UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-QSB





(Mark One)



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

For the quarterly period ended April 30, 2008.






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

For the transition period from _______ to ________






Commission file number
        000-49626






CORTELCO SYSTEMS PUERTO RICO, INC.

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





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






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

(Address of principal executive office)





(787) 704-0000

(Issuers telephone number, including area code)





Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNo o



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



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



1,588,536 shares of Common Stock, $0.01 par value, as of April 30, 2008.



Transitional Small Business Disclosure Format (Check one):  Yes oNox



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CORTELCO SYSTEMS PUERTO RICO, INC.

FORM 10-QSB

QUARTER ENDED APRIL 30, 2008



INDEX



PART I - FINANCIAL INFORMATION
        1


ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).
        1


Condensed Balance Sheet (Unaudited)
        1


Condensed Income Statements and Comprehensive Income (Unaudited)
        2


Condensed Statements of Changes in Stockholders' Equity (Unaudited)
        3


Condensed Statements of Cash Flows (Unaudited)
        4


Notes to Condensed Financial Statements (Unaudited)
        5


ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS.
        9


ITEM 3.  CONTROLS AND PROCEDURES.
        13


PART II - OTHER INFORMATION
        14


ITEM 1.  LEGAL PROCEEDINGS.
        14


ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
        14


ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.
        14


ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
        14


ITEM 5.  OTHER INFORMATION.
        14


ITEM 6.  EXHIBITS AND REPORTS ON FORM 8-K.
        14


SIGNATURES
        15






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PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED).



CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Balance Sheet (Unaudited)April 30, 2008(Dollars in thousands)ASSETSCurrent assets:Cash
        $               760Trade accounts receivable, net of allowance for uncollectible accounts of $86
        2,272Current portion of financed accounts receivable
        63Inventories
        169Installations in process
        115Prepaid expenses
        95Total current assets
        3,474Available for sale securities
        46Non current portion of financed accounts receivable
        152Property and equipment,net
        49Purchased software, net of accumulated amortization of $11
        7$            3,728LIABILITIES AND STOCKHOLDERS' EQUITYCurrent liabilities:Trade accounts payable
        $            1,253Due to affiliated entities
        8Deposits on purchases
        10Other accrued liabilities
        325Deferred revenue
        239Total current liabilities
        1,835Commitments and contingenciesStockholders' equity:Preferred stock, par value $.01 per share; authorized 10,000,000 shares, no shares issued
        --Common stock, par value $.01 per share; 5,000,000 shares authorized, 1,604,557 shares issued and 1,588,536 outstanding
        16Treasury stock, 16,021 shares at cost
        (5)Capital in excess of par value
        7,326Accumulated deficit
        (5,263)Accumulated other comprehensive loss
        (181)Total stockholders' equity
        1,893$            3,728


See notes to condensed financial statements.



1




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CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Income Statements and Comprehensive Income (Unaudited)For the Three Months and Nine Months Ended April 30, 2008 and 2007(Dollars in thousands, except per share data)Three Months Ended
April 30,
        
        Nine Months Ended
April 30,




2008
        
        2007
        
        2008
        
        2007Net revenues:Products
        $         1,214
        
        $           735
        
        $         3,296
        
        $         1,907Services
        761
        
        792
        
        2,348
        
        2,433Telephony
        797
        
        555
        
        2,317
        
        888Total net revenues
        2,772
        
        2,082
        
        7,961
        
        5,228Cost of revenues:Products
        904
        
        517
        
        2,456
        
        1,411Services
        510
        
        545
        
        1,484
        
        1,545Telephony
        740
        
        510
        
        2,153
        
        796Total cost of revenues
        2,154
        
        1,572
        
        6,093
        
        3,752Gross profit
        618
        
        510
        
        1,868
        
        1,476Operating expenses:Selling, general, and administrative
        555
        
        488
        
        1,708
        
        1,482Income (loss) from operations
        63
        
        22
        
        160
        
        (6)Other income, net
        13
        
        4
        
        24
        
        15Income before income taxes
        76
        
        26
        
        184
        
        9Provision for income taxes:
        --
        
        --
        
        --
        
        --Net income
        $              76
        
        $              26
        
        $            184
        
        $               9Other comprehensive income (loss):Net unrealized loss on available
for sales securities
        (40)
        
        (83)
        
        (102)
        
        (60)Comprehensive income (loss)
        $              36
        
        $            (57)
        
        $              82
        
        $            (51)Basic and diluted net income
per common share
        $           0.05
        
        $           0.02
        
        $           0.12
        
        $           0.01






See notes to condensed financial statements.



2




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CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Statements of Changes in Stockholders Equity (Unaudited)For the Nine Months Ended April 30, 2008(Dollars in thousands)Common stock
         
        Treasury Stock
         
        Capital in excess of par value
         
        (Deficit)
         
        Accumulated other comprehensive loss
         
        TotalBalance, July 31, 2007
        $            16
         
        $            (11)
         
        $            7,316
         
        $            (5,447)
         
        $                      (79)
         
        $            1,795Treasury Stock disposed
        
         
        6
         
        10
         
        
         
        
         
        16Net income
        
         
        
         
        
         
        184
         
        
         
        184Other comprehensive loss
        --
         
        --
         
        --
         
        --
         
        (102)
         
        (102)Balance, April 30, 2008
        $             16
         
        $             (5)
         
        $             7,326
         
        $             (5,263)
         
        $                    (181)
         
        $            1,893




























See notes to condensed financial statements.



3




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CORTELCO SYSTEMS PUERTO RICO, INC.Condensed Statements of Cash Flows (Unaudited)For the Three Months and Nine Months ended April 30, 2008 and 2007(Dollars in thousands)




Three Months Ended,
April 30,
        
        Nine Months Ended,
April 30,




2008
        
        2007
        
        2008
        
        2007Cash flows from operating activities:Net income
        $                    76
        
        $                    26
        
        $                 184
        
        $                      9Adjustments to reconcile net income to net cash provided by (used in) operating activities:Provision for doubtful accounts
        37
        
        --
        
        37
        
        --Depreciation and amortization
        16
        
        26
        
        45
        
        82Stock compensation
        6
        
        --
        
        16
        
        --Amount financed on sales
        (215)
        
        --
        
        (215)
        
        --Loss on disposition of equipment
        --
        
        2
        
        1
        
        2Changes in operating assets and liabilities:Decrease (increase) in:Trade accounts receivable
        237
        
        (222)
        
        (567)
        
        (146)Inventories
        141
        
        20
        
        77
        
        (118)Installation in process
        3
        
        (70)
        
        174
        
        (44)Prepaid expenses
        43
        66
        
        21
        
        (6)Increase (decrease) in:Trade accounts payable
        (32)
        
        266
        
        217
        
        379Due to affiliated entities
        (3)
        
        (2)
        
        (4)
        
        (12)Deposits on purchases
        (161)
        
        13
        
        (223)
        
        (65)Other accrued liabilities
        13
        
        (8)
        
        46
        
        (74)Deferred revenue
        (3)
        
        (54)
        
        (29)
        
        (189)Total adjustments
        82
        
        37
        
        (404)
        
        (191)Net cash provided by (used in) operating activities
        158
        
        63
        
        (220)
        
        (182)Cash flows from investing activities:Capital expenditures
        (18)
        
        (12)
        
        (31)
        
        (28)Net cash used in investing activities
        (18)
        
        (12)
        
        (31)
        
        (28)Net change in cash
        140
        
        51
        
        (251)
        
        (210)Cash,beginning
        620
        
        612
        
        1,011
        
        873Cash,ending
        $                  760
        
        $                  663
        
        $                  760
        
        $                  663


See notes to condensed financial statements.



4




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Cortelco Systems Puerto Rico, Inc.

Notes to Condensed Financial Statements (Unaudited)

For the Nine Months Ended April 30, 2008 and 2007



Basis of Presentation



The accompanying unaudited condensed financial statements have been prepared by Cortelco Systems Puerto Rico, Inc. ("CSPR" or the "Company").  It is managements opinion that these statements include all adjustments necessary to present fairly the financial position, results of operations, changes in stockholders equity, and cash flows as of April 30, 2008 and for all periods presented, and the same were of normal recurring nature.



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



Significant Accounting Policies



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



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



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



Installation and services -The Company recognizes revenue for equipment shipped to customers (including those under Company provided long-term financing) when persuasive evidence of an arrangement exits, the arrangement fee is fixed or determinable, delivery performance has occurred and collectibility is reasonable assumed.  Revenues from communications systems service contracts are recognized over the life of the individual contracts.    The Company allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element.



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



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



The following table summarizes the activity relating to the unexpired maintenance contracts during the quarter ended April 30, 2008:





(Dollars in thousands)
        
        January 31, 2008
Liability Balance
        
        Additions
        
        Deductions
        
        April 30, 2008Liability BalanceMaintenance Contracts
        
        $                201
        $              84
        
        $             94
        
        $                191






5




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



The following table summarizes the activity relating to the warranty reserve during the quarter ended April 30, 2008:





(Dollars in thousands)
        
        January 31, 2008 Liability Balance
        
        Additions
        
        Deductions
        
        April 30, 2008Liability BalanceWarranty Reserve
        
        $                41
        $              25
        
        $            18
        
        $                48






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



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



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



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



Available for sale securities Securities held in eOn Communications, a related party, are classified as available for sale securities.  They are reported at fair value, and unrealized gains and losses reported as a net amount in other comprehensive income.  As of April 30, 2008, the unrecognized holding loss was approximately $181,000.



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



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





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






For all periods presented herein the resulting income tax expense has been offset by available carryforward losses.







6




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Recent Accounting Pronouncements



Recently issued FASB Statements or Interpretations, SEC Staff Accounting Bulletins, and AICPA Emerging Issue Task Force Consensuses have either been implemented in prior periods or are not applicable to the Company.  Recently implemented accounting pronouncements have not resulted in any significant effect in the financial position or results of operations of the Company.





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



The following table summarizes the Company equity compensation plan as of April 30, 2008:





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


--
        (b)


--
        (c)


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






InventoriesInventories consist of the following:





April 30, 2008(In thousand)Purchased components, net
        $                        103Parts and materials for maintenance, net
        66Total inventories
        $                        169






Segments

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







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





Three Months EndedApril 30,2008
        
        2007Comm.Systems
        
        Telephony Billing Services
        
        Total
        
        Comm.Systems
        
        Telephony Billing Services
        
        Total(In Thousands)Revenues
        $1,975
        
        $   797
        
        $2,772
        
        $1,527
        
        $   555
        
        $2,082Income (loss) from
operations
        53
        
        10
        
        63
        
        33
        
        (11)
        
        22Other income
        13
        
        --
        
        13
        
        4
        
        --
        
        4Provision for income
taxes
        --
        
        --
        
        --
        
        --
        
        --
        
        --Net income (loss)
        66
        
        10
        
        76
        
        37
        
        (11)
        
        26








Nine Months EndedApril 30,2008
        
        2007Comm.Systems
        
        Telephony Billing Services
        
        Total
        
        Comm.Systems
        
        Telephony Billing Services
        
        Total(In Thousands)Revenues
        $5,644
        
        $2,317
        
        $7,961
        
        $4,340
        
        $   888
        
        $5,228Income (loss) from
Operations
        145
        
        15
        
        160
        
        36
        
        (42)
        
        (6)Other income
        24
        
        --
        
        24
        
        15
        
        --
        
        15Provision for income
Taxes
        --
        
        --
        
        --
        
        --
        
        --
        
        --Net income (loss)
        169
        
        15
        
        184
        
        51
        
        (42)
        
        9Total assets
        3,152
        
        576
        
        3,728
        
        2,730
        
        399
        
        3,129Capital expenditures
        30
        
        1
        
        31
        
        28
        
        0
        
        28Depreciation and amortization
        45
        
        0
        
        45
        
        82
        
        0
        
        82






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.









8




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





Three Months EndedApril 30,
        
        Nine Months Ended
April 30,2008
        
        2007
        
        2008
        
        2007(Dollars in thousands, except per share data)Basic and diluted income per share:Net income
        $          76
        
        $          26
        
        $         184
        
        $           9Weighted average number of common shares outstanding
        1,578,887
        
        1,571,453
        
        1,578,887
        
        1,571,453Income from operations per share
        $       0.05
        
        $       0.02
        
        $       0.12
        
        $       0.01






Major customers



During the quarter ended April 30, 2008, the Company completed a system installation for a customer that resulted in revenues of approximately  $284,000.  This represents approximately 10% of the total revenues for the three months period presented herein.



Commitments



CSPR leases one building of approximately 8,200 square feet for office space and assembly processing from the Municipality of Caguas.  The lease on this facility expired in November 2007 and the Municipality approved a one year extension under the existing contract.  Adjacent to this building, the Company leases another building of approximately 5,800 square feet for warehouse space from Puerto Rico Industrial Development Company (PRIDCO).  The lease on this facility expires in December 2012.  Virtually all of CSPRs employees work at these facilities.



Contingencies



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



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



The Municipal Revenue Collection Center of Puerto Rico ("CRIM") conducted a personal property tax audit for the years 1999 and 2000 as a result of certain alleged debts arising in CRIM's system for the years 2001 through 2007, in the principal amount of approximately $320,000 (approximately $540,000 as of April 30, 2008, including interest and penalties).  The alleged debts arose from CRIM's disallowance of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2004 personal property tax returns.  During the audit process, CRIM alleged that some components of the inventory reported as exempt should be taxable.  The parties met several times and an informal administrative hearing was held on September 27, 2006.  The Company submitted its position in writing within the time period provided by CRIM.  The Company believes it has strong arguments to support the position that the
components of inventory qualify as raw material.  However, at this point, the Company cannot predict the outcome of this matter.  Accordingly, no provision for losses, if any, has been recorded in the financial statements.



ITEM 2.  MANAGEMENTS DISCUSSION AND ANALYSIS.



This report contains unaudited forward-looking statements within the meaning of the federal securities laws.  Unaudited forward-looking statements are those that express managements views of future events, developments, and trends.  In some cases, these statements may be identified by terminology such as "may," "will," "should," "expects," "plans," "intends," "anticipates,"



9




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"believes," "estimates," "predicts," "potential," or "continue" or the negative of such terms and other comparable expressions.  Unaudited forward-looking statements include statements regarding the Companys anticipated or projected operating performance, financial results, liquidity and capital resources.  These statements are based on managements beliefs, assumptions, and expectations, which in turn are based on the information currently available to management.  Information contained in these unaudited forward-looking statements is inherently uncertain, and the Companys actual operating performance, financial results, liquidity, and capital resources may differ materially due to a number of factors, most of which are beyond managements ability to predict or control.  The Company also directs your attention to the risk factors affecting its business that are discussed in our 10-KSB
filed for the period ended July 31, 2007.  CSPR disclaims any obligation to update any of the unaudited forward-looking statements contained in this report to reflect any future events or developments.  The following discussions should be read in conjunction with the Companys unaudited financial statements and the notes included thereto.



Plan of Operation



The Companys strategy is to be a solutions provider to help enterprises communicate more effectively with customers and increase their customer satisfaction, loyalty, and security.  CSPR desires to position itself in the marketplace as a one-stop-shop to its customers for all of their telecommunications needs including voice, data, security, applications transmission services and telephone billing services.  To continue with the Companys strategy, in the quarter ended January 31, 2008, CSPR entered a partnering relationship with Microsoft Corporation.  The Company integrates, sells, installs, and services the voice and data communications, including the newer VoIP, and a number of equipment manufacturers, including Avaya, Mitel, Cisco, Cortelco, eOn, Nortel, Hitachi, NEC, McAfee, Juniper, Extreme Networks, among others.  As part of the Companys business strategy, the Company now offers
telephony billing services provided through the Puerto Rico Telephone (PRT the main local telephone company).  Consistent with managements plan for fiscal year 2008, the telephony billing services is an important source of revenues.  Although Telephony billing services produces less margin than Products and Services, the Company expects this segment to continue to provide significant revenues for the current fiscal year.  For the nine months ending April 30, 2008, the profit of this line of business was approximately $15,000.  For the year ended July 31, 2007, the revenue from the resale of these services was considered as a new segment in its financial reporting and is presented in the Income Statement as Telephony.  To complement this segment, at the end of the third quarter of fiscal year 2007, CSPR entered into a business relationship with Sprint to carry all long distance calls, including local, domestic and international.  However, there have been
no significant revenues from this business arrangement with Sprint.



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



The Company conducts most of its business in Puerto Rico, and also sells telephone equipment in the Caribbean and Latin America, although sales outside Puerto Rico are not of a recurring nature.



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



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



The Companys cash position has been stable for the quarters ended April 30, 2008 and 2007.  Cash and cash equivalents were approximately $760,000 and $663,000 as of April 30, 2008 and 2007, respectively.  The Company continues with its strong collection efforts to improve cash flows and continues to maintain accounts receivable and inventories at controlled levels during the current fiscal period.  CSPR exceeded budgeted sales in the first quarter ended October 31, 2007, in the second quarter ended January 31, 2008 and in the third quarter ended April 30, 2008.  CSPR has received customer orders and commitments for new systems installations that are expected to allow CSPR to achieve its current projections for the following fiscal quarter also.



10




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Results of Operations and Cash Flows for the Three Months Ended April 30, 2008 and 2007



The following discussion provides information about the Company's operations, for the three months ended April 30, 2008 and for the three months ended April 30, 2007.



Net Revenues



Net revenues consist of sales of new system installations, data and security products, and additions (Products), services related to revenues from maintenance contract, warranties and other billable services (Services) and revenues from the resale of telephony billing services (Telephony).  Net revenues increased approximately 33% in the three months ended April 30, 2008 compared to the same quarter last fiscal year.  The results primarily reflect increased revenues of approximately $479,000 in Products, due to managements new strategy to focus the Company as a solutions provider, with additions of new products to its portfolio that resulted in new revenues for this quarter.  An decrease of approximately $31,000 in Services were due to normal fluctuations in the service business, and an increase of approximately $242,000 in Telephony, due to an increase in the number of customers billed for this service in this quarter compared to the same
quarter of fiscal year 2007, when the Company was starting to develop this line of business.



Cost of Revenues and Gross Profit



Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation, maintenance labor cost and cost of the reselling revenues.  The gross margin for Product, Services and Telephony for the three months ended April 30, 2008 and 2007 was approximately 22% and 25%, respectively.  The gross margin decreased principally because Telephony produces less margin than Products and Services.  Also, the gross margin for Products and Services decreased to 28% in the three months ended April 30, 2008, from 30% in the same period last year, due to normal market strategies to introduce the new line of business of data and security products.  CSPR continues with the strategies of better markups in the price of products, maximizing productivity, a decrease in some subcontracting services by fulfilling them with
internal resources, and more competitive selling and operational strategies.



Selling, General and Administrative



Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, facilities and other overhead expenses incurred to support the Companys business activities.  This expense increased approximately 14% to approximately $555,000 in the three months ended April 30, 2008 from approximately $488,000 in the same period last fiscal year.  The increase was principally due to an increase in business during the period.



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



The Company had no significant other income or interest expense in the three months ended April 30, 2008 or 2007.



For the three months ended April 30, 2008 and 2007, the resulting income tax was fully absorbed by available carryforward losses.  For the quarter ended April 30, 2008 and 2007, other comprehensive loss consists of unrealized potential loss, if sold at that point in time, of securities owned by the Company.



Cash Flows



Cash flows provided by operating activities were approximately $158,000 and $63,000 in the three months ended April 30, 2008 and 2007 respectively.  Cash provided by operating activities in the three months ended April 30, 2008 resulted primarily from net income adjusted by a decrease in trade accounts receivable and inventories, partially offset by a decrease in deposits on purchases. Also, during the same period, the Company financed a sale for 36 months, resulting in a financed receivable of approximately $215,000 as of April 30, 2008.  Cash provided by operating activities in the three months ended April 30, 2007 of $63,000, resulted primarily from net income adjusted by an increase in trade accounts payable, partially offset by an increase in trade accounts receivable. Cash flows used in investing activities for the three months ended April 30, 2008 and 2007 were approximately ($18,000) and ($12,000)
respectively.  Cash used for investing activities in the three months ended April 30, 2008 was related to the acquisition of new hardware, to improve employee performance.



Results of Operations and Cash Flows for the Nine Months Ended April 30, 2008 and 2007



The following discussion provides information about the Company's operations, for the nine months ended April 30, 2008 and for the nine months ended April 30, 2007.



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Net Revenues



Net revenues consist of sales of new system installations, data and security products, and additions (Products), services related to revenues from maintenance contract, warranties and other billable services (Services) and revenues from the resale of telephony billing services (Telephony).  Net revenues increased approximately 52% in the nine months ended April 30, 2008 compared to the same quarter last fiscal year.  The results primarily reflect increased revenue of approximately $1,389,000 in Products, due to managements new strategy to focus the Company as a solutions provider, with additions of new products to its portfolio that resulted in new revenues for this quarter.  A decrease of approximately $85,000 in Services were due to normal fluctuations in the service business, and an increase of approximately $1,429,000 in Telephony, due to an increase in the number of customers billed for this service in this period compared to the same
period of fiscal year 2007, when the Company was starting to develop this line of business.



Cost of Revenues and Gross Profit



Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, system installation, maintenance labor cost and cost of the reselling revenues.  The gross margin for Product, Services and Telephony for the nine months ended April 30, 2008 and 2007 was approximately 23% and 28%, respectively.  The gross margin decreased principally because Telephony, which has become a major segment, produces less margin than Products and Services.  The gross margin for Products and Services was approximately 30% and approximately 32% for the nine months ended April 30, 2008 and 2007, respectively.  The decrease is due to the product mix, more Products were sold during 2008, compared to the same period last year, and this line of business has less gross profit.  The Company has stabilized the gross profit for both periods due to
better markups in the price of products, maximizing productivity, a decrease in some subcontracting services by fulfilling them with internal resources, and more competitive selling and operational strategies.



Selling, General and Administrative



Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, facilities and other overhead expenses incurred to support the Companys business activities.  This expense increased approximately 15% to approximately $1,708,000 in the nine months ended April 30, 2008 from approximately $1,482,000 in the same period last fiscal year.  The increase was principally due to a non- recurring severance pay and the increase in business during the period.



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



The Company had no significant other income or interest expense in the nine months ended April 30, 2008 or 2007.



For the nine months ended April 30, 2008, the resulting income tax was fully absorbed by available carryforward losses.  For the same period last year, the reported losses resulted in a deferred tax asset that was fully allowed for.



For the period ended April 30, 2008 and 2007, other comprehensive loss consists of unrealized potential loss, if sold at that point in time, of securities owned by the Company.



Cash Flows



Cash flows used in operating activities were approximately ($220,000) and ($182,000) in the nine months ended April 30, 2008 and 2007, respectively.  Cash used in operating activities in the nine months ended April 30, 2008 resulted primarily from an increase in trade accounts receivable, partially offset by an increase in trade accounts payable.  Also, during the same period, the Company financed a sale for 36 months, resulting in a financed receivable of approximately $215,000 as of April 30, 2008.  Cash used in operating activities in the nine months ended April 30, 2007 resulted primarily from net income adjusted by a decrease in deferred revenues and deposits and increases in inventories and trade accounts receivable partially offset by an increase in accounts payable.  Cash flows used in investing activities for the nine months ended April 30, 2008 and 2007 were approximately ($31,000) and ($28,000)
respectively.  Cash used for investing activities in the nine months ended April 30, 2008 and 2007 was related mainly to the acquisition of new hardware, to improve employee performance.



Liquidity and Capital Resources



The Company has principally relied on cash provided from operations as its primary sources of capital.  The Company is dependent on existing cash and cash equivalents, and operating cash flows to finance operations and meet capital needs.  If such resources are not sufficient, a $400,000 credit line was approved in June 2007 by a Puerto Rican financial institution.CSPR does not anticipate the need to raise additional capital to meet its operational and capital expenditure requirements in the foreseeable future.  The Companys funding status is dependent on a number of factors in the cash flow, including those related to profit



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margins, inventories, and the control of selling, general and administrative expenses.  The Company believes that, if its financial condition continues to remain stable, it will continue to obtain beneficial credit terms from its primary suppliers.



Other Relevant Financial Information



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



CSPRs officers, directors and five percent or greater stockholders beneficially own or control, directly or indirectly, approximately 1,060,715 shares, which in the aggregate represent approximately 67% voting interest in the outstanding shares of the Companys common stock.  These stockholders have the ability to control all matters submitted to the Companys stockholders for approval, including the election and removal of directors and the approval of any business combinations.



Off-Balance Sheet Arrangements



CSPR was not involved in any significant off-balance sheet arrangement during the Nine Months ended April 30, 2008 and 2007.



ITEM 3.  CONTROLS AND PROCEDURES.



Under the supervision and with the participation of the Company management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e) as of the end of the period covered by this report.  Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective.  There were no changes in CSPR internal controls over financial reporting during the Nine Months ended April 30, 2008 that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.



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PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS.

No new legal proceedings.

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

None.

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES.

None.

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

None.

ITEM 5.  OTHER INFORMATION.

None.

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

(A)  Exhibits.

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






(B)  Reports on Form 8-K.

None.



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SIGNATURES



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



Cortelco Systems Puerto Rico, Inc.

Date:   June 13, 2008

/s/ Francisco Sanchez------------------------------------------------------
Francisco Sanchez, Vice President
Chief Financial Officer, Treasurer
Duly Authorized Officer
(Principal Financial and Accounting Officer)

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