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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

|     |  |                                                                                                                                                       
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------
|[X]  |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarter ended October 31, 2002.                      
|     |  |                                                                                                                                                       
|[  ] |  | Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. For the transition period from ____________ to ____________.

Commission file number 000-49626

CORTELCO SYSTEMS PUERTO RICO, INC.
(Exact name of registrant as specified in its charter)

|                                     |  |                                                
|------------------------------------ |  | -----------------------------------------------
|PUERTO RICO
(State of incorporation) |  | 66-0567491
(I.R.S. Employer Identification No.)

1550 Ponce de Leon Ave. Suite 100, San Juan, Puerto Rico, 00926
(Address of principal executive office)

(787) 758-0000
(Telephone number)

Indicate by check mark whether the registrant (1) has filed all reports
required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 126-2 of the Exchange Act). Yes [  ] No [X]

Indicate the number of shares outstanding of each of the issuers classes of
Common Stock, as of the latest practicable date: 1,204,557 shares of Common
Stock, $0.01 par value, as of October 31, 2002.





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TABLE OF CONTENTS



|                                             |                                                                                               |                                                               |  |  |  |  |  | 
|-------------------------------------------- | --------------------------------------------------------------------------------------------- | ------------------------------------------------------------- |  |  |  |  |  | 
|PART I  FINANCIAL INFORMATION              
|                                             | ITEM 1. FINANCIAL STATEMENTS                                                                 
|                                             |                                                                                               | Cortelco Systems Puerto Rico, Inc. Balance Sheets (Unaudited)
|                                             |                                                                                               | Statements of Operations (Unaudited)                         
|                                             |                                                                                               | Condensed Statement of Changes in Stockholders Equity       
|                                             |                                                                                               | Statements of Cash Flows (Unaudited)                         
|                                             |                                                                                               | Notes to Condensed Financial Statements (Unaudited)          
|                                             | ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                             | ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK                            
|                                             | ITEM 4. CONTROLS AND PROCEDURES                                                              
|PART II  OTHER INFORMATION                 
|SIGNATURES                                  
|EX-99.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-99.2 SECTION 906 CERTIFICATION OF THE CFO



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CORTELCO SYSTEMS PUERTO RICO, INC.
FORM 10-Q
QUARTER ENDED OCTOBER 31, 2002

INDEX

|                              |                                          |                                                                                               |                                                                                                    |    |      |  | 
|----------------------------- | ---------------------------------------- | --------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -- | ---- |  | 
|                              |                                          |                                                                                               |                                                                                                    |    | Page
|Part I: FINANCIAL INFORMATION |                                          |                                                                                               |                                                                                                    |   
|                              | Item 1. Financial Statements (Unaudited) |                                                                                               |                                                                                                    |    |     
|                              |                                          |                                                                                               | Condensed
Balance Sheets as of October 31, 2002 and July 31, 2002                                  |    | 3   
|                              |                                          |                                                                                               | Condensed
Statements of Operations for the Three Months
ended October 31, 2002 and 2001            |    | 4   
|                              |                                          |                                                                                               | Condensed
Statement of Changes in Stockholders Equity for the Three
Months ended October 31, 2002 |    | 5   
|                              |                                          |                                                                                               | Condensed
Statements of Cash Flows for the Three Months
ended October 31, 2002 and 2001            |    | 6   
|                              |                                          |                                                                                               | Notes
to Condensed Financial Statements                                                            |    | 7   
|                              |                                          | Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                    | 13
|                              |                                          | Item 3. Qualitative and Quantitative Disclosure about Market Risk                             |                                                                                                    |    | 23   | 
|                              |                                          | Item 4. Controls and Procedures                                                               |                                                                                                    |    | 23   | 
|Part II: OTHER INFORMATION    |                                          | 24                                                                                           





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CORTELCO SYSTEMS PUERTO RICO, INC.
PART I  FINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS




Cortelco Systems Puerto Rico,
Inc. Condensed Balance Sheets(Unaudited)
October 31, 2002 and July 31, 2002
(Dollars in thousands)

|                                     |                                                                                                               |                            |     |        |             |  |          |        |       |  | 
|------------------------------------ | ------------------------------------------------------------------------------------------------------------- | -------------------------- | --- | ------ | ----------- |  | -------- | ------ | ----- |  | 
|                                     |                                                                                                               |                            |     |        | October 31, |  | July 31,
|                                     |                                                                                                               |                            |     |        | 2002        |  | 2002    
|                                     |                                                                                                               |                            |     |        |             |  |         
|ASSETS                              
|Current assets:                      |                                                                                                               |                            |     |        |             |  |          |       
|                                     | Cash and cash equivalents                                                                                     |                            | $   | 76     |             |  | $        | 333    |      
|                                     | Trade accounts receivable, net of allowance
for doubtful accounts of $810 and $864, respectively              |                            |     | 2,116  |             |  |          | 2,016  |      
|                                     | Due
from affiliated entities                                                                                  |                            |     | 201    |             |  |          | 187    |      
|                                     | Current portion of investment in sales-type leases                                                            |                            |     | 76     |             |  |          | 82     |      
|                                     | Inventories                                                                                                   |                            |     | 2,854  |             |  |          | 2,989  |      
|                                     | Prepaid expenses                                                                                              |                            |     | 210    |             |  |          | 296    |      
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|                                     |                                                                                                               | Total current assets       |     |        | 5,533       |  |          |        | 5,903 | 
|Investment in Sales-Types Leases     |                                                                                                               |                            | 30  |        |             |  | 47       |       
|Property and equipment, net          |                                                                                                               |                            | 464 |        |             |  | 489      |       
|Goodwill                             |                                                                                                               |                            | 382 |        |             |  | 382      |       
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|                                     |                                                                                                               | Total                      |     | $      | 6,409       |  |          | $      | 6,821 | 
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|LIABILITIES AND STOCKHOLDERS EQUITY
|Current liabilities:                 |                                                                                                               |                            |     |        |             |  |          |       
|                                     | Trade accounts payable                                                                                        |                            |     | 1,195  |             |  |          | 1,262  |      
|                                     | Due to affiliated entities                                                                                    |                            |     | 161    |             |  |          | 147    |      
|                                     | Other accrued liabilities                                                                                     |                            |     | 552    |             |  |          | 671    |      
|                                     | Deferred revenue                                                                                              |                            |     | 305    |             |  |          | 315    |      
|                                     | Note payable                                                                                                  |                            |     | 25     |             |  |          | 50     |      
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|                                     |                                                                                                               | Total current liabilities  |     |        | 2,238       |  |          |        | 2,445 | 
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|Commitments and Contingencies        |                                                                                                               |                            |     |        |             |  |          |       
|Stockholders equity:                |                                                                                                               |                            |     |        |             |  |          |       
|                                     | Preferred stock, par value $0.01 per share; authorized,
10,000,000 shares, no shares issued                   |                            |     |       |             |  |          |       |      
|                                     | Common stock, par value $0.01 per share, 5,000,000 shares
authorized; 1,204,557 shares issued and outstanding |                            |     | 12     |             |  |          | 12     |      
|                                     | Capital in excess of par value                                                                                |                            |     | 6,865  |             |  |          | 6,865  |      
|                                     | Retained earnings(deficit)                                                                                    |                            |     | (2,706 | )           |  |          | (2,501 | )    
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|                                     |                                                                                                               | Total stockholders equity |     |        | 4,171       |  |          |        | 4,376 | 
|                                     |                                                                                                               |                            |     |        |             |  |          |       
|                                     |                                                                                                               | Total                      |     | $      | 6,409       |  |          | $      | 6,821 | 
|                                     |                                                                                                               |                            |     |        |             |  |          |       

See notes to condensed financial statements





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Cortelco Systems Puerto Rico, Inc.




Condensed Statements of Operations(Unaudited)
For the Three Months Ended October 31, 2002 and 2001
(Dollars in thousands, except per share data)

|                                            |                                    |   |                    |       |      |   |       |       | 
|------------------------------------------- | ---------------------------------- | - | ------------------ | ----- | ---- | - | ----- | ----- | 
|                                            |                                    |   | Three Months Ended
|                                            |                                    |   | October 31,       
|                                            |                                    |   |                   
|                                            |                                    |   | 2002               |       | 2001
|                                            |                                    |   |                    |       |     
|Net revenues:                               |                                    |   |                    |       |      |   |       |      
|                                            | Products                           |   | $                  | 1,353 |      |   | $     | 2,902 | 
|                                            | Services                           |   |                    | 884   |      |   |       | 978   | 
|                                            |                                    |   |                    |       |      |   |       |      
|                                            | Total net revenues                 |   |                    | 2,237 |      |   |       | 3,880 | 
|                                            |                                    |   |                    |       |      |   |       |      
|Cost of revenues:                           |                                    |   |                    |       |      |   |       |      
|                                            | Products                           |   |                    | 1,106 |      |   |       | 2,335 | 
|                                            | Services                           |   |                    | 524   |      |   |       | 487   | 
|                                            |                                    |   |                    |       |      |   |       |      
|                                            | Total cost of revenues             |   |                    | 1,630 |      |   |       | 2,822 | 
|                                            |                                    |   |                    |       |      |   |       |      
|Gross profit                                |                                    |   | 607                |       |      |   | 1,058 |      
|                                            |                                    |   |                    |       |      |   |       |      
|Operating expenses:                         |                                    |   |                    |       |      |   |       |      
|                                            | Selling, general, & administrative |   |                    | 818   |      |   |       | 1,045 | 
|                                            | Separation costs                   |   |                    |      |      |   |       | 83    | 
|                                            |                                    |   |                    |       |      |   |       |      
|                                            | Total operating expenses           |   |                    | 818   |      |   |       | 1,128 | 
|                                            |                                    |   |                    |       |      |   |       |      
|Loss from operations                        |                                    |   | (211               | )     |      |   | (70   | )    
|Interest income                             |                                    |   | 6                  |       |      |   | 4     |      
|                                            |                                    |   |                    |       |      |   |       |      
|Loss before income taxes                    |                                    |   | (205               | )     |      |   | (66   | )    
|Income tax                                  |                                    |   |                   |       |      |   |      |      
|                                            |                                    |   |                    |       |      |   |       |      
|Net loss                                    |                                    | $ | (205               | )     |      | $ | (66   | )    
|                                            |                                    |   |                    |       |      |   |       |      
|Basic and diluted net loss per common share |                                    | $ | (0.17              | )     |      | $ | (0.05 | )    
|                                            |                                    |   |                    |       |      |   |       |      

See notes to condensed financial statements





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Cortelco Systems Puerto Rico, Inc.




Condensed Statement of Changes in Stockholders Equity(Unaudited)
For the Three Months Ended October 31, 2002
(Dollars in thousands, except per share data)

|                            |  |              |           |            |  |           |    |           |  |   |       |  |  |   |        |   |  |   |       |  
|--------------------------- |  | ------------ | --------- | ---------- |  | --------- | -- | --------- |  | - | ----- |  |  | - | ------ | - |  | - | ----- | -
|                            |  | Common Stock |           | Capital in |  | Retained  |    |           |  |  
|                            |  |              |           | Excess of  |  | Earnings  |    | Total    
|                            |  | Shares       |           | Amount     |  | Par Value |    | (Deficit) |  |  
|                            |  |              |           |            |  |           |    |           |  |   |       | 
|Balance at July 31, 2002    |  |              | 1,204,557 |            |  | $         | 12 |           |  | $ | 6,865 |  |  | $ | (2,501 | ) |  | $ | 4,376 |  
|Net loss                    |  |              |           |            |  |           |    |           |  |   |       |  |  |   | (205   | ) |  |   | (205  | )
|                            |  |              |           |            |  |           |    |           |  |   |       |  |  |   |        |   |  |   |       |  
|Balance at October 31, 2002 |  |              | 1,204,557 |            |  | $         | 12 |           |  | $ | 6,865 |  |  | $ | (2,706 | ) |  | $ | 4,171 |  
|                            |  |              |           |            |  |           |    |           |  |   |       |  |  |   |        |   |  |   |       |  

See notes to condensed financial statements





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Cortelco Systems Puerto Rico, Inc.




Condensed Statements of Cash Flows(Unaudited)
For the Three Months Ended October 31, 2002 and 2001
(Dollars in thousands)

|                                                                    |                                                                             |                                              |                              |      |                    |      |      |     |      |      |  
|------------------------------------------------------------------- | --------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------- | ---- | ------------------ | ---- | ---- | --- | ---- | ---- | -
|                                                                    |                                                                             |                                              |                              |      | Three Months Ended
|                                                                    |                                                                             |                                              |                              |      | October 31,       
|                                                                    |                                                                             |                                              |                              |      |                   
|                                                                    |                                                                             |                                              |                              |      | 2002               |      | 2001
|                                                                    |                                                                             |                                              |                              |      |                    |      |     
|CASH FLOWS FROM OPERATING ACTIVITIES:                               |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    | Net loss                                                                    |                                              | $                            | (205 | )                  |      | $    | (66 | )   
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    | Adjustments to reconcile net loss to net cash
used in operating activities: |                                              |                              |      |                    |      |      |     |     
|                                                                    |                                                                             | Depreciation and amortization                |                              |      | 37                 |      |      |     | 48   |     
|                                                                    |                                                                             | Changes in operating assets and liabilities: |                              |      |                    |      |      |     |      |     
|                                                                    |                                                                             | Decrease (increase) in:                      |                              |      |                    |      |      |     |      |     
|                                                                    |                                                                             |                                              | Trade accounts receivables   |      |                    | (100 | )    |     |      | (507 | )
|                                                                    |                                                                             |                                              | Due from affiliated entities |      |                    | (14  | )    |     |      | 71   |  
|                                                                    |                                                                             |                                              | Inventories                  |      |                    | 135  |      |     |      | 424  |  
|                                                                    |                                                                             |                                              | Prepaid expenses             |      |                    | 86   |      |     |      | 62   |  
|                                                                    |                                                                             | Increase (decrease) in:                      |                              |      |                    |      |      |     |      |     
|                                                                    |                                                                             |                                              | Trade accounts payable       |      |                    | (67  | )    |     |      | (245 | )
|                                                                    |                                                                             |                                              | Due to affiliated entities   |      |                    | 14   |      |     |      | (131 | )
|                                                                    |                                                                             |                                              | Accrued liabilities          |      |                    | (119 | )    |     |      | (176 | )
|                                                                    |                                                                             |                                              | Deferred revenue             |      |                    | (10  | )    |     |      | 17   |  
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    |                                                                             | Total adjustments                            |                              |      | (38                | )    |      |     | (437 | )   
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    |                                                                             | Net cash used in operating activities        |                              |      | (243               | )    |      |     | (503 | )   
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|CASH FLOWS FROM INVESTING ACTIVITIES:                               |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    | Capital expenditures                                                        |                                              |                              | (12  | )                  |      |      | (24 | )   
|                                                                    | Net decrease (increase) in investment in
sales-type leases                  |                                              |                              | 23   |                    |      |      | (37 | )   
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|                                                                    | Net cash provided by (used in) investing activities                         |                                              |                              | 11   |                    |      |      | (61 | )   
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|CASH
FLOWS USED IN FINANCING ACTIVITIES-
Payment on promissory note |                                                                             |                                              | (25                          | )    |                    |      | (37  | )  
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|NET CHANGE IN CASH AND CASH EQUIVALENTS                             |                                                                             |                                              | (257                         | )    |                    |      | (601 | )  
|CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD                      |                                                                             |                                              | 333                          |      |                    |      | 959  |    
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    
|CASH AND CASH EQUIVALENTS, END OF PERIOD                            |                                                                             | $                                            | 76                           |      |                    | $    | 358  |    
|                                                                    |                                                                             |                                              |                              |      |                    |      |      |    

See notes to condensed financial statements





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Cortelco Systems Puerto Rico, Inc.

Notes to Condensed Financial Statements(Unaudited)
For the Three Months Ended October 31, 2002 and 2001

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, consisting
of only normal recurring adjustments, necessary to present fairly the financial
position, results of operations, and cash flows as of October 31, 2002 and for
all periods presented.

CSPR, a Puerto Rico corporation, was a wholly-owned subsidiary of eOn
Communications Corporation (eOn) through July 30, 2002. Effective July 31,
2002, CSPR was spun-off from eOn to the eOn stockholders. Each holder of eOn
common stock received one share of CSPR common stock for every ten shares of
eOn common stock held as of July 22, 2002, which was the record date of the
distribution. After such spin-off, CSPR became an independent entity
headquartered in San Juan, Puerto Rico. CSPRs operations include the sale of
cellular telephones and cellular airtime and of integrated communications and
data equipment in Puerto Rico.

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. It is suggested that these condensed financial statements be read in conjunction
with the financial statements and notes as of July 31, 2002 and 2001,
and for the periods then ended which are included in the Annual Report on Form 10-K 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 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.

Product Warranties The Company provides to the customers with warranties to
replace or repair certain products from the date of purchase or the date of
installation depending on the contract terms. Costs associated with these
warranty programs are estimated and accrued at the time of sale on the basis of
expected net future costs.

Inventory Obsolescence- CSPR carries inventories at the lower of cost or
market. This policy depends on the timely identification of those items
included in inventory whose market price may have declined below carrying
value, such as slow-moving or obsolete items, and we record any necessary
write-offs. The Company performs an analysis of slow-moving or
obsolete inventory on a quarterly basis, and any necessary write-offs,
which could potentially be significant, are included as a deduction
from earnings in the period
in which the evaluations are completed.





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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. Because of
uncertainties inherent in the estimation process and the future availability of
additional information, managements estimate of credit losses inherent in the
existing accounts receivable and the related allowance may change in the near
term.

Going Concern and
Management Plan - The accompanying condensed financial
statements have been prepared on a going concern basis, which
contemplates the realization of assets and the settlement or
liabilities and commitments in the normal course of business. The
Companys significant revenue decrease and resulting loss from
operations in fiscal year 2002 and its lack of financing resources
raise substantial doubt about its ability to continue as a going
concern. Management plans include the reduction of operating costs and
the increase in sales to customers outside of Puerto Rico as the
Company continues to establish distribution channels in the
Caribbean. In addition, the Company will continue to assess possible
acquisitions of other companies or assets to increase its products
offering and its installed base of service customers. The
Companys goal is to improve cash flows and to ultimately
generate operating profits. However, no assurances can be given that
the Company will be successful in achieving profitability and
positive cash flows. The condensed financial statements do not
include any adjustments that might result from the outcome of this
uncertainty.

Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (the FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 141, Business
Combinations. SFAS No. 141 requires that all business combinations be
accounted for under the purchase method only and that certain acquired
intangible assets in a business combination initiated after June 30, 2001 be
recognized as assets apart from goodwill. Adoption of SFAS No. 141 did not
have a significant effect on the Companys results of operations or financial
position.

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS 142). SFAS No. 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The amortization provisions apply to goodwill
and other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption. The Company adopted SFAS No. 142 effective August 1, 2001, and
performed an impairment test of its existing goodwill based on a fair value
concept. It is managements assessment that goodwill impairment did not result
upon adoption. As of October 31 and July 31, 2002, the Company has net
unamortized goodwill of $382,000.

In June 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS No. 143 addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated retirement costs. The Company was required to
implement SFAS No. 143 on August 1, 2002. Adoption of SFAS No. 143 did not
have a significant effect on the Companys results of operations or financial
position.

In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No.
121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of. However, SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 for (a) recognition and measurement of the
impairment of long-lived assets to be held and used and (b) measurement of
long-lived assets to be disposed of by sale. The Company was required to
implement SFAS No. 144 on August 1, 2002. Adoption of SFAS No. 144 did not
have a significant effect on the Companys results of operations or financial
position.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB No. 4, 44
and 64, Amendment of SFAS No. 13, and Technical Corrections. SFAS No. 145
rescinds SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt 
an amendment of APB Opinion No. 30, which required all gains and losses from
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related income tax effect. As a result, the
criteria in Opinion No. 30 will now be used to classify those gains and losses.
This amendment was effective on August 1, 2002. SFAS No. 145 did not have a
significant effect on the Companys financial condition or results of
operations.





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In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated With Exit or Disposal Activities. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
and measured initially at fair value only when the liability is incurred. SFAS
No. 146 also establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 applies to costs associated with an
exit activity but does not involve an entity newly acquired in a business
combination or with a disposal activity covered by SFAS No. 144. SFAS No. 146
does not apply to costs associated with a retirement of long-lived assets
covered by SFAS No. 143. The Company is required to implement SFAS No. 146 for
exit or disposal activities that are initiated after December 31, 2002. The
Company has not yet determined the impact that this statement will have on its
results of operations or financial position.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain
Financial Instruments, an amendment of SFAS No. 72 and 144, and FASB
Interpretation No. 9.Except for transactions between two or more mutual
enterprises, SFAS NO. 147 removes acquisitions of financial institutions from
the scope of both SFAS No. 72 and Interpretation No. 9 and requires that those
transactions be accounted for in accordance with SFAS No. 141, Business
Combinations and SFAS No. 142. In addition, SFAS No. 147 amends SFAS No. 144,
to include in its scope long-term customer-relationship intangible assets of
financial institutions such as depositor-and-borrower-relationship intangible
assets and credit cardholders intangible assets. SFAS No. 147 is effective for
acquisitions or impairment measurement of the above intangibles effected on or
after October 1, 2002. SFAS No. 147 is not expected to have a significant
effect on the Companys financial condition or results of operations.

Revenue Recognition

The Company recognizes revenues from the communications systems segment
upon completion of installation services and acceptance by the customer due to
the customized nature of each installation. The Company recognizes revenues
upon shipment of equipment to customers for communications systems and cellular telephones shipped to
dealers because, at that point, the Company has no further obligations to our
dealers to either deliver additional products or perform services. Also the
Company recognizes revenues upon shipment for cellular telephones sold to
retail customers and recognizes cellular sales commission revenues when retail
contracts are submitted to cellular carriers and recognizes revenues for resold
cellular airtime when the customer uses the airtime. 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 eOn, as well as various third-party communications
systems from various manufacturers.

Special Charges

To reduce costs and improve productivity, the Company adopted a
restructuring plan in the second quarter of fiscal year 2001. The plan, which
included headcount reductions and office space consolidation, was effectively
amended in fiscal year 2002. The majority of the restructuring plan was
completed by July 31, 2002. The remaining expenditures for the restructuring
plan are expected to be substantially complete by July 2003.





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The following table summarizes the activity relating to the special
charges during the first quarter of fiscal 2003 and the associated liabilities
at October 31, 2002 (in thousands):

|                     |  |               |     |         |  |              |   |             |  |         |    |       |  |           |   |              |  |   |     | 
|-------------------- |  | ------------- | --- | ------- |  | ------------ | - | ----------- |  | ------- | -- | ----- |  | --------- | - | ------------ |  | - | --- | 
|                     |  | July 31, 2002 |     |         |  |              |   |             |  |         |    |       |  |           |   | Oct 31, 2002
|                     |  | Liability     |     |         |  |              |   |             |  |         |    | Other |  | Liability
|                     |  | Balance       |     | Charges |  | Expenditures |   | Adjustments |  | Balance
|                     |  |               |     |         |  |              |   |             |  |        
|Termination benefits |  | $             | 288 |         |  |              |  |             |  | $       | 34 |       |  |           |  |              |  | $ | 254 | 

The liability for
restructuring charges of $254,000 as of October 31, 2002, is
included in other accrued liabilities.

Separation Costs

During fiscal 2002, legal and accounting fees associated with our
separation from eOn were classified as a separate component of operating
expenses under the caption Separation costs. The Company
does not expect to incur any additional
such costs during the balance of fiscal year 2003.

Income (Loss) 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) available 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.

On July 31, 2002, CSPR issued 1,194,557 shares of common stock to effect
the spin-off to eOn shareholders. The weighted average number of shares
outstanding for the period ended October 31,2001 has been adjusted to give
effect to eOns distribution to eOns shareholders of all the Companys shares
held by eOn on the basis of one share of the Companys stock for every ten
shares of eOn common stock outstanding as if such distribution had occurred as
of the beginning of the earliest period presented.





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

|                                                     |  |                       |           |      |  |   |           |  
|---------------------------------------------------- |  | --------------------- | --------- | ---- |  | - | --------- | -
|                                                     |  | Three Months Ended   
|                                                     |  | October 31,          
|                                                     |  |                      
|                                                     |  | 2002                  |           | 2001
|                                                     |  |                       |           |     
|                                                     |  | (In thousands, except
|                                                     |  | per share data)      
|Basic and diluted loss per share:                    |  |                       |           |      |  |   |           |  
|Loss from operations                                 |  | $                     | (205      | )    |  | $ | (66       | )
|                                                     |  |                       |           |      |  |   |           |  
|Weighted average number of common shares
outstanding |  |                       | 1,204,557 |      |  |   | 1,204,557 |  
|Loss from operations per share                       |  | $                     | (0.17     | )    |  | $ | (0.05     | )
|                                                     |  |                       |           |      |  |   |           |  

Inventories

Inventories consist of the following:

|                                                            |                   |   |                |       |          |   |       |       | 
|----------------------------------------------------------- | ----------------- | - | -------------- | ----- | -------- | - | ----- | ----- | 
|                                                            |                   |   | October 31,    |       | July 31,
|                                                            |                   |   | 2002           |       | 2002    
|                                                            |                   |   |                |       |         
|                                                            |                   |   | (In thousands)
|Purchased components                                        |                   | $ | 1,301          |       |          | $ | 1,487 |      
|Components and materials related to
installation in process |                   |   | 94             |       |          |   | 36    |      
|Parts and Materials for sales                               |                   |   | 1,459          |       |          |   | 1,466 |      
|                                                            |                   |   |                |       |          |   |       |      
|                                                            | Total inventories |   | $              | 2,854 |          |   | $     | 2,989 | 
|                                                            |                   |   |                |       |          |   |       |      

Accounting for Goodwill

In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible
Assets(SFAS 142). SFAS No. 142 eliminates the amortization of goodwill and
indefinite-lived intangible assets and initiates an annual review for
impairment. Identifiable intangible assets with a determinable useful life
will continue to be amortized. The amortization provisions apply to goodwill
and other intangible assets acquired after June 30, 2001. Goodwill and other
intangible assets acquired prior to June 30, 2001 will be affected upon
adoption.

Goodwill of $382,000 had been recorded in conjunction with the assets
acquisition of Ochoa Telecom in May 14, 2001. The Company adopted SFAS No. 142
effective August 1, 2001, and performed an impairment test of its existing
goodwill based on a fair value concept. The adoption of SFAS No. 142 did not
have a significant impact on the Companys results of operations or financial
position during fiscal year 2001 or 2002. As of October 31 and July 31, 2002,
the Company has net unamortized goodwill of $382,000.





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Contingencies

CPRS is a defendant
in lawsuits arising out of the ordinary course of business.
Management, based on advice from legal counsel, is of the opinion
that the ultimate resolution of these matters will not have a
material effect on CSPRs financial position or result of
operations.

Segment Information Contingencies

CSPRs reportable segments are Communications Systems and Cellular Airtime
Services, each of which offers different products and services. Each segment
requires different technology and marketing strategies. The Communications
Systems segment offers communications solutions that address voice and data
network switching while the Cellular Airtime Services segment resells cellular
airtime and cellular telephones in Puerto Rico.

Unaudited segment information for the three months ended October 31, 2002.

|                              |  |                |       |          |  |          |     |   |  |   |       |  
|----------------------------- |  | -------------- | ----- | -------- |  | -------- | --- | - |  | - | ----- | -
|                              |  |                |       |          |  | Cellular |     |   |  |  
|                              |  | Communications |       | Airtime  |  |          |     |  
|                              |  | Systems        |       | Services |  | Total   
|                              |  |                |       |          |  |         
|                              |  | (In thousands)
|Revenues                      |  | $              | 2,004 |          |  | $        | 233 |   |  | $ | 2,237 |  
|Loss from operations          |  |                | (138  | )        |  |          | (73 | ) |  |   | (211  | )
|Interest income               |  |                | 6     |          |  |          |    |   |  |   | 6     |  
|Provision for income taxes    |  |                |      |          |  |          |    |   |  |   |      |  
|Net loss                      |  |                | (132  | )        |  |          | (73 | ) |  |   | (205  | )
|Total assets                  |  |                | 5,978 |          |  |          | 431 |   |  |   | 6,409 |  
|Capital expenditures          |  |                | (12   | )        |  |          |    |   |  |   | (12   | )
|Depreciation and amortization |  |                | 35    |          |  |          | 2   |   |  |   | 37    |  

Unaudited segment information for the three months ended October 31, 2001.

|                              |  |                |       |          |  |          |       |  |  |   |        |  
|----------------------------- |  | -------------- | ----- | -------- |  | -------- | ----- |  |  | - | ------ | -
|                              |  |                |       |          |  | Cellular |       |  |  |  
|                              |  | Communications |       | Airtime  |  |          |       | 
|                              |  | Systems        |       | Services |  | Total   
|                              |  |                |       |          |  |         
|                              |  | (In thousands)
|Revenues                      |  | $              | 3,236 |          |  | $        | 644   |  |  | $ | 3,880  |  
|Income (loss) from operations |  |                | (78   | )        |  |          | 8     |  |  |   | (70    | )
|Interest income               |  |                | 4     |          |  |          |      |  |  |   | 4      |  
|Provision for income taxes    |  |                |      |          |  |          |      |  |  |   |       |  
|Net income (loss)             |  |                | (74   | )        |  |          | 8     |  |  |   | (66    | )
|Total assets                  |  |                | 8,951 |          |  |          | 1,163 |  |  |   | 10,114 |  
|Capital expenditures          |  |                | (24   | )        |  |          |      |  |  |   | (24    | )
|Depreciation and amortization |  |                | 45    |          |  |          | 3     |  |  |   | 48     |  





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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 our anticipated or projected operating
performance, financial results, liquidity and capital resources. These
statements are based on managements beliefs, assumptions, and expectations,
which in turn are based on the information currently available to management.
Information contained in these unaudited forward-looking statements is
inherently uncertain, and our actual operating performance, financial results,
liquidity, and capital resources may differ materially due to a number of
factors, most of which are beyond our ability to predict or control. The
Company also direct your attention to the risk factors affecting our business
that are discussed elsewhere at the end of this Item. 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 our unaudited financial
statements and the notes included thereto.

Overview

The Company is a value-added reseller of numerous third-party brands of
voice and data communication systems as well as cellular telephones and
airtime. Most of our business is conducted in Puerto Rico, although we also
sell communications systems in the Caribbean and Latin America. The Companys
products help enterprises communicate more effectively with customers and
increase customer satisfaction and loyalty. The Company sells both to
enterprises in our voice and data communications business and to individual
retail customers in our cellular business.

The Companys reportable segments are Communications Systems and Cellular
Airtime Services, each of which offers different products and services. Each
segment requires different technology and marketing strategies. The
Communications Systems segment offers communications solutions that address
voice and data network switching while the Cellular Airtime Services segment
resells cellular airtime and cellular telephones in Puerto Rico. The
Communications Systems segment revenues are comprised mostly of sales of PBX
customer premise equipment. The Communications Systems segment represented 82%
of our revenues in fiscal year 2002 and 90% of the operating loss of the
Company, while Cellular Airtime Services represented 18% of revenues and 10% of
the operating loss. Cellular Airtime Services revenues were 10% of our total
revenues for the three months ended October 31, 2002 and we anticipate that
these revenues will continue to represent a smaller percentage of the total
revenues than in fiscal year 2002. As Communications Systems revenues will
constitute a larger portion of our revenue in the future than in fiscal year
2002, it is important that we continue to add to our product and service
offering and increase our installed base of customers. In the period ended
October 31, 2002, the resale of third-party communications systems equipment
from our Communications Systems segment have our highest gross margins, greater
than Service revenues or our Cellular Airtime Services segment.

While the Companys recent losses have primarily been due to our
Communications Systems segment, CSPR anticipates increasing the revenues in the
Communications Systems segment while trying to closely control our selling,





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general, and administrative expenses. The Company will continually look for
ways to increase our installed base of customers via acquisitions or by
distributing new types of voice and data communications products as our highest
gross margins are from service revenues in our Communications Systems segment.
The Companys recent losses in the Communications System segment were mainly a
result of expanding our sales and administrative infrastructure following our
rapid growth in fiscal year 1999 and the first half of fiscal year 2000. In
fiscal year 2001, CSPR restructured our business to address the downward cycle
in the telecommunications industry and began to look for ways to increase our
higher margin business by acquiring certain assets of Ochoa Telecom in Puerto
Rico. While the telecommunications market has continued to be depressed in
Puerto Rico due to macroeconomic factors in the country, CSPR will continue to
seek acquisition opportunities that allow us to increase our maintenance
revenues in the Communications Systems segment.

Three Months Ended October 31, 2002 and 2001

The following discussion provides information about the Companys
operations, as an independent company for the period of three months ended
October 31, 2002 and as a wholly-owned subsidiary of eOn for the three months
ended October 31, 2001.

Net Revenues

Net revenues decreased 42.3% to $2.2 million in the quarter ended October
31, 2002 from $3.9 million in the quarter ended October 31, 2001, reflecting
economical recession factors that affect many of our multinational customers
and the market for voice and data communication systems in Puerto Rico.
Customers in such markets as call centers and retail outlets have been
postponing the purchases of capital assets during the period.

Cost of Revenues and Gross Profit

Cost of revenues consists primarily of purchases from our equipment
manufacturers and other suppliers and costs incurred for final assembly,
quality assurance and installation of our systems. Gross profit decreased
42.6% to $.6 million in the quarter ended October 31, 2002
from $1.1 million in
the quarter ended October 31, 2001. The decrease resulted basically from
decreased revenues in Cellular Airtime Services and in the Communications
Systems revenues. Our gross margins were 27.1% in this quarter and 27.3% in
the same quarter last year.

Selling, General and Administrative

The operating expenses consist mainly of salaries of our sales, marketing,
service, and administrative personnel and associated overhead. CSPR recognizes
these expenses as incurred. As the Company distributes the products of third
parties and do not sell any products that the Company design or develop
ourselves, the Company does not incur any costs for research and development.
Before the spin-off from eOn the Company essentially operated as a stand-alone
entity from our parent due to our location in Puerto Rico, with separate
audits, legal counsel, corporate officers, and accounting and administrative
functions. CSPR has not previously operated as a stand-alone public company.
Therefore, CSPR anticipates that it will incur additional general and
administrative expenses due to public company reporting requirements that were
previously performed by our parent. Selling, general and administrative
expenses decreased 22.0% to $.8 million in the quarter ended October 31, 2002
from $1.0 million in the quarter ended October 31, 2001. The decrease was
primarily due to reductions in





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personnel, facilities, and associated overhead resulting from the
implementation of our restructuring plan.

Amortization of Goodwill and Cumulative Effect of Change in Accounting
Principles

Goodwill of $382,000 had been recorded in conjunction with the assets
acquisition of Ochoa Telecom on May 14, 2001. This balance has not been
subsequently amortized. On August 1, 2001 the Company adopted SFAS No. 142,
Goodwill and Other Intangible Assets, which changed the method of evaluating
goodwill from a recoverability test based upon undiscounted cash flows to a
fair value approach, which is stipulated in SFAS No. 142. In addition, the new
standard eliminated the periodic amortization of goodwill; consequently, no
goodwill amortization was recorded in the current quarter.

Separation Costs

Separation costs were
$83,000 in the three months ending October 31,
2001, representing legal and accounting fees associated with our separation
from eOn. The company incurred no separation costs in the three months ending
October 31, 2002 and expects to incur no additional such costs during the
balance of fiscal year 2003.

Interest and Other Income and Expenses

No material amount was recorded in the first quarter of fiscal year 2003
or corresponding quarter of the prior fiscal year.

Income Tax Benefit (Expense)

No income tax benefit was recognized in the current quarter because the
Company cannot conclude that it is more likely than not that its deferred tax
assets will be realized in the future.

LIQUIDITY AND CAPITAL RESOURCES

Prior to the initial
public offering of eOn, the Company funded its
operations primarily through cash generated from operations and periodic
borrowings under our former revolving credit facility. Subsequent to the
initial public offering, eOn periodically provided funds through
parent-subsidiary loans as our credit facility was retired with funds from the
initial public offering. The last funds received from eOn were in November
2000 and we have funded all cash requirements and loan repayments to eOn of
$2.25 million since that date from operating revenues. However, as our
business continues to grow, we may need additional capital. Such capital may
not be available on favorable terms or at all.

The Companys
significant revenue decrease and resulting loss from operations in
fiscal year 2002 and its lack of financing resources raise
substantial doubt about its ability to continue as a going concern.
Management plans include the reduction of operating costs and the
increase in sales to customers outside of Puerto Rico as the Company
continues to establish distribution channels in the Caribbean. In
addition, the Company will continue to assess possible acquisitions
of other companies or assets to increase its products offering and
its installed base of service customers. The Companys goal is
to improve cash flows and to ultimately generate operating profits.
However, no assurances can be given that the Company will be
successful in achieving profitability and positive cash flows. The
magnitude of our future capital requirements will depend on many
factors, including, among others, investments in working capital, and
the amount of income generated by operations. If we need to raise
additional capital, that capital may not be available on acceptable
terms, or at all. If the Company cannot raise necessary additional
capital on acceptable terms, we may not be able to successfully market
our products and services, take advantage of future opportunities,
respond to competitive pressures or unanticipated requirements or even
continue operating our business.

Net cash used in operating activities was $0.2 million and $0.5 million
for the three months ended October 31, 2002 and 2001, respectively. Cash used
by operating activities in the first three months of this fiscal year resulted
primarily from the increase in the net loss from operations partially offset by
a decrease in the level of inventory and prepaid expenses, and a decrease in
liabilities.

Net cash provided by
(used in) investing activities was $11,000 for
the three months ended October 31, 2002 and ($61,000) for the same
quarter last





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fiscal year. Cash provided by investing activities in this three months of the
current fiscal year consisted primarily of investment in sales-type leases
offset by cash used in capital expenditure.

Net cash used in
financing activities was $25,000 and $37,000
in the three months ended October 31, 2002 and 2001, respectively. Cash used
in financing activities in the three months ended October 31, 2002 and 2001
represents repayments of part of the note payable issued for the acquisition of
certain assets acquired from Ochoa Telecom in May 2001.

ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS

You should carefully
consider the risks set forth in this 10-Q, particularly the risk that
we may not be able to continue operations as described in
Liquidity and Capital Resources and the risk factors
described below when evaluating CSPR. If any of the following risks occur, CSPRs business,
operating results and financial condition could be seriously harmed.
Additional risks and uncertainties that CSPR is presently not aware of could
also impair its business, operating results and financial condition.

If the Company is not able to sustain our traditional private branch exchange
(PBX) market, our business, operating results, and financial condition will be
harmed.

Approximately 41.7% and 37.6% of our revenues for fiscal year 2002 and
2001, respectively, were from sales of PBX customer premise equipment. Our PBX
revenues declined 56.6% from fiscal year 2000 to fiscal year 2002 due mainly to
a decline in the overall PBX market and significant Year 2000 upgrade revenues.
These revenues comprise approximately 56.3% of our Communications Systems
segment revenues as virtually all enterprise voice communications systems sold
worldwide today are PBXs. The remainder of the segment revenues is service
revenues.

The Company may not be able to sustain our PBX market revenues because the
traditional PBX market is declining. One reason for the decline of the
traditional PBX market is the emergence of voice switching platforms based on





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standard PCs and the continued introduction of IP based voice and data
communications devices by many of the large equipment manufacturers such as
Nortel Networks, Avaya, Mitel, NEC, Toshiba, Panasonic, and Siemens. If CSPR is
not able to grow or sustain our traditional PBX revenues or properly train our
personnel to sell and service the newer products developed by these companies,
our business, operating results and financial condition could be harmed.

If the Company
fails to obtain and market new telecommunication and data
products or to add features to our existing telecommunication and data
products, the Company may not be able to generate sufficient revenues to
sustain our business.

Our success is highly dependent upon the continued successful timely
introduction of new telecommunication and data products and new models of our
existing telecommunications and data products containing additional features.
The markets for our products are characterized by rapid technological change,
frequent new product introductions, uncertain product life cycles and changing
customer requirements. The rapid change in customers requirements and the
constant introduction of new products by our suppliers could cause
technological obsolescence of some of our inventory, which could harm our
business, operating results and financial condition.

The success of new products and new models with additional features
depends on a number of factors, including strategic allocation of limited
financial and technical resources, accurate forecasting of consumer demand, and
market and industry acceptance of our products and services. If we are unable
to successfully train our sales and technical personnel to sell and service the
new telecommunications and data products developed by our equipment
manufacturers, our business, operating results, and financial condition could
be harmed.

CSPR faces intense competition from participants in the telecommunications and
data value-added reseller markets, which may impair our revenues and ability to
obtain new customers and maintain existing customers.

The telecommunications and data value-added reseller markets are intensely
competitive and rapidly evolving. In addition, there are few barriers to entry
into the telecommunications and data value-added reseller markets, and new
entrants to these markets may develop and offer products that will compete
directly with our products and services. Rapid technological innovation and
intense price competition characterize the markets, and the competition for new
customers and for retention of existing customers is intense.

Some of the products and services provided by the Company are available
through competitors with long operating histories in our markets and many of
these products are already familiar to and accepted by consumers. Many of the
manufacturers and distributors of these competing telecommunication and data
products and services have substantially greater brand recognition, market
presence, distribution channels, advertising and marketing budgets and
promotional and other strategic partners than us.

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

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

The uncertainty of our sales cycle makes the timing of sales difficult to
predict and may cause fluctuations in our quarterly operating results. Our
sales





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cycles generally vary from one to twelve months based on the size of the system
to be installed and the various requirements of our potential customers. The
purchase of our products may involve a significant commitment of our customers
time, personnel, financial, and other resources. We generally recognize
revenues on the date of shipment for communications systems and cellular
telephones shipped to dealers and upon completion of installation for
communications systems sold directly to end users. For cellular sales
commission revenues we recognize revenues when retail contracts are submitted
to cellular carriers. Resold cellular airtime is recognized as revenues as the
airtime is actually used. Also, it is difficult to predict the timing of
indirect sales because we have little control over the selling activities of
our dealers and value-added resellers.

The Company incurs
substantial sales and marketing expenses and spends
significant management time before customers place orders with us, if at all.
Revenues from a specific customer may not be recognized in the quarter in which
CSPR incurs related sales and marketing expense, which may cause CSPR to miss
our revenue or earnings expectations.

Seasonal trends may cause our quarterly operating results to fluctuate, which
may adversely affect the market price of our stock.

Telecommunications product sales have traditionally been much lower in
Puerto Rico, our main market, during the winter holiday season than during
other times of the year due to the potential business disruption caused by
installing new communications systems, and the extended winter holiday season
present in Puerto Rico due to local custom. Although predicting consumer
demand for our products will be very difficult, the Company believes that sales
of telecommunications systems will be disproportionately low during this period
when compared to other times of the year due to the factors above and the
seasonal buying patterns of many of our customers. Any fluctuation in our
quarterly operating results may cause the market price of our stock to decline,
and that decline may be substantial if the fluctuation is caused by factors
other than anticipated seasonal buying patterns of customers. Finally, if CSPR
is unable to accurately forecast and respond to consumer demand for our
telecommunications systems, our reputation and brand may suffer, and the market
price of our stock would likely fall.

Any future business acquisitions may disrupt our business, dilute stockholder
value or distract management attention.

As part of our ongoing business strategy, the Company may consider
additional acquisitions of, or significant investments in, businesses that
offer products, services and technologies complementary to our own. In
particular, CSPR may pursue acquisitions and strategic alliances as a means of
acquiring additional brands of communications systems to sell and service.
Such acquisitions could materially adversely affect our operating results and
the price of our stock. Acquisitions also entail numerous risks, including:

|  |  |                                                                                                                                     
|- |  | ------------------------------------------------------------------------------------------------------------------------------------
|- |  | difficulty of assimilating the operations, products and personnel of the
acquired businesses;                                       
|- |  | potential disruption of our ongoing business;                                                                                       
|- |  | unanticipated costs associated with the acquisition;                                                                                
|- |  | inability of management to manage the financial and strategic position of
acquired or developed products, services and technologies;





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|  |  |                                                                                                                             
|- |  | ----------------------------------------------------------------------------------------------------------------------------
|- |  | inability to maintain uniform standards, controls, policies and procedures; and                                             
|- |  | impairment of relationships with employees and customers that may occur
as a result of integration of the acquired business.

To the extent that shares of our stock or other rights to purchase stock
are issued in connection with any future acquisitions, dilution to our existing
stockholders will result and our earnings per share may suffer. Any future
acquisitions or strategic investments may not generate additional revenue or
provide any benefit to our business, and we may not achieve a satisfactory
return on our investment in any acquired businesses.

If the Company loses key management personnel, we may not be able to
successfully operate the business.

CSPRs future performance will be substantially dependent on the continued
services of our senior management, especially our President and Chief Executive
Officer, Sergio R. Moren, and other key personnel. The loss of any members of
our executive management team and our inability to hire additional executive
management could harm our business and results of operations. The Company
employs our key personnel on an at-will basis. CSPR does not maintain key
person insurance policies on any of the members of our executive management
team.

The Company may be unable to hire and retain sales, marketing, and service
personnel to execute our business strategy.

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

Since the Company does not have exclusive agreements with the manufacturers,
manufacturers may enter into dealer agreements with our competitors, which may
adversely affect our business.

CSPR distributes and services products designed and manufactured by eOn,
Avaya, Nortel, Hitachi, Mitel, Toshiba, NEC, Cortelco, Nokia, Ericsson,
Motorola, and others. However, the Company does not have exclusive distribution
agreements with these companies and have competitors in our major markets that
sell the same products. Our customers often have the option of purchasing
similar communications systems from other distributors in our markets. A
decision by the manufacturer to sell to other dealers in our market increases
competitive pressures on the Company, and may adversely affect our business.

If the Company is unable to establish and maintain satisfactory relationships
with the manufacturers of our products that we expect to sell and service, our
business will suffer.

The Company acquires all of our products that sell from manufacturers
pursuant to the terms of distribution agreements. The loss of our distribution
agreements with our product manufacturers would reduce our revenues, increase
obsolescence risk to our existing inventory, and materially harm our business.





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##### Table of Contents



CSPR depends on a limited number of third parties to manufacture and supply our
products, and may be unable to operate the business if those parties do not
perform their obligations.

We expect to rely on third-party suppliers for many of the products that
we distribute and service, including telecommunications and data systems as
well as cellular phones and accessories. We do not have long-term agreements
in place with our suppliers and we do not control the time and resources that
these third parties devote to our business. We cannot be sure that these
parties will perform their obligations as expected or that any revenue, cost
savings or other benefits will be derived from the efforts of these parties. If
any of our third party suppliers breaches or terminates its agreement with us
or otherwise fails to perform its obligations in a timely manner, we may be
delayed or prevented from delivering some of our products and services. Because
our relationships with these parties are non-exclusive, they may also support
products or services that compete directly with ours or offer similar or
greater support to our competitors. Any of these events could require us to
undertake unforeseen additional responsibilities or devote additional resources
to deliver our products and services. This outcome would harm our ability to
compete effectively and perform our services.

The Company faces
many risks in expanding its international operations into the
Caribbean.

Sales outside of Puerto Rico accounted for approximately 7.7% of our total
revenues during fiscal year 2002. The Company expects to increase sales to
customers outside Puerto Rico and establish additional distribution channels in
the Caribbean. However, foreign markets for our products may develop more
slowly than currently anticipated. CSPR may not be able to successfully
establish international distribution channels, or may not be able to hire the
additional personnel necessary to support such distribution channels.

CSPR future results could be harmed by economic, political, regulatory and
other risks associated with the reliance on international sales and operations.

As stated above, sales outside of Puerto Rico accounted for approximately
7.7% of our total revenues during fiscal year 2002. Because of the operations
and relationships in other parts of the Caribbean, and our reliance on foreign
third-party manufacturing, assembly and testing operations, we are subject to
the risks of conducting business outside of Puerto Rico, including:

|  |  |                                                                              
|- |  | -----------------------------------------------------------------------------
|- |  | changes in a specific countrys or regions political or economic
conditions;
|- |  | trade protection measures and import or export licensing requirements;       
|- |  | potentially negative consequences from changes in tax laws;                  
|- |  | difficulty in managing widespread sales and customer service operations; and 
|- |  | less effective protection of intellectual property.                          

CSPR is currently involved in litigation, which, if resolved unfavorably, could
have a material adverse effect on our business.

CSPR is currently subject to one lawsuit regarding an alleged breach of
contract, three lawsuits regarding employment issues, and a recent fourth
lawsuit in which the Company was included as a Third Party Defendant. In the
breach of contract case, the plaintiff alleges that CPRS breached the terms of
our contract by ceasing to supply services to the plaintiff, and the plaintiff
seeks damages of





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approximately $854,430. In the employment lawsuits, each of the plaintiffs are
former employees of our company, and they each allege under various theories of
law that their dismissal from employment by the Company was unjustified.
Collectively, the employment law cases allege damages of approximately $13
million. Regarding the fourth lawsuit, the Company believes that this
litigation is without merit and filed a motion for the court to order our
dismissal. CSPR has analyzed each lawsuit with our legal advisors, and the
Company does not believe that any of these cases will result in an unfavorable
outcome that would have a material adverse effect upon our business. However,
in the event of one or more unfavorable determinations against us, such
litigation could have a material adverse effect on our business by harming
earnings if the Company is liable for a significant monetary judgment, by
harming our reputation with our customers through any adverse publicity
generated from an unfavorable determination, or by adversely affecting our
relationship with current and prospective employees of our company.

Laws or regulations that govern the telecommunications industry and copyrighted
works could expose us to legal action if the Company fail to comply or could
require us to change our business.

Because our products and services provide our customers with access to the
public telephone system and other methods of electronic communication, the
products we sell are subject to the regulations of the Federal Communications
Commission and Junta Reglamentadora de Telecomunicaciones de Puerto Rico,
relating to consumer products that connect to the public telephone network and
electronic emissions of consumer products.

Changes in the regulatory climate or the enforcement or interpretation of
existing laws could expose us to legal action if we fail to comply. In
addition, any of these regulatory bodies could promulgate new regulations or
interpret existing regulations in a manner that would cause us to incur
significant compliance costs or force us to alter the features or functionality
of our products and services.

Product defects, system failures or interruptions may have a negative impact on
our revenues, damage our reputation and decrease our ability to attract new
customers.

Errors and product defects can result in significant warranty and repair
problems, which could cause customer relations problems. Correcting product
defects requires significant time and resources, which could delay product
releases and affect market acceptance of our products. Any delivery by us of
products with undetected material product defects could harm our credibility
and market acceptance of our products.

The products the Company sells and service may have undetected faults leading
to liability claims, which could harm our business.

The products the Company sells and service may contain undetected faults
or failures. Any failures of these products could result in significant losses
to our customers, particularly in mission-critical applications. A failure
could also result in product returns and the loss of, or delay in, market
acceptance of our products. In addition, any failure of the products we sell
could result in claims against us. Our purchase agreements with our customers
typically contain provisions designed to limit our exposure to potential
product liability claims. Although we are unaware of any specific laws or
cases that would invalidate our purchase agreement limitation of liability
provisions, there is a risk that such provisions may not be effective as a
result of federal, state or local laws or





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ordinances or unfavorable judicial decisions in Puerto Rico or other countries.
We maintain insurance to protect against certain claims associated with the
use of our products, but our insurance coverage may not adequately cover all
possible claims asserted against us. In addition, even claims that ultimately
are unsuccessful could be expensive to defend and consume management time and
resources.

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

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

Our stock is subject to the requirements for penny stocks, which could
adversely affect your ability to sell and the market price of your shares.

We believe our stock fits the definition of a penny stock. The Securities
Exchange Act of 1934 defines a penny stock as any equity security that is not
traded on a national securities exchange or authorized for quotation on The
Nasdaq Stock Market and that has a market price of less than $5.00 per share,
with certain exceptions. Penny stocks are subject to Rule 15g under the
Securities Exchange Act of 1934, which imposes additional sales practice
requirements on broker-dealers who sell such securities. In general, a
broker-dealer, prior to a transaction in a penny stock, must deliver a
standardized risk disclosure document that provides information about penny
stocks and the risks in the penny stock market. The broker-dealer must provide
the customer with current bid and offer quotations for the penny stock,
information about the commission payable to the broker-dealer and its
salesperson in the transaction and monthly statements that disclose recent
price information for each penny stock in the customers account. Finally,
prior to any transaction in a penny stock, the broker-dealer must make a
special written suitability determination for the purchaser and receive the
purchasers written consent to the transaction prior to sale. All of these
requirements may restrict your ability to sell our stock and could limit the
trading volume of our stock and adversely affect the price investors are
willing to pay for our stock.

Insiders have substantial voting control over us which could delay or prevent
us from engaging in a change of control transaction and you from selling our
shares at a premium to the shares then current market value.

Our officers, directors and five percent or greater stockholders
beneficially own or control, directly or indirectly, approximately 487,869
shares, which in the aggregate represents approximately 41% voting interest in
the outstanding shares of our common stock. These stockholders have the
ability to control all matters submitted to our stockholders for approval,
including the election and removal of directors and the approval of any
business combinations.





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##### Table of Contents






ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

The majority of our cash equivalents are invested in variable rate
instruments with frequent rate resets. Because these securities have short
effective maturities, we believe the market risk for such holdings is
insignificant. In addition, the vast majority of the Companys sales are made
in U.S. dollars, and consequently, we believe that our foreign exchange rate
risk is immaterial. We do not have any derivative instruments and do not
engage in hedging transactions.




ITEM 4. CONTROLS AND PROCEDURES

Within the 90-day period preceding the filing of this Quarterly Report on
Form 10-Q, an evaluation was performed under the supervision of and with the
participation of the Companys management, including the Chief Executive
Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of the
design and operation of the Companys disclosure controls and procedures.
Based on that evaluation, the Companys management, including the CEO and CFO,
concluded that the design and operation of the Companys disclosure controls
and procedures were effective to ensure that material information relating to
CSPR is made known to such officers by others within CSPR, particularly during
the period this quarterly report and prepared, in order to allow timely
decisions regarding required disclosure. There have been no significant
changes in the Companys internal control or in other factors that could
significantly affect internal controls subsequent to the date of their
evaluation.





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##### Table of Contents






PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In early 2002, former
employees of Ochoa Telecom, Inc. filed a suit against Ochoa alleging
under various theories of law that they were dismissed from
employment without severance payment, and suffered consequential
mental anguishes. The total claim is in the amount of $2,660,289.91. In July 24, 2002 the Court of First Instance,
Superior Court, Bayamon Section, Puerto Rico, ordered the inclusion of
Cortelco as indispensable party in the case. Subsequently, in
September 9, 2002 plaintiffs filed a Motion to include Cortelco
as a Third Party Defendant. The Court granted such petition and at
September 11, 2002, Cortelco was summoned with such suit. Our
legal advisors answered the complaint at October 25, 2002, and
until this date the Court has not attended the matter. In accordance
to the Asset Purchase and Sale Agreement between Cortelco
and Ochoa, the latter is obliged to give legal representation to
Cortelco in possible employee reclamations. Due to the matter of the
reclamations, the manner in which Ochoa has managed the case, and the
affirmative defenses brought by Cortelco, it can result in a conflict
of interests between the parties and such representation cannot be
provided. Due to this reason, our legal advisors proceeded to answer
with the corresponding motion to the court. In accordance to the
labor laws of Puerto Rico, and to the Agreement between the parties,
Cortelco is not likely to respond in this case. The most important
issue in this case is to sustain the Agreement with Ochoa and design
strategies for the Court to relieve us from such claim.

ITEM 2. CHANGES IN SECURITIES

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

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

(A)  Exhibits.

|            |  |                                                               
|----------- |  | --------------------------------------------------------------
|Exhibit No. |  | Description                                                   
|            |  |                                                               
|99.1        |  | Certificate of Chief Executive officer under 18 U.S.C. § 1350 
|99.2        |  | Certificate of Chief Financial Officers under 18 U.S.C. § 1350

(B)  Reports On Form 8-K.

None.





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##### Table of Contents






SIGNATURES

Pursuant to the Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto authorized.

Cortelco Systems Puerto Rico, Inc.

|      |  |                   |  |                                                                                                                                                                
|----- |  | ----------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Date: |  | December 13, 2002 |  | /s/ Francisco SanchezFrancisco Sanchez, Vice President
Chief Financial Officer, Secretary
Duly Authorized Officer
(Principal Financial and Accounting Officer))





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##### Table of Contents



I, Sergio Moren, Chief Executive Officer of Cortelco Systems Puerto Rico, Inc.
certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Cortelco Systems
Puerto Rico, Inc.;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weakness in
internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                      



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                     
|----------------------- |  | ----------------------------------------------------
|Date: December 13, 2002 |  | /s/ Sergio MorenSergio Moren
Chief Executive Officer





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##### Table of Contents



I, Francisco Sánchez, Chief Financial Officer of Cortelco Systems Puerto Rico,
Inc. certify that:



|1. |  | I have reviewed this quarterly report on Form 10-Q of Cortelco Systems
Puerto Rico, Inc.;                                                                                                                                                                                                                                     
|-- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
|  
|3. |  | Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;                   
|  
|4. |  | The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
have:                                                                                                        



| | a) |  | designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
| | -- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | evaluated the effectiveness of the registrants disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the Evaluation Date); and                                                                                                  
|
| | c) |  | presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date.                                                                                                                        



|5. |  | The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | a) |  | all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrants
ability to record, process, summarize and report financial data and
have identified for the registrants auditors any material weakness in
internal controls; and
| | -- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | b) |  | any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrants
internal controls; and                                                                                                                                      



|6. |  | The registrants other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and
material weaknesses.
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                        |  |                                                               
|----------------------- |  | --------------------------------------------------------------
|Date: December 13, 2002 |  | /s/ Francisco SanchezFrancisco Sanchez
Chief Financial Officer