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UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





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FORM 10-K





(Mark One)


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




| |  | For the fiscal year ended July 31, 2002
| |  | ---------------------------------------




or





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




| |  | For the transition period
fromto
| |  | --------------------------------




Commission File Number 000-26399





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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)





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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)





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Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO  ̈





Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. x





The aggregate market value of the
shares of common stock held by non-affiliates of the registrant was approximately $3,185,000 based upon the closing sale price as reported by the Nasdaq Stock Market on September 30, 2002. The number of outstanding shares of the registrants
$0.001 par value common stock was 12,059,363 shares as of that date.





DOCUMENTS INCORPORATED BY REFERENCE





Certain portions of the registrants Proxy Statement for the 2002 Annual Meeting of Shareholders are
incorporated by reference in Part III.





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TABLE OF CONTENTS








PagePART IItem 1.

Business

2Executive Officers

11Item 2.

Properties

11Item 3.

Legal Proceedings

11Item 4.

Submission of Matters to a Vote of Security Holders

11PART IIItem 5.

Market for Registrants Common Equity and Related Stockholder Matters

12Item 6.

Selected Financial Data

12Item 7.

Managements Discussion and Analysis of Financial Condition and Results of Operations

14Item 7a.

Quantitative and Qualitative Disclosures About Market Risk

25Item 8.

Financial Statements and Supplementary Data

25Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

45PART IIIItem 10.

Directors and Executive Officers of the Registrant

45Item 11.

Executive Compensation

45Item 12.

Security Ownership of Certain Beneficial Owners and Management

45Item 13.

Certain Relationships and Related Transactions

45PART IVItem 14.

Exhibits, Financial Statement Schedules, and Reports on Form 8-K

46SIGNATURES

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PART 1





FORWARD-LOOKING STATEMENTS





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





ITEM
1.    
BUSINESS.





Introduction





eOn Communications Corporation  (eOn or the Company) designs, develops and markets unified voice, email and Web-based communications systems 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, fax 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 7,000 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.





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.





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.




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Background and General Development of Business





Now more than ever, customers insist on conducting business anytime, anywhere, through any media. 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, what we at eOn refer to as The Customer Era.





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. eOn helps enterprises communicate more effectively with customers, convert inquiries into sales and increase customer satisfaction.





The eQueue ® Multi-Media Contact Center Solution offers a comprehensive and unified solution for customer interaction management The eQueue applications include multi-media routing of all interaction types with robust Automatic
Contact Distribution (ACD) functionality, PBX capability, email, Web chat, integrated voice response, voice mail with unified messaging, quality assurance recording and a range of desktop devices and applications.





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 a distinct advantage in the complex and competitive customer interaction management marketplace. Our company and our solution are differentiated by several key factors imperative to the success of any
multi-media contact center.





| |  |  | 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 match the most appropriate resource to every customer need.





| |  |  | Comprehensive
| | - |  | -------------




The eQueue offers comprehensive applications including multi-media routing of all interaction types, robust ACD and PBX capabilities, complete web services including email, Web chat, and Web collaboration, integrated voice response,
voice mail with unified messaging, quality assurance recording and a range of desktop devices and applications.





| |  |  | Open
| | - |  | ----




The eQueue is an open standards-based solution based on the Linux  operating system.
Using an open solution not only provides for ease of integration, but also allows the contact center to evolve to meet 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 today and well into the future. The eQueue is compatible with most third party
systems, allowing companies the ability to integrate other applications.




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| |  |  | 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 any mission-critical environment.





Benefits of an eQueue Solution





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





| |  |  | Improved Customer Satisfaction, Retention & Loyalty
| | - |  | ---------------------------------------------------




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





| |  |  | Increased Productivity
| | - |  | ----------------------




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





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




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





Strategy





Our mission is to be the recognized global leader
in providing comprehensive contact center solutions. Key elements of our strategy are the following:





| |  |  | Grow Our eQueue Business
| | - |  | ------------------------




We believe eOns best opportunities lie with our eQueue Multi-Media Contact Center Solution. We believe we have an architectural advantage over other companies that will enable eOn to respond
quickly to opportunities with




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our eQueue solution. We will continue to build brand awareness and will service this market via our direct sales force and our channel partners.
We will also add to our alliance partnerships and expand our consultant liaison program.





| |  |  | Maintain Our Millennium Business
| | - |  | --------------------------------




While we promote and grow our eQueue business we will also strive to maintain our Millennium revenues while achieving and maintaining profitability for our Millennium business. We will continue to
support our existing dealer channel though our indirect sales support personnel and will look for creative marketing programs to make the channel more effective and productive.





| |  |  | Gain Traction in our Marketing Programs
| | - |  | ---------------------------------------




During fiscal year 2002, eOn launched several programs targeted at increasing our eQueue revenues, including:





| |  |  | eQueue Alliance Program
| | - |  | -----------------------




| |  |  | eQueue Consultant Program
| | - |  | -------------------------




| |  |  | Lead Generation Program
| | - |  | -----------------------




| |  |  | Brand Awareness Program
| | - |  | -----------------------




| |  |  | Customer Migration Program
| | - |  | --------------------------




| |  |  | Professional Services Offerings
| | - |  | -------------------------------




| |  |  | Customer Service and Maintenance Offerings
| | - |  | ------------------------------------------




These programs were successfully implemented and have been communicated to our partners, customers, and prospects. Our goal going forward is to gain traction in these areas and maximize their
effectiveness to generate profitable growth for eOn.





| |  |  | Expand Internationally
| | - |  | ----------------------




eOn has established a successful partnering relationship with NSer Community in Korea to address contact center opportunities in Southeast Asia. In addition, we have established OEM partnerships with several companies
within the US and Canada that will assist us in expanding sales efforts to other countries. We will continue to target selected international markets and opportunities to expand our international presence.





| |  |  | Enhance Our Reputation For Product Innovation And Customer Responsiveness
| | - |  | -------------------------------------------------------------------------




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.





Products and Products Under Development





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:




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| |  |  | eQueue Routing
| | - |  | --------------




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, dynamic resource management, host directed routing, 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 Routing are incorporated into our development initiatives.





| |  |  | eQueue ACD and eQueue PBX
| | - |  | -------------------------




We built the eQueue from the platform up with an understanding of the critical nature of call center operations; therefore, eQueue ACD and eQueue PBX are an integral part of the eQueue solution. Our
redundant, reliable, fault-tolerant system platform is used to deploy mission-critical business communications. The eQueue comes complete with a rich set of telephony features, telephony grade reliability, comprehensive ACD and PBX capabilities,
multi-featured phones, PC phones, and networking interfaces. Enhancements to eQueue PBX features are incorporated into our development initiatives.





| |  |  | eQueue Email
| | - |  | ------------




eQueue Email is a powerful option that allows agents to interact with online customers quickly and easily. Emails are received in queue with voice calls and chat sessions and then delivered to agents based on defined skill sets and
priorities. Using an intuitive browser-based interface, agents can respond to email contacts individually, or by using automatic responses to FAQs from the shared knowledge base. eQueue Email integrates seamlessly with other eQueue
applications offering extensive real-time and historical reporting, secured multi-domain support, dynamic routing, instant messaging and more. Additionally, the knowledge base is integrated with all eQueue web services, and can be used to answer
email, chat and voice contacts. Enhancements to eQueue Email are incorporated into our development initiatives.





| |  |  | eQueue Chat & eQueue Collaboration
| | - |  | ----------------------------------




eQueue Chat enables customers to receive real-time answers to questions as they browse a companys website. As with eQueue Email, chat sessions are queued with voice and email, offering
multi-media contact management from a single queue. All incoming chat requests are routed to the available agent with the best skills to respond accurately, ensuring a consistent customer experience. Additionally, eQueue Chat offers extensive
real-time and historical reporting capabilities in a common format for all media types, archived transactions for future report analysis and tracking, use of standardized responses to FAQs using the shared knowledge base, secured multi-domain
support, dynamic routing, instant messaging, and basic collaboration. Enhancements to eQueue Chat 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 Voice Mail
| | - |  | -----------------




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. Voice




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messages are deposited into a group mailbox that is accessible by agents in that group who can then select, review and respond to the mailbox
messages as they become available.





| |  |  | eQueue Messaging
| | - |  | ----------------




In addition to Voice Mail capabilities, the eQueue also brings unified messaging to the contact center. eQueue Messaging unifies messages from all of the various media types into a single queue, giving contact centers
freedom of choice in accepting and responding to voice, fax, and email messages directly from the email client. The ability to access all messages is especially important in the contact center environment, where centralized tracking of all customer
communications is paramount. Additionally, 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 that enable users to view voice, fax, and email messages anywhere, anytime, from one intuitive user-friendly interface.





| |  |  | 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.





| |  |  | 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 Supervisor Workspace are incorporated into our development initiatives.





| |  |  | eQueue Interfaces
| | - |  | -----------------




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





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;




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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 2002, 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. The markets that we will pursue include:





| |  |  | Banking, financial services and insurance companies
| | - |  | ---------------------------------------------------




| |  |  | Retail, including catalog companies
| | - |  | -----------------------------------




| |  |  | Service bureaus
| | - |  | ---------------




| |  |  | Communications, including telephone, cable and news print companies
| | - |  | -------------------------------------------------------------------




| |  |  | Transportation and hospitality segments where reservation systems are prevalent
| | - |  | -------------------------------------------------------------------------------




| |  |  | Government, including critical service applications such as 911 centers
| | - |  | -----------------------------------------------------------------------




| |  |  | Linux community
| | - |  | ---------------




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. We use our indirect sales force for sales of our Millennium
voice switching platforms to national accounts and the federal government. We also sell the Millennium domestically and internationally 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.





We continue to invest heavily in research and development. Research and development expense was $3.0
million, $4.3 million, and $3.9 million in fiscal years 2002, 2001, and 2000, respectively. We intend to use independent contractors from time to time to assist with certain product development and testing activities.




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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.





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 reference-able 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 Rockwell. 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.




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| |  |  | 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. Among data-centric companies pursuing this strategy are Cisco Systems, and 3Com. 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.





| |  |  | 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.





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 2 additional patents pending. There can be no assurance that any of our patent applications pending will result in patents 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, 2002, we employed 80 people. We had 24 employees in sales and marketing, 45 in research, development, and professional services, and 11 in finance and administration. We also employ
independent contractors and temporary employees. None of our employees is represented by a labor union, and we consider our employee relations to be good.




10




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##### Table of Contents




EXECUTIVE OFFICERS





The following table sets forth information about our executive
officers:





Name

Age

PositionTroy E. Lynch

37

President and Chief Executive OfficerLanny N. Lambert

53

Vice President, Chief Financial Officer, SecretaryThomas G. Bevan

53

Vice President, Chief Marketing Officer





TROY E. LYNCH, President and Chief Executive Office, leads
eOns executive team, defines corporate strategies, and sets the standards and vision for the corporate culture. He is responsible for all corporate, strategic, and operational decisions. Mr. Lynch joined eOn in February 1999 as Vice President
of Engineering and Chief Technology Officer, and most recently he held the position of Executive Vice President and Chief Operating Officer, providing operational direction and leadership for the Company. Prior to joining eOn, he served as Vice
President of Research and Development of Hayes Corporation, a manufacturer of cable, DSL, analog modems and remote access equipment. He joined Hayes Corporation via a merger with Access Beyond Inc., where he served as Vice President of Engineering
and was instrumental in the development of internet and enterprise access solutions. He also served in the role of Director of Development at Penril Communications Inc., a telecommunications company. Mr. Lynch holds a bachelors degree in
electrical engineering from the University of Maryland and a masters degree in computer science and telecommunications from Johns Hopkins University.





LANNY N. LAMBERT was appointed Chief Financial Officer in February 2001. Mr. Lambert joined the Company in October 2000 as Vice President and Chief Accounting Officer. His previous experience in
the communications industry includes service as Vice President of Finance and Administration and CFO of CMC Industries, Inc.; Vice President of Finance and Administration and CFO of the Corinth Telecommunications Corporation subsidiary of Alcatel
N.V.; and various financial and administrative positions with ITT.





THOMAS G. KELLY BEVAN, Vice
President and Chief Marketing Officer, leads the Companys marketing and product management, directing growth initiatives for product and brand awareness, direct and indirect sales channels, and strategic alliances. Prior to joining eOn in
February of 2001, Mr. Bevan was Vice President of Marketing at Cellit, a market leader in the customer interaction management industry. With more than twenty years experience in the call center, networking and telecommunications industries, he has
served in executive and senior product management positions for such companies as: Altitude Software, formerly Easyphone; Melita International, now known as eShare; Newbridge Networks; Nortel Networks; and, Mitel Networks. Mr. Bevan holds a
bachelors degree in Engineering from the University of Wales.





ITEM 2.    
PROPERTIES.





The Company leases property as detailed in the following table.





Location

Approximate Size

Lease Expiration Date

Intended UseKennesaw, Georgia

40,000 sq. ft.

March 2007

Office





Aggregate monthly rental payments for the Companys facilities
are approximately $25,000. 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.





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.




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##### Table of Contents




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 National Market.





Quarter Ended

High

LowJuly 31, 2002

$
0.90

$
0.50April 30, 2002

$
1.30

$
0.83January 31, 2002

$
1.10

$
0.61October 31, 2001

$
1.00

$
0.50July 31, 2001

$
1.40

$
0.71April 30, 2001

$
2.75

$
1.09January 31, 2001

$
3.38

$
0.91October 31, 2000

$
4.47

$
2.73





As of September 30, 2002, 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 2002, 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.





The Company received notification from Nasdaq in May 2002 that the Company was not in compliance with the minimum bid price requirements for continued listing. Subsequent to July 31, 2002, the Company applied for, and was
granted permission to transfer to the Nasdaq SmallCap Market. The Company believes, based upon current Nasdaq guidelines, that we effectively have until May 2003 to regain compliance with the minimum bid price requirement for continued listing.





Information set forth under the caption Securities Authorized for Issuance under Equity Compensation
Plans in the Companys definitive Proxy Statement for the 2002 Annual Meeting of Shareholders to be held on December 19, 2002 (the Proxy Statement), which will be filed with the Securities and Exchange Commission not later
than 120 days after July 31, 2002, 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 includes the operating results of BCS Technologies, Inc. (BCS) beginning April 12, 1999, the date on which BCS was acquired, and excludes 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 3 to the consolidated financial statements). The statement of operations data
set forth below for each of the fiscal years ended July 31, 2002, 2001, and 2000, and the selected balance sheet data at July 31, 2002 and 2001, are derived from consolidated financial statements included in Item 8, which have been audited by
Deloitte & Touche LLP, independent auditors, whose report also appears in Item 8. The consolidated statement of operations data for the years ended July 31, 1999 and 1998, and the consolidated balance sheet data at July 31, 2000, 1999, and 1998,
are derived from audited consolidated financial statements not included in this report. This data should be read in




12




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##### Table of Contents

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.





Year Ended July 31,2002


2001


2000


1999


1998(in thousands, except per share data)Consolidated Statement of Operations Data:Net revenues

$
15,046


$
20,184


$
29,705


$
27,188


$
17,825Cost of revenues


6,706



9,111



14,027



13,748



10,156Special charges(1)


752



1,985











Gross profit


7,588



9,088



15,678



13,440



7,669Operating expenses:Selling, general and administrative


9,538



14,380



15,283



9,545



5,339Research and development


2,959



4,340



3,914



2,334



1,407Goodwill amortization






586



586



177



Special charges(1)


970



4,714











Total operating expenses


13,467



24,020



19,783



12,056



6,746Income (loss) from operations


(5,879
)


(14,932
)


(4,105
)


1,384



923Interest income


(287
)


(783
)


(759
)






Interest expense


6







211



429



478Other (income) expense, net


210



214



971



15



162Income (loss) from continuing operations before income taxes


(5,808
)


(14,363
)


(4,528
)


940



283Income tax expense (benefit)


(121
)


(45
)


(1,193
)


(9
)


Income (loss) from continuing operations

$
(5,687
)

$
(14,318
)

$
(3,335
)

$
949


$
283Income (loss) from continuing operations per share:Basic

$
(0.47
)

$
(1.19
)

$
(0.34
)

$
0.19


$
0.07Diluted

$
(0.47
)

$
(1.19
)

$
(0.34
)

$
0.14


$
0.05Weighted average shares outstanding:Basic


12,013



12,040



9,885



5,036



3,918Diluted


12,013



12,040



9,885



6,651



5,353Consolidated Balance Sheet Data:Cash and cash equivalents

$
2,682


$
3,590


$
1,829


$
1,803


$
3Marketable securities


6,610



8,850



16,337







Working capital


9,855



20,591



35,882



1,800



(111
)Goodwill, net






10,375



10,961



11,547



Total assets


15,771



39,693



55,189



33,617



10,452Long-term debt


613











2,314



3,000Total stockholders equity (deficit)


10,900



34,077



50,002



17,226



(1,166
)


---

|(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 (see Footnote 5 to the consolidated financial statements).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents




|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.





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 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial statements.





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.





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.




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##### Table of Contents

Results of Operations





The following table presents our operating ratios for fiscal years 2002, 2001, and 2000:





Year Ended July 31,2002


2001


2000Net revenues

100.0
%

100.0
%

100.0
%Cost of revenues

44.6
%

45.1
%

47.2
%Special charges

5.0
%

9.8
%

0.0
%Gross margin

50.4
%

45.1
%

52.8
%Operating expenses:Selling, general, and administrative

63.4
%

71.2
%

51.4
%Research and development

19.7
%

21.5
%

13.2
%Amortization of goodwill

0.0
%

2.9
%

2.0
%Special charges

6.4
%

23.4
%

0.0
%Total operating expenses

89.5
%

119.0
%

66.6
%Loss from operations

(39.1
)%

(73.9
)%

(13.8
)%Interest (income) expense, net

(1.9
)%

(3.9
)%

(1.9
)%Other (income) expense, net

1.4
%

1.1
%

3.3
%Loss from continuing operations before income taxes

(38.6
)%

(71.1
)%

(15.2
)%Income tax benefit

(0.8
)%

(0.2
)%

(4.0
)%Loss before discontinued operations, extraordinary items, and cumulative effect of change in accounting
principle.

(37.8
)%

(70.9
)%

(11.2
)%Income (loss) from discontinued operations, net of tax

(17.5
)%

(3.2
)%

1.6
%Extraordinary loss from early extinguishment of debt, net of tax

0.0
%

0.0
%

(0.6
)%Cumulative effect of change in accounting principle, Net of tax

(69.0
)%

0.0
%

0.0
%Net loss

(124.3
)%

(74.1
)%

(10.2
)%





The following discussion provides information about the
Companys continuing operations, which excludes the results of Cortelco Systems Puerto Rico, Inc. (see Footnote 3Discontinued Operations in the notes to the consolidated financial statements).





Net Revenues





Our
overall net revenues decreased 25.5% to $15.0 million in fiscal 2002 from $20.2 million in fiscal 2001. The decrease resulted primarily from a weaker U.S. economic environment in the current year, which resulted in capital constraints and delays in
purchasing by potential and existing customers. Fiscal 2001 net revenues represented a 32.1% decrease from $29.7 million in fiscal 2000. The decrease was primarily due to the large amount of sales in fiscal 2000 that were driven by Year 2000
upgrades.





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 16.5% to $7.6 million for the year ended July 31, 2002 from $9.1 million in fiscal 2001. The decrease was due primarily to decreased revenues for both our eQueue and Millennium products due to the weaker economic environment, offset by a
$1.2 million decline in special charges recorded as a component of cost of revenues (see Special Charges section below). Fiscal 2001 represented a decrease in gross profit of 42.0% from $15.7 million in fiscal 2000. The decrease in gross profit in
2001 was primarily due to the lower level of revenues coupled with $2.0 million in special charges related to our restructuring initiatives (see Special Charges section below). Our gross margins, excluding any special charges, were relatively




15




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##### Table of Contents

stable at 55.4%, 54.9%, and 52.8% for fiscal years 2002, 2001, and 2000, 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 $9.5 million in fiscal 2002, a decrease of 33.7% from $14.4
million in fiscal 2001. Fiscal 2001 represented a 5.9% decrease from $15.3 million in fiscal 2000. The decrease in fiscal years 2002 and 2001 resulted from a decrease in personnel and fixed costs from the implementation of our restructuring plan
(see the Special Charges section below).





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 decreased 31.8% to $3.0 million in the year ended July 31, 2002 from $4.3 million in fiscal 2001. Fiscal 2001 represented a 10.9% increase from
$3.9 million in fiscal 2000. The decrease in fiscal year 2002 resulted from a decrease in personnel and fixed costs from the implementation of our restructuring plan. The increase in fiscal year 2001 resulted from the hiring of additional engineers
and expansion of facilities dedicated to our R&D efforts in the early part of the fiscal year, offset by decreases in personnel and overhead later in the year with the implementation of our restructuring plans.





Amortization of Goodwill and Cumulative Effect of Change in Accounting Principle





We recorded $11.7 million of goodwill related to the acquisition of BCS Technologies, Inc. in April 1999 and amortized the amount using an estimated 20-year life through
fiscal 2001. 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 our functions to our 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.





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 $970,000 and $4,714,000 in 2002 and 2001 respectively. Approximately $1,222,000 of the charge in fiscal 2001 related to employee termination benefits for 78 employees. During fiscal year 2001, the Company terminated
73 of the 78 employees with reductions in all major functions and at all locations. In 2002, the Company terminated 5 employees in the sales and field service functions for a charge of $58,000.




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##### Table of Contents




The special charge in operating expenses also included $970,000 and $1,968,000 in
fiscal 2002 and 2001, respectively, for the expected costs associated with excess space at the Companys locations in Memphis, Tennessee; Englewood, Colorado; and Guelph, Ontario and $1,248,000 in fiscal 2001 for asset impairments, primarily
related to the write-off of previously capitalized leasehold improvements. The excess space and asset impairments resulted from the Companys relocation of personnel and certain functions to the Atlanta headquarters and the corresponding
reductions in our workforce. The remaining $276,000 in special charges recorded in operating expenses in fiscal 2001 primarily related to costs incurred to relocate employees and equipment to our Atlanta headquarters.





The Company also recognized special charges of $752,000 and $1,985,000 in cost of revenues during 2002 and 2001, respectively. The 2002
noncash charge was recorded to properly value excess inventories in light of current economic conditions. The 2001 charge related to the write-down of inventory to net realizable value, determined based upon estimated proceeds from disposal, in
connection with the discontinuance of the sales of certain third-party products, as well as the Companys manufacturing outsourcing initiatives.





The following tables summarize the activity relating to the special charges during fiscal 2002 and 2001 and the associated liabilities at July 31, 2002 and 2001:





July 31, 2000 Liability Balance

Charges

Expenditures


Other Adjustments


July 31, 2001 Liability BalanceInventory charges

$


$
1,985

$



$
(1,985
)(1)

$
Termination benefits





1,222


(597
)






625Excess facilities cost





1,968


(363
)






1,605Asset impairments





1,248






(1,248
)(2)


Relocation costs





276


(234
)






42Total

$


$
6,699

$
(1,194
)

$
(3,233
)

$
2,272





July 31, 2001 Liability Balance

Charges

Expenditures


Other Adjustments


July 31, 2002 Liability BalanceInventory charges

$


$
752

$



$
(752
)(1)

$
Termination benefits


625


58


(622
)






61Excess facilities cost


1,605


912


(1,013
)


(1,331
)(3)


173Relocation costs


42





(42
)






Total

$
2,272

$
1,722

$
(1,677
)

$
(2,083
)

$
234


---

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

|(2) |  | Represents write-off of assets
|--- |  | ------------------------------

|(3) |  | Reflects issuance of note payable in connection with the lease termination agreement for the Companys former facility in Memphis, Tennessee.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------




Net workforce reductions under the plan will reduce our employee expense. The reduction in employee expense
began in the second quarter of fiscal 2001 and continued through the fourth quarter of fiscal 2002. The annual depreciation expense associated with the impaired assets will not have a significant impact on future results. The reduction in rent and
facility costs from the consolidation of sites is expected to reduce our expenses by over $0.5 million annually from fiscal 2001 levels. The decrease in costs as a result of the restructuring activities outlined above will primarily impact selling,
general and administrative expense, and to a somewhat lesser extent, research and development expense. The remaining cash outlays of $234 related to the above restructuring activities are expected to be completed by the end of fiscal 2003 and will
be funded from current cash and marketable securities.





Interest Income and Expense





Interest expense was $6,000 in fiscal 2002, representing two months of interest on the note payable associated with the termination of the
lease on the Memphis facility. We had no interest expense in fiscal 2001. Interest expense was $211,000 in fiscal 2000, reflecting interest on borrowings up until the retirement of all outstanding debt in February 2000 in connection with our initial
public offering.




17




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##### Table of Contents

Interest income in fiscal 2002 of $0.29 million decreased 63.3% from $0.78 million in fiscal 2001. Interest income was
$0.76 million in fiscal 2000. The decrease in fiscal 2002 reflected significantly lower interest rates and a lower level of investments in marketable securities. The slight increase in fiscal 2001was due to the investment of surplus funds for a full
year versus only 6 months after our IPO in the previous year, offset by lower marketable securities balances and interest rates.





Other Income and Expense, Net





Other expense was $0.2 million in fiscal 2002, compared to
$0.2 million in fiscal 2001 and $1.0 million in fiscal 2000. Other expense in fiscal 2000 resulted primarily from the recognition of a loss on marketable securities of $0.8 million from an investment in equity securities of a publicly traded
company.





Income Tax Expense (Benefit)





Income tax benefit was $0.12 million, $0.05 million, and $1.19 million in fiscal 2002, 2001, and 2000, 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 newly enacted Job Creation and Worker Assistance Act of 2002, versus two years under the previous tax laws. The income tax benefit for fiscal 2001 and 2000 resulted from the
carryback of operating losses to previous periods. See Footnote 13  Income Taxes of the notes to the consolidated financial statements.





Extraordinary Loss





We used a portion of the net proceeds from our initial public offering
to repay $6.4 million of outstanding debt in February 2000. In connection with the repayment of debt, the Company paid pre-payment penalties and wrote off deferred financing costs totaling $0.3 million. In fiscal 2000, the Company recognized an
extraordinary loss from the early extinguishment of debt of $0.2 million, net of an income tax benefit of $0.1 million.





Liquidity and
Capital Resources





As of July 31, 2002, we had cash and cash equivalents of $2.7 million, $6.6 million in
short term investments, and a working capital balance of $9.9 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 $2.1 million, $2.5 million, and $8.0 million for
fiscal years 2002, 2001, and 2000, respectively. The net operating cash outflow for the current year was primarily the result of our operating loss (adjusted for non-cash items) and expenditures for accrued special charges, which were partially
offset by increased collections of accounts receivable and a reduction in inventories. The net operating cash outflow for fiscal 2001 resulted primarily from our operating loss (adjusted for non-cash items), which was offset by a decrease in
accounts receivable and inventories, and an increase in accrued special charges. The net operating cash outflow for fiscal 2000 was the result of our operating loss (adjusted for non-cash items) coupled with increases in inventory levels, a
reduction in trade accounts payable, and payments of income taxes.





Our investing activities resulted in cash
inflows of $1.8 million and $5.7 million in fiscal years 2002 and 2001, respectively, and a cash outflow of $17.9 million in fiscal year 2000. Cash provided by investing activities in the current year consisted primarily of $2.1 million in net sales
of marketable securities. Cash provided by investing activities for fiscal 2001 consisted primarily of net sales of $7.8 million in marketable securities, offset by purchases of property and equipment of $2.1 million. Cash used in investing
activities in fiscal 2000 consisted primarily of net purchases of marketable securities of $16.6 million plus an additional $1.3 million in outflows for purchases of property and equipment.





Our financing activities have resulted in a cash outflows of $0.2 million and $1.0 million in fiscal years 2002 and 2001, respectively, and a cash inflow of $29.0 million
in fiscal 2000. 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. Cash used in financing activities in fiscal 2001 consisted primarily of repurchases of common stock under the Companys stock




18




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##### Table of Contents

repurchase program. The cash inflow from financing activities in fiscal 2000 reflected the proceeds from our initial public offering, offset by
deferred offering costs and the retirement of all outstanding debt obligations at that time.





We believe that our
available funds will satisfy our projected working capital and capital expenditure requirements for 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.





Commitments and Contingencies





As of July 31, 2002, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately
$1,258,000.





During fiscal 2001, the Company issued a $750,000 letter of credit to the lessor of the Memphis,
Tennessee facility under the terms of the lease agreement. The letter of credit permitted the landlord to draw against it in the event the Company defaulted on the lease agreement. In 2002, the Company entered into a lease termination agreement. The
$750,000 letter of credit was cancelled, and a new $1,400,000 declining balance letter of credit was issued to secure payments under the termination agreement. The $1,400,000 letter of credit is secured by $1,400,000 of municipal securities.





The Company received notification from Nasdaq in May 2002 that the Company was not in compliance with the minimum
bid price requirements for continued listing on the Nasdaq National Market. Subsequent to July 31, 2002, the Company applied for, and was granted permission to transfer to the Nasdaq SmallCap Market. The Company believes, based upon current Nasdaq
guidelines, that we effectively have until May 2003 to regain compliance with the minimum bid price requirement for continued listing.





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.





Our restructuring plan may not be successful.





In fiscal
year 2001, the Company adopted a restructuring plan which involved both a reduction in the Companys workforce and the relocation and concentration of management and certain strategic functions. The majority of the restructuring actions were
completed by July 31, 2002. No assurance can be given that the restructuring will prove to be successful, that future operating results will improve, or that the completion of the restructuring will not disrupt the Companys operations.
Further, in light of the current economic environment, additional reorganization of the Companys operations may be required in the future.




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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.
| | - |  | -----------------------------------------------------




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.




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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 new 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.





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.





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 grow or sustain our Millennium voice switching platform revenues, our business,
operating results and financial condition could be harmed.





We may not be able to grow or 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.





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




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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 September 30, 2002, our executive officers, directors and principal stockholders and their affiliates beneficially owned 5,393,526 shares, or 43% 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.





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




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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 July 2001, the FASB
issued SFAS No. 141, Business Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain
acquired intangible assets in a business combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwills impairment and that intangible
assets other than goodwill should be amortized over their useful lives. The Company elected to early adopt SFAS No. 142 on August 1, 2001. Footnote 4 of the consolidated financial statements provides additional discussion regarding the impact to the
Companys financial statements as a result of adopting this statement.





In August 2001, the FASB issued SFAS
No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated retirement costs. The
adoption of SFAS No. 143 is effective for the Company in the first quarter of fiscal year 2003. The Company does not expect the adoption of SFAS No. 143 to have a significant impact on the Companys future results of operations or financial
position.





In October 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 supersedes previous guidance for financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be disposed of. The adoption of SFAS No. 144 is effective
for the Company in the first quarter of fiscal 2003. The Company is currently assessing the impact of SFAS No. 144 on its results of operations and financial position.





In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.
13, and Technical Corrections, which provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting of certain lease modifications and various technical corrections that are not
substantive in nature to existing pronouncements. eOn will adopt SFAS No. 145 on August 1, 2002, except for the provisions relating to the amendment of SFAS No. 13, which were adopted for transactions occurring subsequent to May 15, 2002. The




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Company does not expect the adoption of SFAS No. 145 to have a significant impact on its financial
position and results of operations.





In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a significant impact on its financial position and results of operations.





Quarterly Financial Data (Unaudited)





Quarterly financial data for the years ended July 31, 2002 and 2001 is summarized as follows:





First Quarter


Second Quarter


Third Quarter


Fourth Quarter(4)(In thousands)2002Net revenues(1)

$
5,022


$
3,030


$
3,266


$
3,728Gross profit(1)


2,824



1,671



1,858



1,235Income (loss) before discontinued operations and extraordinary item(1)


(290
)


(1,369
)


(2,140
)


(1,888
)Net income (loss)


(10,730
)


(1,940
)


(3,041
)


(2,984
)Income (loss) before discontinued operations and extraordinary item per common share(1):Basic and diluted

$
(0.02
)

$
(0.11
)

$
(0.18
)

$
(0.16
)Net income loss per common share:Basic and diluted(2)


(0.89
)


(0.16
)


(0.25
)


(0.25
)





First Quarter


Second Quarter


Third Quarter


Fourth Quarter(3)(In thousands)2001Net revenues(1)

$
6,312


$
4,010


$
4,863


$
4,999Gross profit(1)


3,420



1,151



2,787



1,730Income (loss) before discontinued operations and extraordinary item(1)


(1,198
)


(5,308
)


(1,230
)


(6,582
)Net income (loss)


(1,157
)


(6,293
)


(1,360
)


(6,153
)Income (loss) before discontinued operations and extraordinary item per common share(1):Basic and diluted

$
(0.10
)

$
(0.44
)

$
(0.10
)

$
(0.55
)Net income loss per common share:Basic and diluted


(0.09
)


(0.53
)


(0.11
)


(0.51
)


---

|(1) |  | Represents results from continuing operations; excludes disposition of Cortelco Systems Puerto Rico, Inc. (see Footnote 3 of the notes to the consolidated
financial statements).
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) |  | The fourth quarter results of operations include special charges of $4,500,000 related to 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 (see Footnote 4 of the notes to the consolidated financial statements.)
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) |  | The fourth quarter gross profit includes a $752,000 non-cash charge for excess inventories (see Footnote 4 of the notes to the consolidated financial
statements).
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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, while the remainder are invested in fixed income securities with maturities less than one year. Because these securities have short effective
maturities, we believe the market risk for such holdings is insignificant. In addition, the vast majority of our sales are made in U.S. dollars and, consequently, we believe that our foreign currency exchange rate risk is immaterial. We do not have
any derivative instruments, and we do not engage in hedging transactions.





ITEM 8.    
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS








PageIndependent Auditors Report

26Consolidated Balance Sheets as of July 31, 2002 and 2001

27Consolidated Statements of Operations for the Years ended July 31, 2002, 2001, and 2000

28Consolidated Statements of Cash Flows for the Years ended July 31, 2002, 2001, and 2000

29Consolidated Statements of Stockholders Equity for the Years Ended July 31, 2002, 2001, and 2000

31Notes to Consolidated Financial Statements

32




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##### Table of Contents




INDEPENDENT AUDITORS REPORT





To the Board of Directors and
Stockholders of eOn Communications Corporation





We have audited the accompanying consolidated balance sheets of
eOn Communications Corporation and subsidiaries (the Company) as of July 31, 2002 and 2001 and the related consolidated statements of operations, cash flows, and stockholders equity (deficit) for the years ended July 31, 2002,
2001, and 2000. Our audits also included the financial statement schedules listed in the Index at Item 14. These financial statements and financial statement schedules are the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements and financial statement schedules based on our audits.





We
conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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 audits provide a reasonable basis for our opinion.





In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company at July 31, 2002 and 2001 and the results of its operations and
its cash flows for the years ended July 31, 2002, 2001, and 2000 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, 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 4 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.





As discussed in Note 9 to the consolidated
financial statements, on August 1, 2001 the Company changed its method of accounting for the cost of certain inventories from the last-in, first-out method to the first-in, first-out method and, retroactively, restated the consolidated financial
statements for the years ended July 31, 2001 and 2000 for the change.





/S/    DELOITTE & TOUCHE LLP





Atlanta, Georgia


August 29, 2002




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##### Table of Contents




eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





CONSOLIDATED BALANCE SHEETS


July 31, 2002 and 2001


(Dollars in thousands)





July 31,2002


2001ASSETSCurrent assets:Cash and cash equivalents

$
2,682


$
3,590Marketable securities


6,610



8,850Trade accounts receivable, net of allowance for doubtful accounts of $866 and $1,265


1,986



3,713Inventories


2,710



4,042Income tax refund receivable






271Assets held for disposition






5,568Other current assets


125



173Total current assets


14,113



26,207Property and equipment, net


1,631



2,041Other assets:Goodwill






10,375Intangible assets, net of accumulated amortization of $20 and $5


27



42Assets held for disposition






1,028Total other assets


27



11,445Total

$
15,771


$
39,693LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Trade accounts payable

$
1,292


$
1,343Payable to affiliate


84



60Note payablecurrent


665



Accrued special charges


234



2,272Accrued expenses and other


1,983



1,941Total current liabilities


4,258



5,616Commitments and contingencies






Note payablenoncurrent


613



Stockholders equity:Common Stock, $.001 par value (50,000,000 shares authorized, 12,040,634 and 12,041,945 shares issued and
outstanding)


12



12Additional paid-in capital


51,877



56,623Accumulated deficit


(40,989
)


(22,294
)Note receivable from affiliate (former parent)






(264
)Total stockholders equity


10,900



34,077Total

$
15,771


$
39,693





See notes to consolidated financial statements.




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##### Table of Contents




eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF OPERATIONS


For The Years Ended July 31, 2002, 2001, And 2000


(Dollars In Thousands, Except Per Share Data)





Year Ended July 31,2002


2001


2000Net revenues

$
15,046


$
20,184


$
29,705Cost of revenues


6,706



9,111



14,027Special charges


752



1,985



Gross profit


7,588



9,088



15,678Operating expenses:Selling, general and administrative


9,538



14,380



15,283Research and development


2,959



4,340



3,914Amortization of goodwill






586



586Special charges


970



4,714



Total operating expenses


13,467



24,020



19,783Loss from operations


(5,879
)


(14,932
)


(4,105
)Interest expense


6







211Interest income


(287
)


(783
)


(759
)Other (income) expense, net


210



214



971Loss from continuing operations before income tax benefit


(5,808
)


(14,363
)


(4,528
)Income tax benefit


(121
)


(45
)


(1,193
)Loss from continuing operations extraordinary loss, and cumulative effect of change in accounting principle


(5,687
)


(14,318
)


(3,335
)Income (loss) from discontinued operations, net of income tax effect


(2,633
)


(645
)


497Extraordinary loss from early extinguishment of debt, net of income tax benefit










(187
)Cumulative effect of change in accounting principle, net of income tax effect


(10,375
)






Net loss and comprehensive loss

$
(18,695
)

$
(14,963
)

$
(3,025
)Net loss per common share:Basic and diluted:Loss before discontinued operations and extraordinary items

$
(0.47
)

$
(1.19
)

$
(0.34
)Income (loss) from discontinued operations


(0.22
)


(0.05
)


0.05Extraordinary loss










(0.02
)Cumulative effect of change in accounting principle


(0.86
)






Net loss per common share

$
(1.56
)

$
(1.24
)

$
(0.31
)





See notes to consolidated financial statements.




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##### Table of Contents




eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS


For the Years Ended July 31, 2002, 2001, and 2000


(Dollars In Thousands)








Year Ended July 31,2002


2001


2000CASH FLOWS FROM OPERATING ACTIVITIES:Net loss

$
(18,695
)

$
(14,963
)

$
(3,025
)Adjustments to reconcile net loss to net cash used in operating activities:(Income) loss from discontinued operations


2,633



645



(497
)Impairment of goodwill from adoption of FAS 142


10,375







Depreciation and amortization


744



1,691



1,328Extraordinary loss on early extinguishment of debt










187Provision for the allowance for doubtful accounts


164



986



193Loss on sales/write-off of property and equipment






1,075



6Loss on investments


94



87



752Changes in net assets and liabilities (net of effect of discontinued operations):Trade accounts receivable


1,563



1,494



1,310Accounts receivable from/payable to affiliates


24



63



(129
)Inventories


1,332



3,548



(3,178
)Other assets


48



1,527



(538
)Trade accounts payable


(51
)


(1,065
)


(2,024
)Accrued special charges


(707
)


2,272



Accrued expenses and other


95



(838
)


756Income taxes payable (refund receivable)


271



969



(3,169
)Net cash used in operating activities


(2,110
)


(2,509
)


(8,028
)CASH FLOWS FROM INVESTING ACTIVITIES:Purchases of property and equipment


(301
)


(2,086
)


(1,357
)Purchases of intangible assets






(5
)


(3
)Repayments of notes receivable from employees










73Sales of marketable securities


7,438



17,633



31,235Purchases of marketable securities


(5,310
)


(9,850
)


(47,868
)Net cash provided by (used in) investing activities


1,827



5,692



(17,920
)CASH FLOWS FROM FINANCING ACTIVITIES:Net repayments under revolving line of credit










(2,825
)Decrease in checks outstanding










(156
)Repayments of long-term debt










(2,314
)Collection of note receivable from affiliate/former parent










420Repayment of note payable


(53
)






Proceeds from offering










32,774Repurchases of common stock


(203
)


(1,296
)


Issuances of common stock from company plans


84



334



7Deferred offering costs










1,119Net cash provided by (used in) financing activities


(172
)


(962
)


29,025Cash to discontinued operations


(453
)


(460
)


(3,051
)




29




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)


For The Years Ended July 31, 2002, 2001, and 2000





Year Ended July 31,2002


2001

2000Net increase (decrease) in cash and cash equivalents


(908
)


1,761


26Cash and cash equivalents, beginning of year


3,590



1,829


1,803Cash and cash equivalents, end of year

$
2,682


$
3,590

$
1,829Supplemental cash flow information:Interest paid

$
6


$


$
818Income taxes paid









1,672Noncash 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.2000:Simultaneous with the offering on February 4, 2000, all of the shares of the Companys Series A convertible
preferred stock were converted into shares of the Companys common stock on approximately a 1 for .98 basis, resulting in the issuance of 1,434,894 shares of common stock.The Company distributed a $2,600,000 note receivable from CSHC to CSHC in
payment of$2,600,000 in dividends previously declared and payable.The Company sold inventory in exchange for common stock of a publicly-traded company. The Company recorded the $839,000
sale at the estimated fair value of the securities received.





See notes to consolidated financial statements.







30




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##### Table of Contents




eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY


For the Years Ended July 31, 2002, 2001, and 2000


(Dollars in thousands)





Preferred Stock


Common Stock

Additional Paid-In Capital


Accumulated Deficit


Note Receivable From Affiliate/ Former Parent


Total Stockholders EquityShares


Amount


Shares


AmountBalance at July 31, 1999

1,463,206



660


7,639,932



8


24,148



(4,380
)


(3,284
)


17,152Effect of change in inventory valuation method from LIFO to FIFO



















74







74Adjusted balance at July 31, 1999

1,463,206



660


7,639,932



8


24,148



(4,306
)


(3,284
)


17,226Collection of note from former parent























420



420Conversion of preferred stock to common stock

(1,463,206
)


(660
)

1,434,894



1


659











Issuance of common stock in the offering








3,180,000



3


32,771











32,774Note receivable distributed in payment of dividend payable























2,600



2,600Exercise of stock options








9,620






7











7Net loss and comprehensive loss



















(3,025
)






(3,025
)Balance at July 31, 2000








12,264,446



12


57,585



(7,331
)


(264
)


50,002Repurchase of common stock








(431,500
)





(1,296
)










(1,296
)Exercise of stock options








82,972






82











82Issuances from employee stock purchase plan








126,027






252











252Net loss and comprehensive loss



















(14,963
)






(14,963
)Balance at July 31, 2001




$



12,041,945


$
12

$
56,623


$
(22,294
)

$
(264
)

$
34,077Repurchase of common stock








(234,500
)





(203
)










(203
)Exercise of stock options








112,620






56











56Issuances from employee stock purchase plan








120,569






81











81Distribution of CSPR stock















(4,680
)






264



(4,416
)Net loss and comprehensive loss



















(18,695
)






(18,695
)Balance at July 31, 2002




$



12,040,634


$
12

$
51,877


$
(40,989
)

$



$
10,900





See notes to consolidated financial statements.







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##### Table of Contents




eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Years Ended July 31, 2002, 2001, and 2000





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. These activities constitute one segment.





Basis of PresentationThe consolidated financial statements of eOn include the accounts of its wholly-owned subsidiary, eOn Communications Corporation of Colorado (formerly BCS Technologies, Inc.). All significant intercompany
balances and transactions have been eliminated.





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 3 for additional information.





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





Cortelco Systems Holding Corporation (CSHC)





Cortelco International, Inc. (CII, subsidiary of CSHC)





Cortelco Puerto Rico, Inc. (CPR, subsidiary of CSHC)





Cortelco Canada (CC, subsidiary of CSHC)





2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Cash and Cash
EquivalentsAll highly liquid investments with a maturity of three months or less when purchased are considered to be cash equivalents.





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. During 2001 and 2000, the Company determined that an other-than-temporary
impairment had occurred relating to an equity investment. The cost basis of the security was written down, and losses of $87,000 and $752,000, respectively, were recognized.





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.





GoodwillGoodwill represents 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




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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 4 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.





Deferred Financing CostsDeferred financing costs represent costs
associated with the issuance of debt. These costs are amortized using the effective interest method over the life of the related debt issue.





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.





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 reasonable assured. The Company believes that its revenue recognition policies are compliant with Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements, and
Statement of Position No. 97-2, Software Revenue Recognition





Medical Care and Disability Benefit
PlansThe Company is self-insured with respect to the medical and disability benefits offered to substantially all employees. These costs are charged against earnings in the period in which claims are incurred. 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.





Fair
Value of Financial InstrumentsThe carrying amounts of financial instruments such as cash, accounts receivable, and accounts payable approximate their fair value due to the short term nature of the instruments.





EstimatesThe preparation of financial statements in conformity with generally accepted accounting principles 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, 2002, 2001, and 2000, net loss equaled comprehensive loss.




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




New Accounting StandardsIn July 2001, the FASB issued SFAS No. 141, Business
Combinations, and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations be accounted for under the purchase method only and that certain acquired intangible assets in a business
combination be recognized as assets apart from goodwill. SFAS No. 142 requires that ratable amortization of goodwill be replaced with periodic tests of the goodwills impairment and that intangible assets other than goodwill should be amortized
over their useful lives. Management adopted SFAS No. 142 on August 1, 2001. See Footnote 4 for more information.





In August 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The adoption of SFAS No. 143 is effective for the Company in the first quarter of fiscal year 2003. The Company does not expect the adoption of SFAS No. 143 to have a significant impact on the
Companys future results of operations or financial position.





In October 2001, the FASB issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes previous guidance for financial accounting and reporting for the impairment or disposal of long-lived assets and for segments of a business to be
disposed of. The adoption of SFAS No. 144 is effective for the Company in the first quarter of fiscal 2003. The Company is currently assessing the impact of SFAS No. 144 on its results of operations and financial position.





In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64,
Amendment of FASB Statement No. 13, and Technical Corrections, which provides for the rescission of several previously issued accounting standards, new accounting guidance for the accounting of certain lease modifications and various technical
corrections that are not substantive in nature to existing pronouncements. The Company will adopt SFAS No. 145 on August 1, 2002. The Company does not expect the adoption of SFAS No. 145 to have a significant impact on the Companys future
results of operations or financial position.





In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities, which requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is to
be applied prospectively to exit or disposal activities initiated after December 31, 2002. The Company does not expect the adoption of SFAS No. 146 to have a significant impact on the Companys future results of operations or financial
position.





3.    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. The assets held for disposition are primarily comprised of accounts
receivable, inventory, and fixed assets, net of liabilities.




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







Operating results of the discontinued operations are as follows:





Year ended July 31,2002


2001


2000(In thousands)Net sales

$
10,384


$
22,181


$
24,262Earnings (loss) before income taxes and extraordinary loss


(2,633
)


(645
)


527Income tax expense










30Net earnings (loss) from discontinued operations

$
(2,633
)

$
(645
)

$
497Net earnings (loss) per share:Basic and Diluted

$
(0.22
)

$
(0.05
)

$
0.05





4.    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.





The following table presents the pro forma financial
results for fiscal years 2001 and 2000 on a basis consistent with the new accounting principle (dollars in thousands except per share amounts):





Year Ended July 31, 2001


Year Ended July 31, 2000Reported net loss

$
(14,963
)

$
(3,025
)Add back amortization of goodwill


586



586Adjusted net loss

$
(14,377
)

$
(2,439
)Reported basic and diluted net loss per share

$
(1.24
)

$
(0.31
)Add back goodwill amortization per share


0.05



0.06Adjusted basic and diluted net loss per share

$
(1.19
)

$
(0.25
)





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 condensed consolidated statement




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




of operations for the year ended July 31, 2002. The income tax effect of this change in accounting principle was $0.





5.    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.





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 $970,000 and $4,714,000 in 2002 and 2001 respectively. Approximately $1,222,000 of the charge in fiscal 2001 related to employee termination benefits for 78 employees. During fiscal
year 2001, the Company terminated 73 of the 78 employees with reductions in all major functions and at all locations. 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 $970,000 and $1,968,000 in fiscal 2002 and 2001, respectively, for the
expected costs associated with excess space at the Companys locations in Memphis, Tennessee; Englewood, Colorado; and Guelph, Ontario and $1,248,000 in fiscal 2001 for asset impairments, primarily related to the write-off of previously
capitalized leasehold improvements. The excess space and asset impairments resulted from the Companys relocation of personnel and certain functions to the Atlanta headquarters and the corresponding reductions in our workforce. The remaining
$276,000 in special charges recorded in operating expenses in fiscal 2001 primarily related to costs incurred to relocate employees and equipment to our Atlanta headquarters.





The Company also recognized special charges of $752,000 and $1,985,000 in cost of revenues during 2002 and 2001, respectively. The 2002 noncash charge was recorded to
properly value excess inventories in light of current economic conditions. The 2001charge related to the write-down of inventory to net realizable value, determined based upon estimated proceeds from disposal, in connection with the discontinuance
of the sales of certain third-party products, as well as the Companys manufacturing outsourcing initiatives.




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The following tables summarize the activity relating to the special
charges during fiscal 2002 and 2001 and the associated liabilities at July 31, 2002 and 2001:





July 31, 2000 Liability Balance

Charges

Expenditures


Other Adjustments


July 31, 2001 Liability BalanceInventory charges

$


$
1,985

$



$(1,985
)(1)

$
Termination benefits





1,222


(597
)





625Excess facilities cost





1,968


(363
)





1,605Asset impairments





1,248





(1,248
)(2)


Relocation costs





276


(234
)





42Total

$


$
6,699

$
(1,194
)

$(3,233
)

$
2,272





July 31, 2001 Liability Balance

Charges

Expenditures


Other Adjustments


July 31, 2002 Liability BalanceInventory charges

$


$
752

$



$
(752
)(1)

$
Termination benefits


625


58


(622
)






61Excess facilities cost


1,605


912


(1,013
)


(1,331
)(3)


173Relocation costs


42





(42
)






Total

$
2,272

$
1,722

$
(1,677
)

$
(2,083
)

$
234


---

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

|(2) |  | Represents write-off of assets
|--- |  | ------------------------------

|(3) |  | 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.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




6.    THE OFFERING





On February 4, 2000, the Company completed the
initial public offering of 2,790,000 shares of common stock at a price of $12.00 per share resulting in proceeds to the Company, net of underwriting commissions and discounts and offering costs, of $28,400,000. On February 17, 2000, the underwriters
exercised their over-allotment right resulting in the issuance of an additional 390,000 shares of common stock and additional proceeds to the Company totaling $4,400,000. Simultaneous with the offering, all of the shares of the Companys Series
A convertible preferred stock were converted into shares of the Companys common stock on a 1 for .98 basis, resulting in the issuance of 1,434,894 shares of common stock. The Company used the net proceeds from the offering to repay $2,800,000
of outstanding principal and interest on 8% subordinated notes due in 2002 and $3,600,000 of outstanding indebtedness under a revolving credit facility and for working capital and general corporate purposes. In connection with the repayment of debt,
the Company recognized an extraordinary loss of $187,000, net of income tax benefit of $97,000 related to the early extinguishment of debt.





7.    MAJOR CUSTOMERS AND CONCENTRATION OF CEDIT 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, and the U.S. government. 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.




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







8.    MARKETABLE SECURITIES





Marketable securities consists of the following:





July 31, 2002

July 31, 2001Cost

Market value

Cost

Market Value(In thousands)Municipal bonds

$
6,200

$
6,200

$
7,700

$
7,700Certificates of deposit








1,150


1,150Corporate obligations


410


410





Total

$
6,610

$
6,610

$
8,850

$
8,850





The municipal bond investments are comprised solely of taxable
auction-rate securities with stated maturities ranging from 18-27 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, 2002 or 2001. The Company
has classified the municipal bonds as available for sale investments, while the certificates of deposits and corporate obligations are classified as held to maturity.





The Company has pledged a $1,400,000 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 in 2002, whereas cost was determined by the last-in,
first-out (LIFO) method for approximately 55% and 60% of the inventories at July 31, 2001 and 2000, respectively. The new method of accounting for inventories was adopted 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. Accordingly, the consolidated financial statements of prior years have been restated to apply the new method retroactively. The effect of the accounting change on income of
2002 and on income as previously reported for 2001 and 2000 is as follows:





2002

2001

2000(In thousands, except per share data)(Increase) decrease in loss before discontinued operations and extraordinary items

$
8

$

$
(26
)Increase in basic and diluted loss per common share

$
0.00

$

$
(0.00
)





The balances of accumulated deficit for 2000 and 2001 have been
adjusted for the effect of applying retroactively the new method of accounting.





Inventories consist of the
following:





2002

2001(In thousands)Raw materials and purchased components

$
68

$
304Finished goods


2,642


3,738Total inventories

$
2,710

$
4,042




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







10.    PROPERTY AND EQUIPMENT





Property and equipment consists of the following:





2002


2001(In thousands)Leasehold improvements

$
282


$
287Equipment


3,794



3,596Furniture and fixtures


790



784Total


4,866



4,667Less accumulated depreciation


(3,235
)


(2,626
)Property and equipment, net

$
1,631


$
2,041





Depreciation expense was $711,000, $903,000, and $534,000 for 2002,
2001, and 2000, respectively.





11.    ACCRUED EXPENSES AND OTHER





Accrued expenses and other consists of the following:





2002

2001(In thousands)Employee compensation

$
572

$
435Commissions


98


128Vacation


307


251Deferred income


296


257Employee withholdings


54


39Other


656


831Total

$
1,983

$
1,941





12.    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, 2002:





(In thousands)Year Ending2003

$
2842004


2842005


2842006


2892007


182Thereafter


Total

$
1,323





Rent expense for the years ended July 31, 2002, 2001, and 2000
totaled $327,000, $754,000, and $767,000, respectively, which included $146,000 in 2000 charged by CII for the sharing of warehouse space.




39




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eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







13.    INCOME TAXES





The income tax provision is summarized as follows:





2002


2001


2000(In thousands)Continuing operations

$
(121
)

$(45
)

$(1,193
)Discontinued operations








30Extraordinary item








(97
)Total income tax benefit


(121
)

(45
)

(1,260
)





The components of income tax benefit for 2002, 2001, and 2000
attributable to continuing operations are as follows:





2002


2001


2000(In thousands)Current:Federal

$
(121
)


$(476
)

$
(1,402
)State










(70
)Total current


(121
)


(476
)


(1,472
)Deferred:Federal






386



250State






45



29Total deferred






431



279Total income tax benefit

$
(121
)


$(45
)

$
(1,193
)





A reconciliation between the income tax 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:





2002


2001


2000(In thousands)Income tax at Federal statutory rate (35%)

$
(5,664
)

$
(5,027
)

$
(1,530
)State income taxes, net of federal benefit


(308
)


(448
)


(162
)Change in valuation allowance


2,227



5,689



256Amortization of goodwill


3,631



205



205Tax refunds recovered






(476
)


Other, net


(7
)


12



38Total income tax benefit

$
(121
)

$
(45
)

$
(1,193
)




40




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







The deferred tax effects of the Companys principal temporary
differences at July 31, 2002 and 2001 are as follows:





Assets


Liabilities

Total(In thousands)2002Allowance for doubtful receivables

$
343


$


$
343Inventories


622






622Basis difference in property and equipment


31






31Accrued warranty costs


86






86Accrued expenses and other


323






323Accrued restructuring


78






78Net operating loss carryforwards


6,485






6,485Capital loss carryforward


337






337Valuation allowance


(8,305
)





(8,305
)Total deferred asset (liability)

$



$


$






Assets


Liabilities

Total(In thousands)2001Allowance for doubtful receivables

$
607


$


$
607Inventories


811






811Basis difference in property and equipment


777






777Accrued warranty costs


87






87Accrued expenses and other


36






36Accrued restructuring


692






692Net operating loss carryforwards


2,770






2,770Capital loss carryforward


298






298Valuation allowance


(6,078
)





(6,078
)Total deferred asset (liability)

$



$


$






Due to uncertainties surrounding the timing of realizing the
benefits of its net favorable tax attributes in future tax returns, the Company has placed a valuation allowance against its deferred tax assets at July 31, 2002 and 2001.





At July 31, 2002, net operating loss carryforwards of approximately $15.9 million, which expire at various dates through July 2022, are available to reduce future taxable
income.





14.    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 2002, 2001, or 2000. 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. 200,000, 754,383 and 652,531 options
were issued under this plan during fiscal years 2002, 2001, and 2000, respectively, with exercise prices ranging from $0.53 to $24.25 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




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




terms of this plan. During 2002 and 2001, 130,500 and 78,000 options, respectively, were issued under this plan with exercise prices
ranging from $0.53$1.09.





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. During 2002 and 2001, 120,569 and 126,027 shares, respectively, were purchased by employees
under this plan. No shares were purchased under this plan in fiscal year 2000.





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





2002

2001

2000Number of Shares


Weighted Average Exercise Price

Number of Shares


Weighted Average Exercise Price

Number of Shares


Weighted Average Exercise PriceOutstanding, beginning of year

2,002,837


$
4.71

1,780,344


$
7.13

1,408,093


$
8.30Granted

330,500



0.51

832,383



1.51

652,531



5.25Exercised

(113,192
)


0.03

(82,800
)


1.00

(9,620
)


0.72Cancelled

(377,579
)


6.39

(527,090
)


8.43

(270,660
)


8.89Outstanding, end of year

1,842,566


$
3.90

2,002,837


$
4.71

1,780,344


$
7.13Exercisable, end of year

1,009,162


$
5.34

744,368


$
6.89

530,404


$
6.55Exercise price range

$0.00-$24.25

$0.24-$24.25

$0.24-$24.25Options available for grant, end of year

743,054

701,286

627,466Weighted average grant date fair value of options granted during the year

$0.57

$1.24

$5.34





The following table summarizes information about the options
outstanding as of July 31, 2002:





Options Outstanding

Options ExercisableRange of Exercise
Prices

Outstanding at July 31, 2002

Weighted Average Remaining Contractual Life

Weighted Average Exercise Price

Exercisable at July 31, 2002

Weighted Average Exercise
Price$  0.00$  5.00

1,358,952

7.9 years

$ 1.88

585,320

$ 2.32$  5.01$10.00

372,475

5.5 years

$ 8.84

330,747

$ 8.83$10.01$15.00

100,598

6.7 years

$10.79

86,099

$10.86$15.01$25.00

10,541

6.2 years

$24.25

6,996

$24.251,842,566

7.3 years

$ 3.90

1,009,162

$ 5.34





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 2001, or 2000 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




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)




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:





2002


2001


2000(In thousands, except per share data)Net loss:As reported

$
(18,695
)

$
(14,963
)

$
(3,025
)Pro forma


(19,944
)


(16,478
)


(5,260
)Loss per share:As reportedbasic and diluted

$
(1.56
)

$
(1.24
)

$
(0.31
)Pro formabasic and diluted

$
(1.66
)

$
(1.37
)

$
(0.53
)





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:





2002


2001


2000Risk-free interest rate

4.25
%

5.00
%

6.00
%Dividend yield







Expected volatility

75
%

75
%

75
%Expected option life in years

10


10


10





15.    RELATED PARTIES





The following represent related party transactions:





Year Ended July 31,2002

2001

2000(In thousands)Purchases from ACT Manufacturing, affiliate through common ownership

$


$


$
13,571Sales to ACT Manufacturing








101Purchases from CSHC and subsidiaries


784


985


444Sales to CSHC and subsidiaries


1





187





During fiscal 2001, management determined that ACT Manufacturing
(ACT) was not a related party due to the resignation of David Lee, eOns Chairman, from the board of directors of ACT. Accordingly, purchases from and sales to ACT in fiscal 2002 and 2001 are excluded from the disclosure above.





The following represent related party balances:





July 31,2002

2001(In thousands)Payable to CII

84

60





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 matures on or before 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 is due and payable on demand and provides for interest at a rate equal to prime plus 1.5% (8.25% at
July 31, 2001). 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.




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##### Table of Contents



eON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)







16.    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 16% 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 2002, 2001, and 2000, contributions allocated by the Company totaled $96,000, $138,000 and $85,000 respectively.





17.    COMMITMENTS AND CONTINGENCIES





At July 31, 2002, the Company had outstanding commitments for inventory purchases under open purchase orders of approximately $1,258,000.





During fiscal 2001, the Company issued a $750,000 letter of credit to the lessor of the Memphis, Tennessee facility under the terms of the lease agreement. The letter of credit permitted the landlord
to draw against it in the event the Company defaulted on the lease agreement. In 2002, the Company entered into a lease termination agreement. The $750,000 letter of credit was cancelled, and a new $1,400,000 declining balance letter of credit was
issued to secure payments under the termination agreement. The $1,400,000 letter of credit is secured by $1,400,000 of municipal securities.





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.





18.    EARNINGS PER SHARE





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





2002


2001


2000(In thousands, except per share data)Basic and diluted loss per share:Loss before discontinued operations and extraordinary items

$
(5,687
)

$
(14,318
)

$
(3,335
)Weighted average shares outstanding


12,013



12,040



9,885Basic and diluted loss per share before discontinued operations and extraordinary items

$
(0.47
)

$
(1.19
)

$
(0.34
)





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.





Potential common shares related to options outstanding at July 31, 2001 to purchase 2,002,837 shares of common stock were excluded from
the computation of diluted loss per share for the year ended July 31, 2001 because their inclusion would have had an antidilutive effect.





Potential common shares related to the assumed conversion of 1,463,206 shares of preferred stock prior to the offering and options outstanding at July 31, 2000 to purchase 1,780,344 shares of common stock were excluded from
the computation of diluted loss per share for the year ended July 31, 2000 because their inclusion would have had an antidilutive effect on earnings per share.




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##### Table of Contents




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




None.





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 2002 Annual Meeting of Shareholders to be held on
December 19, 2002 (the Proxy Statement), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2002, 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.





|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.




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##### Table of Contents




PART IV





ITEM 14.    
EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON 8-K.





(A)  (1)    Financial Statements





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





  Independent Auditors Report  Consolidated Balance Sheets as of July 31, 2002 and 2001  Consolidated Statements of Operations for the Years Ended July 31, 2002, 2001, and 2000  Consolidated Statements of Cash Flows for the Years Ended July 31, 2002, 2001, and 2000  Consolidated Statements of Stockholders Equity (Deficit) for the Years Ended July 31, 2002,
2001, and 2000  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





None





(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.




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##### Table of Contents




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 CORPORATIONBy:

/s/    LANNY N.
LAMBERTLanny N. Lambert, Vice
President, Chief Financial Officer, Secretary (Principal Financial Officer)





Date: October 29, 2002





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/    TROY E.
LYNCH Troy E. Lynch

President, Chief Executive Officer (Principal Executive Officer)

October 29, 2002/s/    LANNY N.
LAMBERT Lanny N. Lambert

Vice President, Chief Financial Officer, Secretary (Principal Financial Officer)

October 29, 2002/s/    THOMAS G.
BEVAN Thomas G. Bevan

Vice President, Chief Marketing Officer

October 29, 2002/s/    DAVID S. LEE
David S. Lee

Chairman

October 29, 2002/s/    STEPHEN R.
BOWLING Stephen R. Bowling

Director

October 29, 2002/s/    ROBERT P.
DILWORTH Robert P. Dilworth

Director

October 29, 2002/s/    W. FRANK
KING W. Frank King

Director

October 29, 2002/s/    JENNY HSUI
THELEEN Jenny Hsui Theleen

Director

October 29, 2002







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##### Table of Contents




CERTIFICATIONS OF PERIODIC REPORT


PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002





I,
Troy E. Lynch, certify that:





1.  I have reviewed this annual report on Form 10-K of eOn
Communications Corporation (Registrant);





2.  Based on my knowledge, this
annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the
period covered by this annual report; and





3.  Based on my knowledge, the financial
statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual
report.





By:

/s/    TROY E. LYNCHTroy E. Lynch Chief Executive
Officer


Date:    October 29, 2002





I, Lanny N. Lambert, certify that:





1.  I have reviewed this annual report on Form 10-K of eOn Communications Corporation (Registrant);





2.  Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; and





3.  Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all
material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report.





By:

/s/     LANNY N. LAMBERTLanny N. Lambert Chief
Financial Officer


Date:    October 29, 2002




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##### Table of Contents




EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES





Schedule IIValuation and Qualifying Accounts





Column A

Column B

Column C

Column D

Column EAdditionsBalance at Beginning of
Period

Charged to Costs and Expenses

Charged to Other Accounts

Deductions

Balance at End of Period2000:Allowance for doubtful accounts and sales allowance

602,748

192,619



337,695

457,672Warranty reserve

139,124

91,578



99,794

130,9082001:Allowance for doubtful accounts and sales allowance

457,672

986,057



178,594

1,265,135Warranty reserve

130,908

428,370



338,726

220,5522002:Allowance for doubtful accounts and sales allowance

1,265,135

164,000



562,924

866,211Warranty reserve

220,552

213,044



234,854

198,742




49




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##### Table of Contents




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 Document3.1*

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 eOn4.1*

Reference is made to Exhibits 3.1 and 3.210.1*

Promissory Note issued by Cortelco Systems Holding Corporation in favor of eOn, dated as of July 31,
1997.10.2*

Form of Indemnity Agreement between eOn and its officers and directors.10.3

Sublease Termination and Release Agreement between eOn and TC Forest Hill Development, LP dated May 31,
2002.10.9#@

Separation Agreement, dated as of February 19, 2001, by and between eOn and Robert R. Cash18

Preferability letter regarding LIFO to FIFO change in inventory accounting21

Subsidiaries of Registrant.23

Consent of Deloitte & Touche LLP.99.1

Officers Certification of Periodic Report pursuant to Section 906 of SarbanesOxley Act of
2002


---

|(*) |  | 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
|--- |  | --------------------------------------------------------------------------------------------------






50