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                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                        _________________________________
                                    FORM 10-K

(Mark One)

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

                     For the fiscal year ended July 31, 2001

                                       or

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

                     For the transition period from        to

                        Commission File Number 000-26399

                         eOn Communications Corporation
             (Exact name of registrant as specified in its charter)

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

             4105 Royal Drive NW, Suite 100, Kennesaw, Georgia 30144
                    (Address of principal executive offices)

                                 (770) 423-2200
                               (Telephone number)

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

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

                    Common Stock, $0.001 par value per share
                              (Title of each class)

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

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

     The aggregate market value of the shares of common stock held by
non-affiliates of the registrant was approximately $5,053,000 based upon the
closing sale price as reported by the Nasdaq Stock Market on September 28, 2001.
The number of outstanding shares of the registrant's $0.001 par value common
stock was 11,980,297 shares as of that date.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Certain portions of the registrant's Proxy Statement for the 2001 Annual
Meeting of Shareholders are incorporated by reference in Part III.

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                               TABLE OF CONTENTS

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PART I

     Item 1.    Business ...............................................................     2
                Executive Officers .....................................................    12
     Item 2.    Properties .............................................................    13
     Item 3.    Legal Proceedings ......................................................    13
     Item 4.    Submission of Matters to a Vote of Security Holders ....................    13

PART II

     Item 5.    Market for Registrant's Common Equity and Related Stockholder Matters...    14
     Item 6.    Selected Financial Data ................................................    14
     Item 7.    Management's Discussion and Analysis of Financial Condition
                   and Results of Operations ...........................................    16
     Item 7a.   Quantitative and Qualitative Disclosures About Market Risk .............    25
     Item 8.    Financial Statements and Supplementary Data ............................    25
     Item 9.    Changes in and Disagreements With Accountants on Accounting
                   and Financial Disclosure ............................................    44

PART III

     Item 10.   Directors and Executive Officers of the Registrant .....................    44
     Item 11.   Executive Compensation .................................................    44
     Item 12.   Security Ownership of Certain Beneficial Owners and Management .........    44
     Item 13.   Certain Relationships and Related Transactions .........................    44

PART IV

     Item 14.   Exhibits, Financial Statement Schedules, and Reports on Form 8-K .......    45

SIGNATURES .............................................................................    46

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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(TM) ("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(TM) 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 merged with Cortelco
Systems Puerto Rico, Inc. ("CSPR"), another subsidiary of CSHC, and we acquired
BCS. BCS and CSPR have been wholly-owned subsidiaries of eOn since April 1999.

DISCONTINUED OPERATIONS

     Through Cortelco Systems Puerto Rico, Inc. ("CSPR"), our wholly-owned
subsidiary based in San Juan, Puerto Rico, we sell and service communications
systems and cellular phones and resell cellular airtime. In August 2001, the
Board of Directors approved a plan to spin-off this subsidiary as a separate
entity to the stockholders of eOn. To accomplish the spin-off , the Company
intends to declare a special dividend of the shares of CSPR to its stockholders.
A spin-off would not take place until the stock of CSPR is registered with the
Securities and

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Exchange Commission, and all other applicable legal requirements are met. It is
currently anticipated that this will occur during the latter half of fiscal year
2002.

     The remainder of the discussion in Item I will focus on our continuing
operations.

BACKGROUND AND GENERAL DEVELOPMENT OF BUSINESS

     Now more than ever, customers have more ways of contacting and interacting
with companies. Customers insist on conducting business on their terms, at
anytime, from anywhere. Because of this newfound freedom, we believe that
customer satisfaction and loyalty are determined, in large part, by customers'
ability to access and receive the level of customer service that they demand.
This demand for a consistent and personalized experience 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.

     We understand the relationship between customer satisfaction and contact
center success. With the eQueue(TM) Multi-Media Contact Center Solution, eOn
embraces the customer-driven environment by providing contact centers the
capability to deliver a seamless customer experience across all media types.

     The eQueue(TM) offers a comprehensive and unified solution for customer
interaction management. The universal or single queue approach enables contact
centers to more efficiently interact with their customers regardless of the
media. 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(R) 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.

eOn's  eQueue 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 for all multi-media contact types serves
    the customer in the way the customer chooses. The single routing engine, or
    unified queue, capabilities not only provide customers with consistent
    interaction management across all media, but also include 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.

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 .        Open

         The eQueue is an open standards-based solution based on the Linux(TM)
    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.

 .        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
    7,000 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,
    integrated contact solution designed to perform in any mission-critical
    environment.

    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 single routing engine, or 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 outstanding
features such as skilled 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.

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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 our
eQueue solution. We intend to take action to gain awareness and will initially
focus on servicing this market via our direct sales force. We plan to establish
alliance partnerships with other companies. In creating our own alliance
program, we will focus on leveraging third-party products and services to
broaden our product offering and provide our customers an even more
comprehensive solution. We also intend to join the alliance programs of some
targeted vendors, including CRM vendors, and focus on leveraging their
distribution organization to create revenue opportunities for our direct sales
organization.

 .      Maintain Our Millennium Business

     While we promote and grow our eQueue business we will also strive to
modestly grow 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.

 .      Develop A Channel Of Distribution For Our Contact Center Solutions

     We intend to develop a new indirect sales channel to sell and service our
eQueue Multi-Media Contact Center Solution. We will seek major distributors;
target local, state and federal government agencies; and develop a channel of
value added resellers (VAR's) that are geared towards selling contact center
solutions. We will also recruit sales agents or brokers as sources of referrals
for the eQueue product. In addition we will pursue original equipment
manufacturer ("OEM") relationships with companies that have complementary
distribution.

 .      Expand Internationally

     To date, with the exception of our operations in Puerto Rico which we are
spinning off, eOn has not focused on penetrating international markets; however,
in the future we intend to enter some targeted international markets. We have
already established OEM partnerships with several companies within the US and
Canada that will assist us in expanding sales efforts to other countries. The
other way we will enter the international arena is through reseller channels,
and we will focus on opportunities with the Latin American market since we have
certification in some countries and established partnerships through the
operations in Puerto Rico. We will also pursue specific international
opportunities as they arise.

 .      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(TM) 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.

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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:

 .        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. Significant 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, including the availability of
eQueue Collaboration that enables co-browsing, assisted form completion, and
text highlighting.

 .        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

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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.
Significant 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 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. Significant enhancements to real time reporting and the user
interface in general are scheduled with the availability of eOn Supervisor
WorkSpace(TM). eOn Supervisor WorkSpace is Java(TM)-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.

 .        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

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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 communications
ports and provides enterprises with the ability to increase the number of ports
and add new features through the simple installation of add-in cards and
software.

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

     The Millennium can be used for multi-site networking by connecting
Millennium platforms in multiple locations, thereby creating a private
communications network that operates as if all sites were on a single system.
The Millennium may also be networked with our eQueue communications server for a
range of virtual private network applications.

SALES AND MARKETING

     Our major marketing objective will be to build awareness and brand identity
for eOn and the eQueue through promotional strategies, including public
relations, trade shows, advertising, direct mail, seminars, Web based
initiatives, and other marketing programs. 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.

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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.

     We continue to invest significantly in research and development. We expect
to increase the number of our research and development employees and to apply
these additional resources to our new product development initiatives. In
particular, we intend to add more software engineers and programmers to
facilitate rapid development of our eQueue Multi-Media Contact Center Solution.
We intend to use independent contractors from time to time to assist with
certain product development and testing activities.

     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.

     Research and development expense was $4.3 million, $3.9 million, and $2.3
million in fiscal years 2001, 2000, and 1999, respectively.

MANUFACTURING

     We currently use two contract manufacturers to produce the Millennium - ACT
Manufacturing, Inc. and Innovative Circuits, Inc. Both contract manufacturers
perform printed circuit board assembly and soldering, in-circuit and functional
testing and packaging. We believe that ACT 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. Under our contract with ACT, we negotiate
pricing annually for the next fiscal year. We make purchases from Innovative
Circuits through purchase orders.

     We currently use Clover Manufacturing, Inc. to perform printed circuit
board assembly and soldering, in-circuit and functional testing and packaging of
boards for our eQueue product line. We plan to outsource the configuration,
final assembly, testing, and shipment of eQueue products to Avnet Electronics
during the second quarter of fiscal 2002 . We believe that Avnet & Clover have
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. A
number of emerging companies have completed initial public offerings, while many
more remain private. 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.

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     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. There is also emerging new
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, Cellit
Technologies, and Apropos Technologies.

 .        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, 3Com and Sun Microsystems.
Although data communications companies generally do not have substantial
experience with voice communications systems, they could develop these
capabilities internally or through acquisitions. We believe these companies face
a substantial challenge in integrating their acquisitions and product
development plans due to their limited experience in voice communications.
Nevertheless, 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, Live Person, and eShare. 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 (formally Lucent
Technologies), Mitel, NEC, Toshiba, Panasonic and Siemens. There are also
emerging a number of companies who provide all-in-one communications platforms
that reduce costs by using PC-based standards and data networks for voice
communications. A characteristic of Private Communication Exchanges (PCX's) is
their PC based system architecture, which, compared to the closed architecture
of proprietary systems, provides greater ease of use, more applications and
expanded programmability. Companies in this category include AltiGen
Communications, Artisoft, NBX Corporation (acquired by 3Com), and Cisco Systems.

                                       10

<PAGE>

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, 2001, we employed 84 people. We had 28 employees in sales
and marketing, 43 in research, development, and technical support, and 13 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.

                                       11

<PAGE>

EXECUTIVE OFFICERS

The following table sets forth information about our executive officers:

   Name             Age                 Position
----------------  -----   -----------------------------------------------------
Troy E. Lynch       36    President and Chief Executive Officer
Lanny N. Lambert    52    Vice President, Chief Financial Officer, Secretary
Thomas G. Bevan     52    Vice President, 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.

                                       12

<PAGE>

ITEM 2.  PROPERTIES.

     The Company leases property as detailed in the following table.

                                                LEASE
                            APPROXIMATE       EXPIRATION
     LOCATION                  SIZE              DATE            INTENDED USE
-----------------------  ----------------  ----------------  -------------------
Kennesaw, Georgia         40,000 sq. ft.    March 2005         Office
Memphis, Tennessee        50,000 sq. ft.    July 2010
Englewood, Colorado       10,000 sq. ft.    July 2002          Office
Guelph, Ontario, Canada    5,000 sq. ft.    September 2001

     During fiscal 2001, the Company relocated its headquarters to the Atlanta,
Georgia metropolitan area. In connection with this, the Company ceased
operations at its Memphis facility as of July 31, 2001. In addition, the Company
plans to end operations at its Guelph facility by September 30, 2001. The
Company plans to find a suitable tenant to assume the lease at the Memphis
facility.

     Aggregate monthly rental payments for the Company's facilities are
approximately $90,000. Of this amount, $28,000 is for facilities currently in
active use, while the remainder represents payments associated with
vacant/unused facilities. 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.

                                       13



<PAGE>

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                LOW
                 -----------------   --------------     -------------
                  July 31, 2001           $1.40              $0.71
                  April 30, 2001          $2.75              $1.09
                  January 31, 2001        $3.38              $0.91
                  October 31, 2000        $4.47              $2.73

                  July 31, 2000          $11.00              $3.00
                  April 30, 2000         $31.13              $6.69



     As of September 28, 2001, there were 217 shareholders of record of our
common stock and, to the best of our knowledge, approximately 5,500 beneficial
owners whose shares of common stock were held in the names of brokers, dealers,
and clearing agencies.

     During fiscal 2001, we did not declare any 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.

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, 2001, 2000, and 1999,
and the selected balance sheet data at July 31, 2001 and 2000, 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,
1998 and 1997, and the consolidated balance sheet data at July 31, 1999, 1998,
and 1997, are derived from audited consolidated financial statements not
included in this report. This data should be read in conjunction with the
consolidated financial statements, including the notes thereto, appearing in
Item 8 and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in Item 7.

                                       14

<PAGE>

<TABLE>
<CAPTION>
                                                                         Year Ended July 31,
                                                      ----------------------------------------------------
                                                        2001       2000       1999       1998       1997
                                                      --------   --------   -------    --------   --------
                                                                 (in thousands, except per share data)
<S>                                                  <C>        <C>        <C>         <C>       <C>
Consolidated Statement of
  Operations Data:
Net revenues .......................................  $ 20,184   $ 29,705   $27,188     $17,825    $20,871
Cost of revenues ...................................     9,111     14,001    13,708      10,072     14,174
Special charges (1) ................................     1,985          -         -           -          -
                                                      ---------  ---------  ---------  ---------  --------
     Gross profit ..................................     9,088     15,704    13,480       7,753      6,697

Operating expenses:
  Selling, general and
    administrative .................................    14,380     15,283     9,545       5,339      5,091
  Research and development .........................     4,340      3,914     2,334       1,407      1,310
  Goodwill amortization ............................       586        586       177           -          -
  Special charges (1) ..............................     4,714          -         -           -          -
                                                      ---------  ---------  ---------  ---------  --------
     Total operating expenses ......................    24,020     19,783    12,056       6,746      6,401

Income (loss) from operations ......................   (14,932)    (4,079)    1,424       1,007        296
Interest income ....................................      (783)      (759)        -           -          -
Interest expense ...................................         -        211       429         478        554
Other (income) expense, net ........................       214        971        15         162        678
                                                      --------  ---------  ---------  ---------  ---------
Income (loss) from continuing operations before
   income taxes ....................................   (14,363)    (4,502)      980         367       (936)
Income tax expense (benefit) .......................       (45)    (1,193)       (9)          -          -
                                                      ---------  ---------  ---------  ---------  --------
Income (loss) from continuing
  operations .......................................  $(14,318)  $ (3,309)  $   989    $    367   $   (936)
                                                      =========  =========  =========  =========  ========
Income (loss) from continuing operations per share:
     Basic .........................................  $  (1.19)   $ (0.33)  $  0.20    $   0.09   $  (0.24)
     Diluted .......................................  $  (1.19)   $ (0.33)  $  0.15    $   0.07   $  (0.24)
Weighted average shares outstanding:
     Basic .........................................    12,040      9,885     5,036       3,918      3,825
     Diluted .......................................    12,040      9,885     6,651       5,353      3,825

Consolidated Balance Sheet Data:
Cash and cash equivalents ..........................  $  3,590    $ 1,829   $ 1,803    $      3     $  254
Marketable securities ..............................     8,850     16,337         -           -          -
Working capital ....................................    20,543     35,834     1,726        (225)     2,896
Goodwill, net ......................................    10,375     10,961    11,547           -          -
Total assets .......................................    39,645     55,141    33,543      10,338     10,522
Long-term debt .....................................         -          -     2,314       3,000      3,000
Total stockholders' equity (deficit) ...............    34,029     49,954    17,152      (1,280)       952
</TABLE>

(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 (see Footnote 4 to the consolidated financial statements).

                                       15

<PAGE>

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.

     We recognize revenues from our eQueue communications server products upon
completion of installation when they are sold directly to end users due to the
customized nature of each installation. We recognize revenues upon shipment for
products shipped to dealers and for our Millennium products sold to end-users.

     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.

RESULTS OF OPERATIONS

     The following table presents our operating ratios for fiscal years 2001,
2000, and 1999:

<TABLE>
<CAPTION>
                                                                Year Ended July 31,
                                                           -------------------------------
                                                              2001       2000      1999
                                                           ---------- ---------- ---------
<S>                                                        <C>        <C>        <C>
Net revenues.............................................     100.0%     100.0%     100.0%
Cost of revenues.........................................      45.1%      47.1%      50.4%
Special charges..........................................       9.8%       0.0%       0.0%
                                                           ---------- ---------- ---------
Gross margin.............................................      45.1%      52.9%      49.6%
Operating expenses:
  Selling, general, and administrative...................      71.2%      51.4%      35.1%
  Research and development...............................      21.5%      13.2%       8.6%
  Amortization of goodwill...............................       2.9%       2.0%       0.7%
  Special charges........................................      23.4%       0.0%       0.0%
                                                           ---------- ---------- ---------
Total operating expenses.................................     119.0%      66.6%      44.4%
                                                           ---------- ---------- ---------
Income (loss) from operations............................     (73.9%)    (13.7%)      5.2%
Interest (income) expense, net...........................      (3.9%)     (1.8%)      1.6%
Other (income) expense, net..............................       1.1%       3.3%       0.0%
                                                           ---------- ---------- ---------
Income (loss) from continuing operations before
     income taxes........................................     (71.1%)    (15.2%)      3.6%
Income tax expense (benefit).............................      (0.2%)     (4.0%)      0.0%
                                                           ---------- ---------- ---------
Income (loss) before discontinued operations and
     extraordinary item..................................     (70.9%)    (11.2%)      3.6%

Income (loss) from discontinued operations, net of tax...      (3.2%)      1.7%       4.3%
Extraordinary loss from early extinguishment of debt,
     net of tax..........................................       0.0%      (0.6%)      0.0%
                                                           ---------- ---------- ---------
Net income (loss)........................................     (74.1%)    (10.1%)      7.9%
                                                           ========== ========== =========
</TABLE>

                                       16

<PAGE>

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 / Subsequent Events in the notes to
the consolidated financial statements).

NET REVENUES

     Our overall net revenues decreased 32.1% to $20.2 million in fiscal 2001
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 and demand
weakness in fiscal 2001. Fiscal 2000 net revenues represented a 9.3% increase
from $27.2 million in fiscal 1999. The increase in 2000 was primarily due to the
addition of the eQueue Multimedia Contact Center product line and additional
Millennium sales volume 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 42.1% to $9.1 million for the year ended July
31, 2001 from $15.7 million in fiscal 2000. The decrease was due primarily to
special charges related to our restructuring initiatives (see Special Charges
section below) as well as decreased revenues for both our eQueue and Millennium
products. Fiscal 2000 represented an increase in gross profit of 16.5% from
$13.5 million in fiscal 1999. The increase in gross profit in 2000 was primarily
due to the addition of the higher margin eQueue product line.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE

     Selling, general and administrative expenses were $14.4 million in fiscal
2001, a decrease of 5.9% from $15.3 million in fiscal 2000. Fiscal 2000
represented a 60.1% increase from $9.5 million in fiscal 1999. The decrease in
fiscal 2001 resulted from a decrease in personnel and fixed costs from the
implementation of our restructuring plan (see the Special Charges section
below). The increase in fiscal 2000 was primarily due to the addition of the
eQueue product line, increased marketing expenses, and the hiring of additional
sales and customer service personnel.

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 increased 10.9% to $4.3 million
in the year ended July 31, 2001 from $3.9 million in fiscal 2000. Fiscal 2000
represented a 67.7% increase from $2.3 million in fiscal 1999. The increases in
both years were primarily due to the hiring of additional engineers and
expansion of facilities dedicated to our R&D efforts.

AMORTIZATION OF GOODWILL

     We recorded $11.7 million of goodwill related to the acquisition of BCS in
April 1999, and are amortizing this amount over a 20-year period. It is
anticipated that goodwill amortization will cease with the adoption of Statement
of Financial Accounting Standard No. 142 - Goodwill and Other Intangible Assets
in fiscal 2002.

SPECIAL CHARGES

     To reduce costs and improve productivity, the Company adopted a
restructuring plan in fiscal 2001. Major components of the 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%. See Footnote 4 -
Special Charges in the notes to the consolidated financial statements.

                                       17

<PAGE>

    The following table provides detail about the special charges recorded
during fiscal year 2001and the associated liabilities at July 31, 2001:

<TABLE>
<CAPTION>
                                                                                 July 31, 2001
                                  Charges   Expenditures   Other Adjustments   Liability Balance
                                ---------- -------------- ------------------- -------------------
<S>                             <C>        <C>            <C>                 <C>
Inventory charges                $  1,985    $      -        $  (1,985) (1)       $         -
Termination benefits             $  1,222    $   (597)       $       -            $       625
Excess facilities cost              1,968        (363)               -                  1,605
Asset impairments                   1,248           -           (1,248) (2)                 -
Relocation costs                      276        (234)               -                     42
                                ---------- -------------- ------------------- -------------------
     Total                       $  6,699    $ (1,194)       $  (3,233)           $     2,272
                                ========== ============== =================== ===================
</TABLE>

(1) Represents write-down of inventory to net realizable value.
(2) Represents write-off of assets.

    Net workforce reductions under the plan will reduce our employee expense.
The reduction in employee expense began in the second quarter and continued
through the fourth quarter of fiscal 2001. 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. The
decrease in costs as a result of the restructuring activities outlined above
will primarily impact selling, general and administrative expense, and to a
lesser extent research and development expense. The remaining cash outlays of
$2,272 related to the above restructuring activities are expected to be
completed by the end of fiscal 2002 and will be funded from current cash and
marketable securities.

INTEREST INCOME AND EXPENSE

    We had no interest expense in fiscal 2001. Interest expense decreased 50.8%
to $0.2 million in fiscal 2000 from $0.4 million in fiscal 1999. The decrease in
both years was primarily due to the retirement of all outstanding debt in
February 2000 in connection with our initial public offering.

    Interest income in fiscal 2001 of $0.78 million was relatively unchanged
from $0.76 million in fiscal 2000. We had no interest income in fiscal 1999. The
slight increase in fiscal 2001 was due to the investment of surplus funds for a
full year versus 6 months in the previous year, offset by lower marketable
securities balances and interest rates. The increase in fiscal 2000 was
primarily due to the investment of funds from our initial public offering in
interest-bearing securities.

OTHER INCOME AND EXPENSE, NET

    Other expense was $0.2 million in fiscal 2001, compared to $1.0 million in
fiscal 2000 and $0.02 million in fiscal 1999. 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 expense (benefit) was $(0.05) million, $(1.2) million, and
$(0.01) million in fiscal 2001, 2000, and 1999, respectively. The income tax
benefit for fiscal 2001 and 2000 was affected by the carryback of operating
losses to previous periods. Fiscal 1999 income tax benefit was affected by the
utilization of consolidated operating loss carryforwards from 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

                                       18

<PAGE>

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

     Prior to our initial public offering, we funded our operations primarily
through cash generated from operations, periodic borrowings under former
revolving credit facilities, a $3.0 million subordinated convertible note
financing and acquisition financing provided by Alcatel in connection with the
purchase of our business from Alcatel in 1990. In February 2000, we received
$32.8 million, net of underwriting fees, commissions, and offering costs, upon
the issuance of 3,180,000 shares of common stock in our initial public offering.
The net proceeds from the offering were used to retire $2.8 million of
outstanding principal and interest on 8% subordinated notes due in 2002 and $3.6
million of outstanding indebtedness under a revolving credit facility and for
working capital and general corporate purposes. See Footnote 5 - The Offering of
the notes to consolidated financial statements.

     Net cash provided by (used in) operating activities was ($2.5) million,
($8.0) million, and $2.9 million for fiscal 2001, 2000, and 1999, respectively.
The improvement in fiscal 2001 from fiscal 2000 was due primarily to increased
collections of receivables and reductions in inventory levels, offset by higher
net loss. The decrease in fiscal 2000 from fiscal 1999 was due primarily to
lower net income, an increase in inventories, and the reduction in income taxes
payable and increase in income taxes receivable.

     Net cash provided by (used in) investing activities was $5.7 million,
($17.9) million, and $2.4 million for fiscal 2001, 2000, and 1999, respectively.
Cash provided by investing activities in the current year consisted primarily of
sales of short-term available-for-sale securities. Cash used in investing
activities in fiscal 2000 was due primarily to the investment of funds from our
initial public offering in available for sale debt securities, while cash
provided by investing activities in fiscal 1999 resulted primarily from cash
acquired in the acquisition of BCS.

     Net cash provided by (used in) financing activities was ($1.0) million,
$29.0 million, and ($3.5) million for fiscal 2001, 2000, and 1999, respectively.
Cash used in financing activities in fiscal 2001 was primarily due to
repurchases of our common stock. Cash provided by financing activities in fiscal
2000 consisted primarily of the proceeds from our initial public offering,
offset by the early retirement of our outstanding long-term debt and amounts
borrowed under our former revolving credit facilities. Cash used in financing
activities in fiscal 1999 was primarily due to expenditures associated with our
initial public offering and the issuance of a note receivable from our former
parent.

     We believe that our available funds and anticipated cash flows from
operations will satisfy our projected working capital and capital expenditure
requirements at least through fiscal 2002. To the extent that we grow more
rapidly than expected in the future, we may need additional cash to finance our
operating and investing activities.

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 the second quarter of 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,
2001. No assurance can be given that the restructuring will prove to be
successful, that future operating results will improve, or that the completion
of

                                       19

<PAGE>

the restructuring will not disrupt the Company's operations. Further, there can
be no assurance that additional reorganization of the Company's operations will
not be required in the future.

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.

We may not successfully introduce new products that are planned for the near
future which could harm our business and financial condition.

     We plan to introduce new products in the near future to serve the evolving
contact center and e-commerce markets. These new products must achieve market
acceptance, maintain technological competitiveness and meet increasing customer
requirements. New products may require long development and testing periods.
Significant delays in the development, release, installation or implementation
of new products could harm our business and financial condition.

Our communications servers and software 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,
competitors gain additional financial resources from public offerings, 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, 3COM, and
      Sun Microsystems;
 .     email management and web center software suppliers, such as eGain, Kana
      Communications, Live Person, eShare and WebLine Communications (acquired
      by Cisco);
 .     and

                                       20


<PAGE>

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

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

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

If we cannot expand our indirect sales channel to sell our eQueue products, our
ability to generate revenue would be harmed.

     We sell our eQueue communications servers both directly and indirectly
through dealers and value added resellers that have experience in data as well
as voice communications. We may not be able to expand this 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, financial, and other resources. We generally recognize revenues on
the date of shipment for Millennium and eQueue systems shipped to dealers and
upon completion of installation for our eQueue systems sold directly to end
users. 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

                                       21

<PAGE>

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

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

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

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

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

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

     As of July 31, 2001, our executive officers, directors and principal
stockholders and their affiliates beneficially owned 4,878,097 shares, or 40% 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

                                       22

<PAGE>

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

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

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

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

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

Future sales of shares may decrease our stock price.

     Sales of substantial amounts of our common stock in the public market after
our initial public offering, 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.

                                       23

<PAGE>

RECENT ACCOUNTING PRONOUNCEMENTS

     In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 Business Combinations and Statement of
Financial Accounting Standards 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 initiated after June 30, 2001 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 has determined that the adoption of SFAS No. 141 will not have a
material impact on our results of operations. Management plans to adopt SFAS No.
142 effective August 1, 2001, and is currently evaluating the impact that
adoption will have on our results of operations. Goodwill amortization for
fiscal year 2001 approximated $586,000.

     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 retirment 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 June 1998, the FASB issued SFAS No .133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet measured at fair value. The adoption of SFAS No. 133 on August 1,
2000 did not have a material impact on the Company's results of operations or
financial position.

QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly financial data for the years ended July 31, 2001 and 2000 is
summarized as follows:

<TABLE>
<CAPTION>
2001                                                       First        Second       Third       Fourth
                                                          Quarter       Quarter     Quarter      Quarter(3)
                                                        ------------ ------------ ------------ ------------
                                                                           (In thousands)
<S>                                                     <C>          <C>          <C>          <C>
Net revenues (1) .....................................     $  6,312     $  4,010      $ 4,863     $  4,999
Gross profit (1) .....................................        3,420        1,151        2,787        1,730
Income (loss) before discontinued operations
 and extraordinary item (1) ..........................         (984)      (5,127)      (1,625)      (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 (2) .........................................     $  (0.08)    $  (0.43)     $ (0.14)    $  (0.55)
   Diluted (2) .......................................     $  (0.08)    $  (0.43)     $ (0.14)    $  (0.55)
Net income loss per common share:
   Basic .............................................        (0.09)       (0.53)       (0.11)       (0.51)
   Diluted ...........................................        (0.09)       (0.53)       (0.11)       (0.51)
</TABLE>

                                       24











<PAGE>

<TABLE>
<CAPTION>
2000                                                First        Second       Third       Fourth
                                                   Quarter       Quarter     Quarter      Quarter
                                                 ------------ ------------ ------------ ------------
                                                                     (In thousands)
<S>                                              <C>          <C>          <C>          <C>
Net revenues (1)...............................   $  9,891     $  7,275      $ 7,032     $  5,507
Gross profit (1)...............................      5,113        3,692        4,133        2,766
Income (loss) before discontinued operations
 and extraordinary item (1)....................        269         (583)      (1,291)      (1,704)
Net income (loss)..............................        335         (373)      (1,571)      (1,390)

Income (loss) before discontinued operations
 and extraordinary item per common
 share (1):

   Basic (2)...................................   $   0.04     $  (0.08)     $ (0.11)    $  (0.14)
   Diluted (2).................................   $   0.03     $  (0.08)     $ (0.11)    $  (0.14)
Net income loss per common share:

   Basic (2)...................................       0.04        (0.05)       (0.13)       (0.11)
      Diluted (2)..............................       0.04        (0.05)       (0.13)       (0.11)
</TABLE>


(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.)

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

     The majority of our cash equivalents and available-for-sale securities are
invested in variable rate instruments with frequent rate resets. Because these
securities have short effective maturities, we believe the market risk for such
holdings is insignificant. In addition, the vast majority of the Company's sales
are made in U.S. dollars, and consequently, we believe that our foreign exchange
rate risk is immaterial. We do not have any derivative instruments and do not
engage in hedging transactions.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                            Page
                                                                                            ----

<S>                                                                                         <C>
Independent Auditors' Report .............................................................    26

Consolidated Balance Sheets as of July 31, 2001 and 2000 .................................    27

Consolidated Statements of Operations for the Years ended July 31, 2001, 2000, and 1999...    28

Consolidated Statements of Cash Flows for the Years ended July 31, 2001, 2000, and 1999...    29

Consolidated Statements of Stockholders Equity (Deficit) for the
         Years Ended July 31, 2001, 2000, and 1999 .......................................    31

Notes to Consolidated Financial Statements ...............................................    32
</TABLE>

                                       25

<PAGE>

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, 2001
and 2000 and the related consolidated statements of operations, cash flows, and
stockholders' equity (deficit) for the years ended July 31, 2001, 2000, and
1999. 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, 2001 and
2000 and the results of its operations and its cash flows for the years ended
July 31, 2001, 2000, and 1999 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 3 to the financial statements, on August 28, 2001, the
Company approved a plan to spin-off CSPR, its wholly-owned Caribbean / Latin
America service and distribution subsidiary, as an independent entity
headquartered in San Juan, Puerto Rico. The operations of this business are
included in income from discontinued operations in the accompanying financial
statements.

/s/ Deloitte & Touche LLP

Atlanta, Georgia
August 22, 2001

(August 28, 2001 as to Note 3)

                                       26

<PAGE>

                  eOn Communications Corporation and Subsidiaries
                              Consolidated Balance Sheets
                                 July 31, 2001 and 2000
                                 (Dollars in thousands)

ASSETS

                                                               July 31,
                                                     ------------------------
                                                           2001       2000
                                                     ------------  ----------
Current assets:
   Cash and cash equivalents ........................   $  3,590    $  1,829
   Marketable securities ............................      8,850      16,337
   Trade accounts receivable, net of allowance for
    doubtful accounts of  $1,265 and $458 ...........      3,713       6,193
   Inventories ......................................      3,994       7,542
   Income tax refund receivable .....................        271       1,240
   Receivable from affiliate ........................         --           3
   Assets held for disposition ......................      5,568       6,265
   Other current assets .............................        173       1,612
                                                        --------    --------
Total current assets ................................     26,159      41,021

Property and equipment, net .........................      2,041       1,933

Other assets:
   Goodwill, net of accumulated
    amortization of $1,349 and $763 .................     10,375      10,961
   Intangible assets, net of accumulated
    amortization of $5 and $172 .....................         42         239
   Assets held for disposition ......................      1,028         516
   Other ............................................         --         471
                                                        --------    --------
Total other assets ..................................     11,445      12,187

                                                        --------    --------
Total ...............................................   $ 39,645    $ 55,141
                                                        ========    ========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
   Trade accounts payable ...........................   $  1,343    $  2,408
   Payable to affiliate .............................         60          --
   Accrued expenses and other .......................      4,213       2,779
                                                        --------    --------
Total current liabilities ...........................      5,616       5,187

Commitments and contingencies .......................         --          --

Stockholders' equity:
 Common Stock, $.001 par value (50,000,000 shares
  authorized, 12,041,945 and 12,264,446 shares issued
  and outstanding) ..................................         12          12
 Additional paid-in capital .........................     56,623      57,585
 Accumulated deficit ................................    (22,342)     (7,379)
 Note receivable from affiliate (former parent) .....       (264)       (264)
                                                        --------    --------
Total stockholders' equity ..........................     34,029      49,954

                                                        --------    --------
Total ...............................................   $ 39,645    $ 55,141
                                                        ========    ========

See notes to consolidated financial statements.

                                       27

<PAGE>

                 eOn Communications Corporation and Subsidiaries
                      Consolidated Statements of Operations
                For the Years Ended July 31, 2001, 2000, and 1999
                  (Dollars in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                 Year Ended July 31,
                                                           -------------------------------
                                                             2001       2000       1999
                                                           ---------  ---------  ---------
         <S>                                               <C>        <C>        <C>
         Net revenues....................................  $ 20,184   $29,705    $27,188
         Cost of revenues................................     9,111    14,001     13,708
         Special charges.................................     1,985         -          -
                                                           ---------  ---------  ---------
              Gross profit...............................     9,088    15,704     13,480

         Operating expenses:
           Selling, general and administrative...........    14,380    15,283      9,545
           Research and development......................     4,340     3,914      2,334
           Amortization of goodwill......................       586       586        177
           Special charges...............................     4,714         -          -
                                                           ---------  ---------  ---------
              Total operating expenses...................    24,020    19,783     12,056

         Income (loss) from operations...................   (14,932)   (4,079)     1,424

         Interest expense................................         -       211        429
         Interest income.................................      (783)     (759)         -
         Other (income) expense, net.....................       214       971         15
                                                           ---------  ---------  ---------
         Income (loss) from continuing operations
          before income tax benefit......................   (14,363)   (4,502)       980

         Income tax benefit..............................       (45)   (1,193)        (9)
                                                           ---------  ---------  ---------
         Income (loss) before discontinued operations
          and extraordinary item.........................   (14,318)   (3,309)       989

         Income (loss) from discontinued operations,
          Net of income tax effect.......................      (645)      497      1,166

         Extraordinary loss from early extinguishment
          of debt, net of income tax benefit.............         -      (187)         -
                                                           ---------  ---------  ---------
         Net income (loss) and comprehensive
          income (loss)..................................  $(14,963)  $(2,999)    $2,155
                                                           =========  =========  =========

         Net income (loss) per common share:
          Basic:
           Income (loss) before discontinued
            operations and extraordinary item............  $  (1.19)  $ (0.33)    $ 0.20
           Income (loss) from discontinued operations....     (0.05)     0.05       0.23
           Extraordinary loss............................         -     (0.02)         -
                                                           ---------  ---------  ---------
             Net income (loss) per common share..........  $  (1.24)  $ (0.30)   $  0.43
                                                           =========  =========  =========
         Net income (loss) per common share Diluted:
           Income (loss) before discontinued
            operations and extraordinary item............  $  (1.19)  $ (0.33)    $ 0.15
           Income (loss) from discontinued operations....     (0.05)     0.05       0.18
           Extraordinary loss............................         -     (0.02)         -
                                                           ---------  ---------  ---------
             Net income (loss) per common share..........  $  (1.24)  $ (0.30)     $0.33
                                                           =========  =========  =========
</TABLE>

         See notes to consolidated financial statements.

                                       28

<PAGE>

                eOn Communications Corporation and Subsidiaries
                      Consolidated Statements of Cash Flows
                For the Years Ended July 31, 2001, 2000, and 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                 Year Ended July 31,
                                                                           -----------------------------
                                                                              2001      2000     1999
                                                                           ---------  -------  ---------
<S>                                                                        <C>        <C>      <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................   $(14,963)  $(2,999)   $2,155
Adjustments to reconcile net income (loss) to net cash
 provided by (used in) operating activities:
  (Income) loss from discontinued operations...........................        645      (497)   (1,166)
  Depreciation and amortization........................................      1,691     1,328       510
  Extraordinary loss on early extinguishment of debt...................          -       187         -
  Provision for the allowance for doubtful accounts....................        986       193       415
  Loss on sales/write-off of property and equipment....................      1,075         6         9
  Loss on investments..................................................         87       752        67
  Changes in net assets and liabilities (net of effects
   of acquisition and discontinued operations):
     Trade accounts receivable.........................................      1,494     1,310    (1,879)
     Accounts receivable from/payable to affiliates....................         63      (129)       11
     Inventories.......................................................      3,548    (3,204)    1,281
     Other assets......................................................      1,527      (538)     (273)
     Trade accounts payable............................................     (1,065)   (2,024)    1,027
     Accrued expenses and other........................................      1,434       756       228
     Income taxes payable (refund receivable)..........................        969    (3,169)      518
                                                                           ---------  ---------  ---------
   Net cash provided by (used in) operating activities.................     (2,509)   (8,028)    2,903

CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash acquired from business acquisition..............................          -         -     3,l26
  Purchases of property and equipment..................................     (2,086)   (1,357)     (720)
  Purchases of intangible assets.......................................         (5)       (3)      (77)
  Repayments of notes receivable from employees........................          -        73        65
  Sales of available for sale securities...............................     17,633    31,235         -
  Purchases of available for sale securities...........................     (9,850)  (47,868)        -
                                                                           ---------  ---------  ---------
   Net cash provided by (used in) investing activities.................      5,692   (17,920)    2,394

CASH FLOWS FROM FINANCING ACTIVITIES:
  Net borrowings (repayments) under revolving line of credit...........          -    (2,825)      472
  Increase (decrease) in checks outstanding............................          -      (156)      100
  Repayments of long-term debt.........................................          -    (2,314)        -
  Repayment of note payable to related party...........................          -         -      (250)
  Repayment of note payable to parent company..........................          -         -      (100)
  Collection (issuance) of note receivable
   from affiliate/former parent........................................          -       420    (2,600)
  Proceeds from offering...............................................          -    32,774         -
  Repurchase of common stock...........................................     (1,296)        -         -
  Issuances of common stock from company plans.........................        334         7         -
  Deferred offering costs..............................................          -     1,119    (1,119)
                                                                           ---------  ---------  ---------
   Net cash provided by (used in) financing activities.................       (962)   29,025    (3,497)

Cash from discontinued operations......................................       (460)   (3,051)        -
</TABLE>

                                       29

<PAGE>

                 eOn Communications Corporation and Subsidiaries
                Consolidated Statements of Cash Flows (continued)
                For the Years Ended July 31, 2001, 2000, and 1999

<TABLE>
<CAPTION>
                                                         Year Ended July 31,
                                                      ------------------------
                                                       2001     2000     1999
                                                      ------   ------   ------
<S>                                                   <C>      <C>      <C>
Net increase in cash and cash equivalents .........    1,761       26    1,800
Cash and cash equivalents, beginning of year ......    1,829    1,803        3
                                                      ------   ------   ------
Cash and cash equivalents, end of year ............   $3,590   $1,829   $1,803
                                                      ======   ======   ======
Supplemental cash flow information:
 Interest paid ....................................   $    -   $  818   $  476
 Income taxes paid ................................        -    1,672      110
</TABLE>

Noncash activity:

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.

1999:

  The Company issued 1,463,206 shares of preferred stock in connection with the
  conversion of $686,000 of subordinated debt.

  On February 24, 1999, the Company's Board of Directors declared a dividend of
  $2,216,514 payable to the stockholders of record on February 26, 1999.
  Approximately $1,957,000 of the dividend was payable upon certain events
  occurring in the future. The remaining amount of the dividend declaration
  relates to the distribution of a non -interest bearing note receivable from an
  officer/director to Cortelco Systems Holding Corporation ("CSHC"). On April 8,
  1999, prior to the merger discussed in Note 1, Cortelco Systems Puerto Rico
  ("CSPR") declared a dividend of $700,000 payable to the stockholder (CSHC) of
  record on April 8, 1999. The dividends have been reflected in the financial
  statements as if declared on July 31, 1998.

  On April 5, 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 receivable
  balance.


See notes to consolidated financial statements.

                                       30

<PAGE>

                 eOn Communications Corporation and Subsidiaries
            Consolidated Statements of Stockholders' Equity (Deficit)
                For the Years Ended July 31, 2001, 2000, and 1999
                             (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                                           Note
                                                                                                       Receivable
                                                                                                          From           Total
                                    Preferred Stock         Common Stock      Additional               Affiliate/   Stockholders'
                                   ------------------   -------------------     Paid-In   Accumulated    Former         Equity
                                     Shares    Amount     Shares     Amount     Capital     Deficit      Parent        (Deficit)
                                   ----------  ------   ----------  -------   ----------  -----------  ----------   -------------
<S>                                <C>         <C>      <C>         <C>       <C>         <C>          <C>          <C>
Balance at July 31, 1998                    -       -    3,920,252        4       8,324       (6,535)      (3,184)        (1,391)

Issuance of common stock
 to acquire business                        -       -    3,969,680        4      16,796            -            -         16,800
Capital contribution from
 parent                                     -       -            -        -       1,528            -            -          1,528
Conversion of debt to
 preferred stock                    1,463,206     660            -        -           -            -            -            660
Shares exchanged for
 note retirement                            -       -     (250,000)       -      (2,500)           -        2,500              -
Loan to affiliate (former
 parent)                                    -       -            -        -           -            -       (2,600)        (2,600)
Net income and
 comprehensive income                       -       -            -        -           -        2,155            -          2,155
                                   ----------   -----   ----------  -------    --------   ----------   ----------   ------------
Balance at July 31, 1999            1,463,206     660    7,639,932        8      24,148       (4,380)      (3,284)        17,152

Collection of note from
 former parent                              -       -            -        -           -            -          420            420
Conversion 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            -            -         32,774
Note receivable distributed
 in payment of dividend
 payable                                    -       -            -        -           -            -        2,600          2,600
Exercise of stock options                   -       -        9,620        -           7            -            -              7
Net income (loss) and
 comprehensive income (loss)                -       -            -        -           -       (2,999)           -         (2,999)
                                   ----------   -----   ----------  -------    --------   ----------   ----------   ------------
Balance at July 31, 2000                    -       -   12,264,446       12      57,585       (7,379)        (264)        49,954

Repurchase of common stock                  -       -     (431,500)       -      (1,296)           -            -         (1,296)
Exercise of stock options                   -       -       82,972        -          82            -            -             82
Issuances from employee
 stock purchase plan                        -       -      126,027        -         252            -            -            252
Net income (loss) and
 comprehensive income (loss)                -       -            -        -           -      (14,963)           -        (14,963)
                                   ----------   -----   ----------  -------    --------   ----------   ----------   ------------
Balance at July 31, 2001                    -   $   -   12,041,945      $12    $ 56,623   $  (22,342)    $   (264)    $   34,029
                                   ==========   =====   ==========  =======    ========   ==========   ==========   ============
</TABLE>

See notes to consolidated financial statements.

                                       31

<PAGE>


                 eOn Communications Corporation and Subsidiaries
                   Notes to Consolidated Financial Statements
                    Years Ended July 31, 2001, 2000, and 1999

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.) which was acquired April 12, 1999,
for the period April 12, 1999 through July 31, 2001. All significant
intercompany balances and transactions have been eliminated.

The Company also has 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. 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
and the Company's financial statements have been restated to conform to the
discontinued operations presentation. See Footnote 3 for additional information.

The Company is also 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)

In April 1999, a series of transactions occurred whereby CSHC distributed the
common stock of the Company to the CSHC stockholders and CPR formed a new
wholly-owned subsidiary in the Commonwealth of Puerto Rico, CSPR, in
contemplation of a merger between the Company and the newly formed subsidiary.
Previous to the merger, CPR contributed substantially all of the operations and
certain assets and liabilities to the newly formed CSPR. CPR retained certain
real estate assets and the related mortgage note payable resulting in a capital
contribution to the Company of $1,528,000. In April 1999, CPR transferred all
issued and outstanding stock of CSPR to CSHC, the Company issued 553,880 shares
of common stock to CSHC in exchange for the 100% interest in CSPR, and CSPR
assumed the CPR Credit Facility. The business combination was between entities
under common control as CSHC owned 100% of CSPR and 97% of the Company;
therefore, the merger was accounted for in a manner similar to a pooling of
interests and accordingly, all periods presented in the accompanying financial
statements reflect the results of operations on an "as if pooled" basis. The
common stock issued to effect the business combination has been reflected as
outstanding for all periods presented.

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 other-than

                                      -32-

<PAGE>

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 last-in, first out ("LIFO") method for approximately 55%
and 60% of the inventories at July 31, 2001 and 2000, respectively. The
first-in, first-out ("FIFO") method is principally used for the remainder.

     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 five to thirty years.

     Goodwill - Goodwill represents the cost in excess of the fair value of net
     --------
assets acquired. These costs are being amortized on a straight line basis over
twenty years. The Company reviews the carrying value for impairment based on
undiscounted cash flows whenever events or changes in circumstances occur which
might indicate that the amount might not be recoverable.

     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. Prior
to the distribution of the Company's common stock to the CSHC stockholders, the
Company's results were included in the consolidated U.S. income tax return of
CSHC. The consolidated provision or benefit was allocated proportionately
between the subsidiaries of CSHC based on the contribution of each company in
the consolidated federal tax return as if each company calculated its tax on a
separate return basis. Income taxes are not provided on the unremitted earnings
of the Company's foreign subsidiaries and foreign joint ventures since it is the
Company's intention to continue to reinvest these earnings.

     Revenue Recognition - Revenues from our eQueue communications server
     -------------------
products are recognized upon completion of installation when they are sold
directly to end users due to the customized nature of each installation.
Revenues are recognized upon shipment for products shipped to dealers and for
our Millennium products sold to end-users. Net revenues are comprised of sales
reduced by related sales allowances.

     In December 1999, The Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements". SAB No. 101 summarized the staffs' various views in applying
generally accepted accounting principles to revenue recognition in financial
statements. Management has evaluated the Company's revenue recognition policies
and concluded that they comply with this SAB, as revenues are only recognized
when persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the seller's price to the buyer is fixed or
determinable, and collectibility is reasonably assured.

                                       33

<PAGE>

     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.

     Reverse Stock Split - On February 24, 1999, the Company's board of
     -------------------
directors authorized a 1-for-10 reverse stock split of its common and preferred
stock effective for stockholders of record on March 1, 1999. The Company's board
of directors also approved an amendment to the Company's certificate of
incorporation to decrease the authorized common and preferred shares to
50,000,000 and 10,000,000, respectively, and to increase the par value per
common share from $.0001 to $.001. Shares outstanding and all per share amounts
in the accompanying financial statements have been restated to give effect to
the reverse stock split.

     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,
2001, 2000, and 1999, net income (loss) equaled comprehensive income (loss).

     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 plans to adopt SFAS 142 effective
August 1, 2001, and is currently evaluating the impact that adoption will have
on our results of operations. Goodwill amortization for fiscal year 2001
approximated $586,000.

    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

                                       34

<PAGE>

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 June 1998, the FASB issued SFAS No .133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
balance sheet measured at fair value. The adoption of SFAS No. 133 on August 1,
2000 did not have a material impact on the Company's results of operations or
financial position.

3. DISCONTINUED OPERATIONS / SUBSEQUENT EVENTS

On August 28, 2001, the Board of Directors of the Company approved a plan to
spin-off CSPR, its wholly-owned Caribbean/Latin America service and distribution
subsidiary, as an independent entity headquartered in San Juan, Puerto Rico. To
accomplish the spin-off , the Company intends to declare a special dividend of
the shares of CSPR to its stockholders. A spin-off would not take place until
the stock of CSPR is registered with the Securities and Exchange Commission, and
all other applicable legal requirements are met. It is currently anticipated
that this will occur during the latter half of fiscal year 2002.

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.

Operating results of the discontinued operations are as follows:

                                                 Year ended July 31,
                                      -----------------------------------------
                                          2001           2000           1999
                                      -----------    -------------   ----------
                                                    (In thousands)

Net sales                              $19,906         $20,733         $15,186
                                      =========       =========      ==========
Earnings (loss) before income
    taxes and extraordinary loss          (645)            527           1,258
Income tax expense                           -              30              92
                                      ---------       ---------      ----------
Net earnings (loss) from
    discontinued operations            $  (645)        $   497         $ 1,166
                                      =========       =========      ==========
Net earnings (loss) per share:

       Basic                           $ (0.05)        $  0.05         $  0.23
       Diluted                         $ (0.05)        $  0.05         $  0.18


4. SPECIAL CHARGES

To reduce costs and improve productivity, the Company adopted a restructuring
plan during the second quarter of fiscal year 2001, which included headcount
reductions and office space consolidation and resulted in charges of $2,199,000.
During the fourth quarter, 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. Major components of this 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, 2001. The remaining components of
the plan, which relate to the outsourcing of our manufacturing operations and
obtaining tenants for leased space, are expected to be completed by July 31,
2002.

                                       35

<PAGE>

As a result of the adoption of the restructuring plan, the Company recognized
special charges of $4,714,000 in our operating expenses. Approximately
$1,222,000 of this charge related to employee termination benefits for 78
employees. During fiscal year 2001, the Company terminated 73 of the 78
employees and paid $597,000 in termination benefits. These reductions took place
in all major functions and at all locations. At July 31, 2001, the remaining
amount of employee termination benefits recorded as a current liability was
approximately $625,000.

The special charge in operating expenses also included $1,968,000 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
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. During fiscal
year 2001, the Company paid $363,000 for excess space costs. At July 31, 2001,
the remaining amount of expected costs for vacant and excess facilities was
approximately $1,605,000. The remaining $276,000 in special charges recorded in
operating expenses primarily related to costs incurred to relocate employees and
equipment to our Atlanta headquarters, of which $42,000 was recorded as a
liability as of July 31, 2001.

In connection with restructuring plan, the Company also recognized special
charges of $1,985,000 in cost of revenues during the year. These charges were
made to write-down 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.

5.  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.

6.  ACQUISITION OF BCS TECHNOLOGIES, INC.

On April 12, 1999, the Company acquired BCS Technologies, Inc. ("BCS") in
exchange for 3,969,680 common shares. The purchase price was determined based on
the fair value of the BCS equity. The parties agreed to the merger and the
purchase price was determined in November 1998. The acquisition was accounted
for using the purchase method and, accordingly, the operating results of BCS
have been included in the Company's consolidated financial statements since the
date of acquisition. The purchase price, including direct costs of acquisition,
was $17,089,000 and it exceeded the fair value of net assets acquired by
$11,724,000, which is being amortized on a straight-line basis over twenty
years.

7.  MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK

Financial instruments which potentially subject the Company to a concentration
of credit risk consist principally of cash, marketable securities, trade
accounts receivable, and notes receivable. The Company maintains its cash
balances with large regional financial institutions and has not experienced
losses. The marketable securities are invested in accounts at large national
brokerages which maintain insurance coverage. The Company's products are sold
principally to dealers, value added resellers, national accounts, and the U.S.
government. The Company's credit risk is limited principally to trade accounts
receivable. The

                                       36

<PAGE>

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.

8.  MARKETABLE SECURITIES

Marketable securities consists of the following:

<TABLE>
<CAPTION>
                                     July 31, 2001              July 31, 2000
                              -------------------------  --------------------------
                                 Cost      Market value     Cost       Market Value
                              -----------  ------------  ------------  ------------
<S>                           <C>          <C>           <C>           <C>
(In thousands) ..............
Municipal bonds ............. $    7,700   $     7,700   $    16,250   $    16,250
Certificates of deposit......      1,150         1,150             -             -
Equity securities ...........          -             -            87            87
                              -----------  -----------   -----------   -----------
 Total                        $    8,850   $     8,850   $    16,337   $    16,337
                              ===========  ===========   ===========   ===========
</TABLE>

The municipal bond investments are comprised solely of taxable auction-rate
securities with stated maturities ranging from 25-35 years. Due to the fact that
these investemnts have frequent interest rate resets, the Company did not have
any gross unrealized gains or losses at July 31, 2001 or 2000. The Company has
classified the municipal bonds as available for sale investments, while the
certificates of deposits are classified as held to maturity.

The Company has pledged a $750,000 certificate of deposit to secure a standby
letter of credit associated with the Memphis facility. The Company anticipates
that it will find a party to assume the lease on the Memphis facility within the
next year and that the letter of credit will be terminated. Accordingly, the
Company has classified the certificate of deposit as a current asset.

9.  INVENTORIES

Inventories consist of the following:
                                                          2001        2000
                                                       ----------  ----------
                                                            (In thousands)

Raw materials and purchased components ..............  $     304   $   1,460
Finished goods ......................................      3,738       6,130
LIFO reserve ........................................        (48)        (48)
                                                       ----------  ----------
 Total inventories                                     $   3,994   $   7,542
                                                       ==========  ==========

In 1999, the liquidation of LIFO inventories decreased cost of revenues and
therefore increased the net income from continuing operations before taxes by
$40,000.

10. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

                                                2001            2000
                                           --------------  --------------
                                                  (In thousands)

Leasehold improvements .................   $      287      $      314
Equipment ..............................        3,596           2,817
Furniture and fixtures .................          784             525
                                           --------------  --------------
 Total .................................        4,667           3,656
Less accumulated depreciation ..........       (2,626)         (1,723)
                                           --------------  --------------
 Property and equipment, net ...........   $    2,041       $   1,933
                                           ==============  ==============

Depreciation expense was $903,000, $534,000 and $196,000 for 2001, 2000, and
1999, respectively.

                                       37

<PAGE>

11. ACCRUED EXPENSES AND OTHER

Accrued expenses and other consists of the following:

<TABLE>
<CAPTION>
                                                           2001            2000
                                                      --------------  --------------
                                                              (In thousands)
<S>                                                   <C>             <C>
Employee compensation ............................    $         435   $       418
Commissions ......................................              128           230
Vacation .........................................              251           361
Deferred income ..................................              257           939
Employee withholdings ............................               39           221
Special charges ..................................            2,230             -
Other ............................................              873           610
                                                       -------------  --------------
 Total ...........................................    $       4,213   $     2,779
                                                      ==============  ==============
</TABLE>

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, 2001:

<TABLE>
<CAPTION>
Year Ending                                                           (In thousands)
                                                                      ----------------
<S>                                                                   <C>
2002 .............................................................    $           854
2003 .............................................................                865
2004 .............................................................                862
2005 .............................................................                856
2006 .............................................................                923
Thereafter .......................................................              2,640
                                                                      ----------------
 Total ...........................................................    $         7,000
                                                                      ================
</TABLE>

Rent expense for the years ended July 31, 2001, 2000, and 1999 totaled $754,000,
$767,000, and $347,000, respectively, which included $146,000 in 2000 and
$137,000 in 1999 charged by CII for the sharing of warehouse space.

13. INCOME TAXES

The income tax provision is summarized as follows:

<TABLE>
<CAPTION>
                                           2001            2000            1999
                                      --------------  --------------  --------------
                                                      (In thousands)
 <S>                                  <C>             <C>             <C>
 Continuing operations .............  $        (45)   $      (1,193)  $           (9)
 Discontinued operations ...........             -               30               92
 Extraordinary item ................             -              (97)               -
                                      --------------  --------------  --------------
       Total                                   (45)          (1,260)              83
                                      ==============  ==============  ==============
</TABLE>

                                       38

<PAGE>

The components of income tax expense (benefit) for 2001, 2000, and 1999
attributable to continuing operations are as follows:

<TABLE>
<CAPTION>
                                               2001            2000            1999
                                           --------------  --------------  --------------
                                                           (In thousands)
<S>                                        <C>             <C>             <C>
Current:
 Federal ...............................   $         (476) $       (1,402) $          415
 State .................................                -             (70)             22
                                           --------------  --------------  --------------
       Total current ...................             (476)         (1,472)            437

Deferred:
 Federal ...............................              386             250            (424)
 State .................................               45              29             (22)
                                           --------------  --------------  --------------
       Total deferred ..................              431             279            (446)

                                           --------------  --------------  --------------
Total income tax expense (benefit) . ...   $          (45) $       (1,193) $           (9)
                                           ==============  ==============  ==============
</TABLE>

A reconciliation between the income tax expense (benefit) from continuing
operations recognized in the Company's consolidated statement of operations and
the income tax expense (benefit) computed by applying the domestic federal
statutory income tax rate to income from continuing operations before income
taxes is as follows:

<TABLE>
<CAPTION>
                                                     2001            2000           1999
                                                --------------  --------------  -------------
                                                                (In thousands)
<S>                                             <C>             <C>             <C>
Income tax at Federal statutory rate (35%) ..   $       (5,027) $       (1,530) $         333
State income taxes, net of federal benefit ..             (448)           (162)            22
Change in valuation allowance ...............            5,689             256           (471)
Amortization of goodwill ....................              205             205             62
Tax refunds recovered .......................             (476)              -              -
Other, net ..................................               12              38             45
                                                --------------  --------------  -------------
     Total income tax expense (benefit) .....   $          (45) $       (1,193) $          (9)
                                                ==============  ==============  =============
</TABLE>

The deferred tax effects of the Company's principal temporary differences at
July 31, 2001 and 2000 are as follows:

<TABLE>
<CAPTION>
2001                                              Assets     Liabilities      Total
                                               ------------  ------------  ------------
                                                            (In thousands)
<S>                                            <C>           <C>           <C>
Allowance for doubtful receivables ..........  $        607  $          -  $        607
Inventories .................................           811             -           811
Basis difference in property and equipment ..           777             -           777
Accrued warranty costs ......................            87             -            87
Accrued expenses and other ..................            36             -            36
Accrued restructuring .......................           692             -           692
Net operating loss carryforwards ............         2,770             -         2,770
Capital loss carryforward ...................           298             -           298
Valuation allowance .........................        (6,078)            -        (6,078)
                                               ------------  ------------  ------------
     Total deferred asset (liability) .......  $          -  $          -  $          -
                                               ============  ============  ============
</TABLE>

                                       39

<PAGE>

<TABLE>
<CAPTION>
2000                                               Assets     Liabilities      Total
                                                ------------  ------------  ------------
                                                             (In thousands)
<S>                                             <C>           <C>           <C>
Allowance for doubtful receivables ..........   $       174   $         -   $       174
Inventories .................................            79             -            79
Basis difference in property and equipment ..             -           (91)          (91)
Accrued warranty costs ......................            49             -            49
Accrued expenses and other ..................           219             -           219
Net operating loss carryforwards ............           103             -           103
Capital loss carryforward ...................           285             -           285
Valuation allowance .........................          (389)            -          (389)
                                                ------------  ------------  ------------
 Total deferred asset (liability) ...........   $       520   $       (91)  $       429
                                                ============  ============  ============
</TABLE>

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, 2001 and 2000.

At July 31, 2001, net operating loss carryforwards of approximately $7.6
million, which expire at various dates through July 2021, 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 2001 or 2000.
The board of directors has declared that no future grants will be made under
this plan. During 1999, 288,402 options were granted under this plan with
exercise prices ranging from $.70 to $6.50 per share.

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.
During 2001, 2000, and 1999, 754,383, 652,531 and 989,314 options, respectively,
were issued under this plan with exercise prices ranging from $1.00 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 terms of this plan. During
2001, 78,000 options were issued under this plan with exercise prices ranging
from $0.84 - $1.00.

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 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 2001, 126,027
shares of the Company's common stock were purchased by employees under this
plan. No shares were purchased under this plan in fiscal year 2000 or 1999.

                                       40

<PAGE>

The status of the Company's stock option plans is summarized below:

<TABLE>
<CAPTION>
                                             2001                  2000                   1999
                                     --------------------   --------------------    -------------------
                                                 Weighted               Weighted               Weighted
                                                 Average                Average                Average
                                      Number of Exercise    Number of   Exercise    Number of  Exercise
                                       Shares     Price       Shares     Price       Shares     Price
                                     ----------  --------   ----------  --------   ----------  --------
<S>                                   <C>        <C>         <C>        <C>           <C>      <C>
Outstanding, beginning of year        1,780,344  $  7.13     1,408,093  $ 8.30        139,311  $  0.89

     Granted ......................     832,383     1.51       652,531    5.25      1,277,716     9.11
     Exercised ....................     (82,800)    1.00        (9,620)   0.72              -     0.00
     Cancelled ....................    (527,090)    8.43      (270,660)   8.89         (8,934)    8.17
                                     ----------  --------   ----------  --------   ----------  -------
Outstanding, end of year ..........   2,002,837  $  4.71     1,780,344  $ 7.13      1,408,093  $  8.30
                                     ==========  ========   ==========  ========   ==========  =======
Exercisable, end of year ..........     744,368  $  6.89       530,404  $ 6.55         85,368  $  2.62
                                     ==========  ========   ==========  ========   ==========  =======
Exercise price range ..............       $0.24-$24.25          $0.24-$24.25           $0.24 - $ 10.38

Options available for
 grant, end of year ...............     701,286                627,466              1,041,907

Weighted average grant date
 fair value of options
 granted during the year ..........  $     1.24             $     5.34             $     7.61
</TABLE>


The following table summarizes information about the options outstanding as of
July 31, 2001:

<TABLE>
<CAPTION>
                          Options Outstanding           Options Exercisable
                 ----------------------------------  ------------------------
                              Weighted
                 Outstanding  Average      Weighted  Exercisable     Weighted
   Range of          at       Remaining    Average        at         Average
   Exercise        July 31,   Contractual  Exercise     July 31,     Exercise
    Prices          2001         Life       Price        2001         Price
---------------  -----------  -----------  --------  -------------  ---------
<S>              <C>          <C>          <C>       <C>            <C>
$0.00 -$5.00      1,347,499     8.4 years   $ 2.33       303,430      $ 3.10
$5.01 - $10.00      534,160     6.6 years   $ 9.02       366,270      $ 9.04
$10.01 - $15.00     108,823     7.8 years   $10.78        70,317      $10.95
$15.01 - $25.00      12,355     8.3 years   $24.25         4,351      $24.25
---------------  -----------  -----------  --------  -------------  ---------
                  2,002,837     7.9 years   $ 4.71       744,368      $ 6.89
                 ===========  ===========  ========  =============  =========
</TABLE>

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. No compensation expense related to stock options was
recorded during 2001, 2000, or 1999 as the option exercise prices were equal to
or greater than the fair market value of the underlying common stock on the date
of the grant. In addition, no compensation expense was recognized on any
purchases of common stock under the Employee Stock Purchase Plan during the
year. Had compensation expense been determined based upon fair values of the
options at the grant date in accordance with SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company's net income (loss) and earnings per
share would have been as follows:

<TABLE>
<CAPTION>
                                               2001          2000          1999
                                           ------------  ------------  ------------
                                            (In thousands, except per share data)
<S>                                        <C>           <C>           <C>
Net income (loss):
     As reported ........................    $(14,963)     $(2,999)       2,155
     Pro forma ..........................     (16,478)      (5,234)       1,724
Earnings per share:
         As reported - basic ............    $  (1.24)     $ (0.30)      $ 0.43
         Pro forma - basic ..............    $  (1.37)     $ (0.53)      $ 0.34
         As reported - diluted ..........    $  (1.24)     $ (0.30)      $ 0.33
         Pro forma - diluted ............    $  (1.37)     $ (0.53)      $ 0.26
</TABLE>

                                       41

<PAGE>

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:

<TABLE>
<CAPTION>
                                                 2001          2000          1999
                                             ------------  ------------  ------------
<S>                                          <C>           <C>           <C>
Risk-free interest rate ..................       5.00%        6.00%         6.25%
Dividend yield ...........................          -            -             -
Expected volatility ......................         75%          75%           75%
Expected option life in years ............         10           10            10
</TABLE>

15.  RELATED PARTIES

The following represent related party transactions:

<TABLE>
<CAPTION>
                                                          Year Ended July 31,
                                                2001             2000             1999
                                           ---------------  ---------------  ---------------
                                                            (In thousands)
<S>                                        <C>              <C>              <C>
Purchases from ACT Manufacturing,
 affiliate through common ownership ...... $            -   $        13,571  $        8,835
Sales to ACT Manufacturing ...............              -               101             161
Sales to BCS prior to acquisition ........              -                 -             985
Purchases from CSHC and subsidiaries .....            985               444             283
Sales to CSHC and subsidiaries ...........              -               187             131
</TABLE>

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 2001 are excluded from the disclosure above.

The following represent related party balances:

<TABLE>
<CAPTION>
                                                                  July 31,
                                                          2001               2000
                                                    -----------------  ------------------
                                                               (In thousands)
<S>                                                <C>                 <C>
Receivable from CSHC ..........................    $               -   $               66
Payable to CII ................................                    60                  63
</TABLE>

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.

The accompanying financial statements for the year ended July 31, 1999, include
revenues and expenses specifically identifiable with the Company as well as
certain administrative costs incurred on behalf of CSHC and the consolidated
group. The costs have been allocated using formulas including estimates of
effort expended and sales, and management believes the allocation method to be
reasonable. The financial statements may not necessarily reflect the results of
operations of the Company had it been operated as a stand-alone entity. In
fiscal 1999, eOn recognized management fee income of $53,000 from CSHC and
subsidiaries.

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

                                       42

<PAGE>

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 2001, 2000, and 1999, contributions
allocated by the Company totaled $138,000, $85,000 and $21,000 respectively.

17.  COMMITMENTS AND CONTINGENCIES

At July 31, 2001, the Company had outstanding commitments for inventory
purchases under open purchase orders of approximately $1,767,000.

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 permits the landlord to draw against it in the event the
Company defaults on the lease agreement.

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:

<TABLE>
<CAPTION>
                                                                       2001         2000         1999
                                                                     --------     --------     --------
                                                                   (In thousands, except per share data)
<S>                                                                  <C>          <C>          <C>
Basic earnings (loss) per share:
 Income (loss) before discontinued operations and
  extraordinary item ............................................    $(14,318)    $ (3,309)    $    989
 Weighted average shares outstanding - basic ....................      12,040        9,885        5,036
                                                                     --------     --------     --------
    Basic earnings (loss) per share before
      discontinued operations and extraordinary item.............    $  (1.19)    $  (0.33)    $   0.20
                                                                     ========     ========     ========

Diluted earnings (loss) per share:
Income:
 Income (loss) before discontinued operations and
  extraordinary item ............................................    $(14,318)    $ (3,309)    $    989
 Interest on 8% convertible subordinated debt ...................           -            -           38
                                                                     --------     --------     --------
 Income (loss) before discontinued operations and
  extraordinary item available to common
  shareholders ..................................................     (14,318)      (3,309)       1,027
Weighted average shares:
 Outstanding ....................................................      12,040        9,885        5,036
 Assumed conversion of convertible debt/
       preferred stock ..........................................           -            -        1,435
 Dilutive effect of stock options ...............................           -            -          180
                                                                     --------     --------     --------
 Weighted average shares outstanding - diluted ..................      12,040        9,885        6,651
                                                                     --------     --------     --------
    Diluted earnings (loss) per share before
      discontinued operations and extraordinary item ............    $  (1.19)    $  (0.33)    $   0.15
                                                                     ========     ========     ========
</TABLE>

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 earnings (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

                                       43

<PAGE>

excluded from the computation of diluted earnings (loss) per share for the year
ended July 31, 2000 because their inclusion would have had an antidilutive
effect on earnings per share.

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 2001 Annual Meeting of Shareholders to be
held on December 19, 2001 (the "Proxy Statement"), which will be filed with the
Securities and Exchange Commission not later than 120 days after July 31, 2001,
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.

                                       44

<PAGE>

                                     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, 2001 and 2000
     - Consolidated Statements of Operations for the Years Ended July 31, 2001,
       2000, and 1999
     - Consolidated Statements of Cash Flows for the Years Ended July 31, 2001,
       2000, and 1999
     - Consolidated Statements of Stockholders' Equity (Deficit) for the Years
       Ended July 31, 2001, 2000, and 1999
     - 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.

                                       45

<PAGE>

                                   SIGNATURES

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

EON COMMUNICATIONS CORPORATION

Date: October 29, 2001                      By /s/ Lanny N. Lambert
                                            -----------------------
                                            Lanny N. Lambert, Vice President,
                                            Chief Financial Officer, Secretary
                                            (Principal Financial Officer)

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

<TABLE>
<CAPTION>
                Name                                    Title                                   Date
-------------------------------------     -----------------------------------    -----------------------------------
<S>                                       <C>                                    <C>
/s/ Troy E. Lynch                         President, Chief Executive                      October 29, 2001
-----------------
Troy E. Lynch                             Officer (Principal Executive
                                          Officer)
/s/ Lanny N. Lambert                      Vice President, Chief Financial                 October 29, 2001
--------------------
Lanny N. Lambert                          Officer, Secretary (Principal
                                          Financial Officer)

/s/ Thomas G. Bevan                       Vice President, Chief Marketing                 October 29, 2001
-------------------
Thomas G. Bevan                           Officer

/s/ David S. Lee                          Chairman                                        October 29, 2001
----------------
David S. Lee

/s/ Stephen R. Bowling                    Director                                        October 29, 2001
----------------------
Stephen R. Bowling

/s/ Robert P. Dilworth                    Director                                        October 29, 2001
----------------------
Robert P. Dilworth

/s/ W. Frank King                         Director                                        October 29, 2001
-----------------
W. Frank King

/s/ Jenny Hsui Theleen                    Director                                        October 29, 2001
----------------------
Jenny Hsui Theleen
</TABLE>

                                       46

<PAGE>

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

<TABLE>
<CAPTION>
Column A                 Column B            Column C        Column D   Column E
--------------------------------------------------------------------------------------
                                            Additions
                                      --------------------
                         Balance at   Charged to  Charged                   Balance
                         Beginning    Costs and   to Other                   at End
                         of Period    Expenses    Accounts   Deductions    of Period

                        ------------  ----------  --------  ------------  ------------
<S>                     <C>           <C>         <C>       <C>           <C>
1999:

Allowance for doubtful
 accounts and sales
 allowance              $   494,908   $ 262,931   $     -   $   155,091   $   602,748
Warranty reserve            181,214      80,903         -       122,993       139,124

2000:

Allowance for doubtful
 accounts and sales
 allowance                  602,748     192,619         -       337,695       457,672
Warranty reserve            139,124      91,578         -        99,794       130,908

2001:

Allowance for doubtful
 accounts and sales
 allowance                  457,672     986,057         -       178,594     1,265,135
Warranty reserve            130,908     428,370         -       338,726       220,552
</TABLE>

                                       47

<PAGE>

EXHIBIT INDEX

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

Exhibit
Number                           Description of Document
-------  -----------------------------------------------------------------------
3.1*     Amended and Restated Certificate of Incorporation of eOn as filed with
         the Secretary of State of Delaware on November 16, 1999.

3.2*     Amended and Restated Bylaws of eOn

4.1*     Reference is made to Exhibits 3.1 and 3.2

4.2*     Investor Rights Agreement between eOn, Cortelco Systems Holding
         Corporation and ChinaVest, dated as of July 31, 1997.

4.3*     Registration Rights Agreement between CMC Industries, Inc. and eOn,
         dated as of March 15, 1999.

10.1*    Promissory Note issued by Cortelco Systems Holding Corporation in favor
         of eOn, dated as of July 31, 1997.

10.2*    Assumption Agreement between eOn and Cortelco Systems Puerto Rico,
         dated as of April 12, 1999, and Loan and Security Agreement between
         Cortelco Systems Puerto Rico, Inc. and Foothill Capital Corporation,
         dated as August 28, 1997.

10.3*    Promissory Note issued by Cortelco Systems Holding Corporation in favor
         of BCS Technologies, Inc., dated as of May 28, 1999.

10.4*    Form of Indemnity Agreement to be entered into between eOn and its
         officers and directors.

10.5*    Manufacturing Agreement between eOn and CMC Manufacturing, Inc., dated
         as of August 1, 1998.

10.6*    Lease Agreement between Cortelco Systems Puerto Rico, Inc. and Cortelco
         Puerto Rico, Inc. dated as of March 1, 1999.

10.7*#   Employment Agreement, dated as of April 12, 1999, by and between eOn
         and each of David M. Fredrick and Frank Naso.

10.8*#   eOn's 1999 Equity Incentive Plan and related documents.

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

21*      Subsidiaries of Registrant.

23       Consent of Deloitte & Touche LLP.

------------------
(*)  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.

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