UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

FORM 10-KSB

(Mark One)

[ X ]
        ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the fiscal year ended July 31, 2007

or

[    ]
        TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


For the transition period from                            to

Commission File Number 000-49626

CORTELCO SYSTEMS PUERTO RICO, INC.

(Name of small business issuer in its charter)

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


Parque Industrial Caguas Oeste, Road 156 Km 58.2, Valle Tolima, Caguas PR 00727-0137

(Address of principal executive offices)

(787) 758-0000

(Telephone number)

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.01 par value per share

(Title of each class)

Check whether the issuer is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act.  [     ]


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 [     ]

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.  [ X ]

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

Revenues for the Registrants most recent fiscal year: $7,779,000

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $462,248 based upon the closing sale price as quoted on the OTC Bulletin Board on 10/02/07.  The number of outstanding shares of the registrants $0.01 par value common stock was 1,571,453 shares as of that date.

DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants Proxy Statement for the 2007 Annual Meeting of Shareholders are incorporated by reference in Part III.

Transitional Small Business Disclosure Format (Check one):
        YES [     ]NO [ X ]


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TABLE OF CONTENTS



Page


PART I
        1


ITEM 1DESCRIPTION OF BUSINESS
        1


ITEM 2DESCRIPTION OF PROPERTY
        4


ITEM 3        LEGAL PROCEEDINGS
        4


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





PART II
        5


ITEM 5        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
        5


ITEM 6        MANAGEMENTS DISCUSSION AND ANALYSIS
        6


ITEM 7        FINANCIAL STATEMENTS
        9


ITEM 8CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                      AND FINANCIAL DISCLOSURE
        25


ITEM 8A CONTROLS AND PROCEDURES
        25


ITEM 8B OTHER INFORMATION
        25





PART III
        26


ITEM 9DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS;                       COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
        26


ITEM 10  EXECUTIVE COMPENSATION
        26


ITEM 11SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
                      MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
        26


ITEM 12CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
                      INDEPENDENCE
        27


ITEM 13  EXHIBITS
        27


ITEM 14  PRINCIPAL ACCOUNTANT FEES AND SERVICES
        27


SIGNATURES
        28






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PART I



FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws.  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.  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 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.  We also direct your attention to the risk factors affecting our business that are discussed elsewhere in this report.  We disclaim any obligation to update any of the forward-looking statements contained in this report to reflect any future events or developments.  The following discussions should be read in conjunction with our financial statements and the notes included thereto in Item 7.



ITEM 1
        DESCRIPTION OF BUSINESS


Introduction

Cortelco Systems Puerto Rico, Inc. (the Company, CSPR) is a value-added reseller of third-party brands of voice, data, security, applications, transmission services and telephone billing services.  The Company is a one-stop-shop to its customer for all of their telecommunications needs.  CSPRs products help enterprises communicate more effectively with customers and increase their customer satisfaction and loyalty.  The Companys revenues are comprised mostly of sales of PBX customer premise new equipment and additions, including the newer IP based voice and data communication as well as maintenance contracts and services.   At the end of fiscal year 2006, the Company began a new line of business, the resale of Puerto Rico Telephone (PRT  the local main telephone company) services offered to the local users of intra-island calls, ISDN, T1, and other
services excluding the long distance outside Puerto Rico.  This revenue was presented separately in the Income Statement as Other and this business is referred to in the financial statement notes as Telephony Billing Services.  The Telephony Billing Services is considered as a new segment.  To complement this line of business, at the end of the third quarter of fiscal year 2007, CSPR entered into a business relationship with Sprint to carry all long distance calls, including local, domestic and international.  There were no revenues from this business arrangement with Sprint for fiscal year 2007.

The Company also has entered into business arrangements with strategic suppliers like 1) Cisco Systems, Inc. to sell their products in the area of data and security since many of CSPRs customers have Cisco routers and switches in their LAN/WAN infrastructure; 2) McAfee, a security software provider for networks; 3) Juniper, a router and LAN security provider; and 4) Extreme Network, a network switch provider to further complement the Company business.

The Company conducts most of its business in Puerto Rico, and also sells telephone equipment in the Caribbean and Latin America.  The Company has been awarded a major project by one of the largest companies on the Virgin Islands, which CSPR expected to complete during fiscal year 2007, but current plans are to complete this installation in the first quarter of fiscal year 2008.

CSPR was incorporated in July 1998 under the laws of the Commonwealth of Puerto Rico.  At the time of incorporation, the Companys sole stockholder was Cortelco Puerto Rico, Inc. (CPR).  Prior to becoming a wholly-owned subsidiary of eOn Communications Corporations (eOn) in April 1999, CPR contributed substantially all of its operations and certain assets and liabilities to the Company.  On July 31, 2002, the Company was spun-off from eOn as a separate entity to the stockholders of eOn.



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Products and Services

The Company integrates, programs, installs, and services voice and data communications systems such as customer premise PBXs, call centers, voice over IP systems, interactive voice switches, data switches, routers, firewall, security systems, and CTI applications, as well as reselling computers and local area networks to enterprises and businesses of all sizes.  PBXs are private telephone switching systems, usually located on a customers premises, which provide telephone services within the customer's premises, as well as access to the public switched network.  Also, to be a one-stop-shop to its customer, the Company offers to existing or new customers the telephony billing service.  It is a beneficial service to its customers because they only need to call one company for all communication services.

Sales and Marketing

The Company utilizes a direct sales force to sell its products and services, most of which are installed by the Companys technical staff.  CSPR advertises its products and services primarily through trade shows and hosted marketing presentations.

Customer Service and Support

The Company earned approximately $3.0 million of revenue in fiscal year 2007 and 2006 from the servicing of voice and data communications systems previously installed.  Customers generally sign maintenance agreements, which detail the services provided and the fees charged for delivering such services.  The equipment manufacturers provide training courses for Company personnel for the products that the Company integrates and distributes.  A key factor in assessing whether to serve additional equipment brands or acquire assets of other distributors is the size of an installed base of customers in the market and the technical expertise required to service the equipment.

Industry Overview

Competitors that distribute many of the same products that CSPR distributes generally characterize the Companys markets.  Therefore, price competition is often intense for many of the products that CSPR distributes.  As other value-added resellers sometimes offer the same equipment, the quality of customer service provided is often the differentiating factor in winning new customers.

Competition

The business communications market is highly competitive.  Competitive factors include (1) market acceptance of the products, services and technology solutions that the Company provides, (2) pending and future legislation affecting the communications industry, (3) name recognition and market share, (4) ability to provide integrated communication and data solutions for customers in a dynamic industry, and (5) the introduction of new technologies.

The dominant competitor in the Puerto Rico market is Puerto Rico Telephone (PRT), which is significantly larger than any other competitor in the market.  The Company believes that PRT has begun to reduce its voice equipment installation and service business in order to apply its resources to other markets that it deems more attractive.  PRT has traditionally been the reseller, installer, and a service company in Puerto Rico for Nortel Networks, the largest voice communications equipment provider in Puerto Rico.  As PRT exits the reseller and service business for customer premise voice products, the Company will compete with other resellers in an attempt to acquire the maintenance contracts from PRTs customers.  Buyers of enterprise voice communications systems are generally very sensitive to price and, to a lesser degree, customer service; therefore, having the lowest sales price is often
the key to winning a customer initially.  Resellers will often compete aggressively on price in order to win customers for maintenance purposes.  CSPR is one of the largest resellers in the Puerto Rico market.  The Company believes that its size offers a competitive advantage in continuing to grow the communications systems segment as the large resellers are better able to compete on sales price due to discounts received from equipment manufacturers for larger volume purchases and other special discounts for obtaining certification required by some of CSPRs suppliers.

Some competitors in the communications business are small, owner-operated companies typically located and operated in a single geographic area.  Certain of these smaller competitors may have lower overhead cost structures and, consequently, may be able to charge lower rates for their services.  Therefore, CSPRs relative size may be a competitive disadvantage for small customers, but the Company is beginning to pursue the medium to large systems



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for which the overhead of major competitors is higher.  Strategic alliances between CSPR, as the systems provider, and major network providers allow presentation of a full solution to large accounts based on a monthly rate for the customer.

There are a number of large, integrated national companies, which also manufacture and sell directly the products that the Company services and sells.  Some larger competitors may have greater financial resources to finance acquisition and internal growth opportunities and may be willing to pay higher prices for acquisition opportunities.  As a result, CSPR has a competitive disadvantage compared to these larger competitors.

Future competition may be encountered from other newly formed or existing public or private service companies with aggressive acquisition and marketing programs.  Products and services that the Company offers are manufactured or supplied by others.  This presents a competitive disadvantage since CSPR incurs the risk of reliance upon third-party systems and services, as well as risks associated with the need to integrate services and solutions across networks, platforms and equipment manufactured or supplied by various companies.

Principal suppliers

The Company integrates, sells, installs, and services the voice and data communications of a number of equipment manufacturers, including Avaya, Mitel, Cisco, Cortelco, eOn, Nortel, Lucent, Hitachi, Nec, McAfee, and PRT (for telephony billing services) among others.  CSPR does not make any of the product parts that it sells but rather assembles, configures, integrates and programs the communication systems.  The products that CSPR sells are not under exclusive agreements from the main manufacturers.

Customers

CSPRs customers include large and medium sized businesses as well as a number of small customers.   In the past, the Company has not derived a significant portion of any of its revenues from any single customer.  However, for the telephony billing segment, the Company sells services from one carrier and one major customer represents approximately 38% of the segments total revenues for year ended July 31, 2007.

Intellectual Property

The Company does not own any patents, trademarks, or licenses in the conduct of business.  The Company conducts most of its activities under the trade name "Cortelco" which is well known by customers in Puerto Rico.  Under Puerto Rican law, CSPR has a proprietary interest in this trade name for as long as the Company continues to actively use it.

Governmental Regulation

The Company is not directly regulated by any governmental agency.  However, the Federal Communications Commission and Telecommunications Regulatory Board of Puerto Rico have regulations, which address consumer products that connect to the public telephone network.  The Companys business could be adversely affected if these agencies modify or adopt new regulations.  Such regulations could impact the cost of the products CSPR sells or limit the types of products that it may sell, thus reducing revenues.

Research and Development Activities

As the Company integrates and distributes the products of third parties and does not sell any products that the Company designs or develops, CSPR does not incur any costs for research and development.

Employees

As of July 31, 2007, the Company had approximately 64 employees, including 17 in sales and marketing, including design and configuration, 7 in customer service, 28 technical staff including voice and data, and 12 in finance and administration, including regular, part-time, and contract employees.





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ITEM 2
        DESCRIPTION OF PROPERTY


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 expires in November 2007 with an extension of one additional year already requested by the Company.  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.



ITEM 3
        LEGAL PROCEEDINGS


From time to time, the Company may be a party to legal proceedings incidental to our business.  The Company does not believe that any of these proceedings will have a material adverse effect on our business or financial condition.

In 2001, Jorge Gonzalez-Nogueras filed a complaint in the Court of First Instance, San Juan, Puerto Rico alleging that CSPR offered him employment in order to reduce competition from other enterprises and with the ill intent to take advantage of his business.  After accepting employment, Mr. Gonzalez-Nogueras resigned voluntarily alleging problems adjusting to the corporate culture of CSPR.  The plaintiff seeks $5,074,321 for alleged damages and loss of business.  CSPR filed a Motion for Summary Judgment and such motion is under the consideration of the court.  Cortelco is strongly defending this case because the Company believes all allegations of conspiracy are false, plaintiff does not have a profitable competing business and his resignation was voluntary.  The Company has strong defenses to allow CSPR to prevail.  However, at the present time, an outcome of the case cannot be determined.  Accordingly,
no provision for losses, if any, has been recorded in the financial statements.

The Municipal Revenue Collection Center of Puerto Rico (CRIM) conducted a personal property tax audit for the years 1999 and 2000 as a result of certain alleged debts arising in CRIMs system for the years 2001 through 2007, in the principal amount of $320,000 (approximately $513,000 as of July 31, 2007, including interest and penalties).  The alleged debts arose from CRIMs disallowance of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2004 personal property tax returns.  During the audit process, CRIM alleged that some components of the inventory reported as exempt should be taxable.  The parties met several times and an informal administrative hearing was held on September 27, 2006.  The Company submitted its position in writing within the time period provided by CRIM.  The Company believes it has strong arguments to support the position that the components of
inventory qualify as raw material.  However, at this point, the Company cannot predict the outcome of this matter.  Accordingly, no provision for losses, if any, has been recorded in the financial statements.



ITEM 4
        SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS


None.











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PART II



ITEM 5
        MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS


Market Information

There is currently is no established public trading market for any class of CSPRs capital stock.  The Company is not currently offering any shares of capital stock publicly, nor has CSPR publicly proposed to conduct such an offering.  Shares of the Companys common stock are reported on the OTC Bulletin Board under the symbol CPROF.

The OTC Bulletin Board is a quotation service that displays quotes, last-sale prices and volume information regarding over-the-counter (OTC) equity securities.  An OTC equity security generally is any equity security that is not listed or traded on a national securities exchange nor is authorized for quotation on The NASDAQ Stock Market.

The OTC Bulletin Board is only a quotation medium, not an issuer listing services, and should not be confused with The NASDAQ Stock Market.  Market makers for OTC Bulletin Board securities generally are required only to match up willing buyers and sellers.  Generally, market makers are not required to purchase securities directly from willing sellers or sell securities directly to willing buyers.  For this and other reasons, the trading markets for OTC equity securities are generally significantly less liquid than the trading markets for securities listed on a national securities exchange or authorized for quotation on The NASDAQ Stock Market and, therefore, there may be a substantial delay in execution of trades.  In addition, an active trading market in the Company common stock may not develop.

The following table sets forth the quarterly high and low bid quotations per share of common stock on the OTC Bulletin Board as reported for the periods indicated.  These prices also represent inter-dealer quotations without retail mark-ups, markdowns, or commissions and may not necessarily represent actual transactions.



FISCAL YEAR ENDED JULY 31, 2007
        HIGH
        LOWFirst Quarter
        $0.73
        $0.65Second Quarter
        0.85
        0.85Third Quarter
        0.90
        0.80Fourth Quarter
        0.85
        0.85




FISCAL YEAR ENDED JULY 31, 2006First Quarter
        $0.35
        $0.32Second Quarter
        0.40
        0.35Third Quarter
        0.60
        0.31Fourth Quarter
        1.05
        0.35




Holders

As of September 30, 2007, there were 221 shareholders of record of the Companys common stock and, to the best of our knowledge, approximately 1,965 beneficial owners whose shares of common stock were held in the names of brokers, dealers, and clearing agencies.



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Dividends

During fiscal year 2007, the Company did not declare any dividends on capital stock.  The Company currently intends to retain any earnings to finance the operation and expansion of business and, therefore, does not expect to pay cash dividends on the common stock in the foreseeable future.

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

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



Equity Compensation Plan InformationPlan category
        Number of securities to beissued upon exercise ofoutstanding options, warrantsand rights (a)
        Weighted-average exerciseprice of outstanding options,warrants and rights(b)
        Number of securities remaining availablefor future issuance under equitycompensation plans (excluding securitiesreflected in column (a))(c)Equity compensationplans approved bysecurity holders
        --
        --
        375,000Equity compensationplans not approvedby security holders
        --
        --
        --Total
        --
        --
        375,000




ITEM 6
        MANAGEMENT'S DISCUSSION AND ANALYSIS


Financial Condition

The Companys cash position has been stable for the fiscal years 2007 and 2006.  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, the Company has a new $400,000 credit line approved by a Puerto Rican financial institution, in June 2007.  Cash and cash equivalents at the end of the fiscal year 2007 were approximately $1,011,000 and for fiscal year 2006 were approximately $873,000.

Working capital increased to approximately $1.6 million in fiscal year 2007 from approximately $1.4 million in fiscal year 2006, mainly because the Company had no significant investing or financing outlays.

The Companys inventory increased approximately $70,000 from approximately $176,000 in fiscal year 2006 to approximately $246,000 in fiscal year 2007.  CSPRs ongoing aggressive inventory management and obsolescence analysis were key factors in maintaining low warehouse inventories in fiscal year 2007. The increase in 2007 is directly related to purchases for projects that had not commenced as of July 31, 2007.

Installation 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.  The Companys installation in process increased approximately $215,000 from approximately $75,000 in fiscal year 2006 to approximately $290,000 in fiscal year 2007, principally as a result of a major project in process on the Virgin Islands.

During fiscal year 2006, the Company began a new line of business, the resale of Puerto Rico Telephone (PRT  the local main telephone company) services offered to the local users of intra-island calls, ISDN, T1, and other services excluding the long distance outside Puerto Rico.  This business segment is referred to in the financial statement notes as Telephony Billing Services.  To complement this line of business, the Company entered into a business relationship with Sprint to carry all long distance calls, including local, domestics and international.  There were no revenues from this business arrangement with Sprint for fiscal year 2007.

The Company also entered into business arrangements with strategic suppliers like 1) Cisco Systems, Inc. to sell their products in the area of data and security since many of CSPRs customers have Cisco routers and switches in



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their LAN/WAN infrastructure; 2) McAfee, a security software provider for networks; 3) Juniper, a router and LAN security provider; and 4) Extreme Network, a network switch provider to complement the Company business. The Company have being prepared to be competitive in the new technological tendencies, specially to those related to the VoIP telephony Cortelco is already immersed in the VoIP telephony market with products and solutions for our customers With this approach, CSPR is trying to be a one-stop-shop to our customers for all of their telecommunications needs, including voice, data, security, applications, transmission services and telephony invoicing.

The Company conducts most of its business in Puerto Rico, and also sells telephone equipment in the Caribbean and Latin America.  The Company has been awarded a major project by one of the largest company in the Virgin Islands.   CSPR original plans were to complete this project during fiscal year 2007, but current plans are to complete this installation in the first quarter of fiscal year 2008.

The Company believes that, if its financial condition continues to improve, it will continue to obtain beneficial credit terms from its primary suppliers.  During the fiscal year 2007, CSPR successfully continued the policy of accelerating payment terms to improve cash flows and maintain accounts receivable and inventories at controlled levels.  In the past, customers were allowed to withhold up to 30% of the total contract until final acceptance, whenever possible, new agreements are and will be negotiated to limit the amount subject to final customer acceptance to not more than 10%.

The Company continues to closely monitor its operating costs and expenses.  The Company will also look for ways to increase its installed base of customers by improving equipment sales and customer service performance, along with the increase in maintenance service sales efforts.  The service sales increased this fiscal year as per CSPR managements plans, which will be continued for the next fiscal year.  To improve service performance, the Company will continue its training program to develop more highly qualified technicians and salespersons.  CSPRs technical staff includes two Avaya Certified Experts (ACE), the highest level given to a technical person and the first ACE awarded to an Avaya Business Partner in the Caribbean.  Also, all members of the Avaya sales team obtained the Avaya Certified Associate (ACA) during this fiscal year.  The Company is a Gold Avaya Business Partner, Platinum
Mitel Business Partner, Advance Nortel Business Partner and recently obtained a McAfee Premium Business Partner.  These levels of Business Partners entitle the Company to additional discounts and special technical trainings, and improve its competitive position with customers and suppliers. To continue the service performance, CSPR began working with Cisco, and created a new department specialized in Data with experts certified in Cisco Certified Network Associate (CCNA) and Cisco Sell Expert (CSE) among other certifications.  To develop this new Data Department, CSPR has incorporated other trademarks like McAfee, Juniper and Extreme.  To develop the security products, the Company hired one person dedicated to support this area.  To improve new installation and maintenance sales results, the Company has three of its sales staff dedicated to support and increase its maintenance customer base.  The
Company is pursuing an increase in productivity with continuing improvements in customer service and support through web ticketing and project management programs.

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

Results of Operations and Cash Flows

The following discussion provides information about the Companys operations for the fiscal years ended July 31, 2007 and 2006.

Net revenues consist of sales of new product and additions (Product), services related to revenues from maintenance contract and billable services (Services) and revenues from the resale of PRT services (Other).  Net revenues increased approximately $345,000 to $7,779,000 in fiscal year 2007 from $7,434,000 in fiscal year 2006.  The results primarily reflected decreased revenues of approximately $1,413,000 from the Product segment due a delay in a major project on the Virgin Islands, and postponement of some medium and small new equipment installations that the Company expect to be invoiced in the first quarter of fiscal year 2008.  Also, the slow down in the local economy may have had an effect on sales.  In the Service segment revenues increased approximately $164,000 as a result of increases in billable service calls, partially offset by a decline in maintenance
contracts, both due principally to normal fluctuations in the service business.   In the Other segment, revenues increased approximately $1,594,000 due to the acquisition of new customers for this service in the first year of operation.  Cost of revenues consists of the same three segments as revenues.



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The cost of revenues for the Product segment consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance and installations.  The cost of revenues for the Service segment consists primarily of costs to replace or repair equipment and labor related to the services.  The cost of revenues for the Other segment consists primarily of expenses related to the reselling business.  The gross margins for the fiscal year 2007 and 2006 were 27% and 32%, respectively.  The gross margin decreased principally because the new 2007 reselling division, shown as Other, produces less margin than Products and Services.  The gross margin for Products and Services has stabilized for both periods.  To maintain such gross profits, the Company has maximized profitability by replacing subcontracted services with internal resources, and has
established more competitive selling and operational strategies.

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.  Selling, general and administrative expenses decreased approximately $95,000 from approximately $2,145,000 in fiscal year 2006 to approximately $2,050,000 in fiscal year 2007.

For fiscal year 2007 and 2006, there were no additional provisions for doubtful accounts.  For the previously written-off balances, the Company plans to continue collections efforts by using collection agencies and legal resources.

The Companys only significant other income for fiscal year 2007 was interest income of $25,000 from short-term time deposit.  There was no other income for the 2006 fiscal year.  For the fiscal year 2007 and 2006 there was no interest or income tax expense.

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

Cash flow provided by operating activities was approximately $172,000 and $405,000 in fiscal years 2007 and 2006, respectively.  Cash provided by operating activities in fiscal year 2007 resulted primarily from net income and increases in trade accounts payable and customer deposits, partially offset by an increase in projects in process, inventories and trade accounts receivable.  Cash flow used in investing activities for the fiscal year 2007 and 2006 was approximately ($34,000) and ($31,000), respectively.  The change in cash for investing activities is related to the acquisition of new technical equipment to improve operational performance.  For the fiscal years 2007 and 2006, there were no transactions related to financing activities.

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 1,027,632 shares, which in the aggregate represent approximately 65% 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 its 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



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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 the ability to sell stock and could limit the trading volume and adversely affect the price investors are willing to pay for CSPR stock.

As a subsequent event, on September 14, 2007, the Board of Directors authorized the transfer of 2,500 shares of the Companys treasury stock to each member of the Board as recognition of the contributions of each Board member for the year ended July 31, 2007.  Stock compensation is to be prorated for time served during the fiscal year 2007 as follows: Alan Laffoon 2,500; Gloria Lee 2,500; Robert A. Gordon 2,083; Sergio Moren 2,500 and, Walter Duffey 2,500.

Off-Balance Sheet Arrangements

CSPR was not involved in any significant off-balance sheet arrangement during the fiscal years ended July 31, 2007 and 2006.



ITEM 7
        FINANCIAL STATEMENTS




INDEX TO FINANCIAL STATEMENTS



PAGEFinancial Statements of Cortelco Systems Puerto Rico, Inc.:Independent Auditors Report  Horwath Velez & Co. PSC
        10Balance Sheet as of July 31, 2007
        11Statements of Income for the Years Ended July 31, 2007 and 2006
        12Statements of Changes in Stockholders Equity for the Years Ended July 31, 2007 and 2006
        13Statements of Cash Flows for the Years Ended July 31, 2007 and 2006
        14Notes to the Financial Statements
        15




All other schedules have been omitted since the required information is not presented or not present in an amount sufficient to require submission of the schedules, or because the information required is included in the financial statements or notes thereto.



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INDEPENDENT AUDITORS REPORT



To the Board of Directors and Stockholders of

Cortelco Systems Puerto Rico, Inc.

Caguas, Puerto Rico



We have audited the accompanying balance sheet of Cortelco Systems Puerto Rico, Inc. as of July 31, 2007, and the related statements of income, changes in stockholders equity and cash flows for each of the two years in the period ended July 31, 2007.  These financial statements are the responsibility of the Companys management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Cortelco Systems Puerto Rico, Inc. at July 31, 2007, and the results of its operations and its cash flows for each of the two years in the period ended July 31, 2007 in conformity with accounting principles generally accepted in the United States of America.



/S/  HORWATH VÉLEZ & CO, PSC

Puerto Rico

October 26, 2007

Puerto Rico Society of Certified Public Accountants

Stamp number 2277200 was

affixed to the original of this report.





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See notes to financial statements.






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CORTELCO SYSTEMS PUERTO RICO, INC.STATEMENTS OF INCOMEYEARS ENDED JULY 31, 2007 AND 2006(Dollars and Share Data in Thousands Except Per Share Data)









|                                                      |  |  |  | 2007 |       | 2006
|----------------------------------------------------- |  |  |  | ---- | ----- | ----
|Net
revenues:                                         |  |  |  |      |       |     
|Product                                               |  |  |  | $    | 2,906 |     
|Services                                              |  |  |  |      | 3,249 |     
|Other                                                 |  |  |  |      | 1,624 |     
|Total net
revenues                                    |  |  |  |      | 7,779 |     
|Cost of
revenues:                                     |  |  |  |      |       |     
|Product                                               |  |  |  |      | 2,129 |     
|Services                                              |  |  |  |      | 2,041 |     
|Other                                                 |  |  |  |      | 1,497 |     
|Total cost of
revenues                                |  |  |  |      | 5,667 |     
|Gross
profit                                          |  |  |  |      | 2,112 |     
|Operating
expenses:                                   |  |  |  |      |       |     
|Selling,
general and administrative                   |  |  |  |      | 2,050 |     
|Income from
operations                                |  |  |  |      | 62    |     
|Other income,
mostly interest, net                    |  |  |  |      | 23    |     
|Income before
provision for income taxes              |  |  |  |      | 85    |     
|Provision for
income taxes                            |  |  |  |      |      |     
|Net
income                                            |  |  |  | $    | 85    |     
|Other
comprehensive loss:                             |  |  |  |      |       |     
|Net
unrealized loss on available for sales securities |  |  |  |      | (67   | )   
|Comprehensive
income                                  |  |  |  | $    | 18    |     
|Basic and
diluted net income per share                |  |  |  | $    | 0.05  |     
|Weighted-average number of shares outstanding         |  |  |  |      | 1,571 |     



See notes to financial statements.





12

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CORTELCO SYSTEMS PUERTO RICO, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYYEARS ENDED ULY 31, 2007 AND 2006
(Dollars in Thousands)






|                                                           |  |  |  | Common stock |    | Treasury Stock |  | Capital in excess of par value |     | Capital contribution note receivable
from related party |  | (Deficit) |       | Accumulated other comprehensive
loss |  | Total
|---------------------------------------------------------- |  |  |  | ------------ | -- | -------------- |  | ------------------------------ | --- | ------------------------------------------------------- |  | --------- | ----- | ------------------------------------ |  | -----
|Balance,
August 1, 2005                                    |  |  |  | $            | 16 |                |  | $                              |    |                                                         |  | $         | 7,273 |                                      |  | $    
|Collection of
capital contribution note from related party |  |  |  |              |   |                |  |                                |    |                                                         |  |           |      |                                      |  |      
|Cancellation of
debt assumed in 2002 spin-off              |  |  |  |              |   |                |  |                                |    |                                                         |  |           | 43    |                                      |  |      
|Treasury
stock                                             |  |  |  |              |   |                |  |                                | (11 | )                                                       |  |           |      |                                      |  |      
|Net
income                                                 |  |  |  |              |   |                |  |                                |    |                                                         |  |           |      |                                      |  |      
|Other
comprehensive loss                                   |  |  |  |              |   |                |  |                                |    |                                                         |  |           |      |                                      |  |      
|Balance, July
31, 2006                                     |  |  |  |              | 16 |                |  |                                | (11 | )                                                       |  |           | 7,316 |                                      |  |      
|Net
income                                                 |  |  |  |              |   |                |  |                                |    |                                                         |  |           |      |                                      |  |      
|Other
comprehensive loss                                   |  |  |  |              |   |                |  |                                |    |                                                         |  |           |      |                                      |  |      
|Balance, July
31, 2007                                     |  |  |  | $            | 16 |                |  | $                              | (11 | )                                                       |  | $         | 7,316 |                                      |  |      
|                                                          





See notes to financial statements.



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|CORTELCO
        SYSTEMS PUERTO RICO, INC.                                       
|---------------------------------------------------------------------------------
|STATEMENTS
        OF CASH FLOWS                                                 
|YEARS
        ENDEDJULY 31, 2007 AND
        2006                                
|(Dollars
        in Thousands)                                                   
|
|Cash flows
from operating activities:                                            
|Net
income                                                                       
|Adjustments
to reconcile net income to net cash provided by operating activities:
|Depreciation
and amortization                                                    
|Loss on
disposition of equipment                                                 
|Changes in
operating assets and liabilities:                                     
|Decrease
(increase) in:                                                          
|Trade
accounts receivable                                                        
|Inventories                                                                      
|Installation
in process                                                          
|Prepaid
expenses                                                                 
|Increase
(decrease) in:                                                          
|Trade accounts
payable                                                           
|Due to
affiliated entities                                                       
|Deposits on
purchases                                                            
|Other accrued
liabilities                                                        
|Deferred
revenue                                                                 
|Total
adjustments                                                                
|Net cash
provided by operating activities                                        
|Cash flows
from investing activities:                                            
|Capital
expenditures                                                             
|Net cash used
in investing activities                                            
|Net change in
cash and cash equivalents                                          
|Cash and cash
equivalents, beginning of year                                     
|Cash and cash
equivalents, end of year                                           



During the years ended July 31, 2007 and 2006, the Company did not pay interest or income taxes.





See notes to financial statements.





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CORTELCO
SYSTEMS PUERTO RICO, INC. NOTES TO FINANCIAL STATEMENTS  YEARS ENDED JULY 31, 2007 AND
2006  (Dollars in Tables in Thousands)

1.
        ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:


Organization -Cortelco Systems Puerto Rico, Inc. ("the Company"), a Puerto Rico corporation, was a wholly-owned subsidiary of eOn Communications Corporation ("eOn") through July 30, 2002.  Effective July 31, 2002, the Company was spun-off from eOn to the eOn stockholders.  After such spin-off, the Company became an independent entity originally headquartered in San Juan, Puerto Rico that subsequently moved to Caguas, Puerto Rico.  The Company's operations include the sale and service of integrated communications, data equipment and telephony billing in Puerto Rico.

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 amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Concentration risks -The Company's business activities primarily are with customers located in Puerto Rico and to a lesser extent the US Virgin Islands. Trade accounts receivable reflect a broad customer base in the local markets.  The Company routinely assesses the financial strength of its customers.  As a consequence, concentration of credit risk on an individual customer basis is limited for the Product segment.  For the telephony billing segment, the Company sells services from one carrier and one major customer represents approximately 38% of the segments total revenues for year ended July 31, 2007.

Recent accounting pronouncement -The following are recent accounting pronouncements:

In June 2006, the Financial Accounting Standards Board (FASB) issued an Interpretation No. 48,Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.This interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprises financial statements in accordance with FASB Statement No. 109,Accounting for Income Taxes.This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  This Interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.  This Interpretation is effective for fiscal
years beginning after December 15, 2006.  Earlier application of the provisions of this Interpretation is encouraged if the enterprise has not yet issued financial statements, including interim financial statements, in the period this Interpretation is adopted.  The future implementation of this Statement will have no significant effect on the Companys financial statements.



In September 2006, the FASB issued a Statement Accounting Financial Standard (SFAS) No. 157,Fair Value Measurements.This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements.  This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute.  Accordingly, this
Statement does not require any new fair value measurements.  However, for some entities, the application of this Statement will change current practice.  The future implementation of this Statement will have no significant effect on the Companys financial statements.

In February 2007, the FASB issued a Statement Accounting Financial Standard (SFAS) No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an Amendment of FASB Statement No. 115.  This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This Statement is expected to expand the use of fair value measurement, which is consistent with the Boards long-term measurement objectives for accounting for



15

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financial instruments.  The Company does not foresee the implementation of these statements in the near future; accordingly, it will have no effect 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 being implemented or are not applicable to the Company.

Fair value of financial instruments-The carrying amount of cash is a reasonable estimate of their fair value.  The carrying amounts of accounts receivable, accounts payable trade (including related party), accrued expenses, and deposit liabilities are at their approximate fair value due to their short-term maturity.  Available for sale securities are stated at quoted market price.

Impairment of long-lived assets -The Company periodically reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable from the estimated future net cash flows expected to result from the use of the asset.  Any indicated impairment would be measured as the amount by which the carrying amount of the asset exceeds its fair value.  Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.  No indications of impairment are evident as a result of such review.

Communication systems and maintenance services revenues- Revenues from communication systems and parts include the sales of integrated communications equipment and all the related installation and implementation services.  The Company recognizes revenues from the communications systems it installs upon completion of the installation services and acceptance by the customer due to the customized nature of each installation.  The Company recognizes service revenues for maintenance contracts over the life of the service contracts on a straight-line basis, and for other services as the service is provided.  The Company allocates fees from multiple-element arrangements to the elements based on the relative fair value of each element.  The Company believes that its revenue recognition policies are compliant with Staff Accounting Bulleting No. 104,Revenue Recognition in Financial Statements.

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

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

Allowance for doubtful accounts -The allowance for doubtful accounts is an amount that management believes will be adequate to absorb losses on existing accounts receivable that are considered doubtful 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, as which time, it is valued at the lower of the repair cost or its net realizable value.

Installation in process Installation in process represents the cost of the equipment at the customers premises for which the installation service had not been completed nor the revenue earned.

Available for sale securities Securities held in eOn Communications, a related party, are accounted 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 July 31, 2007, the unrecognized holding loss was $79,000, including $67,000 and $12,000 recognized during the years ended July 31, 2007 and 2006, respectively.

Property and equipment -Property and equipment are recorded at cost.  Depreciation and amortization are provided using the straight-line method over the shorter of the assets estimated useful life or lease term as follows:





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Estimated useful life (years)Office and production equipment
        
        3Furniture and fixtures
        
        5Internal use software
        
        3Leasehold improvements
        
        5 or lesser of lease life or asset category life




When assets are sold, retired or otherwise disposed of, their cost and related accumulated depreciation are removed from the accounts, and any gain or loss is credited or charged to income.  Significant improvements to leased property are capitalized and amortized over the term of the lease.  Maintenance and repairs are expensed.

Purchased software -Purchased software for internal use is recorded at cost, and amortized using the straight-line method over the estimated useful life of 3 years.

Accounting for legal costs expected to be incurred in connection with a loss contingency The Company policy to account for legal costs in relation to a loss contingency is to account for such costs as incurred.

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.

Advertising -Advertising is charged to expense as incurred.  The advertising expense for fiscal year 2007 was $6,511.  There was no advertising expense for fiscal year 2006.

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 net income 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.

Stock based compensation- At present, the Company does not have any stock assigned to Stock-Based Compensation agreements.  However, there are 375,000 common stock shares segregated for such purposes in the future.  Upon the issuance of any such agreement, the Company will have to apply SFAS No. 123(R),Accountingfor 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.

Reclassification- Certain balances disclosed in the 2006 Notes to the Financial Statements have been reclassified to conform to the current year presentation.





2. INVENTORIES:


|                    
|--------------------
|Purchased
components
|Parts and
materials 
|                    





17

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3.
        PROPERTY AND EQUIPMENT:


|                                              
|----------------------------------------------
|Furniture and
fixtures                        
|Leasehold
improvements                        
|Computer
equipment                            
|                                              
|Less
accumulated depreciation and amortization
|                                              



The accumulated amortization of leasehold improvements was $72,000.



4.
        OTHER ACCRUED LIABILITIES:




|Payroll and
payroll taxes |  |  |  | $ | 131 | 
|------------------------- |  |  |  | - | --- | 
|Commissions               |  |  |  |   | 14  | 
|Other                     |  |  |  |   | 134 | 
|                          |  |  |  | $ | 279 | 



5.
        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 fiscal year 2007.








|                      |  |  |  | July 31, 2006 Liability Balance |     | Additions |  | Deductions |     | July 31, 2007 Liability Balance
|--------------------- |  |  |  | ------------------------------- | --- | --------- |  | ---------- | --- | -------------------------------
|Maintenance
Contracts |  |  |  | $                               | 288 |           |  | $          | 369 |                                



6.
        PRODUCT WARRANTY:


The Company gives a one-year warranty for 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 technicians labor and freight.



18

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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 fiscal year 2007.



|                 |  |  |  | July 31, 2006 Liability Balance |    | Additions |  | Deductions |    | July 31, 2007 Liability Balance
|---------------- |  |  |  | ------------------------------- | -- | --------- |  | ---------- | -- | -------------------------------
|Warranty
Reserve |  |  |  | $                               | 78 |           |  | $          | 59 |                                



7.
        LINE-OF-CREDIT:


On June 27, 2007, the Company was granted a $400,000 revolving line-of-credit by a bank.  The advances will be secured by trade accounts receivable and bear interest at 1% over the Citibanks base rate.  The agreement which is renewable annually at the banks sole discretion, established certain negative covenants that the Company has to comply with.



8.
        RELATED PARTY TRANSACTIONS:


During the years ended July 31, 2007 and 2006, the Company purchased approximately $51,000 and $62,000, respectively, in merchandise from a related party.

As of July 31, 2007, the balances due to related parties are non-interest bearing, unsecured, and are due in the normal course of business.



9.
        INCOME TAXES:


As a Puerto Rico corporation not doing business in the United States, the Company is exempt from Federal taxes.

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 enjoys preferential tax rates, as follows:



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




Under the decree, the Company will be required to comply with certain levels of employment.  The tax decree did not result in any income tax benefit for the years ended July 31, 2007 and 2006.



19

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The Company has available income tax carryforward losses to offset future taxable income that expire as follows:   
 Year
     
     
     
     Income covered by the decree
     
     Other Income2009
     
     
     
     $
     
     
     
     $
     2,2282010
     
     
     
     
     1,501
     
     
     
     3022011
     
     
     
     
     1,453
     
     
     
     8292012
     
     
     
     
     856
     
     
     
     2013
     
     
     
     
     248
     
     
     
     2014
     
     
     
     
     
     
     
     
     22$
     4,058
     
     
     $
     3,381   Reconciliation between the income tax expense recognized in the Company's statement of operations and the income tax expense (benefit) computed by applying the Puerto Rico statutory income tax rate to income before income taxes for taxable income is as follows:   
 2007
     
     2006Current income
tax, assuming no carryforward benefit at Puerto Rico tax rate (39%)
     
     
     
     $
     33
     
     
     $
     63Difference in
method in recognizing doubtful accounts receivable
     
     
     
     
     (4
     )
     
     
     (56
     )Difference in
method in recognizing inventory write-downs
     
     
     
     
     12
     
     
     
     18Differences in
accrued expenses
     
     
     
     
     (11
     )
     
     
     4Differences in
deferred revenues
     
     
     
     
     (37
     )
     
     
     26Utilization of
carryforward benefit
     
     
     
     
     
     
     
     
     (63
     )Effect of decree
on tax determination
     
     
     
     
     (2
     )
     
     
     12Change in
valuation allowance, and other
     
     
     
     
     9
     
     
     
     (4
     )Total income tax
expense
     
     
     
     $
     
     
     
     $
          20    The components of the net deferred tax asset for taxable income at July 31, 2007 are as follows:  2007Deferred tax
assets resulting from:Allowance for
doubtful accounts
     
     
     
     $
     24Inventory
allowance
     
     
     
     
     30Accrued
liabilities and deferred income
     
     
     
     
     155Net operating
loss carryforwards
     
     
     
     
     1,6021,811Less valuation
allowance
     
     
     
     
     (1,811
     )$
        The Company cannot conclude that it is more likely than not that deferred tax assets will be realized in the future.  Accordingly, a valuation allowance has been recorded for the total amount of the deferred tax asset.  10.
        COMMITMENTS AND CONTINGENCIES:
 Claims: The Company is currently subject to claims regarding an alleged employment issue and property taxes as follows: The Company is defendant in one claim by a former employee, with alleged damages totaling approximately $5 million.  The Company has filed motion for summary judgment and such motion is under the consideration of the Court.  The Companys management believes based on the opinion of counsel that the Company has strong defenses to allow CSPR to prevail.  However, at the present time, an outcome of the case cannot be determined.  Accordingly, no provision for losses, if any, has been recorded in the financial statements. The Municipal Revenue Collection Center of Puerto Rico ("CRIM") conducted a personal property tax audit for the years 1999 and 2000 as a result of certain alleged debts arising in CRIM's system for the years 2001 through 2007, in the principal amount of $320,000 (approximately $513,000 as of July 31, 2007, including interest and penalties).  The alleged debts arose from CRIM's disallowance of certain credits for overpayments from 1999 and 2000, claimed in the 2001 through 2004 personal property tax returns.  During the audit process, CRIM alleged that some components of the inventory reported as exempt should be taxable.  The parties met several times and an informal administrative hearing was held on September 27, 2006.  The Company submitted its position in writing within the time period provided by CRIM.  The Company believes it has strong arguments to support the position that the
components of inventory qualify as raw material.  However, at this point, the Company cannot predict the outcome of this matter.  Accordingly, no provision for losses, if any, has been recorded in the financial statements. Leases: The Company leases its principal facilities from the Municipality of Caguas under an operating lease agreement that expires on November 30, 2007 with an extension of one year that expires on November 20, 2008.  Rent expense related to this agreement for the year ended July 31, 2007 and 2006 amounted to $50,000 and $46,000, respectively.  The Company also leases warehouse facilities from the Puerto Rico Industrial Development  Company (PRIDCO) under an operating lease agreement that expires on December 30, 2012.  Rent expense related to this agreement for the years ended July 31, 2007 and 2006 amounted to $25,000 each year.  21      Future minimum lease payments under these agreements for the next five years are as follows:  Year ending July 31,
     
     
     
     
     
     Amount2008
     
     
     
     
     
     $
     782009
     
     
     
     
     
     
     442010
     
     
     
     
     
     
     272011
     
     
     
     
     
     
     272012
     
     
     
     
     
     
     27$
     203   During the years ended July 31, 2007 and 2006, rent expense related to other operating leases amounted to approximately $19,000 and $23,000, respectively.  11.
        EMPLOYEE BENEFITS:
 The Company provides its employees a savings plan (the plan).  Under the terms of the plan, employees may contribute from 1% to 10% of pretax annual compensation, but cannot exceed $8,000.  However, effective January 2003, the Company no longer contributes to the plan.  Previously the Company matched 50% of employee's contributions up to 6% of the employee's compensation, as defined, with a maximum limitation of $2,000 for any one employee.  12.
        SHAREHOLDERS EQUITY:
 The Board of Directors of the Company is authorized from time to time to divide the preferred stock into series and to determine the number of shares of each series and the relative designation, powers, rights and preferences of each such series.  As of July 31, 2007, there were no outstanding shares of preferred stock. The shareholders have authorized a stock incentive plan which authorizes a total of 375,000 shares under the plan.  However, as of this date, no options or other stock-based awards have been granted pursuant to the plan. Treasury stock represents 33,104 shares at their acquisition cost.  13.
        MAJOR CUSTOMER:
 The Company's business activities primarily are with customers located in Puerto Rico and to a lesser extent the US Virgin Islands. Trade accounts receivable reflects a broad customer base in the local markets.  The Company routinely assesses the financial strength of its customers.  As a consequence, concentration of credit risk on an individual customer basis is limited for the Products and Services segments.  For the Telephony Billing Services segment, the Company sells services from one carrier and one major customer represents approximately 38% of the segments total revenues for year ended July 31, 2007. 14.
        SEGMENTS:
 CSPRs
reportable segments are the Communications Systems (Products and Services) and Telephony Billing
Services (Other), 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.  22    The Communications Systems segment offers communications solutions that address voice and data network switching while the Telephone Billing Services segment resells PRTs services in Puerto Rico. The accounting policies of the segments are those described
 in the summary of significant accounting policies.   
 2007
     
     
     
     Communication Systems
     
     Telephony Billing Services
     
     Total(In Thousands)Revenues
     
     
     
     $
     6,155
     
     
     $
     1,624
     
     
     $
     7,779Income
(loss) from operations
     
     
     
     
     123
     
     
     
     (61
     )
     
     
     62Other
income
     
     
     
     
     23
     
     
     
     
     
     
     
     23Provision
for income taxes
     
     
     
     
     
     
     
     
     
     
     
     
     Net income
(loss)
     
     
     
     
     146
     
     
     
     (61
     )
     
     
     85Total
assets
     
     
     
     
     3,285
     
     
     
     338
     
     
     
     3,623Capital
expenditures
     
     
     
     
     34
     
     
     
     
     
     
     
     34Depreciation
and amortization
     
     
     
     
     114
     
     
     
     
     
     
     
     114   For the fiscal year 2006 there were no significant revenues from the Telephony Billing segment, accordingly, all operations relate to the Communication Systems segment.  15.
        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:   
 2007
     
     
     2006Basic and
diluted income per share:
     
     
     
     (Dollars in
thousands, Except per share data)Net
income
     
     
     
     $
     85
     
     
     $
     201Weighted
average number of common shares outstanding
     
     
     
     
     1,571,453
     
     
     
     1,597,203Income from
operations per share
     
     
     
     $
     0.05
     
     
     $
     0.13   16.
        SUBSEQUENT EVENT:
 On September 14, 2007, the Board of Directors authorized the transfer of 2,500 shares of the Companys treasury stock to each member of the Board as recognition of the contributions of each Board member for the year ended July 31, 2007.  Stock compensation is to be prorated for time served during the fiscal year 2007 as follows: Alan Laffoon 2,500; Gloria Lee 2,500; Robert A. Gordon 2,083; Sergio Moren 2,500, and Walter Duffey 2,500.  23    ITEM 8
        CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
 None. ITEM 8A
        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 fiscal year ended July 31, 2007 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.   ITEM 8B
        OTHER INFORMATION
 None.  24




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PART III


    ITEM 9
        DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Executive Officers The following table sets forth information as to the persons who served as our executive officers as of July 31, 2007.  The Companys board of directors may appoint additional executive officers from time to time. Name
        Age
        TitleJuan Carlos Ramos
        38
        President Chief Executive OfficerFrancisco Sanchez
        60
        Vice President  Finance and Administration, and Chief Financial Officer
  JUAN CARLOS RAMOS became Chief Executive Officer of the Company in October 2006 and became President of the Company in September 2005 and served as a General Manager from October 2004 to September 2005.  Mr. Ramos was an independent associate consultant of Business Advisers Inc. from February 2004 to October 2004.  Mr. Ramos served as a General Manager of Alliance Networks from November 2002 to February 2004.  From April 2000 to July 2002, Mr. Ramos was Strategy Business consultant for Europraxis Consulting Group (Indra).  Mr. Ramos has taken courses toward a Ph.D. in Electronics and Telecom Engineering from the University of Surrey and University of Catalonia.  Mr. Ramos received a masters degree in business administration from ESADE Business School and a bachelors degree in Physics from the University of Barcelona. FRANCISCO SANCHEZ became Chief Financial Officer of the Company in July 2000 and became Vice President - Finance and Administration in April 1999.  Mr. Sanchez served as a director of the Company from January 2002 to September 2002.  He was Vice President - Finance and Administration of CPR from July 1998 until April 1999.  From June 1987 to June 1998, Mr. Sanchez was Caribbean Region Comptroller for H.B. Fuller Company.  From June 1978 to May 1987, Mr. Sanchez held executive positions, Assistant Comptroller in manufacturing, sales and marketing at ITT Industries, Inc.  Mr. Sanchez received a masters degree from Metropolitan University and a BBA from Puerto Rico University. Information set forth under the captions Election of Directors and Section 16(a) Beneficial Ownership Reporting Compliance in the Companys definitive Proxy Statement for the 2007 Annual Meeting of Shareholders to be held on January 9, 2008 (the Proxy Statement), which will be filed with the Securities and Exchange Commission not later than 120 days after July 31, 2007, are incorporated herein by reference in response to this item. We have adopted a Code of Ethics that applies to all employees, which is incorporated herein by reference.   ITEM 10
        EXECUTIVE COMPENSATION
 Information set forth under the caption Executive Compensation in the Proxy Statement is incorporated herein by reference in response to this item.   ITEM 11
        SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS
 Information set forth under the caption Stock Ownership in the Proxy Statement is incorporated herein by reference in response to this item.  25




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ITEM 12
        CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE


Information set forth under the caption Certain Transactions in the Proxy Statement is incorporated herein by reference.



ITEM 13
        EXHIBITS


The exhibits listed in the Exhibit Index following the signature page of this report are filed as part of this report or are incorporated by reference herein.

Financial Statements

The following information appears in Item 7 of Part II of this Report:

- Independent Auditors Report

- Balance Sheet as of July 31, 2007

- Statements of Operations for the Years Ended July 31, 2007 and 2006

- Statements of Changes in Stockholders Equity for the Years Ended July 31, 2007 and 2006

- Statements of Cash Flows for the Years Ended July 31, 2007 and 2006

- Notes to Financial Statements

All other schedules are omitted because they are not required, not applicable, or the required information is otherwise shown in the consolidated financial statements or the notes thereto.



ITEM 14
        PRINCIPAL ACCOUNTANT FEES AND SERVICES


Information set forth under the caption Fees Paid to the Independent Auditors in the Proxy Statement is incorporated herein by reference.



26



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SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



CORTELCO SYSTEMS PUERTO RICO, INC.



By /s/ Juan Carlos Ramos

Juan Carlos Ramos, President

Chief Executive Officer

(Principal Executive Officer)



By /s/ Francisco Sanchez

Francisco Sanchez, Vice President,

Chief Financial Officer, Treasury

(Principal Financial Officer and

Principal Accounting Officer)

Dated:  October 29, 2007



In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

Name
        
        Title
        
        Date/s/ Juan Carlos RamosJuan Carlos Ramos
        
        President, Chief Executive Officer (Principal Executive Officer)
        
        October 29, 2007/s/ Francisco SanchezFrancisco Sanchez
        
        Vice President, Chief Financial Officer, Treasury (Principal Financial Officer and Principal Accounting Officer)
        
        October 29, 2007/s/ Sergio MorenSergio Moren
        
        Director
        
        October 29, 2007/s/ Alan L. LaffoonAlan L Laffoon
        
        Director
        
        October 29, 2007/s/ Gloria LeeGloria Lee
        
        Director
        
        October 29, 2007/s/ Walt DuffeyWalt Duffey
        
        Director
        
        October 29, 2007/s/ Robert A. GordonRobert A. Gordon
        
        Director
        
        October 29, 2007






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EXHIBIT INDEX

Documents listed below are being filed as exhibits herewith. Exhibits identified by asterisks (*) are being incorporated herein by reference and, pursuant to Rule 12b-32 of the General Rules and Regulations promulgated by the Commission under the Securities Exchange Act of 1934, reference is made to such documents as previously filed exhibits with the Commission.

Exhibit

NumberDescription of Document

3.1 *
        Amended and Restated Certificate of Incorporation of Cortelco Systems Puerto Rico, Inc. ("CSPR").


3.2 *
        Amended and Restated Bylaws of CSPR.


4.1 *
        Amended and Restated Certificate of Incorporation of CSPR (filed as Exhibit 3.1).


4.2 *
        Amended and Restated Bylaws of CSPR (filed as Exhibit 3.2).


4.3*
        Form of certificate representing common stock, par value $.01 per share, of CSPR.


10.1*
        Distribution Agreement dated as of January 30, 2002, between eOn and CSPR (filed as Exhibit 2.1).


10.2 *
        Employee Matters Agreement dated as of January 30, 2002 between eOn and CSPR (filed as Exhibit 2.2).


10.3 *
        Confidential Disclosure Agreement dated as of January 30, 2002 between eOn and CSPR (filed as Exhibit 2.3).


10.4 *
        CSPR 2002 Equity Incentive Plan.


10.5 *
        Lease Agreement dated as of March 1, 1999, between CSPR and Cortelco Puerto Rico, Inc.


10.6(a) *
        Sales Agency Agreement dated as of December 19, 1995, between Celulares Telefonica, Inc. and CSPR (Spanish).


10.6(b) *
        Sales Agency Agreement dated as of December 19, 1995, between Celulares Telefonica, Inc. and CSPR (English translation).


10.7 *
        Mitel Caribbean VAR Agreement dated as of December 7, 2001, between Mitel Networks, Inc. and CSPR.


10.8 *
        Asset Purchase Agreement dated as of May 14, 2001, between CSPR and Ochoa Telecom, Inc.


10.9 *
        Form of Dealer Agreement between eOn and CSPR.


14.1
        Code of Ethics (filed as an exhibit to the Registrants 10-KSB for the period ended 07/31/05).


31.1
        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.


* Incorporated by reference to CSPR's Registration Statement on Form 10 or amendments thereto, filed with the Securities Exchange Commission on February 12, 2002.



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