 18, 2005.

On September 25, 1996, the Company issued options to certain officers and directors to purchase 620,000 shares of the Company's Common Stock, of which 420,000 vested immediately and 100,000 vested on April 1, 1998 and 1999. The options expire ten years from the date of grant. However, in the event of (a) the liquidation or dissolution of the Company or (b) a merger in which the Company is not the surviving corporation or a consolidation involving the Company, the options shall terminate, unless other provision is made in the transaction. The exercise price of the options was $1.156 and equaled the market value of the Company's Stock on the date of grant. At December 31, 2005, none of the options were outstanding and exercisable pursuant to a Final Settlement Agreement and Mutual Release executed on October 11, 2005.

26

Beneficial Ownership Information

The following table sets forth certain information regarding the beneficial ownership of the Company's Common Stock as of February 28, 2006 by each person (or group within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934) known by the Company to own beneficially 5% percent or more of the Company's Common Stock, and by the Company's directors and named executive officers, both individually and as a group.  Unless otherwise noted, the address of each person in the table is c/o the Company, 120 Corporate Blvd., S. Plainfield, New Jersey 07080.

As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting or to dispose or direct the disposition of any security. A person is deemed to be the beneficial owner of securities that can be acquired within sixty days from February 28, 2006 through the exercise of any option, warrant or right. Shares of Common Stock subject to options, warrants or rights (including conversion from Preferred Stock) which are currently exercisable or exercisable within sixty days are deemed outstanding for computing the ownership percentage of the person holding such options, warrants or rights, but are not deemed outstanding for computing the ownership percentage of any other person. The amounts and percentages are based upon 27,050,044 shares of Common Stock and 155,557 shares of Preferred Stock outstanding as of February 28, 2006.

Common Stock

Percent of Class

Norman E. Corn

1,815,000/(1)/

6.3%

Patrick E. Delaney

1,300,000/(2)/

4.5%

Stephen M. Deixler

3,506,380/(3)/

12.8%

Harry F. Immerman

75,000/(4)/

*

Frank  S. Russo

   383,280/(5)/

1.3%

William Whitney

   851,704/(6)/

3.0%

Henry A. Hill

   750,000/(8)/

Directors and Executive Officers as a

8,876,070

31.0%

group 7 persons)

5% or more beneficial owners:

AWM Investment Company

10,387,268/(7)/

36.3%

153 East 53rd Street, 55th Floor

New York, NY 10022

(1)  Includes 1,800,000 shares of Common Stock subject to options of which 1,550,000 are currently exercisable.

(2)  Includes 1,050,000 shares of Common Stock subject to options of which 800,000 are currently exercisable.

(3)   Does not include 69,677 shares of Common Stock owned by Mr. Deixler's wife, mother, children and grandchildren as to which shares Mr. Deixler disclaims beneficial ownership. Includes 480,560 shares of Common Stock subject to conversion from 48,056 shares of Preferred Stock within 60 days of February 28, 2006 and 141,000 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2006. Includes 2,409,639 shares issuable pursuant to conversion of a $200,000 debenture.

(4)   Consist of 75,000 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2006.

(5)   Includes 277,780 shares of Common Stock subject to conversion from 27,778 shares of Preferred Stock within 60 days of February 28, 2006 and 86,500 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2006.

(6)  Includes 38,890 shares of Common Stock subject to conversion from 3,889 shares of Preferred Stock within 60 days of March 15, 2004 and 750,000 shares of Common Stock subject to options that are currently exercisable or exercisable within 60 days of February 28, 2006.  

(7)  Includes currently exercisable warrants to purchase 3,325,882 shares of common stock.

(8)  Includes 750,000 shares of Common Stock subject to options of which 211,250 are currently exercisable.

27

*Indicates ownership of Common Stock of less than one (1%) percent of the total issued and outstanding Common Stock on February 28, 2006.

Item 12: Certain Relationships and Related Transactions

During 2005, certain officers and directors advanced to the Company a total of $160,500 without interest being accrued or paid. Upon closing of debt and equity financings, the Company repaid these advances.

During April 2000, the Company made a $750,000 loan (the “Loan”) to the former Chief Executive Officer (the “Former CEO”) of the Company. At the time, the Company was contemplating a secondary public offering and potential mergers and acquisitions opportunities and issued the loan in exchange for the Former CEO not exercising his stock options at that time.  At the time, the Company had sufficient cash and it was contemplated that the Loan would be repaid within one year.  The Loan accrued interest at a rate of LIBOR plus 1%. This Loan became due by its terms thirty days after the Former CEO resigned his position at the Company effective September 29, 2000.  Following a series of loan amendments, extensions and collections, the total amount, including accrued interest, owed to the Company by the Former CEO at December 31, 2003 was approximately $175,154, which amount was disputed by the Former CEO.  Durin g October 2005 the Company executed a Final Settlement Agreement and Mutual Release and received $32,500 as full and final settlement of all outstanding claims against the Former CEO.

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 October 14, 2004, the Company agreed to a final separation agreement with, its former Executive Vice 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 tha n the sum of $8,000 to cover certain expenses 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 Mr. Deixler, the Chairman of the Company’s Board of 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 lea st $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 had granted certain “piggyback” registration rights to the holder to register for resale the shares issuable upon conversion of the Debenture and Mr. Deixler exercised his registration rights and the underlying shares of 2,400,960 were registered pursuant to the SB2 filing which went effective on August 9, 2005. In 2005 and 2004, the Company recorded $9,951 and $4,167 of related party interest expense as part of the statement of operations, respectively.

28

Item 13. Exhibits and Reports on Form 8-K

(a)   Exhibits:

      Exhibit

      No.           Description

      -------       ---------

       3.1          Certificate of Incorporation of the Company, as amended through               December 31, 2005. *

       3.2          By-Laws of the Company./(1)/

 4.1          1994 Stock Option Plan of the Company. *

       4.2          1998 Stock Option Plan of the Company./(1)/+

 4.3          2000 Stock Option Plan of the Company. *

       4.4          Form of Warrant Agreement dated July 17, 2001./(3)/+

 4.5          Form of Warrant Agreement dated January 4, 2002./(3)/

4.7          Convertible Debenture dated August 5, 2004./(9)/

4.8          2006 Stock Option Plan of the Company.*

4.9          Warrant Agreement by and between the Company and Creso Capital Partners dated September 9, 2005. *

4.10          Form of Warrant Agreement by and between the Company and Mehrdad                      Nadooshan dated November 30, 2005. *

10.1          Equipment Lease Agreements dated October 29, 2003

                    by and between the Company and GE Capital

                    Corporation. /(11)/

10.2          Stock Purchase Agreement dated August 11, 2000 by and

                    between the Company and the parties identified therein./(2)/

10.3          Purchase Agreement by and between the Company and the

                    Selling Shareholders set forth therein dated February 7,

                    2002./(4)/

      10.4          Severance Agreement dated September 2, 2004 by and between the

                    Company and William Whitney. /(11)/ +

      10.5          Severance Agreement dated September 2, 2004 by and between the

                    Company and Henry Gold. /(11)/+

      10.6          Employment Agreement dated August 31, 2004 by and between the  

              Company and Henry A. Hill. /(10)/+

10.7          Employment Agreement dated February 25, 2002, between the Company

                   and William Whitney./(6)/+

10.8          Amended and Restated Employment Agreement dated September 8, 2003,

              between the Company and Norman E. Corn./(7)/+

      10.9          First Amendment to the Amended and Restated Employment Agreement

                    dated September 8, 2003 by and between the Company and Norman E.

                 Corn dated November 10, 2004. /(11)

29

      Exhibit

      No.           Description

      -------       ---------

10.10         Employment Agreement dated September 15, 2003, between the Company

              and Patrick E. Delaney./(5)/+

      10.11         First Amendment to the Employment Agreement dated September 15,

                    2003 by and between the Company and Patrick E. Delaney dated

                    November 10, 2004. /(11)/+

      10.12         Option Agreement dated January 28, 2004 by and between the Company

                    and Norman E. Corn. /(11)/+

      10.13         Option Agreement dated January 28, 2004 by and between the Company

                    and Patrick E. Delaney. /(11)/+

10.14         Lease Agreement dated July 21, 2003 by and between the Company and

              116 Corporate Boulevard, LLC, Inc. /(8)/

10.15         Separation Agreement dated March 29, 2004 between the Company and

              Kam Saifi. /(11)/

10.16         Separation Agreement dated October 14, 2004 between the Company

              and Cameron Saifi. /(11)/

      10.17         Agreement dated February 25, 2005 by and between the Company and

                    Sprint/Untied Management Company. /(11)/

      10.18         Agreement dated October 28, 2004 by and between the Company and

                    General Dynamics Network Systems. /(11)/

10.19         Final Settlement Agreement dated October 11,2005 between the Company and Mr. Gray. *

21.1          List of Subsidiaries./(11)/

      23.1          Independent Auditors Consent. *

31.1          Certification of CEO Pursuant to Section 302 of the Sarbanes Oxley

              Act of 2002.*

31.2          Certification of CFO Pursuant to Section 302 of the Sarbanes Oxley

              Act of 2002.*

32.1          Certification of CEO Pursuant to Section 906 of the Sarbanes Oxley

              Act of 2002.*

32.2          Certification of CFO Pursuant to Section 906 of the Sarbanes Oxley

              Act of 2002.*

30

(1) Incorporated by reference to the Company's Registration Statement on Form S-8 filed on April 22, 1999.

(2) Incorporated by reference to the Company’s Annual report on Form 10-KSB filed on June 29, 2001.

(3) Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended March 31, 2002, as filed on July 1, 2002.

(4) Incorporated by reference to the Company’s Registration Statement on Form S-3 filed on March 4, 2002.

(5) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on November 17, 2003.

(6) Incorporated by reference to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2002, as filed on April 15, 2003.

(7) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on September 12, 2003.

(8) Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed for the year ended December 31, 2003.

(9) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on August 13, 2004.

(10) Incorporated by reference to the Company’s Quarterly Report on Form 10-QSB filed on November 15, 2004

(11) Incorporated by reference to the Company’s Annual Report on Form 10-KSB filed for the year ended December 31, 2004.

* Filed herewith

+ Management contract for compensatory plan or arrangement

(b) Reports on Form 8-K

On November 23, 2005, the Company filed a report on Form 8-K, reporting the appointment of Mr. Norman E. Corn, the Company’s CEO, to the Board of Directors.

On September 30, 2005, the Company filed a report on Form 8-K, reporting the entry into an asset based revolving credit facility (the “Credit Agreement”), for $2.5 million with Bridge Bank, N.A.

On April 5, 2005, the Company filed a report on Form 8-K, the entry into a material agreement to sell equity securities.

On March 25, 2005, the Company filed a report on Form 8-K, reporting the Company’s results for December 31,2004.

On March 2, 2005, the Company filed a report on Form 8-K, reporting a three-year Master Purchase and Reseller Agreement with Sprint/United Management Company.

Item 14.  Principal Accountant Fees and Services

      Year Ended

        Year Ended

December 31, 2005

December 31, 2004

Audit Fees

              $85,950

              $60,500

Audit Related Fees

           0                                                        0

Tax Fees

           0  

           0

All Other Fees

           0                                                        0

The audit committee has adopted a procedure under which all fees charged by Marcum and Kliegman LLP must be pre-approved by the audit committee.

31

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Dated: March 28, 2006

ION NETWORKS, INC.

By:

 /s/ Norman E. Corn

Norman E. Corn

Chief Executive Officer and

Director

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on March 28, 2006:

Signature

Title

/s/ Norman E. Corn

Chief Executive Officer and Director

Norman E. Corn

/s/ Patrick E. Delaney

Chief Financial Officer and Principal Accounting

Patrick E. Delaney

Officer

/s/ Stephen M. Deixler

Chairman of the Board of Directors

Stephen M. Deixler

/s/ Harry F. Immerman

Director

Harry F. Immerman

/s/ Frank S. Russo

Director

Frank S. Russo

32

ION Networks, Inc. and Subsidiary Consolidated Financial Statements

For the Years Ended December 31, 2005 and 2004

33

ION Networks, Inc. and Subsidiary

Index to Consolidated Financial Statements

For the Year Ended December 31, 2005 and 2004

 Page(s)

Report of Independent Registered Public Accounting Firm

35

Consolidated Financial Statements:

Consolidated Balance Sheet as of December 31, 2005

36

Consolidated Statements of Operations for the Years Ended December 31, 2005 and 2004

37

Consolidated Statements of Cash Flows for the Years Ended December 31, 2005 and 2004

38

Consolidated Statements of Stockholders' Equity for the Years Ended December 31, 2005 and 2004

         39-40

Notes to Consolidated Financial Statements

        41-53

34

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Audit Committee of the Board of Directors

ION Networks, Inc.

South Plainfield, New Jersey

We have audited the accompanying consolidated balance sheet of ION Networks, Inc. and Subsidiary as of December 31, 2005, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the years ended December 31, 2005 and 2004. These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ION Networks, Inc. and Subsidiary as of December 31, 2005, and the consolidated results of their operations and their cash flows for the years ended December 31, 2005 and 2004 in conformity with accounting principles generally accepted in the United States of America.

/s/ Marcum & Kliegman LLP

New York, New York

February 10, 2006

35

ION Networks, Inc. and Subsidiary

Consolidated Balance Sheet

December 31, 2005

Assets
Current assets
Cash and cash equivalents	$              196,342
Accounts receivable, net of  allowance for doubtful accounts of $16,520	1,023,914
Inventories, net	526,078
Prepaid expenses and other current assets	75,379
Total current assets	1,821,713
Property and equipment, net	29,293
Capitalized software, net	891,676
Deferred financing costs, net	57,436
Other assets	22,911
Total assets	$           2,823,029
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable	$             436,349
Accrued expenses	265,567
Accrued payroll and related liabilities	260,762
Current portion of long-term debt	2,410
Deferred income	167,110
Other current liabilities	10,000
Total current liabilities	$           1,142,198
Long-term liabilities
Convertible debenture – related party	214,118
Long term debt, net of current portion	9,528
Total long-term liabilities	223,646
Total liabilities	$       1,365,844
Commitments and contingencies
Stockholders’ equity
Preferred stock – par value $.001 per share; authorized 1,000,000 shares, 200,000 shares designated Series A; 155,557 shares issued and outstanding (Aggregate Liquidation Preference $280,003)	156
Common stock – par value $.001 per share; authorized 50,000,000 shares; 27,050,044 shares issued and outstanding	27,051
Additional paid-in capital	44,840,882
Deferred compensation	(16,597)
Accumulated deficit	(43,394,307)
Total stockholders’ equity	1,457,185
Total liabilities and stockholders’ equity	$           2,823,029

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

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ION Networks, Inc. and Subsidiary

Consolidated Statements of Operations

	Years Ended December 31,
	2005	2004
Net sales	$      4,557,764	$      3,616,261
Cost of sales	1,542,395	1,417,603
Gross margin	3,015,369	2,198,658
Research and development expenses	523,060	598,012
Selling, general and administrative expenses, including $ 770 and $58,750 of non-cash        stock based compensation for the years ended December 31, 2005 and 2004, respectively	2,653,865	2,314,834
Depreciation	9,872	57,325
Restructuring and other credits	(59,908)	(180,533)
Loss from operations	(111,520)	(590,980)
Other  income	15,339	25,810
Interest income/(expense)- related party	(9,951)	(4,167)
Interest income/(expense)(1)	(10,604)	(3,334)
Loss before income taxes	(116,736)	(572,671)
Income tax benefit	299,007	322,831
Net income/(loss)	$    182,271	$    (249,840)
Per share data:
Net income (loss) per share
Basic	$             0.01	$             (0.01)
Diluted	$             0.01	$             (0.01)
Weighted average number of common shares outstanding
Basic	25,970,265	23,294,325
Diluted	31,027,880	23,294,325

(1) Includes amortization of deferred financing costs of $8,122 and $0 in 2005 and 2004, respectively.

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

37

ION Networks, Inc. and Subsidiary

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2005	2004
Cash flows from operating activities
Net income/(loss)	$               182,271	$              (249,840)
Adjustments to reconcile net income/(loss) to net cash from operating activities:
Restructuring and other charges	(59,908)	(180,533)
Depreciation and amortization	125,220	409,485
Provision for inventory reserve	(45,749)	(48,880)
Other liabilities	-	(39,171)
Non-cash stock-based compensation	770	58,750
Interest on convertible debt- related party	9,951	-
Interest income from notes receivable from former officers	-	(24,884)
Amortization of deferred financing costs	8,122	-
Changes in operating assets and liabilities:
Accounts receivable	(445,423)	(180,747)
Inventories	31,097	239,496
Prepaid expenses and other current assets	3,057	49,702
Other assets	(10,075)	465
Accounts payable	81,747	126,723
Accrued expenses	(64,421)	(36,305)
Accrued payroll and related liabilities	100,913	57,019
Deferred income	6,898	(40,093)
Sales tax payable	(6,060)	(32,908)
Net cash (used in) provided by operating activities	(81,590)	108,279
Cash flows from investing activities
Acquisition of property and equipment	(27,318)	(11,740)
Capitalized software expenditures	(600,673)	(310,223)
Net cash used in investing activities	(627,991)	(321,963)
Cash flows from financing activities
Principal payments on debt and capital leases	2,686	(67,840)
Advances from related parties	160,500	-
Repayment of advances from related parties	(160,500)	-
Borrowings from revolving credit facility	200,000	-
Repayment of borrowings from revolving credit facility	(200,000)	-
Issuance of convertible debenture	-	200,000
Proceeds from issuance of common stock, net	657,659	-
Deferred financing costs	(41,859)	-
Proceeds from the exercise of stock options	-	11,250
Net cash provided by financing activities	618,486	143,410
Net decrease in cash and cash equivalents	(91,095)	(70,274)
Cash and cash equivalents – beginning of year	287,437	357,711
Cash and cash equivalents – end of year	$              196,342	$              287,437
Supplemental disclosure of cash flow information
Cash paid during period for interest	$                   2,618	$                  3,334

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

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ION Networks, Inc. and Subsidiary

Consolidated Statements of Stockholders’ Equity

For the Years Ended December 31, 2005 and 2004

	Preferred		Common		Additional Paid-In Capital	Accumulated Deficit
	Shares	Stock	Shares	Stock
Balances, December 31, 2003	166,835	$         167	24,875,500	$      24,876	$ 44,585,740	$     (43,326,738)
Net loss						(249,840)
Conversion of preferred stock to common stock	(8,500)	(9)	85,000	85	(76)
Issuances of common stock upon exercise of options			250,000	250	11,000
Notes receivable from former officers – accrued interest
Cancellation of restricted shares from former officers			(2,600,000)	(2,600)	(508,819)
Non-cash stock-based compensation issued to officers					58,750
Balances, December 31, 2004	158,335	$         158	22,610,500	$      22,611	$ 44,146,595	$     (43,576,578)
Net income						182,271
Conversion of preferred stock to common stock	(2,778)	(2)	27,780	27	(25)
Issuances of common stock  upon sale			4,411,764	4,413	653,246
Issuances of warrant to pay for consulting services					17,319
Deferred financing costs					23,699
Non-cash stock-based compensation issued to consultant					48
Balances, December 31, 2005	155,557	$         156	27,050,044	$      27,051	$  44,840,882	$      (43,394,307)

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

39

ION Networks, Inc. and Subsidiary

Consolidated Statements of Stockholders' Equity

For the Years Ended December 31, 2005 and 2004

	Notes Receivable from former Officers	Deferred Compensation	Total Stockholders’ Equity
Balances, December 31, 2003	$          (486,535)	$                         -	$                   797,510
Net loss			(249,840)
Issuances of common stock upon exercise of options			11,250
Notes receivable from former officers – accrued interest	(24,884)		(24,884)
Cancellation of restricted shares from former officers	511,419		-
Non-cash stock-based compensation issued to officers			58,750
Balances, December 31, 2004	$                          -	$                          -	$                   592,786
Net income			182,271
Conversion of preferred stock to common stock Issuances of common stock upon sale			-
Issuances of common stock upon sale			657,659
Issuance of warrant to pay for consulting services		(17,319)	-
Deferred financing costs			23,699
Non-cash stock-based compensation issued to consultant		722	770
Balances, December 31, 2005	$                         -	$              (16,597)	$                   1,457,185

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

40

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

1.  Organization and Basis of Presentation

The Company

ION Networks, Inc. and subsidiary (the "Company"), a Delaware corporation founded in 1999 through the combination of two companies -- MicroFrame, a New Jersey Corporation (the predecessor entity to the Company, originally founded in 1982), and SolCom Systems Limited, a Scottish corporation located in Livingston, Scotland (originally founded in 1994), designs, develops, manufactures and sells network and information security and management products to corporations, service providers and government agencies. The Company's hardware and software suite of 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.

2. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of ION Networks, Inc. and ION Networks, NV, a wholly-owned inactive subsidiary. All material inter-company balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates.

The significant estimates include the allowance for doubtful accounts, allowance for inventory obsolescence, capitalized software costs including estimates of future gross revenues, and the related amortization lives, deferred tax asset valuation allowance and depreciation and amortization lives.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents.

Allowance for Doubtful Accounts Receivable

Accounts receivable are reduced by an allowance to estimate the amount that will actually be collected from our customers.  If the financial condition of customers were to materially deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Inventories, net

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 the Company’s estimate of future demand is not correct or if its customers place significant order cancellations, inventory reserves could increase from the Company’s estimate. The Company may also receive orders for inventory that has been fully or partially reserved.

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, which are generally two to five years. Expenditures for maintenance and repairs, which do not extend the economic useful life of the related assets, are charged to operations as incurred. Gains or losses on disposal of property and equipment are reflected in the statements of operations in the period of disposal.

41

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Deferred Financing Costs

Costs incurred in conjunction with borrowing facilities have been capitalized as Deferred Financing Costs and are amortized over the term of the respective agreements.

Capitalized Software

The Company capitalizes computer software development costs in accordance with the provisions of Statement of Financial Accounting Standards No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS No. 86"). SFAS No. 86 requires that the Company capitalize computer software development costs upon the establishment of the technological feasibility of a product, to the extent that such costs are expected to be recovered through future sales of the product. Management is required to use professional judgment in determining whether development costs meet the criteria for immediate expense or capitalization. Capitalized 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 ov er the estimated useful life of the product. As a result, the carrying amount of the capitalized software costs may be reduced materially in the near term.

The Company records 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. The Company’s cash flow estimates are based on historical results adjusted to reflect its best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. While the Company believes that its estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect the Company’s estimates.

The Company capitalized $600,673 and $310,223 of software development costs for the year ended December 31, 2005 and 2004, respectively. Amortization expense totaled $115,348 and $352,160 for the years December 31, 2005 and 2004, respectively.

Research and Development Costs

The Company charges all costs incurred to establish the technological feasibility or enhancement of a product to research and development expense in the period incurred.

Advertising Costs

Advertising costs are expensed as incurred. The Company incurred approximately $35,000 and $30,000 in advertising costs for the year ended December 31, 2005 and 2004, respectively.

Revenue Recognition Policy

The Company recognizes revenue from product sales of hardware and software to end-users, value added resellers (VARs) and original equipment manufacturers (OEMs) upon shipment if no significant vendor obligations exist and collectibility is probable. The Company does not offer 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.

In addition, the Company sells internally developed stand-alone finished software packages (“PRIISMS Software”), which permit end-users to monitor, secure and administer voice and data communications networks.  The software packages permit the customer to utilize the PRIISMS software pursuant to the terms of the license. Other than during an initial ninety-day warranty period from the date of shipment, the purchaser is not entitled to upgrades/enhancements or services that can be attributable to a multi-element arrangement. In addition, the customer does not have any rights to exchange or return the software. Since the software package sale does not require significant production, modification or customization, the Company recognizes revenue at such time the product is shipped and collectibility is probable in accordance with the accounting guidance under Statement Position 97-2, “Software Revenue Recognition”.  &n bsp;

The Company sells separate customer maintenance contracts and maintenance revenue is recognized on a straight-line basis over the period the service is provided, generally one year. On some occasions, maintenance is provided on a time and material basis in which case revenue is recognized upon shipment of the repaired item.

42

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 Shipping and Handling Costs

Shipping and handling costs incurred are billed to the customer and netted as part of cost of sales.

Fair Value of Financial Instruments

The carrying value of items included in working capital and debt approximates fair value because of the relatively short maturity of these instruments.

Net Income/(Loss) Per Share of Common Stock

Basic net income (loss) per share is computed by dividing net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding during the period.  Diluted net income (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 income (loss) per share when their inclusion would be antidilutive.  The following table sets forth the components used in the computation of basic and diluted income (loss) per share:

	For the years ended
	Dec. 31, 2005**	Dec. 31, 2004*
Weighted average common shares outstanding, basic	25,970,265	23,294,325
Incremental shares of common stock equivalents	1,088,296	-
Conversion of preferred stock to common stock	1,559,680	-
Conversion of convertible debenture to common stock	2,409,639	-
Weighted average common shares outstanding, diluted	31,027,880	23,294,325

* Potential common shares of 9,327,672 for the year ended December 31, 2004, were excluded from the computation of diluted earnings per share, as their inclusion would be anti dilutive.

** Potential common shares of 1,250,019 for the year ended December 31, 2005, were excluded from the computation of diluted earnings per share, as their exercise prices were greater than the average market price of the common stock during the period.

Stock Compensation

The Company accounts for stock-based employee compensation arrangements in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 25, "Accounting for Stock Issued to Employees" and complies with the disclosure requirements of Statement of Financial Accounting Standards (“SFAS”) No. 123, "Accounting for Stock-Based Compensation” as amended by SFAS No. 148 “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123,” issued in December 2002. Under APB Opinion No. 25, compensation expense is based on the difference, if any, generally on the date of grant, between the fair value of our stock and the exercise price of the option.  Equity instruments issued to non-employee vendors are recorded in accordance with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EI TF”) 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.

The Company issued certain stock options in 2005. The fair value of each option grant for the Company’s common stock is estimated on the date of the grant using the Black Scholes option-pricing model. The assumptions used to value the 2005 options issued are as follows:

43

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Expected Volatility	233.00%
Risk-free interest rate	4.00
Expected option lives	5.00 years

If the Company had elected to recognize compensation costs based on the fair value at the date of grant for awards, consistent with the provisions of SFAS No. 123, the Company's net income/(loss) and basic and diluted net loss per share would have been negatively impacted the pro forma amounts indicated below:

	Years Ended December 31,
	2005	2004
Net income (loss) as reported	$      182,271	$   (249,840)
Add: Stock based compensation expense included in net income (loss)	770	58,750
Deduct: Stock based employee compensation determined under the fair value method	(147,018)	(454,493)
Pro forma net income (loss)	$        36,023	$   (645,583)
Basic and diluted net income (loss) per share of common stock
As reported	$            0.01	$         (0.01)
Pro forma	$            0.00	$         (0.03)

Income Taxes

Deferred income tax assets and liabilities are computed annually based on enacted tax laws and rates for temporary differences between the financial accounting and income tax bases of assets and liabilities.  A valuation allowance is established, when necessary, to reduce deferred income tax assets to the amount that is more likely than not to be realized.

Warranty Costs

The Company estimates its warranty costs based on historical warranty claim experience. Future costs for warranties applicable to sales recognized in the current period are charged to cost of sales. Adjustments are made when actual warranty claim experience differs from estimates. The warranty accrual included in other current liabilities as of December 31, 2005 is $10,000.

	For the years ended
	December 31, 2005	December 31, 2004
Balance at beginning of the year	$         10,000	$        48,388
Change in liability due to preexisting warranty	-	(38,388)
Balance at the end of the year	$         10,000	$        10,000

3.  Restructuring and Other Credits

The total amount of restructuring and other credits for the years ended December 31, 2005 and 2004 was $59,908 and $180,533, respectively.  

In March 2003, the Company abandoned its leased space in Fremont, California and entered into an abandonment agreement with the landlord. As a result, the Company recorded a one-time charge to restructuring of $123,510 in the quarter ended March 31, 2003. This amount represents the total lease payments from December 2002 to May 2004 offset by the landlord’s stated sub-lease rental payments.  In 2004, Management revaluated the status of the then ongoing negotiations and reduced its prior reserve amount by $63,716. Management estimates that due to the fact that the landlord leased the property to another tenant and has not responded to the Company’s request for additional information that the final settlement amount will be negligible and therefore wrote off the remaining accrual of  $59,908 at December 31, 2005. However, the Company and Landlord have no settlement agreement in place at this time.

44

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The total amount of restructuring and other credits for the year ended December 31. 2004 was $180,533. This amount consisted of three items for which the Company recognized credits: $67,671 for forgiveness of debt related to legal, taxes and loan amounts; $63,716 related to a change in management estimate reducing potential liability for damages previously accrued for related to the abandonment of an office lease and $49,146 related to the write-off of certain payables which management believes are not valid liabilities.

The components of the restructuring and other credits recorded in 2005 and 2004 are as follows:

	Restructuring	Other Credits	Total
First Quarter 2005 charges	$                  -	$                  -	$                 -
Second Quarter 2005 charges	-	-	-
Third Quarter 2005 charges	-	-	-
Fourth Quarter 2005 charges (reversals)	-	(59,908)	(59,908)
Total	$                  -	$     (59,908)	$    (59,908)
First Quarter 2004 charges	$                  -	$                 -	$                 -
Second Quarter 2004 charges (reversals)	-	(59,570)	(59,570)
Third Quarter 2004 charges (reversals)	(63,716)	-	(63,716)
Fourth Quarter 2004 charges (reversals)	-	(57,247)	(57,247)
Total	$     (63,716)	$   (116,817)	$  (180,533)

4. Inventories

Inventories, net of reserve of $104,104, consists of the following at December 31, 2005:

Finished goods	$       175,508
Raw materials	182
Work-in-progress	350,388
Inventories, net	$      526,078

The Company evaluates its inventory reserve on a quarterly basis. In 2005, the Company adjusted its reserved inventory which resulted in a benefit of $45,749 and this amount was included as part of cost of sales in its consolidated statements of operations. In 2004, the Company recorded a benefit of $48,880 to cost of sales related to reserved excess and obsolete inventories.

5. Property and Equipment

Property and equipment consists of the following at December 31, 2005:

Computer and other equipment	$         667,062
Furniture and fixtures	68,408
	735,470
Less accumulated depreciation	(706,177)
Property and equipment, net	$            29,293

Depreciation expense for property and equipment for the year ended December 31, 2005 and 2004, amounted to $9,872 and $57,325, respectively. During the years ended December 31, 2005 and 2004, the Company retired fully depreciated assets amounting to $125,155 and $53,963, respectively.

45

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

6.  Convertible Debenture – Related Party

On August 5, 2004, the Company issued, for $200,000 cash, a convertible debenture (the “Debenture”) to Stephen M. Deixler, the Chairman of the Company’s Board of 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 accrued interest can only be converted by the borrower. 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. During the years ended December 31, 2005 and 2004, the Company recorded $9,951 and $4,167 of related party interest expense as part of the statement of operations, respectively.  

7. Revolving Credit Facility

On September 21, 2005, the Company entered into an asset based revolving credit facility for $2.5 million with Bridge Bank, N.A. The Revolving Credit Facility has a two-year term and requires payment upon maturity of the outstanding principal and interest balance. The Revolving Credit Facility provides for advances of up to $2.0 million against 80% of eligible accounts receivable and an additional $500,000 against inventories capped at 30% of eligible accounts receivable. The annual interest rate is prime plus 1.75% (9% at December 31, 2005), with a minimum prime rate of 6.25%. Certain assets of the Company secure the credit facility, and the Company is subject to certain financial and restrictive covenants, as defined in the agreement. At December 31, 2005, the Company did not have any amounts outstanding under the Revolving Credit Facility.

8.  Income Taxes

As of December 31, 2005, the Company has available federal and state net operating loss carry forwards of approximately $43,700,000 and $21,330,000, respectively, to offset future taxable income. The federal net operating loss carry forwards expire during the years 2011 through 2024. In addition, the Company has investment credit and research and development credit carry forwards aggregating approximately $405,000, which may provide future tax benefits, expiring from 2008 through 2020. The Internal Revenue Code contains provisions which will limit the net operating loss carry forward available for use in any given year if significant changes in ownership interest of the Company occur.

The Company obtained a corporation business tax benefit certificate pursuant to New Jersey law which allows the sale of unused state net operating losses. For the years ended December 2005 and 2004, the Company received a benefit of $299,077 and $322,831, respectively.

46

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

The tax effect of temporary differences which make up the significant components of the net deferred tax asset and liability at December 31, 2005 are as follows:

	December 31,
	2005
Current deferred tax assets
Inventory reserves	$            62,794
Accrued expenses	117,950
Allowance for doubtful accounts	6,608
Total current deferred tax assets	187,352
Valuation allowance	(187,352)
Net current deferred tax assets	-
Noncurrent deferred tax assets
Depreciation and amortization	257,352
Net operating loss carry forwards	16,137,941
Research and development credit	405,078
Total noncurrent deferred tax assets	16,800,371
Valuation allowance	(16,443,700)
Net noncurrent deferred tax assets	356,671
Noncurrent deferred tax liabilities
Capitalized software	(356,671)
Total noncurrent deferred tax liabilities	(356,671)
Net noncurrent deferred tax (liabilities) assets	$                        -

The Company has recorded a full valuation allowance against the deferred tax assets, including the federal and state net operating loss carry forwards as management believes that it is more likely than not that substantially all of the deferred tax assets will not be realized.  During the year ended December 31, 2005, the Company had an annual change in the valuation allowance of approximately $330.000.

The reconciliation of the statutory U.S. Federal income tax rate to the Company’s effective income tax rate is as follows:

	Year ended December 31,
	2005	2004
Statutory federal income tax rate (benefit)	(34.00)%	(34.00)%
Nondeductible expenses:
State Taxes	6.00	6.00
Sales of net operating losses	(263.00)	(56.00)
Change in valuation allowance	291.00	84.00
Effective tax rate	0.00%	0.00%

9. Stockholders' Equity

Preferred Stock –The Company has designated 200,000 of the 1,000,000 authorized shares of preferred stock as Series A Preferred Stock ("Preferred Stock"). The Preferred Stock is non-voting, has a standard liquidation preference equal to its purchase price, and does not pay dividends. On December 27, 2004 8,500 shares of preferred stock were converted to 85,000 shares of common stock. On February 21, 2005, 2,778 shares of preferred stock were converted to 27,780 of common stock. As of December 31, 2005, there were 155,557 shares of Series A Preferred Stock outstanding, which are convertible to 1,555,570 shares of common stock. The holders can call the conversion of the Preferred Stock at any time.

47

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Restricted Stock – Effective October 2001, the Company approved and granted 2,600,000 shares of restricted stock (the “Restricted Shares”) to two executive officers at fair value. The Company received a series of partial recourse interest bearing promissory notes for the value of the Restricted Shares to be repaid by the officers.  The notes were due to be repaid by the officers when their employment with the Company terminated on July 7, 2003. During 2004, the Company agreed to final separation agreements with each of the former officers.  As part of these agreements, each former officer returned his shares of restricted stock to the Company as full payment for the former officer’s total indebtedness to the Company. In addition, each former officer released the Company from any obligations, which may have arisen from the separation of the officer from the Company. One of the former officers received $8,000 from the Company in exchange for his release.

Common Stock – On March 31, 2005, the Company sold 4,411,764 shares of common stock at a price of $0.17 per share, for net consideration of $657,659

Stock Option Plans

In November 2000, the Company adopted its 2000 Stock Option Plan (the "2000 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2000 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 2000 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During 2005, the Company granted options to purchase 170,000 shares under the 2000 Plan. No options were granted in 2004. As of December 31, 2005, 2,736,000 options were outstanding under the 2000 Plan, of which 2,062,750 options were exercisable.

In June 1998, the Company adopted its 1998 Stock Option Plan (the "1998 Plan"). The aggregate number of shares of common stock for which options may be granted under the 1998 Plan is 3,000,000. The maximum number of options which may be granted to an employee during any calendar year under the 1998 Plan is 400,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. During 2005 and 2004, the Company granted options to purchase 62,500 and zero shares, respectively, under the 1998 Plan. As of December 31, 2005, 1,378,831 options were outstanding under the 1998 Plan, of which 1,033,000 options were exercisable. On January 23, 2006 the Company granted 1,335,000 options under the 199 8 Plan. As of February 28, 2006, 2,710,831 options were outstanding under the 1998 Plan, of which 1,375,831 options were exercisable.

In August 1994, the Company adopted its 1994 Stock Option Plan (the "1994 Plan"). The aggregate number of shares of common stock for which options may be granted under the 1994 Plan, as amended, is 1,250,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair market value of one common stock on the date of grant. During 2005 and 2004, there were no option grants provided under the 1994 Plan. As of December 31, 2005, 25,000 options were outstanding and exercisable under the 1994 Plan.

During the years ended 2005 and 2004, there were no options granted under the Company's Time Accelerated Restricted Stock Award Plan ("TARSAP"). The options vest after seven years, however, under the TARSAP, the vesting is accelerated to the last day of the fiscal year in which the options are granted if the Company meets certain predetermined sales targets. The Company did not meet the targets for 2001 and, as such, all options granted under the TARSAP in 2001 will vest seven years from the original date of grant.

Warrants

On December 1, 2005 in connection with services performed by a consultant, the Company issued warrants to purchase 350,000 shares valued at $17,319 of the Company’s Common Stock at $0.11 per share, which will expire on November 30, 2007. As of December 31, 2005 all options were fully vested.

On September 9, 2005 in connection with services performed by a consultant, the Company issued fully vested warrants to purchase 326,087 shares valued at $23,699 of the Company’s Common Stock at $0.23 per share. The warrants will expire on September 9, 2008.

ION Networks, Inc. and Subsidiary

48

Notes to Consolidated Financial Statements

In connection with the sale of common stock on March 31, 2005, warrants to purchase 2,205,882 shares of common stock with an exercise price of $0.23, subject to certain adjustments, were issued. The warrants expire on March 31, 2010.

In connection with the sale of common stock on February 14, 2002, warrants to purchase 1,120,000 shares of common stock with an exercise price of $1.25, subject to certain adjustments, were issued. As of December 31, 2005 the exercise price currently was $0.95, the difference between the original exercise price and the current was the impact of a series of adjustments for the sale of stock at a prices below $1.25 between February 14, 2002 and December 31, 2005. The warrants expire on February 14, 2007.

During July 2001 in connection with services being performed by a consultant, the Company issued warrants to purchase 48,000 shares of the Company's Common Stock at $0.62 per share. The warrants expire five years from the date of the grant.

During January 2002 in connection with services being performed by a consultant through June 30, 2002, the Company issued warrants to purchase 100,000 shares of the Company's common stock at $1.35 per share. Warrants to purchase an additional 50,000 shares of common stock are exercisable at $1.80. All 150,000 warrants expired in January 2005.

As of December 31, 2005 there are 4,049,969 outstanding and exercisable with an average exercise price of $0.42.

Other Options

On September 25, 1996, the Company issued options to certain officers and directors to purchase 620,000 shares of the Company's Common Stock at an exercise price of $1.156, the market value of the Company's Stock on the date of grant.  420,000 of these options vested immediately and 100,000 vested on April 1, 1998 and 1999. The options were to expire ten years from the date of grant, subject to earlier termination in certain events.  None of these stock options were exercised during 2005 or 2004 and, pursuant to a Final Settlement Agreement and Mutual Release executed on October 11, 2005, all of the options were terminated.

In January 2004, the Company issued options to certain officers to purchase 1,000,000 shares of the Company’s common stock, which vested immediately. The exercise price of the below market options ranged from $0.045 to $0.06 on the date of grant. The Company recorded a stock based compensation charge of $58,750. At December 31, 2005, 750,000 of these options were outstanding and exercisable.

Details of the options outstanding under all plans are as follows:

	Shares	Weighted Average Exercise Price ($)
Options outstanding at December 31, 2003	1,845,155	1.59
Granted	4,333,000	0.15
Expired	(73,250)	5.63
Canceled	(487,276)	1.16
Exercised	(250,000)	0.05
Options outstanding at December 31, 2004	5,367,629	0.51
Granted	232,500	0.18
Expired	(427,500)	2.63
Canceled	(282,798)	1.03
Options outstanding at December 31, 2005	4,889,831	0.32
Options exercisable at December 31, 2005	3,870,750	0.22

49

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

Range of Exercise	Number Outstanding	Weighted Average Remaining Years of Contractual Life	Weighted Average Exercise Price	Number Exercisable	Weighted Average Exercise Price
$0.00 – 0.09	846,000	3.30	$ 0.06	837,750	$ 0.06
$0.10 – 0.24	2,948,500	4.13	0.13	2,383,500	0.12
$0.25 – 0.49	663,000	6.01	0.33	265,700	0.34
$0.50 – 0.99	182,500	1.18	0.72	182,500	0.72
$1.00– 40.00	249,831	4.43	3.07	201,300	1.25
$0.00 – 40.00	4,889,831	4.15	$0.32	3,870,750	$0.22

10.

Commitments

Operating Leases

The Company entered into a lease on August 1, 2003 for approximately 7,000 square feet for its principal executive offices at 120 Corporate Blvd., South Plainfield, New Jersey. The base rent is $4,505 per month effective October 2003 through July 2006. The Company is also obligated to make additional payments to the landlord relating to certain taxes and operating expenses.

The Company also leases certain equipment under agreements which are classified as capital leases. Each of the capital lease agreements expire within five years and have purchase options at the end of the lease term.

Future minimum payments, by year and in the aggregate, under non-cancelable capital and operating leases as of December 31, 2005 are as follows:

	Capital Leases	Operating Leases
Year ending December 31,
2006	$                  2,691	$                44,926
2007	2,691	-
2008	2,243	-
Total minimum lease payments	$                7,625	$             44,926
Less: amount representing interest	686
Present value on net minimum lease payments	$                6,939

Rent expense under operating leases for the years ended December 31, 2005 and 2004 was approximately  $77,500 and $74,500, respectively.

Employment Contracts

The Company has entered into certain employment contracts with various officers. Included in each of these contracts is a severance provision which entitles the officer to payments ranging from three to eighteen months of the officers’ then current annual salary if the officer is terminated without cause (as defined in the agreement).  At December 31, 2005, the Company had a potential loss for severance costs of approximately $813,375 under these employment contracts.   

11.  Contingent Liabilities

In the normal course of business the Company and its Subsidiary may be involved in legal proceedings, claims and assessments arising in the ordinary course of business. Such matters are subject to many uncertainties, and outcomes are not predictable with assurance.

50

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

12.  Employee Benefit Plans

Effective April 1, 1993, the Company adopted a defined contribution savings plan. The terms of the plan provide for eligible employees who have met certain age and service requirements to participate by electing to contribute up to 15% of their gross salary to the plan, as defined, with a discretionary contribution by the Company matching 30% of an employee's contribution in cash up to a maximum of 6% of gross salary, as defined. Company contributions vest at the rate of 25% of the balance at each employee's second, third, fourth, and fifth anniversary of employment. The employees' contributions are immediately vested.  As of January 1, 2003, the Company per the provisions of the plan decided not to make discretionary contributions until further notice.

13.  Geographic Information

The Company's headquarters, physical production and shipping facilities are located in the United States. The Company's domestic and foreign export sales for each of the years ended December 31, 2005 and 2004 are as follows:

	For the Years Ended
	December 31, 2005	December 31, 2004
United States	$               3,590,117	$               2,875,996
Europe	858,221	723,222
Pacific Rim	100,146	16,657
Other	9,280	386
	$             4,557,764	$               3,616,261

Historically, the Company has been dependent on several large customers each year, but they are not necessarily the same every year. For the year ended December 31, 2005, the Company’s most significant customers (stated as an approximate percentage of revenue) were Avaya 33% and Sprint 22%, with outstanding accounts receivables of $170,687 and $491,840, respectively, compared to the year ended December 31, 2004,  Avaya 38% and MCI 9% were the Company’s most significant customers, with outstanding accounts receivables of $275,662 and $20,170, respectively. In general, the Company cannot predict with certainty, which large customers will continue to order.

The loss of any of these customers or a significant decline in sales volumes from any of these customers could have a material adverse effect on the Company's financial position, results of operations and cash flows.

14.  Concentration of Credit and Supplier Risk

The Company maintains deposits in a financial institution which is insured by the Federal Deposit Insurance Corporation ("FDIC") up to $100,000. At December 31, 2005 and periodically throughout 2005, the Company had deposits in this financial institution in excess of the amount insured by the FDIC.

The Company designs its products utilizing readily available parts manufactured by multiple suppliers and the Company currently relies on and intends to continue to rely on these suppliers. The Company has been and expects to continue to be able to obtain the parts generally required to manufacture its products without any significant interruption or sudden price increase, although there can be no assurance that the Company will be able to continue to do so.

The Company sometimes utilizes a component available from only one supplier. If this supplier were to cease to supply this component, the Company would most likely have to redesign a feature of the affected device. The Company maintains a supply of the component on hand which the Company estimates would allow the time necessary to effectuate a redesign or alternative course of action should the need arise.

15.  Supplemental Cash Flow Information

As of December 31, 2005, the Company is indebted to Morgan Walke in the aggregate amount of $37,500, of which $32,500 is reflected in accounts payable and $5,000 has been converted to notes payable.  

As part of the compensation package for assisting in securing the Revolving Credit Facility, the Company issued warrants to purchase 326,087 shares of the Company’s Common Stock with an exercise price of $0.23 per share. The Company recognized $23,699 in deferred financing costs, which it will amortize over the life of the credit facility.

51

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

16. Related Party Transactions

During the quarter ended March 31, 2005, certain directors and officers advanced to the Company a total of $110,500 without interest. Upon closing of the Equity Financing, the Company repaid these advances.

During the quarter ended September 30, 2005, an officer advanced to the Company a total of $50,000 without interest. Upon closing of the Revolving Credit Facility, the Company repaid this advance.

17.  New Accounting Pronouncements

In September 2005, the FASB ratified the following consensus reached in EITF Issue 05-8 ("Income Tax Consequences of Issuing Convertible Debt with a Beneficial Conversion Feature"):  a) The issuance of convertible debt with a beneficial conversion feature results in a basis difference in applying FASB Statement of Financial Accounting Standards SFAS No. 109, Accounting for Income Taxes.  Recognition of such a feature effectively creates a debt instrument and a separate equity instrument for book purposes, whereas the convertible debt is treated entirely as a debt instrument for income tax purposes.  b) The resulting basis difference should be deemed a temporary difference because it will result in a taxable amount when the recorded amount of the liability is recovered or settled.  c) Recognition of deferred taxes for the temporary difference should be reported as an adjustment to additional paid-in capital.  T his consensus is effective in the first interim or annual reporting period commencing after December 15, 2005, with early application permitted.  The effect of applying the consensus should be accounted for retroactively to all debt instruments containing a beneficial conversion feature that are subject to EITF Issue 00-27,"Application of Issue No. 98-5 to Certain Convertible Debt Instruments" (and thus is applicable to debt instruments converted or extinguished in prior periods but which are still presented in the financial statements).  The adoption of this pronouncement is not expected to have a material impact on the Company's financial statements.

In September 2005, the EITF reached a consensus on, Issue No.  05-7, "Accounting for Modifications to Conversion Options Embedded In Debt Securities and Related Issues,” beginning in the first interim or annual reporting period beginning after December 15, 2005.  Early application of this guidance is permitted in periods for which financial statements have not yet been issued. The disclosures required by Statement 154 should be made excluding those disclosures that require the effects of retroactive application. EITF No. 05-7 is not expected to have material effect on the Company’s consolidated financial position.

In June 2005, the EITF reached consensus on Issue No. 05-6,  "Determining the Amortization Period for Leasehold Improvements ("EITF 05-6"). EITF 05-6 provides guidance on determining the amortization period for leasehold improvements acquired in a business combination or acquired subsequent to lease inception.  The guidance in EITF 05-6 will be applied prospectively and is effective for periods beginning after June 30, 2005. EITF 05-6 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.

In May 2005, SFAS No. 154,  "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20, Accounting Changes and FASB Statement No. 3" was issued which, among other things, changes the accounting and reporting requirements for a change in accounting principle and provides guidance on error corrections.  SFAS No.  154 requires retrospective application to prior period financial statements of a voluntary change in accounting principle unless impracticable to determine the period-specific effects or cumulative effect of the change, and restatement with respect to the reporting of error corrections.  SFAS No. 154 applies to all voluntary changes in accounting principles, and to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions.  SFAS No.  154 also requires that a change in method of depreciation or a mortization for long-lived, non-financial assets be accounted for as a change in accounting estimate that is effected by a change in accounting principle. SFAS No. 154 is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005.  At this time, adoption of SFAS No. 154 is not expected to significantly impact the Company's financial statements or future results of operations.

In December 2004, the Financial Accounting Standards Board ("FASB") issued its final standard on accounting for share-based payments  ("SBP"), FASB Statement No. 123R (revised 2004), Share-Based Payment. The statement requires companies to expense the value of employee stock options and similar awards.  Under FAS 123R, SBP awards result in a cost that will be measured at fair value on the awards' grant date, based on the estimated number of awards that are expected to vest.  Compensation cost for awards that vest would not be reversed if the awards expire without being exercised.  The effective date for public companies that file as small business issuers is the annual period beginning after December 15, 2005, and applied to all outstanding and unvested SBP awards at a company's adoption.  The Company believes that the implementation of FAS 123R will result in additional stock based compensation expe nse in future periods. The Company will adopt FAS 123R beginning January 1, 2006 using the modified prospective method.  The impact of this Statement will require the Company to record a charge for the fair value of its stock options over the vesting period in the Company's financial statements.

52

ION Networks, Inc. and Subsidiary

Notes to Consolidated Financial Statements

 In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153, Exchanges Of Non-monetary Assets - An Amendment of APB No. 29 ("SFAS 153"). SFAS 153 amends APB No. 29 to eliminate the exception of non-monetary exchanges of similar productive assets and replaces it with a general exception for exchanges of non-monetary assets that do not have commercial   substance.   A non-monetary exchange has commercial substance if the future cash flows of the entity are expect to change significantly as a result of the exchange.  SFAS 153 and APB No. 29 do not apply to the acquisition of non-monetary assets or services on issuance of the capital stock of an entity.  Currently, the Company has not had any exchanges of non-monetary assets within the meaning of SFAS 153 and adoption of SFAS 153 has had no effect on the Company's financial position or results of operations.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs (SFAS 151). The provisions of this statement become effective for the Company in fiscal 2007. SFAS 151 amends the existing guidance on the recognition of inventory costs to clarify the accounting for abnormal amounts of idle expense, freight, handling costs, and wasted material (spoilage). Existing rules indicate that under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. SFAS 151 requires that those items be recognized as current period charges regardless of whether they meet the criterion of "so abnormal". In addition, SFAS 151 requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The adoption of SFAS 151 is not expected to have a material impact on the Company’s valuation of inventories or operating results.

In October 2004, the FASB ratified the consensus reached in EITF Issue No. 04-8,  "The Effect of Contingently Convertible Instruments on Diluted Earnings per Share."  The EITF reached a consensus that contingently convertible   instruments, such as   contingently   convertible   debt, contingently convertible preferred stock, and other such securities should be included in diluted earnings per share (if dilutive) regardless of whether the market price trigger has been met.  The consensus became effective for reporting periods ending after December 15, 2004.  The adoption of this pronouncement did not have a material effect on the Company's financial statements.

18. Subsequent Events

On January 23, 2006, the Company adopted its 2006 Stock Option Plan (the "2006 Plan"). The aggregate number of shares of common stock for which options may be granted under the 2006 Plan is 4,000,000. The maximum number of options, which may be granted to an employee during any calendar year under the 2006 Plan, is 300,000. The term of these non-transferable stock options may not exceed ten years. The exercise price of these stock options may not be less than 100% (110% if the person granted such options owns more than ten percent of the outstanding common stock) of the fair value of one share of common stock on the date of grant. On January 23, 2006 the Company granted 1,335,000 shares under the 2006 Plan, subject to shareholder approval at the next shareholder meeting. As of February 28, 2006, 1,335,000 options were outstanding under the 2006 Plan, none of which were exercisable.

53

      Exhibit 31.1

I, Norman E. Corn, certify that:

1. 

I have reviewed this annual report on Form 10-KSB of ION Networks, Inc.;

2. 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state

a material fact necessary to make the statements made, in light of the circumstances under which such   statements were made, not misleading with respect to the period covered by this report;

3. 

Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the   small business issuer as of, and for, the periods presented in this report;

4.

The small business issuer’s other certifying officer and I are responsible for establishing and maintaining

disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and   internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the   small business issuer and have:

(a) 

Designed such disclosure controls and procedures, or caused such disclosure controls and

  procedures to be designed under our supervision, to ensure that material information relating to       the small business issuer, including its consolidated subsidiaries, is made known to us by others       within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over

  financial reporting to be designed under our supervision, to provide reasonable assurance         regarding the reliability of   financial reporting and the preparation of financial statements for       external purposes in accordance with generally accepted accounting principles;

(c) 

Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and

  presented in this report our conclusions about the effectiveness of the disclosure controls and       procedures, as of the end of the period covered by this report based on such evaluation; and

(d) 

Disclosed in this report any change in the small business issuer’s internal control over financial

  reporting that occurred during the small business issuer’s most recent fiscal quarter (the small       business issuer’s fourth fiscal quarter in the case of an annual report) that has materially         affected, or is reasonably likely to materially affect, the small business issuer’s internal control       over financial reporting; and

5. 

The small business issuer’s other certifying officer and I have disclosed, based on our most recent

evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit   committee of the small business issuer’s board of directors (or persons performing the equivalent   functions):

(a) 

All significant deficiencies and material weaknesses in the design or operation of internal control

  over financial reporting which are reasonably likely to adversely affect the small business issuer’s       ability to record, process, summarize and report financial information; and

(b)

 Any fraud, whether or not material, that involves management or other employees who have a

  significant role in the small business issuer's internal control over financial reporting.

Date: March 28, 2006     

/s/ Norman E. Corn

Norman E. Corn

Chief Executive Officer

54

      Exhibit 31.2

I, Patrick E. Delaney, certify that:

1. 

I have reviewed this annual report on Form 10-KSB of ION Networks, Inc.;

2. 

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state

a material fact necessary to make the statements made, in light of the circumstances under which such   statements were made, not misleading with respect to the period covered by this report;

3. 

Based on my knowledge, the financial statements, and other financial information included in this report,

fairly present in all material respects the financial condition, results of operations and cash flows of the   small business issuer as of, and for, the periods presented in this report;

4.

The small business issuer’s other certifying officer and I are responsible for establishing and maintaining

disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and   internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the   small business issuer and have:

(a) 

Designed such disclosure controls and procedures, or caused such disclosure controls and

  procedures to be designed under our supervision, to ensure that material information relating to       the small business issuer, including its consolidated subsidiaries, is made known to us by others       within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over

  financial reporting to be designed under our supervision, to provide reasonable assurance         regarding the reliability of   financial reporting and the preparation of financial statements for       external purposes in accordance with generally accepted accounting principles;

(c) 

Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and

  presented in this report our conclusions about the effectiveness of the disclosure controls and       procedures, as of the end of the period covered by this report based on such evaluation; and

(d) 

Disclosed in this report any change in the small business issuer’s internal control over financial

  reporting that occurred during the small business issuer’s most recent fiscal quarter (the small       business issuer’s fourth fiscal quarter in the case of an annual report) that has materially         affected, or is reasonably likely to materially affect, the small business issuer’s internal control       over financial reporting; and

5. 

The small business issuer’s other certifying officer and I have disclosed, based on our most recent

evaluation of internal control over financial reporting, to the small business issuer’s auditors and the audit committee of the small business issuer’s board of directors (or persons performing the equivalent   functions):

(a) 

All significant deficiencies and material weaknesses in the design or operation of internal control

  over financial reporting which are reasonably likely to adversely affect the small business issuer’s       ability to record, process, summarize and report financial information; and

(b)

 Any fraud, whether or not material, that involves management or other employees who have a

  significant role in the small business issuer's internal control over financial reporting.

Date: March 28, 2006     

/s/ Patrick E. Delaney

Patrick E. Delaney

Chief Financial Officer

55

Exhibit 32.1

ION Networks, Inc.

CERTIFICATION

In connection with the periodic report of ION Networks, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Norman E. Corn, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

Date:          March 28, 2006        

By:         /s/ Norman E. Corn

Norman E. Corn

Chief Executive Officer

56

Exhibit 32.2

ION Networks, Inc.

CERTIFICATION

In connection with the periodic report of ION Networks, Inc. (the "Company") on Form 10-KSB for the period ended December 31, 2005 as filed with the Securities and Exchange Commission (the "Report"), I, Patrick E. Delaney, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely for purposes of Title 18, Chapter 63, Section 1350 of the United States Code, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:

(1)  the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and

(2)  the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company at the dates and for the periods indicated.

.

Date:          March 28, 2006        

By:         /s/ Patrick E. Delaney

Patrick E. Delaney

Chief Financial Officer

57

EX-4.10

Appendix A

NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY OTHER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PURSUANT TO REGULATION D AND SUCH OTHER SECURITIES LAWS.  NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT OR ANY APPLICABLE STATE LAWS. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF A UNITED STATES PERSON UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS REQUIRED BY REGULATI ON D.

STOCK PURCHASE WARRANT

To Purchase ________ Shares of Common Stock of

ION NETWORKS INC.

THIS CERTIFIES that, for value received, _____________ (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on _______________ (the “Termination Date”) but not thereafter, to subscribe for and purchase from ION NETWORKS, Inc., a corporation incorporated in the State of Delaware, with offices at 120 Corporate Boulevard, South Plainfield, New Jersey 07080 (the “Company”), up to ___________ shares (the “Warrant Shares”) of Common Stock, $0.001 par value, of the Company (the “Common Stock”).  The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be _______.  The Exercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.

737592_2

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1.

Title to Warrant.  Prior to the Termination Date and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed.

2.

Authorization of Shares.  The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

3.

Exercise of Warrant.  

(a)

Except as provided in Section 4 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date, and before the close of business on the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank, the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the h older hereof within three (3) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid.  For the purposes of this Agreement, (i) “Trading Day” shall mean any day on which the Principal Market is open for business and (ii) “Principal Market” shall mean initially the Nasdaq National Market and shall include the American Stock Exchange, Nasdaq National Market, the Nasdaq SmallCap Market, Bulletin Board or the New York Stock Exchange if the Company is listed and trades on such market or exchange.

(b)

If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(c)

If no registration statement is effective permitting the resale of the shares of Common Stock issued upon exercise of this Warrant at any time commencing one year after the issuance date hereof, then this Warrant shall also be exercisable by means of a “cashless exercise” in which the holder shall be entitled to receive a certificate for the number of shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

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(A) = the average of the high and low trading prices per share of Common Stock on the Trading Day preceding the date of such election on the Nasdaq National Market, or if the Common Stock is not traded on the Nasdaq National Market, then the Principal Market in terms of volume, and converted into US Dollars;

(B) =  the Exercise Price of the Warrants; and

(X) = the number of shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant.

4.

No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the Exercise Price.

5.

Charges, Taxes and Expenses.  Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

6.

Closing of Books.  The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant.

7.

Transfer, Division and Combination.  (a) Subject to compliance with any applicable securities laws, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Wa rrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be exercised by a new holder for the purchase of shares of Common Stock without having a new Warrant issued.

(b)

This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney.  Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new

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Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c)

The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

(d)

The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

8.

Registration of Warrant Shares.  (a)  If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), the Company shall, at such time, promptly give each Holder written notice of such proposed registration.  Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 18(d) hereof, the Company shall, subject to the provisions of Section 8(c), endeavor to cause to be registered under the Act all of the Warrant Shares that each such Holder has requested to be registered.

     (b)  Whenever required under this Section 8(a) to effect the registration of any Warrant Shares, the Company shall, as expeditiously as reasonably possible use reasonable efforts to (i) file a registration statement (the "Registration Statement"), registering for resale the Warrant Shares and (ii) cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the "Act") as soon thereafter as reasonably practicable.  The Company promptly shall provide each Holder with such copies of the final prospectus contained in the Registration Statement after it becomes effective as they shall reasonably request.  In addition, the Company shall (a) use reasonable efforts to keep the Registration Statement effective for a period ending on the earlier of (x) 120 days from its effective date or (y) when all such Warrant Shares can be sold without limitation or delay under Rule 144 and (b) file all report s and forms required to be filed by it under the Securities Exchange Act of 1934, as amended ("Reports") on a timely basis so long as each Holder owns any Warrant Shares and shall provide each Holder copies thereof when filed.

     (c)  Notwithstanding anything contained herein to the contrary, the Company shall be entitled to postpone the filing of the Registration Statement otherwise required to be prepared and filed by it in accordance with subparagraph (b) or, in the event the Registration Statement has been declared effective, without suspending such effectiveness, instruct the Holder promptly in writing (or any subsequent holders thereof) not to sell or distribute any Warrant Shares (a "Delay") as long as the reason for non-disclosure continues, if the Company would be required to disclose in the Registration Statement the existence of any fact relating to a material business situation, transaction or negotiation, or would be required to disclose information that the Company has not otherwise made public, in each case, that the Company reasonably determines is in the best interests of the Company not to disclose at such time, and unless and until each Holder furnishes to the Co mpany in writing information that may

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be required to prepare the disclosure required by Items 507 and 508 of Regulation S-B promulgated under the Act, with respect to such Holder's Warrant Shares being sold under the Registration Statement provided that, with respect to Delays because of information related to the Company (rather than disclosure required to be provided by the holders), the Company shall only be entitled to a maximum of three (3) Delays, each Delay not to exceed a period of thirty (30) days; and further provided, that no period of Delay shall commence within 60 days of a previous Delay.

     (d)  Each Holder shall (i) reasonably cooperate with the Company in connection with the preparation and filing of the Registration Statement and execute and deliver any agreements or instruments reasonably requested by the Company or its counsel in connection therewith and (ii) upon discovery that, or upon the happening of any event as a result of which, the Registration Statement (or any prospectus included therein), as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made (as determined by the Company or its counsel in its sole discretion), forthwith discontinue its disposition of Warrant Shares pursuant to the Registration Statement, until such time as such Holder (or any holders) have received a supplemented or amended prospectus from the Company relating thereto.  The C ompany agrees to use its best efforts to prepare any necessary amendments or supplements to the Registration Statement as soon as reasonably practicable after the same becomes necessary and to provide to each Holder quantities of such amendments or supplements reasonably sufficient for the distribution thereof.

     (e)  The Company shall indemnify and hold harmless each Holder and its respective officers, directors, employees, members, agents, affiliates and control persons (each of the foregoing, a "Holder Indemnitee") who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of or arising from any actual or alleged misrepresentation or misstatement of facts or omission to represent or state any fact or omission to state a fact necessary to make the facts stated under the circumstances not materially misleading, in the Registration Statement or any amendment or supplement thereto or to the prospectus incorporated therein from and against any claim, losses, liabilities, costs and expenses (including attorney's fees, judgments, fines and amounts paid in settlement) ("Loss") actually and reasonably incurred by any such Holder Indemnitee in connection with such claim, action, suit or proceeding or the defense thereof, except to the extent such Loss is the direct result of a misstatement or omission for which such Holder Indemnitee is liable to the Company under Section 9(i); provided, however, that the indemnification contained in this Section 8(e) with respect to any preliminary prospectus shall not inure to the benefit of any Holder Indemnitee on account of any such Loss arising from the sale of the Warrant Shares by such Holder Indemnitee to any person if a copy of the definitive prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and an untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such preliminary prospectus was corrected in the definitive prospectus.

     (f)  In connection with any offering involving an underwriting of

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shares of the Company’s capital stock, the Company shall not be required under Section 8(a) to include any of the Holders’ Warrant Shares in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company.  If the total amount of securities, including Warrant Shares, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securitie s, including Warrant Shares, which the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders).

9.

Representations of Holder. The Holder acknowledges that the Company will rely on the information and on the representations set forth herein, and the undersigned hereby represents, warrants and agrees that:

 (a)  The Holder is an "Accredited Investor", as that term is defined under Section 501(a) of Regulation D under the Act.

 (b)  The Holder has not received any general solicitation or general advertising regarding the exercise of the Warrant.

 (c)  The Holder has sufficient knowledge and experience in financial and business matters so that he or it is able to evaluate the merits and risks of exercising the Warrant as well as substantial experience in previous private and public purchases of securities.

 (d)  The Holder understands that an investment in the Company involves significant risk.  The Holder does not require the funds to be used to exercise this Warrant or the Warrant Shares for his liquidity or other needs, possesses the ability to bear the economic risk of holding the this Warrant or the Warrant Shares purchased hereunder indefinitely and can afford a complete loss of its investment in the this Warrant or the Warrant Shares.

 (e)  Prior to the issuance of this Warrant and prior to exercise, the Holder has or will have had full opportunity to ask questions of and receive answers from the Company and its officers and authorized representatives regarding the terms and conditions of the Warrant and the transactions contemplated hereby, as well as the affairs of the Company and related matters. The Holder confirms that he does not desire to receive any further information.

 (f)  The Holder understands that the exercise price of the Warrant being purchased hereby has been arbitrarily determined and does not necessarily bear any relationship to investment criteria such as projected earnings, discounted cash flow, book value or other measures of value.

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(g)

The Holder understands that the Warrant has not been filed with or reviewed by the Commission nor the securities department of any state because of the private or limited nature of this offering as defined by applicable laws, and that the Warrant and the Warrant Shares have not been registered with the Commission under the Act nor with the securities department of any state in reliance upon an exemption therefrom for non-public offerings.

 (h)  The Holder is a bona fide resident of the state set forth as his "address" above and further represents that (a) if a corporation, partnership, trust or other form of business organization, it has a principal office within such state; and (b) if an individual, he has his principal residence in such state.

 (i)  The Holder represents and warrants that the Warrant and the Warrant Shares are or will be acquired for investment purposes and not with a view to or for sale or distribution.  The Holder represents that there is no contract, undertaking, agreement or arrangement with any person to sell, transfer or pledge to such person or anyone else the Warrant and the Warrant Shares or any part thereof, and the Holder has no present plans to enter into such contract, undertaking, agreement or arrangement and will neither directly or indirectly seek to assign, transfer or sell the same in any way inconsistent with the legend which is being placed on the Warrant.

 (j)  Each Holder agrees to indemnify and hold harmless the Company and each officer, director, employee, agent or control person of the Company, who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to the extent by reason of or arising from any misrepresentation or misstatement of material facts or omission to state material facts necessary to make the facts stated, under the circumstances, not materially misleading, made or omitted by such Holder to the Company in a writing provided to the Company expressly for the purpose of inclusion in the Registration Statement or any amendment thereto, against losses, liabilities and expenses for which the Company, or any officer, director or control person of the Company has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by the Company or such officer, director or control person in connection with such action, suit or proceeding.

10.

No Rights as Shareholder until Exercise.  This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.  Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

11.

Loss, Theft, Destruction or Mutilation of Warrant.  The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant certificate or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which shall not include the posting of any bond), and upon surrender and

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cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

12.

Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

13.

Adjustments of Exercise Price and Number of Warrant Shares.  (a) The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following.  In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the holder of this Warrant shall be entitled to receive the kind and number of Warrant Shares of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof.  Upon each such adjustment of the kind and number of Warrant Shares of the Company which are purchasable hereunder, the holder of this Warrant shall thereafter be entitled to purchase the number of Warrant Shares resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares of the Company resulting from such adjustment.  An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

   (b)  Subject to Section 13(c) below, in case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation, and pursuant to the terms of such reorganization, reclassification, merger, or consolidation, shares of common stock of the successor or acquiring corporation, or shares of stock other than Common Stock of the Company, is to be received by or distributed to the holders of Common Stock of the Company in lieu of the Company’s Common Stock, then Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or other shares of stock of the Company (other than Common Stock) if the Company is the surviving corporation (in the merger, reorganization or reclassification), receivable upon or as a result of such reorganization, reclassification, merger or consolidation, by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event.  Subject to Section 13(c), in case of any such reorganization, reclassification, merger or consolidation, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is

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exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 13(b).  For purposes of this Section 13(b), “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption.  Subject to Section 13(c), the foregoing provisions of this Section 13(b) shall similarly apply to successive reorganizations, reclassifications, mergers or consolidations.

   (c)  In the event of (i) a proposed dissolution or liquidation of the Company, or (ii) a proposed sale of all or substantially all of the assets or outstanding equity of the Company, or (iii) 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 other reorganization own immediately after such merger, consolidation or other reorganization fifty percent (50%) or more of the voting power 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, the Board of Directors of the Company, at its sole discretion, shall, as to any unexercised portion of this Warrant, either (1) make appropriate provision for the protection of any such unexercised portion by the substitution on an equitable basis of appropr iate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect to one share of Common Stock of the Company as set forth in Section 13(b) above; provided that the excess of the aggregate fair market value of the shares subject to the unexercised portion of this Warrant immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such unexercised portion immediately before such substitution over the purchase price thereof, or (2) upon written notice to Holder, provide that the entire unexercised portion of this Warrant  must be exercised within a specified number of days of the date of such notice or such unexercised portion will be terminated.

14.

Voluntary Adjustment by the Company.  The Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

15.

Notice of Adjustment.  Whenever the number of Warrant Shares or number or kind of securities purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the holder of this Warrant notice of such adjustment or adjustments setting forth the number of Warrant Shares (or other securities) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (or other securities) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.  Such notice, in the absence of manifest error, shall be conclusive evidence of the correctness of such adjustment.

16.

Notice of Corporate Action.  If at any time:

(a)

the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or

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(b)

there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,

(c)

there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days’ prior written notice of the date when the same shall take place.  Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such divid end, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up.  Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 16(d).

17.

Authorized Shares.  The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of  the Principal Market upon which the Common Sto ck may be listed.

18.

Miscellaneous.

(a)

Jurisdiction. This Warrant shall be binding upon any successors or assigns of the Company.  This Warrant shall be construed in accordance with the laws of the State of New Jersey, other than those which would defer to the substantive laws of another jurisdiction.

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(b)

Restrictions.  The holder hereof acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

(c)

Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date.  

(d)

Notices.  Any notice, request or other document required or permitted to be given or delivered to the holder hereof by the Company shall be delivered in accordance with the notice provisions of the Financial Consulting Agreement dated July 15, 2005, by and between Holder and Company.

(e)

Limitation of Liability.  No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(f)

Remedies.  Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(g)

Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

(h)

Indemnification.  Except as set forth in Section 9 hereof, the Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys’ fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys’ fees, expenses or disbursements are found in a final non-appealable judgment by a court t o have resulted from Holder’s negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company.

(i)

Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

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(j)

Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(k)

Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

Dated: _________________

ION NETWORKS, INC.

By:

      Name:

      Title:

12

­

NOTICE OF EXERCISE

To: ION NETWORKS, Inc.

(1)

The undersigned hereby elects to purchase ________ shares of Common Stock (the “Common Stock”), of Ion Networks, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)

Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:

_______________________________

(Name)

_______________________________

(Address)

_______________________________

Dated:

______________________________

Signature

737592_2

­

ASSIGNMENT FORM

(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated:  ______________, _______

Holder's Signature:

_____________________________

Holder's Address:

_____________________________

_____________________________

Signature Guaranteed:  ___________________________________________

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

737592_2

­

EX-4.1

1994 STOCK OPTION PLAN

of

MICROFRAME, INC.

1.

PURPOSES OF THE PLAN. This stock option plan (the “Plan”) is designed to provide an incentive to key employ­ees (including officers and directors who are key employees) and consultants who are not employees or directors of Microframe, Inc., a New Jersey corporation (the “Company”), and its present and future subsidiary corporations, as defined in Paragraph 19 (“Subsidiaries”), and to offer an additional inducement in obtaining the services of such individuals. The Plan provides for the grant of “incentive stock options” (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the “Code”), and nonqualified stock options (“NQSOs”), but the Company makes no warranty as to the qualification of any option as an “incentive stock option” under the Code.

2.

STOCK SUBJECT TO THE PLAN. Subject to the provisions of Paragraph 12, the aggregate number of shares of Common Stock, $.001 par value per share, of the Company (“Common Stock”) for which options may be granted under the Plan shall not exceed 250,000. Such shares of Common Stock may, in the discretion of the Board of Directors of the Company (the “Board of Directors”), consist either in whole or in part of authorized but unissued shares of Common Stock or shares of Common Stock held in the treasury of the Company. The Company shall at all times during the term of the Plan reserve and keep available such number of shares of Common Stock as will be sufficient to satisfy the requirements of the Plan. Subject to the provisions of Paragraph 13, any shares of Common Stock subject to an option which for any reason expires, is cancelled or is terminated unexe rcised or which ceases for any reason to be exercisable shall again become available for the granting of options under the Plan.

3.

ADMINISTRATION OF THE PLAN. The Plan shall be administered by a committee of the Board of Directors (the “Committee”) consisting of not less than two Directors, each of whom shall be a “disinterested person” within the meaning of Rule 16b-3 (or any successor rule or regulation) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). A majority of the members of the Committee shall constitute a quorum, and the acts of a majority of the members present at any meeting at which a quorum is present, and any acts approved in writing by all members without a meeting, shall be the acts of the Committee.

Subject to the express provisions of the Plan, the Committee shall have the authority, in its sole discretion, to determine the key employees and consultants who shall receive options; the times when they shall receive options; whether an Employee Option (as defined in Paragraph 19) shall be an ISO or a NQSO; the number of shares of Common Stock to be subject to each option; the term of each option; the date each option shall become exercisable; whether an option shall be exercisable in whole, in part or in installments, and, if in installments, the number of shares of Common Stock to be subject to each install­ment; whether the installments shall be cumulative; the date each installment shall become exercisable and the term of each installment; whether to accelerate the date of exercise of any installment; whether shares of Common Stock may be issued on exercise of an option as partly paid, and, if so, the dates when future installments of the exercise price shall become due and the amounts of such installments; the exercise price of each option; the form of payment of the exercise price; the fair mar­ket value of a share of Common Stock; the amount, if any, neces­sary to satisfy the Company’s obligation to withhold taxes or other amounts; whether to restrict the sale or other disposition of the shares of Common Stock acquired upon the exercise of an option and to waive any such restriction; whether to subject the exercise of all or any portion of an option to the fulfillment of contingencies as specified in the Contract (as described in Paragraph 11), including without limitation, contingencies relating to entering into a covenant not to

compete with the Company and its Parent (as defined in Paragraph 19) and Subsid­iaries, to financial objectives for the Company, a Subsidiary, a division, a product line or other category, and/or the period of continued relationship of the optionee with the Company or its Subsidiaries, and to determine whether such contingencies have been met; to construe the respective Contracts and the Plan; with the consent of the optionee, to cancel or modify an option, provided such option as modified would be permitted to be granted on such date under the terms of the Plan; to prescribe, amend and rescind rules and regulations relating to the Plan; and to make all other determinations necessary or advisable for administering the Plan. The determinations of the Committee on the matters referred to in this Paragraph 3 shall be conclusive.

No member or former member of the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any option granted hereunder. In addi­tion, the Company shall indemnify and hold each member and former member of the Committee harmless from and against any liability, claim for damages and expenses in connection there­with incurred by reason of any action or failure to act under or in connection with the Plan or any option granted hereunder, to the fullest extent permitted with respect to directors of the Company under the Company’s certificate of incorporation, by-laws or applicable law.

4.

ELIGIBILITY. The Committee may, consistent with the purposes of the Plan, grant options from time to time, to key employees (including officers and directors who are key employees) and to consultants of the Company or any of its Sub­sidiaries. Options granted shall cover such number of shares of Common Stock as the Committee may determine; provided, however, that the maximum number of shares subject to options that may be granted to any person during any calendar year under the Plan shall not exceed 75,000 shares; and further provided that the aggregate market value (determined at the time the option is granted) of the shares of Common Stock for which any eligible person may be granted ISOs under the Plan or any other plan of the Company, or of a Parent or a Subsidiary of the Company, which are exercisable for the first time by such optionee during any calendar year shall not exceed $100,000. The $100,000 ISO limitation shall be applied by taking ISOs into account in the order in which they were granted. Any option (or the portion thereof) granted in excess of such amount shall be treated as a NQSO.

5.

EXERCISE PRICE. The exercise price of the shares of Common Stock under each option shall be determined by the Committee; provided, however, that the exercise price of an ISO shall not be less than 100% of the fair market value of the Com­mon Stock subject to such option on the date of grant; and fur­ther provided, that if, at the time an ISO is granted, the optionee owns (or is deemed to own under Section 424(d) of the Code) stock possessing more than 10% of the total combined vot­ing power of all classes of stock of the Company, of any of its Subsidiaries or of a Parent, the exercise price of such ISO shall not be less than 110% of the fair market value of the Com­mon Stock subject to such ISO on the date of grant.

The fair market value of a share of Common Stock on any day shall be (a) if the principal market for the Common Stock is a national securities exchange, the average between the high and low sales prices per share of the Common Stock on such day as reported by such exchange or on a consolidated tape reflecting transactions on such exchange, (b) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is quoted on the National Associa­tion of Securities Dealers Automated Quotations System (“NASDAQ”), and (i) if actual sales price information is avail­able with respect to the Common Stock, the average between the high and low sales prices per share of the Common Stock on such day on NASDAQ, or (ii) if such information is not available, the average between the highest bid and the lowest asked prices for the Co mmon Stock on such day on NASDAQ, or (c) if the principal market for the Common Stock is not a national securities exchange and the Common Stock is not quoted on NASDAQ, the average between the highest bid and lowest asked prices per share

ii

for the Common Stock on such day as reported on the NASDAQ OTC Bulletin Board Service, National Quotation Bureau, Incorporated or a comparable service; provided that if clauses (a), (b) and (c) of this Paragraph are all inapplicable, or if no trades have been made or no quotes are available for such day, the fair mar­ket value of a share of Common Stock shall be determined by the Committee by any method consistent with applicable regulations adopted by the Treasury Department relating to stock options.

6.

TERM. The term of each option granted pursuant to the Plan shall be such term as is established by the Commit­tee, in its sole discretion, at or before the time such option is granted; provided, however, that the term of each ISO granted pursuant to the Plan shall be for a period not exceeding 10 years from the date of grant thereof, and further, provided, that if, at the time an ISO is granted, the optionee owns (or is deemed to own under Section 424(d) of the Code) stock possessing more than 10% of the total combined voting power of all classes of stock of the Company, of any of its Subsidiaries or of a Par­ent, the term of the ISO shall be for a period not exceeding five years from the date of grant. Options shall be subject to earlier termination as hereinafter provided.

7.

EXERCISE. An option (or any part or installment thereof), to the extent then exercisable, shall be exercised by giving written notice to the Company at its principal office (at present 21 Meridian Road, Edison, New Jersey 08820, Attn.: Stock Option Committee), stating which option is being exer­cised, specifying the number of shares of Common Stock as to which such option is being exercised and accompanied by payment in full of the aggregate exercise price therefor (or the amount due on exercise if the Contract permits installment payments) (a) in cash or by certified check or (b) if the Contract at the time of grant so permits, with previously acquired shares of Common Stock having an aggregate fair market value, on the date of exercise, equal to the aggregate exercise price of all options being exercised, or with any combination of cash, certified check or shares of Common Stock. In such case, fair market value shall be determined in accordance with Paragraph 5.

The Committee may, in its discretion, permit payment of the exercise price of an option by delivery by the optionee of a properly executed exercise notice, together with a copy of his irrevocable instructions to a broker acceptable to the Com­mittee to deliver promptly to the Company the amount of sale or loan proceeds sufficient to pay such exercise price. In connection therewith, the Company may enter into agreements for coordinated procedures with one or more brokerage firms.

A person entitled to receive Common Stock upon the exercise of an option shall not have the rights of a shareholder with respect to such shares of Common Stock until the date of issuance of a stock certificate to him for such shares; provided, however, that until such stock certificate is issued, any option holder using previously acquired shares of Common Stock in payment of an option exercise price shall continue to have the rights of a shareholder with respect to such previously acquired shares.

In no case may a fraction of a share of Common Stock be purchased or issued under the Plan.

8.

TERMINATION OF RELATIONSHIP. Any holder of an Employee Option whose employment with the Company (and its Parent and Subsidiaries) has terminated for any reason other than his death or Disability (as defined in Paragraph 19) may exer­cise such option, to the extent exercisable on the date of such termination, at any time within three months after the date of termination, but not thereafter and in no event after the date the option would otherwise have expired; provided, however, that if his employment shall be terminated either (a) for cause, or (b) without the consent of the Company, said option shall termi­nate immediately. Employee Options granted under the Plan shall not be affected by any change in the status of the holder so long as he continues to be a full-time employee of the Company, its Parent or any of the Subsidiaries (regardless of having been trans ferred from one corporation to another).

For purposes of the Plan, an employment relationship shall be deemed to exist between an individual and a corporation if, at the time of the determination, the individual was an employee of such corporation for purposes of Section 422(a) of the Code. As a result, an individual on military, sick leave or other bona fide leave of absence shall continue to be considered an employee for purposes of the Plan during such leave if the period of the leave does not exceed 90 days, or, if longer, so long as the individual’s right to reemployment with the Company (or a related corporation) is guaranteed either by statute or by contract. If the period of leave exceeds 90 days and the indi­vidual’s right to reemployment is not guaranteed by statute or by contract, the employment relationship shall be deemed to have terminated on the 91st day of such leave. In addition, for purposes of the Plan, an optionee’s employment with a Subsidiary or Parent of the Company shall be deemed to have terminated on the date such corporation ceases to be a Subsidiary or Parent of the Company.

Except as may otherwise be provided in the Contract, the holder of a Consultant Option (as defined in Paragraph 19) whose consulting relationship with the Company (and its Parent and Subsidiaries) has terminated for any reason may exercise such option to the extent exercisable on the date of such termi­nation, at any time within three months after the date of termi­nation, but not thereafter and in no event after the date the option would otherwise have expired; provided, however, that if such relationship shall be terminated either (a) for cause, or (b) without the consent of the Company (other than as a result of the death or Disability of the holder or a key employee of the holder), the option shall terminate immediately. Consultant Options granted under the Plan shall not be affected by a change in the relationship so long as the holder continues to be a con ­sultant of the Company, its Parent or any of its Subsidiaries (regardless of having ceased to be a consultant for any other of such corporations).

Nothing in the Plan or in any option granted under the Plan shall confer on any individual any right to continue as an employee or a consultant of the Company, its Parent or any of its Subsidiaries, or interfere in any way with any right of the Company, its Parent or any of its Subsidiaries to terminate such relationship at any time for any reason whatsoever without lia­bility to the Company, its Parent or any of its Subsidiaries.

9.

DEATH OR DISABILITY OF AN OPTIONEE. If an optionee dies (a) while he is employed by the Company, its Parent or any of its Subsidiaries, (b) within three months after the termination of his employment (unless such termination was for cause or without the consent of the Company) or (c) within one year following the termination of his employment by reason of Disability, his Employee Options may be exercised, to the extent exercisable on the date of his death, by his executor, administrator or other person at the time entitled by law to his rights under such option, at any time within one year after death, but not thereafter and in no event after the date the option would otherwise have expired.

Any optionee whose employment has terminated by reason of Disability may exercise his Employee Option, to the extent exercisable upon the effective date of such termination, at any time within one year after such date, but not thereafter and in no event after the date the option would otherwise have expired.

The termination of a Consultant Option as a result of the death or Disability of the holder of the option (or a key employee thereof) shall be governed by Paragraph 8.

10.

COMPLIANCE WITH SECURITIES LAWS. The Committee may require, in its discretion, as a condition to the exercise of any option that either (a) a Registration Statement under the Securities Act of 1933, as amended (the “Securities Act”), with respect to the shares of Common Stock to be issued upon such exercise shall be effective and current at the time of exercise, or (b) there is an exemption from registration under the Securi­ties Act for the issuance of shares of Common Stock upon such exercise. Nothing herein shall be construed as requiring the Company to register shares subject to any option under the Secu­rities Act.

The Committee may require the optionee to execute and deliver to the Company his representations and warranties, in form and substance satisfactory to the Committee, that (i) the shares of Common Stock to be issued upon the exercise of the option are being acquired by the optionee for his own account, for investment only and not with a view to the resale or distribution thereof, and (ii) any subsequent resale or distribution of shares of Common Stock by such optionee will be made only pursuant to (a) a Registration Statement under the Securities Act which is effective and current with respect to the shares of Common Stock being sold, or (b) a specific exemption from the registration requirements of the Securities Act, but in claiming such exemption, the optionee shall prior to any offer of sale or sale of such shares of Common Stock provide the Company with a favorable written opinion of counsel, in form and substance satisfactory to the Company, as to the applicability of such exemp­tion to the proposed sale or distribution.

In addition, if at any time the Committee shall determine in its discretion that the listing or qualification of the shares of Common Stock subject to such option on any securities exchange or under any applicable law, or the consent or approval of any governmental regulatory body, is necessary or desirable as a condition of, or in connection with, the granting of an option, or the issuance of shares of Common Stock thereunder, such option may not be exercised in whole or in part unless such listing, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.

11.

STOCK OPTION CONTRACTS. Each option shall be evidenced by an appropriate Contract which shall be duly exe­cuted by the Company and the optionee, and shall contain such terms and conditions not inconsistent herewith as may be determined by the Committee.

12.

ADJUSTMENTS UPON CHANGES IN COMMON STOCK. Not­withstanding any other provisions of the Plan, in the event of any change in the outstanding Common Stock by reason of a stock dividend, recapitalization, merger in which the Company is the surviving corporation, split-up, combination or exchange of shares or the like, the aggregate number and kind of shares subject to the Plan, the aggregate number and kind of shares subject to each outstanding option and the exercise price thereof, and the maximum number of shares subject to options that may be granted to any individual in any calendar year shall be appropriately adjusted by the Board of Directors, whose determination shall be conclusive.

In the event of (a) the liquidation or dissolution of the Company, (b) a merger in which the Company is not the sur­viving corporation or a consolidation involving the Company, or (c) any other capital reorganization (other than a recapitalization) in which more than 50% of the shares of Common Stock of the Company entitled to vote are exchanged, any outstanding options shall terminate, unless other provision is made therefor in the transaction.

13.

AMENDMENTS AND TERMINATION OF THE PLAN. The Plan was adopted by the Board of Directors on August 10, 1994. No option may be granted under the Plan after August 9, 2004. The Board of Directors, without further approval of the Company’s shareholders, may at any time suspend or terminate the Plan, in whole or in part, or amend it from time to time in such respects as it may deem advisable, including, without limitation, in order that ISO granted hereunder meet the requirements for “incentive stock options” under the Code, to comply with the provisions of Rule 16b-3 promulgated under the Exchange Act or Section 162(m) of the Code, and to conform to any change in applicable law or to regulations or rulings of administrative agencies; provided, however, that no amendment shall be effec­tive without the requisite prior or subsequent shareholder approval whic h would (a) except as contemplated in Paragraph 12, increase the maximum number of shares of Common Stock for which options may be granted under the Plan, (b) materially increase the benefits to participants under the Plan or (c) change the eligibility requirements for individuals entitled to receive options hereunder. No termination, suspension or amendment of the Plan shall, without the consent of the holder of an existing option affected thereby, adversely affect his rights under such option. The power of the Committee to construe and administer any options granted under the Plan prior to the termination or suspension of the Plan nevertheless shall continue after such termination or during such suspension.

14.

NON-TRANSFERABILITY OF OPTIONS. No option granted under the Plan shall be transferable otherwise than by will or the laws of descent and distribution, and options may be exercised, during the lifetime of the holder thereof, only by him or his legal representatives. Except to the extent provided above, options may not be assigned, transferred, pledged, hypothecated or disposed of in any way (whether by operation of law or otherwise) and shall not be subject to execution, attach­ment or similar process.

15.

WITHHOLDING TAXES. The Company may withhold cash and/or shares of Common Stock to be issued with respect thereto having an aggregate fair market value equal to the amount which it determines is necessary to satisfy its obligation to withhold Federal, state and local income taxes or other amounts incurred by reason of the grant or exercise of an option, its disposi­tion, or the disposition of the underlying shares of Common Stock. Alternatively, the Company may require the holder to pay to the Company such amount, in cash, promptly upon demand. The Company shall not be required to issue any shares of Common Stock pursuant to any such option until all required payments have been made. Fair market value of the shares of Common Stock shall be determined in accordance with Paragraph 5.

Notwithstanding anything in the Plan or in any Con­tract to the contrary, the Company may not withhold shares of Common Stock to satisfy the tax withholding consequences of the exercise of an option by a holder who is subject to the report­ing requirements of Section 16(a) of the Exchange Act (as it constitutes a deemed exercise of a stock appreciation right (“SAR”) under Rule 16b-3 under the Exchange Act), unless (a) the Company has filed all periodic reports and statements required to be filed by it pursuant to Section 13(a) of the Exchange Act for at least one year prior to the date of such exercise, (b) the Company on a regular basis releases for publication quar­terly and annual summary statements of sales and earnings in the manner contemplated in the rules promulgated under Section 16 of the Exchange Act, (c) except when the date of exercise of such SAR is automatic or fixed in advance under the Plan and is out­side the control of the holder, the election by the holder to receive cash in full or partial settlement of the SAR, as well as the exercise of the SAR for cash, is made during the period beginning on the third business day following the date of release of the summary statements referred to in clause (b) and ending on the 12th business day following such date, and (d) the option has been held for at least six months from the date of grant to the date of cash settlement.

16.

LEGENDS; PAYMENT OF EXPENSES. The Company may endorse such legend or legends upon the certificates for shares of Common Stock issued upon exercise of an option under the Plan and may issue such “stop transfer” instructions to its transfer agent in respect of such shares as it determines, in its discre­tion, to be necessary or appropriate to (a) prevent a violation of, or to perfect an exemption from, the registration require­ments of the Securities Act, (b) implement the provisions of the Plan or any agreement between the Company and the optionee with respect to such shares of Common Stock, or (c) permit the Com­pany to determine the occurrence of a “disqualifying disposi­tion,” as described in Section 421(b) of the Code, of the shares of Common Stock transferred upon the exercise of an ISO granted under the Plan.

The Company shall pay all issuance taxes with respect to the issuance of shares of Common Stock upon the exercise of an option granted under the Plan, as well as all fees and expenses incurred by the Company in connection with such issuance.

17.

USE OF PROCEEDS. The cash proceeds from the sale of shares of Common Stock pursuant to the exercise of options under the Plan shall be added to the general funds of the Com­pany and used for its general corporate purposes as the Board of Directors may determine.

18.

SUBSTITUTIONS AND ASSUMPTIONS OF OPTIONS OF CER­TAIN CONSTITUENT CORPORATIONS. Anything in this Plan to the contrary notwithstanding, the Board of Directors may, without further approval by the shareholders, substitute new options for prior options of a Constituent Corporation (as defined in Para­graph 19) or assume the prior options of such Constituent Corporation.

19.

DEFINITIONS.

(a)

Subsidiary. The term “Subsidiary” shall have the same definition as “subsidiary corporation” in Section 424(f) of the Code.

(b)

Parent. The term “Parent” shall have the same definition as “parent corporation” in Section 424(e) of the Code.

(c)

Constituent Corporation. The term “Constituent Corporation” shall mean any corporation which engages with the Company, its Parent or any Subsidiary in a transaction to which Section 424(a) of the Code applies (or would apply if the option assumed or substituted were an ISO), or any Parent or any Subsidiary of such corporation.

(d)

Disability. The term “Disability” shall mean a permanent and total disability within the meaning of Sec­tion 22(e)(3) of the Code.

(e)

Employee Option. The term “Employee Option” shall mean an option granted pursuant to the Plan to an individ­ual who, at the time of grant, is a key employee of the Company or a Subsidiary of the Company.

(f)

Consultant Option. The term “Consultant Option” shall mean an NQSO granted pursuant to the Plan to a person who, at the time of grant, is a consultant to the Company or a Subsidiary of the Company, but at such time is neither a common law employee of the Company or of any of its Subsidiaries nor a director of the Company.

20.

GOVERNING LAW. The Plan, such options as may be granted hereunder and all related matters shall be governed by, and construed in accordance with, the laws of the State of New Jersey, without regard to conflict of law provisions.

21.

PARTIAL INVALIDITY. The invalidity or illegality of any provision herein shall not affect the validity of any other provision.

22.

SHAREHOLDER APPROVAL. The Plan shall be subject to approval by a majority of the votes cast at the next duly held meeting of the Company’s shareholders at which a majority of the outstanding voting shares are present, in person or by proxy, and voting on the Plan. No options granted hereunder may be exercised prior to such approval, provided that the date of grant of any options granted hereunder shall be determined as if the Plan had not been subject to such approval. Notwithstanding the foregoing, if the Plan is not approved by a vote of the shareholders of the Company on or before August 9, 1995, the Plan and any options granted hereunder shall terminate.

iii

EX-4.3

                             2000 STOCK OPTION PLAN

                                       OF

                               ION NETWORKS, INC.

        1. Purposes of the Plan. This stock option plan (the "Plan") is intended

to provide an incentive to employees  (including  directors and officers who are

employees),  and to  consultants  and  directors who are not  employees,  of Ion

Networks,  Inc.,  a  Delaware  corporation  (the  "Company"),   or  any  of  its

Subsidiaries  (as  such  term is  defined  in  Paragraph  19),  and to  offer an

additional  inducement in obtaining the services of such  individuals.  The Plan

provides for the grant of "incentive stock options"  ("ISOs") within the meaning

of Section 422 of the Internal  Revenue Code of 1986,  as amended (the  "Code"),

and  nonqualified  stock  options  which do not qualify as ISOs  ("NQSOs").  The

Company  makes no  representation  or  warranty,  express or implied,  as to the

qualification of any option as an "incentive stock option" under the Code.

        2. Stock Subject to the Plan. Subject to the provisions of Paragraph 12,

the aggregate  number of shares of the Company's  Common Stock,  par value $.001

per share  ("Common  Stock"),  for which  options may be granted  under the Plan

shall not exceed  3,000,000  shares.  Such  shares of Common  Stock may,  in the

discretion of the Board of Directors of the Company (the "Board of  Directors"),

consist either in whole or in part of authorized  but unissued  shares of Common

Stock or shares of Common Stock held in the treasury of the Company.  Subject to

the  provisions of Paragraph 13, any shares of Common Stock subject to an option

which for any reason expires, is canceled or is terminated  unexercised or which

ceases for any reason to be  exercisable  shall again become  available  for the

granting of options  under the Plan.  However,  should the exercise  price of an

option  under the Plan be paid with shares of Common  Stock or should  shares of

Common  Stock  otherwise  issuable  under the Plan be withheld by the Company in

satisfaction of the  withholding  taxes incurred in connection with the exercise

of an option,  then the number of shares of Common Stock  available for issuance

under the Plan  shall be  reduced  by the gross  number of shares  for which the

option is exercised,  and not by the net number of shares of Common Stock issued

to the holder of such option.  The Company shall at all times during the term of

the Plan  reserve and keep  available  such number of shares of Common  Stock as

will be sufficient to satisfy the requirements of the Plan.

        3.  Administration  of the Plan.  The Plan will be  administered  by the

Board of Directors,  or by a committee  (the  "Committee")  consisting of two or

more directors appointed by the Board of Directors. Those administering the Plan

shall  be  referred  to  herein  as the  "Administrators."  Notwithstanding  the

foregoing,  if the  Company is or  becomes a  corporation  issuing  any class of

common  equity  securities  required to be  registered  under  Section 12 of the

Securities  Exchange Act of 1934, as amended (the "Exchange Act"), to the extent

necessary  to preserve  any  deduction  under  Section  162(m) of the Code or to

comply with Rule 16b-3 promulgated under the Exchange Act, or any successor rule

("Rule 16b-3"),  any Committee appointed by the Board of Directors to administer

the Plan shall be  comprised  of two or more  directors  each of whom shall be a

"non-employee  director,"  within the  meaning of Rule  16b-3,  and an  "outside

director," within the meaning of Treasury Regulation Section 1.162-27(e)(3), and

the delegation of powers to the Committee  shall be consistent  with  applicable

laws and regulations  (including,  without limitation,  applicable state law and

Rule  16b-3).  Unless  otherwise  provided  in the  By-Laws of the  Company,  by

resolution  of the Board of  Directors  or  applicable  law, a  majority  of the

members of the Board or the Committee shall constitute a quorum, and the acts of

a majority of the  members  present at any meeting at which a quorum is present,

and any acts approved in writing by all members without a meeting,  shall be the

acts of the Board or the Committee.

         Subject to the express provisions of the Plan, the Administrators shall

have the authority, in their sole discretion, to determine the persons who shall

be granted options; the times when they shall receive options; whether an option

granted to an  employee  shall be an ISO or a NQSO;  the type  (i.e.,  voting or

non-voting)  and number of shares of Common  Stock to be subject to each option;

the term of each option; the date each option shall become exercisable;  whether

an  option  shall  be  exercisable  in  whole  or in  installments,  and,  if in

installments,  the  number  of  shares of  Common  Stock to be  subject  to each

installment;  whether  the  installments  shall be  cumulative;  the  date  each

installment shall become  exercisable and the term of each installment;  whether

to accelerate the date of exercise of any option or installment;  whether shares

of Common  Stock may be issued upon the  exercise  of an option as partly  paid,

and,  if so, the dates when  future  installments  of the  exercise  price shall

become due and the  amounts of such  installments;  the  exercise  price of each

option;  the form of payment of the exercise  price;  the fair market value of a

share of Common Stock; whether and under what conditions to restrict the sale or

other disposition of the shares of Common Stock acquired upon the exercise of an

option  and,  if so,  whether  and  under  what  conditions  to  waive  any such

restriction; whether and under what conditions to subject the exercise of all or

any  portion  of an  option  to  the  fulfillment  of  certain  restrictions  or

contingencies  as  specified  in the  contract  referred to in Paragraph 11 (the

"Contract"), including without limitation restrictions or contingencies relating

to (a) entering into a covenant not to compete with the Company,  its Parent (if

any) (as  such  term is  defined  in  Paragraph  19) and any  Subsidiaries,  (b)

financial  objectives for the Company,  any of its Subsidiaries,  a division,  a

product line or other category and/or (c) the period of continued  employment of

the  optionee  with the  Company or any of its  Subsidiaries,  and to  determine

whether such  restrictions or contingencies  have been met; the amount,  if any,

necessary to satisfy the obligation of the Company,  any of its  Subsidiaries or

any  Parent to  withhold  taxes or other  amounts;  whether  an  optionee  has a

Disability  (as such term is defined in Paragraph  19);  with the consent of the

optionee,  to cancel or modify an option,  provided,  however, that the modified

provision is permitted to be included in an option granted under the Plan on the

date of the  modification;  provided,  further,  however,  that in the case of a

modification  (within the meaning of Section 424(h) of the Code) of an ISO, such

option  as  modified  would  be  permitted  to be  granted  on the  date of such

modification  under the terms of the Plan; to construe the respective  Contracts

and the Plan; to prescribe,  amend and rescind rules and regulations relating to

the Plan  (including  the  rules  and  regulations  of the  Company's  2000 U.K.

sub-plan);  to approve any provision of the Plan or any option granted under the

Plan or any amendment to either which, under Rule 16b-3 or Section 162(m) of the

Code,  requires  the  approval  of  the  Board  of  Directors,  a  committee  of

non-employee directors or the stockholders,  in order to be exempt under Section

16(b) of the Exchange Act (unless otherwise  specifically provided herein) or to

preserve any deduction  under Section  162(m) of the Code; and to make all other

determinations   necessary  or  advisable  for   administering   the  Plan.  Any

controversy  or claim arising out of or relating to the Plan, any option granted

under  the  Plan  or  any  Contract  shall  be  determined  unilaterally  by the

Administrators in their sole discretion. The determinations of the

Administrators  on matters  referred to in this  Paragraph 3 shall be conclusive

and binding on all parties.  No Administrator or former  Administrator  shall be

liable for any action or  determination  made in good faith with  respect to the

Plan or any option granted hereunder.

        4. Eligibility.  The  Administrators  may from time to time,  consistent

with the  purposes  of the Plan,  grant  options  to such  employees  (including

officers and directors who are employees) of, or consultants  to, the Company or

any of its  Subsidiaries,  and to such directors of the Company who, at the time

of  grant,  are  not  common  law  employees  of  the  Company  or of any of its

Subsidiaries, as the Administrators may determine in their sole discretion. Such

options  granted  shall  cover  such  number of  shares  of Common  Stock as the

Administrators may determine in their sole discretion;  provided,  however, that

if on the date of grant of an option,  any class of common  stock of the Company

(including  without  limitation  the Common  Stock) is required to be registered

under  Section 12 of the Exchange Act, the maximum  number of shares  subject to

options that may be granted to any employee  during any calendar  year under the

Plan shall be 400,000 shares;  provided,  further,  however,  that the aggregate

market  value  (determined  at the time the option is  granted) of the shares of

Common Stock for which any eligible  employee may be granted ISOs under the Plan

or any other plan of the Company, or of a Parent or a Subsidiary of the Company,

which are  exercisable  for the first time by such optionee  during any calendar

year shall not exceed  $100,000.  The  $100,000 ISO  limitation  amount shall be

applied by taking ISOs into account in the order in which they were granted. Any

option (or  portion  thereof)  granted in excess of such ISO  limitation  amount

shall be treated as a NQSO to the extent of such excess.

        5.  Exercise  Price.  The  exercise  price of the shares of Common Stock

under  each  option  shall be  determined  by the  Administrators  in their sole

discretion;  provided,  however,  that the exercise price of an ISO shall not be

less than the fair market  value of the Common  Stock  subject to such option on

the date of grant; and provided,  further,  however, that if, at the time an ISO

is granted,  the optionee owns (or is deemed to own under Section  424(d) of the

Code) stock  possessing  more than 10% of the total combined voting power of all

classes of stock of the Company,  of any of its Subsidiaries or of a Parent, the

exercise  price of such ISO shall not be less than 110% of the fair market value

of the Common Stock subject to such ISO on the date of grant.

         The fair  market  value of a share of Common  Stock on any day shall be

(a) if the  principal  market  for the  Common  Stock is a  national  securities

exchange,  the average of the highest and lowest  sales  prices per share of the

Common Stock on such day as reported by such exchange or on a consolidated  tape

reflecting  transactions on such exchange,  (b) if the principal  market for the

Common  Stock is not a national  securities  exchange  and the  Common  Stock is

quoted on the Nasdaq  Stock  Market  ("Nasdaq"),  and (i) if actual  sales price

information  is available  with respect to the Common Stock,  the average of the

highest  and lowest  sales  prices per share of the Common  Stock on such day on

Nasdaq, or (ii) if such information is not available, the average of the highest

bid and the lowest  asked  prices per share for the Common  Stock on such day on

Nasdaq,  or (c) if the  principal  market for the Common Stock is not a national

securities exchange and the Common Stock is not quoted on Nasdaq, the average of

the highest bid and lowest  asked  prices per share for the Common Stock on such

day as  reported on the OTC  Bulletin  Board  Service or by  National  Quotation

Bureau, Incorporated or a comparable service; provided,

however,  that  if  clauses  (a),  (b)  and  (c) of  this  Paragraph  5 are  all

inapplicable because the Company's Common Stock is not publicly traded, or if no

trades have been made or no quotes are  available  for such day, the fair market

value of a share of Common Stock shall be  determined by the  Administrators  by

any method  consistent with any applicable  regulations  adopted by the Treasury

Department relating to stock options.

        6. Term. Each option granted pursuant to the Plan shall be for such term

as is established by the Administrators,  in their sole discretion, at or before

the time such option is granted; provided, however, that the term of each option

granted  pursuant to the Plan shall be for a period not  exceeding 10 years from

the date of grant thereof, and provided further,  that if, at the time an ISO is

granted,  the  optionee  owns (or is deemed to own under  Section  424(d) of the

Code) stock  possessing  more than 10% of the total combined voting power of all

classes of stock of the Company,  of any of its Subsidiaries or of a Parent, the

term of the ISO shall be for a period not exceeding  five years from the date of

grant. Options shall be subject to earlier termination as hereinafter provided.

        7. Exercise.  An option (or any installment thereof), to the extent then

exercisable,  shall be exercised by giving  written notice to the Company at its

principal office stating which option is being exercised,  specifying the number

of  shares of  Common  Stock as to which  such  option  is being  exercised  and

accompanied by payment in full of the aggregate  exercise price therefor (or the

amount due on exercise if the applicable Contract permits installment  payments)

(a) in cash  and/or  by  certified  check,  (b)  with the  authorization  of the

Adminstrators,  with  previously  acquired  shares  of  Common  Stock  having an

aggregate fair market value  (determined in accordance with Paragraph 5), on the

date of exercise,  equal to the  aggregate  exercise  price of all options being

exercised, or (c) some combination thereof;  provided,  however, that in no case

may shares be  tendered  if such  tender  would  require  the Company to incur a

charge against its earnings for financial accounting purposes. The Company shall

not be required to issue any shares of Common Stock  pursuant to the exercise of

any option until all required payments with respect thereto,  including payments

for any required withholding amounts, have been made.

         The Administrators may, in their sole discretion, permit payment of the

exercise  price of an option by delivery by the optionee of a properly  executed

notice,  together with a copy of the optionee's  irrevocable  instructions  to a

broker  acceptable to the  Administrators to deliver promptly to the Company the

amount  of sale or loan  proceeds  sufficient  to pay such  exercise  price.  In

connection  therewith,  the Company may enter into  agreements  for  coordinated

procedures with one or more brokerage firms.

         An optionee shall not have the rights of a stockholder  with respect to

such shares of Common Stock to be received  upon the exercise of an option until

the date of issuance of a stock  certificate to the optionee for such shares or,

in the case of  uncertificated  shares,  until  the date an entry is made on the

books of the  Company's  transfer  agent  representing  such  shares;  provided,

however, that until such stock certificate is issued or until such book entry is

made, any optionee using  previously  acquired shares of Common Stock in payment

of an option  exercise  price shall continue to have the rights of a stockholder

with respect to such previously acquired shares.

In no case may a fraction of a share of Common  Stock be  purchased  or

issued under the Plan.

        8.  Termination  of  Relationship.  Except as may otherwise be expressly

provided in the applicable Contract, any optionee whose employment or consulting

relationship  with the  Company,  its  Parent and any of its  Subsidiaries,  has

terminated for any reason other than the death or Disability of the optionee may

exercise any option granted to the optionee as an employee or consultant, to the

extent  exercisable  on the date of such  termination,  at any time within three

months after the date of  termination,  but not thereafter and in no event after

the date the option would  otherwise have expired;  provided,  however,  that if

such  relationship  is terminated  either (a) for Cause (as defined in Paragraph

19),  or (b) without the consent of the  Company,  such option  shall  terminate

immediately.

         For the  purposes  of the Plan,  an  employment  relationship  shall be

deemed to exist between an individual  and a corporation  if, at the time of the

determination,  the individual was an employee of such  corporation for purposes

of Section  422(a) of the Code. As a result,  an  individual on military  leave,

sick leave or other bona fide leave of absence  shall  continue to be considered

an  employee  for  purposes  of the Plan  during such leave if the period of the

leave does not exceed 90 days, or, if longer, so long as the individual's  right

to  re-employment  with the  Company,  any of its  Subsidiaries  or a Parent  is

guaranteed  either by statute or by contract.  If the period of leave exceeds 90

days and the individual's right to re-employment is not guaranteed by statute or

by contract,  the employment  relationship shall be deemed to have terminated on

the 91st day of such leave.

         Except  as may  otherwise  be  expressly  provided  in  the  applicable

Contract, an optionee whose directorship with the Company has terminated for any

reason other than the  optionee's  death or Disability  may exercise the options

granted to the optionee as a director  who was not an employee of or  consultant

to the Company or any of its Subsidiaries, to the extent exercisable on the date

of  such  termination,  at any  time  within  three  months  after  the  date of

termination,  but not thereafter and in no event after the date the option would

otherwise have expired;  provided,  however, that if the optionee's directorship

is terminated for Cause or without the consent of the Company, such option shall

terminate immediately.

         Nothing  in the Plan or in any  option  granted  under  the Plan  shall

confer on any person any right to continue in the employ or as a  consultant  of

the  Company,  its Parent or any of its  Subsidiaries,  or as a director  of the

Company,  or interfere  in any way with any right of the Company,  its Parent or

any of its  Subsidiaries  to  terminate  such  relationship  at any time for any

reason  whatsoever  without  liability to the Company,  its Parent or any of its

Subsidiaries.

        9.  Death or  Disability  of an  optionee.  Except as may  otherwise  be

expressly provided in the applicable Contract,  if an optionee dies (a) while he

is  employed  by, or a  consultant  to,  the  Company,  its Parent or any of its

Subsidiaries,  (b) within three months after the  termination  of the optionee's

employment  or  consulting  relationship  with the  Company,  its Parent and its

Subsidiaries  (unless such  termination  was for Cause or without the consent of

the Company) or (c) within one year following the termination of such employment

or consulting  relationship by reason of the optionee's Disability,  the options

granted to the optionee as an employee of, or consultant  to, the Company or any

of its Subsidiaries,  may be exercised, to the

extent  exercisable on the date of the optionee's death, by the optionee's Legal

Representative (as such term is defined in Paragraph 19), at any time within one

year after death,  but not  thereafter and in no event after the date the option

would otherwise have expired.  Except as may otherwise be expressly  provided in

the  applicable   Contract,   any  optionee   whose   employment  or  consulting

relationship with the Company, its Parent and its Subsidiaries has terminated by

reason of the  optionee's  Disability  may exercise such options,  to the extent

exercisable upon the effective date of such termination,  at any time within one

year after  such date,  but not  thereafter  and in no event  after the date the

option would otherwise have expired.

         Except  as may  otherwise  be  expressly  provided  in  the  applicable

Contract,  if an  optionee  dies (a) while the  optionee  is a  director  of the

Company,  (b)  within  three  months  after the  termination  of the  optionee's

directorship  with the Company  (unless such  termination  was for Cause) or (c)

within one year after the  termination of the optionee's  directorship by reason

of the optionee's Disability,  the options granted to the optionee as a director

who  was  not  an  employee  of or  consultant  to  the  Company  or  any of its

Subsidiaries,  may be exercised,  to the extent  exercisable  on the date of the

optionee's death, by the optionee's Legal  Representative at any time within one

year after death,  but not  thereafter and in no event after the date the option

would otherwise have expired.  Except as may otherwise be expressly  provided in

the applicable  Contract,  an optionee whose  directorship  with the Company has

terminated by reason of  Disability,  may exercise  such options,  to the extent

exercisable  on the effective date of such  termination,  at any time within one

year after  such date,  but not  thereafter  and in no event  after the date the

option would otherwise have expired.

        10.  Compliance with Securities  Laws. It is a condition to the exercise

of any option that either (a) a Registration  Statement under the Securities Act

of 1933, as amended (the "Securities Act"), with respect to the shares of Common

Stock to be issued upon such exercise shall be effective and current at the time

of exercise, or (b) there is an exemption from registration under the Securities

Act for the issuance of the shares of Common Stock upon such  exercise.  Nothing

herein shall be construed as requiring the Company to register shares subject to

any  option  under  the  Securities  Act or to keep any  Registration  Statement

effective or current.

         The  Administrators  may  require,  in  their  sole  discretion,  as  a

condition to the grant or exercise of an option,  that the optionee  execute and

deliver to the Company the optionee's  representations and warranties,  in form,

substance and scope satisfactory to the Administrators, which the Administrators

determine  is  necessary  or  convenient  to  facilitate  the  perfection  of an

exemption from the registration  requirements of the Securities Act,  applicable

state securities laws or other legal requirements, including without limitation,

that (a) the shares of Common Stock to be issued upon exercise of the option are

being acquired by the optionee for the  optionee's  own account,  for investment

only and not with a view to the  resale  or  distribution  thereof,  and (b) any

subsequent  resale or  distribution  of shares of Common Stock by such  optionee

will be made only pursuant to (i) a Registration  Statement under the Securities

Act which is  effective  and current  with respect to the shares of Common Stock

being sold, or (ii) a specific  exemption from the registration  requirements of

the Securities Act, but in claiming such exemption,  the optionee,  prior to any

offer of sale or sale of such shares of Common Stock,  shall provide the Company

with a favorable  written  opinion of counsel  satisfactory  to the Company,  in

form,  substance and scope satisfactory to the Company,  as to the applicability

of such exemption to the proposed sale or distribution.

         In addition, if at any time the Administrators shall determine that the

listing or qualification of the shares of Common Stock subject to such option on

any securities exchange, Nasdaq or under any applicable law, or that the consent

or approval of any  governmental  agency or  regulatory  body,  is  necessary or

desirable as a condition to, or in connection with, the granting of an option or

the  issuance  of shares of Common  Stock  thereunder,  such  option  may not be

granted  or  exercised  in  whole or in part,  as the case may be,  unless  such

listing, qualification, consent or approval shall have been effected or obtained

free of any conditions not acceptable to the Administrators.

        11.  Stock  Option  Contracts.  Each  option  shall be  evidenced  by an

appropriate  Contract  which  shall  be duly  executed  by the  Company  and the

optionee.  Such Contract shall contain such terms, provisions and conditions not

inconsistent  herewith as may be determined by the  Administrators in their sole

discretion. The terms of each option and Contract need not be identical.

        12. Adjustments upon Changes in Common Stock.  Notwithstanding any other

provision  of the Plan,  in the event of any  change in the  outstanding  Common

Stock by  reason  of a stock  dividend,  recapitalization,  spin-off,  split-up,

combination  or exchange of shares or the like which  results in a change in the

number or kind of shares of Common Stock which are outstanding immediately prior

to such event,  the aggregate number and kind of shares subject to the Plan, the

aggregate number and kind of shares subject to each  outstanding  option and the

exercise price thereof, and the maximum number of shares subject to options that

may be granted to any  employee in any  calendar  year,  shall be  appropriately

adjusted by the Board of Directors,  whose determination shall be conclusive and

binding on all  parties.  Such  adjustment  may provide for the  elimination  of

fractional  shares that might  otherwise be subject to options  without  payment

therefor. Notwithstanding the foregoing, no adjustment shall be made pursuant to

this Paragraph 12 if such  adjustment (a) would cause the Plan to fail to comply

with  Section  422 of the  Code or  with  Rule  16b-3  of the  Exchange  Act (if

applicable to such option),  or (b) would be considered as the adoption of a new

plan requiring stockholder approval.

         Except  as may  otherwise  be  expressly  provided  in  the  applicable

Contract,  in the event of (i) a  proposed  dissolution  or  liquidation  of the

Company,  or (ii) a proposed sale of all or  substantially  all of the assets or

outstanding  equity of the Company,  or (iii) 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 other reorganization own immediately after such merger,

consolidation or other  reorganization fifty percent (50%) or more of the voting

power 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, the Board of Directors of the Company shall, as to outstanding

options,  either (1) make  appropriate  provision for the protection of any such

outstanding  options by the  substitution  on an equitable  basis of appropriate

stock of the Company or of the merged,  consolidated  or  otherwise  reorganized

corporation  which will be issuable  in respect to one share of Common  Stock of

the Company;  provided that the excess of

                                      -29-

the aggregate fair market value of the shares subject to the options immediately

after such  substitution  over the purchase  price  thereof is not more than the

excess of the aggregate  fair market value of the shares subject to such options

immediately  before such  substitution  over the purchase price thereof,  or (2)

upon written notice to an optionee, provide that all unexercised options must be

exercised  within a specified  number of days of the date of such notice or they

will be  terminated.  In any such  case,  the  Board of  Directors  may,  in its

discretion, advance the lapse of any waiting or installment periods and exercise

dates.

        13.  Amendments and Termination of the Plan. The Plan was adopted by the

Board of Directors on October 16, 2000.  No option may be granted under the Plan

after October 15, 2010. The Board of Directors,  without further approval of the

Company's stockholders,  may at any time suspend or terminate the Plan, in whole

or in  part,  or  amend  it from  time to time in such  respects  as it may deem

advisable,  including without  limitation,  in order that ISOs granted hereunder

meet the requirements for "incentive stock options" under the Code, or to comply

with the provisions of Rule 16b-3 or Section 162(m) of the Code or any change in

applicable laws or regulations,  ruling or  interpretation  of any  governmental

agency  or  regulatory  body;  provided,  however,  that no  amendment  shall be

effective, without the requisite prior or subsequent stockholder approval, which

would (a) except as contemplated in Paragraph 12, increase the maximum number of

shares of Common Stock for which options may be granted under the Plan or change

the maximum  number of shares for which  options may be granted to  employees in

any calendar  year,  (b) change the  eligibility  requirements  for  individuals

entitled  to  receive  options  hereunder,  or (c) make  any  change  for  which

applicable  law  or  any   governmental   agency  or  regulatory  body  requires

stockholder approval. No termination,  suspension or amendment of the Plan shall

adversely  affect the rights of an optionee  under any option  granted under the

Plan  without  such  optionee's  consent.  The  power of the  Administrators  to

construe  and  administer  any  option  granted  under  the  Plan  prior  to the

termination or suspension of the Plan shall  continue after such  termination or

during such suspension.

        14.  Non-Transferability.  No option  granted  under  the Plan  shall be

transferable  other than by will or the laws of descent  and  distribution,  and

options  may be  exercised,  during the  lifetime of the  optionee,  only by the

optionee or the optionee's Legal Representatives.  Except to the extent provided

above,  options  may not be  assigned,  transferred,  pledged,  hypothecated  or

disposed of in any way (whether by operation of law or otherwise)  and shall not

be subject to execution,  attachment or similar process,  and any such attempted

assignment,  transfer,  pledge,  hypothecation or disposition  shall be null and

void ab initio and of no force or effect.

        15.  Withholding  Taxes.  The Company,  or its Subsidiary or Parent,  as

applicable,  may withhold (a) cash or (b) with the consent of the Administrators

(in the  Contract  or  otherwise),  shares  of Common  Stock to be  issued  upon

exercise of an option or a combination  of cash and shares,  having an aggregate

fair market  value  (determined  in  accordance  with  Paragraph 5) equal to the

amount which the Administrators determine is necessary to satisfy the obligation

of the Company,  a  Subsidiary  or Parent to withhold  Federal,  state and local

income taxes or other amounts incurred by reason of the grant, vesting, exercise

or  disposition  of an option or the  disposition  of the  underlying  shares of

Common Stock. Alternatively,  the Company may require the optionee to pay to the

Company such amount, in cash, promptly upon demand.

        16. Legends; Payment of Expenses. The Company may endorse such legend or

legends upon the certificates for shares of Common Stock issued upon exercise of

an option under the Plan and may issue such "stop transfer"  instructions to its

transfer  agent  in  respect  of  such  shares  as it  determines,  in its  sole

discretion,  to be necessary or appropriate to (a) prevent a violation of, or to

perfect an exemption from, the registration  requirements of the Securities Act,

applicable state securities laws or other legal requirements,  (b) implement the

provisions  of the Plan or any  agreement  between the Company and the  optionee

with  respect to such  shares of Common  Stock,  or (c)  permit  the  Company to

determine  the  occurrence  of a  "disqualifying  disposition,"  as described in

Section 421(b) of the Code, of the shares of Common Stock  transferred  upon the

exercise of an ISO granted under the Plan.

         The Company  shall pay all issuance  taxes with respect to the issuance

of shares of Common Stock upon the exercise of an option granted under the Plan,

as well as all fees and expenses incurred by the Company in connection with such

issuance.

        17. Use of Proceeds.  The cash proceeds to be received upon the exercise

of an option  under the Plan shall be added to the general  funds of the Company

and used for such corporate purposes as the Board of Directors may determine, in

its sole discretion.

        18.  Substitutions  and  Assumptions  of Options of Certain  Constituent

Corporations.  Anything in this Plan to the contrary notwithstanding,  the Board

of Directors may, without further approval by the  stockholders,  substitute new

options for prior options of a Constituent  Corporation (as such term is defined

in Paragraph 19) or assume the prior options of such Constituent Corporation.

        19. Definitions.

        (a) "Cause",  in connection with the  termination of an optionee,  shall

mean (i) "cause," as such term (or any similar  term,  such as "with  cause") is

defined in any employment, consulting or other applicable agreement for services

between  the  Company  and  such  optionee,  or (ii) in the  absence  of such an

agreement,  "cause"  as such term is  defined in the  Contract  executed  by the

Company and such  optionee  pursuant to Paragraph 11, or (iii) in the absence of

both of the foregoing,  (A) indictment of such optionee for any illegal conduct,

(B) failure of such optionee to adequately  perform any of the optionee's duties

and  responsibilities  in  any  capacity  held  with  the  Company,  any  of its

Subsidiaries  or any Parent (other than any such failure  resulting  solely from

such optionee's physical or mental incapacity), (C) the commission of any act or

failure to act by such  optionee  that  involves  moral  turpitude,  dishonesty,

theft,  destruction  of property,  fraud,  embezzlement  or  unethical  business

conduct, or that is otherwise injurious to the Company,  any of its Subsidiaries

or any Parent or any other affiliate of the Company (or its or their  respective

employees), whether financially or otherwise, (D) any violation by such optionee

of any Company  rule or policy,  or (E) any  violation  by such  optionee of the

requirements  of such  Contract,  any other  contract or  agreement  between the

Company and such optionee or this Plan (as in effect from time to time); in each

case, with respect to subsections (A) through (E), as determined by the Board of

Directors.

        (b) "Constituent  Corporation"  shall mean any corporation which engages

with the Company, its Parent or any Subsidiary in a transaction to which Section

424(a) of the Code applies (or would apply if the option  assumed or substituted

were an ISO), or any Parent or any Subsidiary of such corporation.

        (c) "Disability"  shall mean a permanent and total disability within the

meaning of Section 22(e)(3) of the Code.

        (d) "Legal  Representative"  shall mean the executor,  administrator  or

other  person who at the time is  entitled  by law to  exercise  the rights of a

deceased or  incapacitated  optionee with respect to an option granted under the

Plan.

        (e)  "Parent"  shall mean a "parent  corporation"  within the meaning of

Section 424(e) of the Code.

        (f)  "Subsidiary"  shall  mean a  "subsidiary  corporation"  within  the

meaning of Section 424(f) of the Code.

        20.  Governing Law. The Plan, such options as may be granted  hereunder,

the  Contracts  and all related  matters  shall be governed by, and construed in

accordance  with, the laws of the State of Delaware,  without regard to conflict

or choice of law provisions.

         Neither the Plan nor any Contract  shall be  construed  or  interpreted

with any  presumption  against the Company by reason of the Company  causing the

Plan  or  Contract  to  be  drafted.   Whenever  from  the  context  it  appears

appropriate,  any term stated in either the singular or plural shall include the

singular and plural,  and any term stated in the  masculine,  feminine or neuter

gender shall include the masculine, feminine and neuter.

        21. Partial Invalidity.  The invalidity,  illegality or unenforceability

of any  provision  in the Plan,  any  option or  Contract  shall not  affect the

validity,  legality or enforceability of any other provision, all of which shall

be valid,  legal and  enforceable to the fullest extent  permitted by applicable

law.

        22. Stockholder  Approval.  The Plan shall be subject to approval by (a)

the holders of a majority of the votes present in person or by proxy entitled to

vote  hereon at a duly held  meeting of the  Company's  stockholders  at which a

quorum is present or (b) the Company's  stockholders  acting in accordance  with

the  provisions  of Section  228 of the  Delaware  General  Corporation  Law. No

options  granted  hereunder may be exercised  prior to such approval,  provided,

however, that the date of grant of any option shall be determined as if the Plan

had not been subject to such approval.  Notwithstanding  the  foregoing,  if the

Plan is not approved by a vote of the  stockholders  of the Company on or before

October 15, 2001, the Plan and any options granted hereunder shall terminate.

                                                                       EXHIBIT B

                                                                       ---------

                               ION NETWORKS, INC.

                             2000 STOCK OPTION PLAN

                     2000 U. K. SUB-P1AN/U.K. APPROVED RULES

In pursuance of its powers under the Ion  Networks,  Inc. 2000 Stock Option Plan

(the "Plan"), the Board of Directors, or a duly appointed committee of the Board

of Directors (the "Committee") of Ion Networks, Inc. (the "Company") has adopted

these rules (the "UK Rules") for the purposes of operating  the Plan with regard

to such options  ("Options")  which the UK Rules are  expressed to extend at the

time when the Option is granted.  Unless the  context  requires  otherwise,  all

expressions used in the UK Rules have the same meaning as the Plan. The Plan, as

supplemented by the UK Rules, is referred to hereinafter as the "Sub-Plan".  For

the  avoidance  of doubt,  the terms of the Plan  (insofar as they have not been

disapplied by Rule p of the UK Rules) shall form part of the Sub-Plan.

         (1)      The  shares  over  which  Options  may be  granted  under  the

                  Sub-Plan  form part of the ordinary  share capital (as defined

                  in Section 832 (1) Income and  Corporation  Taxes Act 1988) ("

                  ICTA 1988") of the  Company  and must at all times,  including

                  the time of grant and the time of  exercise,  comply  with the

                  terms  of  the  Plan  and  comply  with  the  requirements  of

                  paragraphs 10 to 14 Schedule 9 ICTA 1988.

         (2)      The companies  participating  in this Sub-Plan are the Company

                  and all companies controlled by the Company within the meaning

                  of Section 840 ICTA 1988 ("Subsidiaries").

         (3)      The shares of Common  Stock to be  acquired on exercise of the

                  Option in accordance with the terms of the Sub-Plan will be:

                  (1)      fully paid up;

                  (2)      not redeemable;

                  (3)      not   subject   to  any   restrictions   other   than

                           restrictions  which  attach to all shares of the same

                           class.  For the  purpose  of this  clause,  the  term

                           "restrictions" includes restrictions which are deemed

                           to  attach  to  the   shares   under  any   contract,

                           agreement, arrangement or condition as referred to in

                           paragraph 13 Schedule 9 ICTA 1988.

         (4)      An Option granted under this Sub-Plan shall not be exercisable

                  for more than ten years after the date of grant.

         (5)      To the  extent any  restrictions  or  contingencies  have been

                  imposed by the  Committee  under the  provisions  contained in

                  Paragraph 3 of the Plan,  these  restrictions or contingencies

                  shall:

                  (1)      be objective and set out in full at the time of grant

                           in the stock option contract

                           referred to at Paragraph 11 of the Plan;

                  (2)      be such that rights to exercise such Option after the

                           fulfillment  or  attainment  of any  restrictions  or

                           contingencies  so specified shall not be dependent on

                           the further discretion of any person; and

                  (3)      not be  capable  of  amendment,  variation  or waiver

                           unless an event  occurs  which  causes the  Committee

                           reasonably to consider that waived, varied or amended

                           restrictions  or  contingencies  would  be  a  fairer

                           measure of performance and would be no more difficult

                           to satisfy.

         (6)      No Option will be granted to an  employee  or  director  under

                  this Sub-Plan, or where an Option has previously been granted,

                  no Option  shall be exercised  by an  optionholder  if at that

                  time he has,  or any time within the  preceding  12 months has

                  had, a material  interest  for the purposes of Schedule 9 ICTA

                  1988 in either the Company being a close  company  (within the

                  meaning  of Chapter I of Part XI of ICTA 1988) or in a company

                  being a close company which has control (within the meaning of

                  Section 840 ICTA 1988) of the Company or in a company  being a

                  close  company  and a member of a  consortium  (as  defined in

                  Section   187(7)ICTA   1988)  which  owns  the   Company.   In

                  determining  whether a  company  is a close  company  for this

                  purpose,  Section  414(l)(a)ICTA  1988 (exclusion of companies

                  not  resident in the United  Kingdom)  and Section 415 of ICTA

                  1988 (exclusion of certain companies with listed shares) shall

                  be disregarded.

         (7)      Notwithstanding  any  provision of the Plan, no Option will be

                  granted to an  employee  or  director  under this  Sub-Plan in

                  relation to which the exercise  price is manifestly  less than

                  the fair market value (as defined in Section  187(2)ICTA 1988)

                  of the  Company's  Common  Stock  on the  date of grant of the

                  Option.  The  exercise  price  shall be  stated at the date of

                  grant  of  the  Option  and  determined  in  accordance   with

                  Paragraph 5 of the Plan,  save that the  exercise  price of an

                  Option  granted under the Sub-Plan  shall be not less than one

                  hundred  percent  (100%) of the fair market value of the stock

                  on the date of grant,  and shall be agreed in advance with the

                  Shares  Valuation  Division of the Inland Revenue or otherwise

                  determined   with  the  agreement  of  the  Shares   Valuation

                  Division.

         (8)      Notwithstanding  Paragraph  7 of the Plan,  settlement  of the

                  exercise  price may not be in the form of previously  acquired

                  shares  of Common  Stock  and  payment  of the  amount  due on

                  exercise may not be made in installments.

         (9)      Any  alteration or amendment to this  Sub-Plan  shall not have

                  effect  unless  approved by the Board of Inland  Revenue.  The

                  Company  undertakes to provide details thereof to the Board of

                  Inland Revenue without delay for this purpose.

         (10)     Notwithstanding   Paragraph  11  of  the  Plan,  any  material

                  alteration  of the  standard  form of stock  option  agreement

                  shall not have effect  unless  approved by the Board of Inland

                  Revenue.

         (11)     No adjustment  as a  consequence  of a change in share capital

                  pursuant  to  Paragraph  12 of the  Plan  shall be made to any

                  Option which has been granted  under the Sub-Plan  unless such

                  adjustment  would  be  permitted  under  the  Plan  and  is  a

                  variation in the share capital of which the scheme

                                      -35-

                  shares  form part  under  paragraph  29  Schedule 9 ICTA 1988.

                  Where so permitted, no such adjustment shall take effect until

                  the  approval of the Board of Inland  Revenue  shall have been

                  obtained thereto.  No exchange of options under this paragraph

                  11 will be permitted  unless it complies  with  provisions  of

                  paragraph 15 schedule 9 ICTA 1988.

         (12)     For the  avoidance  of doubt it is stated  that the Company is

                  the grantor as defined in paragraph l(1) Schedule 9 ICTA 1988.

         (13)     Any  Option  granted to an  employee  or  director  under this

                  Sub-Plan  shall be limited to take effect so that  immediately

                  following such grant, the aggregate  market value  (determined

                  at the time  prescribed  by  paragraph 28 Schedule 9 ICTA 1988

                  and  calculated in accordance  with the provisions of the said

                  Schedule 9) of shares of Common  Stock which the  optionholder

                  can  acquire  under  this  Sub-Plan  and any  other  scheme or

                  schemes,  not being a  savings-related  share  option  scheme,

                  approved  under the said  Schedule  9 and  established  by the

                  grantor or by any  associated  company  (as defined in Section

                  416 ICTA 1988) of the grantor (and not  exercised),  shall not

                  exceed  (pound)30,000  or such other sum as may be  prescribed

                  from  time to time  by  paragraph  28  Schedule  9 ICTA  1988,

                  provided   always   that  this  limit  shall  not  exceed  the

                  limitations set out in the Plan.

         (14)     An Option  will only be  granted  under  this  Sub-Plan  to an

                  employee  (other  than one who is a  director)  or a full-time

                  director of the Company or a subsidiary  participating in this

                  Sub-Plan. For this purpose, a full-time director is one who is

                  employed by the  Company  required to work at least 25 hours a

                  week  excluding  meal-times  in the business of the Company or

                  its  Subsidiaries.  For the  avoidance of doubt an Option will

                  not be granted under this Sub-Plan to a consultant or director

                  who  is  not  an  employee  of  the  Company  or  any  of  its

                  Subsidiaries,  and  all  references  in the  Plan  to  Options

                  granted to consultants shall be disregarded.

         (15)     The  Company  shall,  not later  than 30 days after the actual

                  receipt of the written  notice of exercise of an Option  given

                  in accordance  with the provisions of the Plan,  together with

                  the payment of the aggregate  exercise price in respect of the

                  shares of Common Stock to be issued or transferred pursuant to

                  the exercise of an Option,  allot and issue  credited as fully

                  paid or transfer to the Optionee and cause to be registered in

                  his name the number of shares of Common Stock specified in the

                  written notice.

         (16)     The  following  shall not form part of and shall  therefore be

                  disregarded for the purposes of the Sub-Plan:

                  (1)      in  Paragraph  3 of the Plan,  the words  "whether to

                           accelerate  the date of  exercise  of any  option  or

                           installment;  whether  shares of Common  Stock may be

                           issued upon the exercise of an option as partly paid,

                           and, if so, the dates when future installments of the

                           exercise  price  shall  become due and the amounts of

                           such  installments;" the words "the fair market value

                           of a share of Common  Stock;  whether  and under what

                           conditions to restrict the sale or other  disposition

                           of the  shares  of  Common  Stock  acquired  upon the

                           exercise  of an Option  and if so  whether  and under

                           what  circumstances to waive such  restriction;"  and

                           the  words  "with the  consent  of the  optionee,  to

                           cancel or modify an option,  provided  however,  that

                           the modified provision is permitted to be included in

                           an  Option  granted  under  the  Plan on the  date of

                           modification";

                  (2)      in  the  first   paragraph   of   Paragraph   7,  the

                           parenthetical  that  reads,  "or  the  amount  due on

                           exercise   if   the   applicable   Contract   permits

                           installment  payments" and the language from "(b)" to

                           the end of that paragraph; and

                  (3)      all  references  in  the  Plan  to  "Incentive  Stock

                           Options" or "Non-Qualified Stock Options." and

                  (4)      the terms of paragraph 18 of the Plan.

EX-4.8

ION NETWORKS, INC.

2006 STOCK INCENTIVE PLAN

1.

Purposes of the Plan.  The purposes of this Stock Incentive Plan are to attract and retain the best available personnel, to provide additional incentives to Employees, Directors and Consultants and to promote the success of the Company’s business.

2.

Definitions.  As used herein, the following definitions shall apply:

(a)

“Administrator” means the Board or any of the Committees appointed to administer the Plan.

(b)

“Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act.

(c)

“Applicable Laws” means the legal requirements relating to the administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein.

(d)

“Assumed” means that (i) pursuant to a Corporate Transaction defined in Section 2(q)(i), 2(q)(ii) or 2(q)(iii), the contractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent in connection with the Corporate Transaction or (ii) pursuant to a Corporate Transaction defined in Section (q)(iv) or 2(q)(v), the Award is expressly affirmed by the Company.  

(e)

“Award” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Performance Unit, Performance Share, or other right or benefit under the Plan.

(f)

“Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee, including any amendments thereto.

(g)

“Board” means the Board of Directors of the Company.

(h)

“Cause” means, with respect to the termination by the Company or a Related Entity of the Grantee’s Continuous Service, that such termination is for “Cause” as such term is expressly defined in a then-effective written agreement between the Grantee and the Company or such Related Entity, or in the absence of such then-effective written agreement and definition, is based on, in the determination of the Administrator, the Grantee’s:  (i) performance of any act or failure to perform any act in bad faith and to the detriment of the Company or a Related Entity; (ii) dishonesty, intentional misconduct or material breach of any agreement with the Company or a Related Entity; or (iii) commission of a crime involving dishonesty, breach of trust, or physical or emotional harm to any person.

(i)

“Change in Control” means a change in ownership or control of the Company effected through either of the following transactions:

(i)

the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to the Company’s stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend such stockholders accept, or

(ii)

a change in the composition of the Board over a period of thirty-six (36) months or less such that a majority of the Board members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised of individuals who are Continuing Directors.

(j)

“Code” means the Internal Revenue Code of 1986, as amended.

(k)

“Committee” means any committee appointed by the Board to administer the Plan.

(l)

“Common Stock” means the common stock of the Company.

(m)

“Company” means ION Networks, Inc., a Delaware corporation.

(n)

“Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’s capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity.

(o)

“Continuing Directors” means members of the Board who either (i) have been Board members continuously for a period of at least thirty-six (36) months or (ii) have been Board members for less than thirty-six (36) months and were elected or nominated for election as Board members by at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by the Board.

(p)

“Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated.  Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement).  An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave.  For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds ninety (90) da ys, and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the expiration of such ninety (90) day period.

(q)

“Corporate Transaction” means any of the following transactions:  

(i)

a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated;

(ii)

the sale, transfer or other disposition of all or substantially all of the assets of the Company;

(iii)

the complete liquidation or dissolution of the Company;

(iv)

any reverse merger in which the Company is the surviving entity but in which securities possessing more than forty percent (40%) of the total combined voting power of the Company’s outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or

(v)

acquisition in a single or series of related transactions by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities but excluding any such transaction or series of related transactions that the Administrator determines shall not be a Corporate Transaction.

(r)

“Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code.

(s)

“Director” means a member of the Board or the board of directors of any Related Entity.

(t)

“Disability” means as defined under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy.  If the Company or the Related Entity to which the Grantee provides service does not have a long-term disability plan in place, “Disability” means that a Grantee is unable to carry out the responsibilities and functions of the position held by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days.  A Grantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator in its discretion.

(u)

“Dividend Equivalent Right” means a right entitling the Grantee to compensation measured by dividends paid with respect to Common Stock.  

(v)

“Employee” means any person, including an Officer or Director, who is an employee of the Company or any Related Entity, subject to the control and direction of the Company or any Related Entity as to both the work to be performed and the manner and method of performance.  The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company.

(w)

“Exchange Act” means the Securities Exchange Act of 1934, as amended.

(x)

“Fair Market Value” means, as of any date, the value of Common Stock determined as follows:

(i)

If the Common Stock is listed on any established stock exchange or a national market system, including without limitation The Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on such exchange or system on the date of determination (or, if no closing sales price or closing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable;

(ii)

If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by a recognized securities dealer, but selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bid and low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices were reported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or

(iii)

In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the Fair Market Value thereof shall be determined by the Administrator in good faith.

(y)

“Grantee” means an Employee, Director or Consultant who receives an Award under the Plan.

(z)

“Immediate Family”  means any child, stepchild, grandchild, parent, stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the Grantee’s household (other than a tenant or employee), a trust in which these persons (or the Grantee) have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests.  

(aa)

“Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 of the Code

(bb)

“Non-Qualified Stock Option” means an Option not intended to qualify as an Incentive Stock Option.  In addition, any validly issued Option that is intended to be an Incentive Stock Option, but which does not satisfy the Code’s requirements for Incentive Stock Options, shall be treated as a Non-Qualified Stock Option.

(cc)

“Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder.

(dd)

“Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan.

(ee)

“Parent” means a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code.

.

(ff)

“Performance-Based Compensation” means compensation qualifying as “performance-based compensation” under Section 162(m) of the Code

(gg)

“Performance Shares” means Shares or an Award denominated in Shares which may be earned in whole or in part upon attainment of performance criteria established by the Administrator.  

(hh)

“Performance Units” means an Award which may be earned in whole or in part upon attainment of performance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Administrator.  

(ii)

“Plan” means this 2006 Stock Incentive Plan.

(jj)

“Related Entity” means any Parent or Subsidiary of the Company and any business, corporation, partnership, limited liability company or other entity in which the Company or a Parent or a Subsidiary of the Company holds a substantial ownership interest, directly or indirectly.

(kk)

Replaced” means that (i) pursuant to a Corporate Transaction defined in Section 2(q)(i), 2(q)(ii) or 2(q)(iii), the Award is replaced with a comparable stock award or a cash incentive program of the successor entity or Parent thereof which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such Award or (ii) pursuant to a Corporate Transaction defined in Section 2(q)(iv) or 2(q)(v), the Award is replaced with a comparable stock award or a cash incentive program of the Company or Parent thereof which preserves the compensation element of such Award existing at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to such Award.  The determinati on of Award comparability shall be made by the Administrator and its determination shall be final, binding and conclusive.

(ll)

“Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Administrator.  

(mm)

“Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto.

(nn)

“SAR” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by the Administrator, measured by appreciation in the value of Common Stock.

(oo)

“Share” means a share of the Common Stock.

(pp)

“Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code.

3.

Stock Subject to the Plan.

(a)

Subject to the provisions of subsection (b) and Section 10 below, the maximum aggregate number of Shares which may be issued pursuant to all Awards (including Incentive Stock Options) is four million  (4,000,000) Shares; provided, however, that no more than five hundred thousand (500,000) of these Shares may be issued pursuant to Restricted Stock or SARs.  The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock.

(b)

In addition, any Shares authorized for issuance under any of the Company’s 1994, 1998, and 2000 stock option plans as to which no Awards have yet been granted or which have or are returned to any such Plan shall be deemed available for issuance under this Plan.  To the extent such Shares are available for issuance under this Plan, they shall not be simultaneously available for issuance under any other plan, it being the intention of this provision that there be no duplication of Shares underlying any Award.

(c)

Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled or expires, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan.  Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at the lower of their original purchase price or their Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan.  

4.

Administration of the Plan.

(a)

Plan Administrator.  

(i)

Administration with Respect to Directors and Officers.  With respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3.  Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.  

(ii)

Administration With Respect to Consultants and Other Employees.  With respect to grants of Awards to Employees or Consultants who are neither Directors nor

Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws.  Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board.  The Board may authorize one or more Officers to grant such Awards and may limit such authority as the Board determines from time to time.

(iii)

Administration With Respect to Covered Employees.  Notwithstanding the foregoing, grants of Awards to any Covered Employee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which is comprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation.  In the case of such Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee or subcommittee.

(iv)

Administration Errors.  In the event an Award is granted in a manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws.  

(b)

Powers of the Administrator.  Subject to Applicable Laws and the provisions of the Plan (including any other powers given to the Administrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion:

(i)

to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder;

(ii)

to determine whether and to what extent Awards are granted hereunder;

(iii)

to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder;

(iv)

to approve forms of Award Agreements for use under the Plan;

(v)

to determine the terms and conditions of any Award granted hereunder;

(vi)

to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent;

(vii)

to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or Award Agreement, granted pursuant to the Plan;

(viii)

to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such rules or laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and

(ix)

to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate.

5.

Eligibility.  Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants.  Incentive Stock Options may be granted only to Employees of the Company or a Parent or a Subsidiary of the Company.  An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards.  Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Administrator may determine from time to time.

6.

Terms and Conditions of Awards.

(a)

Designation of Award.  Each Award shall be designated in the Award Agreement.  In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option.  However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary of the Company) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options.  For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined a s of the grant date of the relevant Option.

(b)

Conditions of Award.  Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria.  The performance criteria established by the Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total stockholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Administrator.  Partial achievement of the specified criteria may res ult in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement.  

(c)

Acquisitions and Other Transactions.  The Administrator may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction.  

(d)

Deferral of Award Payment.  The Administrator may establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award (but only to the extent that such deferral programs would not result in an accounting compensation charge unless otherwise determined by the Administrator).  The Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts,

Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferral program.

(e)

Separate Programs.  The Administrator may establish one or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time.  

(f)

Individual Option and SAR Limit.  The maximum number of Shares with respect to which Options and SARs may be granted to any Grantee in any fiscal year of the Company shall be three hundred thousand (300,000) Shares.    The foregoing limitation shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section 10, below.  To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitation with respect to a Grantee, if any Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Options and SARs may be granted to the Grantee.  For this purpose, the repricing of an Option (or in the case of a SAR, the base amount on which the stock appreciation is ca lculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existing Option or SAR and the grant of a new Option or SAR.

(g)

Early Exercise.  The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award.  Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to be appropriate.  

(h)

Term of Award.  The term of each Award shall be the term stated in the Award Agreement, provided, however, that the term of an Incentive Stock Option shall be no more than ten (10) years from the date of grant thereof.   However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement.  

(i)

Transferability of Awards.  Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee’s Incentive Stock Option in the event of the Grantee’s death on a beneficiary designation form provided by the Administrator.  Other Awards shall be transferable by will and by the laws of descent and distribution, and during the lifetime of the Grantee, by gift and/or pursuant to a domestic relations order to members of the Grantee’s Immediate Family to the extent and in the manner determined by the Administrator.  

(j)

Time of Granting Awards.  The date of grant of an Award shall for all purposes be the date on which the Administrator makes the determination to grant such Award, or such other date as is determined by the Administrator.

7.

Award Exercise or Purchase Price, Consideration and Taxes.

(a)

Exercise or Purchase Price.  The exercise or purchase price, if any, for an Award shall be as follows:

(i)

In the case of an Incentive Stock Option:

(A)

granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or

(B)

granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(ii)

In the case of a Non-Qualified Stock Option or SAR, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iii)

In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any, shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant.

(iv)

In the case of other Awards, such price as is determined by the Administrator.

(v)

Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(c), above, the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement to issue such Award.

(b)

Consideration.  Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant).  In addition to any other types of consideration the Administrator may determine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law:

(i)

cash;

(ii)

check;

(iii)

delivery of Grantee’s promissory note with such recourse, interest, security, and redemption provisions as the Administrator determines as appropriate;

(iv)

surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Administrator);

(v)

with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; or

(vi)

any combination of the foregoing methods of payment.

(c)

Taxes.  No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has made arrangements acceptable to the Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option.  Upon exercise of an Award the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations.

8.

Exercise of Award.

(a)

Procedure for Exercise; Rights as a Stockholder.  

(i)

Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Administrator under the terms of the Plan and specified in the Award Agreement.

(ii)

An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v).  Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award.  The Company shall issue (or cause to be issued) such stock certificate promptl y upon exercise of the Award.  No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 10, below.

(b)

Exercise of Award Following Termination of Continuous Service.

(i)

An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement.

(ii)

Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’s Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first.

(iii)

Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement.

9.

Conditions Upon Issuance of Shares.

(a)

Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance.

(b)

As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws.

10.

Adjustments Upon Changes in Capitalization.  Subject to any required action by the stockholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Options and SARs may be granted to any Grantee in any fiscal year of the Company, as well as any other terms that the Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar transaction affecting the Shares, (ii)  ;any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Administrator may determine in its discretion, any other transaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-off or other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.”  Such adjustment shall be made by the Administrator and its determination shall be final, binding and conclusive.  Except as the Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any

class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award.  

11.

Corporate Transactions/Changes in Control.  

(a)

Termination of Award to Extent Not Assumed in Corporate Transaction.  Effective upon the consummation of a Corporate Transaction, all outstanding Awards under the Plan shall terminate.  However, all such Awards shall not terminate to the extent they are Assumed in connection with the Corporate Transaction.

(b)

Acceleration of Award Upon Corporate Transaction/Change in Control.  Except as provided otherwise in an individual Award Agreement, in the event of any Corporate Transaction or Change in Control, there will not be any acceleration of vesting or exercisability of any Award.  

(c)

Effect of Acceleration on Incentive Stock Options.  The portion of any Incentive Stock Option accelerated under this Section 11 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only to the extent the $100,000 dollar limitation of Section 422(d) of the Code is not exceeded.  To the extent such dollar limitation is exceeded, the accelerated excess portion of such Option shall be exercisable as a Non-Qualified Stock Option.  

12.

Effective Date and Term of Plan.  The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company.  It shall continue in effect for a term of ten (10) years unless sooner terminated.  Subject to Section 17, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective.

13.

Amendment, Suspension or Termination of the Plan.  

(a)

The Board may at any time amend, suspend or terminate the Plan.  To the extent necessary to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required.

(b)

No Award may be granted during any suspension of the Plan or after termination of the Plan.

(c)

No amendment, suspension or termination of the Plan (including termination of the Plan under Section 12, above) shall adversely affect any rights under Awards already granted to a Grantee, unless consented to by the Grantee.

14.

Reservation of Shares.

(a)

The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan.

(b)

The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in

respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.

15.

No Effect on Terms of Employment/Consulting Relationship.  The Plan shall not confer upon any Grantee any right with respect to the Grantee’s Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or any Related Entity to terminate the Grantee’s Continuous Service at any time, with or without Cause, and with or without notice.  The ability of the Company or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that the Grantee’s Continuous Service has been terminated for Cause for purposes of this Plan.

16.

No Effect on Retirement and Other Benefit Plans.  Except as specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation.  The Plan is not a “Retirement Plan” or “Welfare Plan” under the Employee Retirement Income Security Act of 1974, as amended.

17.

Stockholder Approval.  The Plan shall be subject to approval by (a) the holders of a majority of the votes present in person or by proxy entitled to vote hereon at a duly held meeting of the Company’s stockholders at which a quorum is present or (b) the Company’s stockholders acting in accordance with the provisions of Section 228 of the Delaware general Corporation Law. No options granted hereunder may be exercised prior to such approval, provided, however, that the date of grant of any option shall be determined as if the Plan had not been subject to such approval.  Notwithstanding the foregoing, if the Plan is not approved by a vote of the stockholders of the Company on or before January 22, 2007, the Plan and any options granted hereunder shall terminate.

EX-10.19

FINAL SETTLEMENT AGREEMENT AND MUTUAL RELEASE

This Settlement Agreement and Release, dated October 12, 2005, is entered into between Ion Networks, Inc., a Delaware corporation with offices at 120 Corporate Boulevard, South Plainfield, New Jersey 07080 (hereinafter, “Releasor”) and Stephen Gray and Kathleen Gray, residing in Houston, Texas, to the extent that she was recorded as a Guarantor of the debt (hereinafter, “Releasees”) to fully and finally settle and resolve all outstanding claims and monies owed by Releasors to Releasees in accordance with the following provisions.

1.

The Releasor and Releasees entered into a Separation and Forbearance Agreement and Continuing Guaranty and/or a Settlement Agreement and Release in October of 2000, after which time substantial monies in furtherance of these agreements were paid by Releasees to Releasor, but there remained an outstanding balance which was not paid to Releasor.

2.

The Releasor and Releasees hereby agree that this Settlement Agreement and Release supercedes and replaces all prior agreements and contracts between Releasor and Releasees and that they desire to fully and finally settle all past, pending, and future claims between them by compromising the amount of monies owed under the prior agreements.

3.

Releasee shall pay to Releasor the amount of $32,500.00 by check or wire transfer to the Company’s account at Commerce Bank, Cherry Hill, New Jersey - ABA No. 031201360, Account No. 7859469558, the amount subject to collection.

4.

Releasor and Releasees agree that this Settlement Agreement and Release is contingent upon payment of the agreed upon sum by no later than October 14, 2005.  If said sum is not paid by said date, then this Agreement is null and void and the prior contracts and agreements remain fully valid.  If the sum is paid, then Releasor and Releasees hereby and forever mutually release and discharge each other and their successors and/or assigns, from all claims arising out of or claimed to arise out of Releasee Stephen Gray’s employment by Releasor as well as for all other claims, liability, responsibility, or obligation of any nature whatsoever and under any theory available to Releasor or Releasees, whether

known or unknown, whether present, past or future, or whether actually, potentially or impliedly claimed as a result of any relationship between Releasor and Releasees.

5.

It is understood and agreed that this Settlement Agreement and Release is a compromise of disputed claims and nothing contained herein shall be construed as an admission of liability on the part of any party to this settlement agreement and that liability is denied.

6.

This Settlement Agreement and Release is the entire and exclusive agreement between the parties and may only be modified in writing only if signed by the parties.

7.

All notices required or permitted to be given by either party to the other under this Agreement shall sent to the physical or electronic addresses set forth below, and  shall be sufficient if sent by:  (a) hand delivery or courier service, with signature confirmation; (b) certified mail, return receipt requested; or (c) telegram, facsimile or e-mail (i.e., electronically), with electronic confirmation of receipt to the sender.  Facsimile or other electronic signatures of the undersigned parties will have the same force and effect as original signatures.

If to the Company, to:	Ion Networks, Inc. 120 Corporate Boulevard South Plainfield, New Jersey 07080 Attention: Mr. Norman Corn Chief Executive Officer Facsimile: (908) 546-3901
With a copy to:	Moses & Singer LLP 405 Lexington Avenue New York, New York 10174 Attention: James Alterbaum, Esq. Facsimile: (212) 554-7700
If to Steven Gray and Kathleen Gray, then to:	Porzio, Bromberg & Newman, P.C. 100 Southgate Parkway Morristown, NJ 07962-1997 Attention: Roy Alan Cohen, Esq. Facsimile: 973-538-5186

8.

This Settlement Agreement and Release shall be construed and interpreted in accordance with the laws of the State of New Jersey, other than those which would defer to the substantive laws of another jurisdiction.  The parties hereby agree that any action arising out of this Agreement shall be

2

brought in the state or federal courts located in the State of New Jersey, irrevocably submit to the exclusive jurisdiction of any such court and waive any objection that such party may now or hereafter have to the venue of any such action or proceeding in any such court or that such action or proceeding was brought in an inconvenient court and agree not to plead or claim the same.

9.

The Signatures set forth below acknowledge a reading, understanding, consultation with counsel, and acknowledgement and affirmation that all terms and conditions are accepted fully by the Releasor and Releasees.

10.

This Agreement may be executed in one or more counterparts, each of which shall constitute an original, and which when taken together shall constitute one and the same agreement.  

	ION NETWORKS, INC.
WITNESS:_____________________	By:	/s/ Norman Corn
	Title: Dated:		CEO October        , 2005
WITNESS:_____________________	By:	/s/ Stephen Gray
	Dated:		Stephen Gray October        , 2005
WITNESS:_____________________	By:	/s/ Kathleen Gray
	Dated:		Kathleen Gray October        , 2005

3

EX-3.1

CERTIFICATE OF INCORPORATION

OF

ION NETWORKS, INC.

The undersigned, a natural person, for the purpose of organizing a corporation for conducting the business and promoting the purposes hereinafter stated, under the provisions and subject to the requirements of the laws of the State of Delaware (particularly Chapter 1, Title 8 of the Delaware Code and the acts amendatory thereof and supplemental thereto, and known, identified and referred to as the “General Corporation Law of the State of

Delaware”), hereby certifies that:

FIRST: The name of the corporation (hereinafter called the “Corporation”) is Ion Networks, Inc.

SECOND: The address, including street, number, city, and county, of the registered office of the Corporation in the State of Delaware is 30 Old Rudnick Lane, Dover, Delaware 19901, County of Kent; and the name of the registered agent of the Corporation in the State of Delaware is Bridge Service Corp.

THIRD: The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware.

FOURTH: The Corporation is authorized to issue two classes of shares designated common stock (“Common Stock”) and preferred stock (“Preferred Stock”), respectively. The number of shares of Common Stock authorized to be issued is 50,000,000, with a par value of $.001 per share, and the number of shares of Preferred Stock authorized to be issued is 1,000,000, with a par value of $.001 per share. Shares of Common Stock or Preferred Stock that are redeemed, purchased or otherwise acquired by the Corporation may be reissued except as otherwise provided by law.

Preferred Stock. Shares of Preferred Stock may be issued from time to time in one or more series as may from time to time be determined by the Board of Directors, each of said series to be distinctly designated. The designations, number, voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations or restrictions thereof, if any, of each such series may differ from those of any and all other series of Preferred Stock at any time outstanding, and the Board of Directors is hereby expressly granted authority to fix or alter, by resolution or resolutions, and to file a certificate pursuant to the applicable law of the State of Delaware (hereinafter referred to as a “Certificate of Designation”), the designation, number, voting powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restr ictions thereof, of each such series, including, but without limiting the generality of the foregoing, the following:

(i)  The distinctive designation of, and the number of shares of Preferred Stock that shall constitute, such series, which number (except where otherwise provided by the Board of Directors in the resolution establishing such series) may be increased or decreased (but not below the number of shares of such series then   outstanding) from time to time by like action of the Board of Directors;

(ii)  The rights in respect of dividends, if any, of such series of Preferred Stock, the extent of the preference or relation, if any, of such dividends to the dividends payable on any other class or classes or on any other series of the same or other class or classes of capital stock of the Corporation and whether such dividends shall be cumulative or noncumulative;

(iii)  The right, if any, of the holders of such series of Preferred Stock to convert the same into, or exchange the same for, shares of any other class or classes or of any other series of the same or any other class or classes of capital stock of the Corporation, and the terms and conditions of such conversion or exchange;

(iv)  Whether or not shares of such series of Preferred Stock shall be subject to redemption, and the redemption price or prices and the time or time at which, and the terms and conditions on which, shares of such series of Preferred Stock may   be redeemed;

(v)  The rights, if any, of the holders of such series of Preferred Stock upon the voluntary or involuntary liquidation, dissolution or winding-up of the Corporation or in the event of any merger or consolidation of or sale of assets by the Corporation;

(vi) The voting powers, if any, of the holders of any series of Preferred Stock generally or with respect to any particular matter, which may be less than, equal to or greater than one vote per share; and

(vii) Such other powers, preferences and relative, participating, optional and other special rights, and the qualifications, limitations and restrictions thereof, as the Board of directors shall determine.

[A Certificate of Designation with respect to Series A Preferred Stock has been filed and is attached at the back of this document.]

FIFTH: The name and the mailing address of the incorporator are as follows:

NAME               

MAILING ADDRESS

David R. Fishkin    

c/o Parker Chapin Flattau & Klimpl, LLP

1211 Avenue of the Americas

New York, New York  10036

SIXTH: The Corporation is to have perpetual existence.

SEVENTH: Whenever a compromise or arrangement is proposed between the Corporation and its creditors or any class of them and/or between the Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of the Corporation or of any creditor or stockholder thereof or on the application of any receiver of receivers appointed for the Corporation under the provisions of section 291 of Title 8 of the Delaware Code, order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three-fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of the Corporation, as the case may be, agree to any comprom ise or arrangement and to any reorganization of the Corporation as consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of the Corporation, as the case may be, and also on the Corporation.

EIGHTH: For management of the business and for the conduct of the affairs of the Corporation, and in further definition, limitation and regulation of the powers of the Corporation and of its directors and of its stockholders or any class thereof, as the case may be, it is further provided:

1.  The management of the business and the conduct of the affairs of the Corporation shall be vested in its Board of Directors. The number of directors which shall constitute the whole Board of Directors shall be fixed by, or in the manner provided in, the Bylaws. The phrase “whole Board” and the phrase “total number of directors” shall be deemed to have the same meaning, to wit, the total number of directors which the Corporation would have if there were no vacancies.  No election of directors need be by written ballot.

2.  After the original or other By-laws of the Corporation have been adopted, amended, or repealed, as the case may be, in accordance with the provisions of Section 109 of the General Corporation Law of the State of Delaware, and, after the Corporation has received any payment for any of its stock, the power to adopt, amend, or repeal the Bylaws of the Corporation may be exercised by the Board of Directors of the Corporation; provided, however, that any provision for the classification of directors of the Corporation for staggered terms pursuant to the provisions of subsection (d) of Section 141 of the General Corporation law of the State of Delaware shall be set forth in an initial Bylaw or in a Bylaw adopted by the stockholders entitled to vote of the Corporation unless provisions for such classification shall be set forth in this certificate of incorporation.

3.  Whenever the Corporation shall be authorized to issue only one class of stock, each outstanding share shall entitle the holder thereof to notice of, and the right to vote at, any meeting of stockholders. Whenever the Corporation shall be authorized to issue more

than one class of stock, no outstanding share of any class of stock which is denied voting power under the provisions of the certificate of incorporation shall entitle the holder thereof to the right to vote at any meeting of stockholders, except as the provisions of paragraph (2) of subsection (b) of Section 242 of the General Corporation Law of the State of Delaware shall otherwise require; provided, that no share of any such class which is otherwise denied voting power shall entitle the holder thereof to vote upon the increase or decrease in the number of authorized shares of said class.

NINTH: The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented.

TENTH: The Corporation shall, to the fullest extent permitted by Section 145 of the General Corporation Law of the State of Delaware, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said Section from and against any and all of the expenses (including, without limitation, attorneys fees and expenses), liabilities or other matters referred to in or covered by said Section, and the indemnification provided for herein shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding the position giving rise to the entitlement to indemnification, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, estate, executors and administrators of any such person.

ELEVENTH: From time to time any of the provisions of this certificate of incorporation may be amended, altered or repealed, and other provisions authorized by the laws of the State of Delaware at the time in force may be added or inserted in the manner and at the time prescribed by said laws, and all rights at any time conferred upon the stockholders of the Corporation by this certificate of incorporation are granted subject to the provisions of this Article ELEVENTH.

IN WITNESS WHEREOF, the undersigned has signed this certificate and does hereby affirm the statements contained therein as true under the penalties of perjury this 5^th day of August, 1998.

/s/ David R. Fishkin     

David R. Fishkin, Incorporator

AMENDED AND RESTATED

CERTIFICATE OF DESIGNATION

OF

RIGHTS, PREFERENCES, PRIVILEGES AND RESTRICTIONS

OF

SERIES A PREFERRED STOCK

OF

ION NETWORKS, INC.

The undersigned officer of ION Networks, Inc., a corporation organized and existing under the General Corporation Law of Delaware (the “Company”), does hereby certify:

That, pursuant to the authority conferred upon the Board of Directors of the Company by its Certificate of Incorporation, as amended, and pursuant to the provisions of Section 151 of the General Corporation Law of Delaware, the Board of Directors, at a duly constituted meeting, adopted the following recitals and resolution, which resolution remains in full force and effect on the date hereof:

WHEREAS, the Certificate of Incorporation of the Company, as amended, provides for a class of stock designated “Preferred Stock”;

WHEREAS, the Certificate of Incorporation of the Company, as amended, provides that the Preferred Stock may be issued from time to time in one or more series and authorizes the Board of Directors of the Company to fix and determine or alter the powers, designations, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions granted to or imposed upon any wholly unissued series of Preferred Stock and to fix the number of shares constituting any such series and the designation thereof;

WHEREAS, the Board of Directors, pursuant to its authority as aforesaid, has provided for a series of Preferred Stock of the Company consisting of 200,000 shares designated as “Series A Preferred Stock” and has fixed and determined the powers, designations, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions thereof and other matters relating to the Series A Preferred Stock by previously filing a Certificate of Designation of Rights, Preferences, Privileges and Restrictions of Series A Preferred Stock; and

WHEREAS, the Corporation wishes to amend and restate such powers, designations, preferences and relative, participating, optional and other rights and qualifications, limitations and restrictions of the Series A Preferred Stock and other matters relating to the Series A Preferred Stock;

NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby amend and restate the Certificate of Designation of Rights, Preferences, Privileges and Restrictions of Series A Preferred Stock as follows:

1.  DIVIDEND PROVISIONS. No dividends shall be paid to the holders of

Series A Preferred Stock.

2.  LIQUIDATION PREFERENCE. In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, the holders of Series A Preferred Stock shall be entitled to receive, prior and in preference to any distribution of any of the assets of the Company to the holders of Common Stock by reason of their ownership thereof, an amount per share equal to One Dollar and Eighty Cents ($1.80) (the “Original Series A Issue Price”). If upon the occurrence of such event, the assets and funds thus distributed among the holders of the Series A Preferred Stock shall be insufficient to permit the payment to such holders of the full aforesaid preferential amounts, then the entire assets and funds of the Company legally available for distribution to stockholders shall be distributed ratably among the holders of the Series A Preferred Stock in proportion to the full preferential amount each such holder is otherwise entitled to receive under this paragraph.

3.  REDEMPTION. Neither the Company nor the holders of Series A

Preferred Stock shall have the unilateral right to call or redeem or cause to have called or redeemed any shares of the Series A Preferred Stock.

4.  CONVERSION. The holders of the Series A Preferred Stock shall have conversion rights as follows (the “Conversion Rights”):

(a)  RIGHT TO CONVERT.

(i)  Each share of Series A Preferred Stock, at the option of the holder thereof, at any time after the date of issuance of such share at the office of the Company or any transfer agent for such stock, shall convert into such number of fully paid and nonassessable shares of Common Stock as is determined by dividing the Original Series A Issue Price by the Conversion Price applicable to such share, determined as hereafter provided, in effect on the date the certificate is surrendered for conversion.

(ii)  The Conversion Price per share for shares of Series A Preferred Stock shall be eighteen cents ($0.18); provided, however, that the Conversion Price for the Series A Preferred Stock shall be subject to adjustment as set forth below.

(b)  MECHANICS OF CONVERSION. Before any holder of Series A Preferred Stock shall be entitled to convert the same into shares of Common Stock, the holder shall surrender the certificate or certificates therefore, duly endorsed, at the office of the Company or of any transfer agent for the Series A Preferred Stock, and shall give written notice to the Company at its principal corporate office, of the election to convert the same and shall state therein the name or names in which the certificate or certificates for shares of Common Stock are to be issued. The Company shall, as soon as practicable thereafter, issue and deliver at such office to such holder of Series A Preferred Stock, or to the nominee or nominees of such holder, a certificate or certificates for the number of shares of Common Stock to which such holder shall be entitled as aforesaid. Such conversion shall be deemed to have been made immediately prior to t he close of business on the date of such surrender of the shares of Series A Preferred Stock to be converted, and the person or persons entitled to receive the shares of

Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Common Stock as of such date. If the conversion is in connection with an underwritten offering of securities registered pursuant to the Securities Act of 1933, as amended, the conversion may, at the option of any holder tendering Series A Preferred Stock for conversion, be conditioned upon the closing with the underwriters of the sale of securities pursuant to such offering, in which event the persons entitled to receive the Common Stock upon conversion of the Series A Preferred Stock shall not be deemed to have converted the Series A Preferred Stock until immediately prior to the closing of such sale of securities.

(c)  CONVERSION PRICE ADJUSTMENTS OF SERIES A PREFERRED STOCK.  The Conversion Price of the Series A Preferred Stock shall be subject to adjustment from time to time as follows:

(i)  No adjustment of the Conversion Price for any series of Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments that are not required to be made by reason of this sentence shall be carried forward and shall be either taken into account in any subsequent adjustment made prior to three (3) years from the date of the event giving rise to the adjustment being carried forward, or shall be made at the end of three (3) years from the date of the event giving rise to the adjustment being carried forward. Except to the limited extent   provided for below, no adjustment of such Conversion Price pursuant to this Section shall have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to such adjustment.

(ii) In the event the Company should at any time or from time to time after the applicable Purchase Date fix a record date for the effectuation of a split or subdivision of the outstanding shares of Common Stock or the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock or other securities or rights convertible into, or entitling the holder thereof to receive directly or indirectly, additional shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”) without payment of any consideration by such holder for the additional shares of Common Stock or the Common Stock Equivalents (including the additional shares of Common Stock issuable upon conversion or exercise thereof), then, as of such record date (or the date of such dividend distribution, split or subdivision if no record date is fixed), th e Conversion Price of the Series A Preferred Stock shall be appropriately decreased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be increased in proportion to such increase in the aggregate number of shares of Common Stock outstanding and those issuable with respect to such Common Stock Equivalents.

(iii)  If the number of shares of Common Stock outstanding at any time after the applicable Purchase Date is decreased by a reverse stock split or other combination of the outstanding shares of Common Stock, then, following the record date of such combination, the Conversion Price for the Series A Preferred Stock shall be appropriately increased so that the number of shares of Common Stock issuable on conversion of each share of such series shall be decreased in proportion to such decrease in outstanding shares.

(d)  OTHER DISTRIBUTIONS. In the event the Company shall declare a

distribution payable in securities of other persons, evidences of indebtedness issued by the Company or other persons, assets (excluding cash dividends) or options or rights, then, in each such case for the purpose of this Section 4(d), the holders of the Series A Preferred Stock shall be entitled to a proportionate share of any such distribution as though they were the holders of the number of shares of Common Stock of the Company into which their shares of such series of Preferred Stock are convertible as of the record date fixed for the determination of the holders of Common Stock of the Company entitled to receive such distribution.

(e)  RECAPITALIZATIONS. If at any time or from time to time there shall be a recapitalization of the Common Stock (other than a subdivision, combination or merger or sale of assets transaction provided for elsewhere in Section 4(c)), provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of such series of Preferred Stock the number of shares of stock or other securities or property of the Company or otherwise, to which a holder of the number of shares of Common Stock deliverable upon conversion of the Preferred Stock held by such holder would have been entitled on such recapitalization. In any such case, appropriate adjustment shall be made in the application of the provisions of Section 4(c) with respect to the rights   of the holders of the Series A Preferred Stock after the recapitalization to the end that the provisions of Section 4(c) (including adjustment of the Conversion Price then in effect and the number of shares purchasable upon conversion of such series of Preferred Stock) shall be applicable after that event as nearly equivalent as may be practicable.

(f)  NO IMPAIRMENT. The Company will not, by amendment of its

Amended Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of Section 4(c) and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of Series A Preferred Stock against impairment.

(g)  NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.

(i)  No fractional shares shall be issued upon the conversion of any share or shares of Series A Preferred Stock. In lieu of any fractional shares to which the holder would otherwise be entitled, the Company shall pay cash equal to such fraction multiplied by the then fair market value of a share of Common Stock as determined in good faith by the Board of Directors. The number of shares of Common Stock to be issued upon such conversion shall be determined on the basis of the total number of shares of Series A Preferred Stock the holder is at the time converting into Common Stock and the number of shares of Common Stock issuable upon such aggregate conversion.

(ii)  Upon the occurrence of each adjustment or readjustment of the Conversion Price of Series A Preferred Stock pursuant to Section 4(c), the Company, at its expense, shall promptly compute such adjustment or readjustment in accordance with the terms

hereof

and prepare and furnish to each record holder of Series A Preferred Stock a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based. The Company shall, upon the written   request at any time of any holder of Series A Preferred Stock, furnish or cause to be furnished to such holder a like certificate setting forth (A) such adjustment and readjustment, (B) the Conversion Price for Series A Preferred Stock at the time in effect, and (C) the number of shares of Common Stock and the amount, if any, of other property that at the time would be received upon the conversion of a share of Series A Preferred Stock.

(h)  NOTICES OF RECORD DATE. In the event of any taking by the

Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any dividend (other than a cash dividend) or other distribution, any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, the Company shall mail to each record holder of Series A Preferred Stock, at least twenty (20) days prior to the date specified therein, a notice specifying the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and the amount and character of such dividend, distribution or right.

(i)  RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of Series A Preferred Stock, such number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of Series A Preferred Stock; and if at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of   all then outstanding shares of Series A Preferred Stock, in addition to such other remedies as shall be available to the holder of the Series A Preferred Stock, the Company will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be suffic ient for such purposes, including, without limitation, engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to its Amended Certificate of Incorporation.

(j)  NOTICES. Any notice required by the provisions of Section

4(c) to be given to the holders of shares of Series A Preferred Stock shall be deemed given if deposited in the United States mail, postage prepaid, and addressed to each holder of record at his address appearing on the books of the Company.

5.  VOTING RIGHTS. Except as specifically provided in Section 6, the

Series A Preferred Stock shall not have voting rights.

6.  PROTECTIVE PROVISIONS.

(a)  Subject to the rights of series of Preferred Stock which may from time to time come into existence, so long as any shares of Series A Preferred Stock are outstanding, the Company shall not without first obtaining the approval (by vote or written consent, as provided by law) of the holders of at least a majority of the then outstanding shares of Series A

Preferred Stock voting separately as a single class:

(i)  alter or change the rights, preferences or privileges of the shares of Series A Preferred Stock so as to affect adversely such shares of Series A Preferred Stock;

(ii)  increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A Preferred Stock;

(iii)  authorize or issue, or obligate itself to issue, any equity security (other than Series A Preferred Stock), including any other security convertible into or exercisable for any equity security, having a preference over, or being on a parity with, the Series A Preferred Stock with respect to dividends, liquidation, redemption or voting; or

(iv)  effect any reclassification or recapitalization of the Series A Preferred Stock.

7.  STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares of Series A Preferred Stock shall be converted as provided for herein, the shares so redeemed or converted shall be cancelled and shall not be issuable by the Company.

IN WITNESS WHEREOF, ION Networks, Inc. has caused this Amended and Restated Certificate of Designation of Rights, Preferences, Privileges and Restrictions of Series A Preferred Stock to be executed by its duly authorized officer this 13^th day of September, 2002.

/s/ Kam Saifi

Name:  Kam Saifi

Title: Chief Executive Officer

EX-4.9

NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY OTHER APPLICABLE STATE SECURITIES LAWS IN RELIANCE UPON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT PURSUANT TO REGULATION D AND SUCH OTHER SECURITIES LAWS.  NEITHER THIS WARRANT NOR THE SHARES ISSUABLE UPON EXERCISE HEREOF MAY BE SOLD, PLEDGED, TRANSFERRED, ENCUMBERED OR OTHERWISE DISPOSED OF EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR IN A TRANSACTION WHICH IS EXEMPT FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT OR ANY APPLICABLE STATE LAWS. THIS WARRANT MAY NOT BE EXERCISED BY OR ON BEHALF OF A UNITED STATES PERSON UNLESS REGISTERED UNDER THE SECURITIES ACT OR AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE, AS REQUIRED BY REGULATI ON D.

STOCK PURCHASE WARRANT

To Purchase 326,087 Shares of Common Stock of

ION NETWORKS INC.

THIS CERTIFIES that, for value received, Cresco Capital Partners (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to the close of business on September 9, 2008 (the “Termination Date”) but not thereafter, to subscribe for and purchase from ION NETWORKS, Inc., a corporation incorporated in the State of Delaware, with offices at 120 Corporate Boulevard, South Plainfield, New Jersey 07080 (the “Company”), up to 326,087 shares (the “Warrant Shares”) of Common Stock, $0.001 par value, of the Company (the “Common Stock”).  The purchase price of one share of Common Stock (the “Exercise Price”) under this Warrant shall be $0.23.  The Ex ercise Price and the number of shares for which the Warrant is exercisable shall be subject to adjustment as provided herein.

1.

Title to Warrant.  Prior to the Termination Date and subject to compliance with applicable laws, this Warrant and all rights hereunder are transferable, in whole or in part, at the office or agency of the Company by the holder hereof in person or by duly authorized attorney, upon surrender of this Warrant together with the Assignment Form annexed hereto properly endorsed.

2.

Authorization of Shares.  The Company covenants that all shares of Common Stock which may be issued upon the exercise of rights represented by this Warrant will, upon exercise of the rights represented by this Warrant, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).

3.

Exercise of Warrant.  

(a)

Except as provided in Section 4 herein, exercise of the purchase rights represented by this Warrant may be made at any time or times on or after the Initial Exercise Date, and before the close of business on the Termination Date by the surrender of this Warrant and the Notice of Exercise Form annexed hereto duly executed, at the office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered holder hereof at the address of such holder appearing on the books of the Company) and upon payment of the Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank, the holder of this Warrant shall be entitled to receive a certificate for the number of shares of Common Stock so purchased. Certificates for shares purchased hereunder shall be delivered to the h older hereof within three (3) Trading Days after the date on which this Warrant shall have been exercised as aforesaid. This Warrant shall be deemed to have been exercised and such certificate or certificates shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised by payment to the Company of the Exercise Price and all taxes required to be paid by Holder, if any, pursuant to Section 5 prior to the issuance of such shares, have been paid.  For the purposes of this Agreement, (i) “Trading Day” shall mean any day on which the Principal Market is open for business and (ii) “Principal Market” shall mean initially the Nasdaq National Market and shall include the American Stock Exchange, Nasdaq National Market, the Nasdaq SmallCap Market, Bulletin Board or the New York Stock Exchange if the Company is listed and trades on such market or exchange.

(b)

If this Warrant shall have been exercised in part, the Company shall, at the time of delivery of the certificate or certificates representing Warrant Shares, deliver to Holder a new Warrant evidencing the rights of Holder to purchase the unpurchased shares of Common Stock called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.

(c)

If no registration statement is effective permitting the resale of the shares of Common Stock issued upon exercise of this Warrant at any time commencing one year after the issuance date hereof, then this Warrant shall also be exercisable by means of a “cashless exercise” in which the holder shall be entitled to receive a certificate for the number of shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:

(A) = the average of the high and low trading prices per share of Common Stock on the Trading Day preceding the date of such election on the Nasdaq National Market, or if the Common Stock is not traded on the Nasdaq National Market, then the Principal Market in terms of volume, and converted into US Dollars;

(B) =  the Exercise Price of the Warrants; and

(X) = the number of shares issuable upon exercise of the Warrants in accordance with the terms of this Warrant.

4.

No Fractional Shares or Scrip.  No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant.  As to any fraction of a share which Holder would otherwise be entitled to purchase upon such exercise, the Company shall pay a cash adjustment in respect of such final fraction in an amount equal to the Exercise Price.

5.

Charges, Taxes and Expenses.  Issuance of certificates for shares of Common Stock upon the exercise of this Warrant shall be made without charge to the holder hereof for any issue or transfer tax or other incidental expense in respect of the issuance of such certificate, all of which taxes and expenses shall be paid by the Company, and such certificates shall be issued in the name of the holder of this Warrant or in such name or names as may be directed by the holder of this Warrant; provided, however, that in the event certificates for shares of Common Stock are to be issued in a name other than the name of the holder of this Warrant, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the holder hereof; and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto.

6.

Closing of Books.  The Company will not close its shareholder books or records in any manner which prevents the timely exercise of this Warrant.

7.

Transfer, Division and Combination.  (a) Subject to compliance with any applicable securities laws, transfer of this Warrant and all rights hereunder, in whole or in part, shall be registered on the books of the Company to be maintained for such purpose, upon surrender of this Warrant at the principal office of the Company, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer.  Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Wa rrant not so assigned, and this Warrant shall promptly be cancelled.  A Warrant, if properly assigned, may be exercised by a new holder for the purchase of shares of Common Stock without having a new Warrant issued.

(b)

This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by Holder or its agent or attorney.  Subject to compliance with Section 7(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice.

(c)

The Company shall prepare, issue and deliver at its own expense (other than transfer taxes) the new Warrant or Warrants under this Section 7.

(d)

The Company agrees to maintain, at its aforesaid office, books for the registration and the registration of transfer of the Warrants.

8.

Registration of Warrant Shares.  (a)  If (but without any obligation to do so) the Company proposes to register (including for this purpose a registration effected by the Company for stockholders other than the Holders) any of its stock or other securities under the Act in connection with the public offering of such securities solely for cash (other than a registration statement relating either to the sale of securities to employees of the Company pursuant to a stock option, stock purchase or similar plan or a SEC Rule 145 transaction), the Company shall, at such time, promptly give each Holder written notice of such proposed registration.  Upon the written request of each Holder given within twenty (20) days after mailing of such notice by the Company in accordance with Section 18(d) hereof, the Company shall, subject to the provisions of Section 8(c), endeavor to cause to be registered under the Act all of the Warrant Shares that each such Holder has requested to be registered.

     (b)  Whenever required under this Section 8(a) to effect the registration of any Warrant Shares, the Company shall, as expeditiously as reasonably possible use reasonable efforts to (i) file a registration statement (the "Registration Statement"), registering for resale the Warrant Shares and (ii) cause the Registration Statement to be declared effective under the Securities Act of 1933, as amended (the "Act") as soon thereafter as reasonably practicable.  The Company promptly shall provide each Holder with such copies of the final prospectus contained in the Registration Statement after it becomes effective as they shall reasonably request.  In addition, the Company shall (a) use reasonable efforts to keep the Registration Statement effective for a period ending on the earlier of (x) 120 days from its effective date or (y) when all such Warrant Shares can be sold without limitation or delay under Rule 144 and (b) file all report s and forms required to be filed by it under the Securities Exchange Act of 1934, as amended ("Reports") on a timely basis so long as each Holder owns any Warrant Shares and shall provide each Holder copies thereof when filed.

     (c)  Notwithstanding anything contained herein to the contrary, the Company shall be entitled to postpone the filing of the Registration Statement otherwise required to be prepared and filed by it in accordance with subparagraph (b) or, in the event the Registration Statement has been declared effective, without suspending such effectiveness, instruct the Holder promptly in writing (or any subsequent holders thereof) not to sell or distribute any Warrant Shares (a "Delay") as long as the reason for non-disclosure continues, if the Company would be required to disclose in the Registration Statement the existence of any fact relating to a material business situation, transaction or negotiation, or would be required to disclose information that the Company has not otherwise made public, in each case, that the Company reasonably determines is in the best interests of the Company not to disclose at such time, and unless and until each Holder furnishes to the Co mpany in writing information that may be required to prepare the disclosure required by Items 507 and 508 of Regulation S-B promulgated under the Act, with respect to such Holder's Warrant Shares being sold under the Registration Statement provided that, with respect to Delays because of information related to the Company (rather than disclosure required to be provided by the holders), the Company shall only be entitled to a maximum of three (3) Delays, each Delay not to exceed a period of thirty (30) days; and further provided, that no period of Delay shall commence within 60 days of a previous Delay.

     (d)  Each Holder shall (i) reasonably cooperate with the Company in connection with the preparation and filing of the Registration Statement and execute and deliver any agreements or instruments reasonably requested by the Company or its counsel in connection therewith and (ii) upon discovery that, or upon the happening of any event as a result of which, the Registration Statement (or any prospectus included therein), as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading, in the light of the circumstances under which they were made (as determined by the Company or its counsel in its sole discretion), forthwith discontinue its disposition of Warrant Shares pursuant to the Registration Statement, until such time as such Holder (or any holders) have received a supplemented or amended prospectus from the Company relating thereto.  The C ompany agrees to use its best efforts to prepare any necessary amendments or supplements to the Registration Statement as soon as reasonably practicable after the same becomes necessary and to provide to each Holder quantities of such amendments or supplements reasonably sufficient for the distribution thereof.

     (e)  The Company shall indemnify and hold harmless each Holder and its respective officers, directors, employees, members, agents, affiliates and control persons (each of the foregoing, a "Holder Indemnitee") who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of or arising from any actual or alleged misrepresentation or misstatement of facts or omission to represent or state any fact or omission to state a fact necessary to make the facts stated under the circumstances not materially misleading, in the Registration Statement or any amendment or supplement thereto or to the prospectus incorporated therein from and against any claim, losses, liabilities, costs and expenses (including attorney's fees, judgments, fines and amounts paid in settlement) ("Loss") actually and reasonably incurred by any such Holder Indemnitee in connection with such claim, action, suit or proceeding or the defense thereof, except to the extent such Loss is the direct result of a misstatement or omission for which such Holder Indemnitee is liable to the Company under Section 9(i); provided, however, that the indemnification contained in this Section 8(e) with respect to any preliminary prospectus shall not inure to the benefit of any Holder Indemnitee on account of any such Loss arising from the sale of the Warrant Shares by such Holder Indemnitee to any person if a copy of the definitive prospectus shall not have been delivered or sent to such person within the time required by the Act and the regulations thereunder, and an untrue statement or alleged untrue statement or omission or alleged omission of a material fact contained in such preliminary prospectus was corrected in the definitive prospectus.

     (f)  In connection with any offering involving an underwriting of shares of the Company’s capital stock, the Company shall not be required under Section 8(a) to include any of the Holders’ Warrant Shares in such underwriting unless they accept the terms of the underwriting as agreed upon between the Company and the underwriters selected by it (or by other persons entitled to select the underwriters), and then only in such quantity as the underwriters determine in their sole discretion will not jeopardize the success of the offering by the Company.  If the total amount of securities, including Warrant Shares, requested by stockholders to be included in such offering exceeds the amount of securities sold other than by the Company that the underwriters determine in their sole discretion is compatible with the success of the offering, then the Company shall be required to include in the offering only that number of such securities, including Warrant Shares, whic h the underwriters determine in their sole discretion will not jeopardize the success of the offering (the securities so included to be apportioned pro rata among the selling stockholders according to the total amount of securities entitled to be included therein owned by each selling stockholder or in such other proportions as shall mutually be agreed to by such selling stockholders).

9.

Representations of Holder. The Holder acknowledges that the Company will rely on the information and on the representations set forth herein, and the undersigned hereby represents, warrants and agrees that:

 (a)  The Holder is an "Accredited Investor", as that term is defined under Section 501(a) of Regulation D under the Act.

 (b)  The Holder has not received any general solicitation or general advertising regarding the exercise of the Warrant.

 (c)  The Holder has sufficient knowledge and experience in financial and business matters so that he or it is able to evaluate the merits and risks of exercising the Warrant as well as substantial experience in previous private and public purchases of securities.

 (d)  The Holder understands that an investment in the Company involves significant risk.  The Holder does not require the funds to be used to exercise this Warrant or the Warrant Shares for his liquidity or other needs, possesses the ability to bear the economic risk of holding the this Warrant or the Warrant Shares purchased hereunder indefinitely and can afford a complete loss of its investment in the this Warrant or the Warrant Shares.

 (e)  Prior to the issuance of this Warrant and prior to exercise, the Holder has or will have had full opportunity to ask questions of and receive answers from the Company and its officers and authorized representatives regarding the terms and conditions of the Warrant and the transactions contemplated hereby, as well as the affairs of the Company and related matters. The Holder confirms that he does not desire to receive any further information.

 (f)  The Holder understands that the exercise price of the Warrant being purchased hereby has been arbitrarily determined and does not necessarily bear any relationship to investment criteria such as projected earnings, discounted cash flow, book value or other measures of value.

 (g)  The Holder understands that the Warrant has not been filed with or reviewed by the Commission nor the securities department of any state because of the private or limited nature of this offering as defined by applicable laws, and that the Warrant and the Warrant Shares have not been registered with the Commission under the Act nor with the securities department of any state in reliance upon an exemption therefrom for non-public offerings.

 (h)  The Holder is a bona fide resident of the state set forth as his "address" above and further represents that (a) if a corporation, partnership, trust or other form of business organization, it has a principal office within such state; and (b) if an individual, he has his principal residence in such state.

 (i)  The Holder represents and warrants that the Warrant and the Warrant Shares are or will be acquired for investment purposes and not with a view to or for sale or distribution.  The Holder represents that there is no contract, undertaking, agreement or arrangement with any person to sell, transfer or pledge to such person or anyone else the Warrant and the Warrant Shares or any part thereof, and the Holder has no present plans to enter into such contract, undertaking, agreement or arrangement and will neither directly or indirectly seek to assign, transfer or sell the same in any way inconsistent with the legend which is being placed on the Warrant.

 (j)  Each Holder agrees to indemnify and hold harmless the Company and each officer, director, employee, agent or control person of the Company, who is or may be a party or is or may be threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, to the extent by reason of or arising from any misrepresentation or misstatement of material facts or omission to state material facts necessary to make the facts stated, under the circumstances, not materially misleading, made or omitted by such Holder to the Company in a writing provided to the Company expressly for the purpose of inclusion in the Registration Statement or any amendment thereto, against losses, liabilities and expenses for which the Company, or any officer, director or control person of the Company has not otherwise been reimbursed (including attorneys' fees, judgments, fines and amounts paid in settlement) actually and reasonably incurred by the Company or such officer, director or control person in connection with such action, suit or proceeding.

10.

No Rights as Shareholder until Exercise.  This Warrant does not entitle the holder hereof to any voting rights or other rights as a shareholder of the Company prior to the exercise hereof.  Upon the surrender of this Warrant and the payment of the aggregate Exercise Price, the Warrant Shares so purchased shall be and be deemed to be issued to such holder as the record owner of such shares as of the close of business on the later of the date of such surrender or payment.

11.

Loss, Theft, Destruction or Mutilation of Warrant.  The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant certificate or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.

12.

Saturdays, Sundays, Holidays, etc.  If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall be a Saturday, Sunday or a legal holiday, then such action may be taken or such right may be exercised on the next succeeding day not a Saturday, Sunday or legal holiday.

13.

Adjustments of Exercise Price and Number of Warrant Shares.  (a) The number and kind of securities purchasable upon the exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time upon the happening of any of the following.  In case the Company shall (i) pay a dividend in shares of Common Stock or make a distribution in shares of Common Stock to holders of its outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock into a greater number of shares of Common Stock, or (iii) combine its outstanding shares of Common Stock into a smaller number of shares of Common Stock, then the number of Warrant Shares purchasable upon exercise of this Warrant immediately prior thereto shall be adjusted so that the holder of this Warrant shall be entitled to receive the kind and number of Warrant Shares of the Company which he would have owned or have been entitled to receive had such Warrant been exercised in advance thereof.  Upon each such adjustment of the kind and number of Warrant Shares of the Company which are purchasable hereunder, the holder of this Warrant shall thereafter be entitled to purchase the number of Warrant Shares resulting from such adjustment at an Exercise Price per Warrant Share or other security obtained by multiplying the Exercise Price in effect immediately prior to such adjustment by the number of Warrant Shares purchasable pursuant hereto immediately prior to such adjustment and dividing by the number of Warrant Shares of the Company resulting from such adjustment.  An adjustment made pursuant to this paragraph shall become effective immediately after the effective date of such event retroactive to the record date, if any, for such event.

   (b)  Subject to Section 13(c) below, in case the Company shall reorganize its capital, reclassify its capital stock, consolidate or merge with or into another corporation, and pursuant to the terms of such reorganization, reclassification, merger, or consolidation, shares of common stock of the successor or acquiring corporation, or shares of stock other than Common Stock of the Company, is to be received by or distributed to the holders of Common Stock of the Company in lieu of the Company’s Common Stock, then Holder shall have the right thereafter to receive, upon exercise of this Warrant, the number of shares of common stock of the successor or acquiring corporation or other shares of stock of the Company (other than Common Stock) if the Company is the surviving corporation (in the merger, reorganization or reclassification), receivable upon or as a result of such reorganization, reclassification, merger or consolidation, by a holder of the number of shares of Common Stock for which this Warrant is exercisable immediately prior to such event.  Subject to Section 13(c), in case of any such reorganization, reclassification, merger or consolidation, the successor or acquiring corporation (if other than the Company) shall expressly assume the due and punctual observance and performance of each and every covenant and condition of this Warrant to be performed and observed by the Company and all the obligations and liabilities hereunder, subject to such modifications as may be deemed appropriate (as determined in good faith by resolution of the Board of Directors of the Company) in order to provide for adjustments of shares of Common Stock for which this Warrant is exercisable which shall be as nearly equivalent as practicable to the adjustments provided for in this Section 13(b).  For purposes of this Section 13(b), “common stock of the successor or acquiring corporation” shall include stock of such corporation of any class which is not preferred as to dividends or assets over any other class of stock of such corporation and which is not subject to redemption.  Subject to Section 13(c), the foregoing provisions of this Section 13(b) shall similarly apply to successive reorganizations, reclassifications, mergers or consolidations.

   (c)  In the event of (i) a proposed dissolution or liquidation of the Company, or (ii) a proposed sale of all or substantially all of the assets or outstanding equity of the Company, or (iii) 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 other reorganization own immediately after such merger, consolidation or other reorganization fifty percent (50%) or more of the voting power 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, the Board of Directors of the Company, at its sole discretion, shall, as to any unexercised portion of this Warrant, either (1) make appropriate provision for the protection of any such unexercised portion by the substitution on an equitable basis of appropr iate stock of the Company or of the merged, consolidated or otherwise reorganized corporation which will be issuable in respect to one share of Common Stock of the Company as set forth in Section 13(b) above; provided that the excess of the aggregate fair market value of the shares subject to the unexercised portion of this Warrant immediately after such substitution over the purchase price thereof is not more than the excess of the aggregate fair market value of the shares subject to such unexercised portion immediately before such substitution over the purchase price thereof, or (2) upon written notice to Holder, provide that the entire unexercised portion of this Warrant  must be exercised within a specified number of days of the date of such notice or such unexercised portion will be terminated.

14.

Voluntary Adjustment by the Company.  The Company may at any time during the term of this Warrant, reduce the then current Exercise Price to any amount and for any period of time deemed appropriate by the Board of Directors of the Company.

15.

Notice of Adjustment.  Whenever the number of Warrant Shares or number or kind of securities purchasable upon the exercise of this Warrant or the Exercise Price is adjusted, as herein provided, the Company shall promptly mail by registered or certified mail, return receipt requested, to the holder of this Warrant notice of such adjustment or adjustments setting forth the number of Warrant Shares (or other securities) purchasable upon the exercise of this Warrant and the Exercise Price of such Warrant Shares (or other securities) after such adjustment, setting forth a brief statement of the facts requiring such adjustment and setting forth the computation by which such adjustment was made.  Such notice, in the absence of manifest error, shall be conclusive evidence of the correctness of such adjustment.

16.

Notice of Corporate Action.  If at any time:

(a)

the Company shall take a record of the holders of its Common Stock for the purpose of entitling them to receive a dividend or other distribution, or any right to subscribe for or purchase any evidences of its indebtedness, any shares of stock of any class or any other securities or property, or to receive any other right, or

(b)

there shall be any capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any consolidation or merger of the Company with, or any sale, transfer or other disposition of all or substantially all the property, assets or business of the Company to, another corporation or,

(c)

there shall be a voluntary or involuntary dissolution, liquidation or winding up of the Company;

then, in any one or more of such cases, the Company shall give to Holder (i) at least 10 days’ prior written notice of the date on which a record date shall be selected for such dividend, distribution or right or for determining rights to vote in respect of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, liquidation or winding up, and (ii) in the case of any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up, at least 10 days’ prior written notice of the date when the same shall take place.  Such notice in accordance with the foregoing clause also shall specify (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, the date on which the holders of Common Stock shall be entitled to any such divid end, distribution or right, and the amount and character thereof, and (ii) the date on which any such reorganization, reclassification, merger, consolidation, sale, transfer, disposition, dissolution, liquidation or winding up is to take place and the time, if any such time is to be fixed, as of which the holders of Common Stock shall be entitled to exchange their shares of Common Stock for securities or other property deliverable upon such disposition, dissolution, liquidation or winding up.  Each such written notice shall be sufficiently given if addressed to Holder at the last address of Holder appearing on the books of the Company and delivered in accordance with Section 16(d).

17.

Authorized Shares.  The Company covenants that during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant.  The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for the Warrant Shares upon the exercise of the purchase rights under this Warrant.  The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of  the Principal Market upon which the Common Sto ck may be listed.

18.

Miscellaneous.

(a)

Jurisdiction. This Warrant shall be binding upon any successors or assigns of the Company.  This Warrant shall be construed in accordance with the laws of the State of New Jersey, other than those which would defer to the substantive laws of another jurisdiction.

(b)

Restrictions.  The holder hereof acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered, will have restrictions upon resale imposed by state and federal securities laws.

(c)

Nonwaiver and Expenses.  No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice Holder’s rights, powers or remedies, notwithstanding all rights hereunder terminate on the Termination Date.  

(d)

Notices.  Any notice, request or other document required or permitted to be given or delivered to the holder hereof by the Company shall be delivered in accordance with the notice provisions of the Financial Consulting Agreement dated July 15, 2005, by and between Holder and Company.

(e)

Limitation of Liability.  No provision hereof, in the absence of affirmative action by Holder to purchase shares of Common Stock, and no enumeration herein of the rights or privileges of Holder hereof, shall give rise to any liability of Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.

(f)

Remedies.  Holder, in addition to being entitled to exercise all rights granted by law, including recovery of damages, will be entitled to specific performance of its rights under this Warrant.  The Company agrees that monetary damages would not be adequate compensation for any loss incurred by reason of a breach by it of the provisions of this Warrant and hereby agrees to waive the defense in any action for specific performance that a remedy at law would be adequate.

(g)

Successors and Assigns.  Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors of the Company and the successors and permitted assigns of Holder.  The provisions of this Warrant are intended to be for the benefit of all Holders from time to time of this Warrant and shall be enforceable by any such Holder or holder of Warrant Shares.

(h)

Indemnification.  Except as set forth in Section 9 hereof, the Company agrees to indemnify and hold harmless Holder from and against any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys’ fees, expenses and disbursements of any kind which may be imposed upon, incurred by or asserted against Holder in any manner relating to or arising out of any failure by the Company to perform or observe in any material respect any of its covenants, agreements, undertakings or obligations set forth in this Warrant; provided, however, that the Company will not be liable hereunder to the extent that any liabilities, obligations, losses, damages, penalties, actions, judgments, suits, claims, costs, attorneys’ fees, expenses or disbursements are found in a final non-appealable judgment by a court t o have resulted from Holder’s negligence, bad faith or willful misconduct in its capacity as a stockholder or warrantholder of the Company.

(i)

Amendment.  This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.

(j)

Severability.  Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.

(k)

Headings.  The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.

IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized.

[Dated: September 9, 2005]

ION NETWORKS, INC.

By:  /s/ Norman E. Corn

      Name: Norman E. Corn

      Title: Chief Executive Officer

737592_2

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NOTICE OF EXERCISE

To: ION NETWORKS, Inc.

(1)

The undersigned hereby elects to purchase ________ shares of Common Stock (the “Common Stock”), of Ion Networks, Inc. pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

(2)

Please issue a certificate or certificates representing said shares of Common Stock in the name of the undersigned or in such other name as is specified below:

_______________________________

(Name)

_______________________________

(Address)

_______________________________

Dated:

______________________________

Signature

737592_2

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ASSIGNMENT FORM

(To assign the foregoing warrant, execute
this form and supply required information.
Do not use this form to exercise the warrant.)

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

_______________________________________________ whose address is

_______________________________________________________________.

_______________________________________________________________

Dated:  ______________, _______

Holder's Signature:

_____________________________

Holder's Address:

_____________________________

_____________________________

Signature Guaranteed:  ___________________________________________

NOTE:  The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatsoever, and must be guaranteed by a bank or trust company.  Officers of corporations and those acting in an fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

737592_2

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