UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 2005

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number 000-26399

eOn Communications Corporation

(Exact name of registrant as specified in its charter)

DELAWARE	62-1482176
(State of incorporation)	(I.R.S. Employer Identification No.)

4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144

(Address of principal executive offices)

(770) 423-2200

(Telephone number)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value per share

(Title of each class)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not 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-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)  Yes  ¨    No  x

The aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $31,715,736 based upon the closing sale price as reported by the Nasdaq Stock Market on January 31, 2005. The number of outstanding shares of the registrant’s $0.001 par value common stock was 12,903,057 shares as of September 30, 2005.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrant’s Proxy Statement for the 2005 Annual Meeting of Shareholders are incorporated by reference in Part III.

ITEM NO.		PAGE NO.
PART I		3
ITEM 1.	Business	3
ITEM 2.	Properties	14
ITEM 3.	Legal Proceedings	14
ITEM 4.	Submission of Matters to a Vote of Security Holders	14
PART II		15
ITEM 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	15
ITEM 6.	Selected Financial Data	16
ITEM 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
ITEM 7A.	Quantitative and Qualitative Disclosures about Market Risk	27
ITEM 8.	Financial Statements and Supplementary Data	28
ITEM 9.	Changes In and Disagreements with Accountants on Accounting and Financial Disclosure	53
ITEM 9A.	Controls and Procedures	53
ITEM 9B	Other Information	56
PART III		57
ITEM 10.	Directors and Executive Officers of the Registrant	57
ITEM 11.	Executive Compensation	57
ITEM 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	57
ITEM 13.	Certain Relationship and Related Transactions	57
ITEM 14.	Principal Accountant Fees and Services	57
PART IV		57
ITEM 15.	Exhibits and Financial Statement Schedules	57

2

PART 1

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements are those that express management’s views of future events, developments, and trends. In some cases, these statements may be identified by terminology such as “may,” “will,” “should,” “expects,” “plans,” “intends,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue” or the negative of such terms and other comparable expressions. Forward-looking statements include statements regarding our anticipated or projected operating performance, financial results, liquidity and capital resources. These statements are based on management’s beliefs, assumptions, and expectations, which in turn are based on the information currently available to management. Information contained in these forward-looking statements is inherently uncertain, and our actual operating performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond our ability to predict or control. Factors that may cause or contribute to such differences include, but are not limited to, eOn’s ability to compete successfully in its industry and to continue to develop products for new and rapidly changing markets. We also direct your attention to the risk factors affecting our business that are discussed elsewhere in Item 7. eOn disclaims any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments. The following discussions should be read in conjunction with our consolidated financial statements and the notes included thereto in Item 8.

ITEM 1. BUSINESS.

INTRODUCTION

eOn Communications Corporation^™ (“eOn” or the “Company”) designs, develops and markets unified voice, email and Web-based communications systems and software for customer contact centers and general business applications. One business focus is to provide multi-media contact center solutions that help businesses communicate more effectively and efficiently with their customers using all forms of voice, messaging and Internet based interactions. Through such products eOn enables companies to improve customer service and loyalty, increase agent productivity and lower the cost of ownership. In addition, for small and medium-sized general business applications we offer integrated communication systems, private branch exchanges (PBX’s) with Voice over Internet Protocol (VoIP) capability, voice mail and unified messaging solutions. See footnote 17 to the consolidated financial statements.

In 1997, eOn was one of the first companies to develop a communications server using the open standards-based Linux^™ operating system. In 2000, eOn became one of the first companies to deliver a single queuing multi-media contact center solution. Since then we have won numerous industry awards for product innovation and service, and we have successfully competed for and won the business of our customers. With more than 8,000 customers worldwide, eOn has a proven line of products that enable businesses to improve communications, convert inquiries into sales, and increase customer satisfaction and loyalty.

On June 1, 2004 eOn purchased, through a wholly-owned subsidiary, a controlling interest in Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”). Cortelco Shanghai is an established telecommunications company with a significant customer base throughout China that provides telecommunications products in China. These products include fiber optic transmission equipment, data communications systems, and network management software. See footnote 17 to the consolidated financial statements.

On October 26, 2005 eOn announced that it has signed a Memorandum of Understanding (“MOU”) to sell its 54% interest in Cortelco Shanghai to the 46% minority holder, Shanghai Fortune Telecommunication Technology Development Co. Ltd. (“Shanghai Fortune”) and members of management of Cortelco Shanghai.

3

The MOU is subject to negotiation of a definitive agreement, approval of China government authorities and various other conditions. eOn and Shanghai Fortune have tentatively agreed to a purchase price based on the book value at July 31, 2005. This would result in an estimated purchase price of approximately $1.8 million. Payment of 85% would be paid in cash within 30 days of closing; the remaining 15% (sold to management) would have extended payment terms to be negotiated.

After working with Cortelco Shanghai this past year, we have concluded that our direct eOn sales team better fits our China strategy. Additionally, Cortelco Shanghai traditionally has kept its books and records in accordance with Chinese accounting standards instead of U.S. accounting standards. We had concerns that the costs associated with Cortelco Shanghai meeting the Sarbanes-Oxley internal controls procedures and documentation requirements in the future would be prohibitively expensive. The cash proceeds from this sale can be utilized to build other growth opportunities.

Subsequent to the effective date of the sale, Cortelco Shanghai’s financial statements will no longer be consolidated with eOn. For the year ended July 31, 2005, Cortelco Shanghai had revenues of $8,769,000 and net income after minority interest of $189,000.

The Company’s principal executive offices are located at 4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144. The telephone number at that address is (770) 423-2200. The Company was incorporated in Delaware in July 1991, and in 1993 we became a subsidiary of Cortelco Systems Holding Corporation (“CSHC”). In March 1997, our subsidiary in the automatic call distribution products business was spun off to the CSHC stockholders, merged with Business Communications Systems, Inc., and renamed BCS Technologies, Inc. (“BCS”). In April 1999, CSHC distributed its shares of eOn in a spin-off transaction, we acquired Cortelco Systems Puerto Rico, Inc. (“CSPR”), another subsidiary of CSHC, and we acquired BCS. CSPR was subsequently spun-off to eOn shareholders on July 31, 2002.

BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS

eOn continues to focus resources on developing and marketing products that help businesses communicate more effectively and efficiently with their customers. The demand for consistent and personalized experiences across all forms of interactions—voice, email, and the Web—puts customers in the driver’s seat and at the forefront of a new era in customer interaction management. eOn understands the relationship between customer satisfaction and company success and has created solutions that embrace the customer driven environment by providing companies the capability to deliver seamless customer experiences across all types of media.

The award-winning eQueue^® Multi-Media Contact Center is our proven solution to customers who are looking to evolve from being a traditional call center company to a multimedia contact center. Unlike traditional telecom solutions, the eQueue System is designed to replace proprietary communication devices such as Private Branch Exchanges (PBX), Automatic Call Distributors (ACD), Interactive Voice Response (IVR) systems, recording systems, workforce management systems, voice mail systems, and Computer Telephony Integration (CTI) middleware systems with an all-in-one, fully blended communications system. Because the eQueue platform is built on an “open” unified architecture, organizations can eliminate the need for complex communications systems integration while reducing start-up and maintenance costs, simplifying administration, and increasing ease of customization. In addition, the eQueue can distribute and manage email and web-based interactions, making this a true multi-media contact center solution. The eQueue enables enterprises to communicate more effectively with customers, lowers operational costs and increases agent productivity.

eOn Millennium^® Digital Communications Platform is a proven solution for small and medium-sized installations requiring general business communication. Blending voice, data, wireless and CTI technology into one diverse telephony server platform, the Millennium’s adaptability and flexibility make it ideal for multi-site networks such as school systems, multi-tenant services, professional offices, distribution facilities, and retail stores. The Millennium provides integrated voice mail, unified messaging, fax messaging and an array of capabilities to help employees work more efficiently, access information more easily, and serve customers better.

4

eQueue Multi-Media Contact Center Solution

The eOn eQueue solution offers many advantages in the complex and competitive customer interaction management marketplace.

• Universal Queue

The eQueue’s universal queue approach enables contact centers to more efficiently interact with their customers regardless of the media. The capability not only provides customers with consistent interaction management across all media, but also includes extensive skills-based routing for all contacts that can match the most appropriate resource to a customer’s need.

• Comprehensive

The eQueue offers comprehensive applications including ACD with skills based routing, PBX with VoIP capabilities, email and web chat applications with an integrated knowledge base, integrated voice response, voice mail with unified messaging, quality assurance recording, workforce management and a complete range of desktop devices and applications.

• Open

The eQueue is an open standards-based solution based on the Linux^™ operating system. Using an open solution not only provides for ease of integration, but also provides the contact center with support for evolving future needs.

• Modular

The eQueue provides the flexibility to add, combine and customize important features and functions to meet the individual needs of a contact center. The eQueue is compatible with most third party systems, allowing companies the ability to integrate other applications.

• Scalable

For contact centers with as few as 10 agents to those with over 1000 agents, the eQueue provides the functionality required.

• Proven

With a quarter century of contact center expertise, eOn serves over 8,000 customers in a variety of markets including Multi-Media Contact Centers, Traditional Call Centers, General Business Applications, Service Providers and Emergency 911 Centers. The eQueue is a fully redundant solution designed to perform in a mission-critical environment.

Benefits of an eQueue Solution

The benefits of using an eQueue include improved customer satisfaction, retention and loyalty, increased agent productivity and lower total cost of ownership.

• Improved Customer Satisfaction, Retention & Loyalty

Outstanding customer service is the primary goal of most companies. Attaining this goal is often the direct result of how effectively voice calls, emails and web-based communications are routed and managed within the contact center. The eQueue provides a universal queue together with a common management interface for all types of customer contacts. This, combined with powerful skills-based routing capabilities, ensures that contact centers can match the best possible resource to meet a customer’s need consistently across all media types. Additionally, the eQueue’s open platform provides ease of integration with customer relationship management (“CRM”) and other enterprise applications,

5

allowing a high level of business-driven management of all customer interactions. This enables improved customer satisfaction and retention with consistent service delivery across all contact channels.

• Increased Productivity

Multi-media contact blending is one way to significantly improve productivity. In traditional call centers, individual agents can only handle one contact type, such as voice calls. Therefore, different pools of agents must be created to manage different forms of media. To cover peak demand times, each unique agent pool must be staffed to maximum capacity. With the eQueue, however, all agents can effectively handle all types of contacts, coverage is more flexible, fewer agents can handle the same demand, and idle agents can be minimized. Agent productivity is also increased through the use of features such as skills-based routing, remote agent support, unified reporting for all media types, quality monitoring and dynamic supervisory control.

• Lower Total Cost of Ownership

The eQueue solution offers an overall total lower cost of ownership—lower capital costs and lower operating costs, which equates to a higher return on investment. Integration costs are kept to a minimum with eQueue’s comprehensive applications and open platform. Because the eQueue architecture is open and modular, the contact center is also prepared for future growth.

Millennium Digital Communications Platform

The Millennium is a modular, multi-shelf system combining innovative hardware design with the flexibility of easily configurable software supporting both basic and complex telephony operations. It is an extremely flexible system that can be configured to operate as a PBX, key system, hybrid, tandem switch channel bank or as a conduit for data applications. The Millennium is digital end-to-end and VoIP compatible. Its system design is based on distributed processing and DSP technology. It offers businesses many advantages:

• Voice over Internet Protocol (VoIP)

Choosing the right solution for enterprise communications needs should not be constrained by technology limitations. The Millennium System offers full support of VoIP, digital and analog technologies—enabling businesses to deploy traditional, IP telephony or a combination of both when and where it’s appropriate for the organization. Whether the need is to connect several phones in an office, hundreds of phones in a campus environment or clusters of remote workers, Millennium VoIP enables the creation of a virtual enterprise, maximizing employee productivity while reducing networking and equipment costs.

• Advanced Call Routing

The Millennium offers a rich collection of sophisticated call routing features necessary to intelligently route calls to the appropriate resource throughout the enterprise. Call routing plans can be simple or complex, depending on business requirements. The Millennium supports up to 64 call routing plans, with each plan allowing for 60 different sequences of instructions for customized call handling needs.

• Flexible Networking Options

The Millennium offers cost-effective, results oriented solutions for a variety of unique networking applications. From campus environments to distributed call centers, the Millennium provides networking capabilities and unmatched data connectivity in industries where a communications hub is required to provide a central point of entry into a system or network.

6

• Multimedia Messaging

With the Millennium’s unified messaging option, employees and customers can use the communications medium that they prefer or that is convenient—any combination of voice, fax, or email. The unified messaging option module provides users the ability to access and manage all of their voice, fax and email messages together from a single, highly intuitive interface.

• Automatic Call Distribution

Automatic Call Distribution (ACD) is an effective tool both for handling a high volume of calls and managing call center operations. It is also a tool that small to medium sized call centers need, but they often do not want the burdens that can accompany full-featured ACD equipment. The Millennium offers the perfect solution by providing powerful call routing capabilities that easily distribute calls to equalize the workload across employees and provide callers with prompt service.

• Flexible Desktop Solutions

The Millennium offers a broad selection of telephones and desktop appliances to meet the communications needs of any employee. Multiple models of VoIP and traditional phones, as well as button expansion modules are offered that provide easy access to the Millennium’s sophisticated call processing features.

Millennium Business Benefits

Business communications powered by the Millennium Digital Communications Platform give employees productivity enhancing features that enable new levels of collaboration and productivity. All forms of networking technology are supported, including VoIP, digital as well as traditional. This gives enterprises the option to deploy advanced technologies and at the same time, preserve investment in legacy applications and investments. Lastly, since the Millennium system offers a wide variety of advanced communications solutions, enterprises can invest in one comprehensive platform that meets the needs of the entire enterprise. This lowers the total cost of ownership and simplifies ongoing administrative and expansion needs.

STRATEGY

eOn will continue to work towards being the recognized global leader in providing comprehensive contact center solutions and enterprise communications solutions. Key elements of our strategy for future growth are as follows:

• Provide Migration Paths to Encourage Millennium Customer VoIP Adoption

eOn’s 8000+ Millennium customers require that they be able to support more IP based applications. Since the Millennium has a hybrid architecture that supports traditional TDM switching and IP-based technology, eOn is able to provide a solution that allows users to migrate to IP at their own pace and ultimately reap the cost savings and business performance enhancement benefits of converged networks. eOn plans to implement customer migration programs to encourage IP adoption, while preserving a customer’s existing investment in the Millennium system. We believe this will lead to both short-term and long-term growth.

• Grow Our eQueue Business

We believe excellent opportunities lie with our eQueue Multi-Media Contact Center Solution. We believe we have an architectural advantage over other companies that will enable eOn to respond quickly to opportunities with our eQueue solution. We will also broaden our core routing and voice services applications by offering products such as workforce management and VoIP. eOn will not only gain new opportunities for revenue generation with these additional offerings, but we will also enhance our ability to win competitive bids. Moreover, providing next-generation capabilities such as universal

7

queuing, workforce optimization, and IP-enablement demonstrates that eOn will be able to meet its client’s current and future needs. Today, eOn offers one of the most comprehensive solutions available, and we will continue to broaden our product line to maintain this competitive advantage.

• Differentiate with Enhanced Professional Services

We have already positioned the company as a total solution provider, as we have the software, hardware and the services required to deliver the most advanced products and services in the industry. However, we believe that enhancing our professional services capabilities will serve as a key point of differentiation in the contact center and enterprise business communications market. Providing enhanced services such as customization, system integration and business process consulting are ways to demonstrate to users that eOn truly understands and is able to address their business challenges. eOn has the expertise and reference base to offer the types of services necessary to succeed in this area.

• Expand Market Presence through Partnering

eOn has had success in recent years in penetrating new markets and generating new revenue streams by establishing distribution and technology partnerships. Examples include recent success in the deployment of large scale eQueue systems in Korea and China and the use of eQueue technology in the delivery of hosted contact center services in the United States. eOn will continue to seek and create partnerships as necessary in order to capitalize on emerging market opportunities.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

We have already established a reputation for product innovation. In 1997, eOn was one of the first companies to develop a communications server using the open standards-based Linux^™ operating system, and in 2000, we became one of the first companies to deliver a single queuing multi-media contact center solution. Since then we have won numerous industry awards for product innovation and service, and we have successfully competed for and won the business of prestigious and demanding customers. We will continue to enhance this reputation as we believe that we have a unique opportunity to gain new customers among companies that wish to acquire comprehensive and proven contact center and business communications solutions. We believe our extensive experience in voice communications and call center systems provides us with a strategic advantage for offering an integrated voice and Internet communications product line.

Our products and products under development include a broad line of next-generation communications servers and software.

eQueue Multi-Media Contact Center Solution

The eQueue Multi-Media Contact Center Solution is designed for mission-critical contact center environments and has won numerous industry awards during previous years. The eQueue incorporates a comprehensive range of applications including:

• eQueue ACD

We built the eQueue from the platform up with an understanding of the critical nature of call center operations, and the eQueue ACD application is at the core of the eQueue solution. Our redundant, reliable, fault-tolerant system platform is used to deploy mission-critical business communications. The eQueue has a single robust routing engine for all contact types and is designed with comprehensive and flexible routing capabilities. The eQueue gives contact centers several key routing differentiators, including a single multi-media queue for all contact types, powerful skills based routing across all media types, real-time supervision, and virtual agent groups. Effective customer service is a direct result of contact centers routing customers to the right agents quickly and efficiently. Enhancements to eQueue ACD are incorporated into our development initiatives.

8

• eQueue PBX

The eQueue comes complete with a rich set of telephony features, telephony grade reliability, comprehensive PBX capabilities, multi-featured phones, PC phones, and networking interfaces. The eQueue has a hybrid architecture that supports traditional TDM switching infrastructure and IP-based technology, including the support of VoIP capabilities. Enhancements to eQueue PBX capabilities, including new multi-feature phones, additional VoIP functionality and redundancy enhancements are incorporated into our development initiatives.

• eQueue Email & Chat

eQueue Email and eQueue Chat applications are options that allow agents to interact with online customers quickly and easily. Emails and Chat sessions are received in queue with voice calls and then delivered to agents based on defined skill sets and priorities. Using an intuitive browser-based interface, agents can respond to email contacts and web chat sessions efficiently and can select automatic responses to FAQ’s from the shared knowledge base. eQueue Email & Chat integrates with other eQueue applications to offer extensive real-time and historical reporting, secured multi-domain support, dynamic routing, instant messaging and more. Enhancements to eQueue Email & Chat applications are incorporated into our development initiatives.

• eQueue IVR

The eQueue Interactive Voice Response (IVR) provides contact centers with a customer self-service option by providing unlimited voice announcements, customized greetings, variable delay messages, and interactive multi-level menu selections. With advanced scripting, thousands of customized voice files can be selected and combined so callers hear promotional, call status, and informational updates. Additionally, the eQueue IVR offers features that give contact centers an advantage in servicing their customers, such as real-time statistics, whisper announce, automated paging, callback and web callback. Enhancements to eQueue IVR are incorporated into our development initiatives.

• eQueue Recording

eQueue Recording is an application that allows agent and/or customer interactions to be recorded and stored for later review. eQueue Recording supports two distinct recording types: On-Demand Recording and Quality Assurance Recording. Agents can initiate an On-Demand Recording session at any time during the call by simply pressing a button on their phone or screen. Quality Assurance Recording sessions, on the other hand, are automatically activated based on the agent’s group, type of call, number of calls previously recorded for the agent and number of calls previously recorded for the group. A client application provided with this feature allows supervisors to schedule, maintain and administer all recordings from their desktop. Enhancements to eQueue Recording are incorporated into our development initiatives.

• eQueue Messaging

In addition to voice mail capabilities, eQueue Messaging brings unified messaging to the contact center. In particular eQueue Messaging enables a customer service department to handle and access fax correspondence using the same business processes that handle voice and email inquiries. eQueue Messaging offers an array of features from one intuitive user-friendly interface. eQueue Voice Mail is an integrated voice communications system that offers a wide range of voice messaging options for all users. Within contact centers, eQueue Voice Mail gives callers the option of leaving a voice message instead of waiting in queue, thereby empowering the caller and enhancing the customer contact experience.

• eQueue Reporting

eQueue Reporting provides flexible standard and custom reports and displays, available in both real-time and historical formats, giving contact centers the information needed in any form to manage

9

contact center efficiency, agent performance, and service delivery levels. The unified architecture of the eQueue uses a single, standards-based reporting engine to track contact center resources, applications and interactions. Because of this architecture, eQueue Reporting enables companies to build comprehensive, end-to-end management reports that can also include information from multiple disparate systems. eQueue Reporting delivers consolidated data for voice, email and Web that is timely, easily accessible and presented in a form that fits the unique needs of a contact center. eOn Supervisor WorkSpace is Java^™-based and provides real-time management displays and alerts and can be fully customized for quick and easy identification of customer contact patterns and trends. With this insight, managers can make more timely and informed decisions about how to enhance service delivery and to improve operational efficiencies. Enhancements to eQueue Reporting are incorporated into our development initiatives.

• eQueue Interfaces

eQueue Interfaces, including industry-standard CTI, gives companies the extensibility and integration tools necessary to customize the eQueue solution to meet the specific needs of the enterprise. The eQueue can be tightly integrated with other enterprise applications—including CRM, knowledge bases, self-service applications and e-commerce systems.

• eQueue WorkForce

In February 2002 eOn entered into a software licensing agreement with GMT Corporation (GMT), to offer GMT’s workforce management application as eQueue Workforce. Through this initiative, eOn and GMT provide an integrated workforce scheduling and forecasting solution that allows customers to have the ability to improve the quality of customer interactions, more closely adhere to service level goals, and lower their contact center workforce costs.

Millennium Voice Switching Platform

The Millennium voice-switching platform is a comprehensive, VoIP-enabled PBX with basic customer contact center and computer telephony integration features. It can be expanded in a modular manner from 32 to 1,024 communication ports and provides enterprises with the ability to increase the number of ports and add new features through the simple installation of add-in cards and software.

The Millennium supports the voice switching needs of enterprises with small to medium-sized installations and includes such features as voice mail, interactive voice response and caller identification. The Millennium also offers an advanced voice processing system with unified messaging that integrates email, voice mail and fax on a personal computer connected to a Millennium port; Auto Attendant, which is an automated answering and routing service; and PC Attendant Console, which provides customized computer telephony integration features that support the needs of various vertical markets.

The Millennium can be used for multi-site networking by using IP or digital networks to connect Millennium platforms in multiple locations or clusters of remote workers thereby creating a private communications network that operates as if all employees were on a single system. The Millennium may also be networked with our eQueue communications server for a range of virtual private network applications.

The Millenniun offers a wide range of desktop telephones and appliances that provide easy access to advanced call processing features. Session Initiated Protocol (SIP) compliant telephones and softphones as well as digital and traditional telephones are supported, giving businesses the option to choose the communications technology and phone appliance that best meets their needs. Since both IP and traditional phones are supported, Millennium users can migrate to IP applications and at the same time, preserve investment in existing legacy applications. With this capability, customers can sample new applications at their own pace without disruption.

10

SALES AND MARKETING

We sell, install, maintain and support our eQueue Multi-Media Contact Center around the globe through our direct sales force and through selected value added resellers (VAR). We sell the Millennium through our network of U.S. based dealers and VAR. Installation and support of Millennium systems is largely performed by the eOn dealer and VAR network.

For the eQueue our marketing objective is to position eOn as the leader in offering multi-media contact center solutions. Our target customer base continues to be midsized businesses that are looking to deploy or replace their legacy ACD systems with next generation multi-media contact center solutions. We will continue to promote solutions within selected market segments, including the U.S. Federal Government, providers of outsourced contact center solutions, catalog and on-line retailers. We will continue to reach prospects in these markets via web-based marketing initiatives, customer referral programs and joint marketing efforts with our US and international dealers and VAR.

RESEARCH AND DEVELOPMENT

The market for our products is characterized by rapidly changing technology, evolving industry standards and frequent product introductions. We believe that our future success depends in large part upon our ability to continue to enhance the functionality and capabilities of our products. We plan to extend the functionality of our hardware and software technology by continuing to invest in research and development, as exemplified by the 2005 acquisition of Aelix Systems during fiscal year 2005. Aelix Systems, located in Bangalore, India, is a developer of telecommunications systems and applications based on internet protocol (IP) technology. The acquisition of Aelix Systems enables eOn to more rapidly capitalize on market opportunities presented by the large-scale adoption of VoIP technology. We believe that this, and other investments in research and development, is critical in our efforts to address the increasingly sophisticated and varied needs of our current and prospective customers. Research and development expense for the years ended July 31, 2005, 2004 and 2003 was $3.2 million, $3.1 million and $2.9 million, respectively.

MANUFACTURING

We currently use two contract manufacturers to produce the Millennium—ACT Electronics, Inc. and Innovative Circuits, Inc. ACT Electronics, Inc., a subsidiary of private investment firm Sun Capital Partners, is comprised of the former U.S. operations of ACT Manufacturing, Inc. ACT Manufacturing filed for bankruptcy in December 2001, and Sun Capital Partners purchased the U.S. operations of ACT Manufacturing in July 2002 through a bankruptcy auction. Both contract manufacturers perform printed circuit board assembly and soldering, in-circuit and functional testing and packaging. We believe that ACT Electronics and Innovative Circuits have sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advances in technology. After final assembly by either manufacturer, we inspect and perform quality assurance testing prior to shipment to our dealers or customers. We make purchases from ACT and Innovative Circuits through purchase orders.

We currently use Clover Electronics, Inc. to perform printed circuit board assembly and soldering, in-circuit and functional testing and packaging of boards for our eQueue product line. We believe that Clover Electronics has sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advances in technology.

We depend on sole source suppliers for certain components, digital signal processors and chip sets, and voice processor boards. Interruptions in the availability of components from our key suppliers could result in delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate suppliers or modifying product designs to use alternative components could cause delays and expenses.

11

COMPETITION

The competitive arena for our products is changing very rapidly. Well-established companies and many emerging companies are developing products to address the PBX, ACD and Multi-Media Contact Center markets. While the industry remains fragmented, it is rapidly moving toward consolidation, driven by both emerging companies’ desires to expand product offerings and established companies’ attempts to acquire new technology and reach new market segments. Most established competitors, as well as those emerging companies that have completed initial public offerings, currently have greater resources and market presence than we do.

We compete on the basis of providing reliable integrated voice and data communications systems that can be customized and configured rapidly and at a low cost. Although we believe that we compete favorably with respect to these factors, we may not be successful in this rapidly changing and highly competitive market.

Many of our current and potential competitors have significantly greater financial, technical, marketing, customer service and other resources, greater name recognition and a larger installed customer base than we do. Therefore, our competitors may be able to respond to new or emerging technologies and changes faster than we can. They may also be able to devote greater resources to the development, promotion and sale of their products. Actions by our competitors could result in price reductions, reduced margins and loss of market share, any of which would damage our business.

Our current and potential competitors can be grouped into the following categories:

• Contact Center Vendors

Our major competitors for the eQueue are the traditional ACD or call center vendors who have large customer bases, brand recognition, reliable scaleable product offerings and have extensive experience with voice applications. However, their contact center solutions often consist of multiple separate technologies with little integration, have proprietary system architectures, and are expensive. These competitors include Avaya, Nortel Networks, and Aspect Communications. We also face competition from other contact center competitors that feature integrated applications (all-in-one products) that are built on Intel hardware platforms. These competitors have reduced the need for systems integration and are often aggressively priced, but also lack brand recognition and do not have the depth of telephony capability of the traditional vendors. These vendors include Interactive Intelligence and Nuera.

• Data Communications Equipment Suppliers

Many data communications equipment suppliers have a strategic objective of penetrating the voice communications and customer interaction management market, thereby substantially expanding their total served market. Foremost of these data-centric companies pursuing this strategy is Cisco Systems. Although data communications companies generally do not have substantial experience with voice communications systems, these companies can be expected to compete intensely in this market.

• Email Management and Web Center Software Suppliers

There are many competitors that supply software for managing the rapidly increasing volumes of web and email communications for e-commerce. These competitors’ products and services manage inbound and outbound email and web-based communications, while facilitating the delivery of specific and personalized information to each customer. They strive to enable e-businesses to enhance customer relationships, generate additional revenue opportunities, and reduce the cost of online communications. Email and Web center software competitors include eGain, Kana Communications, and Live Person. We intend to compete in the web center software and services market by providing integrated voice and data communications in a contact center environment or providing a direct upgrade path from a Web center to an integrated contact center.

• Application Solution or Hosted Solution Providers

An emerging area for eQueue competitors are firms that deliver contact center functionality from a web based platform. Telephony @ Work, Five9, and UCN are examples of companies offering this model in

12

the market place. Advantages typically promoted are investment flexibility with monthly or transaction based licensing, immediate access to technology upgrades, and disaster recovery options. Business issues that must be considered include IP voice quality, system and application scalability, and limitations in system management and control.

• Voice Communications Equipment Suppliers

Our major competitors for the Millennium are the companies that provide products for the traditional voice communications market. These products include PBXs, voicemail systems and related products that have generally been based on proprietary hardware and software. These companies are expanding beyond traditional voice based communications into IP based voice and data communications. These companies include Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.

INTELLECTUAL PROPERTY

We rely on patent, trademark, copyright, trade secret protection and confidentiality and license agreements with our employees, clients, partners and others to protect our proprietary rights. We currently have 17 patents issued in the United States and 1 additional patent pending. There can be no assurance that our patent application pending will result in the additional patent being issued.

Our patent position, and that of technology companies in general, involves complex legal and factual questions and, therefore, the validity and enforceability of our patents cannot be predicted with certainty. The steps we have taken to protect our proprietary rights might not be adequate. Third parties might infringe or misappropriate our patents, trade secrets, trademarks and similar proprietary rights. Furthermore, others might independently develop or duplicate technologies similar to ours.

If we fail to protect our intellectual property, our business, financial condition and results of operations could be harmed. In addition, we may have to litigate to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of the proprietary rights of others. Such litigation could result in substantial costs and diversion of management and technical resources, which could harm our business, financial condition and results of operations.

“eOn,” “eQueue,” “Millennium” & “WorkSpace” are trademarks of eOn.

EMPLOYEES

As of July 31, 2005, we employed 173 people. We had 43 employees in the United States, 18 in India, 108 in China and 4 in Korea. The mix of employees was 24 in sales and marketing, 101 in research, development, and professional services, and 48 in finance and administration. We also employ independent contractors and temporary employees. None of our employees are represented by a labor union, and we consider our employee relations to be good.

EXECUTIVE OFFICERS

The following table sets forth information about our executive officers:

NAME	AGE	POSITION
David E. Lee	68	Chairman and Chief Executive Officer
Stephen R. Bowling	63	Chief Financial Officer
Mitch C. Gilstrap	44	Chief Operating Officer

DAVID S. LEE, became the Chairman of the Board of eOn in 1991 and became President and Chief Executive Officer in November 2003. Previously Mr. Lee served as Chief Executive Officer from May 2000

13

through August 2001. Mr. Lee is a director of ESS Technology, Inc., a provider of semiconductor and software solutions for multimedia applications; iBasis, Inc., a telecommunications company; and Linear Technology Corporation, a semiconductor company. Mr. Lee is also a Regent of the University of California. From 1985 to 1988, Mr. Lee was President and Chairman of Data Technology Corporation, a computer peripheral company. Prior to 1985, he was Group Executive and Chairman of the Business Information Systems Group of ITT Corporation, a diversified company, and President of ITT Qume, formerly Qume Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded Qume Corporation and was its Executive Vice President until the company was acquired by ITT Corporation in 1978. Mr. Lee received an M.S. from North Dakota State University and a B.S. and an honorary doctorate from Montana State University.

STEPHEN R. BOWLING, became a director of eOn in 1993 and Chief Financial Officer in November 2003. From 1994 to 1997, he was the President of eOn and, from 1994 to 1998, he was the Chief Executive Officer of eOn. In 1993, Mr. Bowling became a director of Cortelco Systems Holding Corporation. He was the President and Chief Executive Officer of Cortelco Systems Holding Corporation from 1993 to April 2004. He was the President and Chief Executive Officer of eManage.com, an internet web site service company in 1999 and 2000. eManage.com filed for Chapter 11 bankruptcy in November 2000. Mr. Bowling received an M.B.A. from Stanford University and a B.A. from Williams College.

MITCH C. GILSTRAP, Chief Operating Officer, leads eOn’s U.S. operations and sales teams. Mr. Gilstrap is responsible for sales and sales support, professional services, technical support, engineering, information technology and manufacturing. Joining eOn in February 2001, Mr. Gilstrap drove the product marketing efforts for eOn’s contact center solution within the product management group, and most recently led eOn’s professional services team, including custom application development, installation and delivery, training, maintenance, consulting and project management services. Prior to joining eOn, he served as General Manager of Fusion Point Technologies as well as Vice President of Product Marketing at Syntellect, a provider of contact center self-service solutions. With more than eighteen years experience, Mr. Gilstrap has held positions in senior product marketing and development in the contact center and telecommunications industries for such companies as Sprint and Hitachi. Mr. Gilstrap holds a Bachelor’s degree in Engineering from the Georgia Institute of Technology.

ITEM 2. PROPERTIES.

The Company leases property as detailed in the following table.

LOCATION	APPROXIMATE SIZE	LEASE EXPIRATION DATE	INTENDED USE
Kennesaw, Georgia, USA	40,000 sq. ft.	December 2006	Office and Warehouse
Shanghai, Peoples Republic of China	25,000 sq. ft.	February 2008	Office
Shanghai, Peoples Republic of China	10,000 sq. ft.	June 2010	Warehouse
Beijing, Peoples Republic of China	2,000 sq. ft.	May 2006	Office
Seoul, Korea	2,000 sq. ft.	December 2005	Office
Bangalore, India	2,200 sq. ft.	December 2006	Office

Aggregate annual rental payments for the Company’s facilities are approximately $0.5 million. The Company’s current facilities are generally adequate for anticipated needs over the next 12 to 24 months. The Company does not own any real property.

ITEM 3. LEGAL PROCEEDINGS.

From time to time, we may be a party to legal proceedings incidental to our business. We do not believe that any of these proceedings will have a material adverse effect on our business or financial condition.

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

None.

14

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES.

PRICE RANGE OF COMMON STOCK AND DIVIDENDS

Our common stock began trading on the NASDAQ Stock Market under the symbol EONC on February 4, 2000. Prior to that date, there was no public market for our common stock. The following table sets forth, for the fiscal quarters indicated, the high and low sales prices of our common stock as reported by the NASDAQ Stock Market.

QUARTER ENDED	HIGH		LOW
July 31, 2005	$	1.89	$	1.04
April 30, 2005	$	2.62	$	1.12
January 31, 2005	$	3.31	$	1.32
October 31, 2004	$	1.75	$	0.96
July 31, 2004	$	2.50	$	1.10
April 30, 2004	$	4.17	$	2.09
January 31, 2004	$	4.57	$	2.36
October 31, 2003	$	3.70	$	1.70

The prices in the table above represent inter-dealer prices, without retail mark-up, mark-down or commission and may not reflect actual transactions.

As of September 30, 2005, there were 206 shareholders of record of our common stock and, to the best of our knowledge, approximately 5,000 beneficial owners whose shares of common stock were held in the names of brokers, dealers, and clearing agencies.

During fiscal 2005, we did not declare any cash dividends on our capital stock. We currently intend to retain any earnings to finance the operation and expansion of our business and, therefore, do not expect to pay cash dividends on our common stock in the foreseeable future. Cortelco Shanghai declared a dividend of $300,000 during July 2005, of which $136,000 was paid to the minority shareholder during fiscal year 2005.

Information set forth under the caption “Securities Authorized for Issuance under Equity Compensation Plans” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on January 12, 2006 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2005, are incorporated herein by reference.

15

ITEM 6. SELECTED FINANCIAL DATA.

The selected consolidated financial data represent the results from continuing operations of eOn and its subsidiaries, which exclude the results of Cortelco Systems Puerto Rico, Inc., as the results of this subsidiary’s operations are presented separately on a retroactive basis as a discontinued operation during fiscal year 2002. The statement of operations data set forth below for the fiscal year ended July 31, 2005, and the selected balance sheet data at July 31, 2005, are derived from consolidated financial statements included in Item 8, which have been audited by GHP Horwath, P.C. The consolidated financial statements as of and for the years ended July 31, 2004 and 2003 were audited by Grant Thornton LLP. The reports of the independent registered public accounting firms also appear in Item 8. The consolidated statement of operations data for the years ended July 31, 2002, and 2001, and the consolidated balance sheet data at July 31, 2002, and 2001, are derived from audited consolidated financial statements not included in this report. This data should be read in conjunction with the consolidated financial statements, including the notes thereto, appearing in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

	For the Years Ended July 31,
	2005			2004 (2)			2003			2002			2001
	(in thousands, except per share data)
Consolidated Statement of Operations Data:
Net revenue	$	21,372		$	17,950		$	17,457		$	15,046		$	20,184
Cost of revenue		11,967			8,507			7,478			6,706			9,111
Special charges (1)		—			—			—			752			1,985
Gross profit		9,405			9,443			9,979			7,588			9,088
Operating expenses:
Selling, general and administrative		8,106			7,087			8,667			9,538			14,380
Research and development		3,207			3,106			2,859			2,959			4,340
Goodwill amortization		—			—			—			—			586
Special charges (1)		—			—			(63	)		970			4,714
Total operating expense		11,313			10,193			11,463			13,467			24,020
Loss from operations		(1,908	)		(750	)		(1,484	)		(5,879	)		(14,932	)
Interest income		134			79			99			287			783
Interest expense		—			(29	)		(35	)		(6	)		—
Other income (expense), net		61			(167	)		(84	)		(210	)		(214	)
Loss from continuing operations before income taxes and minority interest		(1,713	)		(867	)		(1,504	)		(5,808	)		(14,363	)
Income tax benefit (expense)		(79	)		(24	)		—			121			45
Loss from continuing operations before minority interest		(1,792	)		(891	)		(1,504	)		(5,687	)		(14,318	)
Minority interest		(159	)		(37	)		—			—			—
Loss from continuing operations		(1,951	)		(928	)		(1,504	)		(5,687	)		(14,318	)
Loss from continuing operations per share:
Basic	$	(0.15	)	$	(0.07	)	$	(0.12	)	$	(0.47	)	$	(1.19	)
Diluted	$	(0.15	)	$	(0.07	)	$	(0.12	)	$	(0.47	)	$	(1.19	)
Weighted average shares outstanding:
Basic		12,853			12,522			12,091			12,013			12,040
Diluted		12,853			12,522			12,091			12,013			12,040
Cash dividends per common share, basic and diluted	$	—		$	—		$	—		$	—		$	—
Consolidated Balance Sheet Data:
Cash and cash equivalents	$	3,880		$	4,679		$	3,221		$	2,682		$	3,590
Marketable securities		3,600			4,200			4,200			6,610			8,850
Working capital		8,074			9,715			8,313			9,855			20,591
Goodwill, net		21			—			—			—			10,375
Total assets		17,129			22,295			13,717			15,970			39,914
Long-term debt		—			—			—			613			—
Total stockholders’ equity		7,655			9,459			9,464			10,900			34,077

16

(1) In fiscal year 2001, the Company entered into a restructuring plan that resulted in the write-down of inventory, termination of employees, impairment of assets, and accrual of expected costs associated with excess space. An additional charge was recorded in fiscal year 2002, primarily to reflect the financial impact of the sublease termination agreement for the facilities in Memphis, Tennessee and a noncash valuation charge for excess inventory. In fiscal year 2003, a special charge expense reversal was recorded upon the favorable settlement of all outstanding property tax liabilities associated with the former facility in Memphis, Tennessee (see Footnote 4 to the consolidated financial statements).

(2) On June 1, 2004 we acquired a controlling interest in Cortelco Shanghai Telecom Equipment Company. Cortelco Shanghai’s results of operations have been included with our results of operations since the acquisition date.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

OVERVIEW

We design, develop and market next-generation voice-switching platforms and communications servers and software which integrate and manage voice, email and Internet communications for customer contact centers and general business applications.

On June 1, 2004 eOn purchased a controlling interest in Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”). Cortelco Shanghai is an established telecommunications company with a significant customer base throughout China that provides telecommunications products in China. These products include fiber optic transmission equipment, data communications systems, and network management software.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions. We believe that our critical accounting policies are limited to those described below. For a detailed description of our accounting policies, see Footnote 3, “Summary of Significant Accounting Policies,” in the notes to the consolidated financial statements.

Revenue Recognition

Revenues from our products are recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectibility is reasonably assured. Generally, revenue is recognized (1) upon shipment for equipment and software, (2) as work is performed for professional services, and (3) in equal periodic amounts over the term of the contract for software and hardware maintenance. The Company’s revenue recognition policies are in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition,” and Statement of Position No. 97-2, “Software Revenue Recognition”.

Product Warranties

We generally provide customers a one year product warranty from the date of purchase. We estimate the costs of satisfying warranty claims based on analysis of past claims experience and provide for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 2% of revenues, has historically been comprised of materials and direct labor costs. We perform quarterly evaluations of these estimates and any changes in estimates which could potentially be significant are included in earnings in the period in which the evaluations are completed.

Inventory Obsolescence

We carry inventories at the lower of cost or market. This policy depends on the timely identification of those items included in inventory whose market price may have declined below carrying value, such as

17

slow-moving or obsolete items, and we record any necessary valuation reserves. We perform an analysis of slow-moving or obsolete inventory on a quarterly basis, and any necessary valuation reserves, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.

Allowance for Uncollectible Accounts Receivable

We typically grant standard credit terms to customers in good credit standing. As a result, we must estimate the portion of our accounts receivable that are uncollectible and record any necessary valuation reserves. We generally reserve for estimated uncollectible accounts on a customer-by-customer basis, which requires us to make judgments about each individual customer’s ability and intention to fully pay balances payable to us. We make these judgments based on our knowledge of and relationships with our customers, and we update our estimates on a monthly basis. Any changes in estimate, which can be significant, are included in earnings in the period in which the change in estimate occurs.

Deferred Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Because of substantial losses in prior years, primarily during the years 2000 through 2002, the Company has available net operating loss (“NOL”) carryforwards of $20.1 million.

Accounting principles generally accepted in the United States of America require the recording of a valuation allowance against the net deferred tax asset associated with this NOL and other timing differences if it is “more likely than not” that the Company will not be able to utilize the NOL to offset future taxes. Due to the size of the NOL carryforward in relation to the Company’s taxable income in recent years and to the continuing uncertainties surrounding future earnings, management has not recognized any of its net deferred tax asset. Because this asset has been offset by a valuation allowance, the Company currently provides for income taxes only to the extent of expected cash payments of taxes, primarily state and foreign income taxes, for current income.

Should the Company’s earnings trend cause management to conclude that it is more likely than not the Company will realize all or a material portion of the NOL carryforward, management would record the estimated net realizable value of its deferred tax asset at that time. The Company would then provide for income taxes at a rate equal to its combined federal and state effective rates, which would approximate 39% under current tax rates. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause the provision for income taxes to vary significantly from period to period, although the Company’s cash tax payments would remain unaffected until the benefit of the NOL is utilized.

18

RESULTS OF OPERATIONS

The following table presents our operating ratios for fiscal years 2005, 2004, and 2003:

	For the Years Ended July 31,
	2005		2004		2003
Net revenue	100.0	%	100.0	%	100.0	%
Cost of revenue	56.0	%	47.4	%	42.8	%
Gross profit	44.0	%	52.6	%	57.2	%
Operating expenses:
Selling, general and administrative	37.9	%	39.5	%	49.7	%
Research and development	15.0	%	17.3	%	16.4	%
Special charges	0.0	%	0.0	%	(0.4	%)
Total operating expense	52.9	%	56.8	%	65.7	%
Loss from operations	(8.9	%)	(4.2	%)	(8.5	%)
Interest income, net of interest expense	0.6	%	0.2	%	0.4	%
Other (income) expense, net	0.3	%	(0.9	%)	(0.5	%)
Loss before income taxes and minority interest	(8.0	%)	(4.9	%)	(8.6	%)
Income tax expense	(0.4	%)	(0.1	%)	0.0	%
Loss before minority interest	(8.4	%)	(5.0	%)	(8.6	%)
Minority Interest	(0.7	%)	(0.2	%)	0.0	%
Net loss	(9.1	%)	(5.2	%)	(8.6	%)

NET REVENUE

Net revenue increased 19.1% to $21.4 million for the year ended July 31, 2005 from $18.0 million for the previous fiscal year. The increase reflects the inclusion of a full year of Cortelco Shanghai revenue, versus two months during fiscal year 2004, partially offset by decreases in revenue for both our eQueue and Millennium products. Net revenue for the year ended July 31, 2004 increased 2.8% from $17.5 million for the 2003 fiscal year. The increase during fiscal year 2004 reflects additional revenue recognized by Cortelco Shanghai, partially offset by a decrease in revenues from our eQueue product.

COST OF REVENUE AND GROSS PROFIT

Cost of revenue is primarily comprised of purchases from our contract manufacturers and other suppliers and costs incurred for final assembly of our systems. Gross profit decreased 0.4% to $9.4 million for the year ended July 31, 2005 compared to the previous fiscal year, reflecting declines in our gross profit for our eQueue and Millennium product lines, offset by an increase in gross profit from Cortelco Shanghai. The decrease in gross profit during 2004 was primarily due to decreased revenue from our higher margined eQueue products. Our gross margins, excluding any special charges, were 44.0%, 52.6%, and 57.2% for fiscal years 2005, 2004, and 2003, respectively. The change in gross margin from year-to-year is primarily a function of changes in product mix, rather than changes in pricing and/or costs. Additionally, Cortelco Shanghai gross profit is significantly less than our domestic gross profit and during fiscal 2005 revenue from Cortelco Shanghai was 41% of our total revenues compared to 12.7% during fiscal year 2004.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses were $8.1 million for the year ended July 31, 2005, an increase of 14.4% from $7.1 million in the prior fiscal year. The increase reflects a full year of Cortelco Shanghai expenses and higher bad debt expense related to international receivable balances, partially offset by domestic

19

cost cutting measures implemented by management. Fiscal year 2004 represented an 18.2% decrease from $8.7 million in fiscal 2003. The decrease in fiscal year 2004 resulted from a decrease in personnel and fixed costs from the implementation of our restructuring plan.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses are primarily comprised of personnel and related expenses for our engineering staff. Our research and development efforts are currently concentrated on enhancements for our eQueue and Millennium product lines. Research and development expenses were $3.2 million for the year ended July 31, 2005 which represents a 3.3% increase from $3.1 million in fiscal year 2004. The increase was primarily due to increased development on our Millennium product. Fiscal year 2004 expenses increased 8.6% from $2.9 million in fiscal year 2003.

INTEREST INCOME AND EXPENSE

Interest income was $134,000, $79,000 and $99,000 in fiscal years 2005, 2004 and 2003. The increase in fiscal year 2005 reflects rising interest rates throughout the year. The decrease in fiscal year 2004 reflected significantly lower interest rates and a lower level of investments in marketable securities.

Interest expense was $29,000 and $35,000 in fiscal years 2004 and 2003, respectively. The interest expense was primarily due to the imputation of interest on the note payable associated with the termination of the lease on the Memphis facility.

OTHER INCOME AND EXPENSE, NET

Other income was $61,000 in fiscal 2005 compared to other expense of $167,000 in fiscal 2004 and other expense of $84,000 in fiscal 2003. The income during fiscal year 2005 was the result of reversing a reserve established in fiscal year 2004 for a bankruptcy judgment that occurred during 2001.

INCOME TAX EXPENSE

Income tax expense was $79,000 for fiscal year 2005 compared to $24,000 for fiscal year 2004 and represented Chinese income tax from the operations of Cortelco Shanghai. The increase was a result of a full year of operations for Cortelco Shanghai during fiscal 2005 compared to fiscal year 2004.

SUPPLEMENTAL PRO FORMA INFORMATION (UNAUDITED)

We are providing unaudited pro forma information regarding the acquisition of Cortelco Shanghai. These pro forma results assume that the acquisition had been completed as of August 1, 2001 and therefore presents revenues and net income of us and all our subsidiaries for each fiscal year.

	Fiscal Year Ended July 31,
	2004			2003			2002
	(in thousands)
Net Revenue	$	24,336		$	28,295		$	32,310
Net income (loss) before extraordinary items		(805	)		(1,215	)		(5,381	)
Net income (loss) before cumulative effect of accounting change		(805	)		(1,215	)		(8,014	)
Net income (loss)		(805	)		(1,215	)		(18,389	)
Earnings per share		(0.06	)		(0.10	)		(1.53	)

20

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2005, we had cash and cash equivalents of $3.9 million, $3.6 million in short term investments, and a working capital balance of $8.1 million. Our short term investments are primarily invested in taxable auction rate securities with frequent rate resets and high grade corporate obligations with maturities less than one year.

Our operating activities resulted in net cash outflows of $1.1 million, $1.3 million, and $1.1 million for fiscal years 2005, 2004, and 2003, respectively. The net operating cash for the current fiscal year was primarily the result of a reduction in our accounts receivable and prepaid and other expenses (primarily customer deposits and advances to suppliers), partially offset by our operating loss (adjusted for non cash items), a decrease in our accounts payable and notes payable and an increase in our notes receivable The net operating cash for fiscal year 2004 was primarily the result of our operating loss (adjusted for non-cash items) and an increase in accounts receivable, which was partially offset by a reduction in accounts payable. The net operating cash outflow for fiscal year 2003 was primarily the result of our operating loss (adjusted for non-cash items) and an increase in accounts receivable, which were partially offset by a reduction in inventories.

Our investing activities resulted in cash inflows of $0.3 million, $2.9 million, and $2.2 million in fiscal years 2005, 2004, and 2003, respectively. Cash provided by investing activities during fiscal year 2005 were related to the sale of marketable securities, partially offset by purchases of property and equipment. Cash provided by investing activities during fiscal year 2004 consisted primarily of $3.1 million in cash acquired with the acquisition of Cortelco Shanghai offset by the purchase of property and equipment. Cash provided by investing activities during fiscal year 2003 consisted primarily of $3.9 million in net sales of marketable securities, partially offset by purchases of marketable securities of $1.5 million.

Our financing activities have resulted in cash outflows of $0.1 million, $0.1 million and $0.6 million in fiscal years 2005, 2004, and 2003, respectively. Cash used during fiscal 2005 was attributable to $0.1 million in cash dividends paid to the minority interest shareholder, offset by proceeds from the employee stock purchase plan and the exercise of employee stock options. During 2004, payments against the note payable issued in connection with the lease termination agreement for our former facility in Memphis, Tennessee were partially offset by proceeds from the employee stock purchase plan and the exercise of employee stock options. Cash used in financing activities during fiscal 2003 consisted primarily of payments against the note payable issued in connection with the lease termination agreement for our former facility in Memphis, Tennessee.

We believe that our available funds will satisfy our projected working capital and capital expenditure requirements for at least the next twelve months. To the extent future revenues are not realized or we grow more rapidly than expected, we may need additional cash to finance our operating activities and capital expenditures. Should we need financing, there can be no assurances that financing will be available to us on economically acceptable terms.

Liquidity

Since inception, the Company has financed its operations through debt financing and proceeds generated from public offerings of its common stock. The proceeds from these transactions have been used primarily to fund research and development costs, and selling, general and administrative expenses. Additionally, since inception, the Company has invested approximately $4.8 million in capital expenditures.

The Company has incurred substantial net operating losses since inception and negative cash flows from operating activities through July 31, 2005; resulting in an accumulated deficit of $45.4 million. During fiscal year 2005, cash and cash equivalents and short term investments declined from $8.9 million to $7.5 million, largely due to the operating loss of $2.0 million.

The Company incurred a loss of $2.0 million in fiscal year 2005. As of July 31, 2005, the Company had $4.5 million in cash and cash equivalents and short term investments in the United States available to fund operations, and Cortelco Shanghai had $3.0 million in cash and cash equivalents to fund its operations.

21

The Company is dependent on available cash, short-term investments and operating cash flow to finance operations and meet its other capital needs. If such sources are not sufficient, alternative funding sources may not be available. The Company believes that cash on hand and short-term marketable securities plus the additional liquidity that it expects to generate from operations will be sufficient to cover its working capital and fund expected capital expenditures over at least the next twelve months.

Capital Resources

We have principally relied on the proceeds from equity and cash provided from operations as our primary sources of capital. While we do not currently anticipate the need to raise additional capital to meet our operating and capital expenditure requirements in the foreseeable future, our funding status is dependent on a number of factors influencing projections of operating cash flows, including those related to profit margins, controlling selling, general and administrative costs and research and development costs. Further, we believe that the cash and short-term investment securities on hand plus the additional liquidity that we expect to generate from operations will be sufficient to meet the cash requirements of the business including capital expenditures and working capital needs for at least the next twelve months. Should actual results differ significantly from our current assumptions, our liquidity position could be adversely affected and we could be in a position that would require us to raise additional capital, which may not be available to us or may not be available on acceptable terms.

COMMITMENTS AND CONTINGENCIES

Contractual Obligations

The Company is obligated to make future payments under various contracts it has entered into, including amounts pursuant to non-cancelable operating lease agreements for office and warehouse space and inventory purchase obligations. Expected future minimum contractual cash obligations for the next five years and in the aggregate at July 31, 2005 are as follows (in thousands):

	Payments Due by Period for the Years Ending July 31,
	Total		2006		2007		2008		2009		2010		Thereafter
Operating leases (1)	$	1,076	$	527	$	337	$	148	$	39	$	25	$	—
Purchase obligations (2)		1,071		1,071		—		—		—		—		—
Total	$	2,147	$	1,598	$	337	$	148	$	39	$	25	$	—

(1) Non-cancelable operating leases do not include payments due under renewals to the original lease term.

(2) Outstanding commitments for purchases of inventory under open purchase orders.

During fiscal 2002, the Company entered into a lease termination agreement for its former facility in Memphis, Tennessee. A $1,400,000 declining balance letter of credit was issued to secure payments under the termination agreement. The balance on the letter of credit was paid off during the first fiscal quarter of 2005.

The Company is involved in various matters of litigation, claims, and assessments arising in the ordinary course of business. In the opinion of management, the eventual disposition of these matters will not have a material adverse effect on the financial statements.

ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

The following risk factors and other information contained in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that are not currently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occurs, our business, financial condition, and operating results could be materially adversely affected.

22

In addition to the other information included in this report, the following factors should be considered in evaluating our business and future prospects.

Fluctuations in our quarterly operating results could cause our stock price to decline.

Future operating results are likely to fluctuate significantly from quarter to quarter. Factors that could affect our quarterly operating results include:

• delays or difficulties in introducing new products;

• increasing expenses without commensurate revenue increases;

• variations in the mix of products sold;

• variations in the timing or size of orders from our customers;

• delayed deliveries from suppliers; and

• price decreases and other actions by our competitors.

Our quarterly operating results are also likely to fluctuate due to seasonal factors. Some of our vertical markets, such as the U.S. government, educational and retail buyers, follow seasonal buying patterns and do not make substantial purchases during the quarters ending January 31. Thus, revenues in the quarters ending January 31 are often lower than in the previous quarters. Because of these and other factors, our operating results may not meet expectations in some future quarters, which could cause our stock price to decline.

Our communications servers face intense competition from many companies that have targeted our markets.

The competitive arena for our products is changing very rapidly and we face intense competition in our markets. Well-established companies and many emerging companies continue to develop products that improve communications, increase employee productivity and lower costs. While the industry remains fragmented, it is rapidly moving toward consolidation. A number of our current competitors have been recently acquired by companies seeking to increase market share and their ability to compete. Additionally, robust open-source products have recently emerged in the market further lowering barriers to market entry and increasing competition.

We expect competition to intensify as competitors develop new products, new competitors enter the market, and companies with complementary products enter into strategic alliances.

Our current and potential competitors can be grouped into the following categories:

• contact center vendors, such as Avaya, Nortel Networks and Aspect Communications;

• data communication equipment suppliers, such as Cisco Systems and 3COM;

• email management and web center software suppliers, such as eGain Communications, Kana Communications, and RightNow Technologies;

• voice communications equipment suppliers, such as Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.

• Customer relationship management (CRM) suppliers such as Oracle, Onyx Software and SalesForce.com.

Many of our current and potential competitors have significantly greater financial, technical, marketing, customer service and other resources, greater name and brand recognition and a larger installed customer base than we do. Therefore, our competitors may be able to respond to new or emerging technologies and changes faster than we can. They may also be able to devote greater resources to the development, promotion and sale of their products.

23

Actions by our competitors could result in price reductions, reduced margins and loss of market share, any of which would damage our business. We cannot assure you that we will be able to compete successfully against these competitors.

If we cannot maintain our indirect sales channels our ability to generate revenue would be harmed.

A significant portion of our revenues are derived from dealers and value added resellers who have no obligation to sell our products. Therefore, dealers and value added resellers could discontinue selling our products at any time in favor of our competitors’ products or for any other reason. A reduction or loss of orders from our dealers and value added resellers could harm our business, operating results and financial condition.

The lengthy sales cycles of some of our products and the difficulty in predicting the timing of our sales may cause fluctuations in our quarterly operating results.

The uncertainty of our sales cycle makes the timing of sales difficult to predict and may cause fluctuations in our quarterly operating results. Our sales cycles generally vary from four to twelve months for our eQueue products and from one to six months for our Millennium voice switching platform. The purchase of our products may involve a significant commitment of our customers’ time, personnel, and financial and other resources. Also, it is difficult to predict the timing of indirect sales because we have little control over the selling activities of our dealers and value added resellers.

We incur substantial sales and marketing expenses and spend significant management time before customers place orders with us, if at all. Revenues from a specific customer may not be recognized in the quarter in which we incur related sales and marketing expense, which may cause us to miss our revenues or earnings expectations.

We face many risks from expanding into foreign markets.

The Company expects to increase sales to customers outside of the United States and establish additional distribution channels in Asia. However, foreign markets for our products may develop more slowly than currently anticipated. eOn may not be able to successfully establish international distribution channels, or may not be able to hire the additional personnel necessary to support such distribution channels.

Our future results could be harmed by economic, political, regulatory and other risks associated with international sales and operations.

Because our growth initiatives include expansion into foreign markets, we are subject to the risks of conducting business outside of the United States, including:

• changes in a specific country’s or region’s political or economic conditions;

• trade protection measures and import or export licensing requirements;

• potentially negative consequences from changes in tax laws;

• difficulty in managing widespread sales and customer service operations; and

• less effective protection of intellectual property.

Our products must respond to rapidly changing market needs and integrate with changing protocols to remain competitive.

The markets for our products are characterized by rapid technological change, frequent new product introductions, uncertain product life cycles and changing customer requirements. If we are not able to rapidly and

24

efficiently develop new products and improve existing products to meet the changing needs of our customers and to adopt changing communications standards, our business, operating results and financial condition would be harmed.

Key features of our products include integration with standard protocols, computer telephony integration and automatic call distribution applications and protocols, operating systems and databases. If our products cannot be integrated with third-party technologies or if they do not respond to changing market needs, we could be required to redesign our products. Redesigning any of our products may require significant resources and could harm our business, operating results and financial condition.

Delayed deliveries of components from our single source suppliers or third-party manufacturers could reduce our revenues or increase our costs.

We depend on sole source suppliers for certain components, digital signal processors and chip sets, and voice processor boards. Interruptions in the availability of components from our key suppliers could result in delays or reductions in product shipments, which could damage our customer relationships and harm our operating results. Finding alternate suppliers or modifying product designs to use alternative components may cause delays and expenses. Further, a significant increase in the price of one or more third-party components or subassemblies could reduce our gross profit.

We depend upon our primary contract manufacturers ACT Electronics, Innovative Circuits, and Clover Electronics. We may not be able to deliver our products on a timely basis if any of these manufacturers fail to manufacture our products and deliver them to us on time. In addition, it could be difficult to engage other manufacturers to build our products. Our business, results of operations and financial condition could be harmed by any delivery delays.

We may be unable to hire and retain engineering and sales and marketing personnel necessary to execute our business strategy.

Competition for highly qualified personnel is intense due to the limited number of people available with the necessary technical skills, and we may not be able to attract, assimilate or retain such personnel. If we cannot attract, hire and retain sufficient qualified personnel, we may not be able to successfully develop, market and sell new products.

Our business could be harmed if we lose principal members of our management team.

We are highly dependent on the continued service of our management team. The loss of any key member of our management team may substantially disrupt our business and could harm our business, results of operations and financial condition. In addition, replacing management personnel could be costly and time consuming.

We are effectively controlled by our principal stockholders and management, which may limit your ability to influence stockholder matters.

As of July 31, 2005, our executive officers, directors and principal stockholders and their affiliates beneficially owned 4,300,147 shares, or 31.7% of the outstanding shares of common stock. Thus, they effectively control us and direct our affairs, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our company and some transactions may be more difficult or impossible without the support of these stockholders. The interests of these stockholders may conflict with those of other stockholders. We also conduct transactions with businesses in which our principal stockholders maintain interests. We believe that these transactions have been conducted on an arm’s length basis, but we cannot assure you that these transactions would have the same terms if conducted with unrelated third parties.

25

We may not be able to protect our intellectual property, and any intellectual property litigation could be expensive and time consuming.

Our business and competitive position could be harmed if we fail to adequately protect our intellectual property. Although we have filed patent applications, we are not certain that our patent applications will result in the issuance of patents, or that any patents issued will provide commercially significant protection to our technology. In addition, as we grow and gain brand recognition, our products are more likely to be subjected to infringement litigation. We could incur substantial costs and may have to divert management and technical resources in order to respond to, defend against, or bring claims related to our intellectual property rights. In addition, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual restrictions to establish and protect our proprietary rights. These statutory and contractual arrangements may not provide sufficient protection to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. Any litigation could result in our expenditure of funds, management time and resources.

Our products may have undetected faults leading to liability claims, which could harm our business.

Our products may contain undetected faults or failures. Any failures of our products could result in significant losses to our customers, particularly in mission-critical applications. A failure could also result in product returns and the loss of, or delay in, market acceptance of our products. In addition, any failure of our products could result in claims against us. Our purchase agreements with our customers typically contain provisions designed to limit our exposure to potential product liability claims. However, the limitation of liability provisions contained in our purchase agreements may not be effective as a result of federal, state or local laws or ordinances or unfavorable judicial decisions in the United States or other countries. We maintain insurance to protect against certain claims associated with the use of our products, but our insurance coverage may not adequately cover all possible claims asserted against us. In addition, even claims that ultimately are unsuccessful could be expensive to defend and consume management time and resources.

Our charter contains certain anti-takeover provisions that may discourage take-over attempts and may reduce our stock price.

Our board of directors has the authority to issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or action by the stockholders. The rights of the holders of common stock may be harmed by the rights of the holders of any preferred stock that may be issued in the future. Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of us without the consent of our board of directors, even if such changes were favored by a majority of the stockholders. These include provisions that provide for a staggered board of directors, prohibit stockholders from taking action by written consent and restrict the ability of stockholders to call special meetings.

Future sales of shares may decrease our stock price.

Sales of substantial amounts of our common stock in the public market, including shares issued upon the exercise of outstanding options, or the perception that such sales could occur, could reduce the market price of our common stock. These sales also might make it more difficult for us to raise funds through future offerings of common stock.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial

26

instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). Mandatorily redeemable instruments (i.e., instruments issued in the form of shares that unconditionally obligate the issuer to redeem the shares for cash or by transferring other assets) are to be reported as liabilities by their issuers. This statement does not affect the classification or measurement of convertible bonds, puttable stock, or other outstanding shares that are conditionally redeemable. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, except for those provisions relating to mandatorily redeemable non-controlling interests, which have been deferred. The adoption of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.

In July 2003, the Emerging Issues Task Force (EITF) reached consensus regarding EITF Issue 03-5, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to nonsoftware deliverables. The consensus addresses whether nonsoftware deliverables in a multiple-element arrangement that includes software that is more than incidental to the products or services as a whole should be within the scope of SOP 97-2, Software Revenue Recognition. The pronouncement is effective prospectively for arrangements entered into after the beginning of an entity’s next reporting period beginning after August 13, 2003. The adoption of EITF Issue 03-5 did not have a material impact on the Company’s results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123(R) Share Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Management is evaluating the provisions of this standard. Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company’s financial position and results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The majority of our cash equivalents and marketable securities are invested in variable rate instruments with frequent rate resets. Because these securities have short effective maturities, we believe the market risk for such holdings is insignificant. We do not have any derivative instruments, and we do not engage in hedging transactions.

The Company is exposed to foreign exchange risks through its subsidiary, Cortelco Shanghai, in China. The Company has not entered into any derivative financial instruments to hedge this exposure and believes that the potential exposure is not material to our overall financial position or its results of operations.

27

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Reports of Independent Registered Public Accounting Firms	29
Consolidated Balance Sheets as of July 31, 2005 and 2004	31
Consolidated Statements of Operations for the Years Ended July 31, 2005, 2004, and 2003	32
Consolidated Statements of Cash Flows for the Years Ended July 31, 2005, 2004, and 2003	33
Consolidated Statements of Stockholders’ Equity for the Years Ended July 31, 2005, 2004 and 2003	34
Notes to Consolidated Financial Statements	35
Schedule II—Valuation and Qualifying Accounts for Each of the Three Years in the Period Ended July 31, 2005	60

28

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

eOn Communications Corporation

We have audited the accompanying consolidated balance sheet of eOn Communications Corporation and subsidiaries as of July 31, 2005 and the related consolidated statements of operations, stockholders’ equity, and cash flows for the year then ended. 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 audit.

We conducted our audit 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eOn Communications Corporation and subsidiaries as of July 31, 2005, and the results of their operations and their cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II, Valuation and Qualifying Accounts listed in the Index at Item 15(A), is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule as of July 31, 2005 and for the year then ended has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ GHP Horwath, P.C.

Denver, Colorado

September 2, 2005, except for Note 20 as to

which the date is October 26, 2005

29

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

eOn Communications Corporation

We have audited the accompanying consolidated balance sheets of eOn Communications Corporation and subsidiary as of July 31, 2004, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the two years in the period ended July 31, 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 controls over financial reporting. Our audit 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 controls 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 audit provides a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of eOn Communications Corporation and subsidiary as of July 31, 2004, and the results of their operations and their cash flows for each of the two years in the period ended July 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

Our audit was conducted for the purpose of forming an opinion on the basic financial statements taken as a whole. The Schedule II, Valuation and Qualifying Accounts listed in the Index at Item 15(A), is presented for purposes of additional analysis and is not a required part of the basic financial statements. The schedule as of July 31, 2004 and 2003 and for the years then ended has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.

/s/ Grant Thornton LLP

Atlanta, Georgia

August 26, 2004

30

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

	As of July 31,
	2005			2004
ASSETS
Current assets:
Cash and cash equivalents	$	3,880		$	4,679
Marketable securities		3,600			4,200
Trade accounts receivable, net of allowance of $1,236 and $756, respectively		3,566			6,656
Trade accounts receivable—related party, net of allowance of $23 and $18 respectively		902			615
Notes receivable		281			528
Notes receivable—related party		1,040			—
Inventories		2,809			2,733
Prepaid and other current assets		325			1,913
Total current assets		16,403			21,324
Property and equipment, net		705			971
Goodwill		21			—
Total assets	$	17,129		$	22,295
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade accounts payable	$	3,112		$	5,394
Trade accounts payable—related party		2,178			2,086
Note payable		—			767
Deferred acquisition payment		914			1,078
Accrued expenses and other		2,125			2,284
Total current liabilities		8,329			11,609
Minority interest		1,145			1,227
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.001 par value, (10,000,000 shares authorized, no shares issued and outstanding)		—			—
Common stock, $0.001 par value (50,000,000 shares authorized, 13,579,957 and 13,487,160 shares issued and outstanding 2005 and 2004, respectively)		13			13
Additional paid-in capital		54,455			54,369
Treasury stock, at cost (676,900 shares)		(1,502	)		(1,502	)
Accumulated deficit		(45,372	)		(43,421	)
Accumulated other comprehensive income		61			—
Total stockholders’ equity		7,655			9,459
Total liabilities and stockholders’ equity	$	17,129		$	22,295

See accompanying notes to the consolidated financial statements.

31

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share amounts)

	For the Years Ended July 31,
	2005			2004			2003
REVENUE
Net third party revenue	$	19,102		$	17,816		$	17,457
Net related party revenue		2,270			134			—
Net revenue		21,372			17,950			17,457
COST OF REVENUE
Third party cost of revenue		10,319			8,458			7,478
Related party cost of revenue		1,648			49			—
Cost of revenue		11,967			8,507			7,478
Gross profit		9,405			9,443			9,979
OPERATING EXPENSE
Selling, general and administrative		8,106			7,087			8,667
Research and development		3,207			3,106			2,859
Special charges		—			—			(63	)
Total operating expense		11,313			10,193			11,463
Loss from operations		(1,908	)		(750	)		(1,484	)
Interest income		134			79			99
Interest expense		—			(29	)		(35	)
Other income (expense), net		61			(167	)		(84	)
Loss before income taxes and minority interest		(1,713	)		(867	)		(1,504	)
Income tax expense		(79	)		(24	)		—
Loss before minority interest		(1,792	)		(891	)		(1,504	)
Minority interest		(159	)		(37	)		—
Net loss	$	(1,951	)	$	(928	)	$	(1,504	)
Basic and diluted loss per share	$	(0.15	)	$	(0.07	)	$	(0.12	)

See accompanying notes to the consolidated financial statements.

32

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

	For the Years Ended July 31,
	2005			2004			2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss	$	(1,951	)	$	(928	)	$	(1,504	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		569			596			729
Minority interest		159			37			—
Provision of allowance for doubtful accounts		677			85			110
Provision for obsolete inventory		362			524			234
Changes in net assets and liabilities
Trade accounts receivable		2,184			(2,523	)		(973	)
Inventories		(438	)		(161	)		681
Notes receivable		247			(174	)		—
Notes receivable—related party		(1,040	)		—			—
Prepaid and other current assets		1,597			(26	)		(9	)
Trade accounts payable		(2,287	)		1,879			(52	)
Trade accounts receivable/payable—related party		(220	)		(69	)		37
Accrued special charges		—			—			(195	)
Accrued expenses and other		(199	)		(569	)		(110	)
Notes payable		(767	)		—			—
Net cash used in operating activities		(1,107	)		(1,329	)		(1,052	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash acquired in business acquisition		14			3,108			—
Purchases of property and equipment		(303	)		(345	)		(221	)
Disposal of property and equipment		—			146			—
Proceeds from sale of short term-marketable securities		600			—			3,909
Purchases of marketable securities		—			—			(1,500	)
Net cash provided by investing activities		311			2,909			2,188
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of note payable		—			(724	)		(665	)
Repurchases of common stock		—			—			(3	)
Dividends paid to minority interest shareholder		(136	)		—			—
Proceeds from employee stock purchase plan and stock option exercises		72			602			71
Net cash used in financing activities		(64	)		(122	)		(597	)
Effect of exchange rate changes on cash		61			—			—
Net decrease in cash and cash equivalents		(799	)		1,458			539
Cash and cash equivalents, beginning of period		4,679			3,221			2,682
Cash and cash equivalents, end of period	$	3,880		$	4,679		$	3,221
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest	$	1		$	29		$	35
Cash paid for taxes		73			24			—
SUPPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:
Business Acquisition:
Net liabilities assumed from Aelix Systems	$	(7	)	$	—		$	—
Goodwill recognized on acquisition of Aelix Systems		21			—			—
Stock issued to purchase Aelix Systems		(14	)		—			—
Purchase Price Adjustment:
Accounts receivable	$	229		$	—		$	—
Accrued earnout liability		(124	)		—			—
Minority interest		(105	)		—			—

See accompanying notes to the consolidated financial statements.

33

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands)

	Common Stock			Additional Paid-In Capital		Treasury Stock					Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount				Shares		Amount
Balance at July 31, 2002	12,706,634	$	12	$	53,376	(666,000	)	$	(1,499	)	$	(40,989	)	$	—	$	10,900
Repurchase of common stock	—		—		—	(10,900	)		(3	)		—			—		(3	)
Issuance of common stock under employee stock purchase plan	111,747		—		37	—			—			—			—		37
Issuance of stock under equity incentive plans	34,831		—		34	—			—			—			—		34
Net loss and comprehensive loss	—		—		—	—			—			(1,504	)		—		(1,504	)
Balance at July 31, 2003	12,853,212	$	12	$	53,447	(676,900	)	$	(1,502	)	$	(42,493	)	$	—	$	9,464
Issuance of common stock under employee stock purchase plan	121,758		—		91	—			—			—			—		91
Issuance of stock under equity incentive plans	355,023		1		510	—			—			—			—		511
Issuances of common stock for acquisitions	157,167		—		321	—			—			—			—		321
Net loss and comprehensive loss	—		—		—	—			—			(928	)		—		(928	)
Balance at July 31, 2004	13,487,160	$	13	$	54,369	(676,900	)	$	(1,502	)	$	(43,421	)	$	—	$	9,459
Issuance of common stock under employee stock purchase plan	65,072		—		57	—			—			—			—		57
Issuance of stock under equity incentive plans	17,725		—		15	—			—			—			—		15
Issuance of common stock for acquisitions	10,000		—		14	—			—			—			—		14
Comprehensive income (loss):
Foreign currency translation adjustments	—		—		—	—			—			—			61		61
Net loss	—		—		—	—			—			(1,951	)		—		(1,951	)
Comprehensive loss	—		—		—	—			—			(1,951	)		61		(1,890	)
Balance at July 31, 2005	13,579,957	$	13	$	54,455	(676,900	)	$	(1,502	)	$	(45,372	)	$	61	$	7,655

See accompanying notes to the consolidated financial statements.

34

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended July 31, 2005, 2004, and 2003

1. Description of Business and Basis of Presentation

Description of Business—eOn Communications Corporation (the “Company” or “eOn”) designs, develops and markets communication products that include next generation communications servers and software which integrate and manage voice, email and Internet communications for customer contact centers and other applications. The Company also offers a traditional voice-switching platform which addresses the voice communication needs of small and medium-sized installations. The Company also owns a controlling interest in Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”) based in China, which provides fiber optic transmission equipment, data communications systems, and network management software.

Principles of Consolidation—The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include the accounts of eOn Communication Corporation, Cortelco China Corporation and it’s majority owned subsidiary, Cortelco Shanghai and the accounts of the Company’s newly acquired wholly owned subsidiary Aelix Systems Inc. All significant balances and transactions have been eliminated in consolidation.

The Company is affiliated with the following entities through common stockholder ownership:

Cortelco Systems Puerto Rico (“CSPR,” former subsidiary)

Cortelco Systems Holding Corporation (“CSHC”)

Cortelco International, Inc. (“CII”, subsidiary of CSHC)

Cortelco Puerto Rico, Inc. (“CPR”, subsidiary of CSHC)

Cortelco Canada (“CC”, subsidiary of CSHC)

Alcatel Shanghai Bell Co., Ltd. (“Shanghai Bell”)

2. Acquisitions

Cortelco Shanghai

On June 1, 2004, eOn acquired a controlling interest in Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”), a provider of fiber optic transmission equipment, data communications systems, and network management software in China.

Under the terms of the agreement, eOn acquired all of the stock of Cortelco China Corp, a California corporation that owns a 54.14% ownership interest in Cortelco Shanghai, from Cortelco Systems Holding Corporation (“CSHC”). CSHC received 157,167 shares of eOn common stock valued at $321,250.

35

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

This acquisition was accounted for under the purchase method pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.” During May 2005, we obtained additional information with respect to the fair value of certain assets acquired that resulted in changes to the preliminary purchase price allocation. The changes to the purchase price allocation consisted of a reduction in accounts receivable of $229,000 and a reduction in accrued earnout liability and minority interest of $124,000 and $105,000, respectively. The changes to the purchase price allocation did not affect net income as previously recorded. The final purchase price allocation is summarized as follows:

	Adjusted Opening Balance Sheet June 1, 2004
Acquisition cost:
Shares issued on May 31, 2004	$	321,000
Additional Consideration		7,000
Total consideration		328,000
As of May 31, 2004:		—
Current assets		7,871,000
Long term assets		206,000
Current Liabilities		(5,710,000	)
Minority Interest		(1,085,000	)
Accrued earnout liability		(954,000	)
Net assets acquired	$	328,000

The ultimate earnout liability was based upon revenue targets specified in the purchase agreement. On October 6, 2005, the Company’s Board of Directors approved the issuance of an additional 471,501 shares of eOn common stock as set forth in the purchase agreement. On October 20, 2005, the Company issued eOn common stock valued at $490,361. Subsequent to issuing the stock, the excess of the accrued earnout liability over the fair value of the consideration paid (approximately $595,000) was allocated as a reduction to the amounts assigned to the net assets acquired.

Aelix Systems Incorporated

During the quarter ended April 30, 2005, the Company completed its acquisition of Aelix Systems Inc. (“Aelix”). Aelix is a developer of telecommunications systems and applications which utilize internet protocol (“IP”) technology based in Bangalore, India.

Under the terms of the agreement, eOn acquired all of the net assets of Aelix for 10,000 shares of eOn common stock valued at $14,100. This acquisition was accounted for under the purchase method pursuant to Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations.”

The Company may issue up to an additional 215,000 shares over the six quarters after the closing date if Aelix attains specified product release schedules and eOn achieves specified product revenues. In accordance with SFAS No. 141, the contingent consideration that is not recognized at the acquisition date is recognized and measured when the contingency is resolved and consideration is issued or becomes issuable. The number of shares to be issued may be adjusted upon the occurrence of certain events.

The Company assumed net liabilities of $6,900 and recorded goodwill of $21,000 (in the Company’s eOn business segment) as a result of this acquisition.

36

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

3. Summary of Significant Accounting Policies

(a) Principles of Consolidation

The accompanying consolidated financial statements include the accounts of eOn Communications Corporation, Cortelco China Corporation and its majority owned subsidiary—Cortelco Shanghai and Aelix Systems Inc. All significant inter-company accounts and transactions have been eliminated in consolidation.

(b) Cash and Cash Equivalents

All highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents. At July 31, 2005 and 2004 there was approximately $3.3 million and $2.9 million held in foreign bank accounts, respectively.

(c) Marketable Securities

Marketable securities are classified as available for sale and are reported at fair value. Unrealized holding gains and losses, if any, net of the related income tax effect, are excluded from income and are reported in other comprehensive income. Realized gains and losses are included in income on the specific identification method.

(d) Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts. The Company typically grants standard credit terms to customers in good credit standing. As a result, the Company must estimate the portion of accounts receivable that are uncollectible and record any necessary valuation reserves. The Company generally reserves for estimated uncollectible accounts on a customer-by-customer basis, which requires judgment about each individual customer’s ability and intention to fully pay account balances. The Company makes these judgments based on knowledge of and relationships with customers, and updates estimates on a monthly basis. Any changes in estimate, which can be significant, are included in earnings in the period in which the change in estimate occurs.

(e) Inventories

Inventories consist of phones, systems, system cards and component parts for final assembly of our systems and are valued at the lower of cost or market with cost determined utilizing standard cost which approximates the first-in, first-out (“FIFO”) method. We perform an analysis of slow-moving or obsolete inventory on a quarterly basis and any necessary valuation reserves, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.

(f) Property and Equipment

Property and equipment are stated at cost. Depreciation is provided using the straight-line method for financial reporting purposes and accelerated methods for income tax reporting purposes over the estimated useful lives of the assets, generally three to five years. Maintenance and repair costs are charged to expense as incurred.

(g) Goodwill

Goodwill represents the cost in excess of the fair value of net assets acquired of Aelix Systems Inc. (Aelix). Effective with the adoption of SAFAS No. 142, Goodwill and Other Intangible Assets, management of the Company evaluates the carrying value of goodwill annually or when a possible impairment is indicated. The Company performs its impairment annually during the fourth quarter of the fiscal year and determined that there was no impairment of goodwill as of July 31, 2005.

37

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

(h) Stock Compensation Plans

The Company has three stock-based compensation plans for employees and an Employee Stock Purchase Plan (ESPP). The Company accounts for those plans under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under the stock compensation plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. Further, the ESPP is a non-compensatory plan under APB Opinion No. 25, and, as such, no compensation cost was recognized with respect to the ESPP.

The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation for the years ended July 31, 2005, 2004 and 2003 (in thousands, except per share information):

	Fiscal Year Ended July 31,
	2005			2004			2003
Net loss as reported	$	(1,951	)	$	(928	)	$	(1,504	)
Deduct: Total stock-based compensation determined under fair value based method for all awards, net of tax		(438	)		(612	)		(995	)
Pro forma net loss	$	(2,389	)	$	(1,540	)	$	(2,499	)
Net loss per share—basic and diluted:
Net loss per share—as reported	$	(0.15	)	$	(0.07	)	$	(0.12	)
Net loss per share—pro forma	$	(0.19	)	$	(0.12	)	$	(0.21	)

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for fiscal years 2005, 2004 and 2003:

	2005		2004		2003
Risk free interest rate	4.50	%	4.25	%	4.25	%
Dividend yield	—		—		—
Expected Volatility	100	%	100	%	75	%
Expected option life in years	7		7		10

(i) Product Warranties

The Company generally provides customers a one year product warranty from the date of purchase. We estimate the costs of satisfying warranty claims based on analysis of past claims experience and provide for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 2% of revenues, has historically been comprised of materials and direct labor costs. We perform quarterly evaluations of these estimates and any changes in estimates which could potentially be significant are included in earnings in the period in which the evaluations are completed.

(j) Income Taxes

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets when it is more likely than not that the asset will not be realized.

38

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

(k) Revenue Recognition

Revenues from our products are recognized only when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the customer is fixed or determinable, and collectibility is reasonably assured. Generally, revenue is recognized (1) upon shipment for equipment and software, (2) as work is performed for professional services and (3) in equal periodic amounts over the term of the contract for software and hardware maintenance. The Company’s revenue recognition policies are in accordance with SEC Staff Accounting Bulletin No. 104, “Revenue Recognition,” and Statement of Position No. 97-2, “Software Revenue Recognition”

(l) Earnings Per Share

The Company follows SFAS No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share (“EPS”). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the potentially dilutive common shares, such as options, had been issued.

(m) Fair Value of Financial Instruments

The carrying amounts of financial instruments such as cash, accounts receivable, accounts payable, and notes payable approximate their fair value due to the short term nature of the instruments. The fair value of related party accounts receivable, notes receivable and accounts payable are not practical to estimate based upon the related party nature of the underlying transactions.

(n) 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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(o) Comprehensive Income

SFAS 130, Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components and requires a separate statement to report the components of comprehensive income for each period reported. For the fiscal year ended July 31, 2005, comprehensive income consists of foreign currency translation adjustments. The functional currency of the Company’s subsidiary is the Renminbi Yuan. The financial statements of the subsidiary are translated into United States dollars using year end rates of exchange for the assets and liabilities and average rates of exchange during the year for revenues, costs and expenses. Translation gains and losses are treated as a component of shareholders equity. For the years ended July 31, 2004, and 2003, net loss equaled comprehensive loss.

(p) Research and Development Costs

The Company allocates expenses to Research and Development costs based on headcount that is partially dedicated to Research and Development activities.

39

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

(q) Advertising Expense

The Company expenses advertising expenses as incurred. Advertising expenses for fiscal years 2005, 2004, and 2003 were not significant.

(r) Recently Issued Accounting Standards

In May 2003, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that is within its scope, which may have previously been reported as equity, as a liability (or an asset in some circumstances). Mandatorily redeemable instruments (i.e., instruments issued in the form of shares that unconditionally obligate the issuer to redeem the shares for cash or by transferring other assets) are to be reported as liabilities by their issuers. This statement does not affect the classification or measurement of convertible bonds, puttable stock, or other outstanding shares that are conditionally redeemable. The provisions of SFAS No. 150 are generally effective for all financial instruments entered into or modified after May 31, 2003, except for those provisions relating to mandatorily redeemable non-controlling interests, which have been deferred. The adoption of SFAS No. 150 did not have a material impact on the financial position or results of operations of the Company.

In July 2003, the Emerging Issues Task Force (EITF) reached consensus regarding EITF Issue 03-5, Applicability of AICPA Statement of Position 97-2, Software Revenue Recognition, to Nonsoftware Deliverables in an Arrangement Containing More Than Incidental Software. The consensus addresses whether nonsoftware deliverables in a multiple-element arrangement that includes software that is more than incidental to the products or services as a whole should be within the scope of SOP 97-2, Software Revenue Recognition. The pronouncement is effective prospectively for arrangements entered into after the beginning of an entity’s next reporting period beginning after August 13, 2003. The adoption of EITF Issue 03-5 did not have a material impact on the Company’s results of operations or financial position.

In December 2004, the FASB issued SFAS No. 123(R) Share Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB 25, and generally requires instead that such transactions be accounted for and recognized in the statement of operations based on their fair value. SFAS No. 123(R) will be effective for public companies that do not file as small business issuers as of the beginning of the first interim or annual reporting period that begins after June 15, 2005. Management is evaluating the provisions of this standard. Depending upon the number and terms of options that may be granted in future periods, the implementation of this standard could have a material impact on the Company’s financial position and results of operations.

(s) Reclassifications

Certain amounts in the fiscal year 2004 and 2003 consolidated financial statements have been reclassified to conform with the fiscal year 2005 consolidated financial statement presentation.

4. Special Charges

To reduce costs and improve productivity, the Company adopted a restructuring plan during the second quarter of fiscal year 2001, which included headcount reductions and office space consolidation. During the

40

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

fourth quarter of 2001, the Company made the decision to consolidate the majority of functions to its Atlanta headquarters. In fiscal 2002, the Company recorded additional special charges to reflect the impact of a lease termination agreement for its former facility in Memphis, Tennessee and to properly value excess inventories on hand at July 31, 2002. In fiscal 2003, the company settled all remaining property tax liabilities associated with the former facility in Memphis, Tennessee and recorded an expense reversal of $63,000 to reflect this favorable settlement and close out the restructuring accrual.

Major components of the restructuring plan included corporate management changes; the relocation and concentration of management and strategic functions at the Company’s headquarters in Atlanta, Georgia; site closures; outsourcing initiatives for the assembly, repair, and manufacturing of our products; and workforce reductions of approximately 40%. The majority of the restructuring plan was completed by July 31, 2002.

The following tables summarize the activity relating to the special charges during fiscal year 2003:

	Termination Benefits			Excess Facilities Cost (1)
Liability balance at July 31, 2002		61			173
Liability Charges		—			(63	)
Other Expenditures		(61	)		(110	)
Liability Adjustments		—			—
Liability balance at July 31, 2003	$	—		$	—

(1) Reflects issuance of note payable in connection with the lease termination agreement for the Company’s former facility in Memphis, Tennessee. The note payable did not bear interest and was payable in 24 equal monthly installments beginning July 1, 2002 and ending June 1, 2004.

5. Concentration of Credit Risk, Major Customers and Major Supplier

Financial instruments which potentially subject the Company to a concentration of credit risk consist principally of cash, marketable securities, trade accounts receivable, and notes receivable. The Company maintains its cash balances with large regional U.S. and foreign financial institutions and has not experienced losses. The marketable securities are invested in accounts at large national brokerages which maintain insurance coverage. The Company’s products are sold principally to dealers, value added resellers, national accounts, the U.S. government and foreign telecommunications companies. The Company’s credit risk is limited principally to trade accounts receivable. The Company performs ongoing credit evaluations of its customers and generally does not require collateral. No additional risk beyond amounts provided for collection losses is believed inherent in the Company’s trade accounts receivable.

The Chinese renmimbi yuan (“RMB”) is not freely convertible into foreign currencies.

From January 1, 1994 through July 23, 2005, a single rate of exchange was quoted daily by the People’s Bank of China (the “Unified Exchange Rate”). Beginning July 22, 2005, the rate of exchange was revalued by 2.1%, and the RMB is now to fluctuate according to the value of a group of currencies (the “Managed Float”). However, the unification or managed float of the exchange rates does not imply convertibility of RMB into $US or other foreign currencies. All foreign exchange transactions continue to take place either through the Bank of China or other banks authorized to buy and sell foreign currencies at the exchange rates quoted by the People’s Bank of China.

41

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

The Company’s subsidiary, Cortelco Shanghai had sales to two customers during fiscal year 2005 that represented 16.0% and 10.6% (included in net related party revenue) of total revenue. The accounts receivable due from these customers at July 31, 2005 were $831,000 and $858,000, respectively.

The Company’s subsidiary, Cortelco Shanghai had sales to a customer during 2004 that represented 11% of total revenue. The related accounts receivable due from this customer at July 31, 2004 was $429,000.

The Company purchases approximately 66% of its Millennium phones, systems and system cards from one contract manufacturer. During fiscal year 2005, purchases from this vendor totaled approximately $1.5 million. As of July 31, 2005, the balance payable to this contract manufacturer was $321,000.

6. Marketable Securities

Marketable securities consist of the following as of July 31, 2005 and 2004 (in thousands):

	2005				2004
	Cost		Market Value		Cost		Market Value
Municipal bonds	$	3,600	$	3,600	$	4,200	$	4,200
Total	$	3,600	$	3,600	$	4,200	$	4,200

The municipal bond investments are comprised solely of taxable auction-rate securities with stated maturities ranging from 15-33 years. Due to the fact that these investments have frequent interest rate resets, the Company did not have any gross unrealized gains or losses at July 31, 2005 or 2004. The Company has classified the municipal bonds as available for sale investments.

7. Inventories

Inventories consist of the following as of July 31, 2005 and 2004 (in thousands):

	2005			2004
Raw materials and purchased components	$	703		$	856
Finished goods		3,618			3,608
Total		4,321			4,464
Inventory obsolescence reserve		(1,512	)		(1,731	)
Inventory	$	2,809		$	2,733

8. Prepaid and Other Current Assets

Prepaid and other current assets consist of the following as of July 31, 2005 and 2004 (in thousands):

	2005		2004
Customer deposits	$	178	$	794
Advances to suppliers		43		893
Prepaid expenses		21		132
Other		83		94
Total	$	325	$	1,913

42

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

9. Property and Equipment

Property and equipment consists of the following as of July 31, 2005 and 2004 (in thousands):

	2005			2004
Leasehold improvements	$	315		$	311
Equipment		2,806			2,565
Furniture and fixtures		506			501
Total		3,627			3,377
Less: accumulated depreciation		(2,922	)		(2,406	)
Property and equipment, net	$	705		$	971

10. Accrued Expenses and Other

Accrued expenses and other consists of the following as of July 31, 2005 and 2004 (in thousands):

	2005		2004
Employee compensation	$	448	$	444
Commissions		62		37
Vacation		29		35
Deferred income		692		651
Employee withholdings		247		286
Warranty reserve		289		361
Other		358		470
Total	$	2,125	$	2,284

FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (“FIN 45”), requires that upon issuance of a guarantee, the guarantor must disclose and recognize a liability for the fair value of the obligation it assumes under that guarantee.

The requirements of FIN 45 are applicable to the Company’s product warranty liability. As of July 31, 2005 and July 31, 2004, the Company’s product warranty liability recorded in other accrued liabilities was $289,000 and $361,000, respectively. The following table summarizes the activity related to the product warranty liability during fiscal years 2005 and 2004 (in thousands):

	2005			2004
Balance at beginning of period	$	361		$	283
Accruals for warranty liability		105			325
Warranty expense		(177	)		(247	)
Balance at end of period	$	289		$	361

43

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

11. Income Taxes

The domestic and foreign components of income (loss) before income taxes are as follows:

	2005			2004			2003
United States	$	(2,140	)	$	(972	)	$	(1,504	)
PRC		427			105
Loss before income taxes	$	(1,713	)	$	(867	)	$	(1,504	)

The components of income tax expense for fiscal years 2005, 2004, and 2003 are as follows (in thousands):

	2005		2004		2003
Current:
Federal	$	—	$	—	$	—
State		—		—		—
Foreign income tax expense		79		24		—
Total current	$	79	$	24	$	—
Deferred:
Federal		—		—		—
State		—		—		—
Total deferred		—		—		—
Total income tax expense	$	79	$	24	$	—

No provision has been made for income taxes which may become payable upon distribution of the foreign subsidiary’s earnings since management considers essentially all of these earnings permanently invested. Determination of the net amount of unrecognized U.S. income tax with respect to these earnings is not practicable.

A reconciliation between the income tax expense recognized in the Company’s consolidated statement of operations and the income tax benefit computed by applying the domestic federal statutory income tax rate to loss before income taxes for fiscal years 2005, 2004 and 2003 is as follows (in thousands):

	2005			2004			2003
Income tax benefit at Federal statutory rate (35%)	$	(600	)	$	(303	)	$	(526	)
State income taxes, net of federal benefit		(48	)		(35	)		(66	)
Foreign tax differential		(13	)		(13	)
Change in valuation allowance		735			245			120
Adjustment to effective state tax rate		—			120			—
Over provision of deferred taxes in prior year		—			—			461
Other, net		5			10			11
Total income tax expense	$	79		$	24		$	—

44

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

The deferred tax effects of the Company’s principal temporary differences at July 31, 2005 and 2004 are as follows (in thousands):

	2005			2004
Allowance for doubtful receivables	$	430		$	207
Inventories		547			653
Basis difference in property and equipment		36			33
Accrued warranty costs		160			156
Accrued expenses and other		86			—
Deferred revenue		226			232
Loss reserve		326			326
Net operating loss carryforwards		7,566			7,086
Capital loss carryforward		36			36
Valuation allowance		(9,406	)		(8,671	)
Total deferred asset	$	7		$	58
Accrued expenses and other	$	(7	)	$	(58	)
Total deferred liability		(7	)		(58	)
Net deferred asset (liability)	$	—		$	—

Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax attributes in future tax returns; the Company has placed a valuation allowance against its deferred tax assets at July 31, 2005 and 2004.

At July 31, 2005, net operating loss carry-forwards of approximately $20.1 million are available to reduce future taxable income. The net operating loss carry-forwards expire as follows (in thousands):

	Net Operating Losses
2012	$	63
2013		233
2020		9
2021		6,167
2022		8,730
2023		2,283
2024		1,346
2025		1,234
Total	$	20,065

12. Equity Incentive Plans

The Company’s Equity Incentive Plans, adopted in fiscal years 1997, 1999 and 2001, authorize the granting of incentive stock options, supplemental stock options, stock bonuses, and restricted stock purchase agreements to officers, directors, and employees of the Company and to non-employee consultants. Incentive stock options are granted only to employees and are issued at prices not less than 100% of the fair market value of the stock at

45

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

the date of grant. The options generally vest over a four-year period and the term of any option cannot be greater than ten years from the date of grant. Stock bonuses and restricted stock purchase agreements are issued at prices not less than 85% of the fair market value of the stock at the date of grant.

No grants were made under the 1997 Equity Incentive Plan during fiscal years 2005, 2004, or 2003. The board of directors has declared that no future grants will be made under this plan.

The board of directors has authorized up to an aggregate of 2,000,000 shares of the Company’s common stock for issuance under the 1999 Equity Incentive Plan. 65,000, 264,000 and 215,000 options were issued under this plan during fiscal years 2005, 2004, and 2003, respectively, with exercise prices ranging from $0.45 to $3.27 per share.

During fiscal year 2001, the board of directors authorized 500,000 shares of the Company’s common stock for issuance under the 2001 Equity Incentive Plan. Grants to officers or directors are prohibited under the terms of this plan. 50,000, 64,000 and 81,250 options, respectively, were issued under this plan during fiscal years 2005, 2004, and 2003, respectively, with exercise prices ranging from $0.24 to $3.99 per share.

Additionally, during 1999, the board of directors adopted an Employee Stock Purchase Plan which permits employees to purchase up to 250,000 shares of the Company’s common stock. The plan was amended in 2001 to increase the number of shares available under the plan to 500,000. The purchase price under this plan is 85% of the fair market value of the common stock at the beginning of an offering period or on a purchase date, whichever is less. Offering periods generally last one year with purchase dates six and twelve months from the beginning of an offering period. The plan qualifies as a noncompensatory plan under APB No. 25. 65,072, 121,758 and 111,747 shares were purchased by employees under this plan during fiscal years 2005, 2004, and 2003, respectively.

The status of the Company’s equity incentive plans is summarized below:

	2005				2004				2003
	Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price		Number of Shares		Weighted Average Exercise Price
Outstanding, beginning of year	1,631,470		$	4.21	1,824,053		$	3.66	1,842,566		$	3.90
Granted	115,000			1.50	328,000			3.15	296,250			1.48
Exercised	(17,725	)		0.85	(355,023	)		1.44	(34,831	)		0.98
Cancelled	(155,901	)		2.04	(165,560	)		1.95	(279,932	)		3.28
Outstanding, end of year	1,572,844		$	4.27	1,631,470		$	4.21	1,824,053		$	3.66
Exercisable, end of year	1,222,641		$	4.78	1,082,180		$	5.10	1,184,425		$	4.75
Exercise price range	$0.28 – $24.25				$0.24 – $24.25				$0.24 – $24.25
Options available for grant, end of year	524,365				559,600				725,311
Weighted average grant date fair value of options granted during the year	$1.45				$2.65				$1.20

46

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

The following table summarizes information about the options outstanding as of July 31, 2005:

Range of Exercise Prices	Outstanding at July 31, 2005	Weighted Average Remaining Contractual Life	Weighted Average Exercise Price		Exercisable at July 31, 2005	Weighted Average Exercise Price
$  0.00 – $  5.00	1,170,065	6.3 years	$	2.48	819,862	$	2.48
$  5.01 – $10.00	307,979	2.3 years	$	8.70	307,979	$	8.70
$10.01 – $15.00	86,300	4.0 years	$	10.73	86,300	$	10.73
$15.01 – $25.00	8,500	3.0 years	$	24.25	8,500	$	24.25
	1,572,844	5.3 years	$	4.27	1,222,641	$	4.78

13. Reserves and Distribution of Profits

In accordance with the relevant PRC regulations and the Articles of Association of Cortelco Shanghai (the “Articles of Association”), appropriations representing 5% of the net income as reflected in Cortelco Shanghai’s PRC statutory financial statements are allocated to the Reserve Fund, 5% to the Enterprise Development Fund and 5% to the Staff Welfare Fund. Subject to certain restrictions set out in the relevant PRC regulations and the Articles of Association, the Reserve Fund and the Enterprise Development Fund may be distributed in the form of share bonus issues. The Staff Welfare Fund must be used for capital expenditure on staff welfare facilities. Such facilities are for the use of the staff and are owned by Cortelco Shanghai.

At July 31, 2005 and 2004, Cortelco Shanghai had total Reserve Funds of approximately $227,000 and $167,000, respectively comprised of the Reserve Fund and the Enterprise Development Fund of approximately $113,000 each at July 31, 2005 and approximately $83,000 each at July 31, 2004, respectively.

Reserve funds of Cortelco Shanghai and its subsidiaries may be restricted in accordance with the relevant PRC accounting rules and regulations. Cortelco Shanghai had total retained earnings available for distribution of $398,000 and $395,000 as of July 31, 2005 and 2004, respectively.

14. Related Parties

The following represent related party transactions for the each of the fiscal years ending July 31:

	2005		2004		2003
Sales to SCPR	$	—	$	—	$	28
Sales to Shanghai Bell		2,270		134		—
Total related party sales	$	2,270	$	134	$	28
Purchases from CHSC and subsidiaries	$	580	$	646	$	615
Purchases from Shanghai Bell		250		25		—
Total related party purchases	$	830	$	671	$	615

47

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

Related party trade accounts receivable, trade accounts payable and notes receivable consist of the following as of July 31, 2005 and 2004 (in thousands):

	2005		2004
Receivable from Spark Technology	$	44	$	—
Receivable from Shanghai Bell		858		615
Total related party trade accounts receivable	$	902	$	615
Notes receivable from Shanghai Bell	$	1,040	$	—
Payable to CII	$	51	$	101
Payable to Spark Technology		106		—
Payable to Shanghai Bell		2,021		1,985
Total related party trade accounts payable	$	2,178	$	2,086

The notes receivable from Shanghai Bell are non interest-bearing non-collateralized notes which have maturities of 1 to 5 months.

The acquisition of Cortelco Shanghai disclosed in footnote 2 was made from an entity related to eOn through common ownership.

Shanghai Bell

The chairman of the Board of Directors of Shanghai Bell is also the chairman of the Board of Directors of Shanghai Fortune. Shanghai Fortune is the minority shareholder of the Company’s Cortelco Shanghai subsidiary. Shanghai Bell is one of Cortelco Shanghai’s largest customers and a significant supplier. Cortelco Shanghai buys various telecom equipment from different Shanghai Bell divisions for resale to third parties and Cortelco Shanghai sells, and installs various telecom equipment for Shanghai Bell divisions. Accounts receivable and accounts payable are usually settled in three to six months, sometimes by offset rather than payment in local currency. Payment terms on some installation projects are extended beyond one year from completion, reflecting a negotiated repayment schedule.

Cortelco International, Inc. and Cortelco Systems Holding Corporation

Cortelco International, Inc. (“CII”) is a subsidiary of Cortelco Systems Holding Corporation (“CSHC”) and a supplier of Millenium and eQueue peripheral hardware. Accounts payable are paid on thirty to sixty day terms. The Company has had no significant transactions with CSHC.

Cortelco Systems Puerto Rico

Cortelco Systems Puerto Rico (“CSPR”) was a wholly-owned subsidiary of the Company until August 28, 2001, when it was spun off to the shareholders of eOn. Since the spin-off, the Company has not had significant transactions with CSPR.

48

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

Spark Technologies, Inc.

Aelix performs engineering development projects for Spark Technologies, Inc (“Spark”), a California company that is wholly owned by David Lee, the Chief Executive Officer and majority shareholder of eOn. Aelix has incurred approximately $49,000 of expenses on behalf of Spark during the year ending July 31, 2005 (net of approximately $19,000 incurred by Spark engineers on behalf of eOn). Included in accounts receivable-related party is $13,000 and $6,000 owed to Aelix and eOn, respectively by Spark on July 31, 2005. At July 31, 2005, the Company has a $5,000 payable to Spark for a security deposit for Aelix’s Bangalore facility and furniture and fixtures.

Cortelco Shanghai also performs engineering development projects for Spark. Cortelco Shanghai incurred expenses of approximately $268,000 on behalf of Spark during the year ended July 31, 2005, respectively. At July 31, 2005, Spark owed Cortelco Shanghai $25,000.

Spark deposited $211,000 with the Company in China to pay for Spark expenses. As of July 31, 2005, the balance of this deposit/prepayment is $101,000. This balance is included in the Company’s balance sheet as cash and offset in other payable-related party.

15. Employee Savings Plan

Substantially all U.S. employees of the company can participate in the eOn Communications Corporation Profit Sharing Savings Plan, which is qualified under Section 401 of the Internal Revenue Code. Under the provisions of the plan, all participants may contribute up to 60% of their compensation, subject to limitations established by the Internal Revenue Service. The Company may contribute a matching contribution of not less than 50% of the employee contributions up to 6% of the employee’s compensation. The Company may also provide special discretionary contributions equal to a percentage of an employee’s annual compensation and/or an amount determined by management. During fiscal years 2005, 2004, and 2003, contributions made by the Company totaled $64,000, $77,000 and $79,000, respectively.

16. Commitments and Contingencies

(a) Operating Leases

The Company is obligated under non-cancelable operating lease agreements for its primary warehouse, office facilities and certain office equipment. Future minimum annual lease payments under non-cancelable operating lease agreements with remaining terms greater than one year for the next five years and in the aggregate as of July 31, 2005 are as follows (dollars in thousands):

	July 31, 2005
2006	$	527
2007		337
2008		148
2009		39
2010		25
Thereafter		—
Total	$	1,076

49

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

Rent expense for operating leases for the years ended July 31, 2005, 2004, and 2003 totaled $641,000, $357,000 and $319,000, respectively.

Rent expense is offset by sublease income of $14,000, which represents sublease income for June and July 2005. The sublease agreement expires on October 31, 2005 and renews month to month upon notification from the sublessee.

(b) Commitments

At July 31, 2005, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $1,071,000.

During fiscal 2002, the Company entered into a lease termination agreement for its former facility in Memphis, Tennessee. A $1,400,000 declining balance letter of credit was issued to secure payments under the termination agreement. The balance of the letter of credit as of July 31, 2004 was $175,000.

(c) Litigation

The Company is involved in various matters of litigation, claims, and assessments arising in the ordinary course of business. In the opinion of management, the eventual disposition of these matters will not have a material adverse effect on the financial statements.

17. Segment Information

The company is comprised of two principal business segments: eOn US and Cortelco Shanghai. The eOn US business segment designs, develops and markets communication products for customer contact centers and other applications and offers a traditional voice-switching platform primarily in the United States. Cortelco Shanghai provides fiber optic transmission equipment, data communications systems, and network management software in Asia, primarily the Peoples Republic of China (PRC). There is no overlap in operational management reporting or of decision making authority between the two segments as defined. Following is a tabulation of business segment information on eOn US for fiscal year ended July 31, 2005 and for Cortelco Shanghai for the two months ended July 31, 2004.

	For the Year Ended July 31, 2005
	eOn U.S.			Cortelco Shanghai		Consolidated
Revenues from customers	$	12,603		$	8,769	$	21,372
Total expenses		14,743			8,580		23,323
Business segment income (loss)	$	(2,140	)	$	189	$	(1,951	)
Depreciation and amortization expense	$	465		$	104	$	569
Interest income		97			37		134
Other income (expense)		(56	)		117		61
Income tax expense		—			49		49
Capital expenditures	$	134		$	169	$	303
Long lived assets		434			271		705
Business segment assets		9,450			7,679		17,129

50

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

	For the Year Ended July 31, 2004
	eOn U.S.			Cortelco Shanghai		Consolidated
Revenues from customers	$	15,668		$	2,282	$	17,950
Total expenses		16,640			2,238		18,878
Business segment income (loss)	$	(972	)	$	44	$	(928	)
Depreciation and amortization expense	$	585		$	11	$	596
Interest income		62			17		79
Interest expense		29			—		29
Other income (expense)		(167	)		—		(167	)
Income tax expense		—			24		24
Capital expenditures	$	334		$	11	$	345
Long lived assets		765			206		971
Business segment assets		12,016			10,279		22,295

Corteclo Shanghai resold approximately $1.9 million of cellular handsets to one of its customers during the fiscal year ended July 31, 2005.

18. Earnings Per Share

The computation of basic and diluted earnings (loss) per share for each of the years ending July 31, 2005, 2004 and 2003 were as follows (in thousands, except per share information):

	2005			2004			2003
Net income (loss)	$	(1,951	)	$	(928	)	$	(1,504	)
Basic and diluted weighted-average number of shares outstanding		12,853			12,522			12,091
Basic and diluted earnings (loss) per share		(0.15	)		(0.07	)		(0.12	)

Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding during the period. Potentially dilutive securities of 152,325, 1,631,470 and 1,824,053 for the fiscal years ended July 31, 2005, 2004 and 2003 respectively, have been excluded from the computation of dilutive earnings (loss) per share for the periods because the Company has a net loss from operations and their effect would have been anti-dilutive.

19. Selected Quarterly Financial Data (Unaudited)

Quarterly financial data for the fiscal years ended July 31, 2005 and 2004 is summarized as follows (in thousands, except per share information):

Fiscal Year 2005	First Quarter		Second Quarter			Third Quarter			Fourth Quarter
Net revenues	$	6,467	$	5,453		$	4,721		$	4,731
Gross profit		2,799		2,309			2,147			2,150
Income (loss) before income taxes and minority interest		115		(364	)		(782	)		(712	)
Net income (loss)	$	98	$	(528	)	$	(696	)	$	(825	)
Net income loss per common share:
Basic and diluted (1)	$	0.01	$	(0.04	)	$	(0.05	)	$	(0.06	)

51

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Years Ended July 31, 2005, 2004, and 2003

Fiscal Year 2004	First Quarter		Second Quarter		Third Quarter			Fourth Quarter
Net revenues	$	5,039	$	3,958	$	2,770		$	6,183
Gross profit		2,939		2,367		1,511			2,626
Income (loss) before income taxes and minority interest		330		87		(944	)		(340	)
Net income (loss)	$	330	$	87	$	(944	)	$	(401	)
Net income loss per common share:
Basic and diluted (1)	$	0.03	$	0.01	$	(0.07	)	$	(0.03	)

(1) Due to rounding and changes in outstanding shares, the sum of the four quarters does not equal the earnings per common share amounts calculated for the year.

20. Subsequent Event

On October 26, 2005, eOn announced that it has signed a Memorandum of Understanding (“MOU”) to sell its 54% interest in Cortelco Shanghai to the 46% minority holder, Shanghai Fortune Telecommunication Technology Development Co. Ltd. (“Shanghai Fortune”) and members of management of Cortelco Shanghai.

The MOU is subject to negotiation of a definitive agreement, approval of China government authorities and various other conditions. eOn and Shanghai Fortune have tentatively agreed to a purchase price based on the book value at July 31, 2005. This would result in an estimated purchase price of approximately $1.8 million. Payment of 85% would be paid in cash within 30 days of closing; the remaining 15% (sold to management) would have extended payment terms to be negotiated.

Subsequent to the effective date of the sale, Cortelco Shanghai’s financial statements will no longer be consolidated with eOn. For the year ended July 31, 2005, Cortelco Shanghai had revenues of $8,769,000 and net income after minority interest of $189,000. As of July 31, 2005, Cortelco Shanghai has cash and cash equivalents of $3,010,000, trade accounts receivable of $1,421,000, related party receivables of $1,923,000, inventories of $654,000, other current assets of $400,000, property and equipment of $271,000, trade accounts payable of $2,409,000, related party payables of 2,021,000 and other payables of $522,000.

52

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

GHP Horwath, P.C.

On January 28, 2005, upon the recommendation of the Audit Committee of the Board of Directors of eOn Communications Corporation (the “Company”), the Board of Directors engaged GHP Horwath, P.C. (“Horwath”) to serve as the Company’s independent registered public accounting firm for the fiscal year ending July 31, 2005. Grant Thornton, LLP (“Grant Thornton”) resigned as the independent registered public accounting firm of the Company on December 16, 2004.

Grant Thornton’s audit reports with respect to the Company’s consolidated financial statements for the fiscal years ended July 31, 2004 and 2003, did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.

During the fiscal years ended July 31, 2003 and 2004, and the period commencing August 1, 2004 and ending December 16, 2004, there were no disagreements with Grant Thornton on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure which, if not resolved to the satisfaction of Grant Thornton, would have caused Grant Thornton to make reference to the subject matter of the disagreement in their reports on the Company’s consolidated financial statements for such fiscal years.

During the audit of the Company’s consolidated financial statements for the fiscal year ended July 31, 2004, Grant Thornton identified certain material weaknesses in the internal control over financial reporting of the Company’s newly acquired subsidiary, Cortelco Shanghai Telecom Equipment Company (“Cortelco Shanghai”), which could adversely affect the reliability of the Company’s financial reporting for future periods. Grant Thornton’s specific findings with respect to Cortelco Shanghai and the Company’s actions in response thereto are described more fully in Item 9a of this 10K and in the Company’s annual report on Form 10-K for the fiscal year ended July 31, 2004, to which reference is hereby made. The Audit Committee of the Company’s Board of Directors discussed the findings with Grant Thornton. The Company has authorized Grant Thornton to respond fully to the inquiries of the Company’s successor independent registered public accounting firm concerning these issues.

During the Company’s fiscal year ended July 31, 2004, and the subsequent interim period through December 16, 2004, the Company did not consult Horwath regarding (i) either the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, or (ii) any matter that was either the subject of a disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) or a reportable event (as described in Item 304(a)(1)(v) of Regulation S-K).

ITEM 9a. CONTROLS AND PROCEDURES.

Evaluation of disclosure controls and procedures.

Based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of the period covered by this report, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) are effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in internal control over financial reporting.

There were no changes in internal control over financial reporting that occurred during the three month period ending July 31, 2005.

53

Cortelco Shanghai has historically maintained its books and records in accordance with the Generally Accepted Accounting Principles adopted in the People’s Republic of China (“PRC GAAP”). Since the acquisition during the fourth quarter of fiscal year 2004, eOn included Cortelco Shanghai’s financial information in its consolidated financial statements in accordance with Generally Accepted Accounting Principles adopted in the United States of America (“US GAAP”). During fiscal year 2004 and 2005, a number of adjustments were made to adjust Cortelco Shanghai’s year end financial information from PRC GAAP to US GAAP.

During the fiscal year 2004 audit of the Company’s fiscal year end financial statements, the Company’s external auditors identified certain material internal control deficiencies in Cortelco Shanghai’s financial reporting which could adversely affect the reliability of the Company’s financial reporting for future periods. As a result, the Company has determined that its disclosure controls and procedures related to Cortelco Shanghai were not effective for the two month period from the date of the acquisition until the end of its fiscal year at July 31, 2004. Significant deficiencies identified were:

• Lack of analysis and reconciliation of certain accounts on a periodic basis;

• Limited review by accounting personnel with direct oversight responsibility;

• Cortelco Shanghai senior financial staff had little knowledge of Generally Accepted Accounting Principles in the United States (“U.S. GAAP”);

• No revenue recognition policy in conformance with U.S. GAAP;

• Internal controls structure relied on single person;

• Inadequate detail in procedures for physical inventory counts and

• Large number of adjusting journal entries.

In order to compensate for the internal control deficiencies (cumulatively classified as a material weakness by Grant Thornton) at Cortelco Shanghai, eOn’s certifying officers did the following to ensure that eOn’s financial statements fairly presented in all material respects the financial condition, results of operations and cash flows as of and for the period ended July 31, 2004:

• Reviewed all revenue transactions for proper recognition timing, including appropriate matching of expense and revenue where installation was part of contract;

• Reviewed expense detail to identify accrual requirements and analyze unusual items;

• Compared accruals to prior periods;

• Reviewed the Cortelco Shanghai external audit of 2003 and auditor reviews of interim periods to identify all potential problem areas, including several balance sheet reclassifications;

• Reviewed bank reconciliations;

• Performed line by line inventory analysis for obsolescence;

• Analyzed accounts receivable aging with local management and with historical payment patterns;

• Investigated customer returns documentation for warranty obligations;

• Reviewed terms and payment history of notes receivable and notes payable;

• Reviewed accounts payable aging and

• Reviewed accounts receivable from employees.

eOn has taken the following actions to address the internal control issues identified by the auditors:

1. Cortelco Shanghai has hired a person trained in preparing financial information, with an MBA from a United States university, who is a native of the People’s Republic of China and has experience and knowledge with both PRC GAAP and US GAAP;

54

2. eOn has begun the process of documenting and evaluating Cortelco Shanghai’s internal controls, making adjustments as necessary to conform with eOn’s systems of internal controls over financial reporting;

3. Commencing September 2004, Cortelco Shanghai is reconciling every account monthly, and delivers reconcilement information to eOn monthly for review by eOn’s Controller and the Chief Financial Officer; and

4. During the quarter ended October 2004, Cortelco Shanghai delivered detailed account information to verify that appropriate adjustments are being made between U.S. GAAP and PRC GAAP. Cortelco Shanghai delivers such information to eOn monthly. Specifically, the controls implemented were:

• Review revenue/margin cut off log;

• List all invoices with cost and margin, review ship records and contract terms;

• Review/list all shipments date, contract, customer, RMB cost;

• Review/list all install team activity date, contract, customer, employee RMB cost;

• Review/list all acceptances received date, contract, customer, RMB cost;

• Review/list all new contracts ship date/performance period, contract, customer, revenue, cost;

• Review/list all receipts of product/inventory date, purchase order, vendor, RMB cost, invoice;

• Review/list all new purchase orders (initially included all open PO’s for product and non-product) date, purchase order, vendor, RMB cost;

• Reconcile and review all balance sheet accounts;

• Review accounts receivable aging, reserve analysis;

• Review detailed slow moving inventory analysis;

• Review/list all inventory held at customers site;

• Prepare comparative analysis of general and administrative expense detail and

• Prepare comparative analysis of manufacturing overhead detail.

And quarterly:

• Review analysis of aged advances to suppliers and subcontractors;

• Review Shanghai Bell transactions and account reconciliations and

• Review major customer transactions and account reconciliations.

In addition, in order to compensate for the internal control deficiencies at Cortelco Shanghai, eOn’s certifying officers did the following to ensure that eOn’s financial statements fairly present in all material respects the financial condition, results of operations and cash flows as of and for the year ending July 31, 2005:

• Reviewed all revenue transactions for proper recognition timing, including appropriate matching of expense and revenue where installation was part of contract;

• Reviewed expense detail to identify accrual requirements and analyze unusual items;

• Compared accruals to prior periods;

• Reviewed account reconciliations;

• Reviewed detailed inventory analysis for obsolescence;

55

• Reviewed receivables aging and reserve;

• Reviewed customer returns data for warranty obligations;

• Reviewed terms and payment history of notes receivable and notes payable;

• Reviewed accounts payable aging;

• Reviewed and adjusted accounts receivable from employees and

• Prepared all adjusting journal entries and prepared final adjusted financial statements.

There were additional changes in internal control over financial reporting that occurred during the 3 month period ending January 31, 2005 to remediate the ineffective disclosure controls and procedures described above that have materially affected the Company’s internal control over financial reporting as follows:

1. The Cortelco Shanghai Financial Reporting Manager and Controller created a revenue recognition guideline matrix for all the different contract types in China. The Chief Financial Officer reviewed and approved the Guidelines and

2. eOn US has increased its oversight of the Cortelco Shanghai financial statements in that they are prepared by the Cortelco Shanghai Financial Reporting Manager and reviewed by the eOn Controller and eOn Chief Financial Officer.

eOn believes that these actions satisfactorily addressed the control deficiencies identified by its auditors during the fiscal year 2004 audit and will help ensure that internal controls are sufficient at Cortelco Shanghai to provide reasonable assurance regarding the reliability of the financial information provided to eOn. This is an ongoing process and eOn continues to monitor Cortelco Shanghai’s financial reporting systems and controls closely to ensure that any deficiencies are promptly identified and corrected.

As evidenced by the restatement of the press release filed on Form 8-K/A for the quarter ending January 31, 2005 and based on our management’s evaluation (with the participation of our principal executive officer and principal financial officer), as of the end of January 31,2005, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”)) were ineffective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms for the following reasons:

The Company determined that there was a material weakness in the functioning of the disclosure controls and procedures with respect to Cortelco Shanghai, especially controls over consolidation and expense review. The Company lacked controls relating to the monitoring and investigation of inter-company balances and related differences and elimination of inter-company balances in the consolidation process as it related to Cortelco Shanghai. Management determined in March, 2005 that this weakness commenced with the change in US Controllers in September, 2004.

The following remediation actions were taken in March and early April 2005:

1. The Company hired a new Controller.

2. All inter-company accounts receivable and accounts payable are reconciled monthly.

3. The Cortelco Shanghai Quarterly U.S. GAAP financial worksheet segregates the accounts receivable and accounts payable with eOn as separate line items.

4. The Chief Financial Officer reviews each specific consolidation elimination entry.

ITEM 9b. OTHER INFORMATION.

There were no events that occurred in the fourth quarter that were not previously disclosed in a form 8-K.

56

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

Information set forth under the captions “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s definitive Proxy Statement for the 2005 Annual Meeting of Shareholders to be held on January 12, 2006 (the “Proxy Statement”), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2005, are incorporated herein by reference in response to this item.

Information with respect to executive officers is set forth under the caption “Executive Officers” in Part I of this report.

The Company has adopted a Code of Ethics that applies to all employees, which is attached as Exhibit 14.1 to this report. We intend to satisfy the disclosure requirement under Item 10 of Form 10-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our investor relations website—investor.eoncc.com.

ITEM 11. EXECUTIVE COMPENSATION.

Information set forth under the caption “Executive Compensation” in the Proxy Statement is incorporated herein by reference in response to this item.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.

Information set forth under the caption “Stock Ownership” in the Proxy Statement is incorporated herein by reference in response to this item.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.

Information set forth under the caption “Certain Transactions” in the Proxy Statement is incorporated herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information set forth under the caption “Fees Paid to the Independent Auditors” in the Proxy Statement is incorporated herein by reference.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

(A) (1) Financial Statements

The following information appears in Item 8 of Part II of this Report:

- Reports of Independent Registered Public Accounting Firms

- Consolidated Balance Sheets as of July 31, 2005 and 2004

- Consolidated Statements of Operations for the Years Ended July 31, 2005, 2004, and 2003

- Consolidated Statements of Cash Flows for the Years Ended July 31, 2005, 2004, and 2003

- Consolidated Statements of Stockholders’ Equity for the Years Ended July 31, 2005, 2004, and 2003

- Notes to Consolidated Financial Statements

57

(2) Financial Statement Schedules

The following financial statement schedule is included in this report:

Schedule II—Valuation and Qualifying Accounts

All other schedules are omitted because they are not required, not applicable, or the required information is otherwise shown in the consolidated financial statements or the notes thereto.

(B) Exhibits

The exhibits listed in the Exhibit Index following the signature page of this report are filed as part of this report or are incorporated by reference herein.

58

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EON COMMUNICATIONS CORPORATION
Date: October 28, 2005	By	/s/    STEPHEN R. BOWLING
		Stephen R. Bowling, Vice President,
		Chief Financial Officer, Secretary
		(Principal Financial Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name	Title	Date
/s/    DAVID S. LEE         David S. Lee	President, Chief Executive Officer and Chairman (Principal Executive Officer)	October 28, 2005
/s/    STEPHEN R. BOWLING         Stephen R. Bowling	Vice President, Chief Financial Officer, Director (Principal Financial Officer)	October 28, 2005
/s/    MITCH C. GILSTRAP         Mitch C. Gilstrap	Vice President, Chief Operating Officer	October 28, 2005
/s/    ROBERT P. DILWORTH         Robert P. Dilworth	Director	October 28, 2005
/s/    W. FRANK KING         W. Frank King	Director	October 28, 2005
/s/    FREDERICK W. GIBBS         Frederick W. Gibbs	Director	October 28, 2005

59

eOn Communications Corporation and Subsidiaries

Schedule II—Valuation and Qualifying Accounts

(Dollars in thousands)

	Balance at Beginning of Period		Charged to Costs and Expenses		Charged to Other Accounts		Deductions		Balance at End of Period
2003:
Allowance for doubtful accounts and sales allowance	$	866	$	110	$	—	$	287	$	689
Inventory obsolescence reserve		1,456		234		—		383		1,307
Warranty reserve		199		312		—		228		283
2004:
Allowance for doubtful accounts and sales allowance	$	689	$	333	$	—	$	248	$	774
Inventory obsolescence reserve		1,307		524		—		100		1,731
Warranty reserve		283		325		—		247		361
2005:
Allowance for doubtful accounts and sales allowance	$	774	$	677	$	—	$	192	$	1,259
Inventory obsolescence reserve		1,731		362		—		581		1,512
Warranty reserve		361		105		—		177		289

60

EXHIBIT INDEX

Documents listed below are being filed as exhibits herewith. Exhibits identified by asterisks (*) are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed exhibits with the Commission.

Exhibit Number	Description of Document
2.1(&)	Plan of Acquisition for Cortelco Shanghai Telecom Equipment Company
3.1*	Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999.
3.2*	Amended and Restated Bylaws of eOn
4.1*	Reference is made to Exhibits 3.1 and 3.2
10.1*	Form of Indemnity Agreement between eOn and its officers and directors
10.2(@)	Sublease Termination and Release Agreement between eOn and TC Forest Hill Development, LP dated May 31, 2002.
14.1(%)	Code of Ethics
16(+)	Letter re: change in certifying accountant
18(@)	Preferability letter regarding LIFO to FIFO change in inventory accounting
21.1	Subsidiaries of eOn Communications Corporation.
23.1	Consent of Grant Thornton LLP.
23.2	Consent of GHP Horwath, P.C.
31.1	Rule 13a-14(a)/15d-14(a) Certifications
32.1	Section 1350 Certifications

(&) Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 8-K dated June 1, 2004

(*) Incorporated by reference to the Company’s Registration Statement on Form S-1 (No. 333-77021) or amendments thereto, filed with the Securities and Exchange Commission on April 26, 1999.

(@) Incorporated by reference to identically numbered exhibits to the Registrant’s previously filed Form 10-K’s or Form 10-Q’s

(#) Executive compensation plan or arrangement filed as an exhibit pursuant to Item 14(c) of Form 10-K

(%) Incorporated by reference to identically numbered exhibits to the Registrants’ previously filed Form 10-K dated July 31, 2004.

(+) Incorporated by reference to identically numbered exhibit to the Registrants’ previously filed Form 8-K dated December 21, 2004.

61