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U.S. SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-KSB

(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, 2007
|- | ----------------------------------------------------------------------------------------------------------------------------



| ̈ | 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, $0.001 par value per share

(Title of each class)

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 ̈

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained in this form, and no disclosure will 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-KSB or any amendment to this Form 10-KSB.    x

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

The revenues for the year ended July 31, 2007, the most recent fiscal year, were $10,662,000.

The aggregate market value of the shares of common stock held by non-affiliates of the registrant was approximately $8,393,027 based upon the closing
sale price as reported by the NASDAQ Stock Market on September 30, 2007. The number of outstanding non-affiliate shares of the registrants $0.001 par value common stock was 9,874,149 as of September 30, 2007.

13,585,794 shares of Common Stock, par value $0.001, were outstanding as of September 30, 2007.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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|         |  |                                                                                                                                       |  |        
|-------- |  | ------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|ITEM NO. |  |                                                                                                                                       |  | PAGENO.
|PART I   |  | 1                                                                                                                                    
|         |  |                                                                                                                                      
|ITEM 1.  |  | Description of Business                                                                                                               |  | 1      
|         |  |                                                                                                                                      
|ITEM 2.  |  | Description of Properties                                                                                                             |  | 13     
|         |  |                                                                                                                                      
|ITEM 3.  |  | Legal Proceedings                                                                                                                     |  | 13     
|         |  |                                                                                                                                      
|ITEM 4.  |  | Submission of Matters to a Vote of Security Holders                                                                                   |  | 13     
|         | 
|PART II  |  | 14                                                                                                                                   
|         |  |                                                                                                                                      
|ITEM 5.  |  | Market for Registrants Common Equity and Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities        |  | 14     
|         |  |                                                                                                                                      
|ITEM 6.  |  | Managements Discussion and Analysis or Plan of Operations                                                                            |  | 15     
|         |  |                                                                                                                                      
|ITEM 7.  |  | Financial Statements                                                                                                                  |  | 28     
|         |  |                                                                                                                                      
|ITEM 8.  |  | Changes In and Disagreements with Accountants on Accounting and Financial Disclosure                                                  |  | 50     
|         |  |                                                                                                                                      
|ITEM 8A. |  | Controls and Procedures                                                                                                               |  | 50     
|         |  |                                                                                                                                      
|ITEM 8B. |  | Other Information                                                                                                                     |  | 50     
|         | 
|PART III |  | 51                                                                                                                                   
|         |  |                                                                                                                                      
|ITEM 9.  |  | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchange Act |  | 51     
|         |  |                                                                                                                                      
|ITEM 10. |  | Executive Compensation                                                                                                                |  | 51     
|         |  |                                                                                                                                      
|ITEM 11. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                                        |  | 51     
|         |  |                                                                                                                                      
|ITEM 12. |  | Certain Relationships and Related Transactions, and Director Independence                                                             |  | 51     
|         |  |                                                                                                                                      
|ITEM 13. |  | Exhibits                                                                                                                              |  | 51     
|         |  |                                                                                                                                      
|ITEM 14. |  | Principal Accountant Fees and Services                                                                                                |  | 51     



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PART I

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

INTRODUCTION

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 8,000 customers to easily
leverage advanced 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 advanced contact center technologies, eOn Communications delivers proven, IP-ready products that improve business
performance.

Enterprise IP Telephony

The Millennium Converged
Communications Platform is a proven solution for small and medium-sized installations. Blending support for VoIP, digital communications and Computer Telephony Integration (CTI) technology into one diverse telephony server platform, the Millennium
is designed for multi-site networks such as school systems, multi-tenant services, professional offices, distribution facilities, and retail stores. The Millennium provides integrated voice mail, unified messaging, fax messaging and an array of
advanced desktop telephones to help employees work more efficiently, access information more easily, and serve customers better.

Contact Center

The universal multi-media queuing capability of the eQueue enables contact centers to more efficiently interact with their customers regardless of the involved communications media. eQueue applications include multi-media routing of all interaction
types with Automatic Call Distributors (ACD) functionality, complete telephony capability, email, Web chat and Web collaboration, integrated voice response, voice mail with unified messaging, fax messaging, quality assurance recording and a complete
range of desktop devices and applications. eQueue enables improved customer service and loyalty, increased agent productivity and lower cost of ownership.



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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; Shanghai, PRC; Beijing, PRC; and Bangalore, India.

BACKGROUND

The Company was incorporated in Delaware in July 1991, and in 1993 we became a subsidiary
of Cortelco Systems Holding Corporation (CSHC). In March 1997, our subsidiary in the automatic call distribution products business was spun off to the CSHC stockholders, merged with Business Communications Systems, Inc., and renamed BCS
Technologies, Inc. (BCS). In April 1999, CSHC distributed its shares of eOn in a spin-off transaction, we acquired Cortelco Systems Puerto Rico, Inc. (CSPR), another subsidiary of CSHC, and we acquired BCS. CSPR was
subsequently spun-off to eOn shareholders on July 31, 2002.

On June 1, 2004 eOn acquired a controlling interest in Cortelco
Shanghai Telecom Equipment Company (Cortelco Shanghai), a provider of fiber optic transmission equipment, data communications systems, and network management software in China. After working with Cortelco Shanghai, we concluded that our
direct eOn sales team better fit our China strategy. Additionally, Cortelco Shanghai traditionally has kept its books and records in accordance with Chinese accounting standards instead of U.S. accounting standards. We had concerns that the costs
associated with Cortelco Shanghai meeting the Sarbanes-Oxley internal controls procedures and documentation requirements in the future would be prohibitively expensive. On December 31, 2005, the Company sold Cortelco Shanghai to the minority
holder, and members of management of Cortelco Shanghai. Accordingly, the results of operations of Cortelco Shanghai have been retroactively restated as discontinued operations in accordance with generally accepted accounting principals in the United
States.

During fiscal year 2005, the company acquired Aelix Systems Inc. (Aelix). Located in Bangalore, India, Aelix is a
developer of telecommunications systems and applications based on internet protocol (IP) technology.

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.

Millennium Converged Communications Platform

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



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

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



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

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



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

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



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

The Millennium offers cost-effective results oriented solutions for a variety of 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, 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 these centers effective call routing capabilities that can effectively distribute calls to employees and provide callers with prompt service.

Millennium Business Benefits

Business communications
powered by the Millennium Converged Communications Platform give employees productivity enhancing features that enable more effective levels of collaboration and productivity. All popular forms of networking technology are supported, including VoIP,
digital as well as traditional analog. This gives enterprises the option to deploy advanced technologies and, at the same time, preserve investment in legacy applications and investments. 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 proven solution to customers who are looking to evolve from being a traditional call center company to a multimedia contact center. Unlike traditional telecom solutions, the eQueue System is designed to replace proprietary communication
devices such as Private Branch Exchanges (PBX), Automatic Call Distributors (ACD), Interactive Voice Response (IVR) systems, recording systems, workforce management systems, voice mail systems, and Computer Telephony Integration (CTI) middleware
systems with an all-in-one, fully blended communications system. Because the eQueue platform is built on an open unified architecture, organizations can eliminate the need for complex communications systems integration while reducing
start-up and maintenance costs, simplifying system administration, and increasing ease of customization. In addition, the eQueue can distribute and manage email and web-based interactions, making this a true multi-media contact center solution. The
eQueue enables enterprises to communicate more effectively with customers, lower operational costs and increase 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 more efficiently interact with their customers regardless of the involved communications media. The capability not only provides



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##### Index to Financial Statements

customers with consistent interaction management across all forms of 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 an extensive list of integrated applications including ACD with skills based routing, PBX with VoIP capabilities, email and web chat applications with an integrated knowledge base, interactive voice response, voice mail with unified
messaging, quality assurance recording, workforce management and a complete range of desktop devices.



| |  |  | Open
| | - |  | ----

The eQueue is an open standards-based solution supporting the Linux operating system. Using an open solution not only simplifies integration requirements,
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 and reliability required.



| |  |  | Proven
| | - |  | ------

With a quarter century
of contact center expertise, eOn serves over 8,000 customers in a variety of markets including multi-media contact centers, traditional call centers, general business applications, service providers and emergency 911 centers.The eQueue is a
fully redundant solution designed to perform in mission-critical environments.

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 customer telephone calls, emails and web-based communications are routed and
managed within the contact center. The eQueue provides a single 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



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features such as skills-based routing, remote agent support, unified reporting for all media types, quality monitoring and dynamic supervisory control.



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

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

STRATEGY

eOn will continue to strive to become a recognized global leader in providing comprehensive enterprise
communications and contact center solutions. 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 both product, infrastructure and
partnerships necessary to capitalize on this emerging market opportunity. A recent example of this is that in August of 2007, the Company made a strategic investment in Symbio Investment Corporation. Symbio is a leading China-based provider of
software development, testing, and globalization outsourcing services to multinational companies. The investment forms a partnership between the two organizations that establishes eOn as the 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.



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

Of the thousands of Millennium customers many 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 market, we believe opportunities remain with our eQueue Multi-Media Contact Center Solution in North America. We believe we maintain architectural advantages over competitive offerings
that will enable eOn to maintain its existing customer base and to capture expansion and upgrade business from it. We will also continue to enhance the core product offering.



| |  |  | Explore Merger and Acquisition Based Growth Strategies
| | - |  | ------------------------------------------------------

As exemplified by the Companys recently announced intent to merge Cortelco Systems Holding Corporation (CSHC) into eOn, the Company will actively pursue merger and acquisition options for business growth. CSHC
designs and sells traditional telephones in the US market. In addition to providing increased revenue and earnings potential for the Company, it is believed that eOn can leverage CSHC distribution and customer relationships to increase sales of its
current and future products, such as VoIP compatible business telephones.

PRODUCTS AND PRODUCTS UNDER DEVELOPMENT

We have already established a reputation for product innovation. In 1997, eOn was one of the first
companies to develop a communications server using the open standards-based Linux operating system, and in 2000, we



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became one of the first companies to deliver a single queuing multi-media contact center solution. We have successfully competed for and won the business of
prestigious and demanding customers. We will continue to enhance this reputation as we believe that we have a unique opportunity to gain new customers among companies that wish to acquire comprehensive and proven contact center and business
communications solutions. We believe our extensive experience in voice communications and call center systems provides us with a strategic advantage for offering an integrated voice and internet communications product line.

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

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.



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

Advanced
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 long range calling patterns to determine if service level objectives are being met.



| |  |  | 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 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 an extensive set 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 types of media, 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 Email & Chat
| | - |  | -------------------

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



| |  |  | 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.



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| |  |  | 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 statistical 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 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
| | - |  | ----------------

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

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. eOn Communications eNterprise SIP Business Telephone series offers a variety of next-generation 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 unleash 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;
| | - |  | --------------------------------------------------------------------------------------



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| |  |  | 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.
| | - |  | ------------------------------------------------------------------------------

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 recognized leader in
offering enterprise communications and contact center solutions. Our target customer base continues to be midsized 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.

RESEARCH AND DEVELOPMENT

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

MANUFACTURING

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

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

We currently use IMT of Taiwan to manufacture the subcomponents of our eNterprise SIP Business Telephones. As a major manufacturer of VoIP telephone
sets, we believe IMT has sufficient capacity and technical capabilities to respond to foreseeable increases in customer demand and advanced in technologies.

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



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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.

COMPETITION

The competitive arena for our products is changing very rapidly. Well-established companies and many emerging companies are developing products to address
the PBX, ACD, 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. Most established competitors, as well as those emerging companies that have completed initial public offerings, currently have greater resources and market presence than we do.

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

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

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



| |  |  | 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 Nortel Networks, Avaya, Mitel, NEC, Toshiba, and Siemens.



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

Our
major competitors for the eNterprise SIP Business Telephones include Polycom, Aastra, Linksys, Grandstream among others. Each provide VoIP 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, Nortel Networks, 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 Communications, and Live Person. We intend to compete in the web center software and services market by providing integrated voice and data
communications in a contact center environment or providing a direct upgrade path from a Web center to an integrated contact center.



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

An emerging area for competitors are firms that deliver enterprise communications and contact center functionality from a web based hosted platform. Oracle, Five9, and Packet * 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.

INTELLECTUAL PROPERTY

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

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

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

eOn, eQueue, Millennium eNterprise & WorkSpace are trademarks of eOn.

EMPLOYEES

As of July 31, 2007, we had 92
employees. We had 39 employees in the United States, 33 employees in India, 19 employees in China and 1 employee in Canada. The mix of employees was 16 in sales and marketing, 54 in research, development, and professional services, and 22 in general
and administration. We also employ independent contractors and temporary employees. None of our employees are represented by a labor union and we consider our employee relations to be good.



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EXECUTIVE OFFICERS

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



|                   |  |     |  |                                                  
|------------------ |  | --- |  | -------------------------------------------------
|NAME               |  | AGE |  | POSITION                                         
|David S. Lee       |  | 70  |  | Chairman and Chief Executive Officer and Director
|                   |  |    
|Stephen R. Bowling |  | 65  |  | Chief Financial Officer and Director             
|                   |  |    
|Mitch C. Gilstrap  |  | 47  |  | Chief Operating Officer                          
|                   |  |    
|Vijay Sharma       |  | 53  |  | Chief Technology Officer                         

DAVID S. LEE, became the Chairman of the Board of eOn in 1991 and became President and
Chief Executive Officer in November 2003. Previously Mr. Lee served as Chief Executive Officer from May 2000 through August 2001. Mr. Lee is a director of ESS Technology, Inc., a provider of semiconductor and software solutions for
multimedia applications; iBasis, Inc., a telecommunications company; and Linear Technology Corporation, a semiconductor company. Mr. Lee is also a Regent of the University of California. From 1985 to 1988, Mr. Lee was President and
Chairman of Data Technology Corporation, a computer peripheral company. Prior to 1985, he was Group Executive and Chairman of the Business Information Systems Group of ITT Corporation, a diversified company, and President of ITT Qume, formerly Qume
Corporation, a computer systems peripherals company. In 1973, Mr. Lee co-founded Qume Corporation and was its Executive Vice President until the company was acquired by ITT Corporation in 1978. Mr. Lee received an M.S. from North Dakota
State University and a B.S. and an honorary doctorate from Montana State University.

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

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

VIJAY SHARMA, Chief Technology Office, on October 23, 2006, eOn Communications Corporation appointed Vijay Sharma as its Chief Technology
Officer reporting to David Lee, CEO of eOn Communications Corporation. Mr. Sharma will be working with David Lee in developing eOn business strategies for worldwide markets and managing eOns product development, engineering, and
manufacturing. Prior to joining the Company in April 2005, he served as President and CEO of Aelix Systems Inc, an offshore provider of R&D Engineering services. Mr. Sharma has held key business and engineering management positions with
Cidco Communications, Comdial Corporation, IPC Information Systems in United States and Philips Business Systems, Plessey Office Systems and British Aerospace in England. He holds a Bachelor of Science degree in Electronic Engineering from
University of Salford in the United Kingdom and is the lead author of a patent on IP-based communications. In 2002, he filed for three patents on convergence of Wireline, Cellular, WiFi and IP based communication products. Mr. Sharma holds a
Bachelor of Science in Electronics Engineering degree from University of Salford, United Kingdom.



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|ITEM 2. | DESCRIPTION OF PROPERTIES.
|------- | --------------------------

The Company leases
property as detailed in the following table.



|                                    |  |                  |  |                       |  |             
|----------------------------------- |  | ---------------- |  | --------------------- |  | ------------
|LOCATION                            |  | APPROXIMATE SIZE |  | LEASE EXPIRATION DATE |  | INTENDED USE
|Kennesaw, Georgia, USA              |  | 11,321 sq. ft.   |  | March 2010            |  | Office      
|Beijing, Peoples Republic of China  |  | 4,171 sq. ft.    |  | January 2009          |  | Office      
|Shanghai, Peoples Republic of China |  | 1,520 sq. ft.    |  | December 2007         |  | Office      
|Hangzou, Peoples Republic of China  |  | 560 sq. ft.      |  | February 2007         |  | Apartment   
|Bangalore, India                    |  | 5,000 sq. ft.    |  | December 2010         |  | Office      

Aggregate annual rental payments for the Companys facilities are approximately $404,000. 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 30, 2007, the 2006 Annual Meeting of Stockholders of eOn Communications Corporation was held to vote on the following routine and non-routine items:



| | (1) | To elect two Class I directors 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
|Stephen R. Bowling |  | 10,836,515 |  | 135,427      
|Frederick W. Gibbs |  | 10,861,623 |  | 110,319      



|                                                                                                                                                                                                                                                                                                                                                                                                               |  |            |  |              |  |                |  |                 
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------- |  | ------------ |  | -------------- |  | ----------------
|                                                                                                                                                                                                                                                                                                                                                                                                               |  | Votes For  |  | VotesAgainst |  | VotesAbstained |  | Broker Non-Votes
|(2)    To approve the amendment to the Companys Amended and Restated Certificate of Incorporation to effect a
reverse stock split and to adjust authorized shares and par value, subject to the Board of Directors discretion at one of the following ratios: two-for-one, two and one half-for-one, three-for-one, three and one half-for-one, four-for-one,
four and one half-for-one, or five-for-one and |  | 9,819,975  |  | 455,785      |  | 696,181        |  |                
|                                                                                                                                                                                                                                                                                                                                                                                                               |  |            |  |             
|(3)    To ratify the appointment of GHP Horwath, P.C. as our independent registered public accounting
firm.                                                                                                                                                                                                                                                                                                    |  | 10,908,085 |  | 59,670       |  | 4,187          |  |                

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



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PART II



|ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL BUSINESS 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 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, 2007    |  | $    | 1.14 |     | $ | 0.82
|April 30, 2007   |  | $    | 1.45 |     | $ | 0.88
|January 31, 2007 |  | $    | 1.91 |     | $ | 1.31
|October 31, 2006 |  | $    | 1.92 |     | $ | 1.15
|                 |  |     
|July 31, 2006    |  | $    | 1.85 |     | $ | 1.04
|April 30, 2006   |  | $    | 3.07 |     | $ | 1.10
|January 31, 2006 |  | $    | 1.41 |     | $ | 0.51
|October 31, 2005 |  | $    | 1.70 |     | $ | 0.80

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

Holders

As of September 30, 2007, there were 192 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 2007 and 2006, 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.

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; Stock Repurchases in the
Fourth Quarter

During July 2007, the Company issued 90,000 shares of common stock, 50,000 fully vested options to purchase common stock
and 75,000 warrants to purchase common stock as final payment for the purchase of Aelix Systems Incorporated.



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|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN 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 8,000 customers to easily leverage advanced 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 advanced contact center technologies, eOn Communications delivers proven, IP-ready
products that improve business performance.

On June 1, 2004 eOn acquired a controlling interest in Cortelco Shanghai Telecom
Equipment Company (Cortelco Shanghai), a provider of fiber optic transmission equipment, data communications systems, and network management software in China. Under the terms of the agreement, eOn acquired all of the stock of Cortelco
China Corp., a California corporation that owned a 54.14% ownership interest in Cortelco Shanghai, from Cortelco Systems Holding Corporation (CSHC). See footnote 4, Cortelco Shanghai, Extraordinary Gain and Discontinued
Operations, to the consolidated financial statements.

After working with Cortelco Shanghai, we concluded that our direct eOn sales
team better fits our China strategy. Additionally, Cortelco Shanghai traditionally has kept its books and records in accordance with PRC accounting standards instead of generally accepted accounting principles in the United States of America. We had
concerns that the costs associated with Cortelco Shanghai meeting the Sarbanes-Oxley internal controls procedures and documentation requirements in the future would be prohibitively expensive. Furthermore cash proceeds from a sale of Cortelco
Shanghai could be utilized to build other growth opportunities.

On December 31, 2005, the Company sold its 54.14% interest in
Cortelco Shanghai to the 45.86% minority holder, Shanghai Fortune Telecommunication Technology Development Co. Ltd. (Shanghai Fortune) and members of management of Cortelco Shanghai.

On February 23, 2007, the Companys newly formed subsidiary, eOn IP Voice, Inc. (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. The results of EIPV are included in the Companys consolidated financial statements beginning February 23, 2007, the date the assets were
purchased.

During the first quarter of fiscal year 2008, the Company decided to discontinue sale of EIPV Business Connect hosted products
and services.

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

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.



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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 1%2% 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, 2007. 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.

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.



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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 2007, the Company has
available net operating loss (NOL) carry-forwards of approximately $21,589,000.

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 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, management has not recognized any of
its net deferred tax asset. Because this asset has been offset by a valuation allowance, the Company currently provides for income taxes only to the extent of expected cash payments of taxes, primarily state and foreign income taxes, for current
income.

Should the Companys earnings trend cause management to conclude that it is more likely than not the Company will realize all
or a material portion of the NOL 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.



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##### Index to Financial Statements

RESULTS OF OPERATIONS

The following table presents our operating ratios for fiscal years 2007 and 2006:



|                                                                                  |  |                              |    |  |       |  
|--------------------------------------------------------------------------------- |  | ---------------------------- | -- |  | ----- | -
|                                                                                  |  | For the Years Ended July 31, |   
|                                                                                  |  | 2007                         |    |  | 2006  |  
|Net revenue                                                                       |  | 100.0                        | %  |  | 100.0 | %
|Cost of revenue                                                                   |  | 43.3                         | %  |  | 33.0  | %
|                                                                                  |  |                              |    |  |       |  
|Gross profit                                                                      |  | 56.7                         | %  |  | 67.0  | %
|Operating expenses:                                                               |  |                              |    |  |       |  
|Selling, general and administrative                                               |  | 44.7                         | %  |  | 39.5  | %
|Research and development                                                          |  | 26.9                         | %  |  | 21.4  | %
|Other expense                                                                     |  | 0.1                          | %  |  | 0.5   | %
|                                                                                  |  |                              |    |  |       |  
|Total operating expense                                                           |  | 71.7                         | %  |  | 61.4  | %
|                                                                                  |  |                              |    |  |       |  
|(Loss) income from continuing operations                                          |  | (15.0                        | %) |  | 5.6   | %
|Interest income                                                                   |  | 2.6                          | %  |  | 1.5   | %
|                                                                                  |  |                              |    |  |       |  
|(Loss) income before income taxes, discontinued operations and extraordinary item |  | (12.4                        | %) |  | 7.1   | %
|Income taxes                                                                      |  | 0.0                          | %  |  | 0.0   | %
|                                                                                  |  |                              |    |  |       |  
|(Loss) income before discontinued operations and extraordinary item               |  | (12.4                        | %) |  | 7.1   | %
|Discontinued operations                                                           |  | 0.0                          | %  |  | 4.7   | %
|Extraordinary item                                                                |  | 0.0                          | %  |  | 1.8   | %
|                                                                                  |  |                              |    |  |       |  
|Net (loss) income                                                                 |  | (12.4                        | %) |  | 13.6  | %
|                                                                                  |  |                              |    |  |       |  

NET REVENUE

Revenue is comprised of product revenue generated by our Millennium product line; product, maintenance and professional service revenue generated by our eQueue product line and service and rental revenue generated by
our Business Connect product line. Net revenue decreased approximately 11% to $10,662,000 for the year ended July 31, 2007 from $12,014,000 for the previous fiscal year. The decrease reflects lower eQueue revenue from products, maintenance and
professional services, partially offset by higher revenue from Millennium resulting from product enhancements released during our third fiscal quarter, as well as new revenue from EIPV. Sales of Millennium systems were adversely affected by higher
seasonal slowdowns in key U.S. government and education market segments along with delays encountered with the release of planned product enhancements during the first and second quarters of fiscal year 2007. Sales of eQueue systems were off largely
due to a decline in contributions from U.S. government and education market segments and due to slow ramp up of sales from international markets.

COST
OF REVENUE AND GROSS PROFIT

Cost of revenue is primarily comprised of purchases from our contract manufacturers and other suppliers and
costs incurred for final assembly of our systems. Gross profit decreased approximately 25% to 6,047,000 for the year ended July 31, 2007 compared to $8,047,000 for the previous fiscal year. The decrease in gross profit reflects lower eQueue
product, maintenance and professional service revenues and cost of revenue for EIPV. Our gross margins were 57% and 67% for fiscal years 2007 and 2006, respectively. The decrease in margins primarily reflects lower maintenance and professional
services revenue, which historically have significant contribution to our margins and lower margins on international eQueue revenue. Additionally, cost of revenue for EIPV exceeded revenue by $46,000 during the fiscal year.

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE

Selling, general and administrative expenses were $4,766,000 for the year ended July 31, 2007, an increase of less than 1% from $4,747,000 in the prior fiscal year. The increase reflects non-cash compensation expense



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related to the adoption of SFAS 123R during the current fiscal year, as well as operating expenses related to EIPV, partially offset by lower personnel
costs, lower travel and entertainment expenses and lower professional fees.

RESEARCH AND DEVELOPMENT EXPENSE

Research and development expenses are primarily comprised of personnel and related expenses for our engineering staff. Our research and development
efforts are currently concentrated on enhancements for our eQueue and Millennium product lines. Research and development expenses were $2,872,000 for the year ended July 31, 2007, which represents an increase of approximately 12% from
$2,565,000 in fiscal year 2006. The increase primarily reflects higher personnel costs resulting from expanding our workforce in India, higher travel and entertainment expenses and non-cash compensation expense related to the adoption of SFAS 123R
during the current fiscal year, partially offset by decreased Millennium development costs, as a result of the introduction of enhancements during our third fiscal quarter.

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, net was $11,000 in fiscal 2007 compared to $60,000 in fiscal year 2006, primarily reflecting favorable exchange rate rates and a gain on
the disposal of fixed assets.

INTEREST INCOME, NET

Interest income was $272,000 and $186,000 in fiscal years 2007 and 2006, respectively. The increase in fiscal year 2007 reflects an increase in weighted average marketable securities outstanding and higher weighted
average interest rates throughout the year.

INCOME TAX EXPENSE

No income tax benefit from continuing operations was recorded for the year ended July 31, 2007 as management was unable to conclude that it was more likely than not that the income tax benefit would be realized.
There was no income tax expense for the year ended July 31, 2006 as taxable income was offset by accumulated net operating losses.

DISCONTINUED
OPERATIONS

Discontinued operations is comprised of $256,000 of income from Cortelco Shanghai during the five month period ended
December 31, 2005 and a $303,000 gain on disposal of Cortelco Shanghai on December 31, 2005.

EXTRAORDINARY GAIN

The extraordinary gain of $217,000 reflects the excess of the accrued earnout liability over the fair value of the consideration paid for Cortelco
Shanghai after reducing the amounts assigned to the net assets acquired.

LIQUIDITY AND CAPITAL RESOURCES

As of July 31, 2007, we had cash and cash equivalents of $2,256,000, $3,400,000 in short-term investments, and a working capital balance of
$8,149,000. Our short-term investments are primarily invested in taxable auction rate securities with frequent rate resets and high-grade corporate obligations with maturities of less than one year.

Our operating activities resulted in net cash outflows of $867,000 for fiscal year 2007 compared to net cash inflows of $865,000 for fiscal year 2006.
The decrease in net operating cash flow for the current fiscal year



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##### Index to Financial Statements

primarily reflects net loss (adjusted for non cash items) for the year, lower accrued expenses and other, higher inventory and accounts receivable, partially
offset by increased related party payables and lower prepaid and other assets. Net operating cash flow for fiscal year 2006 was primarily the result of net income (adjusted for non cash items) for the year and lower accounts receivable, partially
offset by lower accrued expenses and accounts payable and higher accounts receivablerelated party and prepaid and other assets.

Our
investing activities resulted in net cash inflows of $2,159,000 for fiscal year 2007 compared to net cash outflows of $886,000 in fiscal year 2006. Cash provided by investing activities during fiscal year 2007 was primarily related to net sales of
marketable securities and final payment of proceeds from the disposal of Cortelco Shanghai, partially offset by the purchase of EIPV and capital expenditures. Cash used by investing activities during fiscal year 2006 consisted primarily of net
purchases of marketable securities, our investment in Spark and capital spending, partially offset by proceeds from the disposal of Cortelco Shanghai.

Our financing activities resulted in net cash inflows of $30,000 and $85,000 in fiscal years 2007 and 2006, respectively. Cash provided by financing activities during fiscal years 2007 and 2006 was attributable to
proceeds from the employee stock purchase plan and proceeds from the exercise of options to purchase common stock under equity incentive plans.

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

Liquidity

Since inception, the Company has financed
its operations through debt financing and proceeds generated from public offerings of its common stock. The proceeds from these transactions have been used primarily to fund research and development costs, and selling, general and administrative
expenses. Additionally, since inception, the Company has invested approximately $5,146,000 in capital expenditures.

On February 23,
2007, the Companys 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.

During the first quarter of fiscal
year 2008, the Company decided to discontinue sale of EIPV Business Connect hosted products and services.

The Company has incurred
substantial net operating losses since inception and negative cash flows from operating activities through July 31, 2007 resulting in an accumulated deficit of $45,065,000. During fiscal year 2007, cash and cash equivalents and short-term
investments decreased from $6,684,000 to $5,656,000, largely as a result of funding operating losses during fiscal year 2007.

The Company
recorded a net loss of $1,330,000 in fiscal year 2007. As of July 31, 2007, the Company had $5,656,000 in cash and cash equivalents and short-term marketable securities available to fund operations, of which $685,000 was held in international
bank accounts.

The Company is dependent on available cash, short-term investments and operating cash flow to finance operations and meet
its other capital needs. If such sources are not sufficient, alternative sources of funding may



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##### Index to Financial Statements

not be available. The Company believes that cash on hand and short-term marketable securities plus the additional liquidity that it expects to generate from
operations will be sufficient to cover its working capital needs and fund expected capital expenditures over at least the next twelve months.

Capital
Resources

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

Recent Developments

On August 1, 2007 and August 27,
2007, the Company made strategic investments in Symbio Group (Symbio) of $500,000 and $400,000, respectively for 250,000 and 200,000 shares or a total of approximately 3% of Symbio Investment Corporation, respectively. Symbio is a
leading China-based provider of software development, testing, and globalization outsourcing services to multinational companies. The investment forms a partnership between the two organizations that establishes eOn as the 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. This transaction will be accounted
for as an investment at cost.

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 on January I, 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.

In conjunction with the purchase of these shares, David Lee was
appointed to the board of directors of Symbio.

On October 22, 2007, the Company executed a non-binding letter of intent with CSHC to
merge CSHC into eOn Communications Corporation. CSHC is a privately held company that designs and sells telephones in the US and Latin America. David Lee is the controlling shareholder of CSHC. The Board has appointed a special committee of
independent directors to negotiate the transaction.

The letter of intent is non-binding on the parties, and several steps remain in order
to acquire CSHC, including the following:



| |  |  | Negotiating and signing a definitive binding purchase agreement;
| | - |  | ----------------------------------------------------------------



| |  |  | Obtaining fairness opinions;
| | - |  | ----------------------------



| |  |  | Filing a detailed registration and proxy with the SEC; and
| | - |  | ----------------------------------------------------------



| |  |  | Obtaining shareholder approvals.
| | - |  | --------------------------------

The Company anticipates that the transaction will close sometime in the Companys second or third fiscal quarter, but there is no guarantee that it will close during this timeframe. The purchase is expected to be a combined stock and
cash transaction with a major portion of the cash contingent on CSHCs past acquisition earnings.



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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, 2007 are as follows (in thousands):



|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |    |  |   |   |  |   |  
|------------------------ |  | ---------------------------------------------------- | ----- | ---- | - | ----- |  | ---- | --- | ---- | - | ---- |  | ---------- | -- |  | - | - |  | - | -
|                         |  | Payments Due by Period for the Years Ending July 31,
|                         |  | Total                                                |       | 2008 |   | 2009  |  | 2010 |     | 2011 |   | 2012 |  | Thereafter
|Operating leases (1)     |  | $                                                    | 508   |      | $ | 224   |  | $    | 168 |      | $ | 100  |  | $          | 16 |  | $ |  |  | $ | 
|Purchase obligations (2) |  |                                                      | 1,196 |      |   | 1,196 |  |      |    |      |   |     |  |            |   |  |   |  |  |   | 
|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |    |  |   |   |  |   |  
|Total                    |  | $                                                    | 1,704 |      | $ | 1,420 |  | $    | 168 |      | $ | 100  |  | $          | 16 |  | $ |  |  | $ | 
|                         |  |                                                      |       |      |   |       |  |      |     |      |   |      |  |            |    |  |   |   |  |   |  

---

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

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

On March 18, 2007, the Companys lease for 40,000 sq. ft. of office and warehouse space in Kennesaw, Georgia expired. Effective April 1, 2007, the lease on the existing facility was amended to extend
the lease for three years and reduce the leased square footage to 11,321 sq. ft., and provided for rent expense of approximately $8,000 per month.

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, Cellstick, 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 300,00 shares or 3% of Spark Common Stock and has the option to purchase all remaining outstanding
Spark Common Stock, including options, by issuing 8,665,000 shares of the Companys Common Stock. The Company will have the right to give notice of its intent to exercise this option at any time between September 30, 2007 and
March 31, 2008. The eOn Board of Directors will continue to monitor Sparks operations and complete its due diligence process prior to granting approval of the option exercise. After such notice of exercise, the Company will file a Form
S-4 with the Securities and Exchange Commission and seek the approval of the Companys shareholders.

The Agreement further provides
that in the event the Company does not exercise this option, or the Companys shareholders do not approve it, the Company may 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. In addition, in the event that Spark discontinues operations or liquidates, David Lee is required to purchase the shares for $300,000 within 60 days.

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

ADDITIONAL RISK FACTORS THAT
MAY AFFECT FUTURE RESULTS OF OPERATIONS

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

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



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

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



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



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



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



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



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



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

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

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

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

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

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



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



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



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



| |  |  | Hosted solution providers including Packet 8, Five9, Echopass and Oracle;
| | - |  | -------------------------------------------------------------------------



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



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



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

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

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



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##### Index to Financial Statements

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

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

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

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

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

We face many risks from expanding into foreign markets.

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

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

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



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



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



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



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



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

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

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

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

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

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

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

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

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

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

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

As of September 30, 2007, our executive officers, directors and principal stockholders and their affiliates beneficially owned 4,586,900 shares, or
31.88% of the outstanding shares of common stock. Thus, they effectively control us and direct our affairs, including the election of directors and approval of significant corporate transactions. This concentration of ownership may have the effect
of delaying, deferring or preventing a change in control of our company and some transactions may be more difficult or impossible without the support of these stockholders. The interests of these stockholders may conflict with those of other
stockholders. We also conduct transactions with businesses in which our principal stockholders maintain interests. We believe that these transactions have been conducted on an arms length basis, but we cannot assure you that these transactions
would have the same terms if conducted with unrelated third parties.

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

Our business and competitive position could be harmed if we fail to
adequately protect our intellectual property. Although we have filed patent applications, we are not certain that our patent applications will result in the issuance of patents, or that any patents issued will provide commercially significant
protection to our technology. In addition, as we grow and gain brand recognition, our products are more likely to be subjected to infringement litigation. We could incur substantial costs and may have to divert management and technical resources in
order to respond to, defend against, or bring claims related to our intellectual property rights. In



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##### Index to Financial Statements

addition, we rely on a combination of patent, trademark, copyright and trade secret laws and contractual restrictions to establish and protect our
proprietary rights. These statutory and contractual arrangements may not provide sufficient protection to prevent misappropriation of our technology or to deter independent third-party development of similar technologies. Any litigation could result
in our expenditure of funds, management time and resources.

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

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

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

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

Future sales of shares may decrease our stock price.

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

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB interpretation No. 48, Accounting for Uncertainty in
Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting and disclosure associated with certain aspects of recognition and measurement related to accounting for income taxes.
The Company has not yet determined the impact, if any, that FIN 48 will have on its consolidated financial statements. FIN 48 is effective for fiscal years beginning after December 15, 2006.

In September 2006, the SEC issued Staff Accounting Bulletin (SAB) 108, Considering the Effects of Prior Year Misstatements in
Current Year Financial Statements (SAB 108). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current
year misstatement. SAB 108 requires the use of both the iron curtain and rollover approach in quantifying the materiality of misstatements. SAB 108 is effective for annual financial statements covering the first fiscal year
ending after November 15, 2006. Early adoption of SAB 108 is permitted. The Company elected to adopt SAB 108 effective July 31, 2007.



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In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements (SFAS 157) which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating what impact, if any, the adoption of SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 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 159 is effective for fiscal years beginning after
November 15, 2007. The Company does not expect SFAS 159 to have a material impact on its consolidated financial statements.



27



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##### Table of Contents

##### Index to Financial Statements

|ITEM 7. | FINANCIAL STATEMENTS.
|------- | ---------------------

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                                    |  |     
|------------------------------------------------------------------------------------------------------------------- |  | ----
|                                                                                                                    |  | Page
|Report of Independent Registered Public Accounting Firm                                                             |  | 29  
|                                                                                                                    | 
|Consolidated Balance Sheets as of July 31, 2007 and 2006                                                            |  | 30  
|                                                                                                                    | 
|Consolidated Statements of Operations for the Years Ended July 31, 2007 and 2006                                    |  | 31  
|                                                                                                                    | 
|Consolidated Statements of Cash Flows for the Years Ended July 31, 2007 and 2006                                    |  | 32  
|                                                                                                                    | 
|Consolidated Statements of Stockholders Equity and Comprehensive Income for the Years Ended July 31, 2007 and 2006 |  | 33  
|                                                                                                                    | 
|Notes to Consolidated Financial Statements                                                                          |  | 34  



28



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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, 2007 and 2006 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, 2007. 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, 2007 and 2006, and the results of their operations and their cash flows for each of the two years in the
period ended July 31, 2007, in conformity with accounting principles generally accepted in the United States of America.

As discussed
in Note 13 to the consolidated financial statements, effective August 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (R), Share Based Payment.



|                     
|---------------------
|/s/ GHP Horwath, P.C.
|Denver, Colorado     
|                     
|October 26, 2007     



29



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share amounts)



|                                                                                                                     |  |                |         |   |      |   |         |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------- | ------- | - | ---- | - | ------- | -
|                                                                                                                     |  | As of July 31, |        
|                                                                                                                     |  | 2007           |         |   | 2006 |  
|ASSETS                                                                                                               |  |                |         |   |      |   |         |  
|Current assets:                                                                                                      |  |                |         |   |      |   |         |  
|Cash and cash equivalents                                                                                            |  | $              | 2,256   |   |      | $ | 934     |  
|Marketable securities                                                                                                |  |                | 3,400   |   |      |   | 5,750   |  
|Trade accounts receivable, net of allowance of $694 and $372, respectively                                           |  |                | 1,831   |   |      |   | 1,639   |  
|Trade accounts receivablerelated party                                                                              |  |                | 117     |   |      |   | 27      |  
|Proceeds receivable from sale of discontinued operations                                                             |  |                |        |   |      |   | 89      |  
|Inventories                                                                                                          |  |                | 2,382   |   |      |   | 2,167   |  
|Prepaid and other current assets                                                                                     |  |                | 153     |   |      |   | 289     |  
|                                                                                                                     |  |                |         |   |      |   |         |  
|Total current assets                                                                                                 |  |                | 10,139  |   |      |   | 10,895  |  
|Property and equipment, net                                                                                          |  |                | 433     |   |      |   | 338     |  
|Long-term receivable, net of allowance of $232                                                                       |  |                |        |   |      |   | 153     |  
|Intangibles, net                                                                                                     |  |                | 334     |   |      |   |        |  
|Goodwill                                                                                                             |  |                |        |   |      |   | 418     |  
|Investments                                                                                                          |  |                | 300     |   |      |   | 301     |  
|                                                                                                                     |  |                |         |   |      |   |         |  
|Total assets                                                                                                         |  | $              | 11,206  |   |      | $ | 12,105  |  
|                                                                                                                     |  |                |         |   |      |   |         |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                 |  |                |         |   |      |   |         |  
|Current liabilities:                                                                                                 |  |                |         |   |      |   |         |  
|Trade accounts payable                                                                                               |  | $              | 433     |   |      | $ | 453     |  
|Trade accounts payablerelated party                                                                                 |  |                | 337     |   |      |   | 72      |  
|Deferred acquisition payment                                                                                         |  |                |        |   |      |   | 397     |  
|Accrued expenses and other                                                                                           |  |                | 1,220   |   |      |   | 1,376   |  
|                                                                                                                     |  |                |         |   |      |   |         |  
|Total current liabilities                                                                                            |  |                | 1,990   |   |      |   | 2,298   |  
|                                                                                                                     |  |               
|Commitments and contingencies                                                                                        |  |                |         |   |      |   |         |  
|                                                                                                                     |  |               
|Stockholders equity:                                                                                                |  |                |         |   |      |   |         |  
|Preferred stock, $0.001 par value, (10,000,000 shares authorized, no shares issued and outstanding)                  |  |                |        |   |      |   |        |  
|Common stock, $0.001 par value (50,000,000 shares authorized, 14,247,029 and 14,128,922 shares issued, respectively) |  |                | 14      |   |      |   | 14      |  
|Additional paid-in capital                                                                                           |  |                | 55,769  |   |      |   | 55,030  |  
|Treasury stock, at cost (676,900 shares)                                                                             |  |                | (1,502  | ) |      |   | (1,502  | )
|Accumulated deficit                                                                                                  |  |                | (45,065 | ) |      |   | (43,735 | )
|                                                                                                                     |  |                |         |   |      |   |         |  
|Total stockholders equity                                                                                           |  |                | 9,216   |   |      |   | 9,807   |  
|                                                                                                                     |  |                |         |   |      |   |         |  
|Total liabilities and stockholders equity                                                                           |  | $              | 11,206  |   |      | $ | 12,105  |  
|                                                                                                                     |  |                |         |   |      |   |         |  

See accompanying notes to the consolidated financial statements.



30



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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,
|                                                                                                     |  | 2007                         |        |   | 2006
|REVENUE                                                                                              |  |                              |        |   |      |   |       
|Third party revenue                                                                                  |  | $                            | 10,076 |   |      | $ | 12,014
|Related party revenue                                                                                |  |                              | 586    |   |      |   |      
|                                                                                                     |  |                              |        |   |      |   |       
|Net revenue                                                                                          |  |                              | 10,662 |   |      |   | 12,014
|                                                                                                     |  |                             
|COST OF REVENUE                                                                                      |  |                              |        |   |      |   |       
|Third party cost of revenue                                                                          |  |                              | 4,126  |   |      |   | 3,967 
|Related party cost of revenue                                                                        |  |                              | 489    |   |      |   |      
|                                                                                                     |  |                              |        |   |      |   |       
|Cost of revenue                                                                                      |  |                              | 4,615  |   |      |   | 3,967 
|                                                                                                     |  |                              |        |   |      |   |       
|Gross profit                                                                                         |  |                              | 6,047  |   |      |   | 8,047 
|                                                                                                     |  |                             
|OPERATING EXPENSE                                                                                    |  |                              |        |   |      |   |       
|Selling, general and administrative                                                                  |  |                              | 4,766  |   |      |   | 4,747 
|Research and development                                                                             |  |                              | 2,872  |   |      |   | 2,565 
|Other expense, net                                                                                   |  |                              | 11     |   |      |   | 60    
|                                                                                                     |  |                              |        |   |      |   |       
|Total operating expense                                                                              |  |                              | 7,649  |   |      |   | 7,372 
|                                                                                                     |  |                              |        |   |      |   |       
|(Loss) income from continuing operations                                                             |  |                              | (1,602 | ) |      |   | 675   
|                                                                                                     |  |                             
|Interest income                                                                                      |  |                              | 272    |   |      |   | 186   
|                                                                                                     |  |                              |        |   |      |   |       
|(Loss) income from continuing operations before income taxes                                         |  |                              | (1,330 | ) |      |   | 861   
|                                                                                                     |  |                             
|Income tax expense                                                                                   |  |                              |       |   |      |   |      
|                                                                                                     |  |                              |        |   |      |   |       
|(Loss) income from continuing operations after income taxes                                          |  |                              | (1,330 | ) |      |   | 861   
|                                                                                                     |  |                             
|DISCONTINUED OPERATIONS                                                                              |  |                              |        |   |      |   |       
|Income from discontinued operations, net of tax and minority interest of $289 and $208, respectively |  |                              |       |   |      |   | 256   
|Gain on disposal of discontinued operations, net of tax of $20                                       |  |                              |       |   |      |   | 303   
|                                                                                                     |  |                              |        |   |      |   |       
|Income from discontinued operations                                                                  |  |                              |       |   |      |   | 559   
|                                                                                                     |  |                              |        |   |      |   |       
|(Loss) income before extraordinary item                                                              |  |                              | (1,330 | ) |      |   | 1,420 
|                                                                                                     |  |                             
|EXTRAORDINARY ITEM                                                                                   |  |                              |        |   |      |   |       
|Extraordinary gain, net of income taxes of $0                                                        |  |                              |       |   |      |   | 217   
|                                                                                                     |  |                              |        |   |      |   |       
|Net (loss) income                                                                                    |  | $                            | (1,330 | ) |      | $ | 1,637 
|                                                                                                     |  |                              |        |   |      |   |       
|Weighted average shares outstanding                                                                  |  |                              |        |   |      |   |       
|Basic                                                                                                |  |                              | 13,558 |   |      |   | 13,339
|Diluted                                                                                              |  |                              | 13,558 |   |      |   | 13,426
|                                                                                                     |  |                             
|Basic (loss) income per share:                                                                       |  |                              |        |   |      |   |       
|From continuing operations after income taxes                                                        |  | $                            | (0.10  | ) |      | $ | 0.06  
|From discontinued operations, net of tax and minority interest                                       |  |                              |       |   |      |   | 0.04  
|From extraordinary gain, net of income taxes                                                         |  |                              |       |   |      |   | 0.02  
|                                                                                                     |  |                              |        |   |      |   |       
|Basic (loss) income per share                                                                        |  | $                            | (0.10  | ) |      | $ | 0.12  
|                                                                                                     |  |                              |        |   |      |   |       
|Diluted (loss) income per share:                                                                     |  |                              |        |   |      |   |       
|From continuing operations after income taxes                                                        |  | $                            | (0.10  | ) |      | $ | 0.06  
|From discontinued operations, net of tax and minority interest                                       |  |                              |       |   |      |   | 0.04  
|From extraordinary gain, net of income taxes                                                         |  |                              |       |   |      |   | 0.02  
|                                                                                                     |  |                              |        |   |      |   |       
|Diluted (loss) income per share                                                                      |  | $                            | (0.10  | ) |      | $ | 0.12  
|                                                                                                     |  |                              |        |   |      |   |       

See accompanying notes to the consolidated financial statements.



31



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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, |       
|                                                                                          |  | 2007                         |        |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Net (loss) income                                                                         |  | $                            | (1,330 | ) |      | $ | 1,637  |  
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                              |        |   |      |   |        |  
|Change in operating assets and liabilities of discontinued operations                     |  |                              |       |   |      |   | (417   | )
|Minority interest of discontinued operations                                              |  |                              |       |   |      |   | 217    |  
|Extraordinary gain                                                                        |  |                              |       |   |      |   | (217   | )
|Gain on disposal of discontinued operations                                               |  |                              |       |   |      |   | (303   | )
|Stock based compensation expense                                                          |  |                              | 312    |   |      |   |       |  
|Depreciation and amortization                                                             |  |                              | 284    |   |      |   | 285    |  
|Allowance for doubtful accounts                                                           |  |                              | 143    |   |      |   | 179    |  
|(Gain) loss on disposal of fixed assets                                                   |  |                              | (11    | ) |      |   | 16     |  
|Changes in net assets and liabilities, net of effects of business acquisition             |  |                              |        |   |      |   |        |  
|Trade accounts receivable                                                                 |  |                              | (123   | ) |      |   | 559    |  
|Long-term customer receivable                                                             |  |                              |       |   |      |   | (385   | )
|Inventories                                                                               |  |                              | (175   | ) |      |   | (12    | )
|Prepaid and other current assets                                                          |  |                              | 151    |   |      |   | (83    | )
|Trade accounts payable                                                                    |  |                              | (20    | ) |      |   | (250   | )
|Trade accounts receivable/payablerelated party                                           |  |                              | 175    |   |      |   | (134   | )
|Accrued expenses and other                                                                |  |                              | (273   | ) |      |   | (227   | )
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash (used in) provided by operating activities                                       |  |                              | (867   | ) |      |   | 865    |  
|                                                                                          |  |                             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Purchases of property and equipment                                                       |  |                              | (146   | ) |      |   | (205   | )
|Proceeds from disposal of property and equipment                                          |  |                              | 15     |   |      |   |       |  
|Investment in Chinese joint venture                                                       |  |                              | 1      |   |      |   | (1     | )
|Investment in Spark                                                                       |  |                              |       |   |      |   | (300   | )
|Purchases of marketable securities                                                        |  |                              | (4,775 | ) |      |   | (2,950 | )
|Sales of marketable securities                                                            |  |                              | 7,125  |   |      |   | 800    |  
|Net cash used in business acquisition                                                     |  |                              | (150   | ) |      |   |       |  
|Proceeds from disposal of discontinued operations                                         |  |                              | 89     |   |      |   | 1,749  |  
|Investing activities from discontinued operations                                         |  |                              |       |   |      |   | 21     |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by (used in) investing activities                                       |  |                              | 2,159  |   |      |   | (886   | )
|                                                                                          |  |                             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                                     |  |                              |        |   |      |   |        |  
|Proceeds from employee stock purchase plan and stock option exercises                     |  |                              | 30     |   |      |   | 85     |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net cash provided by financing activities                                                 |  |                              | 30     |   |      |   | 85     |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Net increase in cash and cash equivalents                                                 |  |                              | 1,322  |   |      |   | 64     |  
|Cash and cash equivalents, beginning of period                                            |  |                              | 934    |   |      |   | 870    |  
|                                                                                          |  |                              |        |   |      |   |        |  
|Cash and cash equivalents, end of period                                                  |  | $                            | 2,256  |   |      | $ | 934    |  
|                                                                                          |  |                              |        |   |      |   |        |  
|SUPPLEMENTAL CASH FLOW INFORMATION:                                                       |  |                              |        |   |      |   |        |  
|Cash paid for taxes (discontinued operations)                                             |  | $                            |       |   |      | $ | 72     |  
|                                                                                          |  |                             
|SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:                   |  |                              |        |   |      |   |        |  
|Business Acquisition:                                                                     |  |                              |        |   |      |   |        |  
|Deferred acquisition payment for goodwill on acquisition of Aelix                         |  | $                            |       |   |      | $ | 397    |  
|Purchase Price Adjustment:                                                                |  |                              |        |   |      |   |        |  
|Fixed assets                                                                              |  | $                            |       |   |      | $ | (206   | )
|Common stock issued on acquisition of Cortelco Shanghai                                   |  |                              |       |   |      |   | 491    |  
|EIPV Business Acquisition:                                                                |  |                              |        |   |      |   |        |  
|See note 3 to the consolidated financial statements.                                      |  |                              |        |   |      |   |        |  

See accompanying notes to the consolidated financial statements.



32



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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)



|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|------------------------------------------------------------------------------- |  | ------------ |  | ------ | -------------- | ------------------------ | ------ | ------------------- |  | -------- | - |  | - | ------ | - |  | -------------------------------------- | ------- | - | -------------------------- | - | --- | - |  | - | ------ | -
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  | Accumulated Other Comprehensive Income |         |   | Total Stockholders Equity |  
|                                                                                |  |              |  |        |                | AdditionalPaid-InCapital |        |                     |  |          |   |  |   |        |   |  |                                       
|                                                                                |  | Common Stock |  |        | Treasury Stock |                          |        | Accumulated Deficit |  |          |  
|                                                                                |  | Shares       |  | Amount |                |                          | Shares |                     |  | Amount   |   |  |   |       
|Balance at August 1, 2005                                                       |  | 13,579,957   |  | $      | 13             |                          | $      | 54,455              |  | (676,900 | ) |  | $ | (1,502 | ) |  | $                                      | (45,372 | ) |                            | $ | 61  |   |  | $ | 7,655  |  
|Issuance of common stock under employee stock purchase plan                     |  | 47,152       |  |        |               |                          |        | 43                  |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 43     |  
|Issuance of stock for employee stock options                                    |  | 30,312       |  |        |               |                          |        | 42                  |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 42     |  
|Issuance of common stock for acquisitions                                       |  | 471,501      |  |        | 1              |                          |        | 490                 |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 491    |  
|Comprehensive income:                                                           |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|Foreign currency translation adjustments                                        |  |             |  |        |               |                          |        |                    |  |         |   |  |   |       |   |  |                                        |        |   |                            |   | (61 | ) |  |   | (61    | )
|Net income                                                                      |  |             |  |        |               |                          |        |                    |  |         |   |  |   |       |   |  |                                        | 1,637   |   |                            |   |    |   |  |   | 1,637  |  
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|Comprehensive income                                                            |  |             |  |        |               |                          |        |                    |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 1,576  |  
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|Balance at July 31, 2006                                                        |  | 14,128,922   |  | $      | 14             |                          | $      | 55,030              |  | (676,900 | ) |  | $ | (1,502 | ) |  | $                                      | (43,735 | ) |                            | $ |    |   |  | $ | 9,807  |  
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|Issuance of common stock under employee stock purchase plan                     |  | 27,232       |  |        |               |                          |        | 29                  |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 29     |  
|Issuance of common stock for employee stock options                             |  | 875          |  |        |               |                          |        | 1                   |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 1      |  
|Issuance of common stock, options and warrants for deferred acquisition payment |  | 90,000       |  |        |               |                          |        | 397                 |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 397    |  
|Stock based compensation expense                                                |  |             |  |        |               |                          |        | 312                 |  |         |   |  |   |       |   |  |                                        |        |   |                            |   |    |   |  |   | 312    |  
|Net loss                                                                        |  |             |  |        |               |                          |        |                    |  |         |   |  |   |       |   |  |                                        | (1,330  | ) |                            |   |    |   |  |   | (1,330 | )
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  
|Balance at July 31, 2007                                                        |  | 14,247,029   |  | $      | 14             |                          | $      | 55,769              |  | (676,900 | ) |  | $ | (1,502 | ) |  | $                                      | (45,065 | ) |                            | $ |    |   |  | $ | 9,216  |  
|                                                                                |  |              |  |        |                |                          |        |                     |  |          |   |  |   |        |   |  |                                        |         |   |                            |   |     |   |  |   |        |  

See accompanying notes to the consolidated financial statements.



33



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended July 31, 2007 and 2006



|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, Aelix Systems, Inc. (Aelix), eOn
Communications (Beijing) Corporation Limited (eOn China) formed on June 20, 2006, Cortelco China Corporation, eOn IP Voice, Inc. (EIPV) formed on February 23, 2007 and through December 31, 2005, the date of
disposition, its majority owned subsidiary, Cortelco Shanghai Telecom Equipment Company (Cortelco Shanghai). 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, 2007 there was approximately $685,000 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 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



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



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.



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

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



|(g) | Goodwill and Other Intangible Assets
|--- | ------------------------------------

Goodwill represents
the cost in excess of the fair value of net assets acquired of Aelix Systems Inc. (Aelix). Effective with the adoption of Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible
Assets, management of the Company evaluates the carrying value of goodwill annually or when a possible impairment is indicated. The Company performs its impairment annually during the fourth quarter of the fiscal year. During our
evaluation for impairment, our business assumptions changed and caused us to reconsider the classification of the balance carried as goodwill. Based upon our changed business assumptions, we concluded that the goodwill originally recorded was
instead process technology and had a finite life of approximately 5 years. Accordingly, the balance in goodwill was reclassified to intangible asset. The Company recorded amortization of $84,000 during the current fiscal year.



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

Effective August 1, 2006,
the Company adopted the provisions of SFAS No. 123R (SFAS 123R), Share Based Payments,which requires the measurement and recognition of compensation expense for all share-based payment awards based on
estimated fair values. SFAS 123R supercedes the Companys previous accounting methodology using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees. 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.

The Company adopted SFAS 123R using the modified
prospective transition method. Under this transition method, compensation expense recognized during the fiscal year ended July 31, 2007 included: (a) compensation expense for all share-based awards granted prior to, but not yet vested as
of July 31, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123 and (b) compensation expense for all share-based awards granted subsequent to July 31, 2006, based on the grant date
fair value estimated in accordance with the provisions of SFAS 123R. In accordance with the modified prospective transition method, the Companys consolidated financial statements for prior periods have not been restated to reflect the impact
of SFAS 123R.

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.



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

The Company generally provides
customers a one year product warranty from the date of purchase. The Company estimates the costs of satisfying warranty claims based on analysis of past claims experience and



35



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



provide for these future claims in the period that revenue is recognized. The cost of satisfying warranty claims, which approximates 1%  2% 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.



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

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



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

The Company follows SFAS No. 128,
Earnings Per Share,which requires disclosure of basic and diluted earnings per share (EPS). Basic EPS is computed by dividing income available to common stockholders by the weighted average number of common
shares outstanding during the year. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the
potentially dilutive common shares, such as options, had been issued. Basic weighted average shares outstanding were 13,558,291 and 13,338,684, for the years ended July 31, 2007 and 2006, respectively. During fiscal year 2007, potentially
dilutive shares of 156,859 have been excluded from the computation of dilutive loss per share for the period because the Company has a net loss from operations and their effect would have been anti-dilutive. Potentially dilutive shares were 87,475
for the fiscal year ended July 31, 2006.



|(m) | Fair Value of Financial Instruments
|--- | -----------------------------------

The carrying amounts
of financial instruments such as cash, marketable securities, 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 and related
party accounts payable are not practical to estimate based upon the related party nature of the underlying transactions.



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

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



36



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



|(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, 2006, comprehensive income consists of foreign currency translation adjustments. The functional currency of the Companys discontinued operations was the Renminbi Yuan. The financial statements of the discontinued
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 shareholders equity.



|(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 2007 and 2006 were not significant.



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

In July 2006, the
Financial Accounting Standards Board (FASB) issued FASB interpretation No. 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109 (FIN 48), which clarifies
the accounting and disclosure associated with certain aspects of recognition and measurement related to accounting for income taxes. The Company has not yet determined the impact, if any, that FIN 48 will have on its financial statements. FIN 48 is
effective for fiscal years beginning after December 15, 2006.

In September 2006, the SEC issued Staff Accounting Bulletin
(SAB) 108, Considering the Effects of Prior Year Misstatements in Current Year Financial Statements (SAB 108). SAB 108 was issued to provide interpretive guidance on how the effects of the carryover
or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 requires the use of both the iron curtain and rollover approach in quantifying the materiality of misstatements.
SAB 108 is effective for annual financial statements covering the first fiscal year ending after November 15, 2006. Early adoption of SAB 108 is permitted. The Company elected to adopt SAB 108 effective July 31, 2007.

In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, Fair Value Measurements (SFAS
157) which defines fair value, establishes guidelines for measuring fair value and expands disclosures regarding fair value measurements. SFAS 157 is effective for fiscal years beginning after November 15, 2007. The Company is currently
evaluating what impact, if any the adoption of SFAS 157 will have on its consolidated financial statements.

In February 2007, the FASB
issued SFAS No. 159, Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). SFAS 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 159 is effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to
have a material impact on its consolidated financial statements.



37



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



|3. | eOn IP Voice, Inc.
|-- | ------------------

On February 23, 2007, the
Companys 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. The results of EIPV are included in the Companys consolidated financial
statements beginning February 23, 2007, the date the assets were purchased. The Company accounted for the purchase in accordance with SFAS No. 141, Business Combinations. A summary of the net assets acquired as of
February 23, 2007 is as follows (in thousands):



|                                |  |   |      |  
|------------------------------- |  | - | ---- | -
|Current assets acquired         |  | $ | 114  |  
|Property and equipment acquired |  |   | 153  |  
|Current liabilities assumed     |  |   | (117 | )
|                                |  |   |      |  
|Net assets acquired             |  | $ | 150  |  
|                                |  |   |      |  

During the first quarter of fiscal year 2008, the Company decided to discontinue sale of EIPV
Business Connect hosted products and services. See further discussion in Note 17.



|4. | Cortelco Shanghai, Extraordinary Gain and Discontinued Operations
|-- | -----------------------------------------------------------------

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

Under the terms of the agreement, eOn acquired all of the stock of Cortelco China Corp, a
California corporation that owned a 54.14% ownership interest in Cortelco Shanghai, from Cortelco Systems Holding Corporation (CSHC). At closing, CSHC received 157,167 shares of eOn common stock valued at $321,250. On October 21,
2005, the Company issued the remaining 471,501 shares valued at $490,361, as set forth in the purchase agreement. The value of the assets acquired exceeded the value of the stock issued and the Company realized an extraordinary gain on the purchase
of $217,000.

After working with Cortelco Shanghai, the Company concluded that its direct eOn China sales team better fits its China
strategy. Additionally, Cortelco Shanghai traditionally has kept its books and records in accordance with Chinese accounting standards instead of U.S. accounting standards. The Company had concerns that the costs associated with Cortelco Shanghai
meeting the Sarbanes-Oxley internal controls procedures and documentation requirements in the future would be prohibitively expensive.

On
December 31, 2005, the Company sold its 54.14% interest in Cortelco Shanghai to the 45.86% minority holder, Shanghai Fortune Telecommunication Technology Development Co. Ltd. (Shanghai Fortune) and members of management of Cortelco
Shanghai for $1,838,000, including dividends of $496,000 resulting in a gain on disposal of $303,000. As of July 31, 2006, all but $89,000 of the total proceeds were received and paid. The $89,000 was received from Cortelco Shanghai in August
2006.



38



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



Results of discontinued operations for the year ended July 31, 2006 follow (in thousands):



|                                                                 |  |                                |       |  
|---------------------------------------------------------------- |  | ------------------------------ | ----- | -
|                                                                 |  | For the Year EndedJul 31, 2006 |      
|REVENUE                                                          |  |                                |       |  
|Net third party revenue                                          |  | $                              | 3,662 |  
|Net related party revenue                                        |  |                                | 734   |  
|                                                                 |  |                                |       |  
|Total revenue                                                    |  |                                | 4,396 |  
|                                                                 | 
|COST OF REVENUE                                                  |  |                                |       |  
|Third party cost of revenue                                      |  |                                | 3,146 |  
|Related party cost of revenue                                    |  |                                | 279   |  
|                                                                 |  |                                |       |  
|Total cost of revenue                                            |  |                                | 3,425 |  
|                                                                 |  |                                |       |  
|Gross profit                                                     |  |                                | 971   |  
|                                                                 | 
|OPERATING EXPENSE                                                |  |                                |       |  
|Selling, general and administrative                              |  |                                | 451   |  
|                                                                 |  |                                |       |  
|Total operating expenses                                         |  |                                | 451   |  
|                                                                 |  |                                |       |  
|Income from operations                                           |  |                                | 520   |  
|                                                                 |  |                                |       |  
|Interest income                                                  |  |                                | 18    |  
|Other income, net                                                |  |                                | 7     |  
|                                                                 |  |                                |       |  
|Income from operations before income taxes and minority interest |  |                                | 545   |  
|Income tax expense                                               |  |                                | (72   | )
|                                                                 |  |                                |       |  
|Income from operations before minority interest                  |  |                                | 473   |  
|Minority interest                                                |  |                                | (217  | )
|                                                                 |  |                                |       |  
|Income from discontinued operations                              |  | $                              | 256   |  
|                                                                 |  |                                |       |  



|5. | Acquisition of Aelix Systems Incorporated
|-- | -----------------------------------------

During
the quarter ended April 30, 2005, the Company completed its purchase of Aelix Systems Inc. (Aelix), for 10,000 shares of eOn common stock valued at $14,100. Aelix is a Bangalore, India based developer of telecommunications systems
and applications which utilize internet protocol (IP) technology.

Under the agreement, the Company could issue up to an
additional 215,000 shares over the six quarters after the closing date if Aelix were to attain specified product release schedules and eOn were to achieve specified product revenues. As of July 31, 2006, management concluded that the outcome of
this contingency associated with the Aelix acquisition was likely and accordingly, the Company recorded a deferred payment and additional goodwill of $397,000 (see note 2(g)). During July 2007, the Company issued 90,000 shares of common stock,
50,000 fully vested options to purchase common stock and 75,000 warrants to purchase common stock as final payment for the purchase.



|6. | 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, marketable securities and
trade accounts receivable. The Company maintains its cash



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



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

During fiscal years 2007 and 2006, the Company recognized
revenue from the federal government of $2,542,000, or 24% of total revenue and $2,500,000, or 22% of total revenue, respectively. As of July 31, 2007 and 2006, the Company had receivables from the federal government of $609,000 and $300,000,
respectively.

The Company purchases approximately 66% of its Millennium phones, systems and system cards from one contract manufacturer.
During fiscal years 2007 and 2006, purchases from this vendor totaled approximately $1,181,000 and $1,950,000, respectively. As of July 31, 2007 and 2006, the balances payable to this contract manufacturer were $143,000 and $169,000,
respectively. 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 year 2007, the Company had revenue in the Peoples Republic of China (PRC) of $1,125,000 or 10.6% of total revenue. During
fiscal year 2006, revenue in the PRC was not significant.



|7. | Marketable Securities
|-- | ---------------------

Marketable securities
consist of the following as of July 31, 2007 and 2006 (in thousands):



|                |  |      |       |             |   |       |  |             |       |  |   |      
|--------------- |  | ---- | ----- | ----------- | - | ----- |  | ----------- | ----- |  | - | -----
|                |  | 2007 |       | 2006       
|                |  | Cost |       | MarketValue |   | Cost  |  | MarketValue
|Municipal bonds |  | $    | 3,400 |             | $ | 3,400 |  | $           | 5,750 |  | $ | 5,750
|                |  |      |       |             |   |       |  |             |       |  |   |      
|Total           |  | $    | 3,400 |             | $ | 3,400 |  | $           | 5,750 |  | $ | 5,750
|                |  |      |       |             |   |       |  |             |       |  |   |      

The municipal bond investments are comprised solely of taxable auction-rate securities with stated
maturities ranging from 24-40 years. Due to the fact that these investments have frequent interest rate resets, the Company did not have any gross unrealized gains or losses at July 31, 2007 or 2006. The Company has classified the municipal
bonds as available for sale investments.



|8. | Inventories
|-- | -----------

Inventories consist of the following
as of July 31, 2007 and 2006 (in thousands):



|                                       |  |      |        |   |      |   |        |  
|-------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                       |  | 2007 |        |   | 2006 |  
|Raw materials and purchased components |  | $    | 645    |   |      | $ | 482    |  
|Finished goods                         |  |      | 2,814  |   |      |   | 2,949  |  
|                                       |  |      |        |   |      |   |        |  
|Total                                  |  |      | 3,459  |   |      |   | 3,431  |  
|Inventory obsolescence reserve         |  |      | (1,077 | ) |      |   | (1,264 | )
|                                       |  |      |        |   |      |   |        |  
|Inventory                              |  | $    | 2,382  |   |      | $ | 2,167  |  
|                                       |  |      |        |   |      |   |        |  



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



|9. | Prepaid and Other Current Assets
|-- | --------------------------------

Prepaid and other
current assets consist of the following as of July 31, 2007 and 2006 (in thousands):



|                             |  |      |     |      |   |    
|---------------------------- |  | ---- | --- | ---- | - | ---
|                             |  | 2007 |     | 2006
|Refundable facility deposits |  | $    | 41  |      | $ | 179
|Prepaid expenses             |  |      | 72  |      |   | 79 
|Other                        |  |      | 40  |      |   | 31 
|                             |  |      |     |      |   |    
|Total                        |  | $    | 153 |      | $ | 289
|                             |  |      |     |      |   |    



|10. | Property and Equipment
|--- | ----------------------

Property and equipment
consist of the following as of July 31, 2007 and 2006 (in thousands):



|                               |  |      |        |   |      |   |        |  
|------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                               |  | 2007 |        |   | 2006 |  
|Leasehold improvements         |  | $    | 384    |   |      | $ | 358    |  
|Equipment                      |  |      | 1,735  |   |      |   | 2,106  |  
|Furniture and fixtures         |  |      | 370    |   |      |   | 539    |  
|                               |  |      |        |   |      |   |        |  
|Total                          |  |      | 2,489  |   |      |   | 3,003  |  
|Less: accumulated depreciation |  |      | (2,056 | ) |      |   | (2,665 | )
|                               |  |      |        |   |      |   |        |  
|Property and equipment, net    |  | $    | 433    |   |      | $ | 338    |  
|                               |  |      |        |   |      |   |        |  



|11. | Accrued Expenses and Other
|--- | --------------------------

Accrued expenses and
other consist of the following as of July 31, 2007 and 2006 (in thousands):



|                                   |  |      |       |      |   |      
|---------------------------------- |  | ---- | ----- | ---- | - | -----
|                                   |  | 2007 |       | 2006
|Employee compensation              |  | $    | 88    |      | $ | 157  
|Commissions                        |  |      | 19    |      |   | 31   
|Vacation                           |  |      | 52    |      |   | 37   
|Deferred income                    |  |      | 524   |      |   | 585  
|Employee withholdings              |  |      | 11    |      |   | 47   
|Warranty reserve                   |  |      | 133   |      |   | 150  
|Professional fees                  |  |      | 187   |      |   | 184  
|Value added taxes payable in China |  |      | 17    |      |   |     
|Other                              |  |      | 189   |      |   | 185  
|                                   |  |      |       |      |   |      
|Total                              |  | $    | 1,220 |      | $ | 1,376
|                                   |  |      |       |      |   |      

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.



41



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



The requirements of FIN 45 are applicable to the Companys product warranty liability. As of
July 31, 2007 and 2006, the Companys product warranty liability recorded in other accrued liabilities was $133,000 and $150,000, respectively. The following table summarizes the activity related to the product warranty liability during
fiscal years 2007 and 2006 (in thousands):



|                                |  |      |     |   |      |   |      |  
|------------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|                                |  | 2007 |     |   | 2006 |  
|Balance at beginning of period  |  | $    | 150 |   |      | $ | 227  |  
|Accruals for warranty liability |  |      | 77  |   |      |   | 74   |  
|Warranty expense                |  |      | (94 | ) |      |   | (151 | )
|                                |  |      |     |   |      |   |      |  
|Balance at end of period        |  | $    | 133 |   |      | $ | 150  |  
|                                |  |      |     |   |      |   |      |  



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

No income tax benefit from continuing
operations was recorded for the year ended July 31, 2007 as management was unable to conclude that it was more likely than not that the income tax benefit would be realized. There was no income tax expense for the year ended July 31, 2006
as taxable income was offset by accumulated net operating losses.

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 2007 and 2006 is as follows (in thousands):



|                                                             |  |      |      |   |      |   |        |  
|------------------------------------------------------------ |  | ---- | ---- | - | ---- | - | ------ | -
|                                                             |  | 2007 |      |   | 2006 |  
|Income tax (benefit)/expense at Federal statutory rate (35%) |  | $    | (465 | ) |      | $ | 573    |  
|State income taxes, net of federal benefit                   |  |      | (81  | ) |      |   | 64     |  
|Change in valuation allowance                                |  |      | 971  |   |      |   | (1,289 | )
|Adjustment to effective state tax rate                       |  |      |     |   |      |   | 726    |  
|Other, net                                                   |  |      | (425 | ) |      |   | (74    | )
|                                                             |  |      |      |   |      |   |        |  
|Total income tax expense                                     |  | $    |     |   |      | $ |       |  
|                                                             |  |      |      |   |      |   |        |  

The deferred tax effects of the Companys principal temporary differences at July 31,
2007 and 2006 are as follows (in thousands):



|                                           |  |      |        |   |      |   |        |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                           |  | 2007 |        |   | 2006 |  
|Allowance for doubtful receivables         |  | $    | 293    |   |      | $ | 250    |  
|Inventories                                |  |      | 481    |   |      |   | 567    |  
|Basis difference in property and equipment |  |      | (5     | ) |      |   | 21     |  
|Accrued warranty costs                     |  |      | 52     |   |      |   | 58     |  
|Accrued expenses and other                 |  |      | 29     |   |      |   | 57     |  
|Deferred revenue                           |  |      | 177    |   |      |   | 222    |  
|Net operating loss carryforwards           |  |      | 8,061  |   |      |   | 6,841  |  
|Capital loss carryforward                  |  |      |       |   |      |   | 101    |  
|Valuation allowance                        |  |      | (9,088 | ) |      |   | (8,117 | )
|                                           |  |      |        |   |      |   |        |  
|Total deferred tax asset                   |  | $    |       |   |      | $ |       |  
|                                           |  |      |        |   |      |   |        |  



42



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



Due to uncertainties surrounding the timing of realizing the benefits of its net favorable tax
attributes in future tax returns; the Company has recorded a valuation allowance against its deferred tax assets at July 31, 2007 and 2006.

At July 31, 2007, the Company has federal and state net operating loss carry-forwards of approximately $21,589,000, which expire on various dates through 2026.



|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 2007 and 2006. 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 2,000,000 shares of the Companys common stock for issuance under the 1999 Equity Incentive Plan. During fiscal years 2007 and
2006, 50,000 and 325,000 options were issued under this plan respectively, with exercise prices ranging from $0.94 to $1.43 per share.

During fiscal year 2001, the board of directors authorized up to an aggregate of 500,000 shares of the Companys common stock for issuance under the 2001 Equity Incentive Plan. Grants to officers or directors are prohibited under the
terms of this plan. During fiscal years 2007 and 2006, 5,000 and 87,000 options were issued under this plan respectively, with an exercise price of $1.46 per share.

Employee Stock Purchase Plan

During 1999, the board of directors adopted an Employee Stock Purchase
Plan, which permits employees to purchase up to 250,000 shares of the Companys common stock. The plan was amended in 2005 to increase the number of shares available under the plan to 1,000,000. 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 2007 and 2006, employees purchased 27,232 and 47,152 shares of common stock respectively, under this plan. During September 2007, employees purchased 15,665 shares under this plan.

Stock Compensation

Beginning August 1, 2006,
the Company adopted SFAS 123R using the modified prospective transition method. Under the modified prospective transition method, prior periods are not restated for the effect of SFAS 123R. 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



43



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



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.

Prior to August 1, 2006, the Company accounted for stock
options under the recognition and measurement provisions of APB Opinion No. 25 (APB 25), Accounting for Stock Issued to Employees, and related Interpretations, as permitted by SFAS 123. No stock-based compensation was
recognized on employee stock options or ESPP shares issued prior to August 1, 2006. The following table sets forth the pro forma amounts of net income and net income per share, for the year ended July 31, 2006, that would have resulted if
we had accounted for our employee stock option plans under the fair value recognition provisions of SFAS 123 (in thousands):



|                                                                                                           |  |      |       |  
|---------------------------------------------------------------------------------------------------------- |  | ---- | ----- | -
|                                                                                                           |  | 2006 |      
|Net income as reported                                                                                     |  | $    | 1,637 |  
|Deduct: Total stock-based compensation determined under fair value based method for all awards, net of tax |  |      | (593  | )
|                                                                                                           |  |      |       |  
|Pro forma net income                                                                                       |  | $    | 1,044 |  
|                                                                                                           |  |      |       |  
|Net income per share:                                                                                      |  |      |       |  
|Basicas reported                                                                                          |  | $    | 0.12  |  
|Basicpro forma                                                                                            |  | $    | 0.08  |  
|Dilutedas reported                                                                                        |  | $    | 0.12  |  
|Dilutedpro forma                                                                                          |  | $    | 0.08  |  

Determining Fair Value

The fair value of each option award is estimated on the date of grant using the Black-Scholes option-pricing model that uses the assumptions in the following table. 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
estimated fair value of the employee stock options are amortized to expense using the straight-line method over the vesting period.

The
assumptions used to value option grants and the Employee Stock Purchase Plan for the year ended July 31, 2007 and 2006 are as follows:



|                         |  |              |   |  |      |  
|------------------------ |  | ------------ | - |  | ---- | -
|                         |  | 2007         |   |  | 2006 |  
|Volatility               |  | 107          | % |  | 107  | %
|Expected term (in years) |  | 6.25         |   |  | 6.25 |  
|Dividend yield           |  |             |   |  |     |  
|Risk free interest rate  |  | 4.43%  4.86 | % |  | 4.86 | %



44



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



Total stock-based compensation recognized for the year ended July 31, 2007, related to unvested
options granted prior to August 1, 2006 and ESPP shares issued during the year ended July 31, 2007, is as follows:



|                                    |  |              |         |      |   |        |  |   |        
|----------------------------------- |  | ------------ | ------- | ---- | - | ------ |  | - | -------
|Income Statement Classification     |  | OptionGrants |         | ESPP |   | Total 
|Selling, general and administrative |  | $            | 271,000 |      | $ | 1,000  |  | $ | 272,000
|Research and development            |  |              | 26,000  |      |   | 14,000 |  |   | 40,000 
|                                    |  |              |         |      |   |        |  |   |        
|Total                               |  | $            | 297,000 |      | $ | 15,000 |  | $ | 312,000
|                                    |  |              |         |      |   |        |  |   |        

As of July 31, 2007, the Company has total unrecognized compensation costs of $238,000
related to unvested stock options outstanding under the Plans. These costs are expected to be recognized over a weighted average period of 3.7 years ending during fiscal year 2010.

General Stock Option Information

Activity in the Companys stock option plans during fiscal
year 2007 is as follows:



|                  |  |                         |   |  |                   |   |  |                              |     
|----------------- |  | ----------------------- | - |  | ----------------- | - |  | ---------------------------- | ----
|                  |  | 2007                   
|                  |  | SharesAvailableforGrant |   |  | SharesOutstanding |   |  | WeightedAverageExercisePrice
|Beginning of year |  | 446,917                 |   |  | 1,644,175         |   |  | $                            | 3.17
|Granted           |  | (55,000                 | ) |  | 55,000            |   |  |                              | 0.99
|Exercised         |  |                        |   |  | (875              | ) |  |                              | 1.00
|Cancelled         |  | 44,743                  |   |  | (44,743           | ) |  |                              | 2.19
|                  |  |                         |   |  |                   |   |  |                              |     
|End of year       |  | 436,660                 |   |  | 1,653,557         |   |  | $                            | 3.13
|                  |  |                         |   |  |                   |   |  |                              |     

Information regarding the stock options outstanding under the Companys stock option plans at
July 31, 2007 is summarized as follows:



|                         |  |                            |  |                                         |  |                              |       |                            |           |                              |   |      
|------------------------ |  | -------------------------- |  | --------------------------------------- |  | ---------------------------- | ----- | -------------------------- | --------- | ---------------------------- | - | -----
|Range of Exercise Prices |  | Outstandingat July 31,2007 |  | WeightedAverageRemainingContractualLife |  | WeightedAverageExercisePrice |       | Exercisableat July 31,2007 |           | WeightedAverageExercisePrice
|$  0.00  $  5.00        |  | 1,398,528                  |  | 6.3 years                               |  | $                            | 2.03  |                            | 1,238,269 |                              | $ | 2.06 
|$  5.01  $10.00         |  | 167,429                    |  | 1.6 years                               |  |                              | 8.08  |                            | 167,429   |                              |   | 8.08 
|$10.01  $15.00          |  | 84,600                     |  | 2.0 years                               |  |                              | 10.73 |                            | 84,600    |                              |   | 10.73
|$15.01  $25.00          |  | 3,000                      |  | 2.6 years                               |  |                              | 24.25 |                            | 3,000     |                              |   | 24.25
|                         |  |                            |  |                                         |  |                              |       |                            |           |                              |   |      
|                         |  | 1,653,557                  |  | 5.6 years                               |  | $                            | 3.13  |                            | 1,493,298 |                              | $ | 3.27 
|                         |  |                            |  |                                         |  |                              |       |                            |           |                              |   |      

Activity in the Companys nonvested options during fiscal year 2007 is as follows:



|                  |  |                 |   |  |                               |     
|----------------- |  | --------------- | - |  | ----------------------------- | ----
|                  |  | NonvestedShares |   |  | Weighted-AverageExercisePrice
|Beginning balance |  | 331,900         |   |  | $                             | 3.47
|Options granted   |  | 55,000          |   |  | $                             | 0.99
|Options vested    |  | (208,429        | ) |  | $                             | 1.95
|Options cancelled |  | (18,212         | ) |  | $                             | 2.75
|                  |  |                 |   |  |                               |     
|Ending balance    |  | 160,259         |   |  | $                             | 3.27
|                  |  |                 |   |  |                               |     



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



The aggregate intrinsic value of both options outstanding and options exercisable as of July 31,
2007 was $26,890. The aggregate intrinsic value of the 156,930 options which vested during the year ended July 31, 2007 was less than $1,000. The aggregate intrinsic value of the 875 options exercised during the year ended July 31, 2007
was less than $1,000.



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

Cortelco International, Inc. and Cortelco
Systems Holding Corporation

Cortelco International, Inc. (CII) is a subsidiary of Cortelco Systems Holding Corporation
(CSHC) and a supplier of Millenium and eQueue peripheral hardware. David Lee, the Companys Chief Executive Officer, is a controlling shareholder of CSHC. Accounts payable are paid on thirty to sixty day terms. The following
represent related party transactions for the each of the fiscal years ending July 31 (in thousands):



|                                           |  |      |        |   |      |   |      |  
|------------------------------------------ |  | ---- | ------ | - | ---- | - | ---- | -
|                                           |  | 2007 |        |   | 2006 |  
|Payable to CII                             |  |      |        |   |      |   |      |  
|Balance at beginning of period             |  | $    | 71     |   |      | $ | 51   |  
|eNterprise product line purchases from CII |  |      | 1,264  |   |      |   | 278  |  
|Existing product line purchases from CII   |  |      | 673    |   |      |   | 594  |  
|Payments to CII                            |  |      | (1,708 | ) |      |   | (852 | )
|                                           |  |      |        |   |      |   |      |  
|Balance at end of period                   |  | $    | 300    |   |      | $ | 71   |  
|                                           |  |      |        |   |      |   |      |  

Cortelco Systems Puerto Rico

Cortelco Systems Puerto Rico (CSPR) was a wholly-owned subsidiary of the Company until August 28, 2001, when it was spun off to the shareholders of eOn. David Lee is a significant shareholder of CSPR.
Since the spin-off, the Company has not had significant transactions with CSPR. CSPR had purchases from the Company totaling $9,000 during the fiscal year ending July 31, 2007.

Spark Technologies, Inc.

Aelix performs engineering development projects for Spark Technologies, Inc
(Spark), a California company that is majority owned by David Lee, the Chief Executive Officer 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 is 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. Prior to this agreement, under the terms of an engineering
development agreement, Aelix billed Spark for personnel and operating costs directly attributable to engineering work on Spark projects and allocated general overhead based upon pro rata head count. The following represent related party transactions
for each of the fiscal years ending July 31 (in thousands):



|                               |  |      |      |   |      |   |      |  
|------------------------------ |  | ---- | ---- | - | ---- | - | ---- | -
|                               |  | 2007 |      |   | 2006 |  
|Receivable from Spark          |  |      |      |   |      |   |      |  
|Balance at beginning of period |  | $    | 27   |   |      | $ | 19   |  
|Aelix engineering development  |  |      | 759  |   |      |   | 401  |  
|Payments received from Spark   |  |      | (678 | ) |      |   | (393 | )
|                               |  |      |      |   |      |   |      |  
|Balance at end of period       |  | $    | 108  |   |      | $ | 27   |  
|                               |  |      |      |   |      |   |      |  



46



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



|                                         |  |      |     |   |      |   |      |  
|---------------------------------------- |  | ---- | --- | - | ---- | - | ---- | -
|                                         |  | 2007 |     |   | 2006 |  
|Payable to Spark                         |  |      |     |   |      |   |      |  
|Balance at beginning of period           |  | $    | 1   |   |      | $ | 106  |  
|Deposit received from Spark              |  |      | 71  |   |      |   | 86   |  
|Engineering services received from Spark |  |      |    |   |      |   | 18   |  
|eOn China engineering development        |  |      | (35 | ) |      |   | (187 | )
|Payments to Spark                        |  |      |    |   |      |   | (22  | )
|                                         |  |      |     |   |      |   |      |  
|Balance at end of period                 |  | $    | 37  |   |      | $ | 1    |  
|                                         |  |      |     |   |      |   |      |  

During July 2007, Spark gave notice of its intent to terminate the engineering development work
performed by Aelix in India. As a result of this termination, the Company reduced the balance due from Spark by $26,000. This credit represents unamortized leasehold costs as of January 2008 and a facility lease deposit, offset by lost Aelix profits
and rent through January 2008.



|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 2007 and 2006, contributions made by the Company totaled $57,000
and $55,000, respectively.



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



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

The Company is obligated under
non-cancelable operating lease agreements for its primary warehouse, office facilities and certain office equipment. Future minimum annual lease payments totaling $508,000 under non-cancelable operating lease agreements with remaining terms greater
than one year are as follows (dollars in thousands):



|      |  |          |    
|----- |  | -------- | ---
|      |  | July 31,
|2008  |  | $        | 224
|2009  |  |          | 168
|2010  |  |          | 100
|2011  |  |          | 16 
|      |  |          |    
|Total |  | $        | 508
|      |  |          |    

Rent expense for operating leases for the years ended July 31, 2007 and 2006 totaled $404,000
and $377,000, respectively.

Rent expense for fiscal year 2006 is offset by $13,000, which represents sublease income for June through
October 2005. The sublease agreement expired on October 31, 2005 and was not renewed by the sub-lessee.



47



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



On March 18, 2007, the Companys lease for 40,000 sq. ft. of office and warehouse space in
Kennesaw, Georgia expired. Effective April 1, 2007, the lease on the existing facility was amended to extend the lease for three years and reduce the leased square footage to 11,321 sq. ft., and provided for rent expense of approximately $8,000
per month.

On May 7, 2006, the Company entered into a lease for 4,171 sq. ft. of office space in Beijing China. The lease term is 2
years beginning May 7, 2006. The monthly rent expense is approximately $280.

On January 16, 2006, the Company entered into a
lease for 1,520 sq. ft. of office space in Shanghai China. The lease term is from January 6, 2006 through December 31, 2007. The monthly rent expense is approximately $1,300.

On November 29, 2005, the Company entered into a lease for 5,000 sq. ft. of office space in Bangalore India. The lease term is five years beginning
January 1, 2006. The monthly rent expense is approximately $2,600.



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

At July 31, 2007, the Company had
outstanding commitments for inventory purchases under open purchase orders of $1,196,000.



|(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 has the option to purchase all remaining outstanding Spark Common Stock, including options, by issuing 8,665,000 shares of the Companys common stock. The
Company will have the right to give notice of its intent to exercise this option at any time between September 30, 2007 and March 31, 2008. The eOn Board of Directors will continue to monitor Sparks operations and complete its due
diligence process prior to granting approval of the option exercise. After such notice of exercise, the Company will file a Form S-4 with the Securities and Exchange Commission and seek the approval of the Companys shareholders.

The Agreement further provides that in the event the Company does not exercise this option, or the Companys shareholders do not approve it, the
Company may require Spark or David Lee to repurchase the Companys Spark shares for $300,000. In addition, in the event that Spark discontinues operations or liquidates, David Lee is required to repurchase the shares for $300,000 within 60
days.

This investment was not evaluated for impairment because (a) the Company did not estimate the fair value of this investment in
accordance with paragraphs 14 and 15 of FASB 107, Disclosures About Fair Value of Financial Instruments, and (b) the Company did not identify any events or changes in circumstances that may have a significant or adverse effect on
its fair value.



|(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. | Subsequent Events
|--- | -----------------



|(a) | Symbio Group
|--- | ------------

On August 1, 2007 and August 27,
2007, the Company made strategic investments in Symbio Group (Symbio) of $500,000 and $400,000 for 250,000 and 200,000, respectively shares or a total of approximately 3%



48



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##### Index to Financial Statements

EON COMMUNICATIONS CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)

Years Ended July 31, 2007 and 2006



of Symbio Investment Corporation. Symbio is a leading China-based provider of software development, testing, and globalization outsourcing services to
multinational companies. The investment is expected to establish eOn as the 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. This transaction will be accounted for as an investment at cost.

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 on 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.

In conjunction with the purchase of these shares, David Lee was appointed to the board of directors of Symbio.



|(b) | Cortelco Acquisition
|--- | --------------------

On October 22, 2007, the
Company executed a non-binding letter of intent with CSHC to merge CSHC into eOn Communications Corporation. CSHC is a privately held company that designs and sells telephones in the US and Latin America. David Lee is the controlling shareholder of
CSHC. The Board has appointed a special committee of independent directors to negotiate the transaction.

The letter of intent is
non-binding on the parties, and several steps remain in order to acquire CSHC, including the following:



| |  |  | Negotiating and signing a definitive binding purchase agreement;
| | - |  | ----------------------------------------------------------------



| |  |  | Obtaining fairness opinions;
| | - |  | ----------------------------



| |  |  | Filing a detailed registration and proxy with the SEC; and
| | - |  | ----------------------------------------------------------



| |  |  | Obtaining shareholder approvals.
| | - |  | --------------------------------

The Company anticipates that the transaction will close sometime in the Companys second or third fiscal quarter, but there is no guarantee that it will close during this timeframe. The purchase is expected to be a combined stock and
cash transaction with a major portion of the cash contingent on CSHCs post acquisition earnings.



|(c) | eOn IP Voice, Inc.
|--- | ------------------

During the first quarter of fiscal
year 2008, the Company decided to discontinue sale of EIPV Business Connect hosted products and services. The operating loss for the EIPV business during the first quarter of fiscal year 2008 is expected to be approximately $375,000, excluding any
write-offs which cannot be estimated at this time. The Company is continuing to provide service until existing customers are transitioned to other service providers and management is evaluating sale of the assets.



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|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
|------- | -------------------------------------------------------------------------------------

None.



|ITEM 8A. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

Evaluation of disclosure controls and
procedures.

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

Changes in internal control over financial reporting.

There were no changes in internal controls over financial reporting that occurred during the fiscal year ended July 31, 2007.



|ITEM 8B. | 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 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(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, 2007, 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 10. | 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 11. | 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 12. | CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.
|-------- | -----------------------------------------------------

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



|ITEM 13. | EXHIBITS
|-------- | --------



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

The following
information appears in Item 7 of Part II of this Report:



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



| |  |  | Consolidated Balance Sheets as of July 31, 2007 and 2006
| | - |  | --------------------------------------------------------



| |  |  | Consolidated Statements of Operations for the Years Ended July 31, 2007 and 2006
| | - |  | --------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Cash Flows for the Years Ended July 31, 2007 and 2006
| | - |  | --------------------------------------------------------------------------------



| |  |  | Consolidated Statements of Stockholders Equity and Comprehensive Income (Loss) for the Years Ended July 31, 2007 and 2006
| | - |  | --------------------------------------------------------------------------------------------------------------------------



| |  |  | 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.



|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.



51



---

##### Table of Contents

##### Index to Financial Statements

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 30, 2007 |  |  |  | By |  | /s/    STEPHEN R.
BOWLING
|                       |  |  |  |    |  |                           |  | Stephen R. Bowling, Vice President,
|                       |  |  |  |    |  |                           |  | Chief Financial Officer, Secretary 
|                       |  |  |  |    |  |                           |  | (Principal Financial Officer)      

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



|                                             |  |                                                                                 |  |                 
|-------------------------------------------- |  | ------------------------------------------------------------------------------- |  | ----------------
|Name                                         |  | Title                                                                           |  | Date            
|                                             |  |                                                                                
|/s/    DAVID S. LEE David S. Lee             |  | President, Chief Executive Officer and Chairman (Principal Executive Officer)   |  | October 30, 2007
|                                             |  |                                                                                
|/s/    STEPHEN R.
BOWLING Stephen R. Bowling |  | Vice President, Chief Financial Officer, Director (Principal Financial Officer) |  | October 30, 2007
|                                             |  |                                                                                
|/s/    MITCH C.
GILSTRAP Mitch C. Gilstrap   |  | Vice President, Chief Operating Officer                                         |  | October 30, 2007
|                                             |  |                                                                                
|/s/    ROBERT P.
DILWORTH Robert P. Dilworth |  | Director                                                                        |  | October 30, 2007
|                                             |  |                                                                                
|/s/    W. FRANK
KING W. Frank King           |  | Director                                                                        |  | October 30, 2007
|                                             |  |                                                                                
|/s/    FREDERICK W.
GIBBS Frederick W. Gibbs |  | Director                                                                        |  | October 30, 2007



52



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##### Table of Contents

##### Index to Financial Statements

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(&)        |  | Plan of Acquisition for Cortelco Shanghai Telecom Equipment Company                                                           
|              | 
|3.1*          |  | Amended and Restated Certificate of Incorporation of eOn as filed with the Secretary of State of Delaware on November 16, 1999
|              | 
|3.2*          |  | Amended and Restated Bylaws of eOn                                                                                            
|              | 
|4.1*          |  | Reference is made to Exhibits 3.1 and 3.2                                                                                     
|              | 
|10.1*         |  | Form of Indemnity Agreement between eOn and its officers and directors                                                        
|              | 
|14(@)         |  | Code of Ethics                                                                                                                
|              | 
|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                                                                                                   

---

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

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

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

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



53