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 April 30, 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              | 66-0567491                       
|------------------------ | ---------------------------------
|(State of
incorporation) | (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:




1,571,453 shares of Common Stock, $0.01 par value, as of
April 30, 2007.




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


---



CORTELCO SYSTEMS PUERTO RICO, INC. FORM 10-QSB
QUARTER ENDED APRIL 30, 2007




INDEX


|PART I 
FINANCIAL INFORMATION                                          |  |  |  | 1 
|----------------------------------------------------------------------- |  |  |  | --
|ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)                                |  |  |  | 1 
|Condensed
Balance Sheet (Unaudited)                                     |  |  |  | 1 
|Condensed
Income Statements and Comprehensive Income (Loss) (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                                         |  |  |  | 11
|                                                                        |  |  |  |   
|PART II
 OTHER INFORMATION                                             |  |  |  | 12
|ITEM 1. LEGAL
PROCEEDINGS                                               |  |  |  | 12
|ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS     |  |  |  | 12
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                                 |  |  |  | 12
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS             |  |  |  | 12
|ITEM 5. OTHER
INFORMATION                                               |  |  |  | 12
|ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K                                |  |  |  | 12
|SIGNATURES                                                              |  |  |  | 13

---





PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).




CORTELCO SYSTEMS PUERTO RICO, INC. Condensed Balance
Sheet (Unaudited) April 30, 2007(Dollars in thousands)


|ASSETS                                                                                                                 |  |  |  |   |        |  
|---------------------------------------------------------------------------------------------------------------------- |  |  |  | - | ------ | -
|Current
assets:                                                                                                        |  |  |  |   |        |  
|Cash                                                                                                                   |  |  |  | $ | 663    |  
|Trade
accounts receivable, net of allowance for uncollectible accounts of $63                                          |  |  |  |   | 1,705  |  
|Inventories                                                                                                            |  |  |  |   | 413    |  
|Prepaid
expenses                                                                                                       |  |  |  |   | 97     |  
|Total current
assets                                                                                                   |  |  |  |   | 2,878  |  
|Available
for sale securities                                                                                          |  |  |  |   | 155    |  
|Property
and equipment, net                                                                                            |  |  |  |   | 78     |  
|Purchased
software, net of accumulated amortization of $113                                                            |  |  |  |   | 18     |  
|                                                                                                                       |  |  |  | $ | 3,129  |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                   |  |  |  |   |        |  
|Current
liabilities:                                                                                                   |  |  |  |   |        |  
|Trade
accounts payable                                                                                                 |  |  |  | $ | 878    |  
|Due to
affiliated entities                                                                                             |  |  |  |   | 2      |  
|Deposits on
purchases                                                                                                  |  |  |  |   | 41     |  
|Other accrued
liabilities                                                                                              |  |  |  |   | 305    |  
|Deferred
revenue                                                                                                       |  |  |  |   | 177    |  
|Total current
liabilities                                                                                              |  |  |  |   | 1,403  |  
|                                                                                                                       |  |  |  |   |        |  
|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 1,571,453 outstanding |  |  |  |   | 16     |  
|Treasury
stock                                                                                                         |  |  |  |   | (11    | )
|Capital in
excess of par value                                                                                         |  |  |  |   | 7,316  |  
|Accumulated
deficit                                                                                                    |  |  |  |   | (5,523 | )
|Accumulated
other comprehensive loss                                                                                   |  |  |  |   | (72    | )
|Total
stockholders equity                                                                                             |  |  |  |   | 1,726  |  
|                                                                                                                       |  |  |  | $ | 3,129  |  



See notes to condensed financial
statements.




1


---



CORTELCO SYSTEMS PUERTO RICO, INC. Condensed Income Statements and Comprehensive Income (Loss) (Unaudited) For the Three Months and
Nine Months Ended April 30, 2007 and 2006(Dollars in thousands, except per share data)







|                                                             |  |  |  | Three Months Ended April 30, |       | Nine Months Ended April 30, | 
|------------------------------------------------------------ |  |  |  | ---------------------------- | ----- | --------------------------- | 
|
|Net
revenues:                                                |  |  |  |                              |       |                             | 
|Products                                                     |  |  |  | $                            | 735   |                             | 
|Services                                                     |  |  |  |                              | 792   |                             | 
|Other                                                        |  |  |  |                              | 555   |                             | 
|Total net
revenues                                           |  |  |  |                              | 2,082 |                             | 
|Cost of
revenues:                                            |  |  |  |                              |       |                             | 
|Products                                                     |  |  |  |                              | 517   |                             | 
|Services                                                     |  |  |  |                              | 545   |                             | 
|Other                                                        |  |  |  |                              | 510   |                             | 
|Total cost of
revenues                                       |  |  |  |                              | 1,572 |                             | 
|Gross
profit                                                 |  |  |  |                              | 510   |                             | 
|Operating
expenses:                                          |  |  |  |                              |       |                             | 
|Selling,
general, & administrative                           |  |  |  |                              | 488   |                             | 
|Income
(loss) from operations                                |  |  |  |                              | 22    |                             | 
|Other
income, net:                                           |  |  |  |                              | 4     |                             | 
|Income
before income taxes                                   |  |  |  |                              | 26    |                             | 
|Provision
for income taxes:                                  |  |  |  |                              |       |                             | 
|Current,
assuming no carryforward benefit                    |  |  |  |                              | 3     |                             | 
|Deferred
credit from losses                                  |  |  |  |                              | (5    | )                           | 
|Change in
valuation allowance                                |  |  |  |                              | 2     |                             | 
|Total
income tax expense                                     |  |  |  |                              |      |                             | 
|Net
income                                                   |  |  |  | $                            | 26    |                             | 
|Other
comprehensive income:                                  |  |  |  |                              |       |                             | 
|Net
unrealized gain (loss) on available for sales securities |  |  |  |                              | (83   | )                           | 
|Comprehensive income (loss)                                  |  |  |  | $                            | (57   | )                           | 
|Basic and
diluted net income per common share                |  |  |  | $                            | 0.02  |                             | 



See notes to condensed financial
statements.




2


---



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




For the Nine Months Ended April 30, 2007(Dollars in thousands)







|                         |  |  |  | Common stock |    | Treasury Stock |  | Capital in excess of par value |     | (Deficit) |  | Accumulated other comprehensive loss |       | Total
|------------------------ |  |  |  | ------------ | -- | -------------- |  | ------------------------------ | --- | --------- |  | ------------------------------------ | ----- | -----
|Balance, July
31, 2006   |  |  |  | $            | 16 |                |  | $                              | (11 | )         |  | $                                    | 7,316 |      
|Net income               |  |  |  |              |    |                |  |                                |     |           |  |                                      |       |      
|Other
comprehensive loss |  |  |  |              |   |                |  |                                |    |           |  |                                      |      |      
|Balance,
April 30, 2007  |  |  |  | $            | 16 |                |  | $                              | (11 | )         |  | $                                    | 7,316 |      



See notes to condensed financial
statements.




3


---



CORTELCO SYSTEMS PUERTO RICO, INC. Condensed Statements of Cash Flows (Unaudited) For the Three Months and Nine Months ended April
30, 2007 and 2006(Dollars in thousands)







|                                                                                            |  |  |  | Three Months Ended, April 30, |      | Nine Months Ended, April 30, | 
|------------------------------------------------------------------------------------------- |  |  |  | ----------------------------- | ---- | ---------------------------- | 
|
|Cash flows
from operating activities:                                                       |  |  |  |                               |      |                              | 
|Net income                                                                                  |  |  |  | $                             | 26   |                              | 
|Adjustments
to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |                               |      |                              | 
|Depreciation
and amortization                                                               |  |  |  |                               | 26   |                              | 
|Changes in
operating assets and liabilities:                                                |  |  |  |                               |      |                              | 
|Loss on
disposition of equipment                                                            |  |  |  |                               | 2    |                              | 
|Decrease
(increase) in:                                                                     |  |  |  |                               |      |                              | 
|Trade
accounts receivable                                                                   |  |  |  |                               | (222 | )                            | 
|Inventories                                                                                 |  |  |  |                               | (50  | )                            | 
|Prepaid
expenses                                                                            |  |  |  |                               | 66   |                              | 
|Increase
(decrease) in:                                                                     |  |  |  |                               |      |                              | 
|Trade
accounts payable                                                                      |  |  |  |                               | 266  |                              | 
|Due to
affiliated entities                                                                  |  |  |  |                               | (2   | )                            | 
|Deposits on
purchases                                                                       |  |  |  |                               | 13   |                              | 
|Other accrued
liabilities                                                                   |  |  |  |                               | (8   | )                            | 
|Deferred
revenue                                                                            |  |  |  |                               | (54  | )                            | 
|Total
adjustments                                                                           |  |  |  |                               | 37   |                              | 
|Net cash
provided by (used in) operating activities                                         |  |  |  |                               | 63   |                              | 
|Cash flows
from investing activities:                                                       |  |  |  |                               |      |                              | 
|Capital
expenditures                                                                        |  |  |  |                               | (12  | )                            | 
|Net cash used
in investing activities                                                       |  |  |  |                               | (12  | )                            | 
|Net change in
cash                                                                          |  |  |  |                               | 51   |                              | 
|Cash,
beginning                                                                             |  |  |  |                               | 612  |                              | 
|Cash,
ending                                                                                |  |  |  | $                             | 663  |                              | 



See notes to condensed financial
statements.




4


---





Cortelco Systems Puerto Rico, Inc.




Notes to Condensed Financial Statements (Unaudited) For the Nine Months Ended April 30, 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 April 30, 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,
2006 and for the periods then ended, which are included in the Annual Report on Form 10-KSB for the year ended July 31, 2006 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 (including to
related parties), accrued expenses, and deposit liabilities approximate fair value due to their short-term maturities. Marketable securities are
classified as available for sale and are reported at fair value.




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.




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 April 30, 2007:







|(Dollars in thousands) |  |  |  | January 31, 2007 Liability Balance |     | Additions |  | Deductions |    | April 30, 2007 Liability Balance
|---------------------- |  |  |  | ---------------------------------- | --- | --------- |  | ---------- | -- | --------------------------------
|Maintenance
Contracts  |  |  |  | $                                  | 174 |           |  | $          | 40 |                                 



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 April 30, 2007:




5


---






|(Dollars in thousands) |  |  |  | January 31, 2007 Liability Balance |    | Additions |  | Deductions |    | April 30, 2007 Liability Balance
|---------------------- |  |  |  | ---------------------------------- | -- | --------- |  | ---------- | -- | --------------------------------
|Warranty
Reserve       |  |  |  | $                                  | 56 |           |  | $          | 15 |                                 



Cash  Cash includes cash deposited in
high-credit qualified financial institutions.




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.




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.




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.




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




The following table summarizes the Company equity
compensation plan as of April 30, 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)
|---------------------------------------------------------- |  |  |  | ------------------------------------------------------------------------------------------- | - | --------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------
|                                                           |  |  |  | (a)                                                                                         |   | (b)                                                                         |  | (c)                                                                                                                                       
|Equity
compensation plans approved by security holders     |  |  |  |                                                                                             |  |                                                                             |  |                                                                                                                                           
|Equity
compensation plans not approved by security holders |  |  |  |                                                                                             |  |                                                                             |  |                                                                                                                                           
|Total                                                      |  |  |  |                                                                                             |   |                                                                             |  |                                                                                                                                           



6


---



Inventories




Inventories consist of the following:


|                                                            |  |  |  | April 30, 2007
|----------------------------------------------------------- |  |  |  | --------------
|
|Purchased
components, net                                   |  |  |  | $             
|Components
and materials related to installation in process |  |  |  |               
|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 April 30, |           | Nine Months Ended April 30, | 
|---------------------------------------------------- |  |  |  | ---------------------------- | --------- | --------------------------- | 
|
|
|Basic and
diluted income per share:                  |  |  |  |                              |           |                             | 
|Net income                                           |  |  |  | $                            | 26        |                             | 
|Weighted
average number of common shares outstanding |  |  |  |                              | 1,571,453 |                             | 
|Income from
operations per share                     |  |  |  | $                            | 0.02      |                             | 



Contingencies




The Company is currently subject to claims regarding an
alleged breach of contract, employment issues, and property taxes as follows:




In the breach of contract case, the plaintiff alleged that
the Company breached the terms of contract by ceasing to supply services to the plaintiff, and the plaintiff sought damages of approximately $855,000.
Although management strongly contested the claim, a settlement offer was presented and the suit is being settled in one payment of $55,000 by June 14,
2007. This amount was fully provided for in prior years.




The Company is also defendant in one claim by former
employee, totaling approximately $5 million. The Court considered a partial motion for summary judgment in CSPRs favor. 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 ($505,000 as of April 30, 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




7


---



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, 2006. 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




During the fiscal year 2006, the Company began a new line
of business, the resale of PRT services offered to the local users of intra-island calls, ISDN, T1, and other services excluding long distance outside
Puerto Rico to customers that are willing to change the billing company. Beginning this fiscal year, the revenue from the resale of these services was
presented separate in the Income Statement as Other. The Company believes there is an important opportunity to increase revenues with
reselling services for this fiscal year 2007. The Company began a partnering relationship with one of the largest long distance provider to increase
the services offered to reselling customers. CSPR also began a partnering relationship with Cisco Systems, Inc. to sell their products in the area of
data and security. The Company has submitted proposals for various projects that CSPR believes it can sell in the next quarter. CSPR also began a
partnering relationship with strategic suppliers like 1) McAfee, a security software provider for networks; 2) Juniper, a router and LAN security
provider; and 3) Extreme Network, a network switch provider. With proposals including these product lines, CSPR is trying to be a one-stop-shop to its
customers for all of their telecommunications needs, including voice, data, security, applications, transmission services and telephony invoicing. CSPR
is establishing a presence in the Virgin Islands as part of its ongoing efforts to increase sales in the Caribbean. At present, the Company has been
awarded a major project in one of the largest companies on the Virgin Islands. CSPR expected to complete this installation during this quarter but
currently plans are to complete this installation within the next two quarters.




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. The service sales increased this fiscal year as per CSPR
managements plans, which will be continued for the next fiscal year. To improve service performance, the Company will continue its training
program to develop more highly qualified technicians and salespersons. CSPR has achieved Platinum level with Avaya, the highest qualification that
Avaya gives to its Business Partner. CSPRs technical staff includes two Avaya Certified Experts (ACE), the highest level given to a technical
person and the first ACE awarded to an Avaya Business Partner in the Caribbean. Also, all members of the Avaya sales team obtained the Avaya Certified
Associate (ACA) during this year. The Company is a Platinum Mitel Business Partner, Advance Nortel Business Partner and recently obtained a McAfee
Premium Business Partner. These levels of Business Partners entitle the Company to additional discounts and special technical trainings. Also, the
Company believes it will improve its competitive position with customers and suppliers. To continue the service performance, CSPR began a partnering
relationship 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 improve new installation and maintenance sales results, the Company has three of its 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.




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 April 30, 2007 and 2006. 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 year. CSPRs shortfall to budgeted sales in the first quarter
ended October 31, 2006 was due to a postponement of some installations. CSPR achieved the budget for the quarter ended January 31, 2007 and for this
quarter ended April 30, 2007. For the next




8


---



quarter, the Company has received customer orders and
commitments for new systems installations that are expected to allow CSPR to achieve the current budget also.




Results of Operations and Cash Flows for the Three
Months Ended April 30, 2007 and 2006




The following discussion provides information about the
Companys operations, for the three months ended April 30, 2007 and for the three months ended April 30, 2006.




Net Revenues




Net revenues consist of sales of new system installations
and additions (Products), services related to revenues from maintenance contract, warranties and other billable services
(Services) and revenues from the resale of PRT services (Other). Net revenues increased 2.41% in the three months ended April
30, 2007 compared to the same quarter last fiscal year. The results primarily reflect decreased revenue of approximately $522,000 in Products due to a
delay in a major project on the Virgin Islands, and postponement of some medium and small new equipment installations, an increase of approximately
$20,000 in Services due to normal fluctuations in the service business, and an increase of approximately $551,000 in Other from a new line of business
of reselling services, due to the acquisition of new customers for this service in the first year of operation.




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 Other for the three months ended April 30, 2007 and 2006 was 24.50% and
30.45%, respectively. The gross margin decreased principally because the reselling division shown as Other 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 decreased 12.70% to approximately $488,000 in the three months ended April 30, 2007 from approximately $559,000 in the same
period last fiscal year. This is principally the result of the decrease in business during the period.




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




The Company had no significant other income and interest
expense in the three months ended April 30, 2007 or 2006.




For the three months ended April 30, 2007 and 2006, the
resulting income tax was fully absorbed by available carryforward losses.




For the quarter ended April 30, 2007 and 2006, other
comprehensive income (loss) consists of unrealized potential gain (loss), if sold at that point in time, of securities owned by the
Company.




Cash Flows




Cash flow provided by operating activities was
approximately $63,000 and $199,000 in the three months ended April 30, 2007 and 2006 respectively. Cash provided by operating activities in the three
months ended April 30, 2007 resulted primarily from an increase in trade accounts payable, partially offset by an increase in trade accounts
receivable. Cash flows used in investing activities for the three months ended April 30, 2007 and 2006 were approximately ($12,000), and ($20,000),
respectively. Cash used for investing activities in the three months ended April 30, 2007 was related mainly to the acquisition of new hardware,
software and technical tools to improve employee performance.




Results of Operations and Cash Flows for the Nine Months
Ended April 30, 2007 and 2006




The following discussion provides information about the
Companys operations, for the nine months ended April 30, 2007 and for the nine months ended April 30, 2006.




Net Revenues




Net revenues consist of sales of new system installations
and additions (Products), services related to revenues from maintenance contract, warranties and other billable services
(Services) and revenues from the resale of PRT services (Other). Net revenues decreased 5.53% in the nine months ended April
30, 2007 compared to the same quarter last fiscal year. The results primarily reflect decreased revenue of approximately $1,309,000 in Products due to
a delay in a major project on the Virgin Islands, economy factor, and postponement of some medium and small new equipment installations, an increase of
approximately $119,000 in Services due to normal




9


---



fluctuations in the service business and an increase of
approximately $884,000 in Other from a new line of business of reselling services, due to the acquisition of new customers for this service in the
first year of operation.




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 Other for the nine months ended April 30, 2007 and 2006 was 28.23%, and
31.73%, respectively. The gross margin decreased principally because the new reselling division shown as Other produce 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 decreased 8.63% to approximately $1,482,000 in the nine months ended April 30, 2007 from approximately $1,622,000 in the same
period last fiscal year. This is principally the result of the decrease in business during the period.




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




The Company had no significant other income and interest
expense in the nine months ended April 30, 2007 or 2006.




For the nine months ended April 30, 2007 and 2006, the
resulting income tax was fully absorbed by available carryforward losses.




Other comprehensive income (loss) consists of unrealized
potential gain (loss), if sold at that point in time, of securities owned by the Company.




Cash Flows




Cash flow used in operating activities was approximately
($182,000) and cash provided by operating activities was approximately $137,000 in the nine months ended April 30, 2007 and 2006, respectively. Cash
used in operating activities in the nine months of this fiscal year resulted primarily from a decrease in deferred revenues and deposits and increases
in inventories and trade accounts receivable partially offset by an increase in accounts payable. Cash flows used in investing activities for the nine
months ended April 30, 2007 and 2006 were approximately ($28,000) and ($32,000), respectively. Cash used for investing activities in the nine months of
this period 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. 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. CSPR expects the cash generated from
operations will be sufficient to meet the cash requirements for the business, including capital expenditures and working capital needs for the near
future. Should actual results differ significantly from current assumptions, the Companys liquidity position could be adversely affected and
could be in a position that would require the Company to raise additional capital, which may not be available to CSPR or may not be available on
acceptable terms. CSPR will continue to seek a credit line from a Puerto Rican financial institution to provide cash flow financing. 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 1,028,682 shares, which in the aggregate represent approximately 65%
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.




10


---



Off-Balance Sheet Arrangements




CSPR was not involved in any significant off-balance sheet
arrangement during the nine months ended April 30, 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 nine months ended April 30, 2007 that have materially affected, or
are reasonably likely to materially affect, the Companys internal controls over financial reporting.




11


---



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.




12


---



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: June 14,
2007 |  |  |  | /s/ Francisco Sanchez Francisco Sanchez, Vice President Chief Financial Officer, Treasurer Duly Authorized Officer
(Principal Financial and Accounting Officer)



13


---