---

---

UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

---

FORM 10-K

|(Mark One)                                  
|--------------------------------------------
|x                                           
|                                            
|                                            
|                                            
|or                                          
|                                            
|o                                           
|                                            
|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. 
YESxNO o

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 o  No x

The aggregate market
value of the shares of common stock held by non-affiliates of the registrant
was approximately $14,138,000 based upon the closing sale price as reported by
the Nasdaq Stock Market on September 30, 2004. 
The number of outstanding shares of the registrants $0.001 par value
common stock was 12,830,152 shares as of that date.

DOCUMENTS
INCORPORATED BY REFERENCE

Certain portions of the
registrants Proxy Statement for the 2004 Annual Meeting of Shareholders are
incorporated by reference in Part III.

---

---

TABLE OF CONTENTS

|           |          |                                                                                                                      | Page
|---------- | -------- | -------------------------------------------------------------------------------------------------------------------- | ----
|           |          |                                                                                                                      |     
|PART I     |         
|           |         
|           | Item 1.  | Business                                                                                                             | 2   
|           |          | Executive Officers                                                                                                   | 12  
|           | Item 2.  | Properties                                                                                                           | 12  
|           | Item 3.  | Legal Proceedings                                                                                                    | 13  
|           | Item 4.  | Submission of Matters to a Vote of
  Security Holders                                                                | 13  
|           |         
|PART II    |         
|           |         
|           | Item 5.  | Market for Registrants Common
  Equity and Related Stockholder Matters, And Issuer Purchases of Equity
  Securities | 14  
|           | Item 6.  | Selected Financial Data                                                                                              | 14  
|           | Item 7.  | Managements Discussion and Analysis
  of Financial Condition and Results of Operations                              | 16  
|           | Item 7a. | Quantitative and Qualitative
  Disclosures About Market Risk.                                                        | 26  
|           | Item 8.  | Financial Statements and
  Supplementary Data                                                                        | 27  
|           | Item 9.  | Changes in and Disagreements With
  Accountants on Accounting and Financial Disclosure                               | 50  
|           | Item 9a. | Controls and Procedures                                                                                              | 50  
|           | Item 9b. | Other Information                                                                                                    | 52  
|           |         
|PART III   |         
|           |         
|           | Item 10  | Directors and Executive Officers of
  the Registrant.                                                                | 53  
|           | Item 11  | Executive Compensation                                                                                               | 53  
|           | Item 12. | Security Ownership of Certain
  Beneficial Owners and Management And Related Stockholder Mattes                      | 53  
|           | Item 13  | Certain Relationships and Related
  Transactions                                                                     | 53  
|           | Item 14. | Principal Accountant Fees and
  Services                                                                             | 53  
|           |         
|PART IV    |         
|           |         
|           | Item 15. | Exhibits and Financial Statement
  Schedules                                                                         | 54  
|           |         
|SIGNATURES | 55      
|           |          |                                                                                                                      |     

1

---

---

PART1

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. Our primary 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.  For small and medium-sized general business
applications we also offer integrated communication systems such as private
branch exchanges (PBXs), voice mail and unified messaging solutions.

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.

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.

2

---

---

DISCONTINUED
OPERATIONS

Through CSPR, we
distributed communications systems and cellular phones and resold cellular
airtime on the island of Puerto Rico and throughout the Caribbean and Latin
America. In August 2001, the Board of Directors approved a plan to spin-off
this subsidiary as a separate entity to the stockholders of eOn. This spin-off
was effective via a stock distribution on July 31, 2002 to eOn shareholders of
record on July 22, 2002. The remainder of the discussion in Item 1 will focus
on our continuing operations.

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 flagship product for delivering a 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.

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 Voice over Internet
  Protocol (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.

3

---

---

| | 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
|- | -----------------------------------------------------
|  |                                                      
|  |                                                      
|  |                                                      
| | Increased Productivity                               
|  |                                                      
|  |                                                      
|  |                                                      
| | Lower Total Cost of Ownership                        
|  |                                                      
|  |                                                      

4

---

---

STRATEGY

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

| | Grow Our eQueue Business                                    
|- | ------------------------------------------------------------
|  |                                                             
|  |                                                             
|  |                                                             
| | Differentiate with Enhanced
  Professional Services         
|  |                                                             
|  |                                                             
|  |                                                             
| | Adopt Customer Migration Programs
  to Encourage IP Adoption
|  |                                                             
|  |                                                             
|  |                                                             
| | Leverage Attractive
  Price/Performance Ratio               
|  |                                                             
|  |                                                             
|  |                                                             
| | Expand Internationally                                      
|  |                                                             
|  |                                                             

5

---

---

| | Opportunistically Manage  the Millennium Business
|- | -------------------------------------------------
|  |                                                  
|  |                                                  

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 a comprehensive and proven contact center
solution. 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.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | 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.                                                                                                                                                                                                                                                                                                                                                                 

6

---

---

| | 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 selected 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
  Application 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
  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.

7

---

---

| | 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 will provide an integrated
  workforce scheduling and forecasting solution that will allow 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 fully featured private branch exchange
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 connecting Millennium
platforms in multiple locations, thereby creating a private communications
network that operates as if all sites were on a single system. The Millennium
may also be networked with our eQueue communications server for a range of
virtual private network applications.

SALES
AND MARKETING

Our marketing objectives
are focused on building upon the accomplishments in fiscal year 2004,
especially in the areas of lead generation, sales tool creation, and increasing
brand awareness. Our goal is to position eOn as the leader in offering
multi-media contact center solutions, but our target customer base continues to
be customers that are looking to replace their ACD systems with the next
generation multi-media contact center solutions. Our strategy will be to
continue to promote solutions within our industry, but we will also promote our
solution to selected vertical and horizontal markets. During FY2004 we launched
many marketing initiatives and programs that began to gain traction and
contributed to the growth in eQueue sales during the past year, including:

| |  | Lead Generation Program                      
| | - | ---------------------------------------------
| |  | eOn Partner Network 
  Program               
| |  | eOn Consulting Services  Program             
| |  | Investment Guarantee and Trade Out Promotions
| |  | Event Marketing Program                      

8

---

---

We sell, install, maintain and
support our eQueue Multi-Media Contact Center in the United States through our
direct sales force and through selected value added resellers. For overseas
sales of our eQueue product, we utilize value-added resellers for sales,
installation, and maintenance. In addition we are in the process of training and
educating Cortelco Shanghai on our product suite to assist in the sales and
installation process. We also sell the Millennium domestically through our
network of dealers and value added resellers.

Net revenues in quarters
ending January 31 usually decline from the previous quarter, reflecting
seasonal factors that affect some of our customers. U.S. government customers
typically make substantial purchases during the quarters ending October 31, the
last quarter of the governments fiscal year, and these purchases decline
significantly in the following quarter. Customers in such markets as contact
centers, education, and retail also have seasonal buying patterns and do not
purchase substantial amounts of equipment during the quarters ending January
31.

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.

Our
success depends, in part, on our ability to enhance our existing products and
to develop functionality, technology and new products that address the
increasingly sophisticated and varied needs of our current and prospective
customers.

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.

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.

9

---

---

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 referencable 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, Aspect Communications, and
  Concerto. 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
  Concerto.
|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | 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 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 & data communications. These companies include Nortel
  Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

10

---

---

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 any of 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, 2004, we employed 174 people. We had 65 employees in the United
States and 109 in Asia. The mix of employees was 26 in sales and marketing, 103
in research, development, and professional services, and 45 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.

11

---

---

EXECUTIVE OFFICERS

The following table sets
forth information about our executive officers:

|Name |                    | Age |    | Position
|---- | ------------------ | --- | -- | --------
|     |                    |     |    |         
|     | David E. Lee       |     | 67 |         
|     | Stephen R. Bowling |     | 62 |         
|     | Mitch C. Gilstrap  |     | 43 |         

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 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 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 |  | 40,000 sq. ft.     |  | March 2007                |  | Office        
|Shanghai, China   |  | 35,000 sq. ft.     |  | August 2005               |  | Office        
|Beijing, China    |  | 2,000 sq. ft.      |  | Monthly                   |  | Office        
|Seoul, Korea      |  | 2,000 sq. ft.      |  | Monthly                   |  | Office        

Aggregate monthly rental
payments for the Companys facilities are approximately $38,000. 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.

12

---

---

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.

13

---

---

PART II

ITEM 5.  MARKET FOR
REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

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 the 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, 2004    |  | $    | 2.50 |     | $
|April 30, 2004   |  | $    | 4.17 |     | $
|January 31, 2004 |  | $    | 4.57 |     | $
|October 31, 2003 |  | $    | 3.70 |     | $
|                 |  |      |      |     |  
|July 31, 2003    |  | $    | 2.35 |     | $
|April 30, 2003   |  | $    | 0.81 |     | $
|January 31, 2003 |  | $    | 0.55 |     | $
|October 31, 2002 |  | $    | 0.60 |     | $

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

As of  September 30, 2004, there were 218
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 2004, 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.

On July 31, 2002, we
distributed our entire ownership in Cortelco Systems Puerto Rico to the
shareholders of eOn via a stock distribution.

Information set forth
under the caption Securities Authorized for Issuance under Equity Compensation
Plans in the Companys definitive Proxy Statement for the 2004 Annual Meeting
of Shareholders to be held on November 30, 2004 (the Proxy Statement), which
will be filed with the Securities and Exchange Commission not later than 120
days after July 31, 2004, are incorporated herein by reference.

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 (see Footnote 4 to the
consolidated financial statements).  The
statement of operations data set forth below for each of the fiscal years ended
July 31, 2004 and 2003, and the selected balance sheet data at July 31, 2004
and 2003, are derived from consolidated financial statements included in Item
8, which have been audited by Grant Thornton LLP as of July 31, 2004 and 2003 and
for the years then ended and by Deloitte & Touche LLP as of July 31, 2002
and for the year then ended. These 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, 2001, and 2000, and the
consolidated balance sheet data at July 31, 2001, and 2000, 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.

14

---

---

|                                                                                             |  | Year Ended July 31,                     |       
|-------------------------------------------------------------------------------------------- |  | --------------------------------------- | ------
|                                                                                             |  |                                         |       
|                                                                                             |  | 2004(2)                                 |       
|                                                                                             |  |                                         |       
|                                                                                             |  | (in
  thousands, except per share data) |       
|Consolidated Statement of
     Operations Data:                                              |  |                                         |       
|Net revenues                                                                                 |  | $                                       | 17,950
|Cost of revenues                                                                             |  |                                         | 8,507 
|Special charges (1)                                                                          |  |                                         | -     
|                                                                                             |  |                                         |       
|Gross
  profit                                                                               |  |                                         | 9,443 
|                                                                                             |  |                                         |       
|Operating expenses:                                                                          |  |                                         |       
|Selling, general and
            administrative                                              |  |                                         | 7,087 
|Research and
  development                                                                   |  |                                         | 3,106 
|Goodwill amortization                                                                        |  |                                         | -     
|Special charges (1)                                                                          |  |                                         | -     
|                                                                                             |  |                                         |       
|Total
  operating expenses                                                                   |  |                                         | 10,193
|                                                                                             |  |                                         |       
|Income (loss) from operations                                                                |  |                                         | (750  
|Interest income                                                                              |  |                                         | (79   
|Interest expense                                                                             |  |                                         | 29    
|Other (income) expense, net                                                                  |  |                                         | 167   
|                                                                                             |  |                                         |       
|                                                                                             |  |                                         |       
|Income (loss) from continuing
     operations before income taxes
     and minority interest |  |                                         | (867  
|Income tax expense(benefit)                                                                  |  |                                         | 24    
|                                                                                             |  |                                         |       
|                                                                                             |  |                                         |       
|Income (loss) from continuing
     operations before minority
     Interest                  |  | $                                       | (891  
|Minority Interest                                                                            |  |                                         | (37   
|                                                                                             |  |                                         |       
|                                                                                             |  |                                         |       
|Income (Loss) from continuing
  Operations                                                   |  | $                                       | (928  
|                                                                                             |  |                                         |       
|Income (loss) from continuing
     operations per share:                                     |  |                                         |       
|Basic                                                                                        |  | $                                       | (0.07 
|Diluted                                                                                      |  | $                                       | (0.07 
|Weighted average shares
     outstanding:                                                    |  |                                         |       
|Basic                                                                                        |  |                                         | 12,522
|Diluted                                                                                      |  |                                         | 12,522
|                                                                                             |  |                                         |       
|Cash dividends per common share,
     basic and diluted                                      |  | $                                       | 0.00  
|                                                                                             |  |                                         |       
|Consolidated Balance Sheet Data:                                                             |  |                                         |       
|Cash and cash equivalents                                                                    |  | $                                       | 4,679 
|Marketable securities                                                                        |  |                                         | 4,200 
|Working capital                                                                              |  |                                         | 9,715 
|Goodwill, net                                                                                |  |                                         | -     
|Total assets                                                                                 |  |                                         | 22,295
|Long-term debt                                                                               |  |                                         | -     
|Total stockholders equity                                                                   |  |                                         | 9,459 

15

---

---

| | (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 FY 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 6 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 communications servers and software which integrate and
manage voice, email and Internet communications for customer contact centers
and other applications. We also offer a traditional voice-switching platform
for small and medium-sized installations.

Net revenues in quarters
ending January 31 usually decline from the previous quarter, reflecting
seasonal factors that affect some of our customers. U.S. government customers
typically make substantial purchases during the quarters ending October 31, the
last quarter of the governments fiscal year, and these purchases decline
significantly in the following quarter. Customers in such markets as contact
centers, education, and retail also have seasonal buying patterns and do not
purchase substantial amounts of equipment during the quarters ending January
31.

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 Millennium and eQueue 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 provide
  our customers with standard product warranties from the date of purchase. The
  costs of satisfying warranty claims have historically been comprised of
  materials and direct labor costs. We estimate the costs of satisfying
  warranty claims based on analysis of past claims experience. We perform
  quarterly evaluations of these estimates, and any changes in estimate, 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 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.                                                                                                                                                                           

16

---

---

| | 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 $18.8 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 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.                                            

RESULTS
OF OPERATIONS

The following table
presents our operating ratios for fiscal years 2004, 2003, and 2002:

|                                                                                                        |  | Year Ended July 31, |       |     
|------------------------------------------------------------------------------------------------------- |  | ------------------- | ----- | ----
|                                                                                                        |  |                     |       |     
|                                                                                                        |  | 2004                |       | 2003
|                                                                                                        |  |                     |       |     
|Net revenues                                                                                            |  |                     | 100.0 | %   
|Cost of revenues                                                                                        |  |                     | 47.4  | %   
|Special charges                                                                                         |  |                     | 0.0   | %   
|                                                                                                        |  |                     |       |     
|Gross margin                                                                                            |  |                     | 52.6  | %   
|Operating expenses:                                                                                     |  |                     |       |     
|Selling, general, and
  administrative                                                                  |  |                     | 39.5  | %   
|Research and
  development                                                                              |  |                     | 17.3  | %   
|Special charges                                                                                         |  |                     | 0.0   | %   
|                                                                                                        |  |                     |       |     
|Total operating expenses                                                                                |  |                     | 56.8  | %   
|                                                                                                        |  |                     |       |     
|Loss from operations                                                                                    |  |                     | (4.2  | )%  
|Interest (income) expense, net                                                                          |  |                     | (0.2  | )%  
|Other (income) expense, net                                                                             |  |                     | 0.9   | %   
|                                                                                                        |  |                     |       |     
|Loss from continuing operations before income taxes
  and
          minority interest                   |  |                     | (4.8  | )%  
|                                                                                                        |  |                     |       |     
|Income tax expense(benefit)                                                                             |  |                     | 0.1   | %   
|                                                                                                        |  |                     |       |     
|Loss from continuing operations before minority
  interest.                                             |  |                     | (5.0  | )%  
|                                                                                                        |  |                     |       |     
|Minority Interest                                                                                       |  |                     | 0.2   | %   
|                                                                                                        |  |                     |       |     
|Loss before discontinued operations and cumulative
          effect of change in
  accounting principle |  |                     | (5.2  | )%  
|                                                                                                        |  |                     |       |     
|Income (loss) from discontinued operations, net of
  tax ..                                             |  |                     | 0.0   | %   
|                                                                                                        |  |                     |       |     
|Cumulative effect of change in accounting principle,
          net of tax                               |  |                     | 0.0   | %   
|                                                                                                        |  |                     |       |     
|Net loss ....                                                                                           |  |                     | (5.2  | )%  
|                                                                                                        |  |                     |       |     

17

---

---

The following discussion
provides information about the Companys continuing operations, which excludes
the results of Cortelco Systems Puerto Rico, Inc. (see Footnote 4 
Discontinued Operations in the notes to the consolidated financial statements).

NET
REVENUES

Our overall net revenues
increased 2.8% to $18.0 million in fiscal 2004 from $17.5 million in fiscal
2003. The increase resulted primarily from the additional revenue received by
the acquisition of Cortelco Shanghai partially offset by a decrease in revenues
from our eQueue products. Fiscal 2003 net revenues represented a 16.0% increase
from $15.0 million in fiscal 2002. The increase was primarily due to an
increase in eQueue revenues of $2.8 million, offset by a decline in Millennium
revenues of $0.4 million.

COST OF
REVENUES AND GROSS PROFIT

Cost of revenues consists
primarily of purchases from our contract manufacturers and other suppliers and
costs incurred for final assembly of our systems. Gross profit decreased 5.4%
to $9.4 million for the year ended July 31, 2004 from $10.0 million in fiscal
2003. The decrease was primarily due to a decrease in revenue for our higher
margined eQueue products. Fiscal 2003 represented an increase in gross profit
of 31.5% from $7.6 million in fiscal 2002. The increase in gross profit in 2003
was primarily due to increased revenues from our eQueue products. Our gross
margins, excluding any special charges, were 52.6%, 57.2%, and 55.4% for fiscal
years 2004, 2003, and 2002, respectively. The change in gross margin from
year-to-year is primarily the function of changes in product mix, rather than
changes in pricing and/or costs.

SELLING,
GENERAL, AND ADMINISTRATIVE EXPENSE

Selling, general and
administrative expenses were $7.1 million in fiscal 2004, a decrease of 18.2%
from $8.7 million in fiscal 2003.  The
decrease was a result of cost cutting measures implemented by management.  Fiscal 2003 represented a 9.1% decrease from
$9.5 million in fiscal 2002. The decrease in fiscal year 2003 resulted from a
decrease in personnel and fixed costs from the implementation of our
restructuring plan (see the Special Charges section).

RESEARCH
AND DEVELOPMENT EXPENSE

Research and development
expenses consist primarily of personnel and related expenses for our
engineering staff. The majority of our research and development efforts are
currently concentrated on enhancements for our eQueue product line. Research
and development expenses were $3.1 million in fiscal 2004 which represents an
8.6% increase from $2.9 million in fiscal 2003.  The increase was primarily due to increased development on our
eQueue product. Fiscal 2003 expenses were relatively unchanged from $3.0
million in fiscal 2002.

18

---

---

AMORTIZATION
OF GOODWILL AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE

On August 1, 2001, the
Company adopted SFAS No. 142, Goodwill and Other Intangible Assets, which
changed the method of evaluating goodwill for impairment from a recoverability
test based upon undiscounted cash flows to a fair value approach, which is
stipulated in SFAS No. 142. In addition, the new standard eliminated the
periodic amortization of goodwill; consequently, no goodwill amortization was
recorded in the current year.

As a result of the
adoption of SFAS No. 142 on August 1, 2001, the Company recorded goodwill
impairment in the amount of $10,375,000, which is reflected as a cumulative
effect of change in accounting principle in the financial statements for the
year ended July 31, 2002. The income tax effect of this change in accounting
principle was $0.

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 and resulted
in charges of $2,199,000. During the fourth quarter of 2001, the Company made
the decision to consolidate the majority of functions to its Atlanta
headquarters, which resulted in additional charges of $4,500,000. 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.

As a result of the
adoption of the restructuring plan, the Company recognized special charges  in operating expenses of ($63,000) and
$970,000 in 2003 and 2002, respectively.In 2002, the Company terminated 5
employees in the sales and field service functions for a charge of $58,000.

The special charge in
operating expenses also included ($63,000) and $970,000 in fiscal 2003 and
2002, respectively, for the expected costs associated with excess space at the
Companys locations in Memphis, Tennessee; Englewood, Colorado; and Guelph,
Ontario. The excess space resulted from the Companys relocation of personnel
and certain functions to the Atlanta headquarters and the corresponding
reductions in our workforce.

The Company also
recognized special charges of $752,000 in cost of revenues during 2002. The
2002 noncash charge was recorded  to
properly value excess inventories in light of then-current economic conditions.

The following tables
summarize the activity relating to the special charges during fiscal years 2003
and the associated liabilities at July 31, 2003 and 2002:

|                         |  | July 31, 2002
  Liability
  Balance |   | Charges |  | Expenditures |  | Other
  Adjustments |      | July 31, 2003
  Liability
  Balance | 
|------------------------ |  | ----------------------------------- | - | ------- |  | ------------ |  | ------------------- | ---- | ----------------------------------- | 
|                         |  |                                     |   |         |  |              |  |                     |      |                                     | 
|Termination
  benefits   |  |                                     |   | 61      |  |              |  |                     | -    |                                     | 
|Excess
  facilities cost |  |                                     |   | 173     |  |              |  |                     | (63) | (1)                                 | 
|                         |  |                                     |   |         |  |              |  |                     |      |                                     | 
|Total                    |  |                                     | $ | 234     |  |              |  | $                   | (63  | )                                   | 
|                         |  |                                     |   |         |  |              |  |                     |      |                                     | 

|(1) | Reflects favorable settlement of all property tax
  liabilities for the Companys former facility in Memphis, Tennessee and the
  resulting closure of the accrued restructuring liability.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

19

---

---

INTEREST
INCOME AND EXPENSE

Interest expense was
$29,000, $35,000 and $6,000 in fiscal years 2004, 2003 and 2002, 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.

Interest income in fiscal
2004 of $0.08 million decreased 20.0% from $0.10 million in fiscal 2003.
Interest income was  $0.29 million in
fiscal 2002. The decrease in fiscal years 2004 and 2003 reflected significantly
lower interest rates and a lower level of investments in marketable securities.

OTHER
INCOME AND EXPENSE, NET

Other expense was $0.2
million in fiscal 2004 compared to $0.1 million in fiscal 2003 and $0.2 million
in fiscal 2002.  The increase was
primarily due to a reserve established for a bankruptcy judgment that occurred
in 2001.

INCOME
TAX EXPENSE (BENEFIT)

Income tax expense was
$24,000 for fiscal 2004 as a result of the acquisition of Cortelco Shanghai.
The income tax benefit was  $0.0 million
and $0.12 million in fiscal years 2003 and 2002, respectively. The income tax
benefit for fiscal year 2002 resulted from the carryback of previous years
operating losses to the preceding five years under the Job Creation and Worker
Assistance Act of 2002, versus two years under previous tax laws.

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                       |       
|                                                                  |  |                            |       
|                                                                  |  | (in thousands)             |       
|Net Revenue                                                       |  | $                          | 24,336
|Net income (loss) before extraordinary items                      |  |                            | (805  
|Net income (loss) before cumulative effect of
  accounting change |  |                            | (805  
|Net income (loss)                                                 |  |                            | (805  
|                                                                  |  |                            |       
|Earnings per share                                                |  |                            | (0.06 

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2004, we
had cash and cash equivalents of $4.7 million, $4.2 million in short term
investments, and a working capital balance of $9.7 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 $1.3 million, $1.1 million, and $2.1 million
for fiscal years 2004, 2003, and 2002, respectively. The net operating cash for
the current year 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. The net operating cash outflow
for fiscal 2002 resulted primarily from our operating loss (adjusted for
non-cash items), and expenditures for accrued special charges, which were
partially offset by increased collections and a reduction in inventories.

20

---

---

Our
investing activities resulted in cash inflows of $2.9 million, $2.2 million,
and $1.8 million in fiscal years 2004, 2003, and 2002, respectively. Cash
provided by investing activities in the current year consisted primarily of
$3.8 million in cash acquired with the acquisition of Cortelco Shanghai offset
by the purchase of property and equipment. Cash provided by investing
activities in 2003 consisted primarily of $2.4 million in net sales of
marketable securities. Cash provided by investing activities in fiscal year
2002 consisted primarily of $2.1 million in net sales of marketable securities.

Our
financing activities have resulted in cash outflows of  $0.1 million, $0.6 million and $0.2 million
in fiscal years 2004, 2003, and 2002, respectively. Cash used in financing
activities in fiscal 2004 and 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. Cash used in financing
activities in fiscal 2002 consisted primarily of repurchases of common stock
and 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.

COMMITMENTS
AND CONTINGENCIES

At July 31, 2004, the
Company had outstanding commitments for inventory purchases under open purchase
orders of approximately $1,518,000.

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.

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.

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;           
| | declining market for traditional private branch
  exchange (PBX) equipment;
| | delayed deliveries from suppliers; and                                     
| | price decreases and other actions by our
  competitors.                    

21

---

---

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 are scrambling
to develop products to improve customer service in e-commerce. While the
industry remains fragmented, it is rapidly moving toward consolidation, driven
by both emerging companies desires to expand product offerings and resources
and established companies attempts to acquire new technology and reach new
market segments. A number of emerging companies have completed initial public
offerings, while many more remain private. More established competitors, as
well as those emerging companies that have completed initial public offerings,
currently have greater resources and market presence than we do. Additionally,
a number of our current and potential competitors have recently been acquired
by larger companies who seek to enter our markets.

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,
  Aspect Communications, and Rockwell;                   
|- | -----------------------------------------------------------------------------------------------------------------
| | data communication equipment suppliers, such as
  Cisco Systems and 3COM;                                        
| | email management and web center software suppliers,
  such as eGain, Kana Communications, and Live Person;       
| | and voice communications equipment suppliers, such
  as Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.

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.

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 expand our indirect sales channel to sell our eQueue products, our
ability to generate revenue would be harmed.

We
sell our eQueue communications servers both directly and indirectly through
dealers and value added resellers that have experience in data as well as voice
communications. We may not be able to expand this indirect sales channel. In
addition, new distribution partners may devote fewer resources to marketing and
supporting our products than to our competitors products and could discontinue
selling our products at any time in favor of our competitors products or for
any other reason.

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.

22

---

---

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.

Unanticipated
difficulties in integrating our recent acquisition of Cortelco Shanghai could harm our
business.

On June 1, 2004
eOn purchased a controlling interest in Cortelco Shanghai.  Cortelco Shanghai
provides telecommunications products  in China, including fiber optic transmission
equipment, data communications systems, and network management software.  eOns
future  operating results may be adversely affected if we are not able to realize
operating efficiencies and sales opportunities as a result  of this acquisition.

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 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.

If
we are not able to sustain our Millennium voice switching platform revenues,
our business, operating results and financial condition could be harmed.

We
may not be able to sustain our Millennium revenues because the traditional
private branch exchange (PBX) market, which accounts for a substantial portion
of our Millennium revenues, is declining. One reason for the decline of the
traditional PBX market is the emergence of voice switching platforms based on
standard PCs. If we are not able to grow or sustain our Millennium voice
switching platform revenues, our business, operating results and financial
condition could be harmed.

In
addition, a significant portion of Millennium 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.

23

---

---

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, 2004, our executive officers, directors and principal stockholders
and their affiliates beneficially owned 4,618,477 shares, or 35.3% 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.

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.

24

---

---

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 November 2002, the
Emerging Issues Task force (EITF) reached a consensus regarding EITF Issue
00-21, Accounting for Revenue Arrangements
with Multiple Deliverables.  The consensus addresses not only
when and how an arrangement involving multiple deliverables should be divided
into separate units of accounting but also how the arrangements consideration
should be allocated among separate units. The addition of this
pronouncement did not have a material impact on our results of operations or
financial position.

In December 2002, the
FASB issued Statement of Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and Disclosure (SFAS 148).
SFAS 148 amends Statement No. 123, Accounting for Stock-Based Compensation(SFAS
123), to provide alternative methods for voluntary transition to SFAS 123s
fair value method of accounting for stock-based employee compensation. SFAS 148
also requires disclosure of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net earnings (loss)
and earnings (loss) per share in annual and interim financial statements. The
provisions of SFAS 148 are effective in fiscal years beginning after December
15, 2002.  The Company has implemented
the required disclosures of this pronouncement and will continue to account for
stock options under the intrinsic value method.

In July 2003, the 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.

25

---

---

QUARTERLY
FINANCIAL DATA (UNAUDITED)

Quarterly
financial data for the years ended July 31, 2004 and 2003 is summarized as
follows:

|2004                                                                                         |  | FirstQuarter   |       | SecondQuarter |   | ThirdQuarter |  | FourthQuarter |      
|-------------------------------------------------------------------------------------------- |  | -------------- | ----- | ------------- | - | ------------ |  | ------------- | -----
|                                                                                             |  |                |       |               |   |              |  |               |      
|                                                                                             |  | (In thousands) |      
|Net
  revenues                                                                               |  | $              | 5,039 |               | $ | 3,958        |  | $             | 2,770
|Gross
  profit                                                                               |  |                | 2,939 |               |   | 2,367        |  |               | 1,511
|Income
  (loss) before discontinued operations
     and extraordinary item                   |  |                | 330   |               |   | 87           |  |               | (944 
|Net
  income (loss)                                                                          |  |                | 330   |               |   | 87           |  |               | (944 
|                                                                                             |  |                |       |               |   |              |  |               |      
|Income
  (loss) before discontinued operations
     and extraordinary item per common share: |  |                |       |               |   |              |  |               |      
|Basic
  and diluted                                                                          |  | $              | 0.03  |               | $ | 0.01         |  | $             | (0.07
|Net
  income loss per common share                                                           |  |                |       |               |   |              |  |               |      
|Basic
  and diluted (1)                                                                      |  | $              | 0.03  |               | $ | 0.01         |  | $             | (0.07

|2003                                                                                             |  | FirstQuarter   |        | SecondQuarter |   | ThirdQuarter |   | FourthQuarter |      
|------------------------------------------------------------------------------------------------ |  | -------------- | ------ | ------------- | - | ------------ | - | ------------- | -----
|                                                                                                 |  |                |        |               |   |              |   |               |      
|                                                                                                 |  | (In thousands) |       
|Net
  revenues                                                                                   |  | $              | 3,555  |               | $ | 4,118        |   | $             | 4,749
|Gross
  profit                                                                                   |  |                | 1,785  |               |   | 2,489        |   |               | 2,969
|Income
  (loss) before discontinued operations
     and extraordinary item                       |  |                | (1,262 | )             |   | (532         | ) |               | 82   
|Net
  income (loss)                                                                              |  |                | (1,262 | )             |   | (532         | ) |               | 82   
|                                                                                                 |  |                |        |               |   |              |   |               |      
|Income
  (loss) before discontinued operations
     and extraordinary item per common share (1): |  |                |        |               |   |              |   |               |      
|Basic
  and diluted                                                                              |  | $              | (0.10  | )             | $ | (0.04        | ) | $             | 0.01 
|Net
  income loss per common share:                                                              |  |                |        |               |   |              |   |               |      
|Basic
  and diluted (1)                                                                          |  |                | (0.10  | )             |   | (0.04        | ) |               | 0 01 

|(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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

26

---

---

ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS

|                                                                                                                  | Page
|----------------------------------------------------------------------------------------------------------------- | ----
|                                                                                                                  |     
|Reports of Independent Registered Public Accounting Firms                                                         | 28  
|                                                                                                                  |     
|Consolidated Balance Sheets as of
  July 31, 2004 and 2003                                                        |     
|                                                                                                                  |     
|Consolidated Statements of Operations
  for the Years ended July 31, 2004, 2003, and 2002                         |     
|                                                                                                                  |     
|Consolidated Statements of Cash Flows
  for the Years ended July 31, 2004, 2003, and 2002                         |     
|                                                                                                                  |     
|Consolidated Statement of
  Stockholders Equity for the Years Ended July 31, 2004, 2003, and 2002                |     
|                                                                                                                  |     
|Notes to
  Financial Statements                                                                                   |     
|                                                                                                                  |     
|Schedule II
   Valuation and Qualifying Accounts for Each of the Three Years in the Period
  Ended July 31, 2004 |     

27

---

---

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 2003, 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.  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
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       

28

---

---

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors
and Stockholders of eOn Communications Corporation

We have audited the
accompanying consolidated statements of operations, cash flows, and
stockholders equity of eOn Communications Corporation and subsidiaries (the
Company) for the year ended July 31, 2002. Our audit also included the
financial statement schedule listed in the Index at Item 15 for the year ended
July 31, 2002. These financial statements and financial statement schedule are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement
schedule 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, such
consolidated financial statements present fairly, in all material respects, the
results of operations and cash flows of the Company for the year ended July 31,
2002 in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly, in all material respects, the information set
forth therein.

As discussed in Note 5 to
the consolidated financial statements, on August 1, 2001 the Company changed
its method of accounting for goodwill and other intangible assets to conform
with FASB Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.

|/s/ Deloitte & Touche LLP
|-------------------------
|                         
|Atlanta, Georgia         
|August 29, 2002          

29

---

---

eOn Communications Corporation
Consolidated Balance Sheets
July 31, 2004 and 2003
(Dollars in thousands)

ASSETS

|                                                                                                                                                |  | July 31, |        
|----------------------------------------------------------------------------------------------------------------------------------------------- |  | -------- | -------
|                                                                                                                                                |  |          |        
|                                                                                                                                                |  | 2004     |        
|                                                                                                                                                |  |          |        
|Current
  assets:                                                                                                                               |  |          |        
|Cash
  and cash equivalents                                                                                                                     |  | $        | 4,679  
|Marketable
  securities                                                                                                                         |  |          | 4,200  
|Trade
  accounts receivable, net of allowance for
          doubtful accounts of $774 and
  $689                                                |  |          | 6,656  
|Trade
  accounts receivable  related party, net of 
          allowance for doubtful
  accounts of $18                                         |  |          | 615    
|Notes
  receivable                                                                                                                              |  |          | 528    
|Inventories                                                                                                                                     |  |          | 2,733  
|Other
  current assets                                                                                                                          |  |          | 1,913  
|                                                                                                                                                |  |          |        
|Total
  current assets                                                                                                                          |  |          | 21,324 
|                                                                                                                                                |  |          |        
|Property and
  equipment, net                                                                                                                   |  |          | 971    
|Intangible
  assets, net of accumulated amortization                                                                                            |  |          | 0      
|                                                                                                                                                |  |          |        
|Total                                                                                                                                           |  | $        | 22,295 
|                                                                                                                                                |  |          |        
|                                                                                                                                                |  |          |        
|LIABILITIES
  AND STOCKHOLDERS' EQUITY                                                                                                          |  |          |        
|                                                                                                                                                |  |          |        
|Current
  liabilities:                                                                                                                          |  |          |        
|Trade
  accounts payable                                                                                                                        |  | $        | 5,431  
|Payable
  to affiliate                                                                                                                          |  |          | 2,049  
|Note
  payable  current                                                                                                                        |  |          | 767    
|Deferred
  acquisition payment                                                                                                                  |  |          | 1,078  
|Accrued
  expenses and other                                                                                                                    |  |          | 2,284  
|                                                                                                                                                |  |          |        
|Total
  current liabilities                                                                                                                     |  |          | 11,609 
|                                                                                                                                                |  |          |        
|                                                                                                                                                |  |          |        
|Minority
  Interest                                                                                                                             |  |          | 1,227  
|                                                                                                                                                |  |          |        
|                                                                                                                                                |  |          |        
|Stockholders'
  equity:                                                                                                                         |  |          |        
|Common
  Stock, $.001 par value (50,000,000 shares 
          authorized, 12,810,260 and
  12,176,312 shares issued 
          and outstanding) |  |          | 13     
|Additional
  paid-in capital                                                                                                                    |  |          | 54,369 
|Treasury
  stock, at cost (676,900 and 676,900 shares,
          respectively)                                                                  |  |          | (1,502 
|Accumulated
  deficit                                                                                                                           |  |          | (43,421
|                                                                                                                                                |  |          |        
|Total
  stockholders' equity                                                                                                                    |  |          | 9,459  
|                                                                                                                                                |  |          |        
|                                                                                                                                                |  |          |        
|Total                                                                                                                                           |  | $        | 22,295 
|                                                                                                                                                |  |          |        

See notes to financial statements.

30

---

---

eOn Communications Corporation
Consolidated Statements of Operations
For the Years Ended July 31, 2004, 2003, and 2002
(Dollars in thousands, except per share data)

|                                                                                                                              |  | Year Ended July 31, |       
|----------------------------------------------------------------------------------------------------------------------------- |  | ------------------- | ------
|                                                                                                                              |  |                     |       
|                                                                                                                              |  | 2004                |       
|                                                                                                                              |  |                     |       
|Net revenues                                                                                                                  |  | $                   | 17,950
|Cost of
  revenues                                                                                                            |  |                     | 8,507 
|Special
  charges                                                                                                             |  |                     | -     
|                                                                                                                              |  |                     |       
|Gross
  profit                                                                                                                |  |                     | 9,443 
|                                                                                                                              |  |                     |       
|Operating
  expenses:                                                                                                         |  |                     |       
|Selling,
  general and administrative                                                                                         |  |                     | 7,087 
|Research
  and development                                                                                                    |  |                     | 3,106 
|Special
  charges                                                                                                             |  |                     | -     
|                                                                                                                              |  |                     |       
|Total
  operating expenses                                                                                                    |  |                     | 10,193
|                                                                                                                              |  |                     |       
|Loss from
  operations                                                                                                        |  |                     | (750  
|                                                                                                                              |  |                     |       
|Interest
  expense                                                                                                            |  |                     | 29    
|Interest
  income                                                                                                             |  |                     | (79   
|Other
  (income) expense, net                                                                                                 |  |                     | 167   
|                                                                                                                              |  |                     |       
|                                                                                                                              |  |                     |       
|Loss from
  continuing operations 
     before income taxes and minority interest                                             |  |                     | (867  
|                                                                                                                              |  |                     |       
|Income tax
  expense                                                                                                          |  |                     | 24    
|                                                                                                                              |  |                     |       
|Loss before
  minority interest                                                                                               |  |                     | (891  
|                                                                                                                              |  |                     |       
|Minority
  interest                                                                                                           |  |                     | (37   
|                                                                                                                              |  |                     |       
|Loss before discontinued
  operations,
     extraordinary loss, and cumulative effect 
     of change in accounting principle |  |                     | (928  
|                                                                                                                              |  |                     |       
|Income
  (loss) from discontinued operations,
     net of income tax effect                                                   |  |                     | -     
|                                                                                                                              |  |                     |       
|Cumulative
  effect of change in accounting 
     principle, net of income tax effect                                         |  |                     | -     
|                                                                                                                              |  |                     |       
|                                                                                                                              |  |                     |       
|Net loss and
  comprehensive loss                                                                                             |  | $                   | (928  
|                                                                                                                              |  |                     |       
|                                                                                                                              |  |                     |       
|Net loss per
  common share:                                                                                                  |  |                     |       
|Basic
  and diluted:                                                                                                          |  |                     |       
|Loss
  before discontinued 
          operations and extraordinary
  items                                                    |  | $                   | (0.07 
|Income
  (loss) from discontinued operations                                                                                  |  |                     | -     
|Cumulative
  effect of change in accounting 
          principle                                                              |  |                     | -     
|                                                                                                                              |  |                     |       
|Net loss per
  common share                                                                                                   |  | $                   | (0.07 
|                                                                                                                              |  |                     |       

See notes to financial statements.

31

---

---

eOn Communications Corporation
Consolidated Statements of Cash FlowsFor the Years Ended July 31, 2004, 2003, and 2002(Dollars in thousands)

|                                                                                              |  | Year Ended July 31, |       
|--------------------------------------------------------------------------------------------- |  | ------------------- | ------
|                                                                                              |  |                     |       
|                                                                                              |  | 2004                |       
|                                                                                              |  |                     |       
|CASH FLOWS
  FROM OPERATING ACTIVITIES:                                                       |  |                     |       
|Net loss                                                                                      |  | $                   | (928  
|Adjustments
  to reconcile net loss to net cash 
     used in operating activities:           |  |                     |       
|Loss
  from discontinued operations                                                           |  |                     | -     
|Impairment
  of goodwill from adoption of FAS 142                                             |  |                     | -     
|Depreciation
  and amortization                                                               |  |                     | 596   
|Minority
  Interest                                                                           |  |                     | 37    
|Provision
  for the allowance for doubtful accounts                                           |  |                     | 85    
|Loss
  on investments                                                                         |  |                     | -     
|Changes
  in net assets and liabilities (net of effect
          of discontinued operations): |  |                     |       
|Trade
  accounts receivable                                                                   |  |                     | (2,523
|Accounts
  receivable from/payable to affiliates                                              |  |                     | (106  
|Notes
  receivable                                                                            |  |                     | (174  
|Inventories                                                                                   |  |                     | 363   
|Other
  assets                                                                                |  |                     | (26   
|Trade
  accounts payable                                                                      |  |                     | 1,916 
|Accrued
  special charges                                                                     |  |                     | -     
|Accrued
  expenses and other                                                                  |  |                     | (569  
|Income
  taxes payable (refund receivable)                                                    |  |                     | -     
|                                                                                              |  |                     |       
|Net
  cash used in operating activities                                                       |  |                     | (1,329
|                                                                                              |  |                     |       
|CASH FLOWS
  FROM INVESTING ACTIVITIES:                                                       |  |                     |       
|Net
  cash acquired in business acquisition                                                   |  |                     | 3,108 
|Purchases
  of property and equipment                                                         |  |                     | (345  
|Disposal
  of property and equipment                                                          |  |                     | 146   
|Sales
  of marketable securities                                                              |  |                     | -     
|Purchases
  of marketable securities                                                          |  |                     | -     
|                                                                                              |  |                     |       
|Net
  cash provided by investing activities                                                   |  |                     | 2,909 
|                                                                                              |  |                     |       
|CASH FLOWS
  FROM FINANCING ACTIVITIES:                                                       |  |                     |       
|Repayment
  of note payable                                                                   |  |                     | (724  
|Repurchases
  of common stock                                                                 |  |                     | -     
|Proceeds
  from the exercise of stock options and
          employee stock purchase plan      |  |                     | 602   
|                                                                                              |  |                     |       
|Net
  cash used in financing activities                                                       |  |                     | (122  
|                                                                                              |  |                     |       
|Cash used by
  discontinued operations                                                        |  |                     | -     

32

---

---

eOn Communications CorporationConsolidated Statements of Cash Flows (continued) For the Years Ended
July 31, 2004, 2003, and 2002

|                                                       |  | Year Ended July 31, |      
|------------------------------------------------------ |  | ------------------- | -----
|                                                       |  |                     |      
|                                                       |  | 2004                |      
|                                                       |  |                     |      
|Net increase
  (decrease) in cash and cash equivalents |  |                     | 1,458
|Cash and
  cash equivalents, beginning of year         |  |                     | 3,221
|                                                       |  |                     |      
|Cash and
  cash equivalents, end of year               |  | $                   | 4,679
|                                                       |  |                     |      
|Supplemental
  cash flow information:                  |  |                     |      
|Interest
  paid                                        |  | $                   | 29   
|Income
  taxes paid                                    |  |                     | 24   

Noncash activity:

|2002: |                                                                                                                                                                                                                                                                                                                                                          
|----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|      | The Company
  distributed its entire ownership interest in Cortelco Systems Puerto Rico,
  Inc. to the shareholders of eOn via a stock distribution of 1,204,157 shares
  of CSPR on July 31, 2002.                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                          
|      | The Company
  contributed a $264,000 note receivable plus accrued interest from our former
  parent, Cortelco Systems Holding Corporation, to Cortelco Systems Puerto Rico
  prior to the spin-off.                                                                                                                                                      
|      |                                                                                                                                                                                                                                                                                                                                                          
|      | In
  connection with the lease termination agreement for the former facility in
  Memphis, Tennessee, the Company issued a non-interest bearing note payable in
  the amount of $1,400,000. After imputing a discount for interest over the
  life of the note, $1,331,000 was reclassified from accrued special charges
  upon the issuance of the note.

See notes to financial statements.

33

---

---

eOn Communications Corporation
Consolidated Statement of Stockholders' Equity
For the Years Ended July 31, 2004, 2003, and 2002
(Dollars in thousands)

|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   | Note
  Receivable
  From
  Affiliate/
  Former
  Parent |      |   |  
|------------------------------------------- |  | ------------ | ---------- | ------------------------------ | - | -------------- | --------------------- | - | ------ | - |  | ------------------------------ | - | - | ------ | - | - | ------- | - | ------------------------------------------------------- | ---- | - | -
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |  
|                                            |  | Common Stock |            | Additional
  Paid-In
  Capital |   | Treasury Stock |                       |   |        |   |  | Total
  Stockholders
  Equity |  
|                                            |  |              |            |                                |   |                | Accumulated
  Deficit |   |        |  
|                                            |  | Shares       |            | Amount                         |   |                | Shares                |   | Amount |   |  |                                |  
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |  
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |  
|Balance at July 31, 2001                    |  |              | 12,473,445 |                                | $ | 12             |                       | $ | 57,919 |   |  | (431,500                       | ) | $ | (1,296 | ) | $ | (22,294 | ) | $                                                       | (264 | ) | $
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Repurchase of common stock                  |  |              | -          |                                |   | -              |                       |   | -      |   |  | (234,500                       | ) |   | (203   | ) |   | -       |   |                                                         | -    |   |  
|Exercise of stock options                   |  |              | 112,620    |                                |   | -              |                       |   | 56     |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Issuances from employee stock purchase plan |  |              | 120,569    |                                |   | -              |                       |   | 81     |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Distribution of CSPR stock                  |  |              | -          |                                |   | -              |                       |   | (4,680 | ) |  | -                              |   |   | -      |   |   | -       |   |                                                         | 264  |   |  
|Net loss and comprehensive loss             |  |              | -          |                                |   | -              |                       |   | -      |   |  | -                              |   |   | -      |   |   | (18,695 | ) |                                                         | -    |   |  
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Balance at July 31, 2002                    |  |              | 12,706,634 |                                | $ | 12             |                       | $ | 53,376 |   |  | (666,000                       | ) | $ | (1,499 | ) | $ | (40,989 | ) | $                                                       | -    |   | $
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Repurchase of common stock                  |  |              | -          |                                |   | -              |                       |   | -      |   |  | (10,900                        | ) |   | (3     | ) |   | -       |   |                                                         | -    |   |  
|Exercise of stock options                   |  |              | 34,831     |                                |   | -              |                       |   | 34     |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Issuances from employee stock purchase plan |  |              | 111,747    |                                |   | -              |                       |   | 37     |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Net loss and comprehensive loss             |  |              | -          |                                |   | -              |                       |   | -      |   |  | -                              |   |   | -      |   |   | (1,504  | ) |                                                         | -    |   |  
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Balance at July 31, 2003                    |  |              | 12,853,212 |                                | $ | 12             |                       | $ | 53,447 |   |  | (676,900                       | ) | $ | (1,502 | ) | $ | (42,493 | ) | $                                                       | -    |   | $
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Exercise of stock options                   |  |              | 355,023    |                                |   | 1              |                       |   | 510    |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Issuances from employee stock purchase plan |  |              | 121,758    |                                |   | -              |                       |   | 91     |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Issuances of common stock for acquisitions  |  |              | 157,167    |                                |   | -              |                       |   | 321    |   |  | -                              |   |   | -      |   |   | -       |   |                                                         | -    |   |  
|Net loss and comprehensive loss             |  |              | -          |                                |   | -              |                       |   | -      |   |  | -                              |   |   | -      |   |   | (928    | ) |                                                         | -    |   |  
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  
|Balance at July 31, 2004                    |  |              | 13,487,160 |                                | $ | 13             |                       | $ | 54,369 |   |  | (676,900                       | ) | $ | (1,502 | ) | $ | (43,421 | ) | $                                                       | -    |   | $
|                                            |  |              |            |                                |   |                |                       |   |        |   |  |                                |   |   |        |   |   |         |   |                                                         |      |   |  

See notes to financial statements.

34

---

---

eOn Communications Corporation
Notes to Consolidated Financial Statements
Years Ended July 31, 2004, 2003, and 2002

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 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 includes the accounts of the companys majority
owned subsidiary, Cortelco Shanghai. 
All significant balances and transactions have been eliminated during
the consolidation.

The
Company also had a wholly-owned subsidiary, Cortelco Systems Puerto Rico, Inc.
(CSPR), based in San Juan Puerto Rico. On August 28, 2001, the Board of
Directors approved a plan to spin-off this subsidiary as a separate entity to
the stockholders of eOn. This action was completed on July 31, 2002 via a
distribution of all the outstanding shares of CSPR to the shareholders of eOn.
Therefore, the assets, liabilities, results of operations and cash flows of
this entity have been segregated and are reflected in the financial statements
of eOn as a discontinued operation for all periods. The Companys financial
statements have been restated to conform to the discontinued operations
presentation. See Footnote 4 for additional information.

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

2.  ACQUISITION OF
CORTELCO SHANGHAI TELECOM EQUIPMENT COMPANY

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.  It is
anticipated that up to an additional 471,501 shares may be issued over the next
four fiscal quarters if Cortelco Shanghai attains specified revenue targets as
set forth in the purchase agreement which is classified as Accrued earnout
liability in the purchase allocation.

35

---

---

This
acquisition has been accounted for under the purchase method pursuant to
Statement of Financial Accounting Standards No. 141, Business Combinations. A
summary of the net assets acquired is as follows:

|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                  |  | $ | 8,100,000  |  
|Long term assets                |  |   | 206,000    |  
|Current Liabilities             |  |   | (5,710,000 | )
|Minority Interest               |  |   | (1,190,000 | )
|Accrued earnout liability       |  |   | (1,078,000 | )
|                                |  |   |            |  
|Net assets acquired             |  | $ | 328,000    |  

3.  SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES

Principles
of Consolidation 
The accompanying consolidated financial statements include the accounts of eOn
Communications Corporation and its majority owned subsidiary  Cortelco
Shanghai Telecom Equipment Company. All significant inter-company accounts and
transactions have been eliminated in consolidation.

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, 2004 there was $2,924,392 held in foreign bank accounts.

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.

Inventories - Inventories are valued at the lower of
cost or market. Cost is determined by the first-in, first-out (FIFO) method.

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.

Goodwill - Goodwill represented the cost in excess of
the fair value of net assets acquired. Prior to July 31, 2001, these costs were
being amortized on a straight line basis over twenty years. On August 1, 2001,
the Company adopted FAS 142, Goodwill and Other Intangible Assets and ceased
amortizing goodwill as of that date. It was also determined that goodwill was
impaired as of that date, and the Company recorded an impairment charge of
$10,375,000. See Footnote 5 for more information.

Intangible
Assets - Intangible
assets primarily represent costs incurred to acquire and/or establish patents,
trademarks, and software technology. These costs are being amortized on a
straight-line basis over the estimated useful lives of the assets, generally
five years. The amortization period begins with the initial introduction of the
underlying product to the market in order to properly match revenue and
expense. The Company reviews the carrying value of intangible assets for
impairment by comparing the net book value of such assets to the future
undiscounted cash flows attributable to such assets whenever events or changes
in circumstances occur which might indicate that the carrying amount might not
be recoverable. If impairment is indicated, the carrying amount of the asset is
written down to fair value.

36

---

---

Stock
Compensation Plans - The Company has three stock-based compensation plans for
employees and an Employee Stock Purchase Plan (ESPP), which are more fully
described in Footnote 15. 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
noncompensatory 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:

|                                                   |  | Fiscal
  Year Ended July 31, |       
|-------------------------------------------------- |  | ---------------------------- | ------
|                                                   |  |                              |       
|                                                   |  | 2004                         |       
|                                                   |  |                              |       
|                                                   |  | (in thousands)               |       
|Net loss as reported                               |  | $                            | (928  
|Add: Stock-based
  compensation, as reported       |  |                              |       
|                                                   |  |                              |      
|Deduct: Total stock-based
  compensation           |  |                              |       
|determined under fair
  value based method for all |  |                              | (612  
|awards, net of tax                                 |  |                              |       
|                                                   |  |                              |       
|Pro forma net loss                                 |  | $                            | (1,540
|                                                   |  |                              |       
|Net loss per share  basic
  and diluted:          |  |                              |       
|Net
  loss per share  as reported                 |  | $                            | (0.07 
|Net
  loss per share  pro forma                   |  | $                            | (0.12 

Product
Warranties - The
Company provides the customer with a warranty from the date of purchase.
Estimated warranty obligations are recorded based on actual claims experience.

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.

Revenue
Recognition Revenues
from our Millennium and eQueue 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

Medical
Care and Disability Benefit Plans- The Company is fully insured with respect to the medical and
disability benefits offered to substantially all employees. The Company does
not provide benefits to retired employees.

Earnings
Per Share- The
Company follows Statement of Financial Accounting Standard (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.

37

---

---

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.

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.

Comprehensive
Income- In June 1997,
the Financial Accounting Standards Board (FASB) issued SFAS 130, Reporting
Comprehensive Income, which 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
years ended July 31, 2004, 2003, and 2002, net loss equaled comprehensive loss.

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.

Advertising
Expense The Company
expenses advertising expenses as incurred. Advertising expenses for 2004, 2003,
and 2002 were not significant.

Recently
Issued Accounting Standards- In November 2002, the Emerging Issues Task force (EITF) reached a
consensus regarding EITF Issue 00-21, Accounting
for Revenue Arrangements with Multiple Deliverables.  The consensus addresses not only when and
how an arrangement involving multiple deliverables should be divided into
separate units of accounting but also how the arrangement's consideration
should be allocated among separate units. 
The adoption of EITF Issue 00-21 did not have a material impact on the
Companys results of operations or financial position.

In December 2002, the
FASB issued Statement of Financial Accounting Standards No. 148, Accounting for Stock -Based Compensation  Transition
and Disclosure (SFAS 148). SFAS 148 amends Statement No. 123, Accounting for Stock-Based Compensation(SFAS
123), to provide alternative methods for voluntary transition to SFAS 123s
fair value method of accounting for stock-based employee compensation. SFAS 148
also requires disclosure of the effects of an entitys accounting policy with
respect to stock-based employee compensation on reported net earnings (loss)
and earnings (loss) per share in annual and interim financial statements. The
provisions of SFAS 148 are effective in fiscal years beginning after December
15, 2002.  The Company has implemented
the required disclosures of this pronouncement and will continue to account for
stock options under the intrinsic value method.

In
July 2003, the 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.

Reclassifications- Certain amounts in
the 2003 and 2002 financial statements have been reclassified to conform with
the 2004 presentation.

38

---

---

4.  DISCONTINUED
OPERATIONS

On
August 28, 2001, the Board of Directors of the Company approved a plan to
spin-off Cortelco Systems Puerto Rico, 
eOns wholly-owned Caribbean/Latin America service and distribution
subsidiary, as an independent entity headquartered in San Juan, Puerto Rico.
The spin-off transaction was completed on July 31, 2002 with the issuance of
CSPR shares on a 1-for-10 basis to eOn stockholders.

The
Companys financial statements have been restated to reflect the Caribbean /
Latin America subsidiary as a discontinued operation for all periods
presented.  Summarized results of the
discontinued business are shown separately as discontinued operations in the
accompanying consolidated financial statements.

Operating
results of the discontinued operations are as follows:

|                                                        |  | Year ended July 31, |  
|------------------------------------------------------- |  | ------------------- | -
|                                                        |  |                     |  
|                                                        |  | 2002                |  
|                                                        |  |                     |  
|                                                        |  | (In thousands)      |  
|                                                        |  |                     |  
|Net sales                                               |  |                     | $
|                                                        |  |                     |  
|Loss before
  income taxes 
     and extraordinary loss |  |                     |  
|Income tax
  expense                                    |  |                     |  
|                                                        |  |                     |  
|                                                        |  |                     |  
|Net loss
  from discontinued 
     operations           |  |                     | $
|                                                        |  |                     |  
|Net
  loss per share:                                   |  |                     |  
|Basic
  and Diluted                                     |  |                     | $

5.  ACCOUNTING FOR
GOODWILL

In
June 2001, the FASB issued SFAS No.142, 
Goodwill and Other Intangible Assets 
which changes the method by which companies may recognize intangible
assets in purchase business combinations and generally requires identifiable
intangible assets to be recognized separately from goodwill.  In addition, it eliminates the amortization
of all existing and newly acquired goodwill on a prospective basis and requires
companies to assess goodwill for impairment, at least annually, based on the
fair value of the reporting unit associated with the goodwill.  The Company elected to early adopt SFAS
No.142 on August 1, 2001, and ceased amortizing goodwill as of this date.

Goodwill
of $11,724,000 had been recorded in conjunction with the acquisition of BCS
Technologies in April 1999. This balance was subsequently reduced by $1,349,000
due to amortization expense in fiscal years 2001, 2000, and 1999.  On August 1, 2001 the Company adopted SFAS
No. 142, Goodwill and Other Intangible
Assets, which changed the method of evaluating goodwill from a
recoverability test based upon undiscounted cash flows to a fair value approach.
Accordingly, the Company's previously recognized goodwill was tested for
impairment as of August 1, 2001. The Company calculated the fair value of the
reporting unit using a combination of the Companys quoted market prices and a
discounted cash flow analysis. As a result of this analysis, the Company
concluded that goodwill was impaired and recorded an impairment charge in the
amount of $10,375,000, which is reflected as a cumulative effect of change in
accounting principle in the accompanying consolidated statement of operations
for the year ended July 31, 2002. The income tax effect of this change in
accounting principle was $0.

39

---

---

6.  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 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 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.

As
a result of the adoption of the restructuring plan, the Company recognized
special charges  in operating
expenses.  The special charge in
operating expenses included ($63,000) and $970,000 in fiscal 2003 and 2002,
respectively, for the expected costs associated with excess space at the
Companys locations in Memphis, Tennessee; Englewood, Colorado; and Guelph,
Ontario.  The excess space resulted from
the Companys relocation of personnel and certain functions to the Atlanta
headquarters and the corresponding reductions in the companys workforce.

The
Company also recognized special charges of $752,000 in cost of revenues during
2002. The noncash charge was recorded to properly value excess inventories in
light of then-current economic conditions.

The
following tables summarize the activity relating to the special charges during
fiscal years 2003 and 2002 and the associated liabilities at July 31, 2003 and
2002:

|                       |  | July 31, 2001Liability
  Balance |   | Charges |  | Expenditures |  | Other
  Adjustments |       | July 31, 2002Liability
  Balance | 
|---------------------- |  | -------------------------------- | - | ------- |  | ------------ |  | ------------------- | ----- | -------------------------------- | 
|                       |  |                                  |   |         |  |              |  |                     |       |                                  | 
|Inventory charges      |  |                                  | $ | -       |  |              |  | $                   | 752   |                                  | 
|Termination benefits   |  |                                  |   | 625     |  |              |  |                     | 58    |                                  | 
|Excess facilities cost |  |                                  |   | 1,605   |  |              |  |                     | 912   |                                  | 
|Relocation costs       |  |                                  |   | 42      |  |              |  |                     | -     |                                  | 
|                       |  |                                  |   |         |  |              |  |                     |       |                                  | 
|Total                  |  |                                  | $ | 2,272   |  |              |  | $                   | 1,722 |                                  | 
|                       |  |                                  |   |         |  |              |  |                     |       |                                  | 

|                       |  | July 31, 2002Liability
  Balance |   | Charges |  | Expenditures |  | Other
  Adjustments |     | July 31, 2003Liability
  Balance | 
|---------------------- |  | -------------------------------- | - | ------- |  | ------------ |  | ------------------- | --- | -------------------------------- | 
|                       |  |                                  |   |         |  |              |  |                     |     |                                  | 
|Termination benefits   |  |                                  |   | 61      |  |              |  |                     | -   |                                  | 
|Excess facilities cost |  |                                  |   | 173     |  |              |  |                     | (63 | )                                | 
|                       |  |                                  |   |         |  |              |  |                     |     |                                  | 
|Total                  |  |                                  | $ | 234     |  |              |  | $                   | (63 | )                                | 
|                       |  |                                  |   |         |  |              |  |                     |     |                                  | 

(1)  Represents write-down of inventory to net
realizable value

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

40

---

---

7.  MAJOR CUSTOMERS
AND CONCENTRATION OF CREDIT RISK

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 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
company had sales to a single customer during 2004 that equaled 11% of total
sales.  The related accounts receivable
due from this customer at July 31, 2004 was $428,810.

8.  MARKETABLE
SECURITIES

Marketable
securities consists of the following:

|                  |  | July 31, 2004 |       | July 31, 2003 | 
|----------------- |  | ------------- | ----- | ------------- | 
|                  |  |               |       |               | 
|                  |  | Cost          |       | Market value  | 
|                  |  |               |       |               | 
|(In
  thousands)  |  |               |       |               | 
|Municipal
  bonds |  | $             | 4,200 |               | 
|                  |  |               |       |               | 
|Total             |  | $             | 4,200 |               | 
|                  |  |               |       |               | 

The
municipal bond investments are comprised solely of taxable auction-rate
securities with stated maturities ranging from 17-26 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, 2004 or 2003. The Company
has classified the municipal bonds as available for sale investments.

The
Company has pledged a $175,000 municipal security to secure a standby letter of
credit associated with the sublease termination agreement for the Memphis
facility.

9.  INVENTORIES

The
Company accounts for inventories at the lower of cost or market. Cost has been
determined by the first-in, first-out (FIFO) method.  The Company adopted FIFO costing for these
inventories as of August 1, 2001 in order to provide a better matching of
revenues and costs and to conform to a single method of accounting for all of
the Companys inventories. The effect of the accounting change on income for
fiscal year 2002 was as follows:

|                                                                                |  | 2002                                    |  
|------------------------------------------------------------------------------- |  | --------------------------------------- | -
|                                                                                |  |                                         |  
|                                                                                |  | (In thousands, except per share
  data) |  
|                                                                                |  |                                         |  
|Decrease in
  loss before discontinued 
     operations and extraordinary items |  |                                         | $
|                                                                                |  |                                         |  
|Increase in
  basic and diluted loss per common share                           |  |                                         | $
|                                                                                |  |                                         |  

The balance of accumulated deficit as of July
31, 2000 was adjusted for the effect of applying retroactively the new method
of accounting.

Inventories consist of the following:

|                                         |  | 2004           |       | 2003 |  
|---------------------------------------- |  | -------------- | ----- | ---- | -
|                                         |  |                |       |      |  
|                                         |  | (In thousands) |      
|Raw
  materials and purchased components |  | $              | 723   |      | $
|Finished
  goods                         |  |                | 2,010 |      |  
|                                         |  |                |       |      |  
|Total
  inventories                      |  | $              | 2,733 |      | $
|                                         |  |                |       |      |  

41

---

---

10. OTHER
CURRENT ASSETS

Other current assets
consists of the following:

|                        |  | 2004           |       | 2003 |  
|----------------------- |  | -------------- | ----- | ---- | -
|                        |  |                |       |      |  
|                        |  | (In thousands) |      
|Customer
  deposits     |  | $              | 794   |      | $
|Advances to
  suppliers |  |                | 893   |      |  
|Prepaid
  expenses      |  |                | 132   |      |  
|Other                   |  |                | 94    |      |  
|                        |  |                |       |      |  
|Total                   |  |                | 1,913 |      |  

11.
PROPERTY AND EQUIPMENT

Property and equipment
consists of the following:

|                                |  | 2004           |        | 2003 |  
|------------------------------- |  | -------------- | ------ | ---- | -
|                                |  |                |        |      |  
|                                |  | (In thousands) |       
|Leasehold
  improvements        |  | $              | 311    |      | $
|Equipment                       |  |                | 2,565  |      |  
|Furniture
  and fixtures        |  |                | 501    |      |  
|                                |  |                |        |      |  
|Total                           |  |                | 3,377  |      |  
|Less
  accumulated depreciation |  |                | (2,406 | )    |  
|                                |  |                |        |      |  
|Property
  and equipment, net   |  | $              | 971    |      | $
|                                |  |                |        |      |  

Depreciation expense was $596,000,
$703,000, and $711,000 for 2004, 2003, and 2002, respectively.

12. ACCRUED EXPENSES AND OTHER

Accrued expenses and other
consists of the following:

|                        |  | 2004           |       | 2003 |  
|----------------------- |  | -------------- | ----- | ---- | -
|                        |  |                |       |      |  
|                        |  | (In thousands) |      
|Employee
  compensation |  | $              | 197   |      | $
|Commissions             |  |                | 37    |      |  
|Vacation                |  |                | 35    |      |  
|Deferred
  income       |  |                | 651   |      |  
|Employee
  withholdings |  |                | 533   |      |  
|Warranty
  reserve      |  |                | 361   |      |  
|Other                   |  |                | 470   |      |  
|                        |  |                |       |      |  
|Total                   |  | $              | 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.

42

---

---

The
requirements of FIN 45 are applicable to the Companys product warranty
liability. As of July 31, 2004 and July 31, 2003, the Companys product
warranty liability recorded in other accrued liabilities was $361,000 and
$283,000, respectively. The following table summarizes the activity related to
the product warranty liability during fiscal 2004 and 2003 (in thousands):

|                                  |  | July 31,
  2004 |   | July 31,
  2003 |  
|--------------------------------- |  | --------------- | - | --------------- | -
|                                  |  |                 |   |                 |  
|Balance at beginning of
  period  |  |                 | $ | 283             |  
|Accruals for
  warranty liability |  |                 |   | 325             |  
|Warranty
  expense                |  |                 |   | (247            | )
|                                  |  |                 |   |                 |  
|Balance at
  end of period        |  |                 | $ | 361             |  
|                                  |  |                 |   |                 |  

13. LEASE COMMITMENTS

The
Company leases its primary warehouse and office facilities, as well as certain
office equipment under operating leases.

The
following is a schedule of future minimum lease payments required under
operating leases that have remaining initial or noncancellable lease terms in
excess of one year as of July 31, 2004:

|Year Ending July 31, 2004 |  | (In thousands) |  
|------------------------- |  | -------------- | -
|                          |  |                |  
|2005                      |  |                | $
|2006                      |  |                |  
|2007                      |  |                |  
|2008                      |  |                |  
|Thereafter                |  |                |  
|                          |  |                |  
|Total                     |  |                | $
|                          |  |                |  

Rent
expense for the years ended July 31, 2004, 2003, and 2002 totaled $357,000,
$319,000, and $327,000, respectively.

14. INCOME TAXES

The
income tax provision is summarized as follows:

|                           |  | 2004           |    | 2003 |   | 2002 | 
|-------------------------- |  | -------------- | -- | ---- | - | ---- | 
|                           |  |                |    |      |   |      | 
|                           |  | (In thousands) |   
|Continuing
  operations    |  | $              | 24 |      | $ | -    | 
|Discontinued
  operations  |  |                | -  |      |   | -    | 
|Extraordinary
  item       |  |                | -  |      |   | -    | 
|                           |  |                |    |      |   |      | 
|Total
  income tax benefit |  |                | 24 |      |   | -    | 
|                           |  |                |    |      |   |      | 

The components of income tax expense
(benefit) for 2004, 2003, and 2002 attributable to continuing operations are as
follows:

|                                     |  | 2004           |    | 2003 |   | 2002 | 
|------------------------------------ |  | -------------- | -- | ---- | - | ---- | 
|                                     |  |                |    |      |   |      | 
|                                     |  | (In thousands) |   
|Current:                             |  |                |    |      |   |      | 
|Federal                              |  | $              | -  |      | $ | -    | 
|State                                |  |                | -  |      |   | -    | 
|Foreign
  Income Tax Expense         |  |                | 24 |      |   | -    | 
|                                     |  |                |    |      |   |      | 
|Total
  current                      |  |                | 24 |      |   | -    | 
|                                     |  |                |    |      |   |      | 
|Deferred:                            |  |                |    |      |   |      | 
|Federal                              |  |                | -  |      |   | -    | 
|State                                |  |                | -  |      |   | -    | 
|                                     |  |                |    |      |   |      | 
|Total
  deferred                     |  |                | -  |      |   | -    | 
|                                     |  |                |    |      |   |      | 
|                                     |  |                |    |      |   |      | 
|Total income
  tax expense (benefit) |  | $              | 24 |      | $ | -    | 
|                                     |  |                |    |      |   |      | 

43

---

---

A reconciliation between the income tax expense (benefit) from
continuing operations 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 income from continuing operations before income
taxes is as follows:

|                                               |  | 2004           |      | 2003 |   | 2002 |  
|---------------------------------------------- |  | -------------- | ---- | ---- | - | ---- | -
|                                               |  |                |      |      |   |      |  
|                                               |  | (In thousands) |     
|Income
  tax at Federal statutory rate (35%)   |  | $              | (340 | )    | $ | (526 | )
|State
  income taxes, net of federal benefit   |  |                | (35  | )    |   | (66  | )
|Change
  in valuation allowance                |  |                | 245  |      |   | 120  |  
|Amortization
  of goodwill                     |  |                | -    |      |   | -    |  
|Adjustment to effective state tax rate         |  |                | 120  |      |   | -    |  
|Over provision of deferred taxes in prior year |  |                | -    |      |   | 461  |  
|Foreign
  income tax expense                   |  |                | 24   |      |   | -    |  
|Other,
  net                                   |  |                | 11   |      |   | 10   |  
|                                               |  |                |      |      |   |      |  
|Total
  income tax expense (benefit)           |  | $              | 24   |      | $ | -    |  
|                                               |  |                |      |      |   |      |  

The deferred tax effects of the Companys principal temporary
differences at July 31, 2004 and 2003 are as follows:

|2004                                         |  | Assets         |        | Liabilities |  | Total |    
|-------------------------------------------- |  | -------------- | ------ | ----------- |  | ----- | ---
|                                             |  |                |        |             |  |       |    
|                                             |  | (In thousands)
|Allowance
  for doubtful receivables         |  | $              | 207    |             |  | $     | -  
|Inventories                                  |  |                | 653    |             |  |       | -  
|Basis
  difference in property and equipment |  |                | 33     |             |  |       | -  
|Accrued
  warranty costs                     |  |                | 156    |             |  |       | -  
|Accrued
  expenses and other                 |  |                | -      |             |  |       | (58
|Deferred
  revenue                           |  |                | 232    |             |  |       | -  
|Loss
  reserve                               |  |                | 326    |             |  |       | -  
|Net
  operating loss carryforwards           |  |                | 7,086  |             |  |       | -  
|Capital
  loss carryforward                  |  |                | 36     |             |  |       | -  
|Valuation
  allowance                        |  |                | (8,729 | )           |  |       | 58 
|                                             |  |                |        |             |  |       |    
|Total
  deferred asset (liability)           |  | $              | -      |             |  | $     | -  
|                                             |  |                |        |             |  |       |    

|2003                                         |  | Assets         |        | Liabilities |  | Total |  
|-------------------------------------------- |  | -------------- | ------ | ----------- |  | ----- | -
|                                             |  |                |        |             |  |       |  
|                                             |  | (In thousands) |       
|Allowance
  for doubtful receivables         |  | $              | 256    |             |  | $     | -
|Inventories                                  |  |                | 551    |             |  |       | -
|Basis
  difference in property and equipment |  |                | 59     |             |  |       | -
|Accrued
  warranty costs                     |  |                | 116    |             |  |       | -
|Accrued
  expenses and other                 |  |                | 101    |             |  |       | -
|Deferred
  revenue                           |  |                | 180    |             |  |       | -
|Loss
  reserve                               |  |                | 332    |             |  |       | -
|Net
  operating loss carryforwards           |  |                | 6,632  |             |  |       | -
|Capital
  loss carryforward                  |  |                | 199    |             |  |       | -
|Valuation
  allowance                        |  |                | (8,426 | )           |  |       | -
|                                             |  |                |        |             |  |       |  
|Total
  deferred asset (liability)           |  | $              | -      |             |  | $     | -
|                                             |  |                |        |             |  |       |  

44

---

---

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, 2004 and
2003.

At July 31, 2004, net operating loss carryforwards of approximately
$18.8 million are available to reduce future taxable income. The net
operating loss carryforwards expire as follows:

|      |  | NOL            |  
|----- |  | -------------- | -
|      |  |                |  
|      |  | (In thousands) |  
|2012  |  |                | $
|2013  |  |                |  
|2020  |  |                |  
|2021  |  |                |  
|2022  |  |                |  
|2023  |  |                |  
|2024  |  |                |  
|      |  |                |  
|Total |  |                | $
|      |  |                |  

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. As of July 31, 2004 the unrecorded tax liability related  to the
undistributed earnings of the Companys foreign subsidiary was insignificant.

15. 
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
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 2004,
2003, or 2002. 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. 264,000, 215,000, and 200,000 options were issued under this
plan during fiscal years 2004, 2003, and 2002, 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. 64,000, 81,250, and 130,500 options, respectively, were issued
under this plan during fiscal years 2004, 2003, and 2002, respectively, with
exercise prices ranging from $0.24 - $3.99.

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 Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. 121,758,
111,747, and 120,569 shares were purchased by employees under this plan during
fiscal years 2004, 2003, and 2002, respectively.

45

---

---

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

|                                                                                        |  | 2004               |              | 2003                                  |  | 2002               |     
|--------------------------------------------------------------------------------------- |  | ------------------ | ------------ | ------------------------------------- |  | ------------------ | ----
|                                                                                        |  |                    |              |                                       |  |                    |     
|                                                                                        |  | Number of
  Shares |              | Weighted
  Average
  Exercise
  Price |  | Number of
  Shares |     
|                                                                                        |  |                    |              |                                       |  |                    |     
|Outstanding,
  beginning of year                                                        |  |                    | 1,824,053    |                                       |  | $                  | 3.66
|                                                                                        |  |                    |              |                                       |  |                    |     
|Granted                                                                                 |  |                    | 328,000      |                                       |  |                    | 3.15
|Exercised                                                                               |  |                    | (355,023     | )                                     |  |                    | 1.44
|Cancelled                                                                               |  |                    | (165,560     | )                                     |  |                    | 1.95
|                                                                                        |  |                    |              |                                       |  |                    |     
|Outstanding,
  end of year                                                              |  |                    | 1,631,470    |                                       |  | $                  | 4.21
|                                                                                        |  |                    |              |                                       |  |                    |     
|Exercisable,
  end of year                                                              |  |                    | 1,082,180    |                                       |  | $                  | 5.10
|                                                                                        |  |                    |              |                                       |  |                    |     
|Exercise
  price range                                                                  |  |                    | $0.24-$24.25 |                                       |  | $0.24-$24.25       |     
|                                                                                        |  |                    |              |                                       |  |                    |     
|Options
  available for
     grant, end of year                                         |  |                    | 559,600      |                                       |  | 725,311            |     
|                                                                                        |  |                    |              |                                       |  |                    |     
|Weighted
  average grant date 
     fair value of options 
     granted during the year |  |                    | $ 2.65       |                                       |  | $ 1.20             |     

The following table summarizes
information about the options outstanding as of July 31, 2004:

|                             |  | Options Outstanding             |           | Options Exercisable                              | 
|---------------------------- |  | ------------------------------- | --------- | ------------------------------------------------ | 
|                             |  |                                 |           |                                                  | 
|Range of
  Exercise
  Prices |  | Outstandingat
  July 31,
  2004 |           | Weighted
  AverageRemaining
  Contractual
  Life | 
|                             |  |                                 |           |                                                  | 
|                             |  |                                 |           |                                                  | 
|$0.00
  -$5.00               |  |                                 | 1,218,691 |                                                  | 
|$5.01
  - $10.00             |  |                                 | 317,979   |                                                  | 
|$10.01
  - $15.00            |  |                                 | 86,300    |                                                  | 
|$15.01
  - $25.00            |  |                                 | 8,500     |                                                  | 
|                             |  |                                 |           |                                                  | 
|                             |  |                                 | 1,631,470 |                                                  | 
|                             |  |                                 |           |                                                  | 

The Company accounts for stock-based compensation using the intrinsic
value method prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, under which no compensation cost
for stock options is recognized for options granted at or above the fair market
value of the underlying common stock. The company recognized $53,000 in
compensation expense during FY 2002 for stock grants to employees. No
compensation expense related to stock options was recorded during 2004 or 2003
as the option exercise prices were equal to or greater than the fair market
value of the underlying common stock on the date of the grant. In addition, no
compensation expense was recognized on any purchases of common stock under the
Employee Stock Purchase Plan during the year. Had compensation expense been
determined based upon fair values of the options at the grant date in
accordance with SFAS No. 123, Accounting for Stock-Based Compensation, the
Companys net income (loss) and earnings per share would have been as follows:

|                                  |  | 2004                                  |        | 2003 |   | 2002   |  
|--------------------------------- |  | ------------------------------------- | ------ | ---- | - | ------ | -
|                                  |  |                                       |        |      |   |        |  
|                                  |  | (In thousands, except per share data) |       
|                                  |  |                                       |        |      |   |        |  
|Net
  loss:                       |  |                                       |        |      |   |        |  
|As
  reported                     |  | $                                     | (928   | )    | $ | (1,504 | )
|Pro
  forma                       |  |                                       | (1,540 | )    |   | (2,499 | )
|Loss
  per share:                 |  |                                       |        |      |   |        |  
|As
  reported  basic and diluted |  | $                                     | (0.07  | )    | $ | (0.12  | )
|Pro
  forma  basic and diluted   |  | $                                     | (0.12  | )    | $ | (0.21) |  

46

---

---

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:

|                                |  | 2004 |      | 2003 |  | 2002 |  
|------------------------------- |  | ---- | ---- | ---- |  | ---- | -
|                                |  |      |      |      |  |      |  
|Risk-free
  interest rate       |  |      | 4.25 | %    |  | 4.25 | %
|Dividend
  yield                |  |      | -    |      |  | -    |  
|Expected
  volatility           |  |      | 100  | %    |  | 75   | %
|Expected
  option life in years |  |      | 7    |      |  | 10   |  

16.   RELATED PARTIES

The following
represent related party transactions:

|                                       |  | Year Ended July 31, |    
|-------------------------------------- |  | ------------------- | ---
|                                       |  |                     |    
|                                       |  | 2004                |    
|                                       |  |                     |    
|                                       |  | (In thousands)      |    
|Purchases
  from CSHC and subsidiaries |  |                     | 609
|Sales
  to CSHC and subsidiaries       |  |                     | -  
|Sales
  to CSPR                        |  |                     | -  
|Purchases
  from Shanghai Bell         |  |                     | 25 
|Sales
  to Shanghai Bell               |  |                     | 134

The following represent related
party balances:

|                           |  | July 31,       |      
|-------------------------- |  | -------------- | -----
|                           |  |                |      
|                           |  | 2004           |      
|                           |  |                |      
|                           |  | (In thousands) |      
|Payable
  to CII           |  |                | 64   
|Payable
  to Shanghai Bell |  |                | 1,985

In addition, at July 31, 1998 the Company had a $3,184,000 note
receivable from CSHC that was reflected as a reduction of stockholders equity
in the accompanying financial statements. The note was to mature on  December 31, 2002. During 1999, the Company
received 250,000 shares of its common stock from CSHC in exchange for a
$2,500,000 reduction of the outstanding note balance. Additionally, the Company
loaned the former parent $2,600,000. The loan was due and payable on demand and
provided for interest at a rate equal to prime plus 1.5%. During 2000, the
Company received $420,000 in principal payments against the note receivable and
distributed the $2,600,000 note to CSHC in payment of a dividend payable.
During 2002, the note receivable and accrued interest was contributed to CSPR
prior to the spin-off.

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

17. 
EMPLOYEE SAVINGS PLAN

Substantially all 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 2004,
2003, and 2002, contributions made by the Company totaled $77,000, $79,000, and
$96,000, respectively.

18. 
COMMITMENTS AND CONTINGENCIES

At July 31, 2004, the Company had outstanding commitments for inventory
purchases under open purchase orders of approximately $1,518,000.

47

---

---

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.

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.

19. 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. Cortelco
Shanghai provides fiber optic transmission equipment, data communications
systems, and network management software. 
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, 2004 and for Cortelco Shanghai for the two
months ended July 31, 2004.

|                                           |  | eOn US         |        | Cortelco
  Shanghai |  | Consolidated |       
|------------------------------------------ |  | -------------- | ------ | ------------------- |  | ------------ | ------
|                                           |  |                |        |                     |  |              |       
|                                           |  | (In thousands) |       
|Revenues
  from customers                  |  | $              | 15,576 |                     |  | $            | 2,282 
|Revenues
  from other segments             |  |                | 92     |                     |  |              | -     
|                                           |  |                |        |                     |  |              |       
|Total
  revenues                           |  | $              | 15,668 |                     |  | $            | 2,282 
|Total
  expenses                           |  |                | 16,640 |                     |  |              | 2,238 
|                                           |  |                |        |                     |  |              |       
|Business
  segment income(loss)            |  | $              | (972   | )                   |  | $            | 44    
|                                           |  |                |        |                     |  |              |       
|                                           |  |                |        |                     |  |              |       
|Depreciation
  and amortization expense    |  | $              | 585    |                     |  | $            | 11    
|Interest
  income                          |  |                | 62     |                     |  |              | 17    
|Interest
  expense                         |  |                | 29     |                     |  |              | -     
|Income
  tax expense                       |  |                | -      |                     |  |              | 24    
|                                           |  |                |        |                     |  |              |       
|Capital
  Expenditures                     |  | $              | 334    |                     |  | $            | 11    
|Business
  Segment Assets at July 31, 2004 |  | $              | 11,716 |                     |  | $            | 10,218

20.
EARNINGS PER SHARE

The
computation of basic and diluted earnings per share for each year were as
follows:

|                                                                                                           |  | 2004                                  |   | 2003   |   | 2002 | 
|---------------------------------------------------------------------------------------------------------- |  | ------------------------------------- | - | ------ | - | ---- | 
|                                                                                                           |  |                                       |   |        |   |      | 
|                                                                                                           |  | (In thousands, except per share data) |  
|Basic
  and diluted loss per share:                                                                        |  |                                       |   |        |   |      | 
|Loss
  before discontinued operations and
          extraordinary items                                    |  |                                       | $ | (928   | ) |      | 
|Weighted
  average shares outstanding                                                                      |  |                                       |   | 12,522 |   |      | 
|                                                                                                           |  |                                       |   |        |   |      | 
|                                                                                                           |  |                                       |   |        |   |      | 
|Basic
  and diluted loss per share before
               discontinued
  operations and extraordinary items |  |                                       | $ | (0.07  | ) |      | 
|                                                                                                           |  |                                       |   |        |   |      | 

50

---

---

Potential common shares related to options outstanding at July 31, 2004
to purchase 1,631,470 shares of common stock were excluded from the computation
of diluted loss per share for the year ended July 31, 2004 because their
inclusion would have had an antidilutive effect.

Potential common shares related to options outstanding at July 31, 2003
to purchase 1,824,053 shares of common stock were excluded from the computation
of diluted loss per share for the year ended July 31, 2003 because their
inclusion would have had an antidilutive effect.

Potential common shares related to options outstanding at July 31, 2002
to purchase 1,842,566 shares of common stock were excluded from the computation
of diluted loss per share for the year ended July 31, 2002 because their
inclusion would have had an antidilutive effect.

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

On June 5, 2003, upon the recommendation of the Audit Committee of the
Board of Directors of eOn Communications Corporation (the Company), the Board
of Directors decided to no longer engage Deloitte & Touche LLP (Deloitte)
as the Companys independent auditor, and engaged Grant Thornton, LLP (Grant Thornton)
to serve as the Companys independent auditor for the fiscal year ending July
31, 2003.

Deloittes reports on the Companys consolidated financial statements
for each of the fiscal years ended July 31, 2002 and 2001, did not contain an
adverse opinion or disclaimer of opinion, nor were they qualified or modified
as to uncertainty, audit scope or accounting principles. Deloittes report on
the Companys consolidated financial statements for 2002 was issued on an
unqualified basis in conjunction with the publication of the Companys 2002
Annual Report and the filing of the Companys Annual Report on Form 10-K for
the fiscal year ended July 31, 2002.

During the Companys fiscal years ended July 31, 2002 and 2001, and the
subsequent interim period through June 5, 2003, there were no disagreements
with Deloitte on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure which, if not resolved to
Deloittes satisfaction, would have caused them to make reference to the
subject matter in connection with their reports on the Companys consolidated
financial statements for such fiscal years.

None of the reportable events described under Item 304(a)(1)(v) of
Regulation S-K occurred within the Companys fiscal years ended July 31, 2002
and 2001, or the subsequent interim period through June 5, 2003.

During the Companys fiscal years ended July 31, 2002 and 2001, and the
subsequent interim period through June 5, 2003, the Company did not consult
Grant Thornton 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.

49

---

---

Changes in internal
control over financial reporting.  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 this year, eOn
must include Cortelco Shanghais financial information in its consolidated
financial statements for its fourth quarter and fiscal year 2004 in accordance
with the Generally Accepted Accounting Principles adopted in the United States
of America (US GAAP).  A number of
adjustments were made to adjust Cortelco Shanghais year end financial
information from PRC GAAP to US GAAP.

eOns auditors have
rendered an unqualified opinion with respect to eOns consolidated financial
statements, which include the financial information for Cortelco Shanghai.  However, during the course of the audit of
Cortelco Shanghai, the auditors identified certain material internal control
deficiencies in Cortelco Shanghais financial reporting which could adversely
affect the reliability of financial reporting for future periods if not
corrected.  Specifically, the auditors
noted that the Cortelco Shanghai accounts were not analyzed or reconciled on a
monthly, quarterly, or annual basis, as part of the closing process, and there
was no provision for any review of any such reconciliations.  The auditors noted that there was no
standardized methodology to reconcile the differences between U.S. GAAP and PRC
GAAP, and the auditors made numerous adjustments relating to the revenue
recognition differences between U.S. GAAP and PRC GAAP.  The auditors concluded that while it was
evident that eOn has qualified accounting and finance personnel, Cortelco
Shanghai does not have the skilled personnel to accumulate and report financial
information in accordance with U.S. GAAP. 
In addition, management of Cortelco Shanghai had not established proper
physical inventory counting procedures for the relevant staff to follow.

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;  
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   |                                                                                                                                                                                                                                                          
|2. | eOn has begun the process of taking an inventory of
  Cortelco Shanghais internal controls and 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. | By the end of October 2004 Cortelco Shanghai will
  have delivered detailed account information to verify that appropriate
  adjustments are being made between U.S. GAAP and PRC GAAP. Cortelco Shanghai
  will deliver such information to eOn monthly.

eOn believes that these
actions will satisfactorily address the control deficiencies identified by its
auditors 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. 
eOn will continue to monitor Cortelco Shanghais financial reporting
systems and controls closely to ensure that any deficiencies are promptly
identified and corrected.

Other than as described
above, there was no change in our internal control over financial reporting
during our fourth fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.

50

---

---

ITEM 9b. 
OTHER INFORMATION

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

51

---

---

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 2004 Annual Meeting of Shareholders to be held on November 30, 2004 (the
Proxy Statement), which will be filed with the Securities and Exchange
Commission not later than 120 days after July 31, 2004, 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.

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.

53

---

---

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:

| | - Report of Independent Registered Public Accounting
  Firm                                          
| | -----------------------------------------------------------------------------------------------------
| | - Consolidated Balance Sheets as of July 31, 2004
  and 2003                                         
| | - Consolidated Statements of Operations for the
  Years Ended July 31, 2004, 2003, and 2002          
| | - Consolidated Statements of Cash Flows for the
  Years Ended July 31, 2004, 2003, and 2002          
| | - Consolidated Statements of Stockholders Equity
  for the Years Ended July 31, 2004, 2003, and 2002
| | - Notes to Consolidated Financial Statements                                                         

(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)  Reports on Form
8-K

During the fourth quarter
ended July 31, 2004, the Company reported the following events of Form 8-K:

|Date
  Filed or Furnished |  | Item
  No(s). |  | Description                                                                     
|------------------------- |  | ------------- |  | --------------------------------------------------------------------------------
|                          |  |               |  |                                                                                 
|June 1, 2004              |  | 7 and 12      |  | Press release reporting financial results for the
  quarter ended April 30, 2004
|                          |  |               |  |                                                                                 
|June 1, 2004              |  | 2 and 7       |  | Announcement of acquisition in Cortelco Shanghai
  Telecomequipment company     

(C)  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.

54

---

---

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 27, 2004 | 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       |  | President, Chief Executive
  Officer  and Chairman(Principal
  Executive Officer)   |         | October 27, 2004
|                       |  |                                                                                     |         |                 
|David S. Lee           |  |                                                                                     |        
|                       |  |                                                                                     |         |                 
|/s/ Stephen R. Bowling |  | Vice President, Chief Financial
  Officer, Director (Principal
  Financial Officer) |         | October 27, 2004
|                       |  |                                                                                     |         |                 
|Stephen R. Bowling     |  |                                                                                     |        
|                       |  |                                                                                     |         |                 
|/s/ Mitch C. Gilstrap  |  | Vice President, Chief Operating                                                     |         | October 27, 2004
|                       |  |                                                                                     | Officer |                 
|Mitch C. Gilstrap      |  |                                                                                     |         |                 
|                       |  |                                                                                     |         |                 
|/s/ Robert P. Dilworth |  | Director                                                                            |         | October 27, 2004
|                       |  |                                                                                     |         |                 
|Robert P. Dilworth     |  |                                                                                     |         |                 
|                       |  |                                                                                     |         |                 
|/s/ W. Frank King      |  | Director                                                                            |         | October 27, 2004
|                       |  |                                                                                     |         |                 
|W. Frank King          |  |                                                                                     |         |                 
|                       |  |                                                                                     |         |                 
|/s/ Frederick W. Gibbs |  | Director                                                                            |         | October 27, 2004
|                       |  |                                                                                     |         |                 
|Frederick W. Gibbs     |  |                                                                                     |         |                 

55

---

---

eOn Communications Corporation and
Subsidiaries
Schedule II  Valuation and Qualifying Accounts

|Column
  A                                                      |  | Column B                         |           | Column C                          |           | Column D                      |         | Column E   | 
|--------------------------------------------------------------- |  | -------------------------------- | --------- | --------------------------------- | --------- | ----------------------------- | ------- | ---------- | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  |                                  |           |                                   | Additions |                               |         |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  | Balance at Beginning
  of Period |           | Charged to
  Costs and
  Expenses |           | Charged
  to Other
  Accounts |         | Deductions | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|2002:                                                           |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|Allowance
  for doubtful
     accounts and sales
     allowance |  |                                  | 1,265,135 |                                   |           |                               | 164,000 |            | 
|Warranty
  reserve                                              |  |                                  | 220,552   |                                   |           |                               | 213,044 |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|2003:                                                           |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|Allowance
  for doubtful
     accounts and sales
     allowance |  |                                  | 866,211   |                                   |           |                               | 110,000 |            | 
|Warranty
  reserve                                              |  |                                  | 198,742   |                                   |           |                               | 312,375 |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|2004:                                                           |  |                                  |           |                                   |           |                               |         |            | 
|                                                                |  |                                  |           |                                   |           |                               |         |            | 
|Allowance
  for doubtful
     accounts and sales
     allowance |  |                                  | 689,029   |                                   |           |                               | 333,000 |            | 
|Warranty reserve                                                |  |                                  | 283,450   |                                   |           |                               | 324,812 |            | 

56

---

---

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                                                                                                                   
|                 |  |                                                                                                                                  
|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 Deloitte & Touche LLP.                                                                                                
|                 |  |                                                                                                                                  
|31.1             |  | Officers Certification of Periodic Report pursuant
  to Section 302 of Sarbanes-Oxley Act of 2002                               
|                 |  |                                                                                                                                  
|32.1             |  | Officers Certification of Periodic Report pursuant
  to Section 906 of Sarbanes- Oxley Act of 2002                              

---

|(&) | Incorporated by reference to identically numbered
  exhibits to the Registrants previously filed Form 8-K                                                                                    
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    |                                                                                                                                                                                               
|(*) | 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                                                                                          

57

---

---