UNITED STATESSECURITIES AND EXCHANGE
COMMISSIONWASHINGTON, D.C. 20549




FORM 10-QSB




(Mark One)


|[X] |  | Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended October 31, 2005.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------

|[  ] |  | Transition report under Section 13 or 15(d) of the Exchange
Act For the transition period from __________ to __________
|---- |  | -----------------------------------------------------------------------------------------------------------------------



Commission file number 000-49626




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


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



Parque Ind. Caguas Oeste Road 156 km 58.2, Caguas, Puerto
Rico, 00725-0137(Address of principal executive office)




(787) 758-0000(Issuers telephone number,
including area code)




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




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




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




1,604,557 shares of Common Stock, $0.01 par value, as of
October 31, 2005.




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


---





CORTELCO SYSTEMS PUERTO RICO, INC. FORM 10-QSB
QUARTER ENDED OCTOBER 31, 2005




INDEX


|PART
IFINANCIAL INFORMATION                                        |  |  |  |  | 1  | 
|------------------------------------------------------------------- |  |  |  |  | -- | 
|                                                                   
|ITEM 1.
FINANCIAL STATEMENTS (UNAUDITED)                            |  |  |  |  | 1  | 
|Condensed
Balance Sheet (Unaudited)                                 |  |  |  |  | 1  | 
|Condensed
Income Statements (Unaudited)                             |  |  |  |  | 2  | 
|Condensed
Statements of Changes in Stockholders Equity (Unaudited) |  |  |  |  | 3  | 
|Condensed
Statements of Cash Flows (Unaudited)                      |  |  |  |  | 4  | 
|Notes to
Condensed Financial Statements (Unaudited)                 |  |  |  |  | 5  | 
|ITEM 2.
MANAGEMENTS DISCUSSION AND ANALYSIS                        |  |  |  |  | 9  | 
|ITEM 3.
CONTROLS AND PROCEDURES                                     |  |  |  |  | 11 | 
|PART
IIOTHER INFORMATION                                           |  |  |  |  | 11 | 
|ITEM 1. LEGAL
PROCEEDINGS                                           |  |  |  |  | 11 | 
|ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |  |  |  |  | 11 | 
|ITEM 3.
DEFAULTS UPON SENIOR SECURITIES                             |  |  |  |  | 11 | 
|ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS         |  |  |  |  | 11 | 
|ITEM 5. OTHER
INFORMATION                                           |  |  |  |  | 11 | 
|ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K                            |  |  |  |  | 11 | 
|SIGNATURES                                                          |  |  |  |  | 12 | 

---





PART IFINANCIAL INFORMATION




ITEM 1. FINANCIAL STATEMENTS
(UNAUDITED)




CORTELCO SYSTEMS PUERTO RICO, INC. Condensed Balance Sheet (Unaudited)October 31, 2005 (Dollars in
thousands)


|ASSETS                                                                                                                       
|-----------------------------------------------------------------------------------------------------------------------------
|Current
        assets:                                                                                                      
|Cash
        and cash equivalents                                                                                            
|Trade
        accounts receivable, net                                                                                       
|Inventories,
        net                                                                                                     
|Prepaid
        expenses                                                                                                     
|Total
        current assets                                                                                                 
|Property
        and equipment,net                                                                                           
|Purchased
        software, net of accumulated amortization of $75                                                           
|                                                                                                                             
|Total                                                                                                                        
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                         
|Current
        liabilities:                                                                                                 
|Trade
        accounts payable                                                                                               
|Due
        to affiliated entities                                                                                           
|Deposits
        on purchases                                                                                                
|Other
        accrued liabilities                                                                                            
|Deferred
        revenue                                                                                                     
|Total
        current liabilities                                                                                            
|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; 1,604,557
        shares issued and outstanding
|Capital
        in excess of par value                                                                                       
|Deficit                                                                                                                      
|Total
        stockholders equity                                                                                           
|                                                                                                                             
|Total                                                                                                                        



See notes to condensed financial statements.




1


---



CORTELCO SYSTEMS PUERTO RICO, INC.
Condensed Income Statements (Unaudited)
For the Three Months Ended October 31, 2005 and 2004
(Dollars in thousands, except per share data)


|                                              |  |  |  | Three Months Ended, October 31 |      
|--------------------------------------------- |  |  |  | ------------------------------ | -----
|
|Net
revenues:                                 |  |  |  |                                |      
|Products                                      |  |  |  | $                              | 1,057
|Services                                      |  |  |  |                                | 796  
|Total net
revenues                            |  |  |  |                                | 1,853
|Cost of
revenues:                             |  |  |  |                                |      
|Products                                      |  |  |  |                                | 795  
|Services                                      |  |  |  |                                | 510  
|Total cost of
revenues                        |  |  |  |                                | 1,305
|Gross
profit                                  |  |  |  |                                | 548  
|Operating
expenses:                           |  |  |  |                                |      
|Selling,
general, & administrative            |  |  |  |                                | 524  
|Total operating
expenses                      |  |  |  |                                | 524  
|Operating
income (loss)                       |  |  |  |                                | 24   
|Other income,
net:                            |  |  |  |                                |     
|Income before
income taxes                    |  |  |  |                                | 24   
|Provision for
income taxes:                   |  |  |  |                                |      
|Current,
assuming no carryforward benefit     |  |  |  |                                | (12  
|Carryforward
benefit                          |  |  |  |                                | 12   
|Total income
tax expense                      |  |  |  |                                |     
|Net
income                                    |  |  |  | $                              | 24   
|Basic and diluted
net income per common share |  |  |  | $                              | 0.01 



See notes to condensed financial statements.




2


---



CORTELCO SYSTEMS PUERTO RICO, INC.
Condensed Statements of Changes in Stockholders Equity (Unaudited)
For the Three Months Ended October 31, 2005
(Dollars in thousands)


|                                                                   |  |  |  | Common stock |    | Capital in excess of par value |  | Capital contribution note receivable from
related party |       | (Deficit) |  | Total
|------------------------------------------------------------------ |  |  |  | ------------ | -- | ------------------------------ |  | ------------------------------------------------------- | ----- | --------- |  | -----
|Balance,
July 31, 2005                                             |  |  |  | $            | 16 |                                |  | $                                                       | 7,273 |           |  | $    
|Partial
collection of capital contribution note from related party |  |  |  |              |   |                                |  |                                                         |      |           |  |      
|Net
income                                                         |  |  |  |              |   |                                |  |                                                         |      |           |  |      
|Balance,
October 31, 2005                                          |  |  |  | $            | 16 |                                |  | $                                                       | 7,273 |           |  | $    



See notes to condensed financial statements




3


---



CORTELCO SYSTEMS PUERTO RICO, INC.
Condensed Statements of Cash Flows (Unaudited)
For the Three Months Ended October 31, 2005 and 2004
(Dollars in thousands)


|                                                                                            |  |  |  | Three Months Ended, October 31 |    
|------------------------------------------------------------------------------------------- |  |  |  | ------------------------------ | ---
|
|CASH FLOWS
FROM OPERATING ACTIVITIES:                                                       |  |  |  |                                |    
|Net
Income                                                                                  |  |  |  | $                              | 24 
|Adjustments
to reconcile net income to net cash provided by (used in) operating activities: |  |  |  |                                |    
|Depreciation
and amortization                                                               |  |  |  |                                | 31 
|Other
non-cash                                                                              |  |  |  |                                | 9  
|Changes in
operating assets and liabilities:                                                |  |  |  |                                |    
|Decrease
(increase) in:                                                                     |  |  |  |                                |    
|Trade
accounts receivables                                                                  |  |  |  |                                | 15 
|Inventories                                                                                 |  |  |  |                                | (48
|Prepaid
expenses                                                                            |  |  |  |                                | (30
|Increase
(decrease) in:                                                                     |  |  |  |                                |    
|Trade
accounts payable                                                                      |  |  |  |                                | 181
|Due to
affiliated entities                                                                  |  |  |  |                                | (83
|Deposits on
purchases                                                                       |  |  |  |                                | 414
|Other accrued
liabilities                                                                   |  |  |  |                                | 18 
|Deferred
revenue                                                                            |  |  |  |                                | (30
|Total
adjustments                                                                           |  |  |  |                                | 477
|Net cash
provided by (used in) operating activities                                         |  |  |  |                                | 501
|CASH FLOWS
FROM INVESTING ACTIVITIES:                                                       |  |  |  |                                |    
|Capital
expenditures                                                                        |  |  |  |                                | (13
|Net cash used
in investing activities                                                       |  |  |  |                                | (13
|NET CHANGE IN
CASH                                                                          |  |  |  |                                | 488
|CASH,
BEGINNING OF YEAR                                                                     |  |  |  |                                | 499
|CASH, END OF
PERIOD                                                                         |  |  |  | $                              | 987



See notes to condensed financial statements.




4


---



Cortelco Systems Puerto Rico, Inc.




Notes to Condensed Financial Statements (Unaudited)For the Three Months Ended October 31, 2005 and 2004




Basis of Presentation




The accompanying unaudited condensed financial statements
have been prepared by Cortelco Systems Puerto Rico, Inc. (CSPR or the Company). It is managements opinion that these
statements include all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders equity, and
cash flows as of October 31, 2005 and for all periods presented.




Certain information and footnote disclosures normally
included in the annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have
been condensed or omitted. These condensed financial statements should be read in conjunction with the financial statements and notes as of July 31,
2005 and for the periods then ended, which are included in the Annual Report on Form 10-KSB for the year ended July 31, 2005 filed with the Securities
and Exchange Commission.




The accompanying financial statements have been prepared on
a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business.
The Companys previous years recurring losses, reduced market share, and lack of financing resources raised doubt about the Companys ability
to continue as a going concern. The Companys current efforts to reorganize its core business has allowed the Company to be in a break-even
position since 2004 (prior to non-recurring charges in 2004), but efforts continue to return to profitability. Accordingly, although management is
optimistic about the projected outcome for other quarters of this fiscal year 2006, no assurances can be given that the Company will be successful in
maintaining positive cash flows and profitability. The financial statements do not include any adjustments that might result from the outcome of this
uncertainty.




Significant Accounting Policies




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




Fair value of financial instruments  The
carrying amounts of cash is a reasonable estimate of its fair value. The carrying amounts of accounts receivable, accounts payable (including to
related parties), accrued expenses, and deposit liabilities approximate fair value due to their short-term maturities.




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




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




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




The following table summarizes the activity relating to the
unexpired maintenance contracts during the first quarter of this fiscal year.




5


---



|(Dollars in thousands) |  |  |  | July 31, 2005 Liability Balance |     | Additions |  | Deductions |    | October 31, 2005 Liability Balance
|---------------------- |  |  |  | ------------------------------- | --- | --------- |  | ---------- | -- | ----------------------------------
|Maintenance
Contracts  |  |  |  | $                               | 250 |           |  | $          | 33 |                                   



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




The following table summarizes the activity relating to the
warranty reserve during the first quarter of this fiscal year.


|(Dollars in thousands) |  |  |  | July 31, 2005 Liability Balance |    | Additions |  | Deductions |    | October 31, 2005 Liability Balance
|---------------------- |  |  |  | ------------------------------- | -- | --------- |  | ---------- | -- | ----------------------------------
|Warranty
Reserve       |  |  |  | $                               | 39 |           |  | $          | 37 |                                   



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




Allowance for Doubtful Accounts  The allowance
for doubtful accounts is an amount that management believes will be adequate to absorb losses on existing accounts receivable that are considered
uncollectible based on evaluations of collectibility of the outstanding accounts.




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




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




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


|Tax       |  |  |  | Benefit      
|--------- |  |  |  | -------------
|Income    |  |  |  | 7% flat
tax  
|Property  |  |  |  | 90%
exemption
|Municipal |  |  |  | 60%
exemption



6


---



Recent Accounting Pronouncements




In May 2005, the FASB issued SFAS No. 154, Accounting
changes and Error Corrections  a replacement of APB Opinion No. 20 and FASB Statement No. 3. This statement replaces APB Opinion 20, Accounting
Changes in Interim Financial Statements, and changes the requirements for the accounting for a reporting of a change in accounting principle. This
Statement applies to all voluntary changes in accounting principle. It also applies to a changes required by an accounting pronouncement in the unusual
instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those
provisions should be followed. The future implementation of this Statement will have no significant effect on the Companys financial
statements.




As revised in 2004, the FASB issued SFAS No. 123,
Accounting for Stock-Based Compensation. This Statement requires that when an entity exchanges its own equity instruments for goods or services,
the transaction should be accounted at the fair value of the shares surrendered. The Company is required to implement SFAS No. 123, as amended, during
the third quarter of fiscal year 2006. At present, the Company does not have any Stock-Based Compensation agreements in force; however, there are
350,000 common stock shares segregated for such purposes in the future. The implementation of SFAS No. 123, as amended, is not expected to have a
material impact in the Companys financial statements.




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




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




The following table summarizes the Company equity
compensation plan as of October 31, 2005:


|Plan category                                              |  |  |  | Number of securities to beissued upon exercise
of outstanding options,warrants and rights |     | Weighted-averageexercise price ofoutstanding
options, warrants and rights |  | Number of securitiesremaining availablefor
future issuanceunder equity compensationplans (excluding securities reflected in column (a)
|---------------------------------------------------------- |  |  |  | ----------------------------------------------------------------------------------------- | --- | ------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------
|                                                           |  |  |  |                                                                                           | (a) |                                                                           |  |                                                                                                                                       
|Equity
compensation plans approved by security holders     |  |  |  |                                                                                           |    |                                                                           |  |                                                                                                                                       
|Equity
compensation plans not approved by security holders |  |  |  |                                                                                           |    |                                                                           |  |                                                                                                                                       
|Total                                                      |  |  |  |                                                                                           |    |                                                                           |  |                                                                                                                                       



Inventories




Inventories consist of the following:


|                                                            |  |  |  | October 31, 2005
|----------------------------------------------------------- |  |  |  | ----------------
|
|Purchased
components, net                                   |  |  |  | $               
|Components
and materials related to installation in process |  |  |  |                 
|Parts and
materials for sale, net                           |  |  |  |                 
|Total
inventories                                           |  |  |  | $               



7


---



Income per Common Share




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




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


|                                                     |  |  |  | Three Months Ended October 31 |          
|---------------------------------------------------- |  |  |  | ----------------------------- | ---------
|
|
|Basic and
diluted income per share:                  |  |  |  |                               |          
|Net
income                                           |  |  |  | $                             | 24       
|Weighted average
number of common shares outstanding |  |  |  |                               | 1,604,557
|Income from
operations per share                     |  |  |  | $                             | 0.01     



Contingencies




CSPR is currently subject to one claim regarding an alleged
breach of contract, and various claims regarding employment issues. In the breach of contract case, the plaintiff alleges that the Company breached the
terms of contract by ceasing to supply services to the plaintiff, and the plaintiff seeks damages of approximately $855,000. Although management is
strongly contesting the claim, management believes, based on the opinion of counsel, that if the Court does not accept the Companys defense, a
negative outcome is reasonably possible, although for a lower sum than the one claimed by plaintiff. Because the loss, if any, cannot be classified as
probable nor the amount determinable, an accrual for losses has not been recorded in the Companys financial statements. The Company is also
defendant in one claim by a former employee, totaling approximately $5 million. The Company has filed motion for summary judgment and such motion is
under the consideration of the court. The Companys management believes based on the opinion of counsel that the same is without merit and does
not believe that this case will result in a significant unfavorable outcome that would have a material adverse effect upon the Companys
business. The Company is also a party in other claim incidental to
their business. The Company does not believe that this claim will have a material adverse effect on the Companys business or its financial
condition.




Subsequent Event




On September 16, 2005, the Board of Directors authorized
the Officers of the Company to accept a partial settlement related to a note receivable of $304,000 from a related party, assigned to the Company upon
the spin-off from eOn Communication Corporation, on July 31, 2002. The partial settlement consist of 43,104 shares of CSPR stock valued at 60 days
trailing average from September 13, 2005, of $0.33 per share, and 175,983 shares of eOn stock valued at 60 days trailing average from September 13,
2005, of $1.29 per share. CSPR expects this transaction will occur before July 31, 2006, and will accounted at the time the shares are received from
the related party. This note is presented in this report in the financial statement as a reduction of stockholders equity.




8


---



ITEM 2. MANAGEMENTS DISCUSSION AND
ANALYSIS.




This report contains unaudited forward-looking statements
within the meaning of the federal securities laws. Unaudited forward-looking statements are those that express managements views of future
events, developments, and trends. In some cases, these statements may be identified by terminology such as may, will,
should, expects, plans, intends, anticipates, believes, estimates,
predicts, potential, or continue or the negative of such terms and other comparable expressions. Unaudited
forward-looking statements include statements regarding 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 directs your attention to the risk factors affecting our business that are discussed on this report. 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.




Financial Condition and Management
Plans




Near term, the Companys cash position has improved
from prior years. The Company will continue with the policy of accelerated payment terms to improve cash flows and continue to maintain accounts
receivable at controlled levels during the current fiscal year. As a result, as of October 31, 2005, cash was approximately $987,000 compared to
approximately $37,000 as of end of the same quarter last year. CSPRs slight shortfall to budgeted sales in this first quarter ended October 31,
2005 was due to a postponement of the installation of a major system. Historically, the second quarter of each fiscal year is a low point for sales
revenue, but CSPR has been receiving customer commitments for new system installations that should allow the Company to achieve the current budget for
said quarter of fiscal year 2006. However, to achieve the increased opportunities, CSPR will continue to seek a credit line from a Puerto Rican
financial institution. Also, the Company believes that, as the financial condition continues to improve, they will continue to obtain more beneficial
credit terms from our main suppliers as successfully done during fiscal year 2005.




CSPR plans to continue to closely monitor our operating
costs and expenses, which have stabilized in 2005 and 2004 after significant reductions in prior years. This was done while striving for an increase in
sales profits. The Company will continually look for ways to increase our installed base of customers via improved service performance, and increased
maintenance sales efforts since our highest gross margins are from service revenues. To improve service performance, the Company will continue its
training program to develop more highly qualified technicians and salespersons. CSPR has achieved Platinum level with Avaya, the highest qualification
that Avaya gives to its Business Partner. Among other things, being a Platinum Business Partner entitles the Company to additional discounts and
special technical trainings. Also, CSPRs technical staff includes an Avaya Certified Expert (ACE).
This is not only the highest level given to a technical person but also is the first ACE awarded to an Avaya Business Partner in the Caribbean. CSPR is
also obtaining the highest certifications in two other key product lines, which the Company believes will improve our competitive position with
customers and suppliers. To improve new installation and maintenance sales results, the Company hired three new salespersons to support and increase
our customer base. The Company is pursuing productivity improvements via implementing new technologies such as Web ticketing and Project Management
programs.




No assurance can be given that CSPR will be successful in
achieving our near term goals.




Results of Operations and Cash Flow for the Three Months
Ended October 31, 2005 and 2004




The following discussion provides information about the
Companys operations, for the three months ended October 31, 2005 and for the three months ended October 31, 2004.




Net revenues consist of sales of new product and additions
(Products) and services (Services) related to revenues from maintenance contract and billable services. Net revenues decreased
7.35%, or approximately $147,000 in the three months ended October 31, 2005 compared to the three months ended October 31, 2004. The results primarily
reflect decreased revenue of approximately $170,000 in Products, and an increase of approximately $23,000 in




9


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Services due to the postponement of a major equipment
installation during the current quarter, and normal fluctuations in the maintenance business.




Cost of revenues consists primarily of purchases from
equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation and maintenance labor cost.
The gross margin for the three months ended October 31, 2005 was 29.57% and 27.70% for the three months ended October 31, 2004. The gross margin
improvement result basically from better margins from suppliers and more competitive sale strategies in line with management's plan for this fiscal
year 2006.




Selling, general and administrative expenses consist
primarily of salaries and benefit costs, advertising, and facilities and other overhead expenses incurred to support our business. Selling, general and
administrative expenses decreased 6.09% to approximately $524,000 in the three months ended October 31, 2005 from approximately $558,000 in the three
months ended October 31, 2004.




The Company had no significant other income and interest
expense in the three months ended October 31, 2005.




For both quarters presented herein, the resulting income
tax was offset by the available carryforward losses, through a change in valuation allowance.




Cash flow provided by operating activities was
approximately $501,000 in the three months ended October 31, 2005 and cash flow used in operating activities was approximately ($77,000) in the three
months ended October 31, 2004. Cash provided by operating activities in the three months of this fiscal year resulted primarily from an increase in
accounts payable and accrued liabilities due to an increase in customers down payment and partially offset by a decrease in trade accounts payable to
affiliates. Cash flows used in investing activities for the three months ended October 31, 2005 and 2004 was approximately ($13,000) and ($12,000),
respectively. The change in cash for investing activities is related to the acquisition of new computer hardware to improve the performance of our
employees.




Other Relevant Financial
Information




The Companys Board of Directors has the authority to
issue up to 10,000,000 shares of preferred stock and to determine the preferences, rights and privileges of those shares without any further vote or
action by the stockholders. The rights of the holders of any preferred stock that may be issued in the future may harm the rights of the holders of
common stock. Certain provisions of our certificate of incorporation and bylaws may make it more difficult for a third party to acquire control of CSPR
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.




CSPRs officers, directors and five percent or greater
stockholders beneficially own or control, directly or indirectly, approximately 979,850 shares, which in the aggregate represent approximately 61%
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.




The Company believes 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.




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Off-Balance Sheet Arrangements




CSPR was not involved in any significant off-balance sheet
arrangements during the three months ended October 31, 2005 and for the three months ended October 31, 2004.




ITEM 3. CONTROLS AND PROCEDURES.




Under the supervision and with the participation of our
management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report. Based on that
evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedure are effective. There
were no changes in our internal control over financial reporting during the three months ended October 31, 2005 that have materially affected, or are
reasonably likely to materially affect, our internal controls over financial reporting.




PART IIOTHER INFORMATION




ITEM 1. LEGAL PROCEEDINGS.




No new legal proceedings.




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




None.




ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.




None.




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




None.




ITEM 5. OTHER INFORMATION.




None.




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


|(A) |  | Exhibits.
|--- |  | ---------

|Exhibit Number |  |  |  | Description of Document                                                                    
|-------------- |  |  |  | -------------------------------------------------------------------------------------------
|31.1           |  |  |  | Officers Certification pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
|31.2           |  |  |  | Officers Certification pursuant to Rules 13a-14(a) of the Securities Exchange Act of 1934.
|32.1           |  |  |  | Officers Certification pursuant to 18 U.S.C ss1350.                                       

|(B) |  | Reports On Form 8-K.
|--- |  | --------------------



None.




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SIGNATURES




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


|                        |  |  |  | Cortelco Systems Puerto Rico, Inc.                                                                                                     |  |  |  | 
|----------------------- |  |  |  | -------------------------------------------------------------------------------------------------------------------------------------- |  |  |  | 
|                        |  |  |  |                                                                                                                                        |  |  |  | 
|Date: December
15, 2005 |  |  |  | /s/ Francisco Sanchez                                                                                                                  |  |  |  | 
|                        |  |  |  | Francisco
Sanchez, Vice PresidentChief Financial Officer, TreasurerDuly Authorized Officer(Principal Financial and Accounting
Officer) |  |  |  | 



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