**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

**FORM10-KSB**

**(Mark One)**

**x****     ****ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934.**

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**                        Forthe fiscal year ended December 31, 2006.**

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**OR**

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**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934.**

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**                        Forthe transition periodfrom                 to                 **

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**Commission file number 0-12551**

**ASPYRA,INC.**

(Name of Small Business Issuer in Its Charter)

| **California**                            |   | **95-3353465**       |
|-------------------------------------------|--------|----------------------|
| (State or Other  Jurisdiction of          |   | (I.R.S. Employer     |
| Incorporation or  Organization)           |   | Identification  No.) |
|                                      |   |                 |
| **26115-A  Mureau Road**                  |   | ** **           |
| **Calabasas,  California**                |   | **91302**            |
| (Address of  Principal Executive Offices) |   | (Zip Code)           |

 

| Issuer’s Telephone Number,  Including Area Code: |   | **(818)  880-6700** |
|-------------------------------------------------------|--------|---------------------|

 

Securitiesregistered under Section 12(b) of the Exchange Act:  **None**

Securitiesregistered under Section 12(g) of the Exchange Act:

**CommonStock, no par value**

(Title of class)

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) of the ExchangeAct.

o

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

Yes  x  No o

Check if there is nodisclosure of delinquent filers in response to Item 405 of Regulation S-B containedin this form, and no disclosure will be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB.

x

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

Yes o  No x

Issuer’s revenues for its most recent fiscal yearended December 31, 2006 were $ 12,689,217

As of March 30,2007, the aggregate market value of the voting and non-voting common equityheld by non-affiliates of the Company was approximately $11,303,000

As of March 30, 2007, theCompany had 10,783,150 shares of its common stock outstanding.

DOCUMENTSINCORPORATED BY REFERENCE

Portions of theCompany’s Fiscal 2005 Definitive Proxy Statement, which will be filed within120 days of the end of the Company’s fiscal year, are hereby incorporated byreference into Items 9, 10, 11, 12 and 14 of Part III of this report.

Transitional SmallBusiness Disclosure Format (check one):

Yes  o  No  x

 

 

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**Aspyra,Inc.**

**TABLE OFCONTENTS**
|              | ** ** | ** **                                                                                                       | ** ** | ** ** |
|--------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|
| **Part I**   |       |                                                                                                             |       |       |
|         |       |                                                                                                             |       |       |
| Item 1       |       | Description of  Business                                                                                         |       |       |
| Item 2       |       | Description of  Property                                                                                         |       |       |
| Item 3       |       | Legal Proceedings                                                                                                |       |       |
| Item 4       |       | Submission of  Matters to a Vote of Security Holders                                                             |       |       |
|         |       |                                                                                                             |       |       |
| **Part II**  |       |                                                                                                             |       |       |
|         |       |                                                                                                             |       |       |
| Item 5       |       | Market for Common Equity, Related Stockholder Matters  and Small Business Issuer Purchases of Equity Securities  |       |       |
| Item 6       |       | Management’s  Discussions and Analysis or Plan of Operation                                                 |       |       |
| Item 7       |       | Financial Statements                                                                                             |       |       |
| Item 8       |       | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                            |       |       |
| Item 8A      |       | Controls and  Procedures                                                                                         |       |       |
| Item 8B      |       | Other Information                                                                                                |       |       |
|         |       |                                                                                                             |       |       |
| **Part III** |       |                                                                                                             |       |       |
|         |       |                                                                                                             |       |       |
| Item 9       |       | Directors, Executive Officers, Promoters and Control  Persons; Compliance with Section 16(a) of the Exchange Act |       |       |
| Item 10      |       | Executive Compensation                                                                                           |       |       |
| Item 11      |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                  |       |       |
| Item 12      |       | Certain  Relationships and Related Transactions and Director Independence                                        |       |       |
| Item 13      |       | Exhibits                                                                                                         |       |       |
| Item 14      |       | Principal  Accountant Fees and Services                                                                          |       |       |
|         |       |                                                                                                             |       |       |
|         |       | Signatures                                                                                                       |       |       |

 

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**SpecialNote Regarding Forward-Looking Statements**

The following Annual Report onForm 10-KSB contains forward-looking statements within the meaning of Section27A of the Securities Act of 1933, as amended, and Section 21E of theSecurities Exchange Act of 1934, as amended. The SEC encourages companies todisclose forward-looking information so that investors can better understand acompany’s future prospects and make informed investment decisions.

Words such as “anticipate,” “believe,” “estimate,” “expect,”“intend,” “may,” “plan,” “project,” “seek,” “will” and words and terms ofsimilar substance used in connection with any discussion of future events,operating or financial performance, financing sources, product development,capital requirements, market growth and the like, identify forward-lookingstatements. These forward-looking statements include, among others:

·    projectionsof revenues and other financial items;

·    statementsof strategies and objectives for future operations;

·    statementsregarding integration plans following the merger with StorCOMM;

·    statementsconcerning proposed applications or services;

·    statementsregarding future economic conditions, performance or business prospects;

·    statementsregarding competitors or competitive actions; and

·    statementsof assumptions underlying any of the foregoing.

All forward-looking statements are presentexpectations of future events and are subject to a number of factors anduncertainties that could cause actual results to differ materially from thosedescribed in the forward-looking statements. The risks related to ASPYRA’sbusiness discussed under “Risk Factors” of this Annual Report on Form 10-KSB,among others, could cause actual results to differ materially from thosedescribed in the forward-looking statements.  Such risks include, amongothers: whether the merger with StorCOMM and the resultant combined companywill realize the potential benefits of the merger; the competitive environment;unexpected technical and marketing difficulties inherent in major productdevelopment efforts such as those described about CyberLAB 7.0; the potentialneed for changes in our long-term strategy in response to future developments;future advances in clinical information technology and procedures, as well as potentialchanges in government regulations and healthcare policies, both of which couldadversely affect the economics of the products offered by ASPYRA; and rapidtechnological change in the microelectronics and software industries.

The Company makes no representation as to whetherany projected or estimated information or results contained in anyforward-looking statements will be obtained or achieved. Shareholders arecautioned not to place undue reliance on the forward-looking statements, whichspeak only as of the date of this Annual Report on Form 10-KSB. The Company isunder no obligation, and it expressly disclaims any obligation, to update oralter any forward-looking statements after the date of this Annual Report onForm 10-KSB, whether as a result of new information, future events orotherwise.

**PART I**

**Item 1.Description of Business.**

**BusinessDescription**

Aspyra, Inc. formerly known asCreative Computer Applications, Inc. (ASPYRA or the Company) is a healthcareinformation technology and service provider that specializes in ClinicalInformation Systems (CIS) and Diagnostic Information Systems (DIS) forhealthcare providers. As a result of its merger with StorCOMM, Inc. a privatecompany, on November 22, 2005, ASPYRA broadened it’s portfolio of products toinclude the Picture Archive Communication Systems (PACS) products that weredeveloped and sold by StorCOMM. In connection with the merger the Companychanged its name to Aspyra, Inc. and StorCOMM’s name was changed to AspyraDiagnostic Solutions, Inc. (ADSI).

ASPYRA’s software andservices for hospitals and clinic-based laboratories, pharmacies, orthopediccenters, and hospital imaging departments are highly scalable and can be usedby a broad variety of healthcare providers. Clinical information is data thatis gathered concerning each individual patient’s health condition, diagnosis,and treatment that are used by doctors, nurses and other healthcare providers.Such data may include laboratory test results, transcribed reports of

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radiological or imaging procedures, digital diagnosticimages, medication administration records, and other clinical and diagnosticdata. ASPYRA’s products are deployed to provide automation of clinicalinformation and digital diagnostic images that facilitate the operation ofclinical departments and allows the rapid recording and processing ofinformation that can be communicated, documented, and delivered to healthcareproviders.

Currently, ASPYRAmarkets a product line that includes a Laboratory Information System under thetrade name CyberLAB®,a general purpose PACS system under the trade name AccessNETTM, a RadiologyInformation System (“RIS”) under the trade name CyberRAD®, a RIS/PACS integratedsystem under the trade name AccessRADTM, a multi-specialty PACS system under thetrade name AccessMEDTM, an Anatomic Pathology System under the trade name ofCyberPATH®,a Pharmacy Information System under the trade name CyberMED®, a WebGatewayTM portalfor physician access to its CIS applications, and other related clinical anddiagnostic application modules.

ASPYRA’s corporateoffices are located at 26115-A Mureau Road, Calabasas, California 91302. TheCompany’s telephone number is (818) 880-6700 and its website address iswww.aspyra.com. The Company’s business consists of three operationalareas:  (1) Clinical Information Systemsand Diagnostic Information System products, (2) service of its customer’sinstallations, and (3) implementation services. The Company generates revenues from the licensing of applicationsoftware, the sale of hardware, and the provision of implementation andlong-term post implementation services. The Company sells its CIS and DISsystems directly through its own sales force in North America, through channelpartners and distributor programs with other companies, and has reselleragreements in certain international markets.

**History andBusiness Development**

Since its inception as aCalifornia corporation in 1978, ASPYRA has been primarily engaged in thedevelopment, marketing, installation, and service of Clinical InformationSystems that automate the collection and management of patient clinical datafor healthcare providers.

Thepercentage of the Company’s net sales attributable to the sale, license, andimplementation of Clinical and Diagnostic Information Systems, accounted forapproximately 45% of total revenues in the fiscal yearended December 31, 2006.ASPYRA expects that its service revenues, which accounted for approximately 55%of total revenues in the current fiscal year, will continue to grow asadditional new installations are added to the Company’s installed base. As ofDecember 31, 2006, the Company supported approximately 400 active applicationinstallations that are used in over 600 customer sites.

Byautomating the collection and organization of patient clinical data and relateddiagnostic images, the Company’s Clinical and Diagnostic Information Systemsreduce operating costs, assist in meeting compliance requirements, addresspatient care and safety issues, improve the turnaround time of patients’diagnosis and treatment, and increase the efficiency of healthcare providersoverall. In addition to such factors, products such as those sold by ASPYRAhave been well documented to provide significant return on investmentscenarios, which further confirms the efficacy of such systems. The healthcareindustry continues to operate under increasing pressure from governmentregulatory agencies and third party payers of medical expense, as well as fromincreased competition in the healthcare industry, to control costs. Managementbelieves that there will be continuing demands to contain healthcare costs forthe foreseeable future. The growing need for improved healthcare technology isevidenced by approximately 100,000 patient deaths in 2006 due to medical errorsfrom incomplete or not easily accessible patient files, as well as a lack ofstandards for keeping medical records. The U.S. Department of Health and HumanService (HHS) National Coordinator for Health Information Technology has setaside $4.5 billion for the development of standards related to an ElectronicMedical Record (EMR) system accessible from any medical organization at anylocation.

Aspart of its business strategy, the Company has consistently pursued thedevelopment of enhancements and new modules to its existing products, as wellas the development of entirely new products and services to expand the Company’sbusiness. The Company has developed a web-based clinician portal marketed asthe ASPYRA WebGateway, which provides online access to the Company’s CyberLABand CyberRAD products so that physicians,nurses and other caregivers can easily utilize them from virtually anywhere inthe world, and the Company is continuing to build upon this technology platformin order to deploy other functionality. ASPYRA’s WebGateway provides access toCyberLAB for order placement, patient inquiry, and results, and is compliantwith security and privacy issues pertaining to the Health Insurance Portabilityand Accountability Act (HIPAA). WebGateway also provides access to CyberRAD fororders, scheduling, exam inquiry, electronic signature, regulatory compliance,and other functions. ASPYRA’s AccessNET family of products is highly scalableand permits their deployment in small standalone operations or in largeenterprise hospitals. Certain application modules can also be deployed infacilities that currently have PACS installations to provide enhancedcapabilities for telemedicine using ASPYRA’s thin client technology.

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The board of directors andmanagement, while deliberating the factors leading to the merger with StorCOMM,determined that the convergence of the Company’s clinical systems producttechnology with a business offering PACS, would present significantopportunities for growth given the changes that were occurring in thehealthcare market place. The board of directors believed that the integrationof clinical information systems that manage clinical operational activities inhealthcare with diagnostic systems such as PACS systems, was becoming moreimportant in the healthcare information systems market. The board of directorsof the Company further believed that by combining the two companies into ASPYRAit would better serve the addressable market and result in greater long-termgrowth opportunities than either independent company had operating alone. TheCompany had completed most of the integration of the two businesses by the endof the fiscal year ended December 31, 2006 and the remainder of the integrationactivities are set to be completed by the second fiscal quarter of 2007.  As a result of the integration we believe thecombined Company now:

·                  offersintegrated applications and services to a broader sector of the healthcareprovider market;

·                  has abroader sales and channel coverage than either company independently;

·                  hasthe advantages of financial synergies; and

·                  hasthe scale to better compete in the marketplace.

While the merger wasbeing completed, the board of directors and management determined it was in thebest interests of the companies to begin developing and executing anintegration plan. In order to mitigate the delays in completing the merger andput the combined Company in the best position to immediately execute itsintegration plan and launch new products following the merger, managementdetermined it was in the best interests of the Company to proceed with thedevelopment of its integration plan, which required significant investment ininfrastructure and product development.  This activity continued throughthe 2006 fiscal year and resulted in short-term increases in certain expensesbut also allowed for the elimination of redundant personnel and other expensesto attain more efficient business synergies. While some of these expenses were non-recurring, others including theaddition of key personnel in product management, regulatory affairs, and productdevelopment, were important additions to management in order to assure thesuccess of the Company’s integration strategy. In aggregate the Company incurred a net loss of approximately $3,570,000in fiscal 2006; however of this amount approximately $1,900,000 werenon-recurring expenses.

**Business Development Strategy**

Our strategy since completing the merger is toadvance ASPYRA’s position to become a leading company in the clinical anddiagnostic sector of the healthcare information technology marketplace, whichis growing rapidly. We plan to accomplish this goal through increased marketpenetration, internal product development efforts, and selective productlicenses from third parties or acquisitions of additional technologies and/or productlines where feasible.  Our goal is toevolve beyond the provision of departmental applications and become anenterprise provider of integrated technologies and services that improve theefficiency, safety, and quality of patient care.

Ourbusiness model is to establish long term relationships with our end-usercustomers that are essential for their operational requirements. Our products are missioncritical clinical and diagnostic applications that they rely upon to help themmanage patient safety, diagnosis, and treatment.  This business model has the potential togenerate recurring revenues from the provision of long term services, upgrades,software add-on and other revenue generating opportunities.  Considering the capital budget constraintsthat are imposed on healthcare providers who use our products, they plan to usethem typically for 5 to 10 years.  Inorder to service them we must keep them current for competitive, clinical anddiagnostic reasons, and regulatory compliance. Enhancements to our products in the form of software upgrades are anintegral part of this business model and are included as a contract obligationin our warranty and extended service agreements.  In order to generate such revenue opportunitiesour investment in software enhancements is significant and is a key componentof our ongoing support obligations.

We plan to increase market penetration through theexpansion of our direct sales activities domestically as well as selectivelyseek new channel partners for some of our products in sectors that areunderserved by us, such as orthopedics. We also plan to expand into otherinternational markets through establishing new relationships with channelpartners and resellers and through the introduction of other products from ourproduct portfolio that are now not currently being offered. We also plan toincrease cross selling into our respective installed base of customers.

We plan to create new integrated products from ourproduct portfolio. Our first integrated product, AccessRAD, which combines ourRIS system and PACS system technologies, is substantially complete and is nowbeing marketed. AccessRAD addresses a growing demand for integrating theclinical, work flow and diagnostic activities in acute care hospitals and clinics.In the same instance there is a growing demand to integrate PACS technologywith anatomic pathology and laboratory systems that we can create from ourproduct portfolio. We also plan to continue to further develop our clinical anddiagnostic applications.

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We plan on licensing or acquiring softwareapplications that enhance our clinical and diagnostic products and resell themto our end users, which will provide additional capabilities such asmultidimensional image visualization in PACS and robotics in the laboratory. Atpresent ASPYRA’s systems contain a large set of the clinical data anddiagnostic images that make up the EMR. Accordingly we plan on evolving ourproduct offerings into an EMR system by acquiring, developing, or licensing themissing components.

**ClinicalInformation Systems**

The Company’s ClinicalInformation Systems are designed to provide cost effective, robust applicationfeatures to manage comprehensive clinical activities throughout most sectors ofthe health care provider marketplace. The Company’s systems are highly userdefinable and scaleable, enabling a wide range of users and different types ofhealthcare providers to employ them.

ASPYRA’s ClinicalInformation System applications are designed around a common open systemsarchitecture that is based on either the UNIX or Microsoft® operating system platforms and employsthin-client technology at the point of user interface. ASPYRA’s use of thistechnology allows easy integration into existing networks, as well as seamlessintegration with other systems. ASPYRA’s suite of Clinical Information Systemapplications allows for scalability and flexibility ensuring that as the needsof a healthcare provider change, the systems can easily be adapted. The Company’sclinical applications are designed around flexible parameterized software,which enables the end user to tailor the software for its individual needs,adapting to the facility’s internal policies, and allows us to sell across the marketplace into variousniches.

For clinical laboratories,the Company has integrated its software applications and data acquisitiontechnology into Laboratory Information Systems (“LIS”), which are sold underits trade name CyberLAB. Extensive applications for a wide variety oflaboratory testing, compliance, and quality control procedures, includinghematology, immunology, chemistry, microbiology, drug testing, toxicology,urinalysis, and cytology testing, are available with the Company’s systems.Validation and reimbursement, medical error reduction, multi-site reporting andmanagement, database management, bedside specimen collections, point of caretesting, auto-verification of results, decision support tools, regulatoryadherence tools, remote communications and flexible user defined reportingcapabilities are also included. Additional modules are also available forcomplete microbiology testing and CyberPATH, ASPYRA’s anatomic pathologysystem, can be fully integrated with CyberLAB. The Company’s LIS are highlyflexible and scalable and are used by laboratories of varying size andcomplexity. During fiscal 2006, ASPYRA migrated CyberLAB to a platform anddatabase independent architecture so that it now is offered either on Windows®with SQL or UNIX with Oracle as its database. We also completed numerous other functional enhancements to our productoffering.

The Company’s PharmacyInformation Systems, which are sold under the trade name CyberMED, integrateinpatient, outpatient, and long term care applications into a highly integratedsoftware product. CyberMED integrates unit dose, IVPB/TPN, controlledsubstances, floor stock, inventory control, and kinetics functions. It performslabor-intensive operations such as patient profiling, drug inventory control,drug interactions, and patient billing. An optional purchasing module canelectronically place orders with suppliers and determine the fastest movingdrugs, as well as track drug usage and costs. CyberMED supports several thirdparty database services for integrated drug interactions, pricing, and patientinformational disclosures that are required by regulation. Extensive reportingcapabilities are supported including a user defined parameterized medicationadministration reporting module.

CyberRAD, the Company’sRadiology Information System, is also hybrid in its design, which allows forits deployment in inpatient, outpatient and multi-site settings. Applicationsinclude extensive scheduling, reporting, film tracking, transcription, billing,and clinical functionality. In addition, Document Imaging for storage andretrieval of important patient information, such as signed HIPAA Consent andAuthorization Notices, Medical Necessity (Advanced Beneficiary Notice (ABN),and other patient information is included in CyberRAD. CyberRAD has also beendesigned with easy to deploy built-in communication interface capabilities fordiagnostic modalities and Picture Archive Communication Systems.

**DiagnosticInformation Systems**

ASPYRA’s AccessNET PACS andclinical image management systems achieve true enterprise-wide connectivity forall types of images and equipment, while providing leading edge productcapabilities, support, and integration. ASPYRA’S customers include hospitals ofall sizes with associated remote locations; independent and hospital-managedimaging centers; orthopedic facilities and specialists; teaching and children’sfacilities; and radiology groups serving multiple locations. The scalability ofthe AccessNET PACS system has enabled it to be deployed into a diverseinstalled base.

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PACS coordinates all aspects of digital imagingin hospitals and clinics. This includes capturing images from Digital Imagingand Communications in Medicine (DICOM) and non-DICOM compliant imagingmodalities and video sources, storing this clinical information in a secure environment,and distributing and displaying both clinical images and correspondingdiagnostic information throughout hospitals and clinics. ASPYRA’S PACS canintegrate with existing hospital systems to share information as necessary. Forexample, if a facility has a hospital information system that manages examappointments, this system can integrate with ASPYRA’S PACS to share informationabout the scheduled exams. Typically, integration is accomplished usingcommunications standards such as DICOM and Health Level Seven  (HL7).

ASPYRA released version6.0 of its AccessNET PACS software in February 2006. Among the enhancements forsystem administrators in version 6.0 is the Install Manager available in ASPYRA’SManagement Station application. This new distribution / update mechanism allowsusers of the system to update their MedVIEW® viewing stationsoftware. MedVIEW® will automatically detect when a newer versionis available on an AccessNET server and will upgrade itself in the backgroundwithout any user intervention. The Install Manager also enables systemadministrators to track versions installed and distributed. The systemadministrator can require the automatic update / upgrade or leave theinstallation timing to the discretion of the system user. Enhancements toannotations, reports, DICOM Interchange CDs, and support for DICOM color imageswith segmented color tables are available in the new version along with newfeatures for system administrators. Alsoin February 2006, ASPYRA announced attainment of the Gold Certified level ofthe Microsoft Partner Program. As a Microsoft Certified Partner, Aspyra reachedthe highest level within the program by earning the ISV/Software SolutionsCompetency for its Picture Archive Communications System (PACS) product -AccessNET, and the Networking Infrastructure Solutions Competency.

During fiscal year endedDecember 31, 2006, extensive development was undertaken to provide integrationbetween CyberRAD and AccessNET, which led to the launch of a new integratedRIS/PACS product that is sold under the trade name AccessRAD. Specificallydeveloped to enhance workflow and provide instant availability to clinicalinformation, AccessRAD is designed to meet the needs of acute-care hospitals,enterprise-wide delivery networks, and large imaging enterprises. Furtheringincreasing efficiency, AccessRAD’s multisite module enables organizations tomanage the workflow and reporting needs at multiple facilities with a singlesolution. AccessRAD provides radiologists with a central command center tomanage RIS and PACS functions. All the tools for reading images, dictating,accessing images and reports, as well as electronically signing reports, areavailable on the AccessRAD desktop. AccessRAD also helps organizations enhancepatient safety by reducing the errors that result from redundant data entry,and the solution improves care delivery by providing clinicians with real-timeinformation.

ASPYRA’s AccessMED is a version of AccessNET that was designed for thespecialty PACS environment, such as orthopedics. It mirrors the workflow andtools specific to the needs of medical specialists to improve efficiency andcare delivery. Work lists of patients and exams can be viewed in multiple waysbased on the needs of clinicians or administrative users. In addition,clinicians can bookmark interesting and special cases for quick and easy followup, or for collaboration with other specialists. AccessMED provides anunlimited configuration of viewing options for images, work lists, reports,prior studies and other clinical information. Content-sensitive help screensand tutorials can be viewed on screen, providing users with a virtual expert attheir fingertips while they complete their tasks. Advanced workflow tools, suchas embedded dictation and report generation, combine diagnostic and reportingcapabilities into a single solution.

Specializedmodules within AccessMED offer enhanced image viewing options. The AccessMEDOrthoViewTM module includes templates from virtually every major prostheticsmanufacturer to provide clinicians with digital surgical planning capabilities.In addition, the AccessMED Image STITCH module provides the tools needed tocombine multiple images into a single image for review, which is especiallyvaluable for long bone and spinal images.

**Integration**

The Company has designedits products to incorporate open systems architecture and to conform tocomputer industry standards, which enable them to be more easily integratedwith other vendors’ products. Healthcare industry standards, including HL7 andAmerican Society for Testing and Materials (ASTM), and DICOM standards areemployed throughout the Company’s software products and in its CyberLINKconnectivity application.  Aspyra is anactive vendor participant with IHE (Integrating the Healthcare Enterprise). IHEis an initiative by healthcare professionals and industry to improve the waycomputer systems in healthcare share information. IHE promotes the coordinateduse of established standards such as DICOM and HL7 to address specific clinicalneeds in support of optimal patient care. Systems developed in accordance withIHE communicate with one another better, are easier to implement, and enablecare providers to use information more effectively.

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The Company’s Clinicaland Diagnostic Information Systems support extensive communication capabilitiesto various healthcare information systems including Hospital InformationSystems, nursing and practice management systems, EMR Systems, for which theCompany has developed over five hundred system-to-system communicationinterfaces. The Company’s Clinical Information Systems are employed in manysettings that consist of multiple sites where testing or medical procedures areseamlessly integrated. In addition, different types of enterprises, such ashospital and affiliated outreach clinics, can use the Company’s systems tointegrate their activities thus enabling the execution of their business strategies.The communication interfaces often support bi-directional data communications,whereby demographic and order requests are transmitted to the ClinicalInformation Systems and, in turn, billing information and results arere-transmitted to the host system. The Company’s Clinical Information Systemssupport their own order communications and test subsystems that have beenemployed in other accounts that have relied on the Clinical Information System’scommunications capabilities. Management believes that communications to othersystems allowing connectivity between its CIS applications and patient care,electronic medical record systems, and other administrative informationsystems, are very important functional requirements in the marketability of itsproducts. The Company has focused considerable attention on the communication,networking, and connectivity capabilities of its products, and plans to furtherdevelop these capabilities as opportunities present themselves.

The Company hasdeveloped standard seamless integration and network connectivity for all itsproducts through user selected network topologies, network protocols, andnetwork operating systems. Although each application has been configured tooperate as a stand-alone product, all can be operated as an integrated package,residing on a shared platform or network, thereby eliminating the need formultiple interfaces, duplicate information handling, and their associatedcosts. ASPYRA continues the development of enhancements to CyberLINK®, a software integrationand communications module that integrates all of its own clinical applicationsand provides a single communications gateway to or from other vendors’ systems.

**Service**

The Company providescomprehensive services to its installed base of system customers through itsown service organization, and provides extensive training and implementation ofits systems to its customers. The Company offers software support services,through a twenty-four hour “hotline,” and hardware repair under extendedservice contracts. In most instances, the Company relies on third parties toservice the hardware components that it sells but may assume responsibility forfirst call support. The Company services its own data acquisition products andrelated software, used as part of its CIS product offerings, under servicecontracts offered to end users. The Company’s long-term inventory requirementsfor its service and repair business have historically been significant becauseit must retain a loaner pool of components used to service its customer base.However, in recent years, the Company has de-emphasized providing hardware inconnection with the sale of its CIS products and currently only provides theservers and a few specialty components for which it relies on the manufacturerto service. In many instances ASPYRA’s products include the hardware componentsthat comprise a PACS system and in such cases the Company includes a directmulti-year manufacturers warranty and service with such hardware components.

The Company’s servicerevenues for fiscal year ended December 31, 2006 increased by approximately 38%from the fiscal year ended December 31, 2005, and they are expected to continueto grow as the installed base of system customers grows. The majority of theCompany’s customers are under service contracts. The Company believes that theability to offer comprehensive services to its customers is a very importantfacet of its business and solidifies a long-term relationship with its customeraccounts. The recurring revenue stream associated with this activity is asignificant part of the Company’s business. The ability to offer long-termservice often leads to add-on sales opportunities for peripheral components,data acquisition products, and upgrades to newer computers and softwareapplications. In addition, the quality of service is an important aspect of theend users buying decision when making a system selection; therefore the Companyis constantly fine-tuning the services it provides and its service organizationas part of its marketing strategy.

The Company has deployedtechnology to automate a company-wide helpdesk system in order to moreeffectively service its customers and employs a “virtual company” concept bylinking outside personnel via the Internet directly into its own internalnetwork. This permits ASPYRA employees who are engaged in technical and servicerelated activities to telecommute through this venue. During fiscal year endedDecember 31, 2005, the Company converted its aged helpdesk system to a newcustomer relationship management system (CRM) and integrated it with itscurrent general accounting system. The Company has substantially completed theupgrade of its company-wide network infrastructure and the integration of allof its business processes into the CRM and accounting systems.

The Company believes that the service of itscustomers is of utmost importance to its long-term success and businessstrategy. Accordingly, a great deal of emphasis is placed on continuing toupgrade the service organization and on expanding the services that the Companyoffers towards a goal of establishing a higher degree of customer satisfaction.As

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part of this effort, the Company routinely surveys itscustomers in an effort to obtain a “report card” on how the serviceorganization performs.  This proactiveapproach allows the Company to further understand the relationship with thecustomer. Surveys are based on varying subjects, including sales,implementation or support processes, and corporate communication or productdevelopment.

The Company recruitedadditional support and implementation personnel during fiscal 2006 andimplemented new training programs.

**SignificantContracts and Programs**

The Company has pursueda strategy of seeking out new market opportunities to expand the distributionof its products in two specific ways, first through joint ventures with othervendors of compatible products and services that are synergistic with ASPYRA’sproducts, and secondly by entering new markets.

ASPYRA is also seekingto expand its presence in international markets. With the completion of themerger, the Company consolidated its international activities in its UnitedKingdom offices. Currently most of the Company’s installations are in theUnited States; however, the Company also has systems placed in the UnitedKingdom, South Africa, Hungary, Russia, Canada, the Caribbean, Malaysia,Indonesia, and Singapore.

As part of its overallmarketing strategy, the Company is also pursuing strategic relationships withorganizations that operate multiple entity enterprises where the Company mayhave the opportunity to offer its array of products and services to the group.

During the fiscal yearended December 31, 2006, there were no customers, contracts or programs thatgenerated over 10% of the Company’s net sales other than through a distributionarrangement with Merry X-Ray that generated approximately $2.3 million inaggregate sales or 18% of total revenues.

**Product****Development**

The market for theCompany’s products is characterized by rapid and significant technologicalchange.  The Company’s ability to compete in the market, and to operatesuccessfully, depends in part on its ability to react to such change. During the Company’s fiscal years ended December 31, 2006, and 2005, amounts(exclusive of capitalized software) equal to approximately 15.6%, and 18%,respectively, of the Company’s net sales were expended for research anddevelopment.  The Company continues to expend a significant amount ofresources for the development of new products, and for the development ofadditional enhancements to existing products and intends to continue to expendsuch resources in the future.

The Company’sdevelopment plans are focused on evolving its clinical and diagnosticapplication products to a common user interface based on industry standard thinclient technology.  Utilization of this common user interface architectureallows for easier deployment in a traditional enterprise environment as well asprojecting the applications natively over the Internet.  Managementbelieves that the total cost of ownership inherent in thin client architectureis very attractive to both current and future users.  As the product suitecontinues to migrate to a common look and feel, ASPYRA is also migrating itsproducts to an independent operating platform and relational databasetechnology. This architectural approach allows the product suite to takeadvantage of all current and any potential future relational databasetechnologies. Management’s goal is to drive the product suite to a total opensystems environment, therefore allowing ASPYRA to take advantage of newtechnologies as they appear.

In addition to thepreceding, ASPYRA has planned product development projects over the next threeyears that include additional enhancements to all of its products.  TheCompany also continues to develop enhancements to its WebGateway that willprovide for greater functionality, and expanded use of its CIS products forphysician users.

Research and development expenditures, net ofcapitalized software, amounted to approximately $1,981,000 in fiscal year endedDecember 31, 2006, and $1,301,000 in fiscal year ended December 31, 2005. Such expenditures were attributable to systems development, including thedevelopment of new Laboratory, Radiology, and Pharmacy Information Systemsapplications, and enhancements to those products. The Company’s ClinicalInformation Systems are programmed using an OBJECT COBOL language that providesa standard code structure for the business logic while the graphicalpresentation is written in JAVA® and HTML.  By employing run-time modulesfor UNIX and Windows, the Company has been able to port to a variety ofhardware platforms with ease.   TheCompany’s Diagnostic Information Systems are built upon the Microsoft® .net platform and are programmedusing C# and C++. The Company currently supports its software applications onIntel® basedHewlett Packard® servers, Dell® servers and IBM® RISC6000 servers, the most popular computer providers in healthcare.  Thiscapability has allowed the Company to become “platform independent” in vendingits software products where some customers may be predisposed to certainhardware brands.  The Company also takes

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advantage of using off the shelf software such asMicrosoft® Word® for transcription and document production anddelivery.  All of the Company’s products are open database compliant(ODBC), and the data structures support the use of standard query language(SQL) report generators that allows a wide range of reporting capabilities.

**Distributionand Marketing**

ASPYRA sells its CIS andDIS systems directly through its own sales force in North America, throughchannel partners and distributor programs with other companies, and hasreseller agreements in certain international markets. It also sells directly inthe United Kingdom through its offices located in East Grinstead, WestSussex.  At present, the Company’sdomestic direct field sales force consists of six regional salespersons, andtwo clinical software consultants, that are managed by a vice president ofsales.

At the time of theconclusion of the merger, the Company launched a new corporate identitycampaign in order to introduce the merged Company under the new name ASPYRA tothe marketplace, which included the creation of a new corporate identitystrategy including a new name, tagline, logo and branding.

In addition, the Companycommenced new promotional activities and is compiling a significant database ofaccounts throughout the healthcare marketplace that is helping to position theCompany’s sales activities. In addition to direct marketing, the Companypromotes its products by attending national industry trade meetings, throughmedia advertising, publishing articles in industry publications, telemarketingcampaigns, and through its website. Because of the opportunity to meet largeraudiences at national industry meetings, the Company intends to upgrade itsparticipation at such meetings for fiscal 2007 with new larger exhibits andother promotional programs. The Company has also formed joint marketingarrangements with other companies that have compatible products and services,which has increased sales penetration in the marketplace.

The Company hasestablished and supports a periodic user symposium in order to encourage usersof its Clinical Information Systems to participate in helping the Company tobetter serve its customers. The focus of the symposium is to encourage opengroup communications with the Company about a range of subjects, includingservice and support and new product enhancements. Since the Company hasexperienced success in vending multiple products to its customers, the nationalsymposium proves to be a good forum to discuss general topics, such as theCompany’s strategy and product direction, and provides an opportunity to focuson specific application issues in breakout sessions, special interest groups(SIGs) and roundtable discussions. The Company also schedules advanced trainingcourses as part of the symposium agenda that have had considerable attendanceby its customers.

The Company alsopublishes newsletters and articles, which are intended to expand communicationswith existing and potential customers. During fiscal 2007, the Company expectsto substantially increase expenditures associated with its marketing plan whichinclude additional web site enhancements, collateral materials, including newproduct marketing literature, and intends to expand its direct marketing andtelemarketing activities.

**Competition**

TheCompany has several significant competitors including McKesson, GE MedicalSystems, Siemens, Cerner, Merge Healthcare, Amicas, Misys, Phillips, andothers, in the Clinical Information Systems business, many of which are muchlarger companies that may offer a wider array of products and services inaddition to competitive clinical applications. These competitors havesignificantly greater resources than we have, including greater namerecognition, larger sales operations, greater ability to finance research anddevelopment and proceedings for regulatory approval, and more developedregulatory compliance and quality control systems. Management believes,however, that few competing CIS products offer the Company’s hybrid multisitecapabilities, variety of data interfaces, add-on capability, and flexibilitythat allows the systems to be user definable, so that they can be employed indifferent types of settings. The multisite and multi-disciplinary or hybridnature of the Company’s products are a strong selling point. The Company hasalso received very good references about its service organization and theability to respond to customers needs on a timely and cost effective basis.

The principalcompetitive factors in the Company’s business are technological competence,diversity of product line, price and performance characteristics, productquality, capability and reliability, marketing and distribution networks,service and support, ability to attract and retain trained technical employeesand business reputation. The Company believes that it has competitiveadvantages in many of these areas. ASPYRA has also positioned itself to focuson large multi-specialty clinics and community based and rural hospitals. Suchentities typically have diverse outpatient populations and operate in a numberof locations that require special features designed in the Company’s productsthat assist them in maximizing their operating potential.

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**Manufacturingand Suppliers**

The Company has utilizedcomputers manufactured by several suppliers for its Clinical InformationSystems in the past, and primarily uses computers manufactured by HewlettPackard ®,Dell, and IBM®.Management believes that other computers, which can be used in the Company’ssystems, are readily available from several suppliers. As part of a strategy tolimit the amount of hardware that the Company carries, it has migrated to a “justin time” inventory program whereby it has relied on purchasing inventory whenit has received an order from a customer rather than stocking inventory on aroutine basis. The Company still maintains an inventory supply of certain itemsincluding spare parts and components for both its CIS product line and for itsdata acquisition product line. In addition, the Company maintains a long-terminventory pool of components and parts to service customer’s hardware pursuantto its long term extended service agreements.

ASPYRA’s DIS systems arefrequently integrated with a variety of third party specialized hardware andsoftware components, which are readily available from a variety ofmanufacturers and distributors. To integrate the majority of our systemconfigurations the hardware is shipped to our location in Jacksonville Floridawhere it is configured with third party software and then installed with the softwaremanufactured by ASPYRA. Any other ancillary components that do not requireadditional application software will be shipped direct to an installation. Whenthe DIS system has received all of the required software components, it is thenshipped to the customer’s site where it is installed, integrated and tested atthe customer site.

ASPYRA’s vendorrelationships are intended to provide affordable hardware, software, andintegration solutions that have been successfully tested with the AccessNETsystem. ASPYRA’s vendors include:

·                  Ciprico. Cipricoprovides NAS storage with high redundancy, high speed, and high volumecapabilities. Ciprico has been a provider for the entertainment industry and ismoving into the healthcare arena. They specialize in handling large volumes ofimage data.

·                  IDC.  IDCis a manufacturer/distributor of DigitalRadiography (DR) systems for diagnostic use in hospitals, imagingcenters and clinics. Aspyra resells andpromotes IDC’s DR systems nationally to new and existing ASPYRA AccessNET andAccessMED PACS customers.

·                  InSiteOne. ASPYRA and InSite One, Inc. have formed an alliance to provide ASPYRA’ssoftware to InSite One customers and InSite One’s remote and on-site archiveand disaster recovery capabilities to ASPYRA customers. This partnership offersfacilities another method of compliance with HIPAA’s requirements for theprotection of patient information. It also provides a high level of redundancyand disaster recovery capabilities at an affordable price.

·                  KonicaMinolta Medical Imaging USA. Konicais a manufacturer/distributor of digital and traditional imagingproducts for diagnostic use by hospitals, imaging centers, clinics and privatepractice physicians - the same audience Aspyra markets its RIS and PACS productsolutions to. Aspyra resells KonicaMinolta’s Xpress CR product line nationally to new and existing Aspyra PACScustomers.

·                  Meridian Technique.ASPYRA has formed a partner relationship with Meridian Technique to providecustomers with their OrthoView® product for orthopedic templating. Meridian’sOrthoView provides access to templates from prosthetic manufacturer.

·                  Microsoft®.ASPYRA has recently attained the Gold Certified level of the Microsoft® Partner Program. As a Microsoft® Certified Partner, the Company reached thehighest level within the program by earning the ISV/Software SolutionsCompetency for its AccessNET PACS, and the Networking Infrastructure SolutionsCompetency.

·                  NAI Tech Products.NAI Tech Products provides DICOM connectivity solutions for non-DICOM compliantimaging modalities.

·                  Barco / Voxar®.Post processing options provide additional methods to review patientinformation and make a diagnosis. MedVIEW® 5.0 integrates with Voxar’s 3D Plug n’ View toprovide image post-processing options including 3D imaging, Multi-planarreconstruction and Maximum intensity projection.

**Warrantiesand Product Liability**

The Company warrantsthat its products conform to their respective functional specifications forperiods that vary according to product category. The Company warrants itsapplication software incorporated in its CIS and DIS products for one yearafter installation. The warranty periods may differ depending on the programthat the products are sold under. However, customers may elect to enter intoextended service agreements with the Company that further extends such

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warranties. The computers and other hardwarecomponents that the Company currently sells as part of its CIS and DIS productsare subject to the warranties of their manufacturers. The manufacturersgenerally warrant their products against faulty material and workmanship forone to three years. The Company passes through the manufacturers warranties tothe end users and in most cases contracts with the manufacturers who are toprovide onsite warranty services through the manufacturer’s service network.The Company’s data acquisition products and components are warranted againstfaulty materials and workmanship for 90 days.

The Company currentlycarries an aggregate of $4,000,000 in product liability insurance. Managementbelieves that this amount of insurance is adequate to cover its risks. Tofurther mitigate its risks, the Company’s standard hardware sales/softwarelicense agreement as well as its service agreement expressly limits itsliabilities and the warranties of its products and services in accordance withaccepted provisions of the Uniform Commercial code as adopted in most states.

**Copyrights,Patents and Trade Secrets**

The Company holds patents protecting some of itsproprietary technology, which it has either filed directly or received throughassignment. The Company has copyrighted the designs of its proprietarycomponents and application software. Patent or copyright protection may not beavailable for many of the Company’s products. A significant portion of theCompany’s proprietary technology is in the form of software. The Company hasrelied primarily on copyright and trade secret protection of its software.Management believes that its business is more dependent upon marketing,service, and knowledge than on patent or copyright protection. The Company hasregistered trademarks for CyberLAB CyberMED, CyberRAD, CyberPATH, CyberPRINT,CyberTERM, CyberLINK, CyberMATE, WebGateway, ImageWEB and MedVIEW, and has applied to register its trademarks on itsother trade and company names. The Company has retained special intellectualproperty counsel to advise management on the appropriate course to follow withrespect to these issues and has continued to pursue measures to protect itsintellectual property.

**GovernmentalRegulation**

ASPYRA’s products are subject to stringentgovernment regulation in the United States and other countries. These laws andregulations govern product testing, manufacture, labeling, storage, recordkeeping, distribution, sale, marketing, advertising and promotion. The Companyis also required to register as a medical device manufacturer with the FederalDrug Administration (FDA) and comply with FDA regulations. The regulatoryprocess can be lengthy, expensive and uncertain, and securing clearances orapprovals often requires the submission of extensive testing and othersupporting information. If we do not comply with regulatory requirements, wemay be subject to fines, recall or seizure of products, total or partialsuspension of production, withdrawal of existing product approvals orclearances, refusal to approve or clear new applications or notices andcriminal prosecution.

The Federal Food, Drug and Cosmetic Act, morecommonly known for its regulation of drugs in interstate commerce, was amendedby the “Medical Device Amendments of 1976” (the “Amendments”) to cover devicesused in medical practice.  These include instruments and reagents used inbiomedical laboratory testing.  In 1987, the Federal Drug Administration(FDA) first classified a number of clinical software products as medicaldevices, but exempted most of them from routine regulations. Subsequently, the FDA amended the policy.

The Company is informed that the FDA requires mostClass I and Class II medical devices, which include the Company’s ClinicalInformation System and Picture Archive Communications System products, tocomply with its Quality System Regulation (QSR).  Additionally, the FDArequires all medical devices utilizing software to meet the design controlrequirements of the QSR.  The Company completed an updated quality policyand a modification of its internal policies to comply with thisdirective.  Management believes that the QSR procedures have an impact onits business to the extent that there are lengthened development cycles of newsoftware and additional costs are incurred.  However, all of itscompetitors are faced with the same requirements. The Company’s Quality Systemwill, however, allow for a higher level of customer satisfaction, as theinternal processes and software must go through more rigorous audits andtesting.

The FDA from time to time reevaluates its rules andclassifications relevant to computer products used in connection with medicaldevices and software used in clinical applications.  No assurance can begiven that the Company’s current or new products developed will not be subjectto the provisions of the Amendments and implementing rules.  From time totime the Company has retained special counsel to advise it in suchmatters.  The likelihood of such changes and their effect on the businessof the Company cannot be ascertained.  If the FDA were to determine thatadditional provisions should apply to all or some of the Company’s products, itis uncertain whether compliance with such interpretation would have a materialadverse effect on the Company or its products or operations.

In general, the Companyand its products are subject to direct governmental regulations applicable tomanufacturers, including those regulations promulgated under the OccupationalSafety and Health Act, and by the Environmental Protection Agency. The Company’scustomers, however, are subject to significant regulation by the FDA, theCenters for Medicare and

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Medicaid Services, the Department of Health and HumanServices , the Centers for Disease Control, and by state and local governmentalauthorities. Such regulations require the Company to comply with certainrequirements in order to sell its systems, and are a major focus of its developmentefforts in order to maintain the regulatory compliance of its products. Inaddition, the new HIPAA requirements indirectly and directly are applicable to the Company and have been afocus of its new product development efforts during the last two fiscal years.

**Backlog**

The Company’s backlog atDecember 31, 2006 was approximately $800,000 for software, hardware andinterface products, and approximately $1,500,000 for deferred services,compared to approximately $1,200,000 for software, hardware and interfaceproducts, and $1,600,000 for deferred services, at December 31, 2005. TheCompany also has annually renewable extended service agreements under contractsaggregating in excess of $6,500,000.

**Employees**

At March 30, 2007, theCompany had 99 full time and 2 part time employees of whom 26 are involved inproduct development, 16 in sales and marketing, 47 in technical services,training, and support, and 12 in administration. The Company is not subject toany collective bargaining agreements and considers its employee relations to begood.

**Item 2.Description of Property.**

ASPYRA’s headquartersare located in a leased facility in Calabasas, California. The facility wasconstructed in 1991 and comprises approximately 16,800 square feet with aneffective base rental of approximately $24,537 per month, plus common areamaintenance costs and property taxes. The facility is leased under an extensionof the original lease that has a five year term that ends in October 2012 andis subject to cost of living adjustments in each year. All other provisions ofthe original lease substantially remained the same.

The Calabasas facilityis used as general offices and operations headquarters that includeswarehousing, service and support, training, development, and assembly. TheCompany considers the facility to be adequate for its intended purposes. TheCompany carries adequate general liability insurance, as required by therespective leases, to cover any risks concerning the facility.

ASPYRA also operates out of a leased facility in Jacksonville, Florida. Thefacility in Jacksonville was constructed in 1991 and comprises approximately8,422 square feet with an effective base rental of approximately $11,405 permonth, plus common area maintenance costs and property taxes. The Jacksonvillelocation is leased under an extension of the original lease which has afive year term that ends in January 2012 and is subject to cost of livingadjustments in each year.

The Jacksonville facilities are used as general offices and for operationsthat includes service and support, training, development, and productintegration. The Company carries adequate general liability insurance, asrequired by its respective leases, to cover any risks concerning thefacilities.

ASPYRA’s United Kingdom subsidiary Aspyra Technologies, Ltd. is located inEast Grinstead, West Sussex, United Kingdom. In June 2005, a new lease wasentered into for 3 years with the option to terminate after two years. Thecombined space in the United Kingdom office is 640 square feet with a monthlyrent of $3,366. The facilities are used for general offices.

**Item 3.Legal Proceedings.**

There are no materialactive, pending, or threatened legal proceedings to which the Company is aparty.

From time to time we maybe involved in other litigation relating to claims of alleged infringement,misuse or misappropriation of intellectual property rights of third parties. Wemay also be subject to claims arising out of our operations in the normal courseof business. As of the date of this Form 10-KSB, we are not a party to any suchother litigation that would have a material adverse effect on us or ourbusiness.

**Item 4.Submission of Matters to a Vote of Security Holders.**

TheCompany did not submit any matter to a vote of its security holders during thefourth quarter of its fiscal year ended December 31, 2006.

 

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**PART II**

**Item 5. Market for Common Equity, Related Stockholder Mattersand Small Business Issuer Purchases of Equity Securities.**

**(a)  Market information.**

The Company’s commonshares trade publicly on the American Stock Exchange under the symbol “APY”. Thefollowing table sets forth for the periods indicated, the range of the high andlow sale prices for the common shares as reported by the American StockExchange. The prices do not include retail markups, markdowns, or commissions.

|                                  | ** ** | **High** | ** ** | **Low** | ** ** |
|----------------------------------|------------|----------|------------|---------|------------|
| Fiscal 2005 ending  December 31, |       |     |       |    |       |
| First Quarter                    |       | $        | 3.98       |    | $          | 1.85 |   |
| Second Quarter                   |       | 2.35     |       | 1.69    |       |
| Third Quarter                    |       | 2.90     |       | 1.68    |       |
| Fourth Quarter                   |       | 3.00     |       | 2.10    |       |
|                             |       |     |       |    |       |
|                             |       |     |       |    |       |
| Fiscal 2006 ending  December 31, |       |     |       |    |       |
| First Quarter                    |       | 2.75     |       | 2.05    |       |
| Second Quarter                   |       | 2.55     |       | 1.35    |       |
| Third Quarter                    |       | 2.45     |       | 1.62    |       |
| Fourth Quarter                   |       | 2.25     |       | 1.50    |       |
|                                  |            |          |            |         |            |  |  |

 

**(b)**  **Holders.**

The number ofshareholders of record of Common Shares of the Company as of March 30, 2007 wasapproximately 550. The Company also has approximately 900 beneficial holders ofrecord whose shares are held in street name as of March 30, 2007.

**(c)**  **Dividends.**

Holders of Common Sharesare entitled to receive such dividends as may be declared by the Company’s Boardof Directors. The Company has never paid a cash dividend on its Common Sharesand the Board of Directors currently intends to retain any earnings for use inthe Company’s business.

**(d)  Securities authorized for issuance underequity compensation plans.**

Thefollowing table represents securities authorized for issuance under our equitycompensation plans as of December 31, 2006:

**Equity Compensation Plan Information**
| **Plan Category**                                       | ** ** | **Number of  securities to be  issued upon  exercise of  options,  warrants  and rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants, and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column)** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
|                                                         |       |                                                                                                                    |       |                                                                                                         |       |                                                                                                                                                                                                |       |
| Equity  Compensation Plans  approved by security holders     |       | 1,290,875                                                                                                               |       | $                                                                                                            | 2.45       |                                                                                                                                                                                                | 820,227    |   |
|                                                         |       |                                                                                                                    |       |                                                                                                         |       |                                                                                                                                                                                                |       |
| Equity Compensation  Plans not  approved by security holders |       | 0                                                                                                                       |       |                                                                                                         |       | 0                                                                                                                                                                                                   |       |
| Total                                                        |       |                                                                                                                    |       |                                                                                                         |       |                                                                                                                                                                                                |       |
|                                                              |            |                                                                                                                         |            |                                                                                                              |            |                                                                                                                                                                                                     |            |  |

 

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**(e)**  **Recent sales ofunregistered securities.**

Fromtime to time the Company has issued restricted common shares to its employeesin lieu of compensation for vacation pay. However, there were no such issuancesof unregistered Common Shares during the years ended December 31, 2006 and2005.

**(f)**  **Small business issuerpurchase of equity securities.**

Duringthe years ended December 31, 2006 and 2005, there were no repurchases of CommonShares.

**Item 6.Management’s Discussions and Analysis or Plan of Operation.**

**Overview**

Thefollowing discussion relates to the merged business of ASPYRA, which includesthe operations of its wholly owned subsidiary Aspyra Diagnostic Solutions, Inc.(ADSI) formerly StorCOMM, Inc. and its wholly owned subsidiary AspyraTechnologies, Ltd. (ATI) formerly StorCOMM Technologies, Ltd..  The merger, which resulted in the acquisitionof ADSI, was consummated on November 22, 2005 and this is the first full annualreport since the merger was consummated.

ASPYRAoperates in one business segment determined in accordance with Statement of FinancialAccounting Standards (“SFAS”) No. 131, and generates revenues primarilyfrom the sale of its Clinical and Diagnostic Information Systems, whichincludes the license of proprietary application software, and may include thesale of servers and other hardware components to be integrated with itsapplication software. In connection with its sales of its products, the Companyprovides implementation services for the installation, integration, andtraining of end users’ personnel. The Company also generates sales of ancillarysoftware and hardware, to its customers and to third parties. We recognizethese revenues under system sales in our financial statements.  The Company also generates recurring revenuesfrom the provision of comprehensive post implementation services to itscustomers, pursuant to extended service agreements. We recognize these revenuesunder service revenues in our financial statements.  This service relationship is an importantaspect of our business as the Company’s products are “mission critical” systemsthat are used by healthcare providers in most cases 24 hours per day and 7 daysper week. The ability to provide comprehensive services is crucial to obtainingnew customers and maintaining existing customers.  In order to retain this service relationshipwe must keep our products current for competitive, clinical, diagnostic, andregulatory compliance.  Enhancements toour products in the form of software upgrades are an integral part of ourbusiness model and are included as a contract obligation in our warranty andextended service agreements.  In order togenerate such revenue opportunities our investment in software enhancements issignificant and is a key component of our on going support obligations.

Becauseof the nature of our business, ASPYRA makes significant investments in researchand development for new products and enhancements to existing products.Historically, ASPYRA has funded its research and development programs throughcash flow primarily generated from operations. Management anticipates thatfuture expenditures in research and development will either continue at currentlevels or may increase for the foreseeable future, and will be funded primarilyout of the Company’s cash flow from operations.

ASPYRA’s results of operation for the fiscal yearended December 31, 2006 were marked by an increase in sales and an operatingloss that are more fully discussed in the following section “Results ofOperations.”  The Company’s increase inrevenues was due to the addition of the revenues from ASPYRA’s wholly ownedsubsidiary ADSI.  Aspyra’s operating losswas attributable to two primary factors, the Company experienced volatility in salesquarter to quarter due to the Company’s reliance on third party distributorsfor its PACS products which attributed to its operating loss.  Second, the Company underwent significantintegration activities which were costly and time consuming.

Generally, sales cycles for CIS and DIS products arelengthy and on average exceed six months from inception to closure.  Because of the complexity of the salesprocess, a number of factors that are beyond the control of the Company candelay the closing of transactions. Furthermore, the Company has been primarily reliant on distributors andchannel partners for the sales of its diagnostic systems and has been subjectto inconsistencies in the performance of such third parties and the

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timely consummation of orders.  ASPYRA completed a unification of its salesforce to focus more on a direct sales model for some of the diagnostic systemproducts to supplement the distribution and channel network so that it is lessreliant on third parties in the sale of its diagnostic systems.  ASPYRA also has completed new versions of itslaboratory and radiology information systems products, as well as its new AccessRADRadiology Information System (“RIS”) / Picture Archive Communication Systems (“PACS”)which it has begun marketing and anticipates increased sales related to suchnew product releases in the future.

The operating losses incurred by the Company duringthe fiscal year ended December 31, 2006 were also attributable to the costsassociated with integration activities in addition to the uneven salesperformance previously discussed.  TheCompany completed the integration and restructuring of the merged businessesand incurred certain costs associated with such activities which were onlypartially offset by reductions in redundant personnel and other expenses duringthe 2006 fiscal year.  The Companyexpects to achieve synergies and cost reductions in its business as itcompletes further integration and restructuring through the first half offiscal 2007.   In sum approximately $1.9million in non recurring expenses were incurred during the 2006 fiscal year asa result of the integration and restructure of the merged business.

ASPYRAconcluded the merger on November 22, 2005 and has accounted for the transactionas a purchase. Accordingly only the operations of ADSI for the period beginningNovember 23, 2005 through December 31, 2005 have been consolidated in theaudited financial statements for the fiscal year ended December 31, 2005.However the operations for the entire Company are included in the results ofoperations for the fiscal year ended December 31, 2006.  In addition, ASPYRA elected to change its fiscal year end fromAugust 31 to December 31 in January 2005 and filed a transitional report onForm 10-QSB for the four months ended December 31, 2004.

This management’s discussion and analysis comparesthe results of operation for the fiscal year ended December 31, 2006 with thefiscal year ended December 31, 2005.

**Resultsof Operations**

*Year Ended December 31, 2006 Compared to Year EndedDecember31, 2005*

The following table sets forth certain line items in our condensedconsolidated statement of operations as a percentage of total revenues for theperiods indicated:

|                                         | ** ** | **Fiscal Year Ended  December 31, 2006** | ** ** | **Fiscal Year Ended  December 31, 2005** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Revenues:                               |       |                                                         |       |                                                         |       |
| System sales                            |       | 44.6                                                         | %          | 29.3                                                         | %          |
| Service revenues                        |       | 55.4                                                         |       | 70.7                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Total revenues                          |       | 100.0                                                        |       | 100.0                                                        |       |
|                                    |       |                                                         |       |                                                         |       |
| Cost of products and  services sold:    |       |                                                         |       |                                                         |       |
| System sales                            |       | 30.8                                                         |       | 25.2                                                         |       |
| Service revenues                        |       | 22.8                                                         |       | 26.1                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Total cost of products  and services    |       | 53.6                                                         |       | 51.3                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Gross profit                            |       | 46.4                                                         |       | 48.7                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Operating expenses:                     |       |                                                         |       |                                                         |       |
| Selling, general  and administrative    |       | 57.1                                                         |       | 54.0                                                         |       |
| Research and  development               |       | 15.6                                                         |       | 18.0                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Total operating  expenses               |       | 72.7                                                         |       | 72.0                                                         |       |
|                                    |       |                                                         |       |                                                         |       |
| Operating loss                          |       | (26.3                                                        | )          | (23.3                                                        | )          |
|                                    |       |                                                         |       |                                                         |       |
| Loss before provision  for income taxes |       | (28.1                                                        | )          | (23.5                                                        | )          |
|                                    |       |                                                         |       |                                                         |       |
| Provision for income  taxes             |       | —                                                       |       | (11.2                                                        | )          |
|                                    |       |                                                         |       |                                                         |       |
| Net loss                                |       | (28.1                                                        | )          | (34.7                                                        | )          |

 

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Revenues

Sales for the fiscalyear ending December 31, 2006 were $12,689,217, as compared to $7,205,757 forthe fiscal year ending December 31, 2005, an overall increase of $5,483,460 or76.1%. When analyzed by revenue category, sales of Clinical Information Systems(CIS) and Diagnostic Information Systems (DIS) increased by $3,552,847 or168.2%, and services increased by $1,931,013 or 37.9%. The increase in sales ofCIS and DIS products during the current period was positively affected by theconsolidation of the reporting of the former entities results of operation forthe full fiscal year. Inaddition, the Company has invested additional funds into marketing activitiesto rebuild its CIS sales pipeline, which was beginning to show improvement bythe end of the 2006 fiscal year. Secondly, the DIS products have been sold through distributors andchannel partners since the inception of ADSI’s business and accounted forapproximately 90% of the sales in fiscal year ended December 31, 2005. Shortlyafter the merger with ADSI was consummated, its primary distributor announcedthat it had changed ownership and subsequently went through a management andoperational restructure, which temporarily caused a cessation in new orderflow. Although the distributor has since resumed representation, new order flowis not at the historical levels and management is developing other sources oflead generation. As part of its future growth strategy management isemphasizing direct sales activities of its DIS products while it continues toutilize distributors and channel partners for some products and market sectors.

Theincrease in service revenues is attributableto a greater number of customer accounts under contract. As part of the assetsacquired in the merger, ASPYRA gained the service relationship with ADSI’scustomers and continues to integrate all of its service policies, proceduresand operational activities including the utilization of ASPYRA’s customerrelationship management system throughout the Company. At present, the Companyhas approximately $6.5 million in annual renewable service agreements undercontract and also has some customers that it supports under billablearrangements. Service revenues are expected to continue to increase as theCompany’s installed base of CIS and DIS installations increases.

The Company continues toexpand its sales and marketing activities, directing its focus towards largercustomers and multi-product sales as well as selling new products into itsinstalled customer base. The Company continues to seek strategic jointmarketing partnerships with other companies, and channel partners, which hasimproved the Company’s market penetration and has initiated more marketingactivities internationally. ASPYRA’s “pipeline” of working CIS and DIStransactions continues to improve, and management views the near term outlookfor the continued sale of such products as cautiously optimistic during thefirst half of the 2007 fiscal year. The Company’s future operating results willcontinue to be subject to annual and quarterly variations based upon a widevariety of factors, including the volume mix and timing of orders receivedduring any quarter or annual period. In addition, the Company’s revenuesassociated with CIS and DIS transactions may be delayed due to customer relatedissues such as availability of funding, staff availability, IT infrastructurereadiness, and the performance of third party contractors, all of which areissues outside of the control of ASPYRA.

Cost of Products andServices Sold

Cost of products andservices sold overall increased by $3,109,500 or 84.1% for the fiscal year ended December 31, 2006 ascompared to the fiscal year ended December 31, 2005. The overall increase incost of sales was primarily attributable to an increase in labor costs of$1,047,003 or 51.6%, an increase of $1,187,436 or 296.6% in material costs, andan increase in other costs of sales of $875,061 or 69.2%. The increase in laborcosts and other costs of sales was primarily attributable to additionalpersonnel hired during the fiscal year and the absorption of the former ADSIoperations department into ASPYRA following the merger. The increase inmaterial costs was attributable to a higher volume of transactions thatincluded hardware components that were provided in connection with sales of DISproducts. On a going forward basis sales of DIS products are expected toinclude a higher percentage of hardware components as the average sale of atypical PACS system includes specialized viewers, storage devices and otherhardware components that are specifically configured for the system andrequired for optimum operation.  Theincrease in other costs of sales was attributable to the absorption of overheadincluding the Jacksonville and UK facilities and infrastructure.

Costof sales as a percentage of sales increased to 54% for the fiscal year endedDecember 31, 2006, as compared to 51% for the fiscal year ended December 31,2005. The overall percentage increase in cost of sales, as a percentage ofsales, was primarily attributable to the absorption of the former ADSIoperations departments into ASPYRA and the volume and mix of sales. Managementbelieves the gross profit margin will improve in fiscal 2007 for the full yearof operations; however, the Company could experience quarterly variations ingross margin as a result of the factors discussed above. Management was able toeliminate redundant personnel and achieve operational synergies that yieldedreductions in operating expenses during fiscal 2006 which we expect to beevident in 2007.

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Selling, General andAdministrative Expenses

Selling, general, andadministrative expenses increased in aggregate by $3,353,738 or 86.2% for thefiscal year ended December 31, 2006 as compared to the fiscal year endedDecember 31, 2005.  Of the totalincrease, approximately $678,000 was attributable to expenses incurred byASPYRA and the balance of approximately $2,676,000 is attributable to theexpenses of ADSI absorbed post merger and was primarily attributable to thepersonnel and overhead expenses associated with the sales, general andadministrative departments. The approximately $678,000 increase incurred byASPYRA consisted of approximately $617,000 of increases in general andadministrative expenses and approximately $61,000 in increases in selling andmarketing expenses. The increases in general and administrative expenses wereprimarily attributable to additional expenditures for legal and auditing ofabout $232,000, expenses associated with corporate governance of $142,000including filing fees, board of director expenses, and investor relations,depreciation expense of about $67,000, section 123R expenses associated withstock options of about $87,000, and various other expenses of about $89,000 inaggregate that were partially offset by savings in other expense categories .The increases in selling and marketing expenses of approximately $61,000 wereprimarily attributable to a user symposium of about $45,000 and tradeshowexpenses of about $16,000.  The increasedtrade show expenses were primarily attributable to the launch of the mergedCompany and new products. A significant portion of the overall increasedexpenses was merger related and nonrecurring.

The Company plans tocontinue to make investments in sales and marketing programs in fiscal 2007associated with increased activities related to programs that target salesopportunities in the community hospital and multi-specialty clinicsectors.  During fiscal 2007, the Companyplans to complete the implementation of its new customer relationshipmanagement system and accounting systems throughout the ADSI operation andexpects to incur expenses associated with that implementation; a portion ofsuch costs will be expensed.  However wealso expect to reduce certain personnel expense as the systems implementationswill provide for additional synergies.

Research and DevelopmentExpenses

  Research and development expenses increased$680,704 or 52.3% during the fiscal year ended December 31, 2006, as comparedto the fiscal year ended December 31, 2005. Of this amount approximately$157,000 was attributable to increased expenses incurred by ASPYRA, and thebalance of approximately $524,000 represents the expenses absorbed related toADSI post merger which was primarily attributable to development personnel andattendant overhead of the research and development department. The increase of$157,000 attributable to ASPYRA is associated with increases in salaries andexpenses of new personnel in product development added during the period. Suchincreased expenses were attributable to the development of AccessRAD,enhancements and new modules for the Company’s CIS products, and newapplications under development. For its current fiscal year ended December 31, 2006and fiscal yearended December 31, 2005, the Companycapitalized software costs of $930,810 and $687,738, respectively, which aregenerally amortized over the estimated useful life not to exceed five years.Management anticipates its overall research and development activities toremain fairly constant in fiscal 2007.

Interest and otherincome was $99,962 for the fiscal year ended December 31, 2006as compared to $26,461 for the fiscal year ended December 31, 2005due to increased interest earned on money market deposits, and an increase infinance charges levied on customers who were late in their payments on accountsreceivable.

Interest and otherexpense was $321,679 for the fiscal year ended December 31, 2006as compared to $37,934 for the fiscal year ended December 31, 2005.  Of this amount approximately $192,000 wasassociated with a penalty imposed as a result of a delay in the registration ofthe securities underlying the private equity placements.  The balance was primarily attributable to anincreased level of borrowings onthe Company’s line of credit with its bank and interest expense on the debtassumed post merger.

Incometax provision was $4,810 for the fiscal year ended December 31, 2006 ascompared to $807,013 for the fiscal year ended December 31, 2005. The decreasewas primarily a result of the Company recording an additional valuationallowance of $793,877 in the third quarter of fiscal year ended December 31,2005 and during 2006, maintaining the full valuation allowance.

As a result of thefactors discussed above, the Company had a net loss of $3,570,438 for thefiscal yearended December 31, 2006, compared to a netloss of $2,501,915 for the fiscal year ended December 31, 2005.The Company’s basic and diluted loss per share was $0.36 for fiscal year ended December 31, 2006as compared to basic and diluted loss per share of $0.62 in fiscal year ended December 31, 2005.

AtDecember 31, 2006, the Company had state and federal net operating loss carryforwardsavailable to offset future taxable income of approximately $30,600,000 and$37,449,000, respectively, that are subject to Internal Revenue Code Section382 limitations. These operating loss carryforwards expire at various datesthrough 2026, and general business tax credit carryforwards available to offsetfuture state and federal income tax payable of approximately $341,000 and$781,300, respectively. While the Federal general business tax credits expireat various dates through 2026, the state general business tax credits can becarried forward indefinitely. The Company also has alternative minimum tax(AMT)

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net operating loss carryforwards of approximately$35,261,000 to offset future AMT taxable income that expires through variousdates through 2026. Internal Revenue Code Section 382 imposes limitations onthe utilization of net operating loss and tax credit carryovers pursuant to anownership change as a consequence of the merger with ADSI. The annual losslimitation amount is $885,000.

The major temporary taxdifferences that are expected to reverse next year are deferred revenue,allowance for doubtful accounts, accrued vacation, Section 263A Unicapinventory, amortization of intangible assets, and component inventory reserve.However, the Company expects new temporary differences to be established inthese years, which will either reduce or exceed the reversing temporarydifferences.

The Company annuallyevaluates the realization of the net deferred tax asset, taking intoconsideration prior earnings history, projected operating results and thereversal of temporary tax differences. In conjunction with the merger, theCompany purchased intangible assets that were not deductible for tax purposes,and a deferred tax liability of $1,806,734 was recorded. In addition, theCompany recorded a deferred tax asset of $1,806,734 which is expected to berealized over the term of the deferred tax liability. The deferred tax assetand deferred tax liability were included in goodwill. At December 31, 2006, theCompany evaluated the net deferred tax asset taking into considerationoperating results and determined that a valuation allowance of approximately$4,643,500 should be maintained.

**CapitalResources and Liquidity**

Historically, theCompany’s primary need for capital has been to invest in software development,and in computers and related equipment for its internal use.  The Company invested $930,810 and $687,738respectively during fiscal 2006 and 2005 in software development.  These expenditures related to investment inthe Company’s new RIS/PACS integrated system AccessRAD, and the new version ofthe Company’s LIS product, CyberLAB, and other product enhancements.  The Company anticipates expending additionalsums during fiscal 2007 on product enhancements to all its products and thefurther development of AccessRAD.  Duringfiscal 2006, the Company invested an aggregate of $285,837 in fixed assetsprimarily consisting of computers and software, as compared to an investment of$325,718 in fixed assets primarily consisting of computers and software infiscal 2005.

As of December 31, 2006, the Company’s working capitalamounted to a deficit of $2,256,352.  AtDecember 31, 2006, the Company’s credit facilities with its bank consistedof a revolving line of credit of $1,000,000, of which $1,000,000 wasoutstanding. The bank credit agreement was due to expire on May 19, 2007and the line of credit was secured by a$1,000,000 time deposit account.  On February 27, 2007,ASPYRA entered into a new banking relationship whereby the bank provided arevolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit matures onFebruary 27, 2008 and is secured by the Company’s accounts receivable andinventory.  The line of credit is subjectto certain covenants.  Advances under therevolving line of credit are on a formula based on eligible accounts receivableand inventory balances.  The Company usedthe initial advance on the revolving line of credit to pay in full its note froma prior bank that was secured by a $1,000,000 certificate of deposit recordedon the December 31, 2006 balance sheet under restricted cash.  The payoff released the certificate ofdeposit previously held by the former bank. Management is considering additional financing to accelerate itsbusiness development plans which in turn may improve its working capitalposition.

Cash used in operatingactivities was $2,231,102 for the fiscal year ended December 31, 2006, comparedto cash used in operating activities of $638,130 for the fiscal year endedDecember 31, 2005.  The increase in cashused for operating activities was primarily attributable to the net lossincurred and net change in accounts payable and deferred revenues which waspartially offset by net change in receivables and inventories.

Net cash used ininvesting activities totaled $1,216,647 for the 2006 fiscal year, compared to$2,661,469 used in investing activities during the 2005 fiscal year.  The change was primarily the result of anincrease in software capitalization costs compared to the prior fiscal year,which were offset by the purchase of ADSI in the previous fiscal year.

Cash provided byfinancing activities amounted to $3,174,669 during the 2006 fiscal yearcompared to cash by financing activities of $2,976,979 in fiscal 2005.  The change in fiscal 2006 resulted primarilyfrom the net proceeds from a private placement completed in May 2006.

TheCompany’s primary source of working capital has been generated from privateplacements and from borrowings.  TheCompany’s results of operations for the current fiscal year ended December 31,2006 produced negative operating cash flow of approximately $2,231,102, whichwas not sufficient to fund its product development activities, and to invest innew marketing programs, which required the Company to seek financing.  An unanticipated decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices, or cancellations of contracts could have a negative effect on cashflow from operations and could in turn create short-term liquidityproblems.  We believe that

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our current cash and cash equivalents, and cash flowfrom operations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and variouscontractual obligations, for at least the next 12 months.  We may, however, require additional cashresources due to changed business conditions or other future developments,including any investments or acquisitions we may decide to pursue.  If these sources are insufficient tosatisfy our cash requirements, we may seek to sell debt securities oradditional equity securities or to obtain a credit facility. The sale ofconvertible debt securities or additional equity securities could result inadditional dilution to our stockholders. The incurrence of indebtedness wouldresult in debt service obligations and could result in operating and financialcovenants that would restrict our operations. In addition, there can be noassurance that any additional financing will be available on acceptable terms,if at all. Although there are no present understandings, commitments oragreements with respect to the acquisition of any other businesses,applications or technologies, we may, from time to time, evaluate acquisitionsof other businesses, applications or technologies.

**ContractualObligations**

The following summarizes our contractual obligationsat December 31, 2006 and the effects such obligations are expected to have onliquidity and cash flow in future periods:

| Contractual   Obligations | ** ** | **Total** | ** ** | **Less than 1   Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5   Years** | ** ** |
|--------------------------------|------------|-----------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|
| Operating leases               |       | $         | 1,164,275  |                                  | $          | 420,000            |       | $                  | 386,264    |                          | $          | 344,276 |   | $ | 13,735 |   |
| Debt (1)                       |       | $         | 1,538,177  |                                  | $          | 1,538,177          |       | $                  | —     |                          | $          | — |   | $ | — |   |
| Capital lease                  |       | $         | 876,402    |                                  | $          | 227,262            |       | $                  | 417,493    |                          | $          | 231,648 |   | $ | — |   |

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(1)          Includes payment of interest of $114,660 in2007.

On March 15, 2007, the Company signed an amendmentto its lease for its headquarters in Calabasas, California. The amendmentextended the expiration date of its lease to October 2012. The Company’scontractual obligations increased as follows:

| Contractual   Obligations | ** ** | **Total** | ** ** | **Less than 1   Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5   Years** | ** ** |
|--------------------------------|------------|-----------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|
| Operating leases               |       | $         | 1,766,647  |                                  | $          | 55,460             |       | $                  | 678,962    |                          | $          | 719,633 |   | $ | 312,592 |   |
|                                |            |           |            |                                       |            |                    |            |                    |            |                               |            |  |  |  |  |  |

 

**Seasonality,Inflation and Industry Trends**

The Company’s sales aregenerally higher in the spring and fall but are subject to a number of factorsrelated to its customers’ budgetary cycles. Inflation has not had a material effect on the Company’s business sincethe Company has been able to adjust the prices of its products and services inresponse to inflationary pressures. Management believes that most phases of the healthcare segment of thecomputer industry will continue to be highly competitive, and that potentialhealthcare reforms including the initiatives to establish a national standardfor the electronic health record may have a long-term positive impact on itsbusiness.  The key issues driving demandfor ASPYRA’s products are industry concerns about patient care and safetyissues, development of a national standard for the electronic health recordthat will affect all clinical data, a shift from analog to digital imagingtechnologies, and regulatory compliance. The Company has continued to invest heavily in new application modulesto assist its customers in addressing these issues.  Management believes that new applicationmodules and features that concentrate on such issues will be key selling pointsand will provide a competitive advantage. In addition, management believes that the healthcare informationtechnology industry will be marked with more significant technologicaladvances, which will improve the quality of service and reduce costs.  The Company anticipates it will be able tomeet these challenges.

**CriticalAccounting Policies and Estimates**

Management’s discussionand analysis of ASPYRA’s financial condition and results of operations arebased upon the consolidated financial statements, which have been prepared inaccordance with accounting principles generally accepted in the United Statesof America.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated disclosures of contingent assets and liabilities.  On an on-going basis, management evaluatesestimates, including those related to the valuation of inventory and theallowance for uncollectible accounts receivable. We base our estimates onhistorical experience and on various other assumptions that are believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities that arenot readily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements:

*Inventory*

The Company’s inventoryis comprised of a current inventory account that consists of items that areheld for resale and a long-term inventory account that consists of items thatare held for repairs and replacement of hardware components that are servicedby the Company under long-term extended service agreements with itscustomers.  Current inventory is valuedat the lower of cost to purchase or the current estimated market value of theinventory items.  Inventory is evaluated

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on a continual basis and reserve adjustments are madebased on management’s estimate of future sales value, or in the case of thelong-term component inventory, on management’s estimation of the usage ofspecific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which are specifically reserved.  Inaddition, reserve adjustments are made for the difference between the cost ofthe inventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At December 31, 2006 the inventory reservewas $115,504.

*Accounts Receivable*

Accounts receivablebalances are evaluated on a continual basis and allowances are provided forpotentially uncollectible accounts based on management’s estimate of thecollectability of customer accounts. If the financial condition of a customerwere to deteriorate, resulting in an impairment of their ability to makepayments, an additional allowance may be required. Allowance adjustments arecharged to operations in the period in which the facts that give rise to theadjustments become known.  The accountsreceivable balance at December 31, 2006 was $1,334,153, net of an allowance fordoubtful accounts of $82,840.

*Revenue Recognition*

Revenues are derivedprimarily from the sale of CIS and DIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.”  SOP No 97-2,as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on therelative fair values of those elements. The Company allocates revenue to each element in a multiple-element arrangementbased on the element’s respective fair value, with the fair value determined bythe price charged when that element is sold seperately and specifically definedin a quotation or contract.  Deferredrevenue related to CIS and DIS sales are comprised of deferrals for licensefees, hardware, and other services for which the implementation has not yetbeen completed and revenues have not been recognized.  Revenues are presented net of discounts.  At December 31, 2006 deferred revenue was$777,800.

Post Implementationsoftware and hardware maintenance services are marketed under monthly,quarterly and annual arrangements and are recognized as revenue ratably overthe contracted maintenance term as services are provided.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to customers, professional services portion of thearrangement, other than installation services, based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At December 31, 2006, deferred servicecontract income was $1,509,042.

*Software Development Costs*

Costs incurredinternally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizable value.Capitalized costs are amortized based on current and expected future revenuefor each product with minimum annual amortization equal to the straight-lineamortization over the estimated economic life of the product not to exceed fiveyears.  For the years ended December 31,2006 and December 31, 2005, the Company capitalized $930,810 and $687,738,respectively.  For the years endedDecember 31, 2006, the balance of capitalized software costs was $2,487,307 netof accumulated amortization of $875,165.

*IntangibleAssets*

Intangible assets, withdefinite and indefinite lives, consist of acquired technology, customerrelationships, channel partners, and goodwill. They are recorded at cost and are amortized, except goodwill, on astraight-line basis based on the period of time the asset is expected tocontribute directly or indirectly to future cash flows, which range from fourto 15 years.

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired.  In accordance with SFAS No. 144,Accounting for Impairment of Long-Lived Assets, management reviews definitelife intangible assets to determine if events or circumstances have occurredwhich may cause the carrying values of intangible assets to be impaired. Thepurpose of these reviews is to identify any facts or circumstances, eitherinternal or external, which may indicate that the carrying value of the assetsmay not be recoverable.

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*Stock-based Compensation*

We have two stock-basedcompensation plans, the 2005 Equity Incentive Plan and the 1997 Stock OptionPlan, under which we may issue shares of our common stock to employees,officers, directors and consultants. Upon effectiveness of the 2005 EquityIncentive Plan on November 22. 2005, the 1997 Stock Option Plan was terminatedfor purposes of new grants.  Both ofthese plans have been approved by our shareholders.

Prior to January 1,2006, we accounted for those plans under the recognition and measurementprovisions of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. No stock-based employee compensationcost was recognized in our Statement of Operations for the year ended December31, 2005 as all options granted under our plans had an exercise price equal tothe market value of the underlying common stock on the date of grant. EffectiveJanuary 1, 2006, we adopted the fair value recognition provisions of SFASNo. 123(R), Share-Based Payment, using the modified prospective transitionmethod. Under that transition method, compensation cost recognized in the yearended December 31, 2006 includes; (a) compensation cost for allshare-based payments granted prior to, but not yet vested as of January 1,2006, based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, and (b) compensation cost forall share-based payments granted subsequent to January 1, 2006, based onthe grant-date fair value estimated in accordance with the provisions of SFASNo. 123(R). Results for prior periods have not been restated.

SFAS No 123(R) requiresus to make certain assumptions and judgments regarding the grant date fairvalue. These judgments include expected volatility, risk free interest rate,expected option life, dividend yield and vesting percentage.  These estimations and judgments aredetermined by us using many different variables that in many cases are outsideof our control. The changes in these variables or trends, including stock pricevolatility and risk free interest rate may significantly impact the grant datefair value resulting in a significant impact to our financial results.

*Income Taxes*

The Company accounts forincome taxes in accordance with SFAS No. 109 “Accounting for Income Taxes,” whichrequires recognition of deferred tax liabilities and assets for the expectedfuture tax consequences of events that have been included in the financialstatements or tax returns.  Under thismethod, deferred tax liabilities and assets are determined based on thedifferences between the financial statements and the tax bases of assets andliabilities using enacted tax rates in effect for the year in which thedifferences are expected to reverse. Valuation allowances are established when necessary to reduce deferredtax assets to the amount expected to be realized.  Income tax expense represents the tax payablefor the period and the change during the period in deferred tax assets andliabilities.

**Risk Factors**

*Inevaluating the Company, various risk factors and other information should becarefully considered.  The risks anduncertainties described below are not the only ones that impact theCompany.  Additional risks and uncertaintiesnot presently known to us or that we currently deem immaterial may also have anadverse impact on us.  Among otherthings, this discussion contains forward-looking statements that are based oncertain assumptions about future risks and uncertainties.  We believe that our assumptions arereasonable.  Nonetheless, it is likelythat at least some of these assumptions will not come true.*

**RISKS RELATED TO OUR BUSINESS**

***We have incurred losses recently that mayadversely impact liquidity.***

Wehave experienced operating losses and cash outflows.  For the fiscal year ended December 31, 2006,our net loss was $3,570,438.  At December31, 2006, our cash and cash equivalents, including restricted cash, totaled$2,014,632 and our working capital deficit was $2,256,352.  We cannot be certain that Aspyra will becomeprofitable and sustain profitability.  IfAspyra does not become profitable and sustain profitability, the market priceof our common stock will decline.  TheCompany’s primary source of working capital has been generated from the privateplacements and borrowings.  The Company’sresults of operations for the fiscal year ended December 31, 2006 producednegative operating cash flow of approximately $2,231,102.  Any decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices or cancellations of contracts could have a negative effect on cashflow from operations and could in turn increase our liquidity problem.  If sales are not as expected, the Companywill consider certain cost cutting measures. We may require additional cash resources to sustain our business.  The sale of convertible debt securities oradditional equity securities could result in additional dilution to ourshareholders.  The incurrence of additionalindebtedness would result in

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incurring debt service obligations and could result inoperating and financial covenants that would restrict our operations.  There can be no assurance that any additionalfinancing will be available on acceptable terms, if at all.

***If ASPYRA and Aspyra Diagnostic Solutions,Inc. fail to effectively integrate their operations, the combined company maynot realize the potential benefits of the merger.***

Theintegration of ASPYRA and Aspyra Diagnostic Solutions, Inc. (ADSI) has been atime consuming and expensive process and may disrupt the combined company’soperations if it is not completed in a timely and efficient manner. Theintegration is still in process.  If thisintegration effort is not successful, the combined company’s results ofoperations could be harmed, employee morale could decline, key employees couldleave, customers could cancel existing orders or choose not to place new onesand the combined company could have difficulty complying with regulatoryrequirements. In addition, the combined company may not achieve anticipatedsynergies or other benefits of the merger. ASPYRA and ADSI must operate as acombined organization utilizing common information and communication systems,operating procedures, financial controls and human resources practices. Thecombined company may encounter the following difficulties, costs and delaysinvolved in integrating their operations:

·              failureto successfully manage relationships with customers and other importantrelationships;

·              failureof customers to accept new services or to continue using the products andservices of the combined company;

·                                         difficultiesin successfully integrating the management teams and employees of ASPYRA andAspyra Diagnostic Solutions, Inc.;

·              challengesencountered in managing larger, more geographically dispersed operations;

·              theloss of key employees;

·              diversionof the attention of management from other ongoing business concerns;

·              potentialincompatibilities of technologies and systems;

·              potentialdifficulties integrating and harmonizing financial reporting systems; and

·              potentialincompatibility of business cultures.

If thecombined company’s operations do not meet the expectations of customers ofASPYRA or ADSI then these customers may cease doing business with the combinedcompany altogether, which would harm the results of operations and financialcondition of ASPYRA.

If theanticipated benefits of the merger are not realized or do not meet theexpectations of financial or industry analysts, the market price of ASPYRAcommon stock may decline. The market price of ASPYRA common stock may declineas a result of the merger if:

·              theintegration of ASPYRA and ADSI is unsuccessful;

·                                         thecombined company does not achieve the expected benefits of the merger asquickly as anticipated or the costs of or operational difficulties arising fromthe merger are greater than anticipated;

·              thecombined company’s financial results are not consistent with the expectationsof financial or industry analysts;

·              theanticipated operating and product synergies of the merger are not realized; or

·              thecombined company experiences the loss of significant customers or employees asa result of the merger.

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***Any failure to successfully introduce future products into the marketcould adversely affect our business.***

The commercial success offuture products depends upon their acceptance by the medical community.  Our future product plans includecapital-intensive clinical information systems. We believe that these products can significantly reduce labor costs,improve patient care and offer other distinctive benefits to the medicalcommunity.  However, there is oftenmarket resistance to products that require significant capital expenditures orwhich eliminate jobs through automation. We can make no assurance that themarket will accept our future products and systems, or those sales of ourfuture products and systems will grow at the rates expected by our management.

***If we fail to meet changing demands of technology, we may not continueto be able to compete successfully with competitors.***

The market for our productsis characterized by rapid technological advances, changes in customerrequirements and frequent new product introductions and enhancements.  Our future success depends upon our abilityto introduce new products that keep pace with technological developments,enhance current product lines and respond to evolving client requirements.  ASPYRA has incurred, and we will need tocontinue to incur, significant research and development expenditures in futureperiods as we strive to remain competitive. Our failure to meet these demands could result in a loss of our marketshare and competitiveness and could harm our revenues and results ofoperations.

***Our success depends on our ability to attract, retain and motivatemanagement and other skilled employees.***

Our future success and growthdepend on the continued services of our key management and employees, includingSteven M. Besbeck, Bruce M. Miller, and James R. Helms.  The loss of theservices of any of these individuals or any other key employee could materiallyaffect our business. Our future success also depends on our ability toidentify, attract and retain additional qualified personnel. Competition foremployees in our industry is intense and we may not be successful in attractingor retaining them.  There are a limitednumber of people with knowledge of, and experience in, our industry.  We do not have employment agreements withmost of our key employees.  However, wegenerally enter into agreements with our employees regarding patents,confidentiality and related matters.  Wedo not maintain life insurance polices on our employees.  Our loss of key personnel, especially withoutadvance notice, or our inability to hire or retain qualified personnel, couldhave a material adverse effect on sales and our ability to maintain ourtechnological edge.  We cannot guaranteethat we will continue to retain our key management and skilled personnel, orthat we will be able to attract, assimilate and retain other highly qualifiedpersonnel in the future.

***If we do not protect our proprietary information and prevent thirdparties from making unauthorized use of our products and technology, ourfinancial results could be harmed.***

We rely on a combination ofconfidentiality agreements and procedures and copyright, patent, trademark andtrade secret laws to protect our proprietary information. However, all of thesemeasures afford only limited protection and may be challenged, invalidated, orcircumvented by third parties. Third parties may copy aspects of our productsor otherwise obtain and use our proprietary information without authorization.Third parties may also develop similar or superior technology independently,including by designing around our patents. Furthermore, the laws of someforeign countries do not offer the same level of protection of our proprietaryrights as the laws of the United States, and we may be subject to unauthorizeduse of our products in those countries. Any legal action that we may bring toprotect proprietary information could be expensive and may distract managementfrom day-to-day operations. Unauthorized copying or use of our products orproprietary information could result in reduced sales of our products.

***Third parties claiming that we infringe their proprietary rights couldcause us to incur significant legal expenses and prevent us from selling ourproducts.***

From time to time, we havereceived claims that we have infringed the intellectual property rights ofothers and may receive additional claims in the future.  Any such claim, with or without merit, could:

·                  be time consuming to defend;

·                  result in costly litigation;

·                  divert management’s time andattention from our business;

·                  require us to stop selling,to delay shipping or to redesign our products; or

·                  require us to pay monetaryamounts as damages to our customers.

 

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In addition, we license anduse software from third parties in our business. These third party softwarelicenses may not continue to be available to us on acceptable terms. Also,these third parties may from time to time receive claims that they have infringedthe intellectual property rights of others, including patent and copyrightinfringement claims, which may affect our ability to continue licensing theirsoftware. Our inability to use any of this third party software could result indisruptions in our business, which could materially and adversely affect ouroperating results.

***ASPYRA operates in a consolidating industry which creates barriers tomarket penetration.***

The healthcare informationtechnology industry in recent years has been characterized by consolidation byboth healthcare providers who are our customers and by those companies that wecompete against. Large hospital chains and groups of affiliated hospitalsprefer to negotiate comprehensive contracts for all of their system needs withlarger vendors who offer broader product lines and services. The conveniencesoffered by these large vendors are administrative and financial incentives thatwe cannot offer our customers.

***Our products may be subject togovernment regulation in the future that could impair our operations.***

Our products could be subject to stringent government regulation in theUnited States and other countries in the future. Furthermore, we expect thatthe integration of our product and service offering will require us to comply withregulatory requirements and that we will devote significant time and resourcesto this effort.  These regulatoryprocesses can be lengthy, expensive and uncertain. Additionally, securingnecessary clearances or approvals may require the submission of extensive dataand other supporting information.

  Failure to comply with applicablerequirements could result in fines, recall, total or partial suspension ofdistribution, withdrawal of existing product or our inability to integrate ourservice and product offerings. If any of these things occur, it could have amaterial adverse impact on our business.

***Changes in government regulation of thehealthcare industry could adversely affect our business.***

Federal and statelegislative proposals are periodically introduced or proposed that would affectmajor changes in the healthcare system, nationally, at the state level or both.Future legislation, regulation or payment policies of Medicare, Medicaid,private health insurance plans, health maintenance organizations and otherthird-party payers could adversely affect the demand for our current or futureproducts and our ability to sell our products on a profitable basis. Moreover,healthcare legislation is an area of extensive and dynamic change, and wecannot predict future legislative changes in the healthcare field or theirimpact on our industry or our business.

***We are subject to the Health Insurance Portability and AccountabilityAct (HIPAA) and the cost of complying with HIPAA may negatively impact our netincome.***

Our business issubstantially impacted by the requirements of HIPAA and our products mustmaintain the confidentiality of a patient’s medical records and information.These requirements also apply to most of our customers.  We believe our products meet the standards ofHIPAA and may require our customers to upgrade their systems, but our customers’preoccupation with HIPAA may adversely impact sales of our products, and thecosts of compliance with HIPAA could have an impact on our product margins andselling, general and administrative expenses incurred by us and couldnegatively impact our net income.

***Defective products or product failure may subject us to liability andcould substantially increase our costs.***

Our products are used togather information for professionals to make medical decisions, diagnosis, andtreatment.  Accordingly, the manufactureand sale of our products entails an inherent risk of product liability arisingfrom an inaccurate, or allegedly inaccurate, test or procedure result.  In the past, ASPYRA has discovered errors andfailures in certain of our product offerings after their introduction and haveexperienced delayed or lost revenues during the period required to correctthese errors.  Errors and failures inproducts released by us could result in negative publicity, product returns,loss of or delay in market acceptance of our products, loss of competitiveposition or claims by customers or others. Alleviating any of these problems could require significant expendituresof our capital and resources and could cause interruptions, delays or cessationof our sales, which could cause us to lose existing or potential customers andwould adversely affect our operating results. We may be subject to product liability claims as a result of any failureor errors in our products.  If a customeris successful in proving its damages, it could prove expensive andtime-consuming to defend against these claims, and we could be liable for thedamages suffered by our customers and other related expenses, which couldadversely affect our operating results. We currently maintain product liability insurance coverage for up to $2million per incident and up to an aggregate of $4 million per year.  Although management believes this liabilitycoverage is sufficient protection against future claims, there can be noassurance of the sufficiency of these policies. We have not received any indication that our insurance carrier will notrenew our product liability insurance at or near current premiums; however, wecannot guarantee that this will continue to be the case.

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***System or network failures could reduce our sales, increase costs orresult in a loss of customers.***

We rely on our managementinformation systems to operate our business and to track our operating results.Our management information systems will require modification and refinement aswe grow and our business needs change. If we experience a significant systemfailure or if we are unable to modify our management information systems torespond to changes in our business needs, then our ability to properly run ourbusiness could be adversely affected and could lead to a reduction in oursales, increase costs and a loss of customers.

***Our evaluation of internal controls and remediation of potential problemswill be costly and time consuming and could expose weakness in our financialreporting.***

While we believe that wecurrently have adequate internal control procedures in place, we are stillexposed to potential risks from recent legislation requiring companies toevaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. We areevaluating our internal controls system in order to allow management to reporton, and our independent registered public accounting firm to attest to, ourinternal controls over financial reporting, as required by Section 404 of theSarbanes-Oxley Act of 2002 beginning in our fiscal year 2008.

***Factors outside of our control may adversely affect our operations andoperating results.***

Our operations and operatingresults may be adversely affected by many different factors which are outsideof our control, including:

·                  deterioration in economicconditions in any of the healthcare information technology industry, whichcould reduce customer demand and ability to pay for our products and services;

·                  political and militaryinstability, which could slow spending within our target markets, delay salescycles and otherwise adversely affect our ability to generate revenues andoperate effectively;

·                  budgetary constraints ofcustomers, which are influenced by corporate earnings and spending objectives;

·                  earthquakes, floods or othernatural disasters affecting our headquarters located in Calabasas, California,an area known for seismic activity, or our other locations worldwide;

·                  acts of war or terrorism;and

·                  inadvertent errors.

Any of these factors couldresult in a loss of revenues and/or higher expenses, which could adverselyaffect our financial results.

***Our international operations involve special risks that could increase ourexpenses, adversely affect our operating results and require increased time andattention of our management.***

We expect to generateapproximately 10% of our revenues from customers located outside of the UnitedStates in the fiscal year ending December 31, 2007.  We may expand our international operationsand such expansion is contingent upon the successful growth of ourinternational revenues. Our international operations are subject to risks inaddition to those faced by our domestic operations, including:

·                  potential loss ofproprietary information due to piracy, misappropriation or laws that may beless protective of our intellectual property rights;

·                  imposition of foreign lawsand other governmental controls, including trade and employment restrictions;

·                  enactment of additionalregulations or restrictions on imports and exports;

·                  fluctuations in currencyexchange rates and economic instability such as higher interest rates andinflation, which could make our products more expensive in those countries;

·                  limitations on future growthor inability to maintain current levels of revenues from international sales ifwe do not invest sufficiently in our international operations;

26

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·                  longer payment cycles forsales in foreign countries and difficulties in collecting accounts receivable;

·                  difficulties in staffing,managing and operating our international operations;

·                  difficulties in coordinatingthe activities of our geographically dispersed and culturally diverseoperations; and

·                  political unrest, war or terrorism,particularly in areas in which we have facilities.

A portion of the Company’stransactions outside of the United States are denominated in foreigncurrencies. Our functional currency is the U.S. dollar.  Accordingly, our future operating results willcontinue to be subject to fluctuations in foreign currency rates. Hedgingforeign currency transaction exposures is complex and subject to uncertainty.We may be negatively affected by fluctuations in foreign currency rates in thefuture, especially if international sales continue to grow as a percentage ofour total sales.

***Changes to financial accounting standards and new exchange rules couldmake it more expensive to issue stock options to employees, which wouldincrease compensation costs and may cause us to change our business practices.***

We prepare our financialstatements to conform with generally accepted accounting principles, or GAAP,in the United States. These accounting principles are subject to interpretationby the Public Company Accounting Oversight Board, the SEC and various otherbodies. A change in those policies could have a significant effect on ourreported results and may affect our reporting of transactions completed beforea change is announced.

For example, we have usedstock options and other long-term equity incentives as a fundamental componentof our employee compensation packages. We believe that stock options and otherlong-term equity incentives directly motivate our employees to maximizelong-term shareholder value and, through the use of vesting, encourageemployees to remain with our Company. The Financial Accounting Standards Boardhas issued Statement of Financial Accounting Standards 123R that requires us torecord a charge to earnings for employee stock option grants. In addition,regulations implemented by the American Stock Exchange generally requireshareholder approval for all stock option plans, which could make it moredifficult or expensive for us to grant stock options to employees. We may, as aresult of these changes, incur increased compensation costs, change our equitycompensation strategy or find it difficult to attract, retain and motivateemployees, each of which could materially and adversely affect our business,operating results and financial condition.

***ADSI currentlyrelies on third party distribution arrangements to distribute itsproducts.  The loss of any of theserelationships, or a material change in any of them, could materially harm ourbusiness.***

For the fiscal years ended December 31, 2006 and2005, ADSI received approximately 90% of its revenues, respectively, throughthird party distribution arrangements. We expect that we will continue togenerate a significant portion of our revenues through a limited number ofdistribution arrangements for the foreseeable future. A significant portion ofthe Company’s outstanding accounts receivable is with such third partydistributors, which will result in a concentration of our credit risk. If anyof these third party distributors decides not to market or distribute ourproducts or decides to terminate or not renew its agreement with us, we may beunable to replace the affected agreements with acceptable alternatives, whichcould materially harm our business, operating results and financial condition.

**Risks Related to Our Common Stock**

***Future sales of our common stock could adversely affect our stockprice.***

Future sales of substantialamounts of shares of our common stock in the public market, or the perceptionthat these sales could occur, may cause the market price of our common stock todecline. In addition, we may be required to issue additional shares uponexercise of previously granted options or warrants such as the warrants topurchase up to 1,650,000 shares of ASPYRA common stock that ASPYRA issued intwo private placements completed in November 2005 and May 2006.  Increased sales of our common stock in themarket after exercise of stock options or warrants could exert significantdownward pressure on our stock price. These sales also might make it moredifficult for us to sell equity or equity-related securities in the future at atime and price we deem appropriate.

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***Our stock price may be volatile in the future, and you could lose thevalue of your investment.***

The market prices of thecommon stock for ASPYRA have experienced significant fluctuations and our stockprice may continue to fluctuate significantly, and you could lose the value ofyour investment. The market price of our common stock may be affected by anumber of factors, including:

·                  announcements of quarterlyoperating results and revenue and earnings forecasts by us, our competitors orour customers;

·                  failure to achieve financialforecasts, either because expected sales do not occur or because they occur atlower prices or on terms that are less favorable to us;

·                  rumors, announcements orpress articles regarding changes in our management, organization, operations orprior financial statements;

·                  changes in revenue andearnings estimates by securities analysts;

·                  announcements of plannedacquisitions by us or by our competitors;

·                  announcements of new orplanned products by us, our competitors or our customers;

·                  gain or loss of asignificant customer;

·                  inquiries by the SEC,American Stock Exchange, law enforcement or other regulatory bodies; and

·                  acts of terrorism, thethreat of war and economic slowdowns in general.

The stock market hasexperienced extreme price volatility, which has adversely affected and maycontinue to adversely affect the market price of our common stock for reasonsunrelated to our business or operating results.

***Fluctuations in our quarterly financial results have affected the stockprices of ASPYRA in the past and could affect our stock price in the future.***

The quarterly financialresults of ASPYRA have fluctuated in the past, and the quarterly financialresults of the combined company are likely to vary significantly in the future.A number of factors associated with the operation of our business may cause ourquarterly financial results to fluctuate, including our ability to:

·                  effectively align salesresources to meet customer needs and address market opportunities;

·                  effectively respond tocompetitive pressures; and

·                  effectively manage ouroperating expense levels.

A number of factors associated with our industry andthe markets for our products, many of which are outside our control, may causeour quarterly financial results to fluctuate, including:

·                  reduced demand for any ofour products;

·                  timing and amount of ordersby customers and seasonality in the buying patterns of customers;

·                  cancellation, deferral orlimitation of orders by customers;

·                  fluctuations in foreigncurrency exchange rates; and

·                  weakness or uncertainty ingeneral economic or industry conditions.

Quarterly changes in ourfinancial results could cause the trading price of our common stock tofluctuate significantly after the merger. If our quarterly financial results or our predictions of futurefinancial results fail to meet the expectations of securities analysts andinvestors, our stock price could be negatively affected. Any volatility in ourquarterly financial results may make it more difficult for us to raise capitalin the future or pursue acquisitions that involve issuances of our stock orsecurities convertible into or exercisable for our stock. You should not relyon the results of prior periods as predictors of our future performance.

**New Accounting Pronouncements**

In February 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”, which provides companies with an option to reportselected financial assets and liabilities at fair value. The objective of SFASNo. 159 is to reduce both complexity in accounting for financial

28

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instruments and the volatility in earnings caused bymeasuring related assets and liabilities differently. SFAS No. 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective for theCompany as of January 1, 2008. We have not completed our evaluation ofSFAS No. 159 but do not expect the adoption of SFAS No. 159 to have amaterial effect on our operating results or financial position.

In November 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, “Accountingfor Registration Payment Arrangements”, which specifies that the contingentobligation to make future payments or otherwise transfer consideration under aregistration payment arrangement, whether issued as a separate agreement orincluded as a provision of a financial instrument or other agreement, should beseparately recognized and measured. Additionally, this guidance furtherclarifies that a financial instrument subject to a registration paymentarrangement should be accounted for in accordance with other applicable GAAPwithout regard to the contingent obligation to transfer consideration pursuantto the registration payment arrangement. This guidance is effective forfinancial statements issued for fiscal years beginning after December 15, 2006,and interim periods within those fiscal years. The Company elected to earlyadopt FSP 00-19-2, effective for the audited consolidated financial statementsas of December 31, 2006, which had no impact on the consolidated financialstatements.

In September 2006, the SEC Staff issued Staff Accounting Bulletin No. 108(“SAB No. 108”), Considering the Effects of Prior Year Misstatements whenQuantifying Misstatements in Current Year Financial Statements, which addresseshow the effects of prior-year uncorrected misstatements should be consideredwhen quantifying misstatements in current-year financial statements. SABNo. 108 will require companies to quantify misstatements using both thebalance sheet and income statement approaches to evaluate whether eitherapproach results in quantifying an error that is material in light of relevantquantitative and qualitative factors. When the initial adoption is determinedto be material, SAB No. 108 allows companies to record that effect as acumulative effect adjustment to beginning-of-the-year retained earnings. Theaccounting provisions of SAB No. 108 are effective for the Company’sfiscal year ending December 31, 2006. The Company has determined that theeffect of the adoption of SAB No. 108 did not have a material effect onthe consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements. This statement defines fair value, establishes a framework formeasuring fair value in generally accepted accounting principles (“GAAP”), andexpands disclosures about fair value measurements. This statement is effectivefor financial statements issued for fiscal years beginning after November 15,2007. The Company does not currently believe that the adoption of SFAS 157 willhave a material impact on the consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes, (“FIN 48”) an interpretation of FASBStatement No. 109, Accounting for Income Taxes. FIN 48 requires thata position taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not (i.e. a likelihood ofmore than fifty percent) that the position would be sustained upon examinationby tax authorities. A recognized tax position is then measured at the largestamount of benefit that is greater than fifty percent likely of being realizedupon ultimate settlement. Upon adoption, the cumulative effect of applying therecognition and measurement provisions of FIN 48, if any, shall bereflected as an adjustment to the opening balance of retained earnings.FIN 48 requires that subsequent to initial adoption a change in judgmentthat results in subsequent recognition, derecognition or change in ameasurement of a tax position taken in a prior annual period (including anyrelated interest and penalties) be recognized as a discrete item in the periodin which the change occurs. Currently, we record such changes in judgment,including audit settlements, as a component of the Company’s income taxprovision. Thus, the Company’s reported quarterly income tax rate may becomemore volatile upon adoption of FIN 48. This change will not impact themanner in which we record income tax expense on an annual basis. FIN 48also requires expanded disclosures including identification of tax positionsfor which it is reasonably possible that total amounts of unrecognized taxbenefits will significantly change in the next twelve months, a description oftax years that remain subject to examination by major tax jurisdiction, atabular reconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective for fiscalyears beginning after December 15, 2006. The Company is currentlyevaluating the impact of this standard on its Consolidated FinancialStatements.

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**Off-Balance SheetArrangements**

We donot have any outstanding derivative financial instruments, off-balance sheetguarantees, interest rate swap transactions or foreign currency forwardcontracts, or any other off-balance sheet arrangements.

**Item7.  Financial Statements.**

For a list of financialstatements filed as part of this report, see index to Financial Statements andFinancial Statement Schedules on page 34.

**Item 8.  Changes in and Disagreements with Accountantson Accounting and Financial Disclosure.**

None.

**Item 8A.  Controls and Procedures**

Attachedas exhibits to this Annual Report on Form 10-KSB are certifications of ASPYRA’sChief Executive Officer and Chief Financial Officer, which are required inaccordance with Rule 13a-14 of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). This “Controls and Procedures” section includesinformation concerning the controls and controls evaluation referred to in thecertifications.  This section should beread in conjunction with the certifications for a more complete understandingof the topics presented.

**Evaluationof Disclosure Controls and Procedures**

TheCompany’s management, with the participation of the Chief Executive Officer andChief Financial Officer, conducted an evaluation of the effectiveness of theCompany’s disclosure controls and procedures, as defined in Exchange Act Rule13a-15(e), as of the end of the fiscal year covered by this Annual Report onForm 10-KSB.  Based on that evaluation,our Chief Executive Officer and Chief Financial Officer concluded that, as ofDecember  31, 2006, our disclosurecontrols and procedures are effective to provide reasonable assurance thatinformation required to be disclosed by us in the reports that we file orsubmit under the Exchange Act (i) is recorded, processed, summarized andreported within the time periods specified in the Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

**Changesin Internal Control over Financial Reporting**

Therewere no changes in our internal control over financial reporting that occurredduring the year ended December 31, 2006 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**Item 8B. Other Information**

Not Applicable.

**PART III**

**Item9.  Directors, Executive Officers,Promoters and Control Persons; Compliance with Section 16(a) of the ExchangeAct.**

Incorporatedby reference from “Directors, Executive Officers, Promoters and Control Persons”in the Definitive Proxy Statement to be filed with the Securities and ExchangeCommission for the 2007 Annual Meeting of the Company’s Shareholders.

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**Section 16(a) Beneficial Ownership ReportingCompliance**

Section16(a) of the Securities Exchange Act of 1934 (1934 Act) requires the Company’sdirectors and officers, and persons who own more than 10% of a registered classof the Company’s equity security, to file with the Securities and ExchangeCommission and the American Stock Exchange (AMEX) reports of ownership andchanges in ownership of common stock and other equity securities of theCompany.  Officers, directors and greaterthan 10% shareholders are required by SEC regulation to furnish the Companywith copies of all Section 16(a) forms they file.

To the Company’sknowledge, based solely on a review of the copies of such reports furnished tothe Company and written representations that no other reports were required,during the fiscal year ended December 31, 2006, all Section 16(a) filingrequirements applicable to its officers, directors and greater than ten percentbeneficial owners were complied with.

**Item 10. Executive Compensation.**

Incorporatedby reference from “Executive Compensation” in the Definitive Proxy Statement tobe filed with the Securities and Exchange Commission for the 2007 AnnualMeeting of the Company’s Shareholders.

**Item 11.Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder Matters.**

Incorporatedby reference from “Security Ownership of Certain Beneficial Owners and Management”in the Definitive Proxy Statement to be filed with the Securities and ExchangeCommission for the 2007 Annual Meeting of the Company’s Shareholders.

**Item 12.Certain Relationships and Related Transactions, and Director Independence.**

Incorporatedby reference from “Certain Relationships and Related Transactions” in theDefinitive Proxy Statement to be filed with the Securities and ExchangeCommission for the 2007 Annual Meeting of the Company’s Shareholders.

**Item13.  Exhibits.**

Thefollowing documents are filed as exhibits to this registration statement:
|        | 2. 1   | (1)       | Agreement and Plan of Reorganization, dated  August 16, 2005, by and among Creative Computer Applications, Inc.,  StorCOMM, Inc. and Xymed.com, Inc.         |
|--------|--------|-----------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 2. 1.1 | (1)       | Agreement and Plan of Reorganization Side Letter,  dated October 20, 2005, by and among Creative Computer Applications, Inc.,  StorCOMM, Inc. and Xymed.com, Inc. |
|   | 2. 2   | (2)       | Asset Purchase Agreement.                                                                                                                                         |
|   | 3. 1   | (3)       | Restated Articles of Incorporation, as Amended.                                                                                                                   |
|   | 3. 2   | (1)       | Form of Amendment to the Restated Articles of  Incorporation.                                                                                                |
|   | 3. 3   | (3)       | By-Laws, as amended.                                                                                                                                              |
|   | 4. 1   | (3)       | Specimen Share Certificate.                                                                                                                                       |
|   | 4. 2   | (4)       | Specimen Warrant Certificate.                                                                                                                                     |
|   | 4. 3   | (4)       | Form of Underwriter’s Warrant.                                                                                                                          |
|   | 4. 4   | (3)† | 1982 Non-Qualified Stock Option Plan.                                                                                                                             |
|   | 4. 5   | (4)† | 1982 Incentive Stock Option Plan, as amended.                                                                                                                     |
|   | 4. 6   | (2)† | 1992 Incentive Stock Option Plan.                                                                                                                                 |
|   | 4. 7   | (5)† | 1992 Non-Qualified Stock Option Plan.                                                                                                                             |
|   | 4. 8   | (6)† | 1997 Stock Option Plan.                                                                                                                                           |
|   | 4. 9   | (2)       | Warrant Agreement and Warrant Certificate between  Creative Computer Applications, Inc. and Western States Pharmacy Consultants,  Ltd.                            |
|   | 4. 10  | (2)       | Warrant Agreement and Warrant Certificate between  Creative Computer Applications, Inc. and James L.D. Roser.                                                     |
|   | 4. 11  | (2)       | Warrant Agreement and Warrant Certificate between  Creative Computer Applications, Inc. and The Roser Partnership.                                                |
|   | 4. 12  | (2)       | Warrant Agreement and Warrant Certificate between  Creative Computer Applications, Inc. and Epigen, Inc.                                                     |
|   | 4. 13  | (7)       | Registration Rights Agreement.                                                                                                                                    |
|   | 4. 14  | (1)       | Form of Warrant.                                                                                                                                             |
|   | 4. 15  | (1)       | Registration Rights Agreement, dated August 18,  2005.                                                                                                            |
|   | 4. 16  | (1)       | 2005 Equity Incentive Plan.                                                                                                                                       |
|   | 4. 17  | (13)      | Specimen Share Certificate.                                                                                                                                       |
|   | 4. 18  | (13)      | A Form of Warrant issued in Private Placement closed  on November 22, 2005.                                                                                       |
|   | 4. 19  | (13)      | A Form of Warrant issued in Private Placement closed  on May 17, 2006.                                                                                            |
|   | 10. 1  | (4)       | Warrant Agreement.                                                                                                                                                |
|   | 10. 2  | (4)       | The Company’s product warranties.                                                                                                                            |
|   | 10. 3  | (4)† | Bruce Miller Employment Agreement.                                                                                                                                |
|   | 10. 4  | (4)† | Steven M. Besbeck Employment Agreement.                                                                                                                           |

 

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|        | 10. 5  | (3)        | 14% Subordinated Convertible Debenture due  December 21, 1987.                                                                                                                     |
|--------|--------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   | 10. 6  | (3)        | Form of 1983 Warrants.                                                                                                                                                             |
|   | 10. 7  | (3)        | Form of 1982 Warrant.                                                                                                                                                              |
|   | 10. 8  | (4)        | Original Equipment Manufacturer Contracts.                                                                                                                                              |
|   | 10. 9  | (4)        | Michael Miller Consulting Agreement.                                                                                                                                                    |
|   | 10. 10 | (4)        | Boehringer Mannheim (Canada) Joint Marketing  Agreement.                                                                                                                                |
|   | 10. 12 | (8)        | Lease for Premises at 26664 Agoura Road, Calabasas,  California.                                                                                                                        |
|   | 10. 13 | (8)        | SAC Shareholders’ Agreement.                                                                                                                                                       |
|   | 10. 14 | (7)        | Lease for Premises at 26115-A Mureau Road,  Calabasas, California.                                                                                                                      |
|   | 10. 15 | (7)        | Mission Park Agreement.                                                                                                                                                                 |
|   | 10. 16 | (9)†  | Change in Control Agreements, by and between  Creative Computer Applications, Inc. and Steven M. Besbeck, dated  February 7, 2005.                                            |
|   | 10. 17 | (9)†  | Change in Control Agreements, by and between  Creative Computer Applications, Inc. and Bruce M. Miller, dated  February 7, 2005.                                              |
|   | 10. 18 | (9)†  | Change in Control Agreements, by and between  Creative Computer Applications, Inc. and James R. Helms, dated  February 7, 2005.                                               |
|   | 10. 19 | (10)† | Employment Agreement, by and between Creative  Computer Applications, Inc. and Samuel G. Elliott, dated October 1,  2005.                                                          |
|   | 10. 20 | (10)† | Employment Agreement, by and between Creative  Computer Applications, Inc. and William W. Peterson, dated October 1,  2005.                                                        |
|   | 10. 21 | (10)       | Shareholder Support Agreement, by and among  StorCOMM, Inc., Steven M. Besbeck, Bruce M. Miller and James R.  Helms, dated September 29, 2005.                           |
|   | 10. 22 | (10)       | Stockholder Support Agreement, by and among Creative  Computer Applications, Inc., Xymed.com, Inc., Giving Productively,  Inc. and TITAB, LLC, dated September 29, 2005. |
|   | 10. 23 | (1)        | Common Stock and Warrant Purchase Agreement, dated  August 18, 2005.                                                                                                               |
|   | 10. 24 | (10)       | Option Agreement Side Letter, by and between  Creative Computer Applications, Inc. and StorCOMM, Inc., dated  October 20, 2005.                                               |
|   | 10. 25 | (10)       | Promissory Note dated September 29, 2005.                                                                                                                                               |
|   | 10. 26 | (12)       | Common Stock and Warrant Purchase Agreement, dated  May 4, 2006.                                                                                                                        |
|   | 10. 27 | (12)       | Registration Rights Agreement, dated May 4, 2006.                                                                                                                                       |
|   | 14. 1  | (11)       | Code of Ethics.                                                                                                                                                                         |
|   | 21. 1  | (10)       | Subsidiaries of the Registrant.                                                                                                                                                         |
|   | 23. 1  | *          | Consent of BDO Seidman, LLP.                                                                                                                                                            |
|   | 31. 1  | *          | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                    |
|   | 31. 2  | *          | Certification of Chief Accounting Officer pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                   |
|   | 32. 1  | *          | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                    |
|   | 32. 2  | *          | Certification of Chief Accounting Officer pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                   |

 

----

| (1)          |   | Included as an Annex to the joint proxy  statement/prospectus that is part of the Company’s Registration Statement on  Form S-4, originally filed on October 3, 2005, SEC File No. 333-128795. |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (2)          |   | Previously filed as an exhibit to the Company’s Form  8-K dated October 21, 1992.                                                                                                              |
| (3)          |   | Previously filed as an exhibit to the Company’s  Registration Statement on Form S-18 dated September 22, 1983, SEC File  No. 2- 85265.                                               |
| (4)          |   | Previously filed as an exhibit to the Company’s  Registration Statement on Form S-1 dated October 1, 1985 SEC File No.  2-99878.                                                          |
| (5)          |   | Previously filed as an addendum to the Company’s  Proxy Statement and Notice of Annual Meeting of Shareholders dated April 10,  1992.                                                          |
| (6)          |   | Previously filed as an exhibit to the Company’s  Proxy Statement and Notice of Annual Meeting of Shareholders dated March 24,  1997.                                                           |
| (7)          |   | Previously filed as an exhibit to the Company’s Form  10-K for the year ended August 31, 1992.                                                                                            |
| (8)          |   | Previously filed as an exhibit to the Company’s Form  10-K for the year ended August 31, 1986.                                                                                            |
| (9)          |   | Form of Change in Control Agreement previously filed  as an exhibit to the Company’s Form 8-K dated February 9, 2005.                                                                          |
| (10)         |   | Previously filed as an exhibit to the Company’s  Registration Statement on Form S-4, originally filed on October 3, 2005 (SEC  File No. 333-128795).                                           |
| (11)         |   | Previously filed as an exhibit to the Company’s Form  10-KSB for the year ended December 31, 2005.                                                                                        |
| (12)         |   | Previously filed as an exhibit to the Company’s Form  8-K, dated May 18, 2006.                                                                                                                 |
| (13)         |   | Previously filed as an exhibit to the Company’s  Registration Statement on Form S-3 dated June 9, 2006 SEC File No.  333-134926.                                                               |
|  † |   | Executive compensation plans and arrangements.                                                                                                                                                      |
| *            |   | Filed with this Annual Report on Form 10-KSB.                                                                                                                                                       |

 

32

----

**Item14.  Principal Accountant Fees andServices.**

Incorporatedby reference from Principal Accountant Fees and Services in the DefinitiveProxy Statement to be filed with the Securities and Exchange Commission for the2007 Annual Meeting of the Company’s Shareholders.

**SIGNATURES**

Inaccordance with Section 13 or 15(d) of the Exchange Act, the registrant causedthis report to be signed on its behalf by the undersigned, thereunto dulyauthorized.
|                              |   | ASPYRA, INC. |
|------------------------------|--------|--------------|
|                         |   |         |
|                         |   |         |
| Dated:   April 16, 2007 |   | By:          |   |   |
|                         |   |         |   | /S/ Steven M. Besbeck |
|                         |   |         |   | Steven M. Besbeck, |
|                         |   |         |   | President, and Chief Executive Officer |

 

Inaccordance with the Exchange Act, this report has been signed below by thefollowing persons on behalf of the registrant and in the capacities and on thedates indicated.
| Signatures                   | ** ** | **Title** | ** **                                   | **Date** |
|------------------------------|------------|-----------|----------------------------------------------|----------|
|                         |       |      |                                         |     |   |
| /S/ Steven M.  Besbeck       |       |      | Chairman, President, and Chief Executive     |     | April 16, 2007 |
| Steven M.  Besbeck           |       |      | Officer (principal executive officer)        |     |   |
|                         |       |      |                                         |     |   |
| /S/ Bruce M.  Miller         |       |      | Chief Technology Officer                     |     | April 16, 2007 |
| Bruce M. Miller              |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ James R.  Helms          |       |      | Chief Operations Officer                     |     | April 16, 2007 |
| James R. Helms               |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ Anahita  Villafane       |       |      | Chief Financial Officer and Secretary        |     | April 16, 2007 |
| Anahita  Villafane           |       |      | (principal accounting and financial officer) |     |   |
|                         |       |      |                                         |     |   |
| /S/ Samuel G.  Elliott       |       |      | Chief International Officer                  |     | April 16, 2007 |
| Samuel G.  Elliott           |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ William W.  Blair        |       |      | Vice President, Sales                        |     | April 16, 2007 |
| William W. Blair             |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ Lawrence S.  Schmid      |       |      | Director                                     |     | April 16, 2007 |
| Lawrence S.  Schmid          |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ Robert S.  Fogerson, Jr. |       |      | Director                                     |     | April 16, 2007 |
| Robert S.  Fogerson, Jr.     |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ Norman R.  Cohen         |       |      | Director                                     |     | April 16, 2007 |
| Norman R. Cohen              |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ Bradford G.  Peters      |       |      | Director                                     |     | April 16, 2007 |
| Bradford G.  Peters          |       |      |                                         |     |   |
|                         |       |      |                                         |     |   |
| /S/ C. Ian  Sym-Smith        |       |      | Director                                     |     | April 16, 2007 |
| C. Ian Sym-Smith             |       |      |                                         |     |   |

 

33

----

**ASPYRA, INC.**

----

 

**Consolidated Financial Statements**

**For the Year Ended December 31, 2006**

----

 

ASPYRA, INC.

INDEX
| **Report of Independent Registered  Public Accounting Firm**                                             |   |   |
|----------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                     |   |   |
| **Consolidated Financial Statements**                                                                    |   |   |
|                                                                                                     |   |   |
| Balance  Sheet - December 31, 2006                                                                       |   |   |
|                                                                                                     |   |   |
| Statements of Operations - Years ended December 31,  2006 and 2005                                       |   |   |
|                                                                                                     |   |   |
| Statements of Shareholders’ Equity and Comprehensive  Loss - Years ended December 31, 2006 and 2005 |   |   |
|                                                                                                     |   |   |
| Statements of Cash Flows - Years ended December 31,  2006 and 2005                                       |   |   |
|                                                                                                     |   |   |
| **Notes to Consolidated Financial Statements**                                                           |   |   |

 

34

----

#### **Reportof Independent Registered Public Accounting Firm**

Boardof Directors and Shareholders

Aspyra,Inc. and Subsidiaries

Calabasas, California

We have audited the accompanying consolidated balancesheet of Aspyra, Inc. and subsidiaries as of December 31, 2006 and the relatedconsolidated statements of operations, shareholders’ equity and comprehensiveloss, and cash flows for each years ended December 31, 2006 and 2005.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (UnitedStates).  Those standards require that weplan and perform the audits to obtain reasonable assurance about whether thefinancial statements are free of material misstatement.  The Company is not required to have, nor werewe engaged to perform, an audit of its internal control over financialreporting.  Our audits includedconsideration of internal control over financial reporting as a basis fordesigning audit procedures that are appropriate in the circumstances, but notfor the purpose of expressing an opinion on the effectiveness of the Company’sinternal control over financial reporting. Accordingly, we express no suchopinion.  An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statementsreferred to above present fairly, in all material respects, the financialposition of Aspyra, Inc. and Subsidiaries at December 31, 2006 and the resultsof its operations and comprehensive loss and its cash flows the years endedDecember 31, 2006 and 2005, in conformity with accounting principles generallyaccepted in the United States of America.

As discussed in Note 8 to the consolidated financialstatements, the Company adopted Statement of Accounting Standards (“SFAS”) No.123(R), Share Based Payment, effective January 1, 2006.
| /s/ BDO SEIDMAN, LLP |   |
|----------------------|--------|

Los Angeles, California

April 16, 2007

35

----

**ASPYRA, INC.**

**CONSOLIDATED BALANCE SHEET**
| ** **                                                                                                                 | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**              | ** ** |
| **ASSETS**                                                                                                                 | ** ** | ** **            | ** ** |
|                                                                                                                       |       |                  |       |
| CURRENT ASSETS:                                                                                                            |       |                  |       |
| Cash                                                                                                                       |       | $                     | 1,014,632  |   |
| Restricted cash                                                                                                            |       | 1,000,000             |       |
| Receivables, net                                                                                                           |       | 1,334,153             |       |
| Inventory                                                                                                                  |       | 111,357               |       |
| Prepaid expenses                                                                                                           |       | 191,040               |       |
| Other assets                                                                                                               |       | 90,798                |       |
|                                                                                                                       |       |                  |       |
| TOTAL CURRENT ASSETS                                                                                                       |       | 3,741,980             |       |
|                                                                                                                       |       |                  |       |
| PROPERTY AND EQUIPMENT,  net                                                                                               |       | 1,171,421             |       |
| OTHER ASSETS                                                                                                               |       | 52,509                |       |
| INVENTORY OF COMPONENT  PARTS                                                                                              |       | 125,053               |       |
| CAPITALIZED SOFTWARE  COSTS, net of accumulated amortization of $875,165                                              |       | 2,487,307             |       |
| INTANGIBLES, net                                                                                                           |       | 4,449,482             |       |
| GOODWILL                                                                                                                   |       | 7,268,434             |       |
|                                                                                                                       |       | $                     | 19,296,186 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                             | ** ** | ** **            | ** ** |
|                                                                                                                       |       |                  |       |
| CURRENT LIABILITIES:                                                                                                       |       |                  |       |
| Notes payable                                                                                                              |       | $                     | 1,423,517  |   |
| Accounts payable                                                                                                           |       | 887,017               |       |
| Accrued  liabilities:                                                                                                      |       |                  |       |
| Vacation pay                                                                                                               |       | 348,178               |       |
| Accrued payroll                                                                                                            |       | 355,719               |       |
| Accrued interest                                                                                                           |       | 93,030                |       |
| Deferred rent                                                                                                              |       | 55,049                |       |
| Cutomer deposits                                                                                                           |       | 141,769               |       |
| Other                                                                                                                      |       | 256,974               |       |
| Deferred service  contract income                                                                                          |       | 1,509,042             |       |
| Deferred revenue  on system sales                                                                                          |       | 777,800               |       |
| Capital lease —  current portion                                                                                      |       | 150,237               |       |
|                                                                                                                       |       |                  |       |
| TOTAL CURRENT  LIABILITIES                                                                                                 |       | 5,998,332             |       |
|                                                                                                                       |       |                  |       |
| CAPITAL LEASE, LESS  CURRENT PORTION                                                                                       |       | 498,522               |       |
|                                                                                                                       |       |                  |       |
| TOTAL LIABILITIES                                                                                                          |       | 6,496,854             |       |
|                                                                                                                       |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES(Note 7)                                                                                     |       |                  |       |
|                                                                                                                       |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                                                 |       |                  |       |
| Common shares,  no par value; 20,000,000 shares authorized; 10,783,150 shares issued and  outstanding at December 31, 2006 |       | 21,044,071            |       |
| Additional  paid-in capital                                                                                                |       | 160,572               |       |
| Accumulated  deficit                                                                                                       |       | (8,360,580            | )          |
| Accumulated other  comprehensive loss                                                                                      |       | (44,731               | )          |
|                                                                                                                       |       |                  |       |
| TOTAL SHAREHOLDERS’  EQUITY                                                                                           |       | 12,799,332            |       |
|                                                                                                                       |       | $                     | 19,296,186 |   |

 

*See notes to consolidated financial statements.*

36

----

**ASPYRA, INC.**

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Years ended**        | ** **  |
|-------------------------------------------------|------------|-----------------------------|-------------|
| ** **                                      | ** ** | **December 31,  2006** | ** **  | **December 31,  2005** | ** ** |
| NET SYSTEM SALES AND  SERVICE REVENUE:          |       |                        |        |   |   |
| System sales                                    |       | $                           | 5,665,629   |   | $ | 2,112,782 |   |
| Service revenue                                 |       | 7,023,588                   |        | 5,092,975 |   |
| TOTAL SYSTEM SALES AND  SERVICE REVENUE         |       | 12,689,217                  |        | 7,205,757 |   |
|                                            |       |                        |        |   |   |
| COSTS OF PRODUCTS AND  SERVICES SOLD:           |       |                        |        |   |   |
| System sales                                    |       | 3,905,703                   |        | 1,817,566 |   |
| Service revenue                                 |       | 2,899,393                   |        | 1,878,030 |   |
| TOTAL COSTS OF PRODUCTS  AND SERVICES SOLD      |       | 6,805,096                   |        | 3,695,596 |   |
|                                            |       |                        |        |   |   |
| GROSS PROFIT                                    |       | 5,884,121                   |        | 3,510,161 |   |
|                                            |       |                        |        |   |   |
| RESEARCH AND  DEVELOPMENT EXPENSES              |       | 1,981,394                   |        | 1,300,690 |   |
| SELLING AND ADMINISTRATIVE  EXPENSES            |       | 7,246,638                   |        | 3,892,900 |   |
| TOTAL OPERATING  EXPENSES                       |       | 9,228,032                   |        | 5,193,590 |   |
|                                            |       |                        |        |   |   |
| OPERATING LOSS                                  |       | (3,343,911)                 |        | (1,683,429) |   |
|                                            |       |                        |        |   |   |
| OTHER INCOME (EXPENSE):                         |       |                        |        |   |   |
| Interest income                                 |       | 99,962                      |        | 26,461 |   |
| Interest and  other expense                     |       | (321,679)                   |        | (37,934) |   |
| TOTAL OTHER EXPENSE                             |       | (221,717)                   |        | (11,473) |   |
|                                            |       |                        |        |   |   |
| LOSS BEFORE PROVISION  FOR INCOME TAXES         |       | (3,565,628)                 |        | (1,694,902) |   |
|                                            |       |                        |        |   |   |
| PROVISION FOR INCOME  TAXES                     |       | 4,810                       |        | 807,013 |   |
|                                            |       |                        |        |   |   |
| NET LOSS                                        |       | $                           | (3,570,438) |   | $ | (2,501,915) |   |
| LOSS PER SHARE:                                 |       |                        |        |   |   |
|                                            |       |                        |        |   |   |
| Basic and  Diluted                              |       | $                           | (.36)       |   | $ | (.62) |   |
|                                            |       |                        |        |   |   |
| WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING: |       |                        |        |   |   |
|                                            |       |                        |        |   |   |
| Basic and Diluted                               |       | 9,914,916                   |        | 4,038,233 |   |

 

*See notes to consolidated financial statements.*

37

----

**ASPYRA, INC.**

**CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITYAND COMPREHENSIVE LOSS**
| ** **                                                                           | ** ** | **Common   Shares** | ** ** | **Common   Shares   Amount** | ** ** | **Additional  Paid-In Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other   Comprehensive  Loss** | ** ** | **Total   Shareholders’  Equity** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|--------------------------|------------|---------------------------------------------------|------------|---------------------------------------------|------------|
| BALANCE, December 31,  2004                                                          |       | 3,321,900                |       | $                                      | 6,195,692  |                                 | $          | —                   |       | $                                                 | (2,288,227 | )                                           | $          | — |   | $ | 3,907,465 |   |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Components of  comprehensive loss:                                                   |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Net loss                                                                             |       | —                   |       | —                                 |       | —                               |       | (2,501,915               | )          | —                                            |       | (2,501,915                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Foreign currency  translation adjustment                                             |       | —                   |       | —                                 |       | —                               |       | —                   |       | (2,690                                            | )          | (2,690                                      | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Total  comprehensive loss                                                            |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       | (2,504,605                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Exercise of  stock options                                                           |       | 169,500                  |       | 171,400                                |       | —                               |       | —                   |       | —                                            |       | 171,400                                     |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Stock issued for  merger                                                             |       | 3,498,000                |       | 7,765,560                              |       | —                               |       | —                   |       | —                                            |       | 7,765,560                                   |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Stock and  warrants issued for private placement (net of $158,430 of costs)          |       | 1,500,000                |       | 2,841,570                              |       | —                               |       | —                   |       | —                                            |       | 2,841,570                                   |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| BALANCE, December 31,  2005                                                          |       | 8,489,400                |       | 16,974,222                             |       | —                               |       | (4,790,142               | )          | (2,690                                            | )          | 12,181,390                                  |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Components of  comprehensive loss:                                                   |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Net loss                                                                             |       | —                   |       | —                                 |       | —                               |       | (3,570,438               | )          | —                                            |       | (3,570,438                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Foreign currency  translation adjustment                                             |       | —                   |       | —                                 |       | —                               |       | —                   |       | (42,041                                           | )          | (42,041                                     | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Total  comprehensive loss                                                            |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       | (3,612,479                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Fractional share  payout resulting from merger                                       |       | —                   |       | (234                                   | )          | —                               |       | —                   |       | —                                            |       | (234                                        | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Compensation  expense                                                                |       | —                   |       | —                                 |       | 160,572                              |       | —                   |       | —                                            |       | 160,572                                     |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Exercise of  stock options                                                           |       | 43,750                   |       | 36,200                                 |       | —                               |       | —                   |       | —                                            |       | 36,200                                      |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| Stock and  warrants issued for private placement (net of $466,117 of offering costs) |       | 2,250,000                |       | 4,033,883                              |       | —                               |       | —                   |       | —                                            |       | 4,033,883                                   |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |       |                                        |       |
| BALANCE, December 31, 2006                                                           |       | 10,783,150               |       | $                                      | 21,044,071 |                                 | $          | 160,572                  |       | $                                                 | (8,360,580 | )                                           | $          | (44,731 | ) | $ | 12,799,332 |   |

 

*See notes to consolidated financial statements.*

38

----

**ASPYRA,INC.**

**CONSOLIDATED STATEMENTS OF CASHFLOWS**

**Increase(Decrease) in Cash**
| ** **                                                                   | ** ** | **Years ended**              | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,   2006** | ** ** | **December 31,   2005** | ** ** |
| OPERATING  ACTIVITIES                                                        |       |                              |       |   |   |
|                                                                         |       |                              |       |   |   |
| Net loss                                                                     |       | $                                 | (3,570,438 | ) | $ | (2,501,915 | ) |
| Adjustments to reconcile net loss to net cash used  in operating activities: |       |                              |       |   |   |
| Depreciation and amortization                                                |       | 377,517                           |       | 184,683 |   |
| Amortization of capitalized software costs                                   |       | 329,390                           |       | 333,424 |   |
| Amortization of acquired intangibles                                         |       | 677,758                           |       | 62,760 |   |
| Provision for doubtful accounts                                              |       | 18,371                            |       | 47,982 |   |
| Deferred tax provision                                                       |       | —                            |       | 793,877 |   |
| Stock based compensation                                                     |       | 160,572                           |       | — |   |
| Increase (decrease) from changes in:                                         |       |                              |       |   |   |
| Receivables                                                                  |       | 195,175                           |       | 560,115 |   |
| Inventories                                                                  |       | 129,237                           |       | (78,001 | ) |
| Prepaid expenses and other assets                                            |       | 255,163                           |       | (283,290 | ) |
| Accounts payable                                                             |       | (331,681                          | )          | 539,065 |   |
| Accrued liabilities                                                          |       | 18,157                            |       | (222,821 | ) |
| Deferred service contract income                                             |       | (102,602                          | )          | (272,726 | ) |
| Deferred revenue on system sales                                             |       | (387,721                          | )          | 198,717 |   |
|                                                                         |       |                              |       |   |   |
| Net cash used in  operating activities                                       |       | (2,231,102                        | )          | (638,130 | ) |
|                                                                         |       |                              |       |   |   |
| INVESTING  ACTIVITIES                                                        |       |                              |       |   |   |
| Additions to property and equipment                                          |       | (285,837                          | )          | (325,718 | ) |
| Purchase of StorCOMM, net of cash received                                   |       | —                            |       | (1,648,013 | ) |
| Additions to capitalized software costs                                      |       | (930,810                          | )          | (687,738 | ) |
|                                                                         |       |                              |       |   |   |
| Net cash used in  investing activities                                       |       | (1,216,647                        | )          | (2,661,469 | ) |
|                                                                         |       |                              |       |   |   |
| FINANCING  ACTIVITIES                                                        |       |                              |       |   |   |
| Borrowings on line of credit                                                 |       | 500,000                           |       | 800,000 |   |
| Payments on line of credit                                                   |       | —                            |       | (600,000 | ) |
| Payments on notes payable                                                    |       | (292,757                          | )          | (230,539 | ) |
| Payments on capital lease obligations                                        |       | (102,423                          | )          | (5,452 | ) |
| Increase in restricted cash                                                  |       | (1,000,000                        | )          | — |   |
| Gross proceeds from sale of stock in private  placement                      |       | 4,500,000                         |       | 3,000,000 |   |
| Payments made for private placement transaction                              |       | (466,117                          | )          | (158,430 | ) |
| Buyback of fractional shares related to merger                               |       | (234                              | )          | — |   |
| Exercise of stock options and warrants                                       |       | 36,200                            |       | 171,400 |   |
|                                                                         |       |                              |       |   |   |
| Net cash  provided by financing activities                                   |       | 3,174,669                         |       | 2,976,979 |   |
|                                                                         |       |                              |       |   |   |
| Foreign currency  translation adjustment                                     |       | (42,041                           | )          | (2,690 | ) |
|                                                                         |       |                              |       |   |   |
| NET DECREASE IN  CASH                                                        |       | (315,121                          | )          | (325,310 | ) |
| CASH, beginning  of year                                                     |       | 1,329,753                         |       | 1,655,063 |   |
| CASH, end of year                                                            |       | $                                 | 1,014,632  |   | $ | 1,329,753 |   |

 

*See notes to consolidated financial statements.*

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# **NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**BusinessActivities**

Aspyra, Inc. (formerly known as Creative ComputerApplications, Inc.) (the Company or ASPYRA), a California corporation, wasformed in 1978.  The Company is ahealthcare information technology and service provider that specializes inClinical Information Systems (CIS) and Diagnostic Information Systems (DIS) forhealthcare providers.

The Company’s software and services for hospitals andclinic-based laboratories, pharmacies, orthopedic centers, and imagingdepartments are highly scalable and can be used by a broad variety ofhealthcare providers.  Clinicalinformation is data that is gathered concerning each individual patient’shealth condition, diagnosis, and treatment that are used by doctors, nurses andother healthcare providers.  Such datamay include laboratory test results, transcribed reports of radiological orimaging procedures, digital diagnostic images, medication administrationrecords, and other clinical and diagnostic data.  The Company’s products are deployed toprovide automation of clinical information and digital diagnostic images thatfacilitates the operation of clinical departments and allows the rapidrecording and processing of information that can be communicated, documented,and delivered to healthcare providers.

TheCompany headquarters is located in Calabasas, California.  The Company also has locations inJacksonville, Florida and the United Kingdom. The Company primarily markets its products in the United States, UnitedKingdom, Canada, the Caribbean, and Southeast Asia.

On November 22, 2005,the Company completed the merger of Xymed.com, Inc., a Delaware corporation andwholly owned subsidiary of ASPYRA, with and into StorCOMM, Inc. (“StorCOMM”), aDelaware corporation, pursuant to the terms of the Agreement and Plan ofReorganization, dated August 16, 2005 (the “Merger Agreement”), by and amongASPYRA, Xymed.com, Inc. and StorCOMM.

OnNovember 22, 2005, simultaneously with the closing of the merger, ASPYRA completeda private placement whereby the Company issued 1,500,000 Common Shares andwarrants to purchase 300,000 Common Shares pursuant to a Common Stock andWarrant Purchase Agreement.

On May17, 2006, the Company sold in a private placement 2,250,000 of its CommonShares and warrants to purchase up to 1,350,000 Common Shares pursuant to theterms of the Common Stock and Warrant Purchase Agreement.

**Principlesof Consolidation**

Theconsolidated financial statements include the accounts of ASPYRA and its subsidiariesafter elimination of all intercompany accounts and transactions.

### **Cash and Cash Equivalents**

TheCompany considers all liquid assets with an initial maturity of three months orless to be cash equivalents.

**Receivablesand Concentration of Credit Risk**

Receivables potentially expose the Company toconcentrations of credit risk. The Company provides credit to a large number ofhospitals, clinics, reference laboratories and other healthcare institutions invarious geographical areas.  The Companyperforms ongoing credit evaluations and maintains a general security interestin the item sold until full payment is received.  Two customers accounted for 44% of tradereceivables that were billed as of December 31, 2006.

TheCompany maintains the majority of its cash and cash equivalents in a number ofcommercial bank accounts.  Accounts atthese banks are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”)up to $100,000 at each bank.  At December31, 2006, the Company had approximately $1,213,000 at a bank that was in excessof the FDIC insurance limit.

TheCompany also maintains a portion of its cash and cash equivalents in aninvestment account at a commercial bank. The investment account is guaranteedby the Securities Investor Protection Company (“SIPC”) up to $400,000. AtDecember 31, 2006, the Company had approximately $280,000 in the investmentaccount that was in excess of the SIPC insurance limit.

**Inventories**

Inventoriesconsist primarily of computer hardware held for resale and are stated at thelower of cost or market (net realizable value). Cost is determined using the first-in, first-out method. Supplies arecharged to expense as incurred.

TheCompany also maintains an inventory pool of component parts to service systemspreviously sold, which is classified as non-current in the accompanying balancesheets.  Such inventory is carried at thelower of cost or market and is charged to cost of sales based on usage.  Allowances are made for quantities on hand inexcess of estimated future usage.  AtDecember 31, 2006 the inventory allowance was $115,504.

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**Propertyand Equipment**

Property,equipment, and leasehold improvements are stated at cost less accumulateddepreciation.  Depreciation of machineryand equipment, furniture and fixtures, and data processing equipment iscomputed for financial reporting purposes using the straight-line method overthe estimated useful life of the related asset, ranging from three to fiveyears.  Amortization of leaseholdimprovements is computed using the straight-line method over the lesser of theestimated useful life or the lease term. Accelerated depreciation methods are used for income tax reportingpurposes.  The Company periodicallyreviews such assets for possible impairments and expected losses, if any, arerecorded currently.  Expenditures formaintenance and repairs are expensed as incurred.

**CapitalizedSoftware Costs**

Inaccordance with SFAS No. 86, “Accounting for the Costs of Computer Software tobe Sold, Leased or Otherwise Marketed”‘ software costs incurred internally increating computer software products are expensed until technologicalfeasibility has been established upon completion of a detailed programdesign.  Thereafter, all softwaredevelopment costs are capitalized until the point that the product is ready forsale and subsequently reported at the lower of unamortized cost or netrealizable value.  The Company considersannual amortization of capitalized software costs based on the ratio of currentyear revenues by product to the product’s total estimated revenues method,subject to an annual minimum based on straight-line amortization over theproduct’s estimated economic useful life, not to exceed five years.  The Company reviews capitalized softwarecosts for impairment on an annual basis. To the extent that the carrying amount exceeds the estimated netrealizable value of the capitalized software cost, an impairment charge isrecorded.

Duringthe years ended December 31, 2006 and 2005, the Company capitalized $930,810and $687,738, respectively of software development costs.  Amortization expense of capitalized softwaredevelopment costs, included in cost of sales, for the years ended December 31,2006 and 2005 amounted to $329,390 and $333,424, respectively.

**RevenueRecognition**

*SystemSales*

Inaccordance with Statement of Position 97-2, “Software Revenue Recognition”, (“SOP 97-2”),as amended by SOP 98-4 and SOP 98-9, and clarified by Staff Accounting Bulletin(SAB) 104, “Revenue Recognition in Financial Statements”, the Company recognizesrevenue on sales of Clinical Information Systems and data acquisition productswhen the following criteria are met: (i) persuasive evidence of anarrangement exists, (ii) delivery has occurred and the system isfunctional, (iii) the vendor’s fee is fixed or determinable and(iv) collectability is probable. Also in accordance with SOP 97-2, as amended, the Company allocates thefee of a multiple element contract to the various elements based on vendor-specificobjective evidence of fair value.  Revenueallocated to a specific element is recognized when the basic revenuerecognition criteria above is met for that element.  If sufficient vendor-specific objectiveevidence for all elements does not exist to allocate revenue to the elements,all revenue from the arrangement generally is deferred until such evidence doesexist or until all elements have been delivered.  Implementation revenue, consisting primarilyof installation and training, is recognized as revenue as the services areperformed.

As a resultof the above provisions, the Company recorded deferred revenue on system salesof $777,800 at December 31, 2006.

*ServiceRevenue*

Servicerevenues are recognized ratably over the contractual period (usually one year)or as the services are provided.  Theseservices are not essential to the functionality of any other elements and areseparately stated.  At December 31, 2006,the Company had deferred service revenues of $1,509,042.

*DeferredRevenue and Income*

Deferredrevenue on system sales and deferred service contract income represent cashreceived in advance or accounts receivable from system and service sales ofwhich the above criteria have not been met for the current reporting of income.

**StockBased Compensation**

OnJanuary 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS)No. 123 (Revised 2004), “Share-Based Payment,” (SFAS 123R), whichrequires the measurement and recognition of compensation expense for allshare-based payment awards made to employees and directors based onestimated fair values at the date of grant using an option-pricing model.SFAS 123R replaces SFAS 123, “Accounting for Stock-Based Compensation”(SFAS No. 123) for awards granted to employees and directors and supersedesAccounting Principles Board Opinion No. 25, “Accounting for 

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Stock Issued toEmployees” (APB 25). Prior to the adoption of SFAS 123R, we accounted forshared-based payment awards to employees and directors using theintrinsic value method in accordance with APB 25 as allowed under SFAS 123.Under APB 25, we recognized no share-based compensation expense in our consolidatedstatements of operations for awards to employees and directors because theexercise price of our stock options equaled the fair market value of theunderlying stock at the date of grant. Under the provisions of SFAS 123R, sharebased compensation expense is recognized over the employee’s requisite serviceperiod (generally the vesting period of the equity grant) using thestraight-line method, and is reduced for estimated forfeitures. SFAS 123Rrequires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from thoseestimates. In our pro-forma information required under SFAS No. 123 forthe periods prior to 2006, we accounted for forfeitures as they occurred.

Weadopted SFAS 123R using the modified prospective transition method, and inaccordance with that method, our consolidated financial statements for 2006include compensation expense related to the unvested portion ofshare-based payment awards granted prior to January 1, 2006 based on thegrant date fair value estimated in accordance with the pro-formaprovisions of SFAS 123. Prior periods have not been restated to reflect, and donot include, the impact of SFAS 123R. As a result of adopting SFAS 123R onJanuary 1, 2006, share-based compensation expense recognized under SFAS123R for employees and directors for 2006 was $160,572, which impacted ourbasic and diluted loss per share by $0.02. Had we determined compensation cost based on the fair value at the grantdate for such stock options under SFAS 123 for the year ended December 31,2005, the pro forma effect on net loss and net loss per share would have beenas follows:

|                                                                                                          | ** ** | **Year Ended**   | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                               | ** ** | **December 31,** | ** ** |
| ** **                                                                                               | ** ** | **2005**              | ** ** |
| Net loss, as  reported                                                                                   |       | $                     | (2,501,915 | ) |
| Add: Stock-based  compensation expense included in reported net income, net of related tax  effects      |       | —                |       |
|                                                                                                     |       |                  |       |
| Deduct: Total  stock-based compensation expense determined under fair value based method for  all awards |       | (193,770              | )          |
|                                                                                                     |       |                  |       |
| Net loss, pro  forma                                                                                     |       | $                     | (2,695,685 | ) |
|                                                                                                     |       |                  |       |
| Basic net loss  per share, as reported                                                                   |       | $                     | (.62       | ) |
| Basic net loss  per share, pro forma                                                                     |       | (.67                  | )          |
|                                                                                                     |       |                  |       |
| Diluted net loss  per share, as reported                                                                 |       | (.62                  | )          |
| Diluted net loss per  share, pro forma                                                                   |       | (.67                  | )          |

 

AtDecember 31, 2005, options and warrants to purchase 821,670 shares were outstandingand could affect future periods, but were not included in the computation ofdiluted loss per common share because the effect would be antidilutive.

The fair value of optiongrants is estimated on the date of grants utilizing the Black-Scholes optionpricing with the following weighted average assumptions for grants in 2006 and2005: expected life of options ranging from 3 to 5 years; expected volatilityranging from 98% to 101%; no dividends; and risk-free interest rate ranging4.0% to 5.0%.  The weighted average fairvalue on the date of grants for options granted during the years ended December31, 2006 and 2005, was $1.51 and $1.80, respectively.

**EarningsPer Share**

TheCompany computes earnings (loss) per common share under Statement of Financial AccountingStandards No. 128, “Earnings per Share” (SFAS No. 128), which requirespresentation of Basic and Diluted earnings (loss) per share.  Basic earnings (loss) per share includes nodilution and is computed by dividing income (loss) available to commonshareholders by the weighted average number of common shares outstanding forthe period. Diluted earnings (loss) per share reflects the potential dilutionof securities that could share in the earnings of an entity, such as stockoptions, warrants or convertible debentures, unless antidilutive (see Note 10).

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**IncomeTaxes**

TheCompany accounts for income taxes in accordance with the Statement of FinancialAccounting Standards (SFAS) No. 109, “Accounting for Income Taxes. SFASNo. 109 requires a Company to use the asset and liability method ofaccounting for income taxes. Under the asset and liability method, deferredincome taxes are recognized for the tax consequences of “temporary differences”by applying enacted statutory tax rates applicable to future years todifferences between the financial statement carrying amounts and the tax basesof existing assets and liabilities. Under SFAS No. 109, the effect ondeferred income taxes of a change in tax rates is recognized in income in theperiod that includes the enactment date.

**ForeignCurrency Translation**

Assets and liabilities of the foreign subsidiary with functional currencyother than the U.S. dollar are translated into U.S. dollars using the exchangerate in effect at the balance sheet date. Results of their operations aretranslated using the average exchange rates during the period. The resultingforeign currency translation adjustment is included in stockholders’ equity asa component of accumulated other comprehensive loss.

**AccountingEstimates**

The preparationof financial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements and the reported amounts of revenues and expenses during thereporting period. Actual results could differ from those estimates.

**Goodwilland Other Intangible Assets**

Goodwill represents the residual purchase price after allocation of thepurchase price of assets acquired. Other intangible assets consist primarily ofpurchased technology and customer relationships. The Company accounts forgoodwill and other intangible assets in accordance with SFAS 142 “Goodwill andOther Intangible Assets”. Under SFAS 142, goodwill is not amortized but testedfor impairment on an annual basis, or whenever events or changes incircumstances indicate that the carrying value may not be recoverable. Otherintangible assets are carried at cost less accumulated amortization.Amortization is computed using the straight-line method over the estimateduseful lives of four to fifteen years.

**CapitalLeases**

Assets held under capital leases are included as computer equipment, and are recorded at the lower of the netpresent value of the minimum lease payments or the fair value of the leasedasset at the inception of the lease. Depreciation expense is computed using thestraight-line method over the estimated useful lives of the assets. Alllease agreements contain bargain purchase options at termination of the lease.

**FairValue of Financial Instruments**

Quotedmarket prices generally are not available for all of the Company’s financialinstruments. Accordingly, fair values are based on judgments regarding currenteconomic conditions, risk characteristics of various financial instruments andother factors. These estimates involve uncertainties and matters of judgment,and therefore, cannot be determined with precision. Changes in assumptionscould significantly affect the estimates. Cash, receivables, accounts payable,accrued liabilities and notes payable are recorded at carrying amounts whichapproximate fair value due to the short maturity of these instruments.

**Reclassifications**

Certainamounts in the prior year consolidated financial statements have beenreclassified to conform to the current year presentation.

**RecentAccounting Pronouncements**

In February 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”, which provides companies with an option to reportselected financial assets and liabilities at fair value. The objective of SFASNo. 159 is to reduce both complexity in accounting for financialinstruments and the volatility in earnings caused by measuring related assetsand liabilities differently. SFAS No. 159 also establishes presentationand disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement attributes for similar types ofassets and liabilities. SFAS No. 159 is effective for the Company as ofJanuary 1, 2008. We have not completed our evaluation of SFAS No. 159but do not expect the adoption of SFAS No. 159 to have a material effecton our operating results or financial position.

In November 2006, the FASB issued FASB Staff Position No. EITF 00-19-2, “Accountingfor Registration Payment Arrangements”, which specifies that the contingentobligation to make future payments or otherwise transfer consideration under aregistration payment arrangement, whether issued as a separate agreement orincluded as a provision of a financial instrument or other agreement, should beseparately recognized and measured. Additionally, this guidance furtherclarifies that a financial instrument subject to a registration paymentarrangement should be accounted for in accordance with other 

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applicable GAAP without regard to the contingent obligation to transferconsideration pursuant to the registration payment arrangement. This guidanceis effective for financial statements issued for fiscal years beginning afterDecember 15, 2006, and interim periods within those fiscal years. The Companyelected to early adopt FSP 00-19-2, “Accounting for Registration PaymentArrangements,” effective for the audited on the consolidated financialstatements as of December 31, 2006, which had no impact on the consolidatedfinancial statements.

In September 2006, the SEC Staff issued Staff Accounting BulletinNo. 108 (“SAB No. 108”), Considering the Effects of Prior YearMisstatements when Quantifying Misstatements in Current Year FinancialStatements, which addresses how the effects of prior-year uncorrected misstatementsshould be considered when quantifying misstatements in current-year financialstatements. SAB No. 108 will require companies to quantify misstatementsusing both the balance sheet and income statement approaches to evaluatewhether either approach results in quantifying an error that is material inlight of relevant quantitative and qualitative factors. When the initialadoption is determined to be material, SAB No. 108 allows companies torecord that effect as a cumulative effect adjustment to beginning-of-the-yearretained earnings. The accounting provisions of SAB No. 108 are effectivefor the Company’s fiscal year ending December 31, 2006. The Company hasdetermined that the effect of the adoption of SAB No. 108 did not have amaterial effect on the consolidated financial statements.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements.This statement defines fair value, establishes a framework for measuring fairvalue in generally accepted accounting principles (“GAAP”), and expandsdisclosures about fair value measurements. This statement is effective forfinancial statements issued for fiscal years beginning after November 15,2007. The Company does not currently believe that the adoption of SFAS 157 willhave a material impact on the consolidated financial statements.

In July 2006, the FASB issued FASB Interpretation No. 48, Accountingfor Uncertainty in Income Taxes, (“FIN 48”) an interpretation of FASBStatement No. 109, Accounting for Income Taxes. FIN 48 requires thata position taken or expected to be taken in a tax return be recognized in thefinancial statements when it is more likely than not (i.e. a likelihood ofmore than fifty percent) that the position would be sustained upon examinationby tax authorities. A recognized tax position is then measured at the largestamount of benefit that is greater than fifty percent likely of being realizedupon ultimate settlement. Upon adoption, the cumulative effect of applying therecognition and measurement provisions of FIN 48, if any, shall bereflected as an adjustment to the opening balance of retained earnings. FIN 48requires that subsequent to initial adoption a change in judgment that resultsin subsequent recognition, derecognition or change in a measurement of a taxposition taken in a prior annual period (including any related interest andpenalties) be recognized as a discrete item in the period in which the changeoccurs. Currently, we record such changes in judgment, including auditsettlements, as a component of the Company’s income tax provision. Thus, theCompany’s reported quarterly income tax rate may become more volatile uponadoption of FIN 48. This change will not impact the manner in which werecord income tax expense on an annual basis. FIN 48 also requiresexpanded disclosures including identification of tax positions for which it isreasonably possible that total amounts of unrecognized tax benefits willsignificantly change in the next twelve months, a description of tax years thatremain subject to examination by major tax jurisdiction, a tabularreconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective forfiscal years beginning after December 15, 2006. The Company is currentlyevaluating the impact of this standard on its Consolidated FinancialStatements.

## **NOTE 2 -LIQUIDITY**

As of December 31, 2006,the Company’s working deficit of $2,256,352 compared to a working deficit of$2,549,521, as of December 31, 2005. At December 31, 2006, theCompany’s credit facilities with its bank consisted of a revolving line ofcredit of $1,000,000, of which $1,000,000 was outstanding. The bank creditagreement is available through May 19, 2007.  Theline of credit is secured by a time deposit account.  On February 27, 2007, the Company enteredinto a new banking relationship whereby the bank provided a revolving line ofcredit in the aggregate amount of $1,300,000. Therevolving line of credit is secured by the Company’s accounts receivable andinventory and matures on February 27, 2008. The revolving line of credit is subject to certain covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventorybalances.  The Company used the initialadvance on the revolving line of credit to pay in full a previous note from anotherbank that was secured by a $1,000,000 certificate of deposit as carried on 

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theDecember 31, 2006 balance sheet under restricted cash.  The pay off released the certificate ofdeposit previously held by the former bank. Management is considering additional financing to accelerate its businessdevelopment plans which in turn may improve its working capital position.

TheCompany’s primary source of working capital has been generated from privateplacements of securities and from borrowings. The Company’s results ofoperations for the current fiscal year ended December 31, 2006 producednegative operating cash flow of $2,231,102, which was not sufficient to fundits product development activities, and to invest in new marketing programs,which required the Company to seek financing. An unanticipated decline insales, delays in implementations where payments are tied to delivery and/orperformance of services, or cancellations of contracts could have a negativeeffect on cash flow from operations and could in turn create short-termliquidity problems. Webelieve that our current cash and cash equivalents, and cash flow fromoperations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and variouscontractual obligations, for at least the next 12 months. We may, however,require additional cash resources due to changed business conditions or otherfuture developments, including any investments or acquisitions wemay decide to pursue. If these sources are insufficient to satisfy ourcash requirements, we may seek to sell debt securities or additionalequity securities or to obtain a credit facility. The sale of convertible debtsecurities or additional equity securities could result in additional dilutionto our stockholders. The incurrence of indebtedness would result in incurringdebt service obligations and could result in operating and financial covenantsthat would restrict our operations. In addition, there can be no assurance thatany additional financing will be available on acceptable terms, if at all.Although there are no present understandings, commitments or agreements withrespect to the acquisition of any other businesses, applications ortechnologies, we may, from time to time, evaluate acquisitions of other businesses,applications or technologies.

## **NOTE 3 -RECEIVABLES**

Receivables are summarized as follows:

| Billed receivables               |   | $       | 1,020,756 |   |
|----------------------------------|--------|---------|-----------|--------|
| Unbilled  receivables            |   | 396,237 |      |
| Allowance for  doubtful accounts |   | (82,840 | )         |
|                             |   |    |      |
|                             |   | $       | 1,334,153 |   |

 

                Unbilledreceivables are billed when milestone events are reached, as agreed upon andestablished in sales contracts.

**NOTE 4 - PROPERTY AND EQUIPMENT**

Property and equipment are summarized as follows:

| Machinery and equipment    |   | $          | 259,285   |   |
|----------------------------|--------|------------|-----------|--------|
| Furniture and  fixtures    |   | 604,654    |      |
| Data processing  equipment |   | 2,289,770  |      |
| Leasehold  improvements    |   | 106,330    |      |
|                       |   |       |      |
|                       |   | 3,260,039  |      |
| Accumulated  depreciation  |   | (2,088,618 | )         |
|                       |   |       |      |
|                       |   | $          | 1,171,421 |   |

 

Depreciation and amortization expense for property andequipment for the years ended December 31, 2006 and 2005 was $377,517 and$184,683.

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**NOTE 5 — GOODWILL AND INTANGIBLE ASSETS**

Intangible assets are summarized as follows:

|                          | ** ** | **December 31,** | ** ** |
|--------------------------|------------|-----------------------|------------|
| ** **               | ** ** | **2006**              | ** ** |
| Acquired  technology     |       | $                     | 3,080,000  |   |
| Customer  relationships  |       | 2,000,000             |       |
| Channel partners         |       | 110,000               |       |
|                     |       |                  |       |
|                     |       | 5,190,000             |       |
| Accumulated amortization |       | (740,518              | )          |
|                     |       |                  |       |
| Intangible  assets, net  |       | $                     | 4,449,482  |   |
|                     |       |                  |       |
| Goodwill                 |       | $                     | 7,268,434  |   |

 

During the year ended December 31, 2006, the Companyreallocated $430,000 of goodwill to acquired technology.

Amortization expense for intangible assets for theyear ended December 31, 2006 was $677,758. Annual estimated amortizationexpense for each of the five succeeding fiscal years is as follows:

| Fiscal year ending December 31, | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|------------|------------|
| 2007                                                |       | $          | 688,496    |   |
| 2008                                                |       | 688,496    |       |
| 2009                                                |       | 685,639    |       |
| 2010                                                |       | 661,004    |       |
| 2011                                                |       | 542,242    |       |
| Thereafter                                          |       | 1,183,605  |       |
| Total                                               |       | $          | 4,449,482  |   |

 

## **NOTE 6 - DEBT**

Long-termdebt at December 31, 2006 consists of the following:

|                                                                                                                                                                             | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **2005**              | ** ** |
| Line of credit  of $1,000,000 with a bank with interest at fixed rate of 5.15%. The line  matures on May 19, 2007, and is secured by a $1,000,000 time deposit account |       | $                     | 1,000,000  |   |
| Note acquired in  conjunction with StorCOMM merger with interest rate of 7%. Payment terms in  accordance with previous judgment in the amount of $25,000 due monthly       |       | 249,439               |       |
| Unsecured notes  acquired in conjunction with StorCOMM merger with interest ranging from 7.00%  to 8.00%. These notes are due upon demand                                   |       | 174,078               |       |
| Total                                                                                                                                                                       |       | 1,423,517             |       |
|                                                                                                                                                                        |       |                  |       |
| Less: current  portion                                                                                                                                                      |       | 1,423,517             |       |
|                                                                                                                                                                        |       |                  |       |
| Long-term portion                                                                                                                                                           |       | $                     | —     |   |

 

Thecarrying amounts of the other debt listed above approximate its fair valuebased on its terms and short maturities.

# **NOTE 7 — COMMITMENTS AND CONTINGENCIES**

**Operating Leases**

TheCompany leases office and warehouse space in Calabasas, California,Jacksonville, Florida, and the United Kingdom under non-cancelable operatingleases expiring in October, 2007 (see Subsequent Events for extension of leaseinformation), January 2012, and June 2010, respectively.

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Futureminimum lease payments, by year and in the aggregate, under the facility leaseswith initial or remaining terms of one year or more are as follows:

|                                                         | ** ** | **Operating** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|
| **Fiscal year ending December 31,** | ** ** | **Leases**    | ** ** |
| 2007                                                    |       | $             | 420,000    |   |
| 2008                                                    |       | 190,883       |       |
| 2009                                                    |       | 195,381       |       |
| 2010                                                    |       | 179,853       |       |
| 2011                                                    |       | 164,423       |       |
| Thereafter                                              |       | 13,735        |       |
|                                                    |       |          |       |
| Total minimum lease  payments                           |       | $             | 1,164,275  |   |

 

Rentexpense for the years ended December 31, 2006 and 2005 was approximately$463,000 and $313,000, respectively.

**Capital Leases**

TheCompany entered into a master agreement to lease equipment as ofOctober 26, 2005. The equipment is being used for the Company’sinfrastructure and has facilitated the integration of the three locations. Thecost of the computer equipment under capital leases is included in theconsolidated balance sheet in property and equipment and was $648,759 atDecember 31, 2006.  Accumulatedamortization of the leased equipment at December 31, 2006 was $102,464.  Amortization of assets under capital leasesis included in depreciation expense.  Theequipment lease provides for an option to purchase at the end of the leaseterm.

Thefuture minimum lease payments required under the capital leases and the presentvalue of the net minimum lease payments, as of December 31, 2006 are asfollows:

|                                                         | ** ** | **Capital** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|
| **Fiscal year ending December 31,** | ** ** | **Leases**  | ** ** |
| 2007                                                    |       | $           | 227,262    |   |
| 2008                                                    |       | 227,262     |       |
| 2009                                                    |       | 190,231     |       |
| 2010                                                    |       | 174,967     |       |
| 2011                                                    |       | 56,680      |       |
| Total minimum  lease payments                           |       | 876,402     |       |
| Less: Amount representing maintenance                   |       | 119,854     |       |
| Less: Amount representing interest                      |       | 107,789     |       |
| Total capital  lease obligations                        |       | 648,759     |       |
| Less: current maturities of capital lease  obligations  |       | 150,237     |       |
| Long term capital lease  obligations                    |       | $           | 498,522    |   |

 

**Employee Benefit Plan**

TheCompany maintains a 401(k) profit sharing plan that allows eligible employeesto defer up to 100% of their earnings, on a pre-tax basis, subject to dollarlimitations of the Internal Revenue Code. The Company provides a discretionarymatch on eligible employee contributions, which is determined on an annualbasis. The amount of matching contribution for 2006 and 2005 was 25% of theeligible employee’s contribution up to 4% of the eligible employee’s totalsalary. Vesting of the matching contributions by the Company is 20% for eachfull year of employment. For the years ended December 31, 2006 and 2005contributions were $45,495 and $32,900, respectively.

**Guarantees and Indemnifications**

In accordance with thebylaws of the Company, officers and directors are indemnified for certainevents or occurrences arising as a result of the officer or director’s servingin such capacity. The term of the indemnification period is for the lifetime ofthe officer or director. The maximum potential amount of future payments theCompany could be required to make under the indemnification provisions of itsbylaws is unlimited. However, the Company has a director and officer liabilityinsurance policy that reduces its exposure and enables it to recover a portionof any future amounts paid. As a result of its insurance policy coverage, theCompany believes the estimated fair value of the indemnification provisions ofits bylaws is minimal and therefore, the Company has not recorded any relatedliabilities.

47

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The Company enters intoindemnification provisions under agreements with various parties in the normalcourse of business, typically with customers and landlords. Under theseprovisions, the Company generally indemnifies and holds harmless theindemnified party for losses suffered or incurred by the indemnified party as aresult of the Company’s activities or, in some cases, as a result of the indemnifiedparty’s activities under the agreement. These indemnification provisions ofteninclude indemnifications relating to representations made by the Company withregard to intellectual property rights. These indemnification provisionsgenerally survive termination of the underlying agreement. The maximumpotential amount of future payments the Company could be required to make underthese indemnification provisions is unlimited. The Company maintains generalliability, errors and omissions, and professional liability insurance in orderto mitigate such risks. The Company has not incurred material costs to defendlawsuits or settle claims related to these indemnification agreements. As aresult, the Company believes the estimated fair value of these agreements isminimal. Accordingly, the Company has not recorded any related liabilities.

**Warranties and Product Liability**

The Company warrantsthat its products conform to their respective functional specifications.The Company’s data acquisition products and components are warranted againstfaulty materials and workmanship for 90 days. The Company also warrants itsapplication software incorporated in its Laboratory, Radiology, and PharmacyInformation Systems for 90 days and its application software incorporated inits PACS systems for 1 year. However, such warranties are extended throughoutthe term of extended service agreements that customers may elect to enterinto with the Company. Direct costs associated with the initial warranties havebeen insignificant. The computers that the Company currently sells aspart of its Clinical Information and Diagnostic Systems are subject to thewarranties of their manufacturers. The manufacturers generally warrant theirproducts against faulty material and workmanship for one to three years. TheCompany passes through the manufacturers warranties to the end users and inmost cases contracts with the manufacturers are to provide onsite warranty servicesthrough the manufacturers service network.

TheCompany currently carries an aggregate of $4,000,000 in product liabilityinsurance. Management believes that this amount of insurance is adequate tocover its risks. To further mitigate its risks, the Company’s standard hardwaresales/software license agreement as well as its service agreement expresslylimits its liabilities and the warranties of its products and services inaccordance with accepted provisions of the Uniform Commercial code asadopted in most states.

**NOTE 8 —SHAREHOLDERS’ EQUITY**

**StockOption Plan and Warrants**

InNovember 2005, the Company adopted the 2005 Equity Incentive Plan. Thepurpose of the Plan is to encourage ownership in the Company by key personnelwhose long-term service is considered essential to the Company’s continuedprogress and, thereby, encourage recipients to act in the shareholders’interest and share in the Company’s success. Under the Plan, the Companymay award to eligible participants the following kinds of equity-basedcompensation, collectively referred to as “Awards”: stock options— bothincentive stock options (ISO) and non-statutory stock options; stock awards —both restricted stock awards and restricted stock unit awards; stockappreciation rights; and cash awards. Up to 1,290,875 shares of common stockmay be available under the Plan. The maximum aggregate number of sharesthat may be issued under the Plan through the exercise of ISOs is also1,290,875. The exercise price cannot be less than 100% of the fair market valueof common stock on the date the option is granted. At December 31, 2006,the 2005 plan has 631,898 options outstanding and 287,824 options exercisable.The plan expires in 2015.

Asummary of option activities under the stock option plans throughDecember 31, 2006 and 2005 is presented as follows:

|                                       | ** ** | ** ** | ** ** | ** **              | ** ** | **Weighted**    | ** **     | ** **    | ** ** |
|---------------------------------------|------------|------------|------------|-------------------------|------------|-----------------|----------------|---------------|------------|
| ** **                            | ** ** | ** ** | ** ** | ** **              | ** ** | **Average**     | ** **     | ** **    | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Weighted-**           | ** ** | **Remaining**   | ** **     | **Aggregate** | ** ** |
| ** **                            | ** ** | ** ** | ** ** | **Average**             | ** ** | **Contractual** | ** **     | **Intrinsic** | ** ** |
| **Stock Options**                | ** ** | **Shares** | ** ** | **Exercise Price** | ** ** | **Term**        | ** **     | **Value**     | ** ** |
| Outstanding at January 1, 2006   |       | 521,670    |       | $                       | 2.17       |            | 34.7 mos. |          | $          | 251,600 |   |
| Granted                               |       | 170,000    |       | $                       | 1.97       |            |           |          |       |   |
| Exercised                             |       | (43,750    | )          | $                       | 0.83       |            |           |          |       |   |
| Canceled or Expired                   |       | (16,022    | )          | $                       | 2.39       |            |           |          |       |   |
|                                  |       |       |       |                    |       |            |           |          |       |
| Outstanding at December 31, 2006 |       | 631,898    |       | $                       | 2.20       |            | 30.7 mos.      |          | $          | 62,175 |   |
|                                  |       |       |       |                    |       |            |           |          |       |
| Exercisable at December 31, 2006 |       | 287,824    |       | $                       | 2.22       |            | 21.0 mos.      |          | $          | 41,350 |   |

 

48

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The aggregate intrinsic value is calculated as thedifference between the exercise price of the underlying awards and the quotedprice of our common stock for the 281,250 options that were in-the-moneyat January 1, 2006 and December 31, 2006. As of December 31, 2006, there was $247,980 of total unrecognizedcompensation cost related to unvested share-based compensation arrangementsgranted under our stock awards plans. That cost is expected to be recognizedover a weighted-average period of two years. The share-based compensation will be amortized based on the acceleratedmethod over the vesting period.  Duringthe year ended December 31, 2006, the Company granted 170,000 options at aweighted average fair value of $1.97 per share.

|                                                                 | ** ** | **Number  of Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|-----------------------------------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|
|                                                            |       |                       |       |                                   |       |
| Options outstanding at  December 31, 2004                  |       | 402,000                    |       | $                                      | 1.19       |   |
|                                                            |       |                       |       |                                   |       |
| Options granted                                                 |       | 311,670                    |       | $                                      | 2.71       |   |
| Warrants granted                                                |       | 300,000                    |       | $                                      | 3.00       |   |
| Options cancelled                                               |       | (2,500                     | )          | $                                      | .72        |   |
| Options expired                                                 |       | (20,000                    | )          | $                                      | 1.00       |   |
| Options exercised                                               |       | (169,500                   | )          | $                                      | 1.01       |   |
| Options and warrants  outstanding at December 31, 2005     |       | 821,670                    |       | $                                      | 2.47       |   |
|                                                            |       |                       |       |                                   |       |
| Options and warrants exercisable at December 31, 2005 |       | 460,000                    |       | $                                      | 2.56       |   |

 

Asummary of the status of the Company’s non-vested stock options during the yearended December 31, 2006 is presented below:

| Non-vested Options              | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|--------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2006  |       | 361,670    |       | $                                                   | 2.36       |   |
| Granted                              |       | 170,000    |       | 1.97                                                |       |
| Vested                               |       | (175,324   | )          | 2.32                                                |       |
| Forfeited or expired                 |       | (12,272    | )          | 2.63                                                |       |
|                                 |       |       |       |                                                |       |
| Non-vested at December 31, 2006 |       | 344,074    |       | $                                                   | 2.18       |   |

 

Informationrelating to stock options and warrants at December 31, 2006 summarized byexercise price is as follows:
| ** **                              | ** ** | **Outstanding** | ** ** | **Exercisable**           | ** ** |
|-----------------------------------------|------------|-----------------|------------|---------------------------|------------|
| ** **                              | ** ** | ** **      | ** ** | **Weighted Average** | ** ** | **Weighted Average** | ** ** |
| **Exercise Price  Per Share** | ** ** | **Shares**      | ** ** | **Life  (Months)**        | ** ** | **Exercise  Price** | ** ** | **Shares** | ** ** | **Exercise  Price** | ** ** |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
| Incentive Stock Option  Plan:           |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
| $  0.72                       |       | 10,000          |       | 2.0                       |       | $ | 0.72 |   | 10,000 |   | $ | 0.72 |   |
| $  1.51                       |       | 20,000          |       | 26.0                      |       | $ | 1.51 |   | 10,000 |   | $ | 1.51 |   |
| $  1.60                       |       | 41,250          |       | 17.5                      |       | $ | 1.60 |   | 30,000 |   | $ | 1.60 |   |
| $  1.66                       |       | 10,000          |       | 26.0                      |       | $ | 1.66 |   | 5,000 |   | $ | 1.66 |   |
| $  1.76                       |       | 20,000          |       | 17.5                      |       | $ | 1.76 |   | 15,000 |   | $ | 1.76 |   |
| $  1.76                       |       | 120,000         |       | 55.5                      |       | $ | 1.76 |   | — |   | $ | 1.76 |   |
| $  2.65                       |       | 60,000          |       | 24.0                      |       | $ | 2.65 |   | 45,000 |   | $ | 2.65 |   |
| $  2.75                       |       | 187,056         |       | 23.0                      |       | $ | 2.75 |   | 93,528 |   | $ | 2.75 |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       | 468,306         |       | 30.5                      |       | $ | 2.22 |   | 208,528 |   | $ | 2.31 |   |

 

49

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| Non-Qualified Stock  Option Plan: |   |    |   |   |   |   |   |   |   |   |   |
|-----------------------------------|--------|---------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                              |   |    |   |   |   |   |   |   |   |   |   |
| $  0.72                 |   | 10,000  |   | 2.0    |   | $      | 0.72   |   | 10,000 |   | $      | 0.72 |   |
| $  1.51                 |   | 30,000  |   | 26.0   |   | $      | 1.51   |   | 15,000 |   | $      | 1.51 |   |
| $  1.60                 |   | 20,000  |   | 17.5   |   | $      | 1.60   |   | 15,000 |   | $      | 1.60 |   |
| $  2.48                 |   | 50,000  |   | 54.0   |   | $      | 2.48   |   | — |   | $      | 2.48 |   |
| $  2.65                 |   | 50,000  |   | 24.0   |   | $      | 2.65   |   | 37,500 |   | $      | 2.65 |   |
| $  2.75                 |   | 3,592   |   | 23.0   |   | $      | 2.75   |   | 1,796  |   | $      | 2.75 |   |
|                              |   |    |   |   |   |   |   |   |   |   |   |
|                              |   | 163,592 |   | 31.4   |   | $      | 2.14   |   | 79,296 |   | $      | 1.99 |   |

 

The fair value of optiongrants is estimated on the date of grants utilizing the Black-Scholes optionpricing with the following weighted average assumptions for grants in 2006 and2005: expected life of options ranging from 3 to 5 years; expected volatilityranging from 98% to 101%; no dividends; and risk-free interest rate ranging4.0% to 5.0%. The weighted average fair value on the date of grants for optionsgranted during the years ended December 31, 2006 and 2005, was $1.51 and $1.80,respectively.

SFAS No. 123(R) requiresus to make certain assumptions and judgments regarding the grant date fairvalue. These judgments include expected volatility, risk free interest rate,expected option life, dividend yield, vesting percentage and forfeitures. Theseestimations and judgments are determined by us using many different variablesthat in many cases are outside of our control. The changes in these variablesor trends, including stock price volatility and risk free interest rate maysignificantly impact the grant date fair value resulting in a significantimpact to our financial results.

The Company issued 1,350,000 warrants pursuant to a private placementtransaction (see Note 13). The fair value of the warrants is estimated utilizingthe Black-Scholes option pricing with the following weighted averageassumptions; expected life of warrants of 3 years; expected volatility of74.21%; and risk-free interest rate of 5.0%. The fair value for the warrantswas approximately $1,070,000.

**NOTE 9 - INCOME TAX PROVISION(BENEFIT)**

Theprovision (benefit) for income taxes for the years ended December 31, 2006and 2005 consists of the following:

|                                | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
|                           |       |                                      |       |   |   |
| Current taxes:                 |       |                                      |       |   |   |
| Federal                        |       | $                                         | —     |   | $ | — |   |
| State                          |       | 4,810                                     |       | 13,136 |   |
|                           |       | 4,810                                     |       | 13,136 |   |
|                           |       |                                      |       |   |   |
| Deferred                       |       |                                      |       |   |   |
| Federal                        |       | (1,448,300                                | )          | (2,029,686 | ) |
| State                          |       | —                                    |       | 10,363 |   |
|                           |       |                                      |       |   |   |
|                           |       | (1,448,300                                | )          | (2,019,323 | ) |
|                           |       |                                      |       |   |   |
| Change in valuation  allowance |       | 1,448,300                                 |       | 2,813,200 |   |
|                           |       |                                      |       |   |   |
| Income tax provision           |       | $                                         | 4,810      |   | $ | 807,013 |   |

 

                For the years ended December 31,2006 and 2005, pretax loss consists of the following:

|              | ** ** | **Year Ended December 31** | ** ** |
|--------------|------------|-------------------------------------------|------------|
| ** **   | ** ** | **2006**                                  | ** ** | **2005** | ** ** |
| Pretax loss: |       |                                      |       |   |   |
| Domestic     |       | 3,102,963                                 |       | 1,617,383 |   |
| Foreign      |       | 462,665                                   |       | 77,569 |   |
| Total        |       | 3,565,628                                 |       | 1,694,902 |   |
|         |       |                                      |       |   |   |
|         |       |                                      |       |   |   |
|         |       |                                      |       |   |   |

 

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Incometax provision differs from the amount obtained by applying the statutoryfederal income tax rate to income before income tax expense for the years endedDecember 31, 2006 and 2005 as follows:

|                                                                           | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2006**                                   | ** ** | **2005** | ** ** |
|                                                                      |       |                                       |       |   |   |
| Computed provision  (benefit) for taxes based on income at statutory rate |       | (34.0                                      | )%         | (34.0 | )% |
|                                                                      |       |                                       |       |   |   |
| State taxes, net of  benefit of state net operating loss carryforward     |       | —                                     |       | 1.4 |   |
|                                                                      |       |                                       |       |   |   |
| Change in valuation  allowance                                            |       | 40.6                                       |       | 76.90 |   |
|                                                                      |       |                                       |       |   |   |
| Permanent differences  and other                                          |       | (6.5                                       | )          | 3.3 |   |
|                                                                      |       |                                       |       |   |   |
|                                                                      |       | 0.1                                        | %          | 47.6 | % |

 

Deferredincome taxes reflect the net tax effects of temporary differences between thecarrying amounts of assets and liabilities for financial reporting purposes andthe amounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities as of December 31, 2006 and 2005 areapproximately as follows:
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2006**              | ** ** | **2005** | ** ** |
|                                               |       |                  |       |   |   |
| Deferred tax assets:                               |       |                  |       |   |   |
| Allowance for  doubtful accounts                   |       | $                     | 33,100     |   | $ | 13,500 |   |
| Inventory  uniform capitalization and reserve |       | 53,200                |       | 53,800 |   |
| Accrued vacation                                   |       | 123,300               |       | 91,600 |   |
| Deferred revenue                                   |       | 312,700               |       | 408,100 |   |
| Depreciation and  amortization                     |       | —                |       | 68,600 |   |
| Unexercised  vested stock options                  |       | 60,400                |       | — |   |
| Net operating  loss carryforwards                  |       | 5,597,400             |       | 4,248,200 |   |
| Tax credits                                        |       | 1,122,300             |       | 699,000 |   |
| Other                                              |       | 3,400                 |       | 1,400 |   |
|                                               |       |                  |       |   |   |
| Gross deferred tax  assets                         |       | 7,305,800             |       | 5,584,200 |   |
|                                               |       |                  |       |   |   |
| Deferred tax liability:                            |       |                  |       |   |   |
| Deferred tax  liability on intangible assets       |       | (1,779,800            | )          | (1,634,700 | ) |
| Depreciation and  amortization                     |       | (24,000               | )          | — |   |
| Capitalized  software costs                        |       | (858,500              | )          | (754,300 | ) |
|                                               |       |                  |       |   |   |
| Gross deferred tax  liability                      |       | (2,662,300            | )          | (2,389,000 | ) |
|                                               |       |                  |       |   |   |
| Valuation allowance                                |       | (4,643,500            | )          | (3,195,200 | ) |
|                                               |       |                  |       |   |   |
| Net deferred tax assets                            |       | $                     | —     |   | $ | — |   |

 

In conjunctionwith the merger with StorCOMM, the Company purchased intangible assets thatwere not deductible for tax purposes, and a deferred tax liability of$1,806,734 was recorded. In addition, the Company recorded a deferred tax assetof $1,806,734 which is expected to be realized over the term of the deferredtax liability. The deferred tax asset and deferred tax liability were includedin goodwill.

At December 31,2006, the Company had state and federal net operating loss carryforwardsavailable to offset future taxable income of approximately $30,600,000 and$37,449,000, that are subject to Internal Revenue Code Section 382 Limitations.These net operating loss carryforwards expire at various dates through 2026,and general business tax credit carryforwards available to offset future stateand federal income tax payable of approximately $341,000 and $781,000,respectively. While the Federal general business tax credits expire at variousdates through 2026, the state general business tax credits can be carriedforward indefinitely. The Company also has alternative minimum tax (AMT) netoperating loss carryforwards of approximately $35,261,000 to offset future AMTtaxable income that expires through various dates through 2026. InternalRevenue Code Section 382 imposes limitations on the utilization of netoperating loss and tax credit carryovers pursuant to an ownership change as aconsequence of the merger with StorCOMM. The annual loss limitation amount is$885,000.

51

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The major temporary taxdifferences that are expected to reverse next year are deferred revenue,allowance for doubtful accounts, accrued vacation, Section 263A Unicapinventory, amortization of intangible assets, and component inventory reserve.However, the Company expects new temporary differences to be established inthese years, which will either reduce or exceed the reversing temporarydifferences.

The Company annuallyevaluates the realization of the net deferred tax asset, taking intoconsideration prior earnings history, projected operating results and thereversal of temporary tax differences. At December 31, 2006, the Companyevaluated the net deferred tax asset taking into consideration operatingresults and determined that a valuation allowance of approximately $4,275,600should be maintained.

# **NOTE 10 —EARNINGS (LOSS) PER SHARE**

|                                                | ** ** | **Years Ended**        | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
|                                           |       |                        |       |   |   |
| Basic weighted average  shares outstanding     |       | 9,914,916                   |       | 4,038,233 |   |
|                                           |       |                        |       |   |   |
| Dilutive effect of  stock options and warrants |       | —                      |       | — |   |
|                                           |       |                        |       |   |   |
| Diluted weighted average shares outstanding    |       | 9,914,916                   |       | 4,038,233 |   |

 

AtDecember 31, 2006 and 2005, options and warrants to purchase 2,281,898,and 821,670 shares, respectively, were outstanding and could affect futureperiods, but were not included in the computation of diluted loss per commonshare because the effect would be antidilutive.

# **NOTE 11 —SEGMENT INFORMATION AND MAJOR CUSTOMERS**

TheCompany determines and discloses its segments in accordance with SFAS 131, “Disclosuresabout Segments of an Enterprise and Related Information,” which uses a “managementapproach designates the internal organization that is used by management formaking operating decisions and assessing performance as the source of a company’sreportable segments. SFAS 131 also requires disclosures about products orservices, geographic areas and major customers. The Company’s managementreporting structure provides for only one reportable segment and accordingly,no separate segment information is presented.

During the fiscal yearended December 31, 2006, there were no customers, contracts or programs thatgenerated over 10% of the Company’s net sales other than through a distributionarrangement with Merry X-Ray that generated approximately $2.3 million inaggregate sales or 18% of total revenues. The Company had no customers that accounted for more than 10% of theCompany’s sales during the years ended December 31, 2005.

**NOTE 12 — ACQUISITION OF STORCOMM, INC.**

On November 22, 2005 (the “Effective Date”),the Company acquired StorCOMM, Inc. pursuant to an Agreement and Plan ofReorganization dated August 16, 2005 (the “Merger Agreement”).Simultaneously with the closing of the merger, ASPYRA sold in a privateplacement 1,500,000 shares of its common stock and warrants to purchase up to300,000 shares of its common stock for $3,000,000 pursuant to the terms of theCommon Stock and Warrant Purchase Agreement dated August 18, 2005. Theprivate placement closed and became effective on November 22, 2005.

Pursuant to the MergerAgreement, the Company issued 3,498,000 shares of common stock in exchange forthe business and assets of StorCOMM. Based upon the average closing price ofthe common stock for August 11, 2005 through August 19, 2005, whichrepresents three business days before and after August 16, 2005, the value ofthe common stock was $7,765,560. In addition, the Company paid approximately$1,157,000 in transaction costs and had advanced StorCOMM $595,387.

The acquisition of StorCOMMis accounted for as a purchase business combination in accordance withStatement of Financial Accounting Standards (SFAS) no. 141, “BusinessCombinations.” The total purchase price related to the acquisition of StorCOMMwas $9,517,590. The purchase price exceeded the net tangible and intangibleassets acquired due to the Company viewing the StorCOMM acquisition aspresenting the opportunity to expand into new markets, includinginternationally, as well as synergies related to next generation softwareproducts.

StorCOMM will operate as a wholly owned subsidiaryof ASPYRA and the Company’s financial statements include the results ofStorCOMM from the closing date of the acquisition (November 22, 2005).

The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition. The allocation of the purchase price isbased in part on independent third-party valuation of certain intangible

52

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assets.The excess purchase price over the estimated fair value of the assets acquiredfinite intangible assets identified and liabilities assumed is recorded asgoodwill.

**At November 22, 2005**

| Current assets             |   | $          | 1,286,767 |   |
|----------------------------|--------|------------|-----------|--------|
| Purchased technology       |   | 2,406,836  |      |
| Other intangible assets    |   | 2,110,000  |      |
| Goodwill                   |   | 7,268,434  |      |
|                       |   |       |      |
| Total assets acquired      |   | 13,072,037 |      |
|                       |   |       |      |
| Current liabilities        |   | 3,554,447  |      |
|                       |   |       |      |
| Total liabilities  assumed |   | 3,554,447  |      |
|                       |   |       |      |
| Net assets acquired        |   | $          | 9,517,590 |   |

 

The purchased technology iscomprised of internally created software, which was valued by the independentthird-party who assigned an expected useful life of 6 years.

The other intangible assetsare primarily comprised of customer relationships valued by the independentthird-party. The expected useful life assigned is 15 years.

The excess of the purchaseprice over the estimated fair value of the assets acquired and the liabilitiesassumed was recorded as goodwill. At acquisition, StorCOMM had deferred taxassets of approximately $3,120,000 against which a 100% valuation allowance wasrecorded and, to the extent the valuation allowance is reduced in the future,such reduction will be made to the carrying value of goodwill.

During the year ended December 31, 2006, the Companyreallocated $430,000 of goodwill to purchased technology.

Since there is no step up inbasis of the acquired intangible assets for tax purposes, amortization ofpurchased technology and other intangible assets is not deductible for taxpurposes. A $1,806,734 deferred tax liability is calculated at the blended taxrate of 40% applied to the $2,406,836 purchased technology and $2,110,000 otherintangible assets. At December 31, 2006, in accordance with SFAS 141,$1,363,959 of the deferred tax liability is expected to be realized over theterm as the deferred tax asset, therefore $1,363,959 of the deferred tax liabilitywas offset against the deferred tax asset on Aspyra, Inc. as part ofthe consolidated income tax provision. As a result of the transaction in 2005,ASPYRA’S deferred tax asset valuation was reduced. In accordance with SFAS 109,the change in valuation allowance was offset against goodwill.

The following summarizedunaudited pro forma consolidated results of operations are presented as if theacquisition of StorCOMM occurred on January 1, 2005. The unaudited proforma results are not necessarily indicative of future earnings or earningsthat would have been reported had the acquisition been completed and presented.

|                                  | ** ** | **Year Ended**         | ** ** |
|----------------------------------|------------|-----------------------------|------------|
| ** **                       | ** ** | **December 31,  2005** | ** ** |
| ** **                       | ** ** | **(unaudited)**             | ** ** |
|                             |       |                        |       |
| Revenues                         |       | 12,856,600                  |       |
| Net Loss                         |       | (3,632,239                  | )          |
| Loss per share-basic and diluted |       | (.90                        | )          |

** **

**NOTE 13 — PRIVATE PLACEMENT**

On May 17, 2006, ASPYRA soldin a private placement 2,250,000 shares of its common stock and warrants topurchase up to 1,350,000 shares of its common stock pursuant to the terms of aCommon Stock and Warrant Purchase Agreement. The shares of common stock and warrants were sold in units, with eachunit consisting of a single share of ASPYRA common stock and three-fifths of awarrant to purchase one share of ASPYRA common stock. The price per unit was$2.00 for an aggregate purchase price of $4,500,000, less costs.  Theexercise price of the warrants is $3.00 per share.  These shares wereissued and sold pursuant to the exemption from registration under theSecurities Act of 1933, as amended (the “Securities Act”) that is available foroffers and sales to accredited investors pursuant to Rule 506 ofRegulation D under the Securities Act and Section 4(2) of theSecurities Act.  Simultaneously with theexecution of the Purchase Agreement, ASPYRA and each of the Purchasers enteredinto a Registration Rights Agreement, pursuant to which each of the Purchasers shall be entitled to certainregistration rights.

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During the year endedDecember 31, 2006, the Company expensed approximately $192,000 to interestexpense which was attributable to a penalty related to the private placementtransactions that were completed in November 2005 and May 2006, whereby theinvestors were entitled to receive a penalty in the amount of 1% per month ofthe private placement of $3,000,000 and $4,500,000 if the Company’sregistration statement had not been declared effective within 120 days of theclosing dates of the respective private placements.  The Company’s registration statement wasdeclared effective on September 22, 2006. The Company elected to early adopt FSP-00-19 “Accounting forRegistration Payment Arrangements” effective for the audited consolidatedfinancial statements as of December 31, 2006, which had no impact on theconsolidated financial statements.

**NOTE 14 — SUBSEQUENT EVENTS**

On March 15, 2007, theCompany signed an amendment to its lease for its headquarters in Calabasas,California.  The amendment extended theexpiration date of its lease to October 2012.

Futureminimum lease payments, by year, under the facility lease amendment is asfollows:

| Fiscal year ending December 31, | ** ** | **Operating  Leases** | ** ** |
|-----------------------------------------------------|------------|-----------------------|------------|
| ** **                                          | ** ** | ** **            | ** ** |
| 2007                                                |       | $                     | 55,460     |   |
| 2008                                                |       | 334,439               |       |
| 2009                                                |       | 344,523               |       |
| 2010                                                |       | 354,607               |       |
| 2011                                                |       | 365,026               |       |
| Thereafter                                          |       | 312,592               |       |
|                                                |       |                  |       |
| Total minimum lease payments                        |       | $                     | 1,766,647  |   |

 

OnFebruary 27, 2007, the Company entered into a new banking relationship wherebythe bank provided a revolving line of credit in the aggregate amount of$1,300,000.  The revolving line of creditis secured by the Company’s accounts receivable and inventory and matures onFebruary 27, 2008.  The revolving line ofcredit is subject to certain covenants. Advances under the revolving line of credit are on a formula based oneligible accounts receivable and inventory balances.  The Company used the initial advance on therevolving line of credit to pay in full a previous note from another bank thatwas secured by a $1,000,000 certificate of deposit as carried on the December31, 2006 balance sheet under restricted cash. The pay off released the certificate of deposit previously held by theformer bank.

**NOTE 15 - SUPPLEMENTAL CASH FLOW INFORMATION**

Supplementalcash flow information is as follows:

|                                                                                                                                                                                                                                                                                        | ** ** | **Year Ended**         | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                             | ** ** | **December 31,  2006** | ** ** | **December 31,  2005** | ** ** |
| ** **                                                                                                                                                                                                                                                                             | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Supplemental cash flow  disclosure:                                                                                                                                                                                                                                                    |       |                        |       |   |   |
| Interest                                                                                                                                                                                                                                                                               |       | $                           | 104,363    |   | $ | 27,140 |   |
| Penalty interest  paid for private placements                                                                                                                                                                                                                                          |       | $                           | 191,998    |   | $ | — |   |
| Income taxes                                                                                                                                                                                                                                                                           |       | $                           | 13,215     |   | $ | 1,165 |   |
| Noncash transactions:                                                                                                                                                                                                                                                                  |       |                        |       |   |   |
| Assets acquired  under capital leases                                                                                                                                                                                                                                                  |       | $                           | 751,182    |   | — |   |
|                                                                                                                                                                                                                                                                                   |       |                        |       |   |   |
| The Company  purchased all of the capital stock of StorCOMM for a total purchase price of  $9,517,590. During the year ended December 31, 2006, the Company reclassed  $430,000 of goodwill to intangibles. In Conjunction with the acquisition,  Liabilities were assumed as follows: |       |                        |       |   |   |
| Assets acquired                                                                                                                                                                                                                                                                        |       | $                           | —     |   | $ | 13,072,037 |   |
| Issuance of  common stock for purchase of StorCOMM                                                                                                                                                                                                                                     |       | —                      |       | $ | (7,765,560 | ) |
| Capitalized  merger costs                                                                                                                                                                                                                                                              |       | —                      |       | $ | (1,156,643 | ) |
| Advance to  StorCOMM                                                                                                                                                                                                                                                                   |       | —                      |       | (595,387 | ) |
| Liabilities assumed                                                                                                                                                                                                                                                                    |       | $                           | —     |   | $ | 3,554,447 |   |

 

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