##### Table of Contents

##### Index to Financial Statements





U.S. 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, 2009
|- | ----------------------------------------------------------------------------------------------------------------------------



| ̈ | 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.)

185 Martinvale Lane, San Jose, CA 95119

(Address of principal executive offices)

(408) 694-9500

(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, $0.005 par value per share

(Title of each class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act.    Yes   ̈    No  x

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

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files).    Yes   ̈    No   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.    x

Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting
company in Rule 12b-2 of the Exchange Act. (check one):



|                           |  |                      |  |                                               |  |                             
|-------------------------- |  | -------------------- |  | --------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈ |  | Accelerated filer   ̈ |  | Non-accelerated filer   ̈                      |  | Smaller reporting company  x
|                           |  |                      |  | (Do not check if a smaller reporting company)

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

The aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $1,093,061 based upon the closing sale
price as reported by the NASDAQ Stock Market on the last business day of the registrants most recently completed second fiscal quarter (January 31, 2009).

2,735,634 shares of Common Stock, par value $0.005, were outstanding as of September 30, 2009.



DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants Proxy Statement for the 2009 Annual Meeting of Shareholders are incorporated by reference in Part III.









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|          |  |                                                                                                               |  |        
|--------- |  | ------------------------------------------------------------------------------------------------------------- |  | -------
|ITEM NO.  |  |                                                                                                               |  | PAGENO.
|PART I    |  | 1                                                                                                            
|          |  |                                                                                                              
|ITEM 1.   |  | Description of Business                                                                                       |  | 1      
|          |  |                                                                                                              
|ITEM 1A.  |  | Risk Factors                                                                                                  |  | 14     
|          |  |                                                                                                              
|ITEM 1B.  |  | Unresolved Staff Comments                                                                                     |  | N/A    
|          |  |                                                                                                              
|ITEM 2.   |  | Properties                                                                                                    |  | 19     
|          |  |                                                                                                              
|ITEM 3.   |  | Legal Proceedings                                                                                             |  | 19     
|          |  |                                                                                                              
|ITEM 4.   |  | Submission of Matters to a Vote of Security Holders                                                           |  | 19     
|          | 
|PART II   |  | 20                                                                                                           
|          |  |                                                                                                              
|ITEM 5.   |  | Market for Registrants Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |  | 20     
|          |  |                                                                                                              
|ITEM 6.   |  | Selected Financial Data                                                                                       |  | *      
|          |  |                                                                                                              
|ITEM 7.   |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                         |  | 22     
|          |  |                                                                                                              
|ITEM 7A.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                    |  | *      
|          |  |                                                                                                              
|ITEM 8.   |  | Financial Statements and Supplementary Data                                                                   |  | 32     
|          |  |                                                                                                              
|ITEM 9.   |  | Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure                          |  | 60     
|          |  |                                                                                                              
|ITEM9A    |  | Controls and Procedures                                                                                       |  | *      
|          |  |                                                                                                              
|ITEM9A(T) |  | Controls and Procedures                                                                                       |  | 60     
|          |  |                                                                                                              
|ITEM 9B.  |  | Other Information                                                                                             |  | 60     
|          | 
|PART III  |  | 61                                                                                                           
|          |  |                                                                                                              
|ITEM 10.  |  | Directors, Executive Officers, and Corporate Governance                                                       |  | 61     
|          |  |                                                                                                              
|ITEM 11.  |  | Executive Compensation                                                                                        |  | 61     
|          |  |                                                                                                              
|ITEM 12.  |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters                |  | 61     
|          |  |                                                                                                              
|ITEM 13.  |  | Certain Relationships and Related Transactions, and Director Independence                                     |  | 61     
|          |  |                                                                                                              
|ITEM 14.  |  | Principal Accountant Fees and Services                                                                        |  | 61     
|          | 
|PART IV   |  | 62                                                                                                           
|          |  |                                                                                                              
|ITEM 15.  |  | Exhibits and Financial Statement Schedules.                                                                   |  | 62     

* - Information is not required because the registrant is a smaller reporting company



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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 6. 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 7.



|ITEM 1. | DESCRIPTION OF BUSINESS.
|------- | ------------------------

BACKGROUND

eOn Communications Corporation (eOn or the Company) is a global provider of communications
solutions incorporated in Delaware in July 1991. Backed with over 20 years of telecommunications engineering expertise, the Companys solutions enable its customers to easily leverage flexible technologies in order to communicate more
effectively. eOns offerings are built on reliable open architectures that enable easy adoption of emerging technologies, such as Voice over Internet Protocol (VoIP) and concepts, such as Service Oriented Architectures (SOA). Whether businesses
are looking to leverage the advantages of enterprise IP telephony or contact center technologies, eOn Communications delivers products that improve business performance. Sales and support of products in Asia is done through eOn Communications
(Beijing) Corporation Limited (eOn China), the Companys wholly owned subsidiary based in Beijing, China.

On
April 1, 2009, the Company acquired Cortelco Systems Holding Corp. (Cortelco). David Lee, Chairman of eOn, was the Chairman and the controlling shareholder of Cortelco. Cortelco, Inc. is a wholly-owned subsidiary of Cortelco
Holding. Cortelco provides commercial grade telephone products primarily for use in businesses, government agencies, colleges and universities, telephone companies, and utilities. Cortelco sells primarily through large national distributors with
whom it has long term relationships.

The Companys principal executive offices are located at 185 Martinvale Lane, San
Jose, California 95119. The telephone number at that address is (408) 694-9500. The Company also has offices located in Kennesaw, GA; Corinth, MS; and Beijing, PRC.

BUSINESS OVERVIEW

eOn focuses its resources on developing and marketing
products that help businesses communicate more effectively and efficiently with their customers. Communications technology is a critical factor for businesses in their effort to gain a competitive edge. To enable businesses to succeed in this area,
eOn offers the Millennium Converged Communications Platform and the eQueue Multimedia Contact Center Solution.



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Cortelco is committed to fulfilling the communication needs of business and organizations
worldwide. Cortelcos mission is to provide our valued customers with telephone products together with service and support. Cortelco has formed partnerships with distributors and provides the support needed to supply customers with sales,
marketing, customer service, technical support and training.

Millennium Converged Communications Platform

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



| |  |  | Voice over Internet Protocol (VoIP)
| | - |  | -----------------------------------

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



| |  |  | Flexible Desktop Solutions
| | - |  | --------------------------

The Millennium offers a selection of telephones and desktop appliances to meet the communications needs of employees. Multiple models of VoIP and traditional phones as well as button expansion modules are
offered that provide access to the Millenniums call processing features.



| |  |  | Advanced Call Routing
| | - |  | ---------------------

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



| |  |  | Flexible Networking Options
| | - |  | ---------------------------

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



| |  |  | Multimedia Messaging
| | - |  | --------------------

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



| |  |  | Automatic Call Distribution
| | - |  | ---------------------------

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



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Millennium Business Benefits

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

eQueue Multi-Media Contact Center Solution

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

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



| |  |  | Universal Queue
| | - |  | ---------------

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



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

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



| |  |  | Open
| | - |  | ----

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



| |  |  | Modular
| | - |  | -------

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



| |  |  | Scalable
| | - |  | --------

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



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##### Index to Financial Statements

| |  |  | Proven
| | - |  | ------

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

Benefits of an eQueue Solution

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



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

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



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

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

Cortelco Products

The telephone industry has evolved in recent years with
cordless telephones, cell phones, VOIP and other computer based voice/data products broadening their scope of application. Most homes in the United States have moved to cordless products and have perhaps one corded or wired telephone. Despite the
decline in the number of corded telephones in the residential market, there has been less migration to cordless and cellular in the business/commercial, government and institutional applications. Cortelco is an industry leader that markets a
traditional design/style single line corded telephone. In order to maintain this leadership, Cortelco must leverage their existing business relationships and introduce new products that address the needs of the converging communications marketplace.



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##### Index to Financial Statements

CUSTOMERS

During fiscal year 2009, the Company recognized revenue from the federal government of $1,638,000, or 15% of total revenue. Revenue from four major distributors acquired with the acquisition of Cortelco
on April 1, 2009 was $2,937,000 or 28% of total revenue for the year ended July 31, 2009. Revenue from one of these distributors, Graybar Electric Co., Inc., was $1,525,000 or 14% of the total revenue for the year ended July 31, 2009.

STRATEGY

Key elements of our strategy for future growth are as follows:



| |  |  | Expand International Market Presence
| | - |  | ------------------------------------

eOn has had success in recent years penetrating international markets. Examples include deployment of eQueue and Millennium systems in China and Korea. The anticipated growth rates for both enterprise
communications and contact center solutions, specifically in China, are much greater than those in more traditional markets such as North America and Europe. eOn has established an operation and a customer base in China and will continue to invest
in product, infrastructure and partnerships necessary to capitalize on this emerging market opportunity.



| |  |  | Provide Migration Paths to Encourage Millennium Customer VoIP Adoption
| | - |  | ----------------------------------------------------------------------

Many existing Millennium customers require that they be able to support more VoIP based applications. Since the Millennium has an
architecture that supports traditional TDM switching and IP-based transmission technology, eOn is able to provide a solution that allows customers to migrate to IP at their own pace and ultimately reap the cost savings and business performance
enhancement benefits of converged networks. eOn offers customer migration programs to encourage IP adoption, that preserve a customers existing investment in the Millennium system.



| |  |  | Maintain Our Investment in the eQueue Business
| | - |  | ----------------------------------------------

In spite of the maturity of the North American market, we believe our eQueue Multi-Media Contact Center Solution offers advantages that will enable eOn to capture new customers. We will continue to
support our core product offering to improve our ability to win competitive bids and provide additional solutions to our existing customers.



| |  |  | Maintain and Develop Strategic Relationships
| | - |  | --------------------------------------------

eOn and Cortelco believe that it is critical that strategic relationships with major distributors be maintained and enhanced. The Company seeks new relationships that fit and do not create conflicting
efforts within its distributor network. In the highly competitive telephony business, Cortelco sells products that are not leading edge technology. Product sales are based on a reputation for quality and service that has been built over many years.



| |  |  | Introduce a new VOIP Platform
| | - |  | -----------------------------

During the next fiscal year, eOn will introduce a new VOIP platform that will support PBX and ACD functions. The goal is to provide all of the features inherent in our existing products while at the same
time improve our capability to seamlessly network over distributed environments.



| |  |  | Opportunistically Explore Emerging Market Opportunities
| | - |  | -------------------------------------------------------

eOn will actively pursue other business options that will favorably position shareholders to participate in emerging market opportunities.



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PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

Our products and products under development include:

Millennium Converged Communications Platform

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

The Millennium offers a broad feature set,
including:



| |  |  | IP Telephony
| | - |  | ------------

The Millennium system offers IP, digital, and analog technologiesallowing customers to deploy traditional, IP telephony or a combination of both when and where its right for their organization. Whether needing to connect several
phones in an office, hundreds of phones in a campus environment or clusters of remote workers, Millennium allows customers to create a virtual enterprise, maximizing productivity while reducing networking and equipment costs.



| |  |  | Modular Architecture
| | - |  | --------------------

The modular architecture of the Millennium allows it to be configured in a variety of waysPBX, IP gateway, key system, hybrid, tandem switch, channel bank, protocol converter, or conduit for data
applications. Digital and IP switching capability, universal ports, highly adaptable programmability, and architectural flexibility are inherent in the system design.



| |  |  | Easy System Management
| | - |  | ----------------------

The Millenniums real-time monitoring and management tools operate network-wide, with reporting capabilities that help to maximize system reliability across the entire enterprise. Extensive
management and cost control features ensure system administrators can account for costs, track phone usage patterns, and perform traffic analysis. Additionally, Millenniums database programming interface is intuitive and easy to use making
installations simple and economical to maintain.



| |  |  | Business Telephones
| | - |  | -------------------

Bringing all the features and services of the Millennium to each desktop helps employees communicate better and improves productivity company-wide. Customers can choose from a wide selection of digital
and IP telephones to match the specific needs of each employee. If the enterprise is seeking to bring VoIP to the desktop, the eNterprise series of IP telephones provide the feature sets of traditional digital telephone with IP telephony
administrative advantages. eNterprise digital phones are a good match for users not requiring IP connectivity but who are in need of advanced call handling capabilities.



| |  |  | VoIP and Traditional Networking Options
| | - |  | ---------------------------------------

Utilizing circuit-switched and in the future, IP networking, the Millenniums networking capabilities facilitates communications across geographically dispersed locations. The systems
networking solutions help businesses consolidate resources as well as ensure call answering and routing consistency throughout all locations.



| |  |  | ACD and Reporting
| | - |  | -----------------

Automatic call distribution is fully integrated with the Millennium providing the enhanced call handling features required in call center environments. The Millennium coupled with its real-time reporting
software allows managers to use both historical and real time data to reallocate agents and resources, forecast future requirements, and plot the long range calling patterns to determine if service level objectives are being met.



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| |  |  | CTI
| | - |  | ---

The Millennium offers a standards-based computer/telephony integration (CTI) solution that includes support for native CSTA interfaces and third-party TAPI, TSAPI and CSTA applications. It provides customers with a common open-platform for
building cost-effective computer telephony solutions. Through integration with existing customer databases and third-party TAPI applications, the Millennium can provide visual call control and call monitoring to enable presentation of caller
information based on Caller ID, ANI, or DNIS.

eQueue Multi-Media Contact Center Solution

The eQueue Multi-Media Contact Center Solution is designed for mission-critical contact center environments. The eQueue incorporates a range
of integrated applications, including:



| |  |  | eQueue ACD
| | - |  | ----------

We built the eQueue with an understanding of the critical nature of call center operations, and the eQueue ACD application is at the core of the eQueue solution. It offers a single routing engine for all contact types and is designed with
an extensive set of flexible routing capabilities. These capabilities include a single multi-media queue for all contact types, skills based routing for all media types, real-time supervision, and virtual agent groups. Effective customer service is
a direct result of contact centers routing customers to the right agents quickly and efficiently.



| |  |  | eQueue PBX
| | - |  | ----------

The eQueue comes complete with an extensive set of telephony features, telephony grade reliability, PBX capabilities, multi-featured phones, PC phones, and networking interfaces. The eQueue has a hybrid architecture that supports
traditional TDM switching infrastructure and IP-based technology, including the support of VoIP desktop phones and software phones.



| |  |  | eQueue IVR
| | - |  | ----------

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



| |  |  | 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 reports and displays, available in both real-time and historical formats. They combine to give contact centers the information needed to manage 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



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##### Index to Financial Statements

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 can be customized to fit the unique needs of a contact center.



| |  |  | 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 each customer. The
eQueue can be tightly integrated with other enterprise applicationsincluding CRM, knowledge bases, self-service applications and e-commerce systems.



| |  |  | eQueue WorkForce
| | - |  | ----------------

eQueue Workforce provides an integrated workforce scheduling and forecasting solution that allows customers to have the ability to improve the quality of customer interactions, more closely adhere to
service level goals, and lower their contact center workforce costs.

eNterprise SIP Business Telephones

The ability to conduct real time communication and collaboration is a critical component to an organizations success. Telephones should
offer the utmost in functionality, intuitive access to advanced telephone features and deliver maximum productivity to users all across the enterprise. eOn Communications eNterprise SIP Business Telephone series offers a variety of telephones
which provide time saving and productivity enhancing features over IP networks.

eNterprise SIP Business Telephones leverage
standards-based technologies to extend communications features of carrier class VoIP soft switch platforms to users over IP networks. These telephones access the potential of IP networks and deliver time-proven telephony applications to the desktop.
Features offered include:



| |  |  | SIP for Businesssupport for Session Initiation Protocol provides access to advanced business IP telephony features and applications;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Simplified Managementdynamic IP addressing allows phones to be relocated quickly and easily without a service technician or IT support;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Multiple Power Optionssupport for power over Ethernet IEEE 802.3af technology;
| | - |  | -------------------------------------------------------------------------------



| |  |  | Excellent Voice Qualityvoice compression codecs optimize bandwidth and audio quality;
| | - |  | --------------------------------------------------------------------------------------



| |  |  | Built-in Speakerphoneenhanced voice quality and operation with acoustic echo cancellation;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | Programmable Feature Keysoptional 22 or 32 keys for customized access to advanced calling features; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | Optional Button Expansion Moduleprovides up to 192 programmable feature keys.
| | - |  | ------------------------------------------------------------------------------

eConn

eOn is developing a
new VOIP platform that will be named eConn and projected for availability in the second quarter of fiscal year 2010. This new platform will support over 500 telephony features which can be delivered through a new easy-to-use graphical
user interface (GUI). The eConn platform will provide options to add unified messaging, auto-attendant, presence management tools and mobility applications. eConn will utilize a native Computer-Supported Telecommunications Applications
(CSTA) interface making it easier to support an extensive range of third-party Computer Telephony Integration (CTI) applications.



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Cortelco

Cortelco focuses its resources on developing and marketing telephony products that help businesses communicate more effectively, efficiently, and reliably with their customers. Communications technology
is a critical factor for businesses in their effort to gain a competitive edge. To enable businesses to succeed in this area, Cortelco offers corded and cordless analog and digital telephones capable of operating in the multiple PBX, Key System and
Centrex environments.



| |  |  | Corded
| | - |  | ------

Cortelco offers a wide variety of corded telephones in multiple colors and with multiple features (including message waiting indicator, flash, hold, mute, speakerphone, headset capable and one to four line models) for home, office,
warehouse, shop or other business use. Models include traditional 2500 desk and 2554 wall models with multiple features and colors. Cortelco offers several models and model families which focus on business, schools, healthcare and other
institutional applications. Cortelco also offers products that target markets for the aged and disabled with models that feature large easy-to-see dial buttons, emergency one-touch dial memory, Braille key pad, and large backlit LCD displays.



| |  |  | Cordless
| | - |  | --------

Cortelco has new products slated for introduction, including DECT (Digital European Cordless Telecommunications) cordless to complement the current cordless analog models as well as expanded corded line powered caller ID models, and a new
four line model to complement the new 7 Series family of business corded telephones.



| |  |  | SIP VOIP
| | - |  | --------

Cortelco is introducing a new SIP (Session Initiation Protocol) VoIP telephone to expand our Internet Protocol (IP) family of products, which have been certified to comply with equipment manufactured by the largest IP network equipment
supplier in the United States. Further expansion of the IP family of products is planned.

SALES AND MARKETING

In North America, we sell, install, maintain and support our eQueue Multi-Media Contact Center through our direct sales force and through
selected value added resellers (VAR). We sell the Millennium through our network of U.S. based dealers and VAR. Installation and support of Millennium systems is largely performed by the eOn dealer and VAR network. eNterprise SIP Business phones are
to be sold through VoIP equipment suppliers and distributors. Sales and support of products in Asia is done through eOn Communications (Beijing) Corporation Limited (eOn China), the Companys wholly owned subsidiary based in
Beijing, China.

Our marketing objective is to position eOn as a proven provider of enterprise communications and contact
center solutions. Our target customer base continues to be mid-size businesses that are looking to deploy or replace their legacy communications systems with next generation IP telephony and multi-media contact center solutions. We will continue to
promote solutions within selected market segments, including the U.S. Federal Government, education/school systems, providers of outsourced contact center solutions, traditional and online retailers. We will continue to reach prospects in these
markets via web-based marketing initiatives, customer referral programs and joint marketing efforts with our US and international dealers and VAR.

Cortelco products are primarily sold through several distribution channels. An integral part of Cortelcos strategy is to strengthen and protect its relationships with resellers, distributors and
other vendors to encourage these parties to recommend or distribute Cortelcos products and to add resellers both domestically and internationally. Cortelco currently invests, and intends to continue to invest, significant resources to expand
its sales and marketing capabilities.



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Cortelcos marketing objective is to offer competitively priced, but with superior
quality and reliability, customer premise communication equipment through our distributor channel. Our distributors target customer base consists of businesses, government, schools, healthcare and other institutions that seek legacy as well as
IP telephone equipment.

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.

Cortelcos approach is to identify market and product applications that fit core competencies as well as to seek new technologies.
Cortelco does not engage in product development engineering, but rather partners with companies that either already have the desired technology or possess the technical background to develop the desired products. The recent merger with eOn provides
additional technical resources that can be applied, on an as needed basis, to evaluate new products and particularly those for VOIP applications. Cortelcos vendor/partner strategy has resulted in favorable credit terms and the
ability to buy small quantities of many models with various colors and features as well as avoid the large cost of baseline hardware and software engineering and development.

MANUFACTURING

We currently use two contract manufacturers to produce the
MillenniumAyrshire Electronics, Inc (formerly ACT Electronics, 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 Ayrshire Electronics and Innovative Circuits have sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advances in technology. After final assembly by either manufacturer, we inspect and
perform quality assurance testing prior to shipment to our dealers or customers. We make purchases from Ayrshire and Innovative Circuits through purchase orders.

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

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

Cortelco buys many of its product families from various offshore suppliers with whom we have worked
for several years. We manufacture our 2500/2554/3554 product lines from both offshore and domestically produced components at our Corinth, Mississippi facility. We are dependent on sole source suppliers for certain components and finished goods.
Interruptions in the availability of these items 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 result in additional expenses.



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COMPETITION

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

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, VoIP 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.

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

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

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



| |  |  | VoIP 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. These
companies include Avaya, Mitel, NEC, Toshiba, and Siemens.



| |  |  | VoIP Telephone Suppliers
| | - |  | ------------------------

Our major competitors for the eNterprise SIP Business Telephones include Polycom, Aastra, Linksys, Snom, and Grandstream among others. Each providesVoIP phones families that are compatible with major VoIP
softswitch suppliers.



| |  |  | Contact Center Vendors
| | - |  | ----------------------

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



| |  |  | Data Communications Equipment Suppliers
| | - |  | ---------------------------------------

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



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| |  |  | 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 Software, and LivePerson. We intend to compete in the web center software
and services market by providing integrated voice and data communications in a contact center environment or providing a direct upgrade path from a Web center to an integrated contact center.



| |  |  | Application Solution or Hosted Solution Providers
| | - |  | -------------------------------------------------

Emerging areas for competitors are firms that deliver enterprise communications and contact center functionality from a web based hosted
platform. Oracle, Five9, and 8 X 8 are examples of companies offering this model in the market place. Advantages typically promoted are investment flexibility with monthly or transaction based licensing, immediate access to technology upgrades, and
disaster recovery options. Business issues that must be considered include IP voice quality, system and application scalability, and limitations in system management and control.



| |  |  | Cortelco Competition
| | - |  | --------------------

The market in which Cortelco participates is intensely competitive, rapidly evolving and subject to technological changes. Cortelco considers KGP Logistics (formerly Embarq or Sprint North Supply),
Telematrix, SciTec, Vtech(AT&T), Aastra and Panasonic to be key competitors for current products. Key competitive factors include product quality, features, functionality, product differentiation and reputation. Cortelco does not sell into the
extremely competitive and low margin retail market but rather sells products into the commercial, government, independent telephone companies and various institutional markets.

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 numerous patents issued in the United States related to our business.

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, eNterprise, WorkSpace, eConn,
Cortelco, Centurion, Tel-Flash, Tel-Trex, & Trendline are trademarks of eOn and Cortelco.



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EMPLOYEES

As of July 31, 2009, we had 61 employees. We had 46 employees in the United States, 14 employees in China and 1 employee in Canada. The mix of employees was 13 in sales and marketing, 17 in research,
development, and professional services, 17 in general and administration, and 14 in manufacturing and distribution. On April 1, 2009, the Company acquired Cortelco, with whom eOn previously had an outsourcing agreement whereby Cortelco provided
management for all U.S. operations for eOn. Included in the management services were sales, marketing, product management, engineering, technical support, quality assurance, accounting, and information technology. The Company also utilizes temporary
employees, independent contractors, and part-time employees as needed. None of our employees are represented by a labor union and we consider our employee relations to be good.

EXECUTIVE OFFICERS

The following table sets forth information about our
Directors and Executive Officers:



|                |  |     |  |                                     
|--------------- |  | --- |  | ------------------------------------
|NAME            |  | AGE |  | POSITION                            
|David S. Lee    |  | 72  |  | Chairman and Director               
|James W. Hopper |  | 65  |  | Chief Executive Officer and Director
|Lee M. Bowling  |  | 54  |  | Chief Financial Officer             

DAVID S. LEE,became the Chairman of the Board of eOn in 1991. From 2003
until June 2008, he served as President and Chief Executive Officer. Previously Mr. Lee served as Chief Executive Officer from May 2000 through August 2001. Mr. Lee is a director of Linear Technology Corporation, a semiconductor
company, Chairman of the Symbio Group, a global outsourcing company and serves as a Senior Advisor for Silver Lake, a private equity investment firm for technology. Mr. Lee is also Regent Emeritus for the University of California. From
1985 to 1988, Mr. Lee was President and Chairman of Data Technology Corporation, a computer peripheral company. Prior to 1985, he was Group Executive and Chairman of the Business Information Systems Group of ITT Corporation, a diversified
company, and President of ITT Qume, formerly Qume Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded Qume Corporation and was its Executive Vice President until the company was acquired by ITT Corporation in
1978. Mr. Lee received an M.S. from North Dakota State University and a B.S. and an honorary doctorate from Montana State University.

JAMES W. HOPPER,became Chief Executive Officer and director of eOn in June 2009. Prior to joining the Company, Mr. Hopper has been President of Cortelco, Inc. since 1997. Prior to 1997, he
was Executive Vice President of Cortelco International, Inc., President and Chief Executive Officer of CMC Industries, and Executive Vice President and Plant Manager of Cortelco USA. Mr. Hoppers experience also includes thirty-five years
with ITT Corporation where he held numerous senior management positions. He has served on the Board of Directors of CMC Industries, Cortelco Systems Puerto Rico, International Telecommunications Corp., Ringers, Inc., and KSS Mid-South, Inc.
Mr. Hopper holds a B.B.A in Management and Economics from the University of Memphis.

LEE M. BOWLING,became Chief
Financial Officer of eOn in June 2009. Prior to joining the Company, Mr. Bowling has been Vice President and Chief Financial Officer of Cortelco, Inc. since 2004. Prior to 2004, Mr. Bowling was Controller of Cortelco, Inc from 1997 until
2004. His experience also includes various supervisory and management positions with ITT Telecommunications and Telephone Electronics Corporation. Mr. Bowling holds a B.S. in Accounting from Mississippi State University.



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|ITEM 1A. | RISK FACTORS
|-------- | ------------

RISK FACTORS

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.

eOn
has experienced substantial losses and may continue to incur losses in the future.

For the year ended July 31, 2009,
eOn had a net loss of $339,000. eOn has incurred substantial losses since inception through July 31, 2009 resulting in an accumulated deficit of $48,856,000. eOn may not be able to achieve profitability from operations in the future.

Downturns in the U.S. economy adversely affect operating results.

Weakness in the U.S. economy has had a negative effect on our operating results. In an economic slowdown, we may also experience the
negative effects of increased competitive pricing pressure and customer turnover. Worsening economic conditions or a prolonged or recurring recession could adversely affect our operating results. Further, we cannot assure you that an
improvement in economic conditions will result in an immediate, if at all positive, improvement in our operating results or cash flows.

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

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



| |  |  | Delays or difficulties in introducing new products;
| | - |  | ---------------------------------------------------



| |  |  | Increasing expenses without commensurate revenue increases;
| | - |  | -----------------------------------------------------------



| |  |  | Variations in the mix of products sold;
| | - |  | ---------------------------------------



| |  |  | Variations in the timing or size of orders from our customers;
| | - |  | --------------------------------------------------------------



| |  |  | Delayed deliveries from suppliers and
| | - |  | -------------------------------------



| |  |  | Price decreases and other actions by our competitors.
| | - |  | -----------------------------------------------------

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

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

The competitive arena for our products is changing
very rapidly and we face intense competition in our markets. Well-established companies and many emerging companies continue to develop products that improve communications, increase employee productivity and lower costs. While the industry remains
fragmented, it is rapidly moving toward consolidation. A number of our current competitors have been recently acquired by



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companies seeking to increase market share and their ability to compete. Additionally, robust open-source products have recently emerged in the market further lowering barriers to market entry
and increasing competition.

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

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



| |  |  | Contact center vendors, such as Avaya and Aspect;
| | - |  | -------------------------------------------------



| |  |  | Data communication equipment suppliers, such as Cisco Systems and Huawei;
| | - |  | -------------------------------------------------------------------------



| |  |  | VoIP telephone manufacturers, such as Polycom, Linksys, Snom, Grand Stream and Aastra
| | - |  | -------------------------------------------------------------------------------------



| |  |  | Hosted solution providers including 8 X 8, Five9, Echopass and Oracle.
| | - |  | ----------------------------------------------------------------------



| |  |  | Email management and web center software suppliers, such as eGain Communications, Kana Software, and LivePerson;
| | - |  | ----------------------------------------------------------------------------------------------------------------



| |  |  | Voice communications equipment suppliers, such as Avaya, Mitel, NEC, Toshiba, and Siemens.
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Customer relationship management (CRM) suppliers such as Oracle, and SalesForce.com.
| | - |  | ------------------------------------------------------------------------------------



| |  |  | Telephony product suppliers such as KGP Logistics, Telematrix, SciTec, Vtech, Aastra, and Panasonic
| | - |  | ---------------------------------------------------------------------------------------------------

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 maintain our indirect sales channels our ability to generate revenue would be harmed.

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

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

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

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



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Our strategic relationships with third parties may not be successful.

Our ability to develop our business, particularly in China, will depend on our ability to identify partnership opportunities and to enter
into suitable commercial arrangements and to maintain close working relationships with these and other industry participants. Our success in this area will also depend on our ability to select and evaluate suitable projects, as well as to consummate
transactions in a highly competitive environment.

To develop our business, we plan to use the business relationships of our
management team in order to form strategic relationships. These relationships may take the form of joint ventures with other private parties and local government bodies and contractual arrangements with other companies. We may not be able to
establish these strategic relationships, or, if established, may not be able to maintain these relationships, particularly if members of the management team leave us. In addition, the dynamics of our relationships with strategic partners may require
us to incur expenses or undertake activities we would not otherwise be inclined to incur or undertake to fulfill our obligations to these partners and/or maintain these relationships. If we do not successfully establish or maintain strategic
relationships, we may not be able to achieve our business goals and that could adversely affect our anticipated results of operations and financial condition.

We face many risks from expanding into foreign markets.

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

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

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



| |  |  | Changes in a specific countrys or regions political or economic conditions;
| | - |  | -----------------------------------------------------------------------------



| |  |  | Trade protection measures and import or export licensing requirements;
| | - |  | ----------------------------------------------------------------------



| |  |  | Potentially negative consequences from changes in tax laws;
| | - |  | -----------------------------------------------------------



| |  |  | Difficulty in managing widespread sales and customer service operations and
| | - |  | ---------------------------------------------------------------------------



| |  |  | Less effective protection of intellectual property.
| | - |  | ---------------------------------------------------

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

The markets for our products are characterized by rapid technological change, frequent new product introductions, uncertain product life cycles and changing customer requirements. If we are not able to
rapidly and efficiently develop new products and improve existing products to meet the changing needs of our customers and to adopt changing communications standards, our business, operating results and financial condition would be harmed.

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



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

We buy many of
our Cortelco products from various offshore suppliers with whom we have worked for several years. We are dependent on sole source suppliers for certain components and finished goods. Interruptions in the availability of these items 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 result in additional expenses.

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

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

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

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

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

As of September 30, 2009, our executive officers, directors and principal stockholders and their affiliates beneficially owned 872,368
shares, or 30.5% 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.



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

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

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

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

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

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

Future sales of shares may decrease our stock price.

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



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|ITEM 2. | PROPERTIES.
|------- | -----------

The Company
leases property as detailed in the following table.



|                          |  |                  |  |                       |  |                 
|------------------------- |  | ---------------- |  | --------------------- |  | ----------------
|LOCATION                  |  | APPROXIMATE SIZE |  | LEASE EXPIRATION DATE |  | INTENDED USE    
|Kennesaw, Georgia, USA    |  | 2,002 sq. ft.    |  | August 2012           |  | Office          
|Corinth, Mississippi, USA |  | 77,000 sq. ft.   |  | December 2010         |  | Office/Warehouse
|San Jose, California, USA |  | 3,780 sq. ft.    |  | December 2010         |  | Office          

Aggregate annual rental payments for the Companys facilities are approximately
$233,000. The Companys current facilities are generally adequate for anticipated needs over the next 12 to 24 months. The Company does not own any real property.



|ITEM 3. | LEGAL PROCEEDINGS.
|------- | ------------------

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



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

On July 28, 2009, the 2008 Annual Meeting of Stockholders of eOn Communications Corporation was held to vote on the following routine items:



| | (1) | To elect one Class III director to serve on the Companys Board of Directors for a term of three years or until his/her successor is elected and qualified;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|              |  |           |  |              
|------------- |  | --------- |  | -------------
|              |  | Votes For |  | VotesWithheld
|W. Frank King |  | 1,862,247 |  | 221,763      



| | (2) | To ratify the appointment of GHP Horwath, P.C. as our independent registered public accounting firm.
| | --- | ----------------------------------------------------------------------------------------------------



|          |  |              |  |                |  |                
|--------- |  | ------------ |  | -------------- |  | ---------------
|Votes For |  | VotesAgainst |  | VotesAbstained |  | BrokerNon-Votes
|2,046,520 |  | 31,494       |  | 5,995          |  |               

Based upon the voting results, each of the above items was approved by shareholders.

The terms of directors David S. Lee, James W. Hopper, Robert P. Dilworth, and Frederick W. Gibbs continued after the Annual
Meeting.



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##### Index to Financial Statements

PART II



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

Market Information

Our
common stock began trading on the NASDAQ Stock Market under the symbol EONC on February 4, 2000. Prior to that date, there was no public market for our common stock. The Company split its common shares in a 5 to 1 reverse split effective at
market close on April 18, 2008. Stock data for all periods presented have been adjusted to reflect the reverse split. The following table sets forth, for the fiscal quarters indicated, the high and low sales prices of our common stock as
reported by the NASDAQ Stock Market.



|                 |  |      |      |     |   |     
|---------------- |  | ---- | ---- | --- | - | ----
|QUARTER ENDED    |  | HIGH |      | LOW
|July 31, 2009    |  | $    | 0.90 |     | $ | 0.59
|April 30, 2009   |  | $    | 0.90 |     | $ | 0.37
|January 31, 2009 |  | $    | 0.80 |     | $ | 0.30
|October 31, 2008 |  | $    | 1.25 |     | $ | 0.54
|                 |  |     
|July 31, 2008    |  | $    | 1.40 |     | $ | 0.66
|April 30, 2008   |  | $    | 2.42 |     | $ | 1.31
|January 31, 2008 |  | $    | 4.65 |     | $ | 1.70
|October 31, 2007 |  | $    | 5.15 |     | $ | 3.70

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

On June 23, 2008 the Company received a NASDAQ Staff
Deficiency Letter from the NASDAQ Stock Market. The letter stated that for the prior 30 consecutive business days, the closing bid price per share of the Companys common stock had been below the $1.00 minimum per share requirement for
continued listing as set forth in NASDAQ Marketplace Rule 4310(c)(4). According to the Marketplace Rule 4310(c)(8)(D), the Company was provided 180 calendar days, or until December 22, 2008, to regain compliance. On October 22, 2008,
pursuant to the suspension of NASDAQs bid and market value rules, NASDAQ notified the Company that eOn had until March 26, 2009 to regain compliance.

On December 23, 2008, March 25, 2009, and July 13, 2009, NASDAQ suspended the bid price and market value of publicly held shares requirement, effectively freezing the stage in the
compliance period until July 31, 2009. The Company had 66 calendar days, or until October 7, 2009 to regain compliance. On August 26, 2009, NASDAQ notified the Company that it has regained compliance with Listing Rule 5550(a)(2) and
the matter is now closed.

Holders

As of September 30, 2009, there were approximately 240 shareholders of record of our common stock and, to the best of our knowledge, approximately 2,400 beneficial owners whose shares of common stock
were held in the names of brokers, dealers, and clearing agencies.

Dividends

During fiscal 2009 and 2008, we did not declare any cash dividends on our capital stock. We currently intend to retain any earnings to
finance the operation and expansion of our business and, therefore, do not expect to pay cash dividends on our common stock in the foreseeable future.



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##### Index to Financial Statements

Securities Authorized for Issuance Under Equity Compensation Plans

Information with respect to Equity Compensation plans is set forth under Part III of this report under the caption Item 11. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Recent Sales of Unregistered Securities

On April 1, 2009, the Company acquired Cortelco for up to $11,000,000 in cash. Cortelco merged with a newly formed
wholly-owned subsidiary of eOn and is now a wholly-owned subsidiary of eOn. David Lee, Chairman of eOn, was the Chairman and the controlling shareholder of Cortelco. In exchange for all of the outstanding shares of Cortelco stock, Cortelco
shareholders received an initial aggregate payment of $500,000. The Company executed a note payable to Cortelcos former shareholders for $10,500,000. The note is non-interest bearing and is contingent primarily upon the level of Cortelco
earnings after closing and all Cortelco shareholders are eligible to receive quarterly payments thereunder in cash until the full consideration has been paid. The note was issued pursuant to an exemption from registration under The Securities Act of
1933 in reliance upon Section 4(2) and Regulation D. The fair value of the note payable obligation assumed on the April 1, 2009 acquisition date was estimated using a discounted cash flow method, and together with approximately $124,000 in
acquisition costs, resulted in a total purchase price of $5,054,000.

Stock Repurchases in the Fourth Quarter

None.



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##### Index to Financial Statements

|ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

OVERVIEW

eOn Communications
Corporation (eOn or the Company) is a global provider of innovative communications solutions. Backed with over 20 years of telecommunications engineering expertise, the Companys solutions enable its customers to
use the eOn products to communicate more effectively. eOns offerings are built on reliable open architectures that enable easy adoption of emerging technologies, such as Voice over Internet Protocol (VoIP) and concepts such as Service Oriented
Architectures (SOA).

The Company completed its acquisition of Cortelco on April 1, 2009. For additional information,
refer to the amended and restated Merger Agreement among the Company, Cortelco Holding, and a subsidiary of the Company, setting forth the terms and conditions of the acquisition, filed as an exhibit to the Company 8-K dated as of December 18,
2008. Cortelco, Cortelco Holdings wholly owned subsidiary, provides customer premise equipment (CPE) commercial grade telephone products primarily for use in businesses, government agencies, colleges and universities, telephone companies, and
utilities. Cortelco has formed strategic alliances with distributors and provides the support needed to supply customers with quality sales, marketing, customer service, technical support, and training.

The Company incurred a net loss of $339,000 for fiscal year 2009. The increase in revenue and gross margin resulting from the acquisition of
Cortelco was partially offset with inputed interest on the note payable to Cortelcos shareholders. Imputed interest is dependent on Cortelcos projected earnings and resulting payments pursuant to the note payable to Cortelcos
former shareholders. Cash flows generated by Cortelco subsequent to the merger will first be used to pay the obligation under the merger agreement until the full $11,000,000 is satisfied.

CRITICAL ACCOUNTING POLICIES

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties and that could potentially result in materially different results under different assumptions and conditions. We believe that
our critical accounting policies are limited to those described below. For a detailed description of our accounting policies, see Footnote 2, Summary of Significant Accounting Policies, in the notes to the consolidated financial
statements.

Revenue Recognition

The Companys revenues from its four product lines are the result of separate, individual deliverables:



|                             |  |                         |  |                       |  |                      
|---------------------------- |  | ----------------------- |  | --------------------- |  | ---------------------
|                             |  | Type of Revenues Earned
|Product Line                 |  | Equipment/Software      |  | Professional Services |  | Maintenance Contracts
|                             |  |                         | 
|Millennium PBX System        |  | Individual sale         |  |                       |  |                      
|                             |  |                         | 
|eQueue Contact Center System |  | Individual sale         |  | Individual sale       |  | Individual sale      
|                             |  |                         | 
|VOIP Telephones              |  | Individual sale         |  |                       |  |                      
|                             |  |                         | 
|Cortelco Products            |  | Individual sale         |  |                       |  |                      

Because the eQueue system is very flexible in its applications, some customers
contract for professional services to tailor their system to specific requirements. Professional services are invoiced separately upon completion. eQueue customers can also elect to enter into maintenance contracts to receive software updates and
free technical support. Revenue is booked quarterly for each maintenance period as provided. The VOIP phones can be deployed with either the Millennium or eQueue systems to provide lower call costs as well as flexible



22



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##### Index to Financial Statements

telecom management across multiple locations. These phones may be sold with a new system, but are often sold subsequent to the system sale.

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

Product Warranties

We generally provide customers a one year product warranty from the date of purchase. We estimate the costs of satisfying warranty claims
based on analysis of past claims experience and provide for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 0.6% - 2.3% of product revenues, has historically been
comprised of materials and direct labor costs. We perform quarterly evaluations of these estimates and any changes in estimates, which could potentially be significant, are included in earnings in the period in which the evaluations are completed.

Inventory Obsolescence

We carry inventories at the lower of cost or market. This policy depends on the timely identification of those items included in inventory whose market price may have declined below carrying value, such
as slow-moving or obsolete items, and we record any necessary valuation reserves. We perform an analysis of slow-moving or obsolete inventory on a quarterly basis and any necessary valuation reserves, which could potentially be significant, are
included in earnings in the period in which the evaluations are completed.

Allowance for Uncollectible Accounts Receivable

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

Stock-Based Compensation

We adopted the provisions of, and account for stock-based compensation in accordance with, Statement of Financial Accounting Standards
No. 123R (SFAS 123R), Share Based Payment on August 1, 2006. We elected the modified-prospective method, under which prior periods are not revised for comparative purposes. Under the fair value recognition
provisions of this statement, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period.

We currently use the Black-Scholes option pricing model to determine the fair value of stock options and employee stock
purchase plan shares. The determination of the fair value of stock-based payment awards on the date of grant using an option-pricing model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables.
These variables include our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, risk-free interest rate and expected dividends.



23



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##### Index to Financial Statements

The fair value of each option award is estimated on the date of grant using the
Black-Scholes option-pricing model. Expected volatilities are based on historical daily closing prices adjusted for our expected future volatility. The Company believes that implied volatility is more reflective of market conditions and a better
indicator of expected volatility than historical volatility. The Company uses historical information to calculate the expected life of option grants. The Company believes that historical information is currently reflective of the economic life of
outstanding option grants. The dividend yield is determined by dividing the expected per share dividend during the coming year by the average fair market value of the stock during the period. The Company has not historically declared any cash
dividends on our common 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. The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant. The estimated fair value of the employee stock options are amortized to expense using the straight-line method over the vesting period.

If factors change and we employ different assumptions for estimating stock-based compensation expense in future periods or if we decide to
use a different valuation model, the future periods may differ significantly from what we have recorded in the current period and could materially affect our operating income, net income and net income per share.

The Black-Scholes option-pricing model was developed for use in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable, characteristics not present in our option grants and employee stock purchase plan shares. Existing valuation models, including the Black-Scholes and lattice binomial models, may not provide reliable measures
of the fair values of our stock-based compensation. Consequently, there is a risk that our estimates of the fair values of our stock-based compensation awards on the grant dates may bear little resemblance to the actual values realized upon the
exercise, expiration, early termination or forfeiture of those stock-based payments in the future. Certain stock-based payments, such as employee stock options, may expire worthless or otherwise result in zero intrinsic value as compared to the fair
values originally estimated on the grant date and reported in our financial statements. Alternatively, value may be realized from these instruments that are significantly higher than the fair values originally estimated on the grant date and
reported in our financial statements. There currently is no market-based mechanism or other practical application to verify the reliability and accuracy of the estimates stemming from these valuation models, nor is there a means to compare and
adjust the estimates to actual values.

The guidance in SFAS 123R and Staff Accounting Bulletin 107 (SAB 107) is
relatively new. The application of these principles may be subject to further interpretation and refinement over time. There are significant differences among valuation models, and there is a possibility that we will adopt different valuation models
in the future. This may result in a lack of consistency in future periods and may materially affect the fair value estimate of stock-based payments. It may also result in a lack of comparability with other companies that use different models,
methods and assumptions.

See Note 13 Stock-Based Compensation to the consolidated financial statements for further
information regarding SFAS 123R.

Deferred Taxes

We recognize deferred tax assets and liabilities based on the differences between the financial statement carrying amounts and the tax bases of assets and liabilities. Because of substantial losses from
inception through fiscal year 2009, the Company has available net operating loss (NOL) carry-forwards of approximately $25,000,000.

Accounting principles generally accepted in the United States of America require the recording of a valuation allowance against the net deferred tax asset associated with this NOL and other timing
differences if it is more likely than not that the Company will not be able to utilize the NOL to offset future taxes. Due to the



24



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##### Index to Financial Statements

size of the NOL carry-forward in relation to the Companys taxable income in recent years and to the continuing uncertainties surrounding future earnings, to the extent that it is more
likely than not that deferred tax assets may not be realized, management has provided for an allowance on its net deferred tax assets. The Company currently provides for income taxes only to the extent of expected cash payments of taxes, primarily
state and foreign income taxes.

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

RESULTS OF OPERATIONS

The following table presents our operating ratios for fiscal years 2009 and 2008:



|                                                     |  |                              |   |  |        |   
|---------------------------------------------------- |  | ---------------------------- | - |  | ------ | --
|                                                     |  | For the Years Ended July 31, |  
|                                                     |  | 2009                         |   |  | 2008   |   
|Net revenue                                          |  | 100.0                        | % |  | 100.0  | % 
|Cost of revenue                                      |  | 55.1                         | % |  | 45.1   | % 
|                                                     |  |                              |   |  |        |   
|Gross profit                                         |  | 44.9                         | % |  | 54.9   | % 
|Operating expenses:                                  |  |                              |   |  |        |   
|Selling, general and administrative                  |  | 34.1                         | % |  | 55.7   | % 
|Research and development                             |  | 8.7                          | % |  | 37.8   | % 
|Other expense                                        |  | 1.1                          | % |  | 4.0    | % 
|                                                     |  |                              |   |  |        |   
|Total operating expense                              |  | 43.9                         | % |  | 97.5   | % 
|                                                     |  |                              |   |  |        |   
|Income (loss) from continuing operations             |  | 1.0                          | % |  | (42.6) | % 
|Interest (expense) income, net                       |  | (4.4)                        | % |  | 1.7    | % 
|Equity earnings of an unconsolidated equity investee |  | 0.3                          | % |  | 0.0    | % 
|                                                     |  |                              |   |  |        |   
|Loss before income taxes and discontinued operations |  | (3.1)                        | % |  | (40.9) | % 
|Income taxes                                         |  | 0.0                          | % |  | 0.0    | % 
|                                                     |  |                              |   |  |        |   
|Loss before discontinued operations                  |  | (3.1)                        | % |  | (40.9) | % 
|Discontinued operations                              |  | 0.0                          | % |  | (8.5)  | % 
|                                                     |  |                              |   |  |        |   
|Net Loss                                             |  | (3.1)                        | % |  | (49.4  | %)
|                                                     |  |                              |   |  |        |   

NET REVENUE

Revenue is comprised of product revenue generated by our Millennium and Cortelco product lines and product and maintenance and professional service revenue generated by our eQueue product line. Net
revenue increased approximately 52% to $10,645,000 for the year ended July 31, 2009 from $6,994,000 for the previous fiscal year. The increase reflects $4,231,000 in Cortelco revenue subsequent to the acquisition on April 1, 2009,
partially offset by lower eQueue revenue from products, maintenance and professional services, and lower Millennium revenue compared to the prior year. Sales of Millennium systems and eQueue systems were adversely impacted by slowdowns in key U.S.
government and education markets and increased competition.



25



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##### Index to Financial Statements

COST OF REVENUE AND GROSS PROFIT

Cost of revenue is primarily comprised of purchases from our contract manufacturers and other suppliers and costs incurred for final assembly
of our phones and systems. Gross profit increased approximately 25% to $4,782,000 for the year ended July 31, 2009 compared to $3,839,000 for the previous fiscal year. The increase in gross profit reflects inclusion of Cortelcos gross
profit and increased Millennium gross profit partially offset by lower eQueue product, maintenance and professional service revenues. Our gross margins were 45% and 55% for fiscal years 2009 and 2008, respectively. The decrease in margin percentage
reflects lower maintenance and professional services revenue, which historically have higher margins. The inclusion of Cortelco activity beginning April 1, 2009, which historically has a lower margin, also contributed to the decline in gross
margin percentages.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses were $3,633,000 for the year ended July 31, 2009, a decline of 7% from $3,893,000 in the
prior fiscal year. The decrease reflects lower personnel costs, lower travel and entertainment expenses and lower overhead expenses, partially offset by the inclusion of Cortelcos expenses subsequent to April 1, 2009.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses are primarily comprised of personnel and related expenses for our engineering staff. Our research and development efforts are currently concentrated on development of the new eConn IP-PBX/ACD with continued
enhancements for our eQueue and Millennium product lines. Research and development expenses were $926,000 for the year ended July 31, 2009, which represents a decrease of approximately 65% from $2,641,000 in fiscal year 2008. The decrease
primarily reflects lower personnel costs, travel, and overhead expenses. The Company capitalized approximately $243,000 of software development costs related to a new IP PBX that is under development. Amortization of the capitalized cost is expected
to begin in the second fiscal quarter of 2010 when the product is available for general release to customers. The Company closed its engineering facility in India effective April 1, 2008 and incurred approximately $244,000 in severance expenses
in fiscal year 2008.

OTHER INCOME AND EXPENSE, NET

Other income and expense, net is primarily comprised of bank service charges, franchise taxes, currency differences and gains or losses from disposal of fixed assets. Other expense was $120,000 in fiscal
2009 compared to $283,000 in fiscal year 2008. The decrease is primarily a result of losses related to the closure of the India engineering facility and losses on disposal of assets in India in fiscal year 2008.

INTEREST EXPENSE, NET

Interest expense was $466,000 in fiscal year 2009 and interest income was $117,000 in fiscal year 2008. The increase in fiscal year 2009 reflects imputed interest of $480,000 on the note payable to the former Cortelco shareholders.

INCOME TAX EXPENSE

No income tax benefit from continuing operations was recorded for the years ended July 31, 2009 and 2008 as management was unable to conclude that it was more likely than not that the income tax benefit would be realized.

DISCONTINUED OPERATIONS

Discontinued operations for the year ended July 31, 2008 is comprised of $604,000 of losses from eOn IP Voice, Inc. and a $13,000 gain on disposal during the third fiscal quarter of 2008.



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LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2009, we had cash and cash equivalents of $3,010,000 and a working capital balance of $7,802,000. At July 31, 2008,
our short-term investments were invested in auction rate securities. These securities were sold at par in October 2008 and are now invested in liquid treasury securities.

Our operating activities resulted in net cash inflows of $1,256,000 for fiscal year 2009 compared to net cash outflows of $2,731,000 for fiscal year 2008. The increase in net operating cash flow for the
current fiscal year primarily reflects lower inventories and higher accounts payable partially offset by net loss (adjusted for non cash items) for the year and higher trade and related party accounts receivable. Net operating cash outflow for
fiscal year 2008 was primarily the result of net loss (adjusted for non cash items) for the year, higher inventory and prepaid assets and lower accounts payable, partially offset by lower accounts receivable.

Our investing activities resulted in net cash inflows of $209,000 for fiscal year 2009 compared to net cash inflows of $1,776,000 in fiscal
year 2008. Cash provided by investing activities during fiscal year 2009 was primarily related to net sales of marketable securities, partially offset by net cash of $400,000 used in the acquisition of Cortelco, capitalized software development
costs of $243,000, an investment of approximately $136,000 in a joint venture in Hangzhou, China, and capital expenditures. Cash provided by investing activities during fiscal year 2008 consisted primarily of net sales of marketable securities and
proceeds from the disposal of Spark stock, partially offset by the investment in Symbio and capital expenditures.

Our
financing activities resulted in net cash inflows of $2,000 and $149,000 in fiscal years 2009 and 2008, respectively. Cash provided by financing activities during fiscal year 2009 was attributable to proceeds from the employee stock purchase plan.
Cash provided by financing activities during fiscal year 2008 was attributable to proceeds from the employee stock purchase plan and proceeds from a note payable.

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

Due to the current state of the credit markets, we are not able to predict with any certainty whether we could obtain
debt or equity financing to provide additional sources of liquidity, should the need arise, at favorable rates.

Liquidity

Since inception, the Company has financed its operations through debt financing and proceeds generated from public offerings of its common
stock. The proceeds from these transactions have been used primarily to fund research and development costs, and selling, general and administrative expenses.

On February 23, 2007, the Companys newly formed subsidiary, eOn IP Voice, Inc. purchased certain accounts receivable, inventory and fixed assets and assumed certain liabilities of One IP Voice,
Inc for $150,000 in order to enter the hosted VoIP Services market. These assets, net of liabilities were purchased under an order of the United States Bankruptcy Court Chapter 11 Order Authorizing Sale of Assets at Auction Out of the Ordinary
Course of Business. The results of EIPV are included in the Companys consolidated financial statements beginning February 23, 2007, the date the assets were purchased.

In October 2007, the Company committed to a plan to discontinue offering EIPV Business Connect hosted products and services. Accordingly,
balances and activity have been reported as discontinued operations. During the quarter ended April 30, 2008, the Company sold the assets of EIPV for approximately $90,000.

The Company has incurred substantial net operating losses since inception and negative cash flows from operating activities through
July 31, 2009 resulting in an accumulated deficit of $48,856,000. The Company



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##### Index to Financial Statements

recorded a net loss of $339,000 in fiscal year 2009. As of July 31, 2009, the Company had $3,010,000 in cash and cash equivalents available to fund operations, of which $83,000 was held in
international bank accounts.

The Company is largely dependent on available cash and operating cash flow to finance operations
and meet its other capital needs. Cortelco has a line of credit based on an asset formula involving accounts receivable and inventory up to a maximum of $2,500,000, none of which was drawn on as of July 31, 2009. The line of credit is secured
by substantially all of Cortelcos assets. The loans interest rate is floating based on LIBOR and expires June 29, 2010. If such sources are not sufficient, alternative funding sources may not be available. The Company believes that
cash on hand, short-term marketable securities, and the Cortelco line of credit plus the additional liquidity that it expects to generate from operations will be sufficient to cover its working capital and fund expected capital expenditures over at
least the next twelve months.

Capital Resources

The Company believes that the cash, short-term marketable securities on hand, and Cortelcos line of credit plus the additional liquidity that we expect to generate from operations will be sufficient
to meet the cash requirements of the business including capital expenditures and working capital needs for at least the next twelve months. Should actual results differ significantly from our current assumptions, our liquidity position could be
adversely affected and the Company could be in a position that would require the Company to raise additional capital, which may not be available to the Company or may not be available on acceptable terms.

NET LOSS

Net loss
decreased to $339,000 in fiscal year 2009 compared to a net loss of $3,452,000 in fiscal year 2008 due to the acquisition of Cortelco and reduction in expenses explained above.

Reported net loss has been materially impacted by the imputed interest expense due to the amortization of the difference between the face
value of the contingent obligation to the former Cortelco shareholders and the discounted present value of the note payable recorded on the balance sheet. The table below presents a non-GAAP financial disclosure to provide a quantitative analysis of
the impact of the imputed interest expense on reported net loss and loss per share. Management does not include this expense in its analysis of financial results or how resources are allocated. Because of this, we deemed it meaningful to provide
this non-GAAP disclosure of the impact of this significant item on our financial results.



|                                                  |  |               |       |  
|------------------------------------------------- |  | ------------- | ----- | -
|Non-GAAP Financial Disclosure                     |  |               |      
|(In thousands, except per share amounts)          |  |               |       |  
|                                                  |  | Year Ended    |      
|                                                  |  | July 31, 2009 |      
|Net loss reported                                 |  | $             | (339  | )
|Interest imputed                                  |  |               | 480   |  
|                                                  |  |               |       |  
|Net income less imputed interest                  |  | $             | 141   |  
|                                                  |  |               |       |  
|Net loss per common share as reported             |  | $             | (0.12 | )
|Interest imputed                                  |  |               | 0.18  |  
|                                                  |  |               |       |  
|Net income per common share less imputed interest |  | $             | 0.05  |  
|                                                  |  |               |       |  
|Weighted average common shares outstanding        |  |               | 2,735 |  
|                                                  |  |               |       |  



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##### Index to Financial Statements

COMMITMENTS AND CONTINGENCIES

Contractual Obligations

The Company is obligated to make future payments
under various contracts it has entered into, including amounts pursuant to non-cancelable operating lease agreements for office and warehouse space and inventory purchase obligations. Expected future minimum contractual cash obligations for the next
five years and in the aggregate at July 31, 2009 are as follows (in thousands):



|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |     |  |   |     |  |   |      
|------------------------ |  | ---------------------------------------------------- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---- |  | ---------- | --- |  | - | --- |  | - | -----
|                         |  | Payments Due by Period for the Years Ending July 31,
|                         |  | Total                                                |       | 2010 |   | 2011  |  | 2012 |     | 2013 |   | 2014 |  | Thereafter
|Notes payable (1)        |  | $                                                    | 5,048 |      | $ | 1,157 |  | $    | 609 |      | $ | 511  |  | $          | 427 |  | $ | 379 |  | $ | 1,965
|Operating leases (2)     |  |                                                      | 396   |      |   | 247   |  |      | 114 |      |   | 35   |  |            |    |  |   |    |  |   |     
|Purchase obligations (3) |  |                                                      | 1,832 |      |   | 1,832 |  |      |    |      |   |     |  |            |    |  |   |    |  |   |     
|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |     |  |   |     |  |   |      
|Total                    |  | $                                                    | 7,276 |      | $ | 3,236 |  | $    | 723 |      | $ | 546  |  | $          | 427 |  | $ | 379 |  | $ | 1,965
|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |     |  |   |     |  |   |      



|(1) | Actual payments under the note payable to Cortelcos shareholders (Cortelco Note), which are to be based on future earnings of Cortelco, may differ
significantly from the projected payments estimated at the Cortelco Notes inception. These differences may result in significant fluctuations in periodic interest expense in order to properly reflect interest expense over the actual life of
the Cortelco Note.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Non-cancelable operating leases do not include payments due under renewals to the original lease term.
|--- | ------------------------------------------------------------------------------------------------------

|(3) | Outstanding commitments for purchases of inventory under open purchase orders.
|--- | ------------------------------------------------------------------------------

On August 10, 2009, the Companys lease was cancelled and the Company entered into a new sublease agreement reducing the leased
square footage to 2,002 sq. ft. of office space in Kennesaw, Georgia. The sublease has a term of three years and provided for rent expense of approximately $2,500 per month.

The Company leases approximately 3,780 square feet of office space in San Jose, California. This joint lease with Spark Technologies has
monthly rent of approximately $3,700 and expires December 31, 2010.

On March 31, 2006, the Company entered into an
Acquisition Option Agreement (the Agreement) with Spark Technologies, Inc. Spark designs and markets accessories for wireless telephones. Its primary product,

CellstickTM, is a small device that allows users to backup, enter, edit and transfer their cell phone contacts. Under the terms of
the Agreement, the Company converted notes receivable of $300,000 to 300,000 shares or 3% of Spark Common Stock and had the option to purchase all remaining outstanding Spark Common Stock, including options, by issuing 8,665,000 (or 1,733,000 after
the 1:5 reverse stock split of the Companys stock in April 2008) shares of the Companys Common Stock. In March 2008, after evaluating the current status of Spark and the option, the eOn Board of Directors decided to not exercise the
option.

The Agreement further provided that in the event the Company does not exercise this option, the Company could require
Spark or David Lee, the Companys Chief Executive Officer and a major shareholder, to repurchase the Companys Spark shares for $300,000 within 60 days. David Lee purchased the shares and paid the Company $300,000 on June 13, 2008.

Cortelco has a line of credit based on an asset formula involving accounts receivable and inventory up to a maximum of
$2,500,000, none of which was drawn on as of July 31, 2009. The line of credit is secured by substantially all of Cortelcos assets. The loans interest rate is floating based on LIBOR and expires June 29, 2010.

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.



29



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##### Index to Financial Statements

SUBSEQUENT EVENT

The Company has evaluated events through October 29, 2009 for consideration as a subsequent event to be included in its July 31, 2009 financial statements issued October 29, 2009.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations,(SFAS No. 141R). SFAS No. 141R will change the accounting for business combinations.
Under SFAS No. 141R, an acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will also change the
accounting treatment and disclosure for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting
period beginning on or after December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until July 31, 2009. The Company expects SFAS No. 141R will have an
impact on accounting for business combinations once adopted and the effect is dependent upon acquisitions at that time.

In
December 2008, the FASB issued FASB Staff Position (FSP) SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends the accounting in
SFAS 141(R) for assets and liabilities arising from contingencies in a business combination. The FSP requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined.

If fair value cannot be reasonably determined, the proposed FSP requires measurement based on the best estimate in accordance with SFAS 5,
Accounting for Contingencies. The FSP is effective for fiscal years beginning after December 15, 2008. The Company expects FSP SFAS 141(R)-1 will have an impact on accounting for business combinations once adopted and the
effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial StatementsAn Amendment of ARB No. 51, or SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company is currently evaluating what impact, if any, the adoption of SFAS No. 160 will have on its consolidated
financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and
Hedging Activitiesan amendment of FASB Statement No. 133 (SFAS No. 161) effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires
an entity to provide enhanced disclosures about derivative instruments and hedging activities. The Company does not expect SFAS No. 161 to have a material impact on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP
No. 142-3). FSP No. 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142. The intent of
this FSP is to improve the consistency between the useful life of an intangible asset determined under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R. FSP No. 142-3
is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is evaluating the potential impact of this FASB Staff Position on its consolidated financial statements.

In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys
Own Stock effective for financial statements issued for fiscal years and interim periods



30



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##### Index to Financial Statements

beginning after December 15, 2008. EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own
stock. The adoption of EITF No. 07-5 is not expected to have a material effect on the Companys consolidated financial statements.

In October 2008, the FASB issued EITF No. 08-6, Equity Method Investment Accounting Considerations(EITF 08-6), which clarifies the accounting for certain
transactions and impairment considerations involving equity method investments. EITF 08-6 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is evaluating the
potential impact of this EITF on its consolidated financial statements.

In April 2009, the FASB issued FSP SFAS 107-1 and
Accounting Principles Board (APB) 28-1, Interim Disclosures about Fair Value of Financial Instruments (FSP 107-1), which will require that the fair value disclosures required for all financial instruments within the
scope of SFAS 107, Disclosures about Fair Value of Financial Instruments, be included in interim financial statements. This FSP also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial
instruments on an interim and annual basis and to highlight any changes from prior periods. FSP 107-1 will be effective for interim periods ending after June 15, 2009. The adoption of FSP 107-1 is not expected to have a material impact on the
Companys consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events
(SFAS No. 165), which updates previous guidance under GAAP by replacing type 1 and type 2 with recognized and unrecognized, and requires disclosure in financial statements of the date through
which subsequent events have been evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009 and was adopted by the Company beginning in the fourth quarter of its fiscal year 2009. The adoption of SFAS
No. 165 did not have a material impact on the Companys consolidated results of operation and financial condition.

In June 2009, the FASB approved its Accounting Standards Codification or Codification as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the
exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in the first quarter of fiscal year
2010, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on the
Companys consolidated financial statements.



31



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##### Index to Financial Statements

|ITEM 8. | FINANCIAL STATEMENTS.
|------- | ---------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                     |  |     
|-------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                     |  | Page
|Report of Independent Registered Public Accounting Firm                                                              |  | 33  
|                                                                                                                     | 
|Consolidated Balance Sheets as of July 31, 2009 and 2008                                                             |  | 34  
|                                                                                                                     | 
|Consolidated Statements of Operations for the Years Ended July 31, 2009 and 2008                                     |  | 35  
|                                                                                                                     | 
|Consolidated Statements of Cash Flows for the Years Ended July 31, 2009 and 2008                                     |  | 36  
|                                                                                                                     | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income for the Years Ended July 
31, 2009 and 2008 |  | 37  
|                                                                                                                     | 
|Notes to Consolidated Financial Statements                                                                           |  | 38  



32



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##### Index to Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors

eOn
Communications Corporation

We have audited the accompanying consolidated balance sheets of eOn Communications Corporation and
subsidiaries as of July 31, 2009 and 2008 and the related consolidated statements of operations, cash flows and stockholders equity and comprehensive income, for each of the two years in the period ended July 31, 2009. These
financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of eOn Communications Corporation and subsidiaries as of July 31, 2009 and 2008, and the results of their operations and their cash flows for each of the two years in the period
ended July 31, 2009, in conformity with accounting principles generally accepted in the United States of America.



|                     
|---------------------
|/s/ GHP Horwath, P.C.
|                     
|Denver, Colorado     
|                     
|October 29, 2009     



33



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share amounts)



|                                                                                                                   |  |                |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                   |  | As of July 31, |        
|                                                                                                                   |  | 2009           |         |   | 2008 |  
|ASSETS                                                                                                             |  |                |         |   |      |   |         |  
|Current assets:                                                                                                    |  |                |         |   |      |   |         |  
|Cash and cash equivalents                                                                                          |  | $              | 3,010   |   |      | $ | 1,545   |  
|Marketable securities                                                                                              |  |                |        |   |      |   | 1,000   |  
|Trade accounts receivable, net of allowance of $332 and $680, respectively                                         |  |                | 2,943   |   |      |   | 932     |  
|Trade accounts receivablerelated party                                                                            |  |                | 228     |   |      |   | 84      |  
|Inventories                                                                                                        |  |                | 5,032   |   |      |   | 2,501   |  
|Deferred income taxes                                                                                              |  |                | 270     |   |      |   |        |  
|Prepaid and other current assets                                                                                   |  |                | 242     |   |      |   | 177     |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total current assets                                                                                               |  |                | 11,725  |   |      |   | 6,239   |  
|Property and equipment, net                                                                                        |  |                | 209     |   |      |   | 176     |  
|Intangibles, net                                                                                                   |  |                | 410     |   |      |   | 251     |  
|Investments                                                                                                        |  |                | 1,136   |   |      |   | 900     |  
|Investment in unconsolidated equity investee                                                                       |  |                | 140     |   |      |   |        |  
|Other non-current assets                                                                                           |  |                |        |   |      |   | 88      |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total assets                                                                                                       |  | $              | 13,620  |   |      | $ | 7,654   |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                               |  |                |         |   |      |   |         |  
|Current liabilities:                                                                                               |  |                |         |   |      |   |         |  
|Trade accounts payable                                                                                             |  | $              | 1,127   |   |      | $ | 214     |  
|Trade accounts payablerelated party                                                                               |  |                | 11      |   |      |   | 126     |  
|Notes payable, related party                                                                                       |  |                | 1,157   |   |      |   | 138     |  
|Accrued expenses and other                                                                                         |  |                | 1,628   |   |      |   | 1,145   |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total current liabilities                                                                                          |  |                | 3,923   |   |      |   | 1,623   |  
|Note payable, related party, net of current portion                                                                |  |                | 3,891   |   |      |   |        |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total liabilities                                                                                                  |  |                | 7,814   |   |      |   | 1,623   |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Commitments and contingencies                                                                                      |  |                |         |   |      |   |         |  
|                                                                                                                   |  |               
|Stockholders equity:                                                                                              |  |                |         |   |      |   |         |  
|Preferred stock, $0.001 par value, (10,000,000 shares authorized, no shares issued and outstanding)                |  |                |        |   |      |   |        |  
|Common stock, $0.005 par value (10,000,000 shares authorized, 2,873,992 and 2,869,608 shares issued,
respectively) |  |                | 14      |   |      |   | 14      |  
|Additional paid-in capital                                                                                         |  |                | 56,048  |   |      |   | 55,931  |  
|Treasury stock, at cost (139,580 shares)                                                                           |  |                | (1,503  | ) |      |   | (1,502  | )
|Accumulated deficit                                                                                                |  |                | (48,856 | ) |      |   | (48,517 | )
|Accumulated other comprehensive income                                                                             |  |                | 103     |   |      |   | 105     |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total stockholders equity                                                                                         |  |                | 5,806   |   |      |   | 6,031   |  
|                                                                                                                   |  |                |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                         |  | $              | 13,620  |   |      | $ | 7,654   |  
|                                                                                                                   |  |                |         |   |      |   |         |  

See accompanying notes to the consolidated financial statements.



34



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)



|                                                                                                             |  |                              |        |   |      |   |        |  
|------------------------------------------------------------------------------------------------------------ |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                                                             |  | For the Years Ended July 31, |       
|                                                                                                             |  | 2009                         |        |   | 2008 |  
|REVENUE                                                                                                      |  |                              |        |   |      |   |        |  
|Third party revenue                                                                                          |  | $                            | 10,355 |   |      | $ | 6,646  |  
|Related party revenue                                                                                        |  |                              | 290    |   |      |   | 348    |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Net revenue                                                                                                  |  |                              | 10,645 |   |      |   | 6,994  |  
|COST OF REVENUE                                                                                              |  |                              |        |   |      |   |        |  
|Third party cost of revenue                                                                                  |  |                              | 5,659  |   |      |   | 2,832  |  
|Related party cost of revenue                                                                                |  |                              | 204    |   |      |   | 323    |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Cost of revenue                                                                                              |  |                              | 5,863  |   |      |   | 3,155  |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Gross profit                                                                                                 |  |                              | 4,782  |   |      |   | 3,839  |  
|OPERATING EXPENSE                                                                                            |  |                              |        |   |      |   |        |  
|Selling, general and administrative (including $243 and $210 of related party management fees, respectively) |  |                              | 3,633  |   |      |   | 3,893  |  
|Research and development                                                                                     |  |                              | 926    |   |      |   | 2,641  |  
|Other expense, net                                                                                           |  |                              | 120    |   |      |   | 283    |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Total operating expense                                                                                      |  |                              | 4,679  |   |      |   | 6,817  |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Income (loss) from continuing operations                                                                     |  |                              | 103    |   |      |   | (2,978 | )
|Interest (expense) income                                                                                    |  |                              | (466   | ) |      |   | 117    |  
|Equity earnings of unconsolidated equity investee                                                            |  |                              | 29     |   |      |   |       |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Loss from continuing operations before income taxes                                                          |  |                              | (334   | ) |      |   | (2,861 | )
|Income tax expense                                                                                           |  |                              | (5     | ) |      |   |       |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Loss from continuing operations after income taxes                                                           |  |                              | (339   | ) |      |   | (2,861 | )
|DISCONTINUED OPERATIONS                                                                                      |  |                              |        |   |      |   |        |  
|Loss from discontinued operations                                                                            |  |                              |       |   |      |   | (604   | )
|Gain on disposal of discontinued operations, net of tax of $0                                                |  |                              |       |   |      |   | 13     |  
|                                                                                                             |  |                              |        |   |      |   |        |  
|Loss from discontinued operations                                                                            |  |                              |       |   |      |   | (591   | )
|                                                                                                             |  |                              |        |   |      |   |        |  
|Net loss                                                                                                     |  | $                            | (339   | ) |      | $ | (3,452 | )
|                                                                                                             |  |                              |        |   |      |   |        |  
|Weighted average shares outstanding                                                                          |  |                              |        |   |      |   |        |  
|Basic and diluted                                                                                            |  |                              | 2,735  |   |      |   | 2,725  |  
|Basic and diluted loss per share:                                                                            |  |                              |        |   |      |   |        |  
|From continuing operations                                                                                   |  | $                            | (0.12  | ) |      | $ | (1.05  | )
|From discontinued operations, net of tax                                                                     |  |                              |       |   |      |   | (0.22  | )
|                                                                                                             |  |                              |        |   |      |   |        |  
|Basic and diluted net loss per share                                                                         |  | $                            | (0.12  | ) |      | $ | (1.27  | )
|                                                                                                             |  |                              |        |   |      |   |        |  

See accompanying notes to the consolidated financial statements.



35



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)



|                                                                                               |  |                              |       |   |      |   |        |  
|---------------------------------------------------------------------------------------------- |  | ---------------------------- | ----- | - | ---- | - | ------ | -
|                                                                                               |  | For the Years Ended July 31, |      
|                                                                                               |  | 2009                         |       |   | 2008 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                          |  |                              |       |   |      |   |        |  
|Net loss                                                                                       |  | $                            | (339  | ) |      | $ | (3,452 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities:      |  |                              |       |   |      |   |        |  
|Change in operating assets and liabilities of discontinued operations                          |  |                              |      |   |      |   | 161    |  
|Gain on disposal of discontinued operations                                                    |  |                              |      |   |      |   | (13    | )
|Stock based compensation expense                                                               |  |                              | 25    |   |      |   | 151    |  
|Depreciation and amortization                                                                  |  |                              | 180   |   |      |   | 223    |  
|Allowance for doubtful accounts                                                                |  |                              | 55    |   |      |   | 14     |  
|Loss on disposal of fixed assets                                                               |  |                              | 39    |   |      |   | 106    |  
|Imputed interest on note payable                                                               |  |                              | 480   |   |      |   |       |  
|Equity earnings in unconsolidated investee                                                     |  |                              | (29   | ) |      |   |       |  
|Changes in net assets and liabilities, net of effects of business acquisition                  |  |                              |       |   |      |   |        |  
|Trade accounts receivable                                                                      |  |                              | (488  | ) |      |   | 835    |  
|Inventories                                                                                    |  |                              | 881   |   |      |   | (153   | )
|Prepaid and other current assets                                                               |  |                              | 232   |   |      |   | (147   | )
|Trade accounts payable                                                                         |  |                              | 329   |   |      |   | (218   | )
|Trade accounts receivable/payablerelated party                                                |  |                              | (259  | ) |      |   | (178   | )
|Accrued expenses and other                                                                     |  |                              | 150   |   |      |   | (60    | )
|                                                                                               |  |                              |       |   |      |   |        |  
|Net cash provided by (used in) operating activities                                            |  |                              | 1,256 |   |      |   | (2,731 | )
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                          |  |                              |       |   |      |   |        |  
|Purchases of property and equipment                                                            |  |                              | (12   | ) |      |   | (114   | )
|Capitalized software development costs                                                         |  |                              | (243  | ) |      |   |       |  
|Purchase of investments                                                                        |  |                              | (194  | ) |      |   | (900   | )
|Sale of investments                                                                            |  |                              | 58    |   |      |   |       |  
|Proceeds from disposal of Spark stock                                                          |  |                              |      |   |      |   | 300    |  
|Sales of marketable securities                                                                 |  |                              | 1,000 |   |      |   | 2,400  |  
|Net cash used in business acquisition                                                          |  |                              | (400  | ) |      |   |       |  
|Proceeds from disposal of discontinued operations                                              |  |                              |      |   |      |   | 90     |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Net cash provided by investing activities                                                      |  |                              | 209   |   |      |   | 1,776  |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                          |  |                              |       |   |      |   |        |  
|Proceeds from note payable                                                                     |  |                              |      |   |      |   | 138    |  
|Proceeds from employee stock purchase plan                                                     |  |                              | 2     |   |      |   | 11     |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Net cash provided by financing activities                                                      |  |                              | 2     |   |      |   | 149    |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Effect of exchange rate changes on cash                                                        |  |                              | (2    | ) |      |   | 95     |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Net increase (decrease) in cash and cash equivalents                                           |  |                              | 1,465 |   |      |   | (711   | )
|Cash and cash equivalents, beginning of period                                                 |  |                              | 1,545 |   |      |   | 2,256  |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Cash and cash equivalents, end of period                                                       |  | $                            | 3,010 |   |      | $ | 1,545  |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Supplemental cash flow information:                                                            |  |                              |       |   |      |   |        |  
|Interest paid                                                                                  |  | $                            |      |   |      | $ |       |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Income taxes paid                                                                              |  | $                            | 5     |   |      | $ |       |  
|                                                                                               |  |                              |       |   |      |   |        |  
|Supplemental disclosure of non-cash investing activity:                                        |  |                              |       |   |      |   |        |  
|Net assets acquired in merger with Cortelco Systems Holding Corp., excluding cash (see Note 3) |  | $                            | 4,954 |   |      |   |        |  
|                                                                                               |  |                              |       |   |      |   |        |  

See accompanying notes to the consolidated financial statements.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME

(In thousands except share amounts)



|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|----------------------------------------------------------- |  | ------------ |  | ------------------------ | -- | -------------- | ------ | ------ | ------------------ | -------- | - | ----------------------------------- | - | ------ | ------------------------ |  | - | ------- | - |  | - | --- | - |  | - | ------ | -
|                                                            |  | Common Stock |  | AdditionalPaid-InCapital |    | Treasury Stock |        |        | AccumulatedDeficit |          |   | AccumulatedOtherComprehensiveIncome |   |        | TotalStockholdersEquity | 
|                                                            |  | Shares       |  | Amount                   |    |                | Shares |        |                    | Amount   |   |                                     |   |       
|Balance at August 1, 2007                                   |  | 2,849,629    |  | $                        | 14 |                | $      | 55,769 |                    | (135,380 | ) |                                     | $ | (1,502 | )                        |  | $ | (45,065 | ) |  | $ |    |   |  | $ | 9,216  |  
|Issuance of common stock under employee stock purchase plan |  | 3,879        |  |                          |   |                |        | 11     |                    |         |   |                                     |   |       |                          |  |   |        |   |  |   |    |   |  |   | 11     |  
|Stock based compensation expense, stock grants              |  | 16,100       |  |                          |   |                |        | 35     |                    |         |   |                                     |   |       |                          |  |   |        |   |  |   |    |   |  |   | 35     |  
|Stock based compensation expense, stock options and ESPP    |  |              |  |                          |   |                |        | 116    |                    |         |   |                                     |   |       |                          |  |   |        |   |  |   |    |   |  |   | 116    |  
|Comprehensive income (loss):                                |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Foreign currency translation adjustments                    |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   | 105 |   |  |   | 105    |  
|Net loss                                                    |  |             |  |                          |   |                |        |       |                    |         |   |                                     |   |       |                          |  |   | (3,452  | ) |  |   |    |   |  |   | (3,452 | )
|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Comprehensive loss                                          |  |             |  |                          |   |                |        |       |                    |         |   |                                     |   |       |                          |  |   |         |   |  |   |    |   |  |   | (3,347 | )
|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Balance at July 31, 2008                                    |  | 2,869,608    |  | $                        | 14 |                | $      | 55,931 |                    | (135,380 | ) |                                     | $ | (1,502 | )                        |  | $ | (48,517 | ) |  | $ | 105 |   |  | $ | 6,031  |  
|Issuance of common stock under employee stock purchase plan |  | 4,384        |  |                          |   |                |        | 2      |                    |         |   |                                     |   |       |                          |  |   |        |   |  |   |    |   |  |   | 2      |  
|Stock based compensation expense, stock options and ESPP    |  |              |  |                          |    |                |        | 25     |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   | 25     |  
|Capital contribution by David Lee                           |  |              |  |                          |    |                |        | 90     |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   | 90     |  
|Treasury stock acquired in merger                           |  |              |  |                          |    |                |        |        |                    | (4,200   | ) |                                     |   | (1     | )                        |  |   |         |   |  |   |     |   |  |   | (1     | )
|Comprehensive income (loss):                                |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Foreign currency translation adjustments                    |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   | (2  | ) |  |   | (2     | )
|Net loss                                                    |  |             |  |                          |   |                |        |       |                    |         |   |                                     |   |       |                          |  |   | (339    | ) |  |   |    |   |  |   | (339   | )
|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Comprehensive loss                                          |  |             |  |                          |   |                |        |       |                    |         |   |                                     |   |       |                          |  |   |         |   |  |   |    |   |  |   | (341   | )
|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  
|Balance at July 31, 2009                                    |  | 2,873,992    |  | $                        | 14 |                | $      | 56,048 |                    | (139,580 | ) |                                     | $ | (1,503 | )                        |  | $ | (48,856 | ) |  | $ | 103 |   |  | $ | 5,806  |  
|                                                            |  |              |  |                          |    |                |        |        |                    |          |   |                                     |   |        |                          |  |   |         |   |  |   |     |   |  |   |        |  

See accompanying notes to the consolidated financial statements.



37



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended July 31, 2009 and 2008



|1. | Description of Business
|-- | -----------------------

eOn Communications Corporation (eOn or the Company) is a global provider of innovative communications solutions. Backed with over 20 years of telecommunications engineering expertise, the Companys
solutions enable its customers to leverage advanced technologies in order to communicate more effectively. eOns offerings are built on open architectures that enable adoption of emerging technologies, such as Voice over Internet Protocol
(VoIP) and concepts, such as Service Oriented Architectures (SOA). Whether businesses are looking to leverage the advantages of enterprise IP telephony or advanced contact center technologies, eOn Communications delivers, IP-ready products to
improve business performance.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



|(a) | Principles of Consolidation
|--- | ---------------------------

The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America, and include the accounts of eOn Communications Corporation, eOn Communications (Beijing)
Corporation Limited (eOn China) formed on June 20, 2006, Cortelco China Corporation, eOn IP Voice, Inc. (EIPV), and Cortelco Systems Holding Corp. (Cortelco) acquired on April 1, 2009. All significant
inter-company accounts and transactions have been eliminated in consolidation.



|(b) | Cash and Cash Equivalents
|--- | -------------------------

All
highly liquid investments with a maturity date of three months or less when purchased are considered to be cash equivalents. At July 31, 2009 there was approximately $83,000 held in foreign bank accounts.



|(c) | Marketable Securities
|--- | ---------------------

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



|(d) | Accounts Receivable
|--- | -------------------

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



|(e) | Inventories
|--- | -----------

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



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|(f) | Property and Equipment
|--- | ----------------------

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



|(g) | Intangible Assets
|--- | -----------------

Intangibles
represent process technology acquired from Aelix Systems Inc. (Aelix) and software development costs. Aelix was the Companys 100% owned subsidiary, which was closed effective April 1, 2008. The Company recorded amortization of $84,000 in
each of the last two fiscal years, and expects to record approximately $84,000 of amortization in each of the next two years.

The Company accounts for costs related to software developed for external use in accordance with SFAS No. 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed. As required by
SFAS No. 86, the Company capitalizes costs in developing software products upon determination that technological feasibility has been established for the product, if that product is to be sold, leased or otherwise marketed. Costs incurred prior
to the establishment of technological feasibility are charged to research and development expense. When the product or enhancement is available for general release to customers, capitalization is ceased, and previously capitalized costs are
amortized based on current and anticipated future revenues for the product, but with an annual amortization amount at least equal to the straight-line amortization over an estimated economic life of five years. The Companys unamortized
software cost at July 31, 2009 was approximately $243,000. The software is under development and is expected to be available for general release to customers in the second fiscal quarter of 2010, at which time the Company will begin amortizing
it.

In accordance with Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-lived Assets, management of the Company evaluates the carrying value of the process technology annually or when a possible impairment is indicated. Based on its evaluation, management believes that no impairment has
occurred as of July 31, 2009.



|(h) | Stock Compensation Plans
|--- | ------------------------

The
Company accounts for stock-based compensation under SFAS No. 123R (SFAS 123R), Share Based Payments. SFAS 123R requires the measurement and recognition of compensation expense for all share-based payment awards based on
estimated fair values. For share-based payments to non-employees, the Company also considers the provisions of Emerging Issues Task Force (EITF) Issue No. 96-18, Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services.

On November 10, 2005, the Financial
Accounting Standards Board (FASB) issued FASB Staff Position No. 123R-3, Transition Election related to Accounting for Tax Effects of Share-Based Payment Awards(FSP 123R-3). The Company has elected to adopt the
alternative transition method provided in the FSP 123R-3 for calculating the tax effects of share-based compensation pursuant to SFAS 123R. The alternative transition method includes simplified methods to establish the beginning balance of the
additional paid-in capital pool (APIC Pool) related to the tax and consolidated statements of cash flows presentation of the tax effects of employee and director share-based awards that are outstanding upon adoption of SFAS 123R.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|(i) | Product Warranties
|--- | ------------------

The Company
generally provides customers a one year product warranty from the date of purchase for the Millennium and eQueue product lines. Warranty for the Cortelco product line ranges from one to five years based upon the product purchased. The Company
estimates the costs of satisfying warranty claims based on analysis of past claims experience and provides for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 0.6% - 2.3% of
product revenues, has historically been comprised of materials and direct labor costs. The Company performs quarterly evaluations of these estimates and any changes in estimates, which could potentially be significant, are included in earnings in
the period in which the evaluations are completed.



|(j) | Income Taxes
|--- | ------------

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

On
August 1, 2007, the Company adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an Interpretation of FASB Statement 109(FIN 48). Based on
managements evaluation, the Company did not have any unrecognized tax benefits, and there was no effect on the Companys opening equity, current operations or cash flows, or its net operating loss carryforwards and related deferred tax
valuation allowance as a result of implementing FIN 48. The Company will recognize any tax-related interest and penalties as a component of income tax expense.



|(k) | Revenue Recognition
|--- | -------------------

The
Companys revenues from its four product lines are the result of separate, individual deliverables:



|                             |  |                         |  |                      |  |                     
|---------------------------- |  | ----------------------- |  | -------------------- |  | --------------------
|                             |  | Type of Revenues Earned
|Product Line                 |  | Equipment/Software      |  | ProfessionalServices |  | MaintenanceContracts
|Millennium PBX System        |  | Individual sale         |  |                      |  |                     
|eQueue Contact Center System |  | Individual sale         |  | Individual sale      |  | Individual sale     
|VOIP Telephones              |  | Individual sale         |  |                      |  |                     
|Cortelco Products            |  | Individual sale         |  |                      |  |                     

Because the eQueue system is very flexible in its applications, some customers
contract for professional services to tailor their system to specific requirements. Professional services are invoiced separately upon completion.

eQueue customers can also elect to enter into maintenance contracts to receive software updates and free technical support. Revenue is booked quarterly for each maintenance period as provided.

The VOIP telephones can be deployed with either the Millennium or the eQueue systems to provide lower call costs as well as flexible
telecom management across multiple locations. These phones may be sold with a new system, but are often sold subsequent to the system sale.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Cortelco sells corded and cordless analog and digital telephones capable of operating in
the multiple PBX, Key System and Centrex environments primarily through stocking distributors.

The Company records shipping
and handling fees billed to customers as revenue, and shipping and handling costs incurred with the delivery of products as cost of sales.

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



|(l) | Earnings Per Share
|--- | ------------------

The Company
follows SFAS No. 128, Earnings Per Share, which requires disclosure of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available to common stockholders by the weighted average
number of common shares outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been
outstanding if the potentially dilutive common shares, such as options, had been issued. Basic weighted average shares outstanding were 2,735,251 and 2,725,280, for the years ended July 31, 2009 and 2008, respectively. During fiscal years ended
July 31, 2009 and 2008, potentially dilutive shares were excluded from the computation of dilutive loss per share because the Company has a net loss from operations for the periods and their effect would have been anti-dilutive.



|(m) | 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. The fair value of related party accounts receivable, related
party accounts payable, and related party notes payable are not practical to estimate due to the related party nature of the underlying transactions.

In September 2006, the FASB issued FASB Statement No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 defines fair value, establishes a framework
for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 were adopted by the Company on August 1, 2008. In February 2008, the FASB staff
issued FSP No. 157-2 Effective Date of FASB Statement No. 157 (FSP FAS 157-2). FSP FAS 157-2 delayed the effective date of FAS No. 157 for nonfinancial assets and nonfinancial liabilities,
except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The provisions of FSP FAS 157-2 are effective for the Companys fiscal year beginning August 1,
2009, and are not expected to have a significant impact on the consolidated financial statements.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



SFAS No. 157 establishes a fair value hierarchy that prioritizes the inputs to
valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs
(Level 3 measurements). The three levels of the fair value hierarchy under SFAS No. 157 are described below:



|        |  |                                                                                                                                                                         
|------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Level 1 |  | Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;                               
|        | 
|Level 2 |  | Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or
liability;  
|        | 
|Level 3 |  | Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market
activity).

The Companys marketable securities, consisting primarily of money market
securities and U.S. Treasury securities, are valued using quoted market prices in active markets and as such are classified within Level 1 of the fair value hierarchy. The fair value of the marketable securities is calculated as the quoted
market price of the marketable security multiplied by the quantity of securities held by the Company.

The note payable to the
former Cortelco shareholders (See Note 3) is valued using a discounted cash flow analysis of the projected future payments of Cortelco using a discount rate of 15.22%. The note is classified within Level 3 of the fair value hierarchy.

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities
(SFAS No. 159). SFAS No. 159 permits companies to elect to measure eligible financial instruments, commitments and certain arrangements at fair value at specified election dates, with changes in fair value recognized in
earnings at each subsequent reporting period. SFAS No. 159 was effective for eOn on August 1, 2008 and did not have a material impact on the Companys consolidated financial statements.



|(n) | Estimates
|--- | ---------

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



|(o) | Comprehensive Income
|--- | --------------------

SFAS 130,
Reporting Comprehensive Income, establishes standards for reporting and display of comprehensive income and its components and requires a separate statement to report the components of comprehensive income for each period
reported. For the fiscal year ended July 31, 2009, comprehensive income consists of foreign currency translation adjustments. The functional currency of the Companys China operations is the Renminbi Yuan. The financial statements of the
operations were translated into United States dollars using year end rates of exchange for the assets and liabilities and average rates of exchange during the year for revenues, costs and expenses. Translation gains and losses were treated as a
component of stockholders equity. Foreign currency transaction gains and losses are included in determining net (loss) income.



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|(p) | Research and Development Costs
|--- | ------------------------------

The Company allocates expenses to research and development costs based on headcount that is dedicated to research and development activities.



|(q) | Advertising Expense
|--- | -------------------

The Company
expenses advertising expenses as incurred. Advertising expenses for fiscal years 2009 and 2008 were not significant.



|(r) | Segment Reporting
|--- | -----------------

The Company
follows SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information and operates in two business segments: Communications Systems and Services, and Telephony Products. Segment information is consistent
with how management reviews its businesses, makes investing and resource allocation decisions and assesses operating performance.



|(s) | Recently Issued Accounting Standards
|--- | ------------------------------------

In December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations,(SFAS No. 141R). SFAS No. 141R will change the accounting for business combinations. Under SFAS No. 141R, an
acquiring entity will be required to recognize all the assets acquired and liabilities assumed in a transaction at the acquisition-date fair value with limited exceptions. SFAS No. 141R will also change the accounting treatment and disclosure
for certain specific items in a business combination. SFAS No. 141R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Accordingly, any business combinations the Company engages in will be recorded and disclosed following existing GAAP until July 31, 2009. The Company expects SFAS No. 141R will have an impact on accounting for
business combinations once adopted and the effect is dependent upon acquisitions at that time.

In December 2008, the FASB
issued FASB Staff Position (FSP) SFAS 141(R)-1, Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies, which amends the accounting in SFAS 141(R) for assets and
liabilities arising from contingencies in a business combination. The FSP requires that pre-acquisition contingencies be recognized at fair value, if fair value can be reasonably determined.

If fair value cannot be reasonably determined, the proposed FSP requires measurement based on the best estimate in accordance with SFAS 5,
Accounting for Contingencies. The FSP is effective for fiscal years beginning after December 15, 2008. The Company expects FSP SFAS 141(R)-1 will have an impact on accounting for business combinations once adopted and the
effect is dependent upon acquisitions at that time.

In December 2007, the FASB issued SFAS No. 160, Noncontrolling
Interest in Consolidated Financial StatementsAn Amendment of ARB No. 51,or SFAS No. 160. SFAS No. 160 establishes new accounting and reporting standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years beginning on or after December 15, 2008. The Company does not expect SFAS No. 160 to have a significant impact on its consolidated financial statements.

In March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative Instruments and Hedging Activitiesan
amendment of FASB Statement No. 133 (SFAS No. 161) effective for financial statements issued



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



for fiscal years and interim periods beginning after November 15, 2008. SFAS No. 161 requires an entity to provide enhanced disclosures about derivative instruments and hedging
activities. The Company does not expect SFAS No. 161 to have a material impact on its consolidated financial statements.

In April 2008, the FASB issued FASB Staff Position No. 142-3, Determination of the Useful Life of Intangible Assets (FSP No. 142-3). FSP No. 142-3 amends the factors that should be considered in developing
renewal or extension assumptions used to determine the useful life of a recognized intangible asset under FASB Statement No. 142. The intent of this FSP is to improve the consistency between the useful life of an intangible asset determined
under SFAS No. 142 and the period of expected cash flows used to measure the fair value of the asset under SFAS No. 141R. FSP No. 142-3 is effective for fiscal years beginning after December 15, 2008, and interim periods within
those fiscal years. The Company is evaluating the potential impact of this FASB Staff Position on its consolidated financial statements.

In June 2008, the FASB issued EITF No. 07-5, Determining Whether an Instrument (or Embedded Feature) is Indexed to an Entitys Own Stock effective for financial statements issued for
fiscal years and interim periods beginning after December 15, 2008. EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entitys own stock. The adoption
of EITF No. 07-5 is not expected to have a material effect on the Companys consolidated financial statements.

In
October 2008, the FASB issued EITF No. 08-6, Equity Method Investment Accounting Considerations(EITF 08-6), which clarifies the accounting for certain transactions and impairment considerations involving
equity method investments. EITF 08-6 is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2008. The Company is evaluating the potential impact of this EITF on its consolidated financial
statements.

In April 2009, the FASB issued FSP SFAS 107-1 and Accounting Principles Board (APB) 28-1, Interim
Disclosures about Fair Value of Financial Instruments (FSP FAS 107-1), which will require that the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value
of Financial Instruments, be included in interim financial statements. This FSP also requires entities to disclose the method and significant assumptions used to estimate the fair value of financial instruments on an interim and annual basis and
to highlight any changes from prior periods. FSP FAS 107-1 will be effective for interim periods ending after June 15, 2009. The adoption of FSP FAS 107-1 is not expected to have a material impact on the Companys consolidated financial
statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS No. 165), which updates
previous guidance under GAAP and requires disclosure in financial statements of the date through which subsequent events have been evaluated. SFAS No. 165 is effective for interim and annual periods after June 15, 2009 and was adopted by
the Company beginning in the fourth quarter of its fiscal year 2009. The adoption of SFAS No. 165 did not have a material impact on the Companys consolidated results of operation and financial condition.

In June 2009, the FASB approved its Accounting Standards Codification or Codification as the single source of authoritative United States
accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards, is effective for interim or annual financial
periods ending after September 15, 2009. Therefore, in the first quarter of fiscal year 2010, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to
change or alter existing US GAAP, it is not expected to have any impact on the Companys consolidated financial statements.



44



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|3. | Acquisition of Cortelco Systems Holding Corp.
|-- | ---------------------------------------------

On April 1, 2009, the Company acquired Cortelco for up to $11,000,000 in cash. Cortelco merged with a newly formed wholly-owned subsidiary of eOn and is now a wholly-owned subsidiary of eOn. In
exchange for all of the outstanding shares of Cortelco stock, Cortelco shareholders received an initial aggregate payment of $500,000. The Company executed a note payable to Cortelcos former shareholders for $10,500,000 (the Cortelco
Note). The Cortelco Note is non-interest bearing and is to be repaid based primarily upon the level of Cortelco earnings after closing and all Cortelco shareholders are eligible to receive quarterly payments thereunder in cash until the full
consideration has been paid. The fair value of the Cortelco Note payable obligation assumed on the April 1, 2009 acquisition date was estimated using a discounted cash flow method (Level 3 input of the FASB No. 157 hierarchy), and together
with approximately $124,000 in acquisition costs, resulted in a total purchase price of $5,054,000. David Lee, Chairman of eOn, was the Chairman and the controlling shareholder of Cortelco at the date of acquisition.

The following represents the purchase price allocation at the date of the Cortelco acquisition (in thousands):



|                                 |  |   |       |  
|-------------------------------- |  | - | ----- | -
|Cash                             |  | $ | 100   |  
|Accounts receivable              |  |   | 1,578 |  
|Inventories                      |  |   | 3,412 |  
|Deferred income taxes, current   |  |   | 212   |  
|Other current assets             |  |   | 333   |  
|Property and equipment           |  |   | 157   |  
|Deferred income taxes, long-term |  |   | 58    |  
|Other assets                     |  |   | 121   |  
|Current liabilities              |  |   | (917  | )
|                                 |  |   |       |  
|Net assets acquired              |  | $ | 5,054 |  
|                                 |  |   |       |  

The following unaudited pro forma financial information gives effect to the
acquisition as if it had been consummated at the beginning of the periods presented. This information is not necessarily indicative of the operational results that would have occurred if the acquisition had been consummated on the dates indicated
nor is it necessarily indicative of the future consolidated results of operations or financial condition.



|                                            |  |                     |        |   |      |   |        |  
|------------------------------------------- |  | ------------------- | ------ | - | ---- | - | ------ | -
|                                            |  | Year Ended July 31, |       
|                                            |  | 2009                |        |   | 2008 |  
|Revenue                                     |  | $                   | 19,042 |   |      | $ | 22,211 |  
|                                            |  |                     |        |   |      |   |        |  
|Loss from continuing operations             |  | $                   | (72    | ) |      | $ | (2,826 | )
|Loss from discontinued operations           |  |                     |       |   |      |   | (591   | )
|                                            |  |                     |        |   |      |   |        |  
|Net loss                                    |  | $                   | (72    | ) |      | $ | (3,417 | )
|                                            |  |                     |        |   |      |   |        |  
|Basic and diluted pro forma loss per share: |  |                     |        |   |      |   |        |  
|From continuing operations                  |  | $                   | (0.03  | ) |      | $ | (1.03  | )
|From discontinued operations, net of tax    |  |                     | *      |   |      |   | (0.22  | )
|                                            |  |                     |        |   |      |   |        |  
|Basic and diluted pro forma loss per share  |  | $                   | (0.03  | ) |      | $ | (1.25  | )
|                                            |  |                     |        |   |      |   |        |  



|* | Less than $0.01
|- | ---------------



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|4. | Discontinued Operations
|-- | -----------------------

In February 2007, the Companys newly formed subsidiary, EIPV purchased certain accounts receivable, inventory and fixed assets and assumed certain liabilities of One IP Voice, Inc. for $150,000 in order to enter the hosted VoIP
services market. These assets, net of liabilities were purchased under an order of the United States Bankruptcy Court Chapter 11 Order Authorizing Sale of Assets at Auction Out of the Ordinary Course of Business. During the quarter ended
April 30, 2008, the Company sold the assets of EIPV for approximately $90,000. Accordingly, EIPV has been reported as discontinued operations for the year ended July 31, 2008.



|5. | Concentrations of Credit Risk, Major Customers, Major Suppliers and Geographic Information
|-- | ------------------------------------------------------------------------------------------

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

During fiscal years 2009 and 2008, the Company recognized revenue from the federal government of $1,638,000, or 15% of total revenue and
$1,387,000, or 20% of total revenue, respectively. Revenue from four distributors arising from the acquisition of Cortelco for the period from April 1, 2009 through July 31, 2009 was $2,937,000 or 28% of revenue. Revenue from one of these
distributors was $1,525,000 or 14% of total revenue for the year ended July 31, 2009. As of July 31, 2009 and 2008, the Company had receivables from the federal government of $600,000 and $223,000, respectively. As of July 31, 2009,
the Company had receivables from four major distributors of $1,428,000. Two of these distributors accounted for 15% each of trade accounts receivable at July 31, 2009.

The Company purchases approximately 82% of its Millennium phones, systems and system cards from one contract manufacturer. Although the
Company utilizes another contract manufacturer, a change in suppliers could cause a delay in manufacturing and a possible loss of sales, which could adversely affect operating results. During fiscal years 2009 and 2008, purchases from this vendor
totaled approximately $514,000 and $972,000, respectively. As of July 31, 2009 and 2008, the balances payable to this contract manufacturer were $50,000 and $90,000, respectively.

The Company purchases approximately 61% of its Cortelco phones from two major suppliers. A change in suppliers could cause a delay in
manufacturing and a possible loss of sales, which could adversely affect operating results. During fiscal year 2009, subsequent to the Companys acquisition of Cortelco on April 1, 2009, purchases from these two suppliers totaled
approximately $1,534,000. As of July 31, 2009, the balances payable to these two suppliers were $747,000.



|6. | Marketable Securities
|-- | ---------------------

At
July 31, 2008, marketable securities consisted of taxable auction rate securities (ARS), with stated maturities ranging from 24-40 years. In the third fiscal quarter of 2008, because there was insufficient observable



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



ARS market information, a temporary impairment of $75,000 was recorded against the securities carrying value. The securities were liquidated in October 2008 at their par value of
$1,000,000, and accordingly, the temporary impairment was reversed in the fourth fiscal quarter of 2008.



|7. | Inventories
|-- | -----------

Inventories
consist of the following as of July 31, 2009 and 2008 (in thousands):



|                                       |  |      |        |   |      |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                       |  | 2009 |        |   | 2008 |  
|Raw materials and purchased components |  | $    | 1,626  |   |      | $ | 961    |  
|Finished goods                         |  |      | 5,098  |   |      |   | 2,759  |  
|                                       |  |      |        |   |      |   |        |  
|Total                                  |  |      | 6,724  |   |      |   | 3,720  |  
|Inventory obsolescence reserve         |  |      | (1,692 | ) |      |   | (1,219 | )
|                                       |  |      |        |   |      |   |        |  
|Inventory                              |  | $    | 5,032  |   |      | $ | 2,501  |  
|                                       |  |      |        |   |      |   |        |  



|8. | Prepaid and Other Current Assets
|-- | --------------------------------

Prepaid and other current assets consist of the following as of July 31, 2009 and 2008 (in thousands):



|                             |  |      |     |      |   |    
|---------------------------- |  | ---- | --- | ---- | - | ---
|                             |  | 2009 |     | 2008
|Refundable facility deposits |  | $    | 24  |      | $ | 57 
|Prepaid expenses             |  |      | 216 |      |   | 103
|Other                        |  |      | 2   |      |   | 17 
|                             |  |      |     |      |   |    
|Total                        |  | $    | 242 |      | $ | 177
|                             |  |      |     |      |   |    



|9. | Property and Equipment
|-- | ----------------------

Property and equipment consist of the following as of July 31, 2009 and 2008 (in thousands):



|                               |  |      |        |   |      |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                               |  | 2009 |        |   | 2008 |  
|Leasehold improvements         |  | $    | 317    |   |      | $ | 350    |  
|Equipment                      |  |      | 1,713  |   |      |   | 1,572  |  
|Furniture and fixtures         |  |      | 345    |   |      |   | 375    |  
|                               |  |      |        |   |      |   |        |  
|Total                          |  |      | 2,375  |   |      |   | 2,297  |  
|Less: accumulated depreciation |  |      | (2,166 | ) |      |   | (2,121 | )
|                               |  |      |        |   |      |   |        |  
|Property and equipment, net    |  | $    | 209    |   |      | $ | 176    |  
|                               |  |      |        |   |      |   |        |  



47



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



|10. | Accrued Expenses and Other
|--- | --------------------------

Accrued expenses and other consist of the following as of July 31, 2009 and 2008 (in thousands):



|                      |  |      |       |      |   |      
|--------------------- |  | ---- | ----- | ---- | - | -----
|                      |  | 2009 |       | 2008
|Employee compensation |  | $    | 131   |      | $ | 288  
|Vacation              |  |      | 104   |      |   | 38   
|Deferred income       |  |      | 348   |      |   | 338  
|Warranty reserve      |  |      | 196   |      |   | 82   
|Professional fees     |  |      | 246   |      |   | 207  
|Other                 |  |      | 603   |      |   | 192  
|                      |  |      |       |      |   |      
|Total                 |  | $    | 1,628 |      | $ | 1,145
|                      |  |      |       |      |   |      

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

The requirements of FIN 45 are applicable to the Companys product warranty
liability. As of July 31, 2009 and 2008, the Companys product warranty liability recorded in other accrued liabilities was $196,000 and $82,000, respectively. The following table summarizes the activity related to the product warranty
liability during fiscal years 2009 and 2008 (in thousands):



|                                                  |  |      |     |   |      |   |     |  
|------------------------------------------------- |  | ---- | --- | - | ---- | - | --- | -
|                                                  |  | 2009 |     |   | 2008 |  
|Balance at beginning of period                    |  | $    | 82  |   |      | $ | 133 |  
|Warranty accrual acquired in Cortelco transaction |  |      | 120 |   |      |   |     |  
|Accruals for warranty liability                   |  |      | 42  |   |      |   | (4  | )
|Warranty expense                                  |  |      | (48 | ) |      |   | (47 | )
|                                                  |  |      |     |   |      |   |     |  
|Balance at end of period                          |  | $    | 196 |   |      | $ | 82  |  
|                                                  |  |      |     |   |      |   |     |  



|11. | Notes Payable, Related Party
|--- | ----------------------------

On June 20, 2008, eOn China issued a note to Hangzhou Nature Opto Company in exchange for RMB 945,000, or approximately $138,000. The note payable is non-interest bearing and was due January 19, 2009. The board of directors has
approved the sale of eOns interest in Smbio-ES Park Business Outsourcing Joint Venture to Symbio in return for Symbios assumption of the note payable to Hangzhou Nature Opto Company. (See Note 14.)

Cortelco has a line of credit based on an asset formula involving accounts receivable and inventory up to a maximum of $2,500,000, none of
which was drawn on as of July 31, 2009. The line of credit is secured by substantially all of Cortelcos assets. The loans interest rate (4% at July 31, 2009) is floating based on LIBOR and expires June 29, 2010.

The fair value of the Cortelco Note payable obligation was valued at approximately $4,430,000 at the April 1, 2009
Cortelco acquisition date using a discounted cash flow analysis of the projected future payments and a discount rate of 15.22%. The $4,910,000 Cortelco Note balance at July 31, 2009 includes $480,000 of interest expense during the year ended
July 31, 2009 imputed at the 15.22% discount rate using the effective interest method.



48



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Actual payments under the Cortelco Note, which are to be based on future earnings of
Cortelco, may differ significantly from the projected payments estimated at the Cortelco Notes inception. These differences may result in significant fluctuations in periodic interest expense in order to properly reflect interest expense over
the actual life of the Cortelco Note.



|12. | Income Taxes
|--- | ------------

No income
tax benefit from continuing operations was recorded for the year ended July 31, 2009 and 2008 as management was unable to conclude that it was more likely than not that the income tax benefit would be realized.

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

A reconciliation between the income tax expense recognized in the Companys consolidated statement of operations and the income tax
benefit computed by applying the domestic federal statutory income tax rate to (loss) income before income taxes for fiscal years 2009 and 2008 is as follows (in thousands):



|                                                   |  |      |      |   |      |   |        |  
|-------------------------------------------------- |  | ---- | ---- | - | ---- | - | ------ | -
|                                                   |  | 2009 |      |   | 2008 |  
|Income tax benefit at federal statutory rate (35%) |  | $    | (117 | ) |      | $ | (1,208 | )
|State income taxes                                 |  |      | (20  | ) |      |   | (207   | )
|Benefit of net operating loss carry-forwards       |  |      |     |   |      |   |       |  
|Change in valuation allowance                      |  |      | 292  |   |      |   | 1,274  |  
|Other, net                                         |  |      | (150 | ) |      |   | 141    |  
|                                                   |  |      |      |   |      |   |        |  
|Total income tax expense                           |  | $    | 5    |   |      | $ |       |  
|                                                   |  |      |      |   |      |   |        |  

The deferred tax effects of the Companys principal temporary differences at
July 31, 2009 and 2008 are as follows (in thousands):



|                                           |  |      |         |   |      |   |        |  
|------------------------------------------ |  | ---- | ------- | - | ---- | - | ------ | -
|                                           |  | 2009 |         |   | 2008 |  
|Allowance for doubtful receivables         |  | $    | 129     |   |      | $ | 273    |  
|Inventories                                |  |      | 708     |   |      |   | 519    |  
|Basis difference in property and equipment |  |      | (1      | ) |      |   | (11    | )
|Intangible assets                          |  |      | (30     | ) |      |   |       |  
|Accrued warranty costs                     |  |      | 76      |   |      |   | 31     |  
|Accrued expenses and other                 |  |      | (478    | ) |      |   | 192    |  
|Deferred revenue                           |  |      | 135     |   |      |   | 131    |  
|Net operating loss carry-forwards          |  |      | 9,882   |   |      |   | 8,724  |  
|Valuation allowance                        |  |      | (10,151 | ) |      |   | (9,859 | )
|                                           |  |      |         |   |      |   |        |  
|Total deferred tax asset                   |  | $    | 270     |   |      | $ |       |  
|                                           |  |      |         |   |      |   |        |  

Due to uncertainties surrounding the timing of realizing the benefits of its net
favorable tax attributes in future tax returns; to the extent that it is more likely than not that deferred tax assets may not be realized, the Company has recorded a valuation allowance against its deferred tax assets at July 31, 2009 and
2008.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



At July 31, 2009, the Company has federal and state net operating loss
carry-forwards of approximately $25,000,000 which expire on various dates through 2028.



|13. | Stock-Based Compensation
|--- | ------------------------

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.

Equity Incentive Plans

No grants were made under the 1997 Equity Incentive Plan during fiscal years 2009 and 2008. The Board of Directors has declared that no future grants will be made under this plan.

During fiscal year 1999, the Board of Directors authorized up to an aggregate of 400,000 shares of the Companys common stock for
issuance under the 1999 Equity Incentive Plan. During fiscal years 2008, 16,100 fully vested shares of stock were granted to twenty-two non-executive employees at no cost to the employee and, on the grant date, had a fair market value of
approximately $35,000.

During fiscal year 2001, the Board of Directors authorized up to an aggregate of 100,000 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 fiscal year 2009, 2,500 options were issued under this plan with an exercise price of
$.54 per share and a fair value of $.44, vesting in four years. During fiscal year 2008, no options were issued under this plan.

Employee
Stock Purchase Plan

During 1999, the board of directors adopted an Employee Stock Purchase Plan, which permits employees
to purchase up to 50,000 shares of the Companys common stock. The plan was amended in 2005 to increase the number of shares available under the plan to 200,000. The purchase price under this plan is 85% of the fair market value of the common
stock at the beginning of an offering period or on a purchase date, whichever is less. Offering periods generally last one year with purchase dates six and twelve months from the beginning of an offering period. During fiscal years 2009 and 2008,
employees purchased 4,384 and 3,879 shares of common stock respectively, under this plan. In September 2009, employees purchased 1,222 shares under this plan.

Stock Compensation

Under SFAS 123R, compensation cost is calculated on the
date of grant using the fair value of the option as determined using the Black-Scholes option pricing model. The compensation cost is then amortized straight-line over the vesting period. The Black-Scholes valuation calculation requires the Company
to estimate key assumptions such as expected term, volatility and forfeiture rates to determine the stock options fair value. The estimate of these key assumptions is based on historical information and judgment regarding market factors and trends.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Expected volatilities are based on historical daily closing prices adjusted for expected
future volatility. The Company believes that implied volatility is more reflective of market conditions and a better indicator of expected volatility than historical volatility. The Company uses historical information to calculate expected life of
option grants. The Company believes that historical information is currently reflective of the economic life of outstanding option grants. The dividend yield is determined by dividing the expected per share dividend during the coming year by the
average fair market value of the stock during the quarter. The Company has not historically declared any cash dividends on its common stock, and currently intends to retain any retained earnings to finance the operation and expansion of the business
and therefore does not expect to pay cash dividends on the common stock in the foreseeable future. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant.

The assumptions used to value option grants and the Employee Stock Purchase Plan for the years ended July 31, 2009 and 2008 are as
follows:



|                         |  |             |   |  |      |  
|------------------------ |  | ----------- | - |  | ---- | -
|                         |  | 2009        |   |  | 2008 |  
|Volatility               |  | 69% - 114   | % |  | 107  | %
|Expected term (in years) |  | 6.25        |   |  | 6.25 |  
|Dividend yield           |  |            |   |  |     |  
|Risk free interest rate  |  | .44% - 1.92 | % |  | 1.83 | %

Total stock-based compensation recognized for the year ended July 31, 2009,
related to stock options vested, stock grants and ESPP shares issued during the year ended July 31, 2009, is as follows (in thousands):



|                                    |  |              |    |      |   |       |  |   |   
|----------------------------------- |  | ------------ | -- | ---- | - | ----- |  | - | --
|Income Statement Classification     |  | OptionGrants |    | ESPP |   | Total
|Selling, general and administrative |  | $            | 22 |      | $ | 3     |  | $ | 25
|Research and development            |  |              |   |      |   |      |  |   |  
|                                    |  |              |    |      |   |       |  |   |   
|Total                               |  | $            | 22 |      | $ | 3     |  | $ | 25
|                                    |  |              |    |      |   |       |  |   |   

As of July 31, 2009, the Company has total unrecognized compensation costs of
$1,000 related to unvested stock options outstanding under the Plans. These costs are expected to be recognized over a weighted average period of 3.2 years ending during fiscal year 2013.



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



General Stock Option Information

Activity in the Companys stock option plans during fiscal years 2009 and 2008 is as follows:



|                  |  |                         |   |  |                   |   |  |                              |      
|----------------- |  | ----------------------- | - |  | ----------------- | - |  | ---------------------------- | -----
|                  |  | 2009                   
|                  |  | SharesAvailableforGrant |   |  | SharesOutstanding |   |  | WeightedAverageExercisePrice
|Beginning of year |  | 181,871                 |   |  | 210,096           |   |  | $                            | 17.30
|Granted           |  | (2,500                  | ) |  | 2,500             |   |  |                              | 0.54 
|Exercised         |  |                        |   |  |                  |   |  |                              |     
|Cancelled         |  | 23,543                  |   |  | (39,233           | ) |  |                              | 37.60
|                  |  |                         |   |  |                   |   |  |                              |      
|End of year       |  | 202,914                 |   |  | 173,363           |   |  | $                            | 12.46
|                  |  |                         |   |  |                   |   |  |                              |      
|                  | 
|                  |  | 2008                   
|                  |  | SharesAvailableforGrant |   |  | SharesOutstanding |   |  | WeightedAverageExercisePrice
|Beginning of year |  | 87,332                  |   |  | 330,728           |   |  | $                            | 15.63
|Granted           |  | (16,100                 | ) |  |                  |   |  |                              |     
|Exercised         |  |                        |   |  |                  |   |  |                              |     
|Cancelled         |  | 110,639                 |   |  | (120,632          | ) |  |                              | 12.72
|                  |  |                         |   |  |                   |   |  |                              |      
|End of year       |  | 181,871                 |   |  | 210,096           |   |  | $                            | 17.30
|                  |  |                         |   |  |                   |   |  |                              |      

Information regarding the stock options outstanding under the Companys stock
option plans at July 31, 2009 is summarized as follows:



|                         |  |                            |  |                                         |  |                              |        |                            |         |                              |   |       
|------------------------ |  | -------------------------- |  | --------------------------------------- |  | ---------------------------- | ------ | -------------------------- | ------- | ---------------------------- | - | ------
|Range of Exercise Prices |  | Outstandingat July 31,2009 |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |        | Exercisableat July 31,2009 |         | WeightedAverageExercisePrice
|$  0.00  $  25.00       |  | 167,843                    |  | 4.7 years                               |  | $                            | 10.74  |                            | 165,309 |                              | $ | 10.89 
|$25.01  $  50.00        |  |                           |  |                                         |  |                              |       |                            |        |                              |   |      
|$50.01  $  75.00        |  | 4,920                      |  | .6 years                                |  |                              | 57.98  |                            | 4,920   |                              |   | 57.98 
|$75.01  $125.00         |  | 600                        |  | .6 years                                |  |                              | 121.25 |                            | 600     |                              |   | 121.25
|                         |  |                            |  |                                         |  |                              |        |                            |         |                              |   |       
|                         |  | 173,363                    |  | 4.6 years                               |  | $                            | 12.46  |                            | 170,829 |                              | $ | 12.64 
|                         |  |                            |  |                                         |  |                              |        |                            |         |                              |   |       

Activity in the Companys nonvested options during fiscal year 2009 is as
follows:



|                  |  |                 |   |  |                              |     
|----------------- |  | --------------- | - |  | ---------------------------- | ----
|                  |  | NonvestedShares |   |  | WeightedAverageExercisePrice
|Beginning Balance |  | 4,235           |   |  | $                            | 6.23
|Options granted   |  | 2,500           |   |  |                              | 0.54
|Options vested    |  | (4,201          | ) |  |                              | 6.24
|Options cancelled |  |                |   |  |                              |    
|                  |  |                 |   |  |                              |     
|Ending Balance    |  | 2,534           |   |  | $                            | 0.61
|                  |  |                 |   |  |                              |     



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



The aggregate intrinsic value of both options outstanding and options exercisable as of
July 31, 2009 was $0. The aggregate intrinsic value of the 4,201 options which vested during the year ended July 31, 2009 was $0.



|14. | Related Parties
|--- | ---------------

Cortelco, Inc. and
Cortelco Systems Holding Corp.

Cortelco, Inc. is a subsidiary of Cortelco and a supplier of Millennium and eQueue
peripheral hardware. On March 8, 2008, the Company and Cortelco entered into an outsourcing agreement whereby Cortelco provided management for all of eOns U.S. operations. Included in the management services were sales, marketing, product
management, engineering, technical support, quality assurance, accounting, and information technology. Charges incurred for products and services in fiscal year 2009 prior to the Companys acquisition of Cortelco on April 1, 2009 were
approximately $535,000 and approximately $113,000 was included in the accounts payable balance at April 1, 2009. David Lee, the Companys Chairman, was the Chairman and a controlling shareholder of Cortelco.

Cortelco Systems Puerto Rico

Cortelco Systems Puerto Rico (CSPR) was a wholly-owned subsidiary of the Company until July 31, 2002, when it was spun off to the shareholders of eOn. David Lee is a significant shareholder of CSPR. Since the spin-off, the
Company has not had significant transactions with CSPR. The following represent related party transactions for each of the fiscal years ended July 31 (in thousands):



|                               |  |      |     |   |      |   |     |  
|------------------------------ |  | ---- | --- | - | ---- | - | --- | -
|                               |  | 2009 |     |   | 2008 |  
|Receivable from CSPR           |  |      |     |   |      |   |     |  
|Balance at beginning of period |  | $    |    |   |      | $ | 9   |  
|Receivable acquired in merger  |  |      | 6   |   |      |   |    |  
|Purchases from CSPR            |  |      | 9   |   |      |   | 7   |  
|Payments to CSPR               |  |      | (14 | ) |      |   | (16 | )
|                               |  |      |     |   |      |   |     |  
|Balance at end of period       |  | $    | 1   |   |      | $ |    |  
|                               |  |      |     |   |      |   |     |  



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



The Company acquired 300,100 shares (or 18.89%) of CSPR stock as the result of the
acquisition of Cortelco on April 1, 2009. These shares were valued at approximately $111,000 at April 1, 2009 based on the quoted market price of CSPRs shares at that date. Because David Lee, Chairman of eOn, is a significant
shareholder of CSPR, eOn is accounting for this investment using the equity method of accounting, and eOns proportionate share of CSPRs earnings or losses, are included in income in the consolidated financial statements. The
Companys proportionate share of CSPRs net income was approximately $29,000 for the period from April 1, 2009 through July 31, 2009. Summarized financial information of CSPR as of July 31, 2009 and for the period from
April 1, 2009 through July 31, 2009, is as follows (in thousands):



|                                           |  |                                                |        |  
|------------------------------------------ |  | ---------------------------------------------- | ------ | -
|                                           |  | July 31, 2009                                  |       
|Assets:                                    |  |                                                |        |  
|Current Assets                             |  | $                                              | 3,151  |  
|Property and equipment                     |  |                                                | 63     |  
|Other assets                               |  |                                                | 94     |  
|                                           |  |                                                |        |  
|Total assets                               |  | $                                              | 3,308  |  
|                                           |  |                                                |        |  
|Liabilities and stockholders equity:      |  |                                                |        |  
|Current liabilities                        |  | $                                              | 1,864  |  
|                                           |  |                                                |        |  
|Total liabilities                          |  |                                                | 1,864  |  
|Stockholders equity                       |  |                                                | 1,444  |  
|                                           |  |                                                |        |  
|Total liabilities and stockholders equity |  | $                                              | 3,308  |  
|                                           |  |                                                |        |  
|                                           | 
|                                           |  | Period from April 1, 2009through July 31, 2009 |       
|Revenues                                   |  | $                                              | 3,388  |  
|Cost of revenues                           |  |                                                | (2,562 | )
|                                           |  |                                                |        |  
|Gross profit                               |  |                                                | 826    |  
|Expenses                                   |  |                                                | (675   | )
|                                           |  |                                                |        |  
|Net income                                 |  | $                                              | 151    |  
|                                           |  |                                                |        |  



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Spark Technologies, Inc.

Aelix and eOn China performed engineering development projects for Spark Technologies, Inc (Spark), a California company that is
majority owned by David Lee, the Chairman and major shareholder of eOn. On November 1, 2006, the Company entered into a professional services agreement with Spark. Under the terms of the agreement, Spark was charged based upon actual personnel,
actual operating costs and allocated general overhead based upon pro rata head count, plus a margin of 10% for these services. On April 1, 2008, an outsourcing services transfer agreement was entered into and eOn transferred all of its rights
and obligations under the professional services agreement with Spark to Symbio Investment Corporation (Symbio). eOn holds an equity interest in Symbio. The following represents related party transactions for each of the fiscal years
ended July 31 (in thousands):



|                                             |  |      |     |   |      |   |      |  
|-------------------------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|                                             |  | 2009 |     |   | 2008 |  
|Receivable from Spark                        |  |      |     |   |      |   |      |  
|Balance at beginning of period               |  | $    |    |   |      | $ | 108  |  
|Engineering development and costs            |  |      | 3   |   |      |   | 370  |  
|Payments received from Spark                 |  |      |    |   |      |   | (344 | )
|Payables offset against accounts receivable  |  |      | (3  | ) |      |   | (134 | )
|                                             |  |      |     |   |      |   |      |  
|Balance at end of period                     |  | $    |    |   |      | $ |     |  
|                                             |  |      |     |   |      |   |      |  
|                                             |  |     
|                                             |  | 2009 |     |   | 2008 |  
|Payable to Spark                             |  |      |     |   |      |   |      |  
|Balance at beginning of period               |  | $    |    |   |      | $ | 37   |  
|Deposit received from Spark                  |  |      |    |   |      |   |     |  
|Operating costs billed to eOn                |  |      | 67  |   |      |   | 97   |  
|Payments to Spark                            |  |      | (64 | ) |      |   |     |  
|Balance offset against receivable from Spark |  |      | (3  | ) |      |   | (134 | )
|                                             |  |      |     |   |      |   |      |  
|Balance at end of period                     |  | $    |    |   |      | $ |     |  
|                                             |  |      |     |   |      |   |      |  

Symbio

On August 1, 2007 and August 27, 2007, the Company made strategic investments in Symbio of $500,000 and $400,000 for 250,000 and 200,000 shares, respectively, or approximately 3% of Symbio.
Symbio is a China-based provider of software development, testing, and globalization outsourcing services to multinational companies. The investment is expected to establish eOn as a preferred provider of telephony and contact center solutions for
Symbios outsourcing engagements requiring customer interaction management. eOn also gains the ability to provide Symbio outsourcing services to its customer base. Symbio is a privately held entity and the Company accounts for its 3% investment
by the cost method.

At the time of the second investment in Symbio for $400,000, the Company received a put option from David
Lee, effective beginning January 1, 2008 and expiring January 1, 2011. The put option allows the Company to sell to David Lee a maximum aggregate of 200,000 shares of its investment in Symbio for a per share price of $2.00.

In consideration of the put option, in the event that the 200,000 shares are sold without exercise of the put option before January 1,
2011, the Company has agreed to pay David Lee 50% of the proceeds in excess of $1,000,000.



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



In conjunction with the purchase of these shares, David Lee was appointed to the board
of directors of Symbio and has been elected chairman. eOn has been granted 45,000 shares of Symbio as compensation for Mr. Lees services. These shares have been valued at $90,000, and have been recorded as an increase in investments and a
capital contribution by David Lee.

Symbio currently shares office space and personnel with eOn in China and is billed for
expenses attributable to Symbios business. Symbio has contracted to assist eOn in the United States with software development. The following represent related party transactions for each of the fiscal years ended July 31 (in thousands):



|                                               |  |      |      |   |      |   |     |  
|---------------------------------------------- |  | ---- | ---- | - | ---- | - | --- | -
|                                               |  | 2009 |      |   | 2008 |  
|Receivable from Symbio                         |  |      |      |   |      |   |     |  
|Balance at beginning of period                 |  | $    | 84   |   |      | $ |    |  
|Billings and accruals for operating expenses   |  |      | 272  |   |      |   | 128 |  
|Payments received from Symbio                  |  |      | (347 | ) |      |   | (44 | )
|                                               |  |      |      |   |      |   |     |  
|Balance at end of period                       |  | $    | 9    |   |      | $ | 84  |  
|                                               |  |      |      |   |      |   |     |  
|                                               |  |     
|                                               |  | 2009 |      |   | 2008 |  
|Payable to Symbio                              |  |      |      |   |      |   |     |  
|Balance at beginning of period                 |  | $    |     |   |      | $ |    |  
|Billings and accruals for engineering services |  |      | 11   |   |      |   |    |  
|Payments to Symbio                             |  |      |     |   |      |   |    |  
|                                               |  |      |      |   |      |   |     |  
|Balance at end of period                       |  | $    | 11   |   |      | $ |    |  
|                                               |  |      |      |   |      |   |     |  

Symbio-ES Park Business Processing Outsourcing Joint Venture

On August 12, 2008, Hangzhou East Software Park (Hangzhou), Symbio and eOn formed Symbio-ESPark Business Processing
Outsourcing Joint Venture (the Joint Venture) located in Hangzhou, China.

On September 9, 2008, eOn invested
RMB 900,000 (approximately $136,000) into the Joint Venture for a 9% ownership interest in the Joint Venture. On June 20, 2008, the Company received approximately $138,000 from an entity related to Hangzhou and executed a promissory note due
January 19, 2009 (Note 11). The eOn Board of Directors has approved the sale of eOns interest in the Joint Venture to Symbio in return for Symbios assumption of the promissory note. The sale has not yet been completed.

The following represents related party transactions for the fiscal year ended July 31, 2009 (in thousands):



|                                  |  |   |     |  
|--------------------------------- |  | - | --- | -
|Receivable from Hangzhou          |  |   |     |  
|Balance at beginning of period    |  | $ |    |  
|Billings for product and services |  |   | 220 |  
|Payments received from Hangzhou   |  |   | (66 | )
|                                  |  |   |     |  
|Balance at end of period          |  | $ | 154 |  
|                                  |  |   |     |  



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Joint Venture

On October 24, 2008, eOn China invested RMB 400,000 (approximately $58,000) into a joint venture in TaiCang, China.eOn China borrowed RMB 300,000 from an unrelated third party in TaiCang and
RMB 100,000 from an employee in October to make this investment. These borrowings were unsecured and interest free. In November 2008, David Lee purchased this investment from eOn China for $58,000 and took personal ownership of the investment. The
proceeds from David Lee were used to repay these borrowings in November 2008. The following represents related party transactions for the fiscal year ended July 31, 2009 (in thousands):



|                                  |  |   |     |  
|--------------------------------- |  | - | --- | -
|Receivable from TaiCang           |  |   |     |  
|Balance at beginning of period    |  | $ |    |  
|Billings for product and services |  |   | 135 |  
|Payments received from TaiCang    |  |   | (71 | )
|                                  |  |   |     |  
|Balance at end of period          |  | $ | 64  |  
|                                  |  |   |     |  



|15. | Employee Savings Plan
|--- | ---------------------

Substantially all U.S. employees of the Company can participate in the eOn Communications Corporation Profit Sharing Savings Plan, which is qualified under Section 401 of the Internal Revenue Code. Under the provisions of the plan, all
participants may contribute up to 60% of their compensation, subject to limitations established by the Internal Revenue Service. The Company may contribute a matching contribution of not less than 50% of the employee contributions up to 6% of the
employees compensation. The Company may also provide special discretionary contributions equal to a percentage of an employees annual compensation and/or an amount determined by management. During fiscal years 2009 and 2008,
contributions made by the Company under this plan totaled $19,000 and $35,000, respectively.

Cortelco offers a
Section 401(k) Safe Harbor Profit Sharing Plan and Trust, a tax-qualified retirement plan, to eligible employees. Under the provisions of the plan, all participants may contribute a percentage of their compensation, subject to limitations
established by the Internal Revenue Service. Cortelco contributes a matching contribution in an amount specified by management each year. Discretionary contributions may be made to the profit sharing portion of Cortelcos plan in an amount
specified by management annually. Company contributions made under the Cortelco plan since April 1, 2009 totaled $18,000.



|16. | Commitments and Contingencies
|--- | -----------------------------



|(a) | Operating Leases
|--- | ----------------

The Company is
obligated under non-cancelable operating lease agreements for its primary warehouse, office facilities and certain office equipment. Future minimum annual lease payments totaling $396,000 under non-cancelable operating lease agreements with
remaining terms greater than one year are as follows (dollars in thousands):



|      |  |          |    
|----- |  | -------- | ---
|      |  | July 31,
|2010  |  | $        | 247
|2011  |  | $        | 114
|2012  |  | $        | 35 
|      |  |          |    
|Total |  | $        | 396
|      |  |          |    



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



Rent expense for operating leases for the years ended July 31, 2009 and 2008
totaled $279,000 and $388,000, respectively.

On August 10, 2009, the Companys lease for 11,321 sq. ft. of office
and warehouse space in Kennesaw, Georgia was cancelled and the Company entered into a new sublease for approximately 2,002 sq. ft. The new sublease has a term of three years and provides for rent expense of approximately $2,500 per month.

In July 2009, the Company terminated its leases for approximately 4,171 sq. ft. of office space in Beijing China. The Company
currently shares space with Symbio in Beijing.

The Company leases approximately 3,780 sq. ft. of office space in San Jose,
California. This joint lease with Spark Technologies has monthly rent of approximately $3,700 and expires December 31, 2010.

The Company leases approximately 77,000 sq. ft. of office and warehouse space in Corinth, Mississippi. The lease has monthly rent of approximately $12,000 and has a term of four years expiring in December 2010.



|(b) | Commitments
|--- | -----------

At July 31,
2007, the Company had outstanding commitments for inventory purchases under open purchase orders of $1,832,000. Purchase commitments for Cortelco account for approximately 91% of the value of the open purchase orders.



|(c) | Spark Purchase Option
|--- | ---------------------

On
March 31, 2006, the Company entered into an Acquisition Option Agreement (the Agreement) with Spark Technology Corporation. Spark designs and markets accessories for wireless telephones. Its primary product, CellStik, is a
small memory device that allows the user to backup, enter, edit and transfer their cell phone contacts. Under the terms of the Agreement, the Company converted notes receivable of $300,000 to 300,000 shares or 3% of Spark Common Stock and had the
option to purchase all remaining outstanding Spark Common Stock, including options, by issuing 8,665,000 (or 1,733,000 after the effect of the Companys 1:5 reverse stock split) shares of the Companys common stock. In March 2008, after
evaluating the current status of Spark and the option, the eOn Board of Directors decided to not exercise the option.

The
Agreement further provided that in the event the Company did not exercise this option, the Company could require Spark or David Lee, the Companys Chief Executive Officer and major shareholder, to repurchase the Companys Spark shares for
$300,000 within 60 days. David Lee purchased the shares and paid the Company $300,000 on June 13, 2008.



|(d) | Litigation
|--- | ----------

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



|17. | Segments
|--- | --------

The
Companys reportable segments are Communications Systems and Services and Telephony Products, each of which offers different products and services. The Communications Systems and Services segment develops and markets products that help
businesses communicate more effectively and efficiently with their



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EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2009 and 2008



customers. The Telephony Products segment provides telephone products, service and support to businesses and organizations. Performance of each segment is assessed independently. Prior to the
acquisition of Cortelco on April 1, 2009, the Company reported all of its operations as one segment. Segment reporting for activity for the fiscal year ended and balances as of July 31, 2009 follows:



|                                |  |                                    |   |  |                    |   |  |        |  
|------------------------------- |  | ---------------------------------- | - |  | ------------------ | - |  | ------ | -
|                                |  | CommunicationsSystems and Services |   |  | Telephony Products |   |  | Total  |  
|Revenue                         |  | 6,414                              |   |  | 4,231              |   |  | 10,645 |  
|Income (loss) from operations   |  | (769                               | ) |  | 435                |   |  | (334   | )
|Provision for income tax        |  |                                   |   |  | (5                 | ) |  | (5     | )
|Net income (loss)               |  | (769                               | ) |  | 430                |   |  | (339   | )
|Total assets                    |  | 6,808                              |   |  | 6,812              |   |  | 13,620 |  
|Capital expenditures            |  | 12                                 |   |  |                   |   |  | 12     |  
|Allowance for doubtful accounts |  | 299                                |   |  | 33                 |   |  | 332    |  
|Depreciation and amortization   |  | 159                                |   |  | 21                 |   |  | 180    |  

Substantially all of the Companys revenues are earned in the United States and
the Peoples Republic of China (PRC). Revenue earned in the PRC for the fiscal year ended July 31, 2009 was approximately $928,000 or 8.7% of total revenue for the fiscal year. During the fiscal year ended July 31, 2008,
revenue in the PRC was approximately $776,000 or 11.1% of total revenue.



|18. | Subsequent Event
|--- | ----------------

The
Company has evaluated events through October 29, 2009 for consideration as a subsequent event to be included in its July 31, 2009 financial statements issued October 29, 2009.



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

None.



|ITEM 9A(T). | CONTROLS AND PROCEDURES.
|----------- | ------------------------

Disclosure
Controls and Procedures.

Our management, with the participation of our chief executive officer and chief financial
officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the
period covered by this report. Based on such evaluation, our chief executive officer and chief financial officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

Internal Control Over Financial Reporting.

There have not been any changes in our internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fourth quarter of 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.

Managements Annual Report on Internal Control Over Financial Reporting.

Management of the Company is responsible for establishing and maintaining adequate control over financial reporting. The Companys
internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Companys financial statements for external purposes in accordance with
generally accepted accounting principles. Internal control over financial reporting is defined in Rules 13a-15(f) and 15d-15(f) promulgated under Securities Exchange Act of 1934, as amended (the Exchange Act).

As of July 31, 2009, management assessed the effectiveness of the Companys internal control over financial reporting based on
criteria for effective internal control over financial reporting established in Internal Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment,
management has determined that the Companys internal control over financial reporting as of July 31, 2009 is effective.

This annual report does not include an attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the
Companys registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Corporation to provide only managements report in this annual report.



|ITEM 9B. | OTHER INFORMATION.
|-------- | ------------------

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



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PART III



|ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 10(a) OF THE EXCHANGE ACT.
|-------- | --------------------------------------------------------------------------------------------------------------------------------------

Information set forth under the captions Election of Directors and Section 16(a) Beneficial Ownership Reporting
Compliance in the Companys definitive Proxy Statement (Proxy Statement), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2009, 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 AND RELATED STOCKHOLDER MATTERS.
|-------- | -----------------------------------------------------------------------------------------------

Information set forth under the caption Stock Ownership in the Proxy Statement is incorporated herein by reference.



|ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
|-------- | -----------------------------------------------------

Information set forth under the caption Certain Transaction in the Proxy Statement is incorporated herein by reference in response to this item.



|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.
|-------- | ---------------------------------------

Audit Fees

Information set forth under the caption Fees Paid to Principal Accountant in the Proxy
Statement is incorporated by reference in response to this item.



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PART IV



|ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|-------- | ------------------------------------------



|(A) | (1) Financial Statements
|--- | ------------------------

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



| |  |  | Report of Independent Registered Public Accounting Firm
| | - |  | -------------------------------------------------------



| |  |  | Consolidated Balance Sheets as of July 31, 2009 and 2008
| | - |  | --------------------------------------------------------



| |  |  | Consolidated Statements of Operations for the Years Ended July 31, 2009 and 2008
| | - |  | --------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for the Years Ended July 31, 2009 and 2008
| | - |  | --------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended July 31, 2009 and 2008
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | Notes to Consolidated Financial Statements
| | - |  | ------------------------------------------

(B) Exhibits

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



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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, 2009 |  | By |  | /s/    LEE M.
BOWLING        
|                       |  |    |  | Lee M. Bowling,              
|                       |  |    |  | Chief Financial Officer      
|                       |  |    |  | (Principal Financial Officer)

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



|                                             |  |                                                                 |  |                 
|-------------------------------------------- |  | --------------------------------------------------------------- |  | ----------------
|Name                                         |  | Title                                                           |  | Date            
|                                             |  |                                                                
|/S/    JAMES W.
HOPPER James W. Hopper       |  | Chief Executive Officer, Director (Principal Executive Officer) |  | October 29, 2009
|                                             |  |                                                                
|/S/    LEE M.
BOWLING Lee M. Bowling         |  | Chief Financial Officer (Principal Financial Officer)           |  | October 29, 2009
|                                             |  |                                                                
|/S/    ROBERT P.
DILWORTH Robert P. Dilworth |  | Director                                                        |  | October 29, 2009
|                                             |  |                                                                
|/S/    W. FRANK
KING W. Frank King           |  | Director                                                        |  | October 29, 2009
|                                             |  |                                                                
|/S/    FREDERICK W.
GIBBS Frederick W. Gibbs |  | Director                                                        |  | October 29, 2009
|                                             |  |                                                                
|/S/    DAVID S.
LEE David S. Lee             |  | Chairman of the Board, Director                                 |  | October 29, 2009



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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.



|              |  |                                                                                                                                                                                                                                                                   
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Description of Document                                                                                                                                                                                                                                           
|2.1           |  | Agreement and Plan of Merger to Acquire Cortelco Systems Holding Corp., incorporated herein by reference to eOns Form 8-K dated December 12, 2008                                                                                                                
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999, incorporated herein by reference to eOns
Registration Statement on Form S-1 (No. 333-77021), filed with the SEC on April 26, 1999
|              | 
|3.2           |  | Amendment to Certificate of Incorporation of eOn, incorporated herein by reference to eOns Registration Statement on Form S-1/A (No. 333-77021), filed with the SEC on November
23, 1999                                                                         
|              | 
|3.3           |  | Amendment to Certificate of Incorporation of eOn, incorporated herein by reference to eOns Form 8-K dated April 18, 2008                                                                                                                                         
|              | 
|3.3           |  | Amended and Restated Bylaws of eOn, incorporated herein by reference to eOns Form 8-K dated December 11, 2007                                                                                                                                                    
|              | 
|4.1           |  | Reference is made to Exhibits 3.1, 3.2, and 3.3                                                                                                                                                                                                                   
|              | 
|10.1          |  | Form of Indemnity Agreement between eOn and its officers and directors incorporated herein by reference to eOns Registration Statement on Form S-1 (No. 333-77021), filed with
the SEC on April 26, 1999                                                         
|              | 
|14.1          |  | Code of Ethics, incorporated herein by reference to Exhibit 14.1 of eOns Form 10-K/A filed July 19, 2005                                                                                                                                                         
|              | 
|21.1          |  | Subsidiaries of eOn Communications Corporation                                                                                                                                                                                                                    
|              | 
|23.1          |  | Consent of GHP Horwath, P.C.                                                                                                                                                                                                                                      
|              | 
|31.1          |  | Rule 13a-14(a)/15d-14(a) Certifications                                                                                                                                                                                                                           
|              | 
|32.1          |  | Section 1350 Certifications                                                                                                                                                                                                                                       



64