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UNITED STATESSECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549



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FORM 10-KSB

(Mark One)

| | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
| | ------------------------------------------------------------------------------------

For the fiscal year ended July 31,
2004

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)

Indicate by check mark 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  NO


Indicate by check mark if there is no disclosure
    of delinquent filers in response to Item 405 of Regulation S-B is not 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.


Revenues for the Registrants most recent
  fiscal year: $7,338,866


The aggregate market value of the voting and
    non-voting common equity held by non-affiliates of the registrant was approximately
    $121,470
  based upon the closing sale price as quoted on the OTC Bulletin Board on 09/30/04.
  The number of outstanding shares of the
registrants $0.01 par value common stock was 1,604,557 shares as of that
date.


DOCUMENTS INCORPORATED BY REFERENCE

Certain portions of the registrants
    Proxy Statement for the 2004 Annual Meeting of Shareholders are incorporated
    by reference in Part
  III.


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


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TABLE OF CONTENTS

|           |         |                                                                                                                               |  | Page | 
|---------- | ------- | ----------------------------------------------------------------------------------------------------------------------------- |  | ---- | 
|           |         |                                                                                                                               |  |      | 
|PART I     |         | 1                                                                                                                             | 
|           |         |                                                                                                                               |  |      | 
|           | Item 1  | DESCRIPTION OF BUSINESS                                                                                                       |  | 1    | 
|           | Item 2  | DESCRIPTION OF PROPERTY                                                                                                       |  | 3    | 
|           | Item 3  | LEGAL PROCEEDINGS                                                                                                             |  | 3    | 
|           | 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 8  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE                                          |  | 25   | 
|           | Item 8A | CONTROLS AND PROCEDURES                                                                                                       |  | 25   | 
|           | Item 8B | OTHER INFORMATION                                                                                                             |  | 25   | 
|           |         |                                                                                                                               |  |      | 
|PART III   |         | 25                                                                                                                            | 
|           |         |                                                                                                                               |  |      | 
|           | Item 9  | DIRECTORS,
          EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
    SECTION 16(a) OF THE EXCHANGE ACT |  | 25   | 
|           | Item 10 | EXECUTIVE COMPENSATION                                                                                                        |  | 26   | 
|           | Item 11 | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDERS MATTERS                               |  | 26   | 
|           | Item 12 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                                                                |  | 26   | 
|           | Item 13 | EXHIBITS                                                                                                                      |  | 26   | 
|           | Item 14 | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                                                                        |  | 26   | 
|           |         |                                                                                                                               |  |      | 
|SIGNATURES |         | 27                                                                                                                            | 
|           |         |                                                                                                                               | 

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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 Item 6. 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 and data communication
  systems. The Companys products help enterprises communicate more effectively
  with customers and increase their customer satisfaction and loyalty. The rapid
  technological change from traditional to voice-over IP systems has necessitated
  the need for the Company to become more focused on fewer brands and on increased
  efficiency in its core business. 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. During this period all of our business was conducted in Puerto
  Rico, although the Company may in the future sell a limited amount of communications
  systems elsewhere in the Caribbean, Latin America or South America. The Companys
  operations also included the sales of cellular telephones and cellular airtime.
  Cellular Services revenues were 3% of our total revenues for the fiscal year
  ended July 31, 2004. Since CSPR anticipated that these revenues would
  continue to decline, the Company discontinued the cellular operation effective
June 30, 2004 in order to focus all efforts in its core business.

CSPR was incorporated in March 1999 under
    the laws of the Commonwealth of Puerto Rico. At the time of incorporation,
    our 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 us. On July 31, 2002, the Company
was spun-off from eOn as a separate entity to the stockholders of eOn.

Products and Services

The Company installs, programs, and services
    voice and data communications systems such as customer premise PBXs, call centers, interactive voice
  switches and CTI applications, as well as reselling computers and local area
  networks to enterprises and businesses of all
sizes. PBXs 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.

|Sales and Marketing
|-------------------

The Company sells our voice and data communications systems through
  a direct sales force. Most of the voice and data communications systems CSPR
  sells are installed directly by us. CSPR advertises our voice and data communications
  products primarily through trade
shows and hosted marketing presentations.

|Customer Service and Support
|----------------------------

The Company earned approximately $3.2 million of our revenue
  in fiscal year 2004 and approximately $3.4 million in fiscal year 2003
  from the servicing of voice and data communications systems previously installed.
Customers

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generally sign maintenance agreements, which
    detail the services provided and the fees charged for delivering such services.
    The equipments
  manufacturer trains our personnel in the products that the Company distributes
  through training courses. A key factor in assessing whether to distribute 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 as us, 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) our
  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. However, recently 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 the attempt to acquire the maintenance contracts
  for 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.

Some of our 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 but the Company
  now has more flexibility to charge lower rates for our services because of
ongoing overhead reductions.

There are also a number of large, integrated national companies,
  which also manufacture and sell directly the products that the Company services
  and sells. Some of our larger competitors may have greater financial resources
  to finance acquisition and internal growth opportunities and may be willing
  to pay higher prices than us for acquisition opportunities. As a result, CSPR
  has a competitive disadvantage compared to these larger competitors but the
  Company is working to find an institutional line of credit to compete in this
  type of
situation.

Future competition may be encountered from other newly formed
  or existing public or private service companies with aggressive acquisition
  and marketing programs. Certain products and services that the Company offers
  are manufactured or supplied by others. This presents a competitive disadvantage
  to us 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 sells, installs, and services the voice and data
  communications of a number of equipment manufacturers, including Avaya, Mitel,
  Cortelco, eOn, Nortel, Lucent, Hitachi and Nec among others. CSPR does not
  make any of the products that it sells but assembles, integrates and programs
the communication system

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equipment that the Company sells. The products that CSPR sells
are not under exclusive agreements from the manufacturers.

|Customers
|---------

Our customers include mostly small and medium sized businesses
  as well as a few larger ones. Although the majority of sales occur only in
  Puerto Rico, the Company does not derive a significant portion of our revenues
  from any single customer. Sales outside Puerto Rico are currently not significant.
  However, CSPR is evaluating the requirements and resources that may in the
  future be needed to expand export sales in the Caribbean, Latin America, or
South America.

|Intellectual Property
|---------------------

The Company does not own any patents, trademarks,
    or licenses in the conduct of our business. The Company conducts most of
    the operations
  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 so 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 Junta
    Reglamentadora de
  Telecomunicaciones de 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
our revenues.

|Research and Development Activities
|-----------------------------------

As the Company 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, 2004, the Company had
    approximately 68 employees, including 16 in sales and marketing, 36 in customer
    service and support, and
16 in finance and administration, including both regular and contract employees.

|Item 2 | DESCRIPTION OF PROPERTY
|------ | -----------------------

Effective February 2003, the Company moved its operation to facilities
  in Caguas Puerto Rico. This movement represented a savings in rent expense
  of approximately $175,000 for fiscal year 2003 and approximately $376,000 for
  fiscal year 2004. CSPR leases one building of approximately 8,200 square feet
  for office space and assembly processing from Municipality of Caguas. The lease
  on this facility expires in November 2007. 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 our employees work at this
  facility, other than those that worked at the direct sales cellular outlets
previously operated by us.

|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 1997, Cellu-Tel, Inc. filed a complaint
    in the Court of First Instance, San Juan, Puerto Rico alleging that CSPR
    breached the terms of a
  contract by ceasing to supply services to the plaintiff. The plaintiff seeks
  damages of approximately $854,430. Discovery proceedings are being conducted.
  As a result of the information obtained during discovery, the Company filed
  a Third Party Complaint against City Cellular, Inc. and Edgardo Correa, who
  is the President of Cellu-Tel, Inc. and City Cellular, Inc. CSPR alleged in
  the Third Party Complaint that
City Cellular is a business conduit (an alter ego) of plaintiff Cellu-Tel,
Inc. The Company has also alleged that City Cellular has continued to conduct
the business of the plaintiff. The Company also believes that City Cellular has
received

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the benefits and income that plaintiff would have received, if any. Therefore, CSPR believes that City Cellular is directly responsible to Cellu-Tel. City Cellular has answered the Third Party Complaint and denied the allegations and raised several defenses. The Company
intends to follow through with discovery proceedings regarding the Third Party Complaint. The Company believes that this litigation is without merit and in any case that any judgment in favor of plaintiff should be for a lower sum than the one claimed by plaintiff.

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. This case included two plaintiffs, Mr. Gonzalez and Mr. Luis Luhring, but as the Company requested, the two causes of action were separated into
different and independent cases. Mr. Luhring filed alleging unjust dismissal by CSPR and age and national origin discrimination. The plaintiff was recruited for 90 days as a probationary employee. Before ending his probationary period, the Company decided not to offer him
a regular position. The plaintiffs seek $5,074,321 for Mr. Gonzalez and $3,072,000 for Mr. Luhring, for alleged damages and loss of business. CSPR filed a Motion for Summary Judgment in each case. The court resolved Mr. Luhrings claim in our favor. The Company was
notified of the judgment on October 21, however, the judgment will not be final until November 2004. CSPR will continue to strongly defend the remaining case. Although CSPR cannot opine as to the outcome of the remaining case, the Company believes that any potential
liability should be limited to the discrimination claims, and only if the plaintiff is able to prove that he was illegally mistreated and discriminated against by the Company.

In 2002, CSPR filed a complaint in the Court of First Instance, San Juan, Puerto Rico against Edwin Colberg, Godwin Aldarondo, former vice president and legal counselor of CSPR respectively, Envision Technologies, Inc., a competitive business created by Colberg and
Aldarondo, and various former employees of CSPR that have repayment contracts with the Company. CSPR claims $10 million in damage by violation of fiduciary duties, use of trade secrets, confidential information, wrongful intent of creating a competitive business, and
wrongful interference with contracts. Also, there is a claim against various employees for breach of contract. Edwin Colberg and his wife filed a counter suit, alleging that CSPR wrongfully discharged Mr. Colberg. Colberg is requesting statutory severance payment for
damages caused by hostile environment and mistreatment by superiors, and economic damages. Also, Mr. Colberg is requesting damages for emotional distress caused by the alleged discrimination, an amount that in conjunction with the punitive damages he is also requesting
totals $6,348,000. Colbergs wife is requesting $1,000,000 in damages for emotional distress. The Company has conducted an investigation of the allegations and concluded from our investigation that no discrimination of any type occurred. The Company believes that our
actions were justified by business reasons, and that this litigation is without merit and will not have a material adverse effect on our business.

In 2002, the Company was included as a Third Party Defendant in a lawsuit against Ochoa Telecom, Inc. (Ochoa) filed in the Court of First Instance, Bayamón, Puerto Rico. Plaintiffs (14 former employees of Ochoa) allege Ochoa dismissed them without just cause and
CSPR is a successor employer. Plaintiffs also request damages for alleged fraud in their employment terminations. CSPR recognized plaintiffs seniority at the workplace and the Court entered partial judgment dismissing the cause of action of 9 plaintiffs that work with the
Company. The Court also dismissed the damage claims of the 14 plaintiffs and only 5 remain in the case concerning their unjust dismissal. CSPR is strongly defending this case. Although CSPR cannot opine as to the outcome of this case, the Company believes that this
litigation is without merit and will not have a material adverse effect on our business.

In 2003, a claim was filed in the Court of First Instance, Caguas, Puerto Rico by Inversionistas Unidos, Inc. (Inversionistas) for the alleged breach of contract of certain lease agreement of two commercial spaces between CSPR and Inversionistas. Notwithstanding, CSPR
never signed the contract they are trying to enforce by means of this cause of action. CSPR only signed a letter of intent with initial terms and conditions. The complaint alleged damages amounting to $129,500, plus expenses and attorney fees. This case was settled out of
court for $25,000 on October 19, 2004, which is accrued in the Companys 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 currently is no established public trading market for any class of our capital stock. The Company is not currently offering any shares of our capital stock publicly, nor have we publicly proposed to conduct such an offering. Shares of our 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.

|                                |  | HIGH |      | LOW |  
|------------------------------- |  | ---- | ---- | --- | -
|                                |  |      |      |     |  
|FISCAL YEAR ENDED JULY 31, 2004 |  |      |      |     |  
|First Quarter                   |  | $    | 0.25 |     | $
|Second Quarter                  |  |      | 0.25 |     |  
|Third Quarter                   |  |      | 0.25 |     |  
|Fourth Quarter                  |  |      | 0.30 |     |  
|                                |  |      |      |     |  
|FISCAL YEAR ENDED JULY 31, 2003 |  |      |      |     |  
|First Quarter                   |  | $    | 0.75 |     | $
|Second Quarter                  |  |      | 0.25 |     |  
|Third Quarter                   |  |      | 0.30 |     |  
|Fourth Quarter                  |  |      | 0.25 |     |  

|       
|-------
|Holders

As of September 30, 2004, there were 229 shareholders of record of our common stock and, to the best of our knowledge, approximately 4,000 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 2004, the Company did not declare any dividends on our capital stock. The Company currently intends to retain any earnings to finance the operation and expansion of our 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, 2004:

Equity Compensation Plan Information

|                                                           |       | Number of securities tobe issued upon exerciseof outstanding options,warrants and rights |   | Weighted-averageexercise price ofoutstanding options,warrants and rights |  | Number of securities remainingavailable for future issuanceunder equity compensation plans(excluding securities reflectedin column (a)) |  
|---------------------------------------------------------- | ----- | ---------------------------------------------------------------------------------------- | - | ------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------- | -
|Plan category                                              |       | (a)                                                                                      |   | (b)                                                                      |  | (c)                                                                                                                                     |  
|                                                           |       |                                                                                          |   |                                                                          |  |                                                                                                                                         |  
|Equity compensation plans approved by security holders     |       |                                                                                          |  |                                                                          |  |                                                                                                                                        |  
|                                                           |       |                                                                                          |   |                                                                          |  |                                                                                                                                         |  
|Equity compensation plans not approved by security holders |       |                                                                                          |  |                                                                          |  |                                                                                                                                        |  
|                                                           |       |                                                                                          |   |                                                                          |  |                                                                                                                                         |  
|                                                           | Total |                                                                                          |   |                                                                         |  |                                                                                                                                         | 

|       |                                     
|------ | ------------------------------------
|       |                                     
|Item 6 | MANAGEMENTS DISCUSSION AND ANALYSIS

|                   
|-------------------
|Financial Condition

Near term, the Companys cash position is tight and our continuance as a going concern is dependent upon our ability to improve profitability above the break even point, generate cash from our receivables on a timely basis and to retain continued support from our suppliers.
Our independent public accountants have expressed doubt about our ability to continue as a going concern in their report on our financial statements.

Working capital decreased to approximately $920,000 in fiscal year 2004 from $1.8 million in fiscal year 2003, principally as a result of the decrease in inventory discussed under Results of Operations, and the collection of related party receivables, which proceeds were used
to settle current obligations.

The Companys management has taken measures to protect our future by narrowing product offerings. The current sales outlook for fiscal year 2005 is encouraging. Historically the second quarter of each fiscal year is a low point for sales revenue, but CSPR has been receiving
customer commitments for new system installations that should provide higher revenue than is currently budgeted. However to achieve the increased opportunities, CSPR will need to obtain a line of credit from a Puerto Rican financial institution, and seek to extend our credit
limit with our main equipment suppliers. Also, CSPR will be implementing a plan to accelerate payment terms during the installation process to reduce accounts receivable. In the past, the customer was allowed to withhold up to 30% of the total contract until final customer
acceptance. New agreements will be negotiated to limit the amount subject to final customer acceptance to not more than 10% of the total.

CSPRs plans include continuing to closely monitor our operating cost and expenses that have been significantly reduced during the last few years, while striving for an increase in sales profits. The Company will continually look for ways to increase our installed base of
customers via improved service performance, and increased maintenance sales efforts since our highest gross margins are from service revenues. To improve service performance, the Company is revamping its training program to develop more highly qualified technicians. To
improve maintenance

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sales results, the Company has reassigned three individuals and one manager from new equipment sales to the sale of maintenance services to support and increase our customer base. The Company is also pursuing productivity improvements via better communication with our
customer base to better understand the service request in order to resolve the problem on our first visit to the customer site.

No assurance can be given that CSPR will be successful in achieving our near term goals necessary to raise sufficient cash and meet the Companys obligations with our customers and suppliers. Ultimately, the Company must achieve profitable operations if the Company is to
be a viable entity.

|Results of Operations
|---------------------

The following discussion provides information about the Companys operations, for the fiscal year ended July 31, 2004 and for the fiscal year ended July 31, 2003.

Net revenues consist of sales of new product and additions (Product) and services (Services) related to revenues from maintenance contract and billable services. Net revenues decreased 5.2% to $7.3 million in fiscal year 2004 from $7.7 million in fiscal year 2003. The
results primarily reflected decreased revenues of approximately $171,000 from the Product segment due to a decline in cellular and export revenues of approximately $627,000, offset by an increase in new product sales by approximately $456,000. In the Service segment the
decrease of revenues was approximately $191,000 as a result of replacing equipment under a service contract with new equipment for existing service customers during the year.

Cost of revenues consists primarily of purchases from equipment manufacturers and other suppliers and costs incurred for final assembly, quality assurance, installations of the systems and maintenances. Cost of revenues includes $950,000 for inventory obsolescence charges in
fiscal year 2004 and $1.2 million in fiscal year 2003. The gross margin before inventory adjustments was 29.8% in fiscal year 2004 and 28.8% in fiscal year 2003. The increase primarily was as a result of the Companys plan to increase the sales profit.

In fiscal year 2003, CSPR identified excess inventory that was also slow moving, for various reasons including, among others a decrease in business. In 2003, CSPR adjusted the value of the inventory by $1,200,000 with the expectation that much of that inventory could be
sold in the secondary market at a discount. However, CSPR was not successful in selling the devalued inventory in the secondary market, that together with the change in product strategy implemented in 2004, required additional adjustments of $725,000 in the second quarter
of fiscal year 2004 and a final adjustment of $225,000 in the last quarter of fiscal year 2004, for a total inventory adjustment of $950,000 for fiscal year 2004. The Company will continue the plan to sell its excess inventory in the secondary market.

In fiscal year 2004, CSPR wrote off $200,000 of doubtful accounts thereby eliminating any credit risk associated with the remaining old and disputed accounts receivable. Regarding to the allowance for doubtful accounts, CSPR plans to continue its collections effort by using
collections agencies and legal resources.

In fiscal year 2004, CSPR wrote off the $382,000 of goodwill originally recorded in the acquisition of Ochoa Telecom. Based upon market values for the company stock, it was not practical to continue to report this at the assigned value.

Selling, general and administrative expenses consist primarily of salaries and benefit costs, advertising, and facilities and other overhead expenses incurred to support our business. Selling, general and administrative expenses decreased 21.4% to $2.2 million in fiscal year 2004
from $2.8 million in fiscal year 2003. The decrease was primarily due to decreased facility expenses and internal actions to reduce costs and improve productivity.

Interest income, mostly from related parties, was nominal in both fiscal years 2004 and 2003. In addition, the Company had no significant interest expense in either fiscal year 2004 or 2003. Interest income from related parties will not be accrued subsequent to July 31, 2004.

The Company recognized no income tax benefit from our loses in fiscal year 2004 or fiscal year 2003 because CSPR cannot conclude whether or not deferred tax assets will be realized in the future.

Cash flow used in operations was approximately $323,000 in fiscal year 2004 and approximately $144,000 in fiscal year 2003. Major cash and non-cash investing and financing activities in 2004: (1) the proceeds of $108,000 from

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the sale of 400,000 shares of common stock to Cortelco, Inc., a related party, at $0.27 per share, as reported in the Companys 10-Q for the period ended January 31, 2004, and (2) the collection of related party receivables of approximately $340,000. Fiscal year 2003 includes
capital expenditures of approximately $127,000 principally as a result of the improvements made to the new leased facilities.

Although the sale of shares of common stock to a related party had a dilutive effect on the outstanding common shares, the Board of Directors of the Company unanimously approved the sale, after considering the lack of alternative sources of funds, the immediate need of the
Company for additional funding to continue operations, the expense and timing associated with a registered offering of its securities to the general public and the prices at which the stock has traded in the open market for the past year.

During fiscal year 2004, CSPR was able to meet our cash needs principally as a result of nonrecurring transactions, including the above discussed shares of common stock, the interim financing provided by a related party, the collection of accounts receivable from other related
parties, and the additional deposits received from customers from its previously discussed change in sales policy.

|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 890,029 shares, which in the aggregate represent approximately 55% voting interest in the outstanding shares of our common stock. These
stockholders have the ability to control all matters submitted to our stockholders for approval, including the election and removal of directors and the approval of any business combinations.

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

|Off-Balance Sheet Arrangements
|------------------------------

CSPR was not involved in any significant off-balance sheet arrangement during the fiscal years ended July 31, 2004 and 2003.

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|Item 7 | FINANCIAL STATEMENTS
|------ | --------------------

CORTELCO SYSTEMS PUERTO RICO, INC.

INDEX TO FINANCIAL STATEMENTS

|                                                            |                                                                                              | PAGE |   
|----------------------------------------------------------- | -------------------------------------------------------------------------------------------- | ---- | --
|Financial Statements of Cortelco Systems Puerto Rico, Inc.: |                                                                                              |      |   
|                                                            | Independent Auditors Report  Horwath Velez & Co.
    PSC                                   |      | 10
|                                                            | Balance Sheet as of July 31,
    2004                                                        |      | 11
|                                                            | Statements of Operations for
    the Years Ended July 31, 2004 and 2003                      |      | 12
|                                                            | Statements of Changes in Stockholders Equity for the Years Ended July 31,
    2004 and 2003 |      | 13
|                                                            | Statements of Cash Flows for
    the Years Ended July 31, 2004 and 2003                      |      | 14
|                                                            | Notes to the Financial Statements                                                           |      | 15
|                                                            | Financial Statement Schedule II-Valuation and Qualifying Accounts                            |      | 23

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, 2004, and the related statements of operations, changes in stockholders equity and cash flows for each of the two years in the period ended July 31, 2004. Our audit also
included the financial statement schedule listed in the Index as Schedule II for the year ended July 31, 2004. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial
statement schedule 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2004, and the results of its operations and its cash flows for each of the two years in the period ended
July 31, 2004 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that Cortelco Systems Puerto Rico, Inc. will continue as a going concern. As discussed in Note 2 to the financial statements, Cortelco Systems Puerto Rico, Inc.s has suffered recurring losses from
operations as a result of significant market loss that combined with a lack of financial resources raise doubt about its ability to continue as a going concern. Managements plans concerning these matters are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

|/s/ HORWATH VELEZ & CO, PSC
Puerto Rico
|---------------------------------------

|                                                                                                                    
|--------------------------------------------------------------------------------------------------------------------
|October 25, 2004                                                                                                    
|                                                                                                                    
|Puerto Rico Society of Certified Public Accountants
Stamp number 2012089 was
affixed to the original of this
report.

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CORTELCO SYSTEMS PUERTO RICO, INC.BALANCE SHEET  JULY 31, 2004(Dollars in Thousands)

ASSETS

|Current assets:
|---------------
|               

|                            | Cash                                                                          |   | $                    | 126   | 
|--------------------------- | ----------------------------------------------------------------------------- | - | -------------------- | ----- | 
|                            | Trade accounts receivable, net of allowance of uncollectible accounts of $329 |   |                      | 2,141 | 
|                            | Inventories                                                                   |   |                      | 444   | 
|                            | Prepaid expenses                                                              |   |                      | 116   | 
|                            |                                                                               |   |                      |       | 
|                            |                                                                               |   | Total current assets |       | 
|                            |                                                                               |   |                      |      
|Property and equipment, net |                                                                               |   | 321                  |      
|Goodwill                    |                                                                               |   |                     |      
|                            |                                                                               |   |                      |      
|                            |                                                                               | $ | 3,148                |      
|                            |                                                                               |   |                      |      

LIABILITIES AND STOCKHOLDERS EQUITY

|Current liabilities:
|--------------------
|                    

|                              | Trade accounts payable                                                                                     |                                                                                            | $                          | 954     |   
|----------------------------- | ---------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------ | -------------------------- | ------- | --
|                              | Due to affiliated entities                                                                                 |                                                                                            |                            | 164     |   
|                              | Deposits from clients                                                                                      |                                                                                            |                            | 213     |   
|                              | Other accrued liabilities                                                                                  |                                                                                            |                            | 345     |   
|                              | Deferred revenue                                                                                           |                                                                                            |                            | 231     |   
|                              |                                                                                                            |                                                                                            |                            |         |   
|                              |                                                                                                            |                                                                                            | Total current liabilities  |         |   
|                              |                                                                                                            |                                                                                            |                            |        
|Commitments and contingencies |                                                                                                            |                                                                                            |                            |        
|                              |                                                                                                            |                                                                                            |                            |        
|Stockholders equity:         |                                                                                                            |                                                                                            |                            |        
|                              | Preferred stock, par value $.01 per share; authorized                                                      |                                                                                            |                            |         |   
|                              |                                                                                                            | 10,000,000 shares, no shares issued                                                        |                            |         |  
|                              | Common stock, par value $.01 per share;                                                                    |                                                                                            |                            |         |   
|                              |                                                                                                            | 5,000,000 shares authorized, 1,604,557 and 1,204,557 shares issued and outstanding in      |                            |         |   
|                              |                                                                                                            | 2004 and 2003, respectively, except for 400,000 shares sold in fiscal year 2004 but issued |                            |         |   
|                              |                                                                                                            | after year end                                                                             |                            |         | 16
|                              | Capital in excess of par value,
    net of capital contribution note receivable from related party of $304 |                                                                                            |                            | 6,969   |   
|                              | Accumulated deficit                                                                                        |                                                                                            |                            | (5,744) |   
|                              |                                                                                                            |                                                                                            |                            |         |   
|                              |                                                                                                            |                                                                                            | Total stockholders equity |         |   
|                              |                                                                                                            |                                                                                            |                            |        
|                              |                                                                                                            | $                                                                                          | 3,148                      |        
|                              |                                                                                                            |                                                                                            |                            |        

See notes to financial statements.

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CORTELCO SYSTEMS PUERTO RICO, INC.STATEMENTS OF OPERATIONSYEARS ENDED JULY 31, 2004 AND 2003(Dollars in Thousands Except Per Share Data)

|                                              |                                     |   |                          |       | 2004 |        | 2003  | 
|--------------------------------------------- | ----------------------------------- | - | ------------------------ | ----- | ---- | ------ | ----- | 
|                                              |                                     |   |                          |       |      |        |       | 
|Net revenues:                                 |                                     |   |                          |       |      |        |      
|                                              | Products                            |   | $                        | 4,119 |      | $      | 4,290 | 
|                                              | Services                            |   |                          | 3,220 |      |        | 3,411 | 
|                                              |                                     |   |                          |       |      |        |       | 
|                                              |                                     |   | Total net revenues       |       |      | 7,339  |       | 
|                                              |                                     |   |                          |       |      |        |       | 
|Cost of revenues:                             |                                     |   |                          |       |      |        |      
|                                              | Products                            |   |                          | 3,302 |      |        | 3,699 | 
|                                              | Services                            |   |                          | 1,849 |      |        | 1,787 | 
|                                              | Inventory write-down adjustments    |   |                          | 950   |      |        | 1,200 | 
|                                              |                                     |   |                          |       |      |        |       | 
|                                              |                                     |   | Total cost of revenues   |       |      | 6,101  |       | 
|                                              |                                     |   |                          |       |      |        |       | 
|Gross profit                                  |                                     |   | 1,238                    |       |      | 1,015  |      
|                                              |                                     |   |                          |       |      |        |       | 
|Operating expenses:                           |                                     |   |                          |       |      |        |      
|                                              | Selling, general and administrative |   |                          | 2,195 |      |        | 2,781 | 
|                                              | Provision for doubtful accounts     |   |                          | 200   |      |        | 8     | 
|                                              | Loss on goodwill write-off          |   |                          | 382   |      |        |      | 
|                                              |                                     |   |                          |       |      |        |       | 
|                                              |                                     |   | Total operating expenses |       |      | 2,777  |       | 
|                                              |                                     |   |                          |       |      |        |       | 
|Loss from operations                          |                                     |   | (1,539                   | )     |      | (1,774 | )    
|Other income, net                             |                                     |   | 45                       |       |      | 25     |      
|                                              |                                     |   |                          |       |      |        |      
|Loss before provision for income taxes        |                                     |   | ( 1,494                  | )     |      | (1,749 | )    
|Provision for income taxes                    |                                     |   |                         |       |      |       |      
|                                              |                                     |   |                          |       |      |        |      
|Net loss                                      |                                     | $ | (1,494                   | )     | $    | (1,749 | )    
|                                              |                                     |   |                          |       |      |        |      
|Basic and diluted net loss per share          |                                     | $ | (1.11                    | )     | $    | (1.45  | )    
|                                              |                                     |   |                          |       |      |        |      
|Weighted-average number of shares outstanding |                                     |   | 1,348                    |       |      | 1,205  |      
|                                              |                                     |   |                          |       |      |        |      

See notes to financial statements.

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CORTELCO SYSTEMS PUERTO RICO, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITYYEARS ENDED JULY 31, 2004 AND 2003(Dollars in Thousands)

|                        |  | Commonstock |    | Capital inexcess ofpar value |   | Capitalcontributionnotereceivablefrom relatedparty |  | Retainedearnings(deficit) |      | Total |  
|----------------------- |  | ----------- | -- | ---------------------------- | - | -------------------------------------------------- |  | ------------------------- | ---- | ----- | -
|                        |  |             |    |                              |   |                                                    |  |                           |      |       |  
|Balance, August 1, 2002 |  | $           | 12 |                              | $ | 7,169                                              |  | $                         | (304 | )     | $
|Net loss                |  |             |   |                              |   |                                                   |  |                           |     |       |  
|                        |  |             |    |                              |   |                                                    |  |                           |      |       |  
|Balance, July 31, 2003  |  |             | 12 |                              |   | 7,169                                              |  |                           | (304 | )     |  
|Capital contribution    |  |             | 4  |                              |   | 104                                                |  |                           |     |       |  
|Net loss                |  |             |   |                              |   |                                                   |  |                           |     |       |  
|                        |  |             |    |                              |   |                                                    |  |                           |      |       |  
|Balance, July 31, 2004  |  | $           | 16 |                              | $ | 7,273                                              |  | $                         | (304 | )     | $
|                        |  |             |    |                              |   |                                                    |  |                           |      |       |  

See notes to financial statements.

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CORTELCO
      SYSTEMS PUERTO RICO, INC.STATEMENTS OF CASH FLOWSYEARS ENDED JULY 31, 2004 AND 2003(Dollars in Thousands)

|                                                                                    |  | 2004 |        | 2003 |  
|----------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -
|                                                                                    |  |      |        |      |  
|Cash flows from operating activities:                                               |  |      |        |      |  
|Net loss                                                                            |  | $    | (1,494 | )    | $
|                                                                                    |  |      |        |      |  
|Adjustments to reconcile
        net loss to net cash used in operating activities: |  |      |        |      |  
|Depreciation
        and amortization                                               |  |      | 149    |      |  
|Provision
        for doubtful accounts                                             |  |      | 200    |      |  
|Inventory
        write-downs                                                       |  |      | 950    |      |  
|Goodwill
        write-down                                                         |  |      | 382    |      |  
|Loss
        on disposition of equipment                                            |  |      | 5      |      |  
|Changes
        in operating assets and liabilities:                                |  |      |        |      |  
|Decrease
        (increase) in:                                                     |  |      |        |      |  
|Trade
        accounts receivable                                                   |  |      | (194   | )    |  
|Due
        from affiliated entities                                                |  |      | 15     |      |  
|Inventories                                                                         |  |      | (147   | )    |  
|Prepaid
        expenses                                                            |  |      | (2     | )    |  
|Increase
        (decrease) in:                                                     |  |      |        |      |  
|Trade
        accounts payable                                                      |  |      | (311   | )    |  
|Due
        to affiliated entities                                                  |  |      |       |      |  
|Other
        accrued liabilities                                                   |  |      | 164    |      |  
|Deferred
        revenue                                                            |  |      | (40    | )    |  
|                                                                                    |  |      |        |      |  
|Total adjustments                                                                   |  |      | 1,171  |      |  
|                                                                                    |  |      |        |      |  
|Net cash used in operating
        activities                                       |  |      | (323   | )    |  
|                                                                                    |  |      |        |      |  
|Cash flows from investing activities:                                               |  |      |        |      |  
|Capital expenditures                                                                |  |      | (31    | )    |  
|Net decrease in investment
        in sales-type leases                             |  |      | 24     |      |  
|                                                                                    |  |      |        |      |  
|Net cash used in investing
        activities                                       |  |      | (7     | )    |  
|                                                                                    |  |      |        |      |  
|Cash flows from financing activities:                                               |  |      |        |      |  
|Issuance of common stocks                                                           |  |      | 108    |      |  
|Proceeds from related parties                                                       |  |      | 310    |      |  
|Payments of promissory
        note                                                 |  |      | (25    | )    |  
|                                                                                    |  |      |        |      |  
|Net cash provided by (used
        in) financing activities                         |  |      | 393    |      |  
|                                                                                    |  |      |        |      |  
|Net change in cash                                                                  |  |      | 63     |      |  
|Cash, beginning of year                                                             |  |      | 63     |      |  
|                                                                                    |  |      |        |      |  
|Cash, end of year                                                                   |  | $    | 126    |      | $
|                                                                                    |  |      |        |      |  

Supplemental schedule of noncash
      investing and financing activities

|                                                                  |  | 2004 |         | 2003 |  
|----------------------------------------------------------------- |  | ---- | ------- | ---- | -
|                                                                  |  |      |         |      |  
|Related party receivable settled by another
        related party |  | $    | 298,000 |      | $
|                                                                  |  |      |         |      |  

See notes to financial statements.

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CORTELCO
      SYSTEMS PUERTO RICO, INC.NOTES TO FINANCIAL STATEMENTSYEARS ENDED JULY 31, 2004 AND 2003(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 and data equipment in Puerto Rico.

| |                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Segment information  The Companys
        previously reportable segments were Communications Systems and Cellular
        Airtime Services. For the years ended July 31, 2004 and 2003, the
        cellular airtime service was not a significant segment, therefore segment
        information is no longer provided.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

| |                                                                                                                                                                                                                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Credit risk concentration  The
        Companys business activities primarily are with customers located
        in Puerto Rico and its trade accounts receivable reflects a broad customer
        base in the local market. The Company routinely assesses the financial
        strength of its customers. As a consequence, concentration of credit
        risk is limited.

| |                                                                                               
| | ----------------------------------------------------------------------------------------------
| | Recent accounting pronouncements  The
        following are recent accounting pronouncements:

| |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In December 2002, the FASB issued SFAS No.
        148, Accounting for Stock-Based Compensation  Transition
        and Disclosure. This Statement amends SFAS No. 123, Accounting
        for Stock-Based Compensation, to provide alternative methods
        of transition for a voluntary change to the fair value based method of
        accounting for stock-based employee compensation. In addition, this Statement
        amends the disclosure requirements of SFAS No. 123 to require prominent
        disclosures in both annual and interim financial statements about the
        method of accounting for stock-based employee compensation and the effect
        of the method used on reported results. The Company has not implemented
        SFAS No. 123 because it still follows Accounting Principle Board Opinion
        No. 25, Accounting for Stock Issued to Employees, which
        is an acceptable alternative. Accordingly, SFAS No. 148 is not applicable
        until the Company implements SFAS No. 123.

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| |  | In August 2003, the Company adopted Emerging
        Issue Task Force (EITF) Issue 00-21, Accounting for Revenue Arrangements
        with Multiple Deliverables. The consensus addresses not only
        when and how an arrangement involving multiple deliverables should be
        divided into separate units of accounting but also how the arrangements
        consideration should be allocated among separate units. EITF 00-21 did
        not have a material impact in the Companys results of operations
        or financial position.
| |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------
| | Fair value of financial instruments  The
        carrying amounts of cash is a reasonable estimate of their fair value.

| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The carrying amounts of accounts receivable,
        accounts payable, accrued expenses, and deposit liabilities approximate
        fair value due to their short-term maturities.

| |                                                                                                                                                                                       
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | It is impracticable to determine the fair
        value of the amounts due to affiliated entities because they are unsecured,
        bear no interest, and have no definite due date.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Impairment of long-live 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, except as more
        fully disclosed under Goodwill.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. 101, Revenue Recognition
          in Financial Statements.

| |                                                                                  
| | ---------------------------------------------------------------------------------
| | Cash  Cash is deposited in high-credit
        qualified financial institutions.

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

| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Inventories  Inventories are
        stated at the lower of cost or market. Cost is determined by the first-in,
        first-out (FIFO) method. Returned equipment and inventory,
        mostly related to warranty claims and replacements of outdated communication
        systems, is recorded at net realizable value.

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

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| |                                 |  |  | Estimated
          useful life (years)                  | 
| | ------------------------------- |  |  | -------------------------------------------------------- | 
| |                                 |  |  |                                                          | 
| | Office and production equipment |  |  | 3-5                                                      | 
| | Furniture and fixtures          |  |  | 5-10                                                     | 
| | Internal use software           |  |  | 3-5                                                      | 
| | Leasehold 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.

| |                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill  During the year ended
        July 31, 2004, the Company determined that goodwill was impaired
        and wrote-off the same. Goodwill represented the excess of cost paid
        for certain net assets over the book value of the assets acquired.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Product warranty  The Company
        gives a one year warranty to certain products and services sold. The
        Company recognizes an accrued warranty liability when it sells a product
        or service. 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.

| |                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Income (loss) per common share  The
        Company reports its earnings per share (EPS) using Financial
        Accounting Standards Board (FASB) Statement No. 128, Earnings
        Per Share (SFAS 128). SFAS 128 requires dual presentation
        of basic and diluted EPS. Basic EPS is computed by dividing net 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.

| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | Reclassification  Certain amounts
        in the 2003 financial statements were reclassified to conform to the
        2004 presentation.

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|2. | GOING CONCERN AND MANAGEMENT PLANS:
|-- | -----------------------------------

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The accompanying financial statements have
        been prepared on a going concern basis, which contemplates the realization
        of assets and the settlement of liabilities and commitments in the normal
        course of business. The Companys recurring losses, reduced market
        share, and lack of financing resources raise doubt about the Companys
        ability to continue as a going concern. Although the Companys efforts
        to increase sales have yet to materialize, actions taken to control costs
        allowed the Company to reduce its 2004 losses before major non-recurring
        charges for inventory write-downs and asset impairment losses. However,
        this has not been sufficient to offset negative cash flows from operations.
        Accordingly, although management is optimistic about the projected outcome
        for fiscal year 2005, no assurances can be given that the Company will
        be successful in achieving sustainable positive cash flows and profitability.
        The financial statements do not include any adjustments that might result
        from the outcome of this uncertainty.

|   |             
|-- | ------------
|3. | INVENTORIES:
|   |             

| | Purchased components, net of slow moving
        inventory write-downs of approximately $817,000       |  | $ | 271 | 
| | ------------------------------------------------------------------------------------------------------ |  | - | --- | 
| | Component and materials related to installations
        in process                                    |  |   | 143 | 
| | Service parts and materials, net of slow
        moving inventory write-downs of approximately $90,000 |  |   | 30  | 
| |                                                                                                        |  |   |     | 
| |                                                                                                        |  | $ | 444 | 
| |                                                                                                        |  |   |     | 

|4. | PROPERTY, PLANT AND EQUIPMENT:
|-- | ------------------------------
|   |                               

| | Furniture and fixtures                         |  | $ | 384  |  
| | ---------------------------------------------- |  | - | ---- | -
| | Leasehold improvements                         |  |   | 86   |  
| | Computer equipment and software                |  |   | 292  |  
| |                                                |  |   |      |  
| |                                                |  |   | 762  |  
| | Less accumulated depreciation and amortization |  |   | (441 | )
| |                                                |  |   |      |  
| |                                                |  | $ | 321  |  
| |                                                |  |   |      |  

|5. | OTHER ACCRUED LIABILITIES:
|-- | --------------------------
|   |                           

| | Reorganization costs      |  | $ | 118 | 
| | ------------------------- |  | - | --- | 
| | Payroll and payroll taxes |  |   | 95  | 
| | Commissions               |  |   | 61  | 
| | Other                     |  |   | 71  | 
| |                           |  |   |     | 
| |                           |  | $ | 345 | 
| |                           |  |   |     | 

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|6. | RELATED PARTY TRANSACTIONS:
|-- | ---------------------------

| |                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the years ended July 31, 2004 and 2003, the Company purchased approximately $466,000 and $102,000, respectively, in merchandise from Cortelco. Inc., a related party.

| |                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Through February 28, 2003, the Company leased its building from Cortelco Puerto Rico, Inc. under an operating lease agreement that was cancelled on such date. Rent expense related to this agreement for the year ended July 31, 2003 amounted to $177,000.

| |                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the fiscal year ended July 31, 2004, related parties that owed $298,000 to the Company settled liabilities of the Company to other related parties for that amount.

| |                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As of July 31, 2004, the balances due to related parties are non-interest bearing, unsecured, and have no definite due date. Also, a $304,000 note receivable from a related party, assigned to the Company upon the spin-off from eOn Communications Corporation, on July 31,
2002, is still outstanding. This note is presented in the financial statements as a reduction of stockholders equity.

|   |                     
|-- | --------------------
|7. | ADVERTISING EXPENSE:

| |                                                                                                               
| | --------------------------------------------------------------------------------------------------------------
| | Advertising expense for the years ended July 31, 2004 and 2003, amounted to $42,000 and $38,000, respectively.

|   |              
|-- | -------------
|8. | 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 will enjoy preferential tax rates, as follows:
| |                                                                                                                                                                                                                                                                                                                               

| |  | Tax       |  | Benefit       |  | 
| |  | --------- |  | ------------- |  | 
| |  |           |  |               |  | 
| |  | Income    |  | 7% flat tax   |  | 
| |  | Property  |  | 90% exemption |  | 
| |  | Municipal |  | 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, 2004 and 2003.

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| | The Company has available income tax carryforward losses to offset future taxable income that expire as follows:
| | ----------------------------------------------------------------------------------------------------------------
| |                                                                                                                 

| | Year |  | Incomecovered bythe decree |       | OtherIncome |  
| | ---- |  | -------------------------- | ----- | ----------- | -
| |      |  |                            |       |             |  
| | 2008 |  | $                          |      |             | $
| | 2009 |  |                            |      |             |  
| | 2010 |  |                            | 1,508 |             |  
| | 2011 |  |                            | 918   |             |  
| |      |  |                            |       |             |  
| |      |  | $                          | 2,426 |             | $
| |      |  |                            |       |             |  

| |                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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:
| |                                                                                                                                                                                                                                                                      

| |                                                            |  | 2004 |      | 2003 |  
| | ---------------------------------------------------------- |  | ---- | ---- | ---- | -
| |                                                            |  |      |      |      |  
| | Income tax expense (benefit) at Puerto Rico tax rate (39%) |  | $    | (583 | )    | $
| | Effect on decree on tax determination                      |  |      | 294  |      |  
| | Difference in method in recognizing doubtful accounts      |  |      | (82  | )    |  
| | Difference in method in recognizing inventory write-downs  |  |      | (200 | )    |  
| | Differences in accrued expenses                            |  |      | (28  | )    |  
| | Other, net                                                 |  |      | 3    |      |  
| | Contingent reserves                                        |  |      | 596  |      |  
| |                                                            |  |      |      |      |  
| | Total income tax expense                                   |  | $    |     |      | $
| |                                                            |  |      |      |      |  

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| | The components of the net deferred tax asset
    for taxable income at July 31, are as follows: |  |      |        |      |  
| | ----------------------------------------------------------------------------------------------- |  | ---- | ------ | ---- | -
| |                                                                                                 |  | 2004 |        | 2003 |  
| |                                                                                                 |  |      |        |      |  
| | Deferred tax assets resulting from:                                                             |  |      |        |      |  
| | Inventory allowance                                                                             |  | $    | 76     |      | $
| | Other accrued liabilities                                                                       |  |      | 92     |      |  
| | Allowance for doubtful accounts                                                                 |  |      | 156    |      |  
| | Net operating loss carryforwards                                                                |  |      | 1,791  |      |  
| |                                                                                                 |  |      |        |      |  
| |                                                                                                 |  |      | 2,115  |      |  
| |                                                                                                 |  |      |        |      |  
| | Less valuation allowance                                                                        |  |      | (2,115 | )    |  
| |                                                                                                 |  |      |        |      |  
| |                                                                                                 |  | $    |       |      | $
| |                                                                                                 |  |      |        |      |  

| |                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.

|   |                               
|-- | ------------------------------
|9. | COMMITMENTS AND CONTINGENCIES:

| |        
| | -------
| | Claims:

| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is currently subject to one claim regarding an alleged breach of contract, and various claims (or counterclaim) regarding employment issues, as follows:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the breach of contract case, the plaintiff alleges that the Company breached the terms of contract by ceasing to supply services to the plaintiff, and the plaintiff seeks damages of approximately $855,000. Although management is strongly contesting the claim, management
believes, based on the opinion of counsel, that if the Court does not accept the Companys defense, a negative outcome is reasonably possible, although for a lower sum than the one claimed by plaintiff. Because the loss, if any, cannot be classified as probable, an accrual for
losses has not been recorded in the Companys financial statements.

| |                                                                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the employment cases, each of the plaintiffs are former employees of the Company or their spouses, and they each allege under various theories of law that their dismissal from employment by the Company was unjustified.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | One of the employment cases relates to a counterclaim, for approximately
$7 million, established by a former employee and his wife, when the Company sued him and other parties for
 violations of fiduciary duties, as a result of the alleged use of trade secrets and confidential
information to establish a competitive business. The plaintiff has presented an offer to settle this case for
 a small percentage of the original amount. The Company is evaluating such offer. The Company has adequate provisions in its balance sheet to settle such amount, which is considered to be the
maximum exposure to settle the same.

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| | The Company is also defendant in two other claims by former employees, totaling approximately $8 million. The Company has filed motions for summary judgment in both claims as management believes, based on the opinion of counsel, that the same are without merit. The
Company does not believe that any of these cases will result in a significant unfavorable outcome that would have a material adverse effect upon the Companys business.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company is also a party in other claims incidental to their business. The Company does not believe that those claims will have a material adverse effect on the Companys business or its financial condition.

| |        
| | -------
| | Leases:

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company leases its principal facilities from the Municipality of Caguas under an operating lease agreement that expires on November 30, 2007. Rent expense related to this agreement for the year ended July 31, 2004 and 2003 amounted to $31,000 and $21,000,
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 year ended July 31, 2004 and
2003 amounted to $23,000 and $13,000, respectively.

| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | Future minimum lease payments under these agreements for the next five years are as follows:
| |                                                                                             

| |  | Year endingJuly 31, |  |  | Amount |     | 
| |  | ------------------- |  |  | ------ | --- | 
| |  |                     |  |  |        |     | 
| |  | 2005                |  |  | $      | 58  | 
| |  | 2006                |  |  |        | 64  | 
| |  | 2007                |  |  |        | 70  | 
| |  | 2008                |  |  |        | 26  | 
| |  |                     |  |  |        |     | 
| |  |                     |  |  | $      | 218 | 
| |  |                     |  |  |        |     | 

| |                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the years ended July 31, 2004 and 2003, rent expense related to other operating leases amounted to approximately $85,000 and $159,000, respectively. These leases expired mostly in 2004.

|    |                   
|--- | ------------------
|10. | 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.

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|11. | PREFERRED AND COMMON STOCK:
|--- | ---------------------------

| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 2004, there were
no outstanding shares of preferred stock.

| |                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 9, 2003, the Board of Directors approved the addition of 250,000 common stock shares to be reserved for an equity incentive plan. As of July 31, 2004, the equity incentive plan has not been established.

| |                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On March 22, 2004, the Company sold 400,000 shares of common stock for $0.27 per share under an agreement with Cortelco Inc., a related party. The shares were issued on September 29, 2004.

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Schedule II  Valuation
      and Qualifying Accounts

($ In thousands)

|Column A                                                    |  | Column
          B                     |     | Column
          C                    |  | Column
          D                |  | Column
          E |  
|----------------------------------------------------------- |  | -------------------------------------- | --- | ------------------------------------- |  | --------------------------------- |  | ------------------ | -
|                                                            |  |                                        |     |                                       |  |                                   |  |                    |  
|                                                            |  |                                        |     | Additions                             |  |                                   |  |                    |  
|                                                            |  |                                        |     |                                       |  |                                   |  |                    |  
|                                                            |  | Balance
          atBeginning ofPeriod |     | Charged
          toCosts andExpenses |  | Charged
          toOtherAccounts |  | Deductions         |  
|                                                            |  |                                        |     |                                       |  |                                   |  |                    |  
|2003:                                                       |  |                                        |     |                                       |  |                                   |  |                    |  
|Allowance for doubtful accounts and sales
        allowance |  |                                        | 864 |                                       |  | 8                                 |  |                    | 
|Warranty reserve                                            |  |                                        | 315 |                                       |  | 454                               |  |                    | 
|                                                            |  |                                        |     |                                       |  |                                   |  |                    |  
|2004:                                                       |  |                                        |     |                                       |  |                                   |  |                    |  
|Allowance for doubtful accounts and sales
        allowance |  |                                        | 539 |                                       |  | 200                               |  |                    | 
|Warranty reserve                                            |  |                                        | 271 |                                       |  | 347                               |  |                    | 

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|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, 2004 that have materially affected, or
    are reasonably likely to materially affect, our internal controls over financial
    reporting.

|Item 8B | OTHER INFORMATION
|------- | -----------------

None.

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 serve as our executive officers. The Companys
    board of directors may appoint additional executive officers from time to
    time.

|Name              |  | Age |  | Title                                                                            | 
|----------------- |  | --- |  | -------------------------------------------------------------------------------- | 
|                  |  |     |  |                                                                                  | 
|Robert Schnabl    |  | 53  |  | President, and Chief Executive
        Officer                                   | 
|Francisco Sanchez |  | 56  |  | Vice President  Finance
        and Administration, and Chief Financial Officer | 

ROBERT SCHNABL was appointed President
    and Chief Executive Officer of the Company effective April 1, 2004.
    Mr. Schnabl has served as Director of Program Management for Cortelco
    Inc. since 1999. From 1994 until 1999, he served in a variety of roles for
    Cortelco Inc., Cortelco Systems and eOn Communications. Prior to joining
    Cortelco, Inc. in 1994, Mr. Schnabl was the Vice-President of Engineering
    and Quality for CMC Industries, Inc., which, at the time, was one of the
    fifteen largest contract electronics manufacturing companies in the world.
    From 1981 until 1990, Mr. Schnabl held numerous position of increasing
    responsibility with ITT Telecommunications and its successor companies in
    the Engineering and Quality departments. Mr. Schnabl has a Bachelor
    of Science degree from the United States Military Academy at West Point.

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.

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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
    2004 Annual Meeting of Shareholders to be held on January 11, 2005 (the Proxy
    Statement), which will be filed with the Securities and Exchange Commission
    not later than 120 days after July 31, 2004, are incorporated herein
    by reference in response to this item.

We have adopted a Code of Ethics
    that applies to all employees, which is attached as Exhibit 14.1 to this
    report.

|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.

|Item 12 | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
|------- | ----------------------------------------------

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

|Item 13 | EXHIBITS
|------- | --------

|    |         
|--- | --------
|(A) | 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, 2004                                                               
| |  Statements of Operations
        for the Years Ended July 31, 2004 and 2003                             
| |  Statements of Changes
        in Stockholders Equity for the Years Ended July 31, 2004 and
        2003
| |  Statements of Cash
        Flows for the Years Ended July 31, 2004 and 2003                             
| |  Notes to Financial
        Statements                                                                   

|                             
|-----------------------------
|Financial Statement Schedules

The following financial statement
    schedule is included in this report:

Schedule II  Valuation and
    Qualifying Accounts

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.

|(B) | Reports on Form 8-K
|--- | -------------------

None.

|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.

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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/ Francisco Sanchez                     | 
| | Francisco Sanchez, Vice President,           | 
| | Chief Financial Officer,
        Secretary   | 
| | (Principal Financial Officer)                | 
| |                                              | 
| | Dated: October 29, 2004                      | 

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/ Robert Schnabl
      Robert Schnabl       |  | President, Chief Executive
      Officer (Principal Executive Officer)                                                    |  | October 29, 2004 | 
|                                              |  |                                                                                                                           |  |                  | 
|/s/ Francisco Sanchez
      Francisco Sanchez |  | Vice President, Chief Financial Officer,
        Secretary (Principal Financial Officer and Principal Accounting Officer) |  | October 29, 2004 | 
|                                              |  |                                                                                                                           |  |                  | 
|/s/ Sergio Moren
      Sergio Moren           |  | Director                                                                                                                  |  | October 29, 2004 | 
|                                              |  |                                                                                                                           |  |                  | 
|/s/ Lanny N. Lambert
      Lanny N. Lambert   |  | Director                                                                                                                  |  | October 29, 2004 | 
|                                              |  |                                                                                                                           |  |                  | 
|/s/ James W. Hopper
      James W. Hopper     |  | Director                                                                                                                  |  | October 29, 2004 | 
|                                              |  |                                                                                                                           |  |                  | 
|/s/ Gloria Lee
      Gloria Lee               |  | Director                                                                                                                  |  | October 29, 2004 | 

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SUPPLEMENTAL
      INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TOSECTION 15(D) OF THE EXCHANGE ACT BY NON-REPORTING ISSUERS

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 
Number | Description 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                                                                                                                  
|                |                                                                                                                                 
|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.

28

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