UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549




FORM 10-QSB




(Mark One)


|[X] |  | Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
|--- |  | ---------------------------------------------------------------------------------



For the quarterly period ended October 31,
2007.


|[    ] |  | Transition 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. Yes [X] No [ ]




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




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
October 31, 2007.




Transitional Small Business Disclosure Format (Check one):
Yes [ ] No [X]


---



CORTELCO SYSTEMS PUERTO RICO, INC. FORM 10-QSB
QUARTER ENDED OCTOBER 31, 2007




INDEX







|PART I
 FINANCIAL INFORMATION                                      |  |  |  | 1  | 
|------------------------------------------------------------------- |  |  |  | -- | 
|ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)                            |  |  |  | 1  | 
|Condensed
Balance Sheet (Unaudited)                                 |  |  |  | 1  | 
|Condensed
Income Statements and Comprehensive Income (Unaudited)    |  |  |  | 2  | 
|Condensed
Statements of Changes in Stockholders Equity (Unaudited) |  |  |  | 3  | 
|Condensed
Statements of Cash Flows (Unaudited)                      |  |  |  | 4  | 
|Notes to
Condensed Financial Statements (Unaudited)                 |  |  |  | 5  | 
|ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS                        |  |  |  | 8  | 
|ITEM 3.
CONTROLS AND PROCEDURES                                     |  |  |  | 10 | 
|                                                                    |  |  | 
|PART II
 OTHER INFORMATION                                         |  |  |  | 11 | 
|                                                                    |  |  | 
|ITEM 1. LEGAL
PROCEEDINGS                                           |  |  |  | 11 | 
|ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |  |  |  | 11 | 
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                             |  |  |  | 11 | 
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         |  |  |  | 11 | 
|ITEM 5. OTHER
INFORMATION                                           |  |  |  | 11 | 
|ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K                            |  |  |  | 11 | 
|                                                                    |  |  | 
|SIGNATURES                                                          |  |  |  | 12 | 

---





PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).




CORTELCO SYSTEMS PUERTO RICO, INC. Condensed Balance
Sheet (Unaudited) October 31, 2007




(Dollars in thousands)




ASSETS







|Current
assets:                                                                                                        |  |  |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  |  |  | - | ------ | -
|Cash                                                                                                                   |  |  |  | $ | 733    |  
|Trade
accounts receivable, net of allowance for uncollectible accounts of $60                                          |  |  |  |   | 1,959  |  
|Inventories                                                                                                            |  |  |  |   | 211    |  
|Installations
in process                                                                                               |  |  |  |   | 232    |  
|Prepaid
expenses                                                                                                       |  |  |  |   | 179    |  
|Total current
assets                                                                                                   |  |  |  |   | 3,314  |  
|Available for
sale securities                                                                                          |  |  |  |   | 166    |  
|Property
and equipment, net                                                                                            |  |  |  |   | 50     |  
|Purchased
software, net of accumulated amortization of $17                                                             |  |  |  |   | 10     |  
|                                                                                                                       |  |  |  | $ | 3,540  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                  
|Current
liabilities:                                                                                                   |  |  |  |   |        |  
|Trade
accounts payable                                                                                                 |  |  |  | $ | 905    |  
|Due to
affiliated entities                                                                                             |  |  |  |   | 10     |  
|Deposits on
purchases                                                                                                  |  |  |  |   | 140    |  
|Other accrued
liabilities                                                                                              |  |  |  |   | 297    |  
|Deferred
revenue                                                                                                       |  |  |  |   | 313    |  
|Total current
liabilities                                                                                              |  |  |  |   | 1,665  |  
|                                                                                                                       |  |  |  |   |        |  
|Commitments and contingencies                                                                                          |  |  |  |   |        |  
|                                                                                                                       |  |  |  |   |        |  
|Stockholders equity:                                                                                                  |  |  |  |   |        |  
|Preferred
stock, par value $.01 per share; authorized 10,000,000 shares, 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 |  |  |  |   | 16     |  
|Treasury
stock, 21,021 shares at cost                                                                                  |  |  |  |   | (7     | )
|Capital in
excess of par value                                                                                         |  |  |  |   | 7,322  |  
|Accumulated
deficit                                                                                                    |  |  |  |   | (5,394 | )
|Accumulated
other comprehensive loss                                                                                   |  |  |  |   | (62    | )
|Total
stockholders equity                                                                                             |  |  |  |   | 1,875  |  
|                                                                                                                       |  |  |  | $ | 3,540  |  



See notes to condensed financial statements.




1


---



CORTELCO SYSTEMS PUERTO RICO, INC.




Condensed Income Statements and Comprehensive Income
(Unaudited) For the Three Months Ended October 31, 2007 and 2006




(Dollars in thousands, except per share
data)







|                                                        |  |  |  | Three Months Ended October 31, |      
|------------------------------------------------------- |  |  |  | ------------------------------ | -----
|
|Net
revenues:                                           |  |  |  |                                |      
|Products                                                |  |  |  | $                              | 992  
|Services                                                |  |  |  |                                | 768  
|Telephony                                               |  |  |  |                                | 742  
|Total net
revenues                                      |  |  |  |                                | 2,502
|Cost of
revenues:                                       |  |  |  |                                |      
|Products                                                |  |  |  |                                | 667  
|Services                                                |  |  |  |                                | 500  
|Telephony                                               |  |  |  |                                | 694  
|Total cost of
revenues                                  |  |  |  |                                | 1,861
|Gross
profit                                            |  |  |  |                                | 641  
|Operating
expenses:                                     |  |  |  |                                |      
|Selling,
general, & administrative                      |  |  |  |                                | 595  
|Income (loss)
from operations                           |  |  |  |                                | 46   
|Other income
(expense), net:                            |  |  |  |                                | 7    
|Income (loss)
before income taxes                       |  |  |  |                                | 53   
|Provision for
income taxes:                             |  |  |  |                                |      
|Current,
assuming no carryforward or tax grant benefits |  |  |  |                                | 43   
|Benefit from
tax exemption                              |  |  |  |                                | (22  
|Benefit from
loss carryforwards                         |  |  |  |                                | (21  
|Deferred
credit from losses                             |  |  |  |                                |     
|Change in
valuation allowance                           |  |  |  |                                |     
|Total income
tax expense                                |  |  |  |                                |     
|Net income
(loss)                                       |  |  |  | $                              | 53   
|Other
comprehensive income:                             |  |  |  |                                |      
|Net
unrealized gain on available for sales securities   |  |  |  |                                | 17   
|Comprehensive
income                                    |  |  |  | $                              | 70   
|Basic and
diluted net income (loss) per common share    |  |  |  | $                              | 0.03 



See notes to condensed financial statements.




2


---



CORTELCO SYSTEMS PUERTO RICO, INC. Condensed
Statements of Changes in Stockholders Equity (Unaudited)




For the Three Months Ended October 31,
2007




(Dollars in thousands)







|                                   |  |  |  | Common stock |    | Treasury Stock |  | Capital in excess of par value |     | (Deficit) |  | Accumulated other comprehensive loss |       | Total
|---------------------------------- |  |  |  | ------------ | -- | -------------- |  | ------------------------------ | --- | --------- |  | ------------------------------------ | ----- | -----
|Balance,
July 31, 2007             |  |  |  | $            | 16 |                |  | $                              | (11 | )         |  | $                                    | 7,316 |      
|Treasury
Stock                     |  |  |  |              |    |                |  |                                | 4   |           |  |                                      |       |      
|Paid in
Capital for Treasury Stock |  |  |  |              |    |                |  |                                |     |           |  |                                      | 6     |      
|Net
income                         |  |  |  |              |    |                |  |                                |     |           |  |                                      |       |      
|Other
comprehensive income         |  |  |  |              |   |                |  |                                |    |           |  |                                      |      |      
|Balance,
October 31, 2007          |  |  |  | $            | 16 |                |  | $                              | (7  | )         |  | $                                    | 7,322 |      



See notes to condensed financial statements




3


---



CORTELCO SYSTEMS PUERTO RICO, INC. Condensed
Statements of Cash Flows (Unaudited) For the Three Months ended October 31, 2007 and 2006(Dollars in thousands)







|                                                                                     |  |  |  | Three Months Ended, October 31, |      
|------------------------------------------------------------------------------------ |  |  |  | ------------------------------- | -----
|
|Cash flows
from operating activities:                                                |  |  |  |                                 |      
|Net income
(loss)                                                                    |  |  |  | $                               | 53   
|Adjustments
to reconcile net income (loss) to net cash used in operating activities: |  |  |  |                                 |      
|Depreciation
and amortization                                                        |  |  |  |                                 | 15   
|Stock
Compensation                                                                   |  |  |  |                                 | 10   
|Changes in
operating assets and liabilities:                                         |  |  |  |                                 |      
|Decrease
(increase) in:                                                              |  |  |  |                                 |      
|Trade accounts
receivable                                                            |  |  |  |                                 | (217 
|Inventories                                                                          |  |  |  |                                 | 35   
|Installation
in process                                                              |  |  |  |                                 | 58   
|Prepaid
expenses                                                                     |  |  |  |                                 | (63  
|Increase
(decrease) in:                                                              |  |  |  |                                 |      
|Trade
accounts payable                                                               |  |  |  |                                 | (131 
|Due to
affiliated entities                                                           |  |  |  |                                 | (2   
|Deposits on
purchases                                                                |  |  |  |                                 | (93  
|Other accrued
liabilities                                                            |  |  |  |                                 | 18   
|Deferred
revenue                                                                     |  |  |  |                                 | 45   
|Total
adjustments                                                                    |  |  |  |                                 | (325 
|Net cash used
in operating activities                                                |  |  |  |                                 | (272 
|Cash flows
from investing activities:                                                |  |  |  |                                 |      
|Capital
expenditures                                                                 |  |  |  |                                 | (6   
|Net cash used
in investing activities                                                |  |  |  |                                 | (6   
|Net change in
cash                                                                   |  |  |  |                                 | (278 
|Cash and cash
equivalent, beginning                                                  |  |  |  |                                 | 1,011
|Cash and cash
equivalent, ending                                                     |  |  |  | $                               | 733  



See notes to condensed financial statements.




4


---



Cortelco Systems Puerto Rico, Inc.




Notes to Condensed Financial Statements
(Unaudited)




For the Three Months Ended October 31, 2007 and
2006




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 October 31, 2007 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 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.




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




Telephony billing revenues  Telephony
billing revenues are 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 excluding long distance outside of Puerto Rico. Revenues from the resale of PRT 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 October 31, 2007:







|(Dollars in thousands) |  |  |  | July 31, 2007 Liability Balance |     | Additions |  | Deductions |     | October 31, 2007 Liability Balance
|---------------------- |  |  |  | ------------------------------- | --- | --------- |  | ---------- | --- | ----------------------------------
|Maintenance
Contracts  |  |  |  | $                               | 209 |           |  | $          | 154 |                                   



5


---



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 October 31, 2007:







|(Dollars in thousands) |  |  |  | July 31, 2007 Liability Balance |    | Additions |  | Deductions |    | October 31, 2007 Liability Balance
|---------------------- |  |  |  | ------------------------------- | -- | --------- |  | ---------- | -- | ----------------------------------
|Warranty
Reserve       |  |  |  | $                               | 59 |           |  | $          | 14 |                                   



Cash and cash equivalents  Cash and cash
equivalents includes cash deposited in high-credit qualified financial institutions and other short-term, highly liquid investments.




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.




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 October 31, 2007, the unrecognized holding loss was approximately
$62,000.




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       |  |  |  | Benefit      
|--------- |  |  |  | -------------
|Income    |  |  |  | 7% flat
tax  
|Property  |  |  |  | 90%
exemption
|Municipal |  |  |  | 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


---



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




The following table summarizes the Company equity
compensation plan as of October 31, 2007:







|Plan category                                              |  |  |  | Number of securities to be issued upon exercise
of outstanding options, warrants and rights |   | Weighted-average exercise price of outstanding
options, warrants and rights |  | Number of securities remaining available for future
issuance under equity compensation plans (excluding securities reflected in column (a)
|---------------------------------------------------------- |  |  |  | ------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|
|Equity
compensation plans approved by security holders     |  |  |  |                                                                                             |  |                                                                             |  |                                                                                                                                           
|Equity
compensation plans not approved by security holders |  |  |  |                                                                                             |  |                                                                             |  |                                                                                                                                           
|Total                                                      |  |  |  |                                                                                             |  |                                                                             |  |                                                                                                                                           



Inventories




Inventories consist of the following:







|                                         |  |  |  | October 31, 2007
|---------------------------------------- |  |  |  | ----------------
|
|Purchased
components, net                |  |  |  | $               
|Parts and
materials for maintenance, net |  |  |  |                 
|Total
inventories                        |  |  |  | $               



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 Ended October 31, |          
|---------------------------------------------------- |  |  |  | ------------------------------ | ---------
|
|
|Basic and
diluted income (loss) per share:           |  |  |  |                                |          
|Net income
(loss)                                    |  |  |  | $                              | 53       
|Weighted
average number of common shares outstanding |  |  |  |                                | 1,571,950
|Income from
operations per share                     |  |  |  | $                              | 0.03     



7


---





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 $521,000 as of October 31, 2007, 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




At the end of the last fiscal year the Company began to
change the focus of the Companys business strategy. 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. 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. The Company expects telephony billing services to continue to provide significant revenues for the current fiscal year.
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. Beginning
in this quarter ended October 31, 2007, the revenue from telephony billing services is presented in the Income Statement as Telephony
instead of Other as presented previously. 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. There were no significant
revenues from this business arrangement with Sprint for the quarter ended October 31, 2007.




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




8


---



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 expected to complete during this first quarter of
fiscal year 2008, but current plans are to complete this installation in the second quarter of fiscal year 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 October 31, 2007 and 2006. Cash and cash equivalents were approximately $733,000 and $734,000 for the quarter ended October 31, 2007 and
2006 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. 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 October 31, 2007 and 2006




The following discussion provides information about the
Companys operations, for the three months ended October 31, 2007 and for the three months ended October 31, 2006.




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 72.91% in the three months ended October 31, 2007 compared to the same quarter last fiscal year. The results primarily reflect
increased revenue of approximately $509,000 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. The decrease of approximately $89,000 in Services were due
to normal fluctuations in the service business, and an increase of approximately $635,000 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.




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 October 31,
2007 and 2006 was 25.62% and 28.82%, respectively. The gross margin decreased principally because Telephony produces less margin than Products and
Services. The gross margin for Products and Services 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 22.13% to approximately $585,000 in the three months ended October 31, 2007 from
approximately $479,000 in the same period last fiscal year. The increase was principally due to a non-recurring $50,000 severance pay and the increase
in business during the period.




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




The Company had no significant
other income nor interest expense in the three months ended October 31, 2007 or 2006.




For the three months ended
October 31, 2007, 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 October 31,
2007 and 2006, other comprehensive income consists of unrealized potential gain, if sold at that point in time, of securities owned by the
Company.




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Cash Flows




Cash flow used in operating
activities was approximately ($272,000) and ($135,000) in the three months ended October 31, 2007 and 2006 respectively. Cash used in operating
activities in the three months ended October 31, 2007 resulted primarily from a decrease in trade accounts payable, and an increase in trade accounts
receivable. For the quarter ended October 31, 2006, cash flows from operations was affected by an increase in inventories and other current
liabilities, partially offset by a decrease in trade accounts receivable. Cash flows used in investing activities for the three months ended October
31, 2007 and 2006 were approximately ($6,000) and ($4,000) respectively. Cash used for investing activities in the three months ended October 31, 2007
and 2006 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 1,043,715 shares, which in the aggregate represent approximately 66%
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 three months ended October 31, 2007 and 2006.




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 three months ended October 31, 2007 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 Document                                                                    
|-------------- |  |  |  | -------------------------------------------------------------------------------------------
|31.1           |  |  |  | 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 Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.







|                        |  |  |  | Cortelco Systems Puerto Rico, Inc.                                                                                                                             
|----------------------- |  |  |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|                        |  |  |  |                                                                                                                                                                
|Date: December
14, 2007 |  |  |  | /s/ Francisco Sanchez Francisco Sanchez, Vice President Chief Financial Officer, Treasurer Duly Authorized Officer
(Principal Financial and Accounting Officer)



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