UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-QSB





(Mark One)



xQUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2008.





oTRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from _______ to ________





Commission file number
        000-49626






CORTELCO SYSTEMS PUERTO RICO, INC.

(Exact name of small business issuer as specified in its charter)





|PUERTO RICO(State of incorporation) |  | 66-0567491(IRS Employer Identification No.)
|----------------------------------- |  | -------------------------------------------





Parque Ind. Caguas Oeste Road 156 km 58.2, Caguas, Puerto Rico, 00725-0137

(Address of principal executive office)





(787) 704-0000

(Issuers telephone number, including area code)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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. YesxNoo



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).YesoNox



State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:



1,583,536 shares of Common Stock, $0.01 par value, as of January 31, 2008.



Transitional Small Business Disclosure Format (Check one):  YesoNox



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CORTELCO SYSTEMS PUERTO RICO, INC.

FORM 10-QSB

QUARTER ENDED JANUARY 31, 2008



INDEX



PART I - FINANCIAL INFORMATION
        1ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
        1Condensed Balance Sheet (Unaudited)
        1Condensed Income Statements and Comprehensive Income (Unaudited)
        2Condensed Statements of Changes in Stockholders Equity (Unaudited)
        3Condensed Statements of Cash Flows (Unaudited)
        4Notes to Condensed Financial Statements (Unaudited)
        5ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS.
        9ITEM 3.  CONTROLS AND PROCEDURES.
        12PART II - OTHER INFORMATION
        13ITEM 1.  LEGAL PROCEEDINGS.
        13ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
        13ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
        13ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
        13ITEM 5.  OTHER INFORMATION.
        13ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
        13SIGNATURES
        14




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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).



CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Balance Sheet (Unaudited)

January 31, 2008

(Dollars in thousands)

ASSETS

Current assets:Cash
         
         $
        620Trade accounts receivable, net of allowance foruncollectible accounts of $67
         
         
        2,546Inventories
         
         
        310Installations in process
         
         
        119Prepaid expenses
         
         
        138Total current assets
         
         
        3,733Available for sale securities
         
         
        86Property and equipment,net
         
         
        44Purchased software, net of accumulated amortization of $19
         
         
        9$
        3,872LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Trade accounts payable
         
         $
        1,285Due to affiliated entities
         
         
        11Deposits on purchases
         
         
        171Other accrued liabilities
         
         
        312Deferred revenue
         
         
        242Total current liabilities
         
         
        2,021Commitments and contingenciesStockholders' equity:Preferred stock, par value $.01 per share; authorized 10,000,000shares, no shares issued
         
         
        --Common stock, par value $.01 per share; 5,000,000 shares authorized,1,604,557 shares issued and 1,583,536 outstanding
         
         
        16Treasury stock, 21,021 shares at cost
         
         
        (7
)Capital in excess of par value
         
         
        7,322Accumulated deficit
         
         
        (5,339
)Accumulated other comprehensive loss
         
         
        (141
)Total stockholders' equity
         
         
        1,851$
        3,872




See notes to condensed financial statements.



1

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CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Income Statements and Comprehensive Income (Unaudited)

For the Three Months and Six Months Ended January 31, 2008 and 2007

(Dollars in thousands, except per share data)



Three Months Ended
January 31,
        
        Six Months Ended
January 31,2008
        
        2007
        

        2008
        
        2007Net revenues:Products
        $           1,090
        
        $               689
        
        $           2,082
        
        $           1,172Services
        819
        
        784
        
        1,587
        
        1,641Telephony
        778
        
        226
        
        1,520
        
        333Total net revenues
        2,687
        
        1,699
        
        5,189
        
        3,146Cost of revenues:Products
        885
        
        518
        
        1,552
        
        894Services
        474
        
        442
        
        974
        
        1,000Telephony
        719
        
        190
        
        1,413
        
        286Total cost of revenues
        2,078
        
        1,150
        
        3,939
        
        2,180Gross profit
        609
        
        549
        
        1,250
        
        966Operating expenses:Selling, general, & administrative
        558
        
        515
        
        1,153
        
        994Income (loss) from operations
        51
        
        34
        
        97
        
        (28
        )Other income, net:
        4
        
        9
        
        11
        
        11Income (loss) before income taxes
        55
        
        43
        
        108
        
        (17
        )Provision for income taxes:Current (net of tax grant benefits), assuming no carryforward benefit
        2
        
        20
        
        8
        
        --Deferred credit from losses
        (18
        )
        --
        
        (8
        )
        4Change in valuation allowance, and other
        16
        
        (20
        )
        --
        
        (4
        )Total income tax expense
        --
        
        --
        
        --
        
        --Net income (loss)
        $                55
        
        43
        
        $               108
        
        $               (17
        )Other comprehensive income:Net unrealized gain (loss) on available
for sales securities
        (79
        )
        (66
        )
        (62
        )
        23Comprehensive income (loss)
        $               (24
        )
        $               (23
        )
        $                46
        
        $                  6Basic and diluted net income (loss)
per common share
        $             0.03
        
        $             0.03
        
        $             0.07
        
        $            (0.01
        )






See notes to condensed financial statements.



2

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CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Statements of Changes in Stockholders Equity (Unaudited)For the Six Months Ended January 31, 2008(Dollars in thousands) Commonstock
         
         
        TreasuryStock
         
         
        Capital inexcess of parvalue
         
         
        (Deficit)
         
         
        Accumulatedothercomprehensiveloss
         
         
        TotalBalance, July 31, 2007
         
         $
        16
         
         $
        (11
         )
         $
        7,316
         
         $
        (5,447
         )
         $
        (79)
         
         $
        1,795Treasury Stock
         
         
        
         
         
        4
         
         
        
         
         
        
         
         
        
         
         
        4Paid in Capital for Treasury Stock
         
         
        
         
         
        
         
         
        6
         
         
        
         
         
        
         
         
        6Net income
         
         
        
         
         
        
         
         
        
         
         
        108
         
         
        
         
         
        108Other comprehensive loss
         
         
        --
         
         
        --
         
         
        --
         
         
        --
         
         
        (62)
         
         
        (62
         )Balance, January 31, 2008
         
         $
        16
         
         $
        (7
        )
         $
        7,322
         
         $
        (5,339
        )
         $
        (141)
         
         $
        1,851




























See notes to condensed financial statements



3

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Cortelco Systems Puerto Rico, Inc.Condensed Statements of Cash Flows (Unaudited)For the Three Months and Six Months ended January 31, 2008 and 2007(Dollars in thousands)




Three Months Ended,
January 31,
        
        Six Months Ended,
January 31,2008
        
        2007
        
        2008
        
        2007Cash flows from operating activities:Net income (loss)
        $                   55
        
        $                   43
        
        $                  108
        
        $                (17
        )Adjustments to reconcile net income (loss) to net cash used in operating activities:Depreciation and amortization
        14
        
        28
        
        29
        
        56Stock compensation
        --
        
        --
        
        10
        
        --Loss on disposition of equipment
        1
        
        
        
        1Changes in operating assets and liabilities:Decrease (increase) in:Trade accounts receivable
        (587
        )
        (187
        )
        (804
        )
        76Inventories
        (99
        )
        (21
        )
        (64
        )
        (138
        )Installation in process
        113
        
        28
        
        171
        
        26Prepaid expenses
        41
        
        (44
        )
        (22
        )
        (72
        )Increase (decrease) in:Trade accounts payable
        380
        
        125
        
        249
        
        112Due to affiliated entities
        1
        
        (2
        )
        (1
        )
        (10
        )Deposits on purchases
        31
        
        (19
        )
        (62
        )
        (78
        )Other accrued liabilities
        15
        
        (2
        )
        33
        
        (65
        )Deferred revenue
        (71
        )
        (59
        )
        (26
        )
        (135
        )Total adjustments
        (161
        )
        (153
        )
        (486
        )
        (228
        )Net cash used in operating activities
        (106
        )
        (110
        )
        (378
        )
        (245
        )Cash flows from investing activities:Capital expenditures
        (7
        )
        (12
        )
        (13
        )
        (16
        )Net cash used in investing activities
        (7
        )
        (12
        )
        (13
        )
        (16
        )Net change in cash
        (113
        )
        (122
        )
        (391
        )
        (261
              )Cash,beginning
        733
        
        734
        
        1,011
        
        873Cash,ending
        $                620
        
        $                612
        
        $                620
        
        $                612






See notes to condensed financial statements.



4

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Cortelco Systems Puerto Rico, Inc.

Notes to Condensed Financial Statements (Unaudited)

For the Three Months Ended January 31, 2008 and 2007



Basis of Presentation



The accompanying unaudited condensed financial statements have been prepared by Cortelco Systems Puerto Rico, Inc. ("CSPR" or the "Company").  It is managements opinion that these statements include all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders equity, and cash flows as of January 31, 2008 and for all periods presented, and the same were of normal recurring nature.



Certain information and footnote disclosures normally included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted.  These condensed financial statements should be read in conjunction with the financial statements and notes as of July 31, 2007 and for the periods then ended, which are included in the Annual Report on Form 10-KSB for the year ended July 31, 2007 filed with the Securities and Exchange Commission.



Significant Accounting Policies



Use of 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 amount of assets and liabilities and the disclosure 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.



Fair value of financial instruments- The carrying amounts of cash is a reasonable estimate of its fair value.  The carrying amounts of accounts receivable, accounts payable trade (including related parties), accrued expenses, deferred revenues, and deposit liabilities are at their approximate fair value due to their short-term maturities. Marketable securities are classified as available for sale and are stated at quoted market price.



Revenue Recognition- The Company believes that its revenue recognition policies disclosed below are in compliance with Staff Accounting Bulletin No. 104,Revenue Recognition in Financial Statements.



Installation and services -The Company recognizes revenue for equipment shipped to customers only after completion of installation services and acceptance by the customer due to the customized nature of each installation.  Revenues from communications systems service contracts are recognized over the life of the individual contracts.  Currently, the Company sells and services communications systems purchased from various third-party vendors.  The Company allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element.



Telephony billing revenues-Telephony billing revenues result from the resale of Puerto Rico Telephone (PRT  the main local telephone company) services offered to the local users of intra-island calls, ISDN, T1, and other services.  This amount also includes the resale of Sprint long distance service, inside and outside of Puerto Rico.  Revenues from the resale of these services are recognized monthly as services are provided to the customers.



Maintenance contracts- Maintenance contract revenues are recognized over the remaining life of each contract (usually one year) based on the straight-line method.



The following table summarizes the activity relating to the unexpired maintenance contracts during the quarter ended January 31, 2008:





(Dollars in thousands)
        
        October 31, 2007
Liability Balance
        
        Additions
        
        Deductions
        
        January 31, 2008Liability BalanceMaintenance Contracts
        
        $    260
        
        $    39
        
        $     98
        
        $    201






5

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Product Warranties The Company gives a one-year warranty to certain products sold.  The Company recognizes an accrued warranty liability when it sells a product.  This amount is an estimate of the cost of labor to be performed if that warranty is exercised, based on experience.  If the Company is required to perform on its warranty, it sends the product to the manufacturer that normally warrants the product.  The Company only incurs the cost of labor of technicians and return freight.  The Company recognizes warranty revenue over the term of the warranty period.  The costs related to warranties exercised are recognized directly as cost of sales when incurred.



The following table summarizes the activity relating to the warranty reserve during the quarter ended January 31, 2008:





(Dollars in thousands)
        
        October 31, 2007Liability Balance
        
        Additions
        
        Deductions
        
        January 31, 2008Liability BalanceWarranty Reserve
        
        $     53
        
        $      7
        
        $     19
        
        $     41






Cash and cash equivalents -Includes cash and cash equivalents deposited in FDIC insured financial institutions.   These deposits exceed federally insured limits.



Allowance for doubtful accounts- The allowance for doubtful accounts is an amount that management believes will be adequate to absorb losses on existing accounts receivable that are considered uncollectible based on evaluations of collectibility of accounts receivable and prior credit experience.



InventoriesInventories are stated at the lower of cost or market.  Cost is determined by the first-in, first-out ("FIFO") method.  Returned equipment and inventory, mostly related to warranty claims and replacements of outdated communication systems, is accounted at no cost, unless repaired, at which time, it is valued at the lower of the repair cost or its net realizable value.



Installations in process Installations in process represents the cost of the equipment at the customers premises for which the installation service had not been completed nor the revenue earned.  This inventory is valued at the lower of cost or its net realizable value.



Available for sale securities Securities held in eOn Communications, a related party, are classified as available for sale securities.  They are reported at fair value, and unrealized gains and losses reported as a net amount in other comprehensive income.  As of January 31, 2008, the unrecognized holding loss was approximately $141,000.



Accounting for income taxes-Deferred income taxes are accounted for using the asset and liability method of accounting.  Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and the respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.



On August 4, 2003, the Company was granted certain tax exemption benefits under the Commonwealth of Puerto Rico Law 135 of December 2, 1997, as amended.  Under the ten-year decree, beginning on December 30, 2002, the Company's process of assembling communication equipment will enjoy preferential tax rates, as follows:





Tax
        
        BenefitIncome
        
        7% flat taxProperty
        
        90% exemptionMunicipal
        
        60% exemption






Recent Accounting Pronouncements



Recently issued FASB Statements or Interpretations, SEC Staff Accounting Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been implemented in prior periods or are not applicable to the Company.

6

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Securities Authorized for Issuance Under the Company's Equity Compensation Plan



The following table summarizes the Company equity compensation plan as of January 31, 2008:



Plan category
        Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
        Weighted-averageexercise price ofoutstanding options,warrants and rights
        Number of securitiesremaining available
for future issuance underequity compensation plans(excluding securities
reflected in column (a)Equity compensation plans approved by security holders
        (a)


--
        (b)


--
        (c)


375,000Equity compensation plans not approved by security holders
        --
        --
        --Total
        ------------------------
--
        ------------------------
--
        ------------------------
375,000






Inventories Inventories consist of the following:





January 31, 2008(In thousand)Purchased components, net
        $    245Parts and materials for maintenance, net
        65Total inventories
        $    310






Segments

CSPRs reportable segments are the Communications Systems (Products and Services), and Telephony Billing Services (Telephony), each of which offers different products and services.  Each segment requires different expertise, and marketing strategies, although some overlapping exists.  Also, performance of each segment is assessed independently.  The Communications Systems segment offers communications solutions that address voice and data network switching while the Telephone Billing Services segment resells PRT and Sprints services in Puerto Rico.



The accounting policies of the segments are those described in the summary of significant accounting policies.





Three Months EndedJanuary 31,2008
        
        2007Comm.Systems
        
        TelephonyBillingServices
        
        Total
        
        Comm.Systems
        
        TelephonyBillingServices
        
        Total(In Thousands)Revenues
        $1,909
        
        $   778
        
        $2,687
        
        $1,473
        
        $   226
        
        $1,699Income (loss) from
operations
        47
        
        4
        
        51
        
        36
        
        (2)
        
        34Other income
        4
        
        --
        
        4
        
        9
        
        --
        
        9Provision for income
taxes
        --
        
        --
        
        --
        
        --
        
        --
        
        --Net income (loss)
        51
        
        4
        
        55
        
        45
        
        (2)
        
        43




7

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Six Months EndedJanuary 31,2008
        
        2007Comm.Systems
        
        TelephonyBillingServices
        
        Total
        
        Comm.Systems
        
        TelephonyBillingServices
        
        Total(In Thousands)Revenues
        $3,669
        
        $1,520
        
        $5,189
        
        $2,813
        
        $   333
        
        $3,146Income (loss) from
Operations
        95
        
        2
        
        97
        
        4
        
        (32)
        
        (28)Other income
        11
        
        --
        
        11
        
        11
        
        --
        
        11Provision for income
Taxes
        --
        
        --
        
        --
        
        --
        
        --
        
        --Net income (loss)
        106
        
        2
        
        108
        
        15
        
        (32)
        
        (17)Total assets
        3,340
        
        532
        
        3,872
        
        2,865
        
        106
        
        2,971Capital expenditures
        13
        
        0
        
        13
        
        16
        
        0
        
        16Depreciation and amortization
        28
        
        1
        
        29
        
        56
        
        0
        
        56






Income per Common Share

The Company reports its earnings per share (EPS) using Financial Accounting Standards Board (FASB) Statement No. 128,Earnings Per Share(SFAS 128).  SFAS 128 requires dual presentation of basic and diluted EPS.  Basic EPS is computed by dividing income (loss) attributable to common stockholders by the weighted average number of common shares outstanding for the period.  Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.



The computations of basic and diluted income per share were as follows:





Three Months EndedJanuary 31,
        
        Six Months Ended
January 31,2008
        
        2007
        
        2008
        
        2007(Dollars in thousands, except per share data)Basic and diluted income (loss) per share:Net income (loss)
        $         55
        
        $         43
        
        $       108
        
        $       (17)Weighted average number of common shares outstanding
        1,574,995
        
        1,571,453
        
        1,574,995
        
        1,571,453Income (loss) from operations per share
        $      0.03
        
        $      0.03
        
        $   0.07
        
        $    (0.01)






Major customers



During the quarter ended January 31, 2008, the Company completed a system installation for a customer that resulted in revenues of approximately $342,000.  This represents approximately 13% and 7%, of the total revenues for the three months and six months periods presented herein.



Commitments



CSPR leases one building of approximately 8,200 square feet for office space and
assembly processing from the Municipality of Caguas. The lease on this facility
expired in November 2007 and the Municipality approved a one year extension
under the

8

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existing contract. Adjacent to this building, the Company leases
another building of approximately 5,800 square feet for warehouse space from
Puerto Rico Industrial Development Company (PRIDCO). The lease on this facility
expires in December 2012. Virtually all of CSPRs employees work at these
facilities.



Contingencies



The Company is currently subject to claims regarding an alleged employment issue and property taxes as follows:



The Company is defendant in one claim by a former employee, with alleged damages totaling approximately $5 million.  The Company has filed motion for summary judgment and such motion is under the consideration of the Court.  The Companys management believes based on the opinion of counsel that the Company has strong defenses to allow CSPR to prevail.  However, at the present time, an outcome of the case cannot be determined.  Accordingly, no provision for losses, if any, has been recorded in the financial statements.



The Municipal Revenue Collection Center of Puerto Rico ("CRIM") conducted a personal property tax audit for the years 1999 and 2000 as a result of certain alleged debts arising in CRIM's system for the years 2001 through 2007, in the principal amount of $320,000 (approximately $526,000 as of January 31, 2008, including interest and penalties).  The alleged debts arose from CRIM's disallowance of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2004 personal property tax returns.  During the audit process, CRIM alleged that some components of the inventory reported as exempt should be taxable.  The parties met several times and an informal administrative hearing was held on September 27, 2006.  The Company submitted its position in writing within the time period provided by CRIM.  The Company believes it has strong arguments to support the position that the components of
inventory qualify as raw material.  However, at this point, the Company cannot predict the outcome of this matter.  Accordingly, no provision for losses, if any, has been recorded in the financial statements.



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS.



This report contains unaudited forward-looking statements within the meaning of the federal securities laws.  Unaudited 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.  Unaudited forward-looking statements include statements regarding the Companys 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 unaudited forward-looking statements is inherently uncertain, and the Companys actual operating
performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond managements ability to predict or control.  The Company also directs your attention to the risk factors affecting its business that are discussed in our 10-KSB filed for the period ended July 31, 2007.  CSPR disclaims any obligation to update any of the unaudited forward-looking statements contained in this report to reflect any future events or developments.  The following discussions should be read in conjunction with the Companys unaudited financial statements and the notes included thereto.



Plan of Operation



The Companys strategy is to be a solutions provider to help enterprises communicate more effectively with customers and increase their customer satisfaction, loyalty, and security.  CSPR desires to position itself in the marketplace as a one-stop-shop to its customers for all of their telecommunications needs including voice, data, security, applications transmission services and telephone billing services.  To continue with the Companys strategy, in the quarter ended January 31, 2008, CSPR entered a partnering relationship with Microsoft Corporation.  The Company integrates, sells, installs, and services the voice and data communications, including the newer VoIP, and a number of equipment manufacturers, including Avaya, Mitel, Cisco, Cortelco, eOn, Nortel, Lucent, Hitachi, NEC, McAfee, Juniper, Extreme Networks, among others.  As part of the Companys business strategy, the Company now
offers telephony billing services provided through the Puerto Rico Telephone (PRT the main local telephone company).  Consistent with managements plan for fiscal year 2007, the telephony billing services was an important source of revenues.  Although Telephony billing services produces less margin than Products and Services, the Company expects this segment to continue to provide significant revenues for the current fiscal year.  For the Six months ending January 31, 2008, this line of business reached the break-even point.  For the year ended July 31, 2007, the revenue from the resale of these services was considered as a new segment in its financial reporting and is presented in the Income Statement as Telephony.  To complement this segment, at the end of the third quarter of fiscal year 2007, CSPR entered into a business relationship with Sprint to carry all long distance calls, including local, domestic and international.  However, there have been no
significant revenues from this business arrangement with Sprint.

9

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The Company plans to continue to closely monitor its operating costs and expenses.  The Company will also look for ways to increase its installed base of customers by improving equipment sales and customer service performance, along with the increase in maintenance service sales efforts.  To improve service performance, the Company will continue its training program to develop more highly qualified technicians and salespersons. The Company is a Gold Avaya Business Partner, Platinum Mitel Business Partner, Advance Nortel Business Partner and recently obtained a McAfee Premium Business Partner certification.  These levels of Business Partners entitle the Company to additional discounts and special technical trainings, and improve its competitive position with customers and suppliers.  To continue the service performance, CSPR began working with Cisco, and created a new department specialized in Data with
experts certified in Cisco Certified Network Associate (CCNA) and Cisco Sell Expert (CSE) among other certifications.  To develop this new Data Department, CSPR has incorporated other trademarks like McAfee, Juniper and Extreme.  To develop the security products, the Company hired one person dedicated to support this area.To improve new installation and maintenance sales results, the Company has sales staff dedicated to support and increase its maintenance customer base.  The Company is pursuing an increase in productivity with continuing improvements in customer service and support through web ticketing and project management programs.



The Company conducts most of its business in Puerto Rico, and also sells telephone equipment in the Caribbean and Latin America, although sales outside Puerto Rico are not of a recurring nature.  The Company has been awarded a major project by one of the largest companies on the Virgin Islands, which CSPR completed during the quarter ended January 31, 2008.



While the Company believes that there are a number of positive trends in its business, no assurance can be given that CSPR will be successful in achieving its near-term goals.  Factors that are beyond our control, such as economic events, technological changes, and business trends may influence our financial performance and goals.



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



The Companys cash position has been stable for the quarters ended January 31, 2008 and 2007.  Cash and cash equivalents were approximately $620,000 and $612,000 as of January 31, 2008 and 2007, respectively.  The Company continues with its strong collection efforts to improve cash flows and continues to maintain accounts receivable and inventories at controlled levels during the current fiscal period.  CSPR exceeded budgeted sales in the first quarter ended October 31, 2007 and in the second quarter ended January 31, 2008.  CSPR has received customer orders and commitments for new systems installations that are expected to allow CSPR to achieve its current projections for the following fiscal quarter also.



Results of Operations and Cash Flows for the Three Months Ended January 31, 2008 and 2007



The following discussion provides information about the Company's operations, for the three months ended January 31, 2008 and for the three months ended January 31, 2007.



Net Revenues



Net revenues consist of sales of new system installations, data and security products, and additions (Products), services related to revenues from maintenance contract, warranties and other billable services (Services) and revenues from the resale of telephony billing services (Telephony).  Net revenues increased approximately 58% in the three months ended January 31, 2008 compared to the same quarter last fiscal year.  The results primarily reflect increased revenue of approximately $401,000 in Products, due to a managements new strategy to focus the Company as a solutions provider, with additions of new products to its portfolio that resulted in new revenues for this quarter.  Also from revenues from a major Virgin Islands customer, which installation was completed in this quarter as previously mentioned.  An increase of approximately $35,000 in Services were due to normal fluctuations in the service business, and an increase of
approximately $552,000 in Telephony, due to an increase in the number of customers billed for this service in this quarter compared to the same quarter of fiscal year 2007, when the Company was starting to develop this line of business.



Cost of Revenues and Gross Profit



Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation, maintenance labor cost and cost of the reselling revenues.  The gross margin for Product, Services and Telephony for the three months ended January 31, 2008 and 2007 was approximately 23% and 32%, respectively.  The gross margin decreased principally because Telephony produces less margin than Products and Services.  Also, the gross margin for Products and Services decreased to 29% in the three months ended January 31, 2008, from 35% in the same period last year, due to normal market strategies to introduce the new line of business of data and security products.  CSPR continues with the strategies of better markups in the price of products, maximizing productivity, a decrease in some subcontracting services by fulfilling them with
internal resources, and more competitive selling and operational strategies.



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Selling, General and Administrative



Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, facilities and other overhead expenses incurred to support the Companys business activities.  This expense increased approximately 8% to approximately $558,000 in the three months ended January 31, 2008 from approximately $515,000 in the same period last fiscal year.  The increase was principally due to an increase in business during the period.



Interest, Other Income and Expense, Income Taxes, and Other Comprehensive Income



The Company had no significant other income or interest expense in the three months ended January 31, 2008 or 2007.



For the three months ended January 31, 2008 and 2007, the resulting income tax was fully absorbed by available carryforward losses.  For the quarter ended January 31, 2008 and 2007, other comprehensive income consists of unrealized potential gain, if sold at that point in time, of securities owned by the Company.



Cash Flows



Cash flow used in operating activities was approximately ($106,000) and ($110,000) in the three months ended January 31, 2008 and 2007 respectively.  Cash used in operating activities in the three months ended January 31, 2008 resulted primarily from an increase in trade accounts receivable, partially offset by an increase in trade accounts payable.  The increase in accounts receivable results principally from the increase in business for the quarter, which includes the revenues from one of the largest companies on the Virgin Islands as previously mentioned.  The increase in accounts payable results principally from new installation in process which the Company expects to complete the next quarter.  Cash flows used in investing activities for the three months ended January 31, 2008 and 2007 were approximately ($7,000) and ($12,000) respectively.  Cash used for investing activities in the three months ended
January 31, 2008 and 2007 was related mainly to the acquisition of new hardware, to improve employee performance.



Results of Operations and Cash Flows for the Six Months Ended January 31, 2008 and 2007



The following discussion provides information about the Company's operations, for the six months ended January 31, 2008 and for the six months ended January 31, 2007.



Net Revenues



Net revenues consist of sales of new system installations, data and security products, and additions (Products), services related to revenues from maintenance contract, warranties and other billable services (Services) and revenues from the resale of telephony billing services (Telephony).  Net revenues increased approximately 65% in the six months ended January 31, 2008 compared to the same quarter last fiscal year.  The results primarily reflect increased revenue of approximately $910,000 in Products, due to a managements new strategy to focus the Company as a solutions provider, with additions of new products to its portfolio that resulted in new revenues for this quarter, as well as to the completion of a major project in the Virgin Islands, as previously discussed.  A decrease of approximately $54,000 in Services were due to normal fluctuations in the service business, and an increase of approximately $1,187,000 in Telephony, due to an
increase in the number of customers billed for this service in this period compared to the same period of fiscal year 2007, when the Company was starting to develop this line of business.



Cost of Revenues and Gross Profit



Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation, maintenance labor cost and cost of the reselling revenues.  The gross margin for Product, Services and Telephony for the six months ended January 31, 2008 and 2007 was approximately 24% and 31%, respectively.  The gross margin decreased principally because Telephony, which has become a major segment, produces less margin than Products and Services.  The gross margin for Products and Services, of approximately 31% and approximately 33% has stabilized for both periods due to better markups in the price of products, maximizing productivity, a decrease in some subcontracting services by fulfilling them with internal resources, and more competitive selling and operational strategies.



Selling, General and Administrative



Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, facilities and other overhead expenses incurred to support the Companys business activities.  This expense increased approximately 16% to approximately $1,153,000 in the six months ended January 31, 2008 from approximately $994,000 in the same period last fiscal year.  The increase was principally due to a non- recurring severance pay and the increase in business during the period.

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Interest, Other Income and Expense, Income Taxes, and Other Comprehensive Income



The Company had no significant other income or interest expense in the six months ended January 31, 2008 or 2007.



For the six months ended January 31, 2008, the resulting income tax was fully absorbed by available carryforward losses.  For the same quarter last year, the reported losses resulted in a deferred tax asset that was fully allowed for.



For the quarter ended January 31, 2008 and 2007, other comprehensive income consists of unrealized potential gain, if sold at that point in time, of securities owned by the Company.



Cash Flows



Cash flow used in operating activities was approximately ($378,000) and ($245,000) in the six months ended January 31, 2008 and 2007 respectively.  Cash used in operating activities in the six months ended January 31, 2008 resulted primarily from an increase in trade accounts receivable, partially offset by an increase in trade accounts payable.  Cash flows used in investing activities for the six months ended January 31, 2008 and 2007 were approximately ($13,000) and ($16,000) respectively.  Cash used for investing activities in the six months ended January 31, 2008 and 2007 was related mainly to the acquisition of new hardware, to improve employee performance.



Liquidity and Capital Resources



The Company has principally relied on cash provided from operations as its primary sources of capital.  The Company is dependent on existing cash and cash equivalents, and operating cash flows to finance operations and meet capital needs.  If such resources are not sufficient, a $400,000 credit line was approved in June 2007 by a Puerto Rican financial institution.CSPR does not anticipate the need to raise additional capital to meet its operational and capital expenditure requirements in the foreseeable future.  The Companys funding status is dependent on a number of factors in the cash flow, including those related to profit margins, inventories, and the control of selling, general and administrative expenses.  The Company believes that, if its financial condition continues to remains stable, it will continue to obtain beneficial credit terms from its primary suppliers.



Other Relevant Financial Information



The Companys 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 any preferred stock that may be issued in the future may harm the rights of the holders of common stock.  Certain provisions of the Companys certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of CSPR without the consent of the Companys 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.



CSPRs officers, directors and five percent or greater stockholders beneficially own or control, directly or indirectly, approximately 1,054,715 shares, which in the aggregate represent approximately 67% voting interest in the outstanding shares of the Companys common stock.  These stockholders have the ability to control all matters submitted to the Companys stockholders for approval, including the election and removal of directors and the approval of any business combinations.



Off-Balance Sheet Arrangements



CSPR was not involved in any significant off-balance sheet arrangement during the six months ended January 31, 2008 and 2007.



ITEM 3.  CONTROLS AND PROCEDURES.



Under the supervision and with the participation of the Company management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedure are effective.  There were no changes in CSPR internal controls over financial reporting during the six months ended January 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.

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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

No new legal proceedings.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5.  OTHER INFORMATION.

None.

ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.

(A)  Exhibits.

Exhibit
Number
        
        Description of Document31.1
        
        Officers Certification pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.31.2
        
        Officers Certification pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.32.1
        
        Officers Certification pursuant to 18 U.S.C ss1350.






(B)  Reports on Form 8-K.

None.

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SIGNATURES



In accordance with the requirements of the Exchange Act, the Small business issuer caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| | Cortelco
Systems Puerto Rico, Inc.
| | ----------------------------------

|Date: March 17, 2008 | /s/
Francisco Sanchez
------------------------------------------------------
Francisco Sanchez, Vice President
Chief Financial Officer, Treasurer
Duly Authorized Officer
(Principal Financial and Accounting Officer)
|-------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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