**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-KSB**

 

**(Mark One)**

 

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

 

**For thefiscal year ended December 31, 2007.**

 

**OR**

 

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

 

**For thetransition periodfrom                 to**

 

**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**  |

 

Securities registeredunder Section 12(b) of the Exchange Act:  **None**

 

Securities registeredunder Section 12(g) of the Exchange Act:

 

**Common Stock, no par value**

(Title of class)

 

Check whether the issueris not required to file reports pursuant to Section 13 or 15(d) ofthe Exchange Act.

o

 

Check whether the issuer (1) filedall 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 tosuch filing 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-Bcontained in this form, and no disclosure will be contained, to the best ofregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-KSB or anyamendment 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 itsmost recent fiscal year ended December 31, 2007 were $ 10,272,247

 

As of March 28,2008, the aggregate market value of the voting and non-voting common equityheld by non-affiliates of the Company was approximately $3,505,829

 

As of March 28,2008, the Company had 12,437,150 shares of its common stock outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’sDefinitive Proxy Statement for its 2008 Annual Meeting of Shareholders, whichwill be filed within 120 days of the end of the Company’s fiscal year, arehereby incorporated by reference into Items 9, 10, 11, 12 and 14 of Part IIIof this report.

 

Transitional SmallBusiness Disclosure Format (check one):

Yes  o No  x

 

 

----

 

**Aspyra, Inc.**

 

**TABLE OFCONTENTS**

 
| **Part I**   |     |                                                                                                                        |
|-------------------|----------|-----------------------------------------------------------------------------------------------------------------------------|
|              |     |                                                                                                                        |   |
|              | Item  1  | Description  of Business                                                                                                    | 3 |
|              | Item 2   | Description of  Property                                                                                                    | 14 |
|              | Item 3   | Legal Proceedings                                                                                                           | 14 |
|              | Item 4   | Submission of  Matters to a Vote of Security Holders                                                                        | 14 |
|              |     |                                                                                                                        |   |
| **Part II**  |     |                                                                                                                        |
|              |     |                                                                                                                        |   |
|              | Item 5   | Market for  Common Equity, Related Stockholder Matters and Small Business Issuer  Purchases of Equity Securities            | 15 |
|              | Item 6   | Management’s  Discussions and Analysis or Plan of Operation                                                            | 16 |
|              | Item 7   | Financial Statements                                                                                                        | 29 |
|              | Item 8   | Changes in and  Disagreements with Accountants on Accounting and Financial Disclosure                                       | 29 |
|              | Item 8A  | Controls and  Procedures                                                                                                    | 29 |
|              | Item 8B  | Other Information                                                                                                           | 30 |
|              |     |                                                                                                                        |   |
| **Part III** |     |                                                                                                                        |
|              |     |                                                                                                                        |   |
|              | Item 9   | Directors,  Executive Officers, Promoters and Control Persons; Compliance with  Section 16(a) of the Exchange Act | 30 |
|              | Item 10  | Executive  Compensation                                                                                                     | 30 |
|              | Item 11  | Security  Ownership of Certain Beneficial Owners and Management and Related Stockholder  Matters                            | 31 |
|              | Item 12  | Certain  Relationships and Related Transactions and Director Independence                                                   | 31 |
|              | Item  13 | Exhibits                                                                                                                    | 31 |
|              | Item 14  | Principal  Accountant Fees and Services                                                                                     | 33 |
|              |     |                                                                                                                        |   |
|              |     | Signatures                                                                                                                  | 33 |

 

2

----

 

**Special NoteRegarding Forward-Looking Statements**

 

The following Annual Report on Form 10-KSB containsforward-looking statements within the meaning of Section 27A of the SecuritiesAct of 1933, as amended, and Section 21E of the Securities Exchange Act of1934, as amended. The SEC encourages companies to disclose forward-lookinginformation so that investors can better understand a company’s futureprospects 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:

 

·    projections of revenues and other financialitems;

 

·    statements of strategies and objectives forfuture operations;

 

·    statements regarding integration plansfollowing the merger with StorCOMM;

 

·    statements concerning proposed applicationsor services;

 

·    statements regarding future economicconditions, performance or business prospects;

 

·    statements regarding competitors orcompetitive actions; and

 

·    statements of assumptions underlying any ofthe 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.

 

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 Companyis under no obligation, and it expressly disclaims any obligation, to update oralter any forward-looking statements after the date of this Annual Report on Form 10-KSB,whether as a result of new information, future events or otherwise.

 

**PART I**

 

**Item 1.Description of Business.**

 

**BusinessDescription**

 

Aspyra, Inc. formerly known as Creative ComputerApplications, Inc. (ASPYRA or the Company) is a healthcare informationtechnology and service provider that specializes in Clinical InformationSystems (CIS) and Diagnostic Information Systems (DIS) for healthcareproviders. As a result of its merger with StorCOMM, Inc. a privatecompany, on November 22, 2005, ASPYRA broadened its portfolio of productsto include 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).

 

3

----

 

ASPYRA’s software andservices for hospitals and clinic-based laboratories, orthopedic centers, andhospital imaging departments are highly scalable and can be used by a broadvariety of healthcare providers. Clinical information is data that is gatheredconcerning each individual patient’s health condition, diagnosis, and treatmentthat are used by doctors, nurses and other healthcare providers. Such data mayinclude laboratory test results, transcribed reports of radiological or imagingprocedures, digital diagnostic images, and other clinical and diagnostic data.ASPYRA’s products are deployed to provide automation of clinical informationand digital diagnostic images that facilitate the operation of clinicaldepartments and allows the rapid recording and processing of information thatcan be communicated, documented, and delivered to healthcare providers.

 

Currently, ASPYRAmarkets a product line that includes a Laboratory Information System (LIS)under the trade name CyberLAB®, a general purpose PACS system underthe trade name AccessNETTM, a Radiology Information System (“RIS”) under thetrade name CyberRAD®, a RIS/PACS integrated system under the tradename AccessRADTM, a specialty PACS system under the trade name AccessMEDTM, anAnatomic Pathology System under the trade name of CyberPATH®, aWebGatewayTM portal for physician access to its CIS applications, and otherrelated clinical and diagnostic application modules. In February 2008 wenotified our customer base that we will discontinue support in February 2009of our Pharmacy Information System previously marketed under the trade nameCyberMED®.

 

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 is www.aspyra.com.The Company’s business consists of three operational areas:  (1) Clinical Information System andDiagnostic Information System products, (2) service of its customer’sinstallations, and (3) implementation services.  The Company generates revenues from thelicensing of application software, the sale of hardware, and the provision ofimplementation and long-term post implementation services. The Company sellsits CIS and DIS systems directly through its own sales force in North America,through channel partners and distributor programs with other companies, and hasreseller agreements in certain international markets.

 

**Historyand Business Development**

 

Since its inception as a California corporation in 1978,ASPYRA has been primarily engaged in the development, marketing, installation,and service of Clinical Information Systems that automate the collection andmanagement of patient clinical data for healthcare providers.

 

Thepercentage of the Company’s net sales attributable to the sale, license, andimplementation of Clinical and Diagnostic Information Systems, accounted forapproximately 32% of total revenues in the fiscal yearended December 31, 2007.ASPYRA expects that its service revenues, which accounted for approximately 68%of total revenues in the current fiscal year, will continue to grow asadditional new installations are added to the Company’s installed base. As of December 31,2007, the Company supported approximately 425 active cutomers using ourproducts in over 600 sites.

 

By automating the collection and organization ofpatient clinical data and related diagnostic images, the Company’s Clinical andDiagnostic Information Systems reduce operating costs, assist in meetingcompliance requirements, address patient care and safety issues, improve theturnaround time of patients’ diagnosis and treatment, and increase theefficiency of healthcare providers overall. The healthcare industry continuesto operate under increasing pressure from government regulatory agencies andthird party payers of medical expense, as well as from increased competition inthe healthcare industry, to control costs. The Company’s products and servicesare designed to improve the efficacy and cost-effectiveness with whichhealthcare providers manage critical information.

 

Aspart of its business strategy, the Company has pursued the development ofenhancements and new modules to its existing products, as well as thedevelopment of entirely new products and services. The Company has developed aweb-based clinician portal marketed as the ASPYRA WebGateway, which providesonline access to the Company’s CyberLAB and CyberRAD products so thatphysicians, nurses and othercaregivers can easily utilize them from virtually anywhere in the world, andthe Company is continuing to build upon this technology platform in order todeploy other functionality. ASPYRA’s WebGateway provides access to CyberLAB fororder placement, 

 

4

----

 

patient inquiry, andresults, and is compliant with security and privacy issues pertaining to theHealth Insurance Portability and Accountability Act (HIPAA). WebGateway alsoprovides access to CyberRAD for orders, scheduling, exam inquiry, electronicsignature, regulatory compliance, and other functions. ASPYRA’s AccessNETfamily of products is designed to be highly scalable and deployable in smallstandalone operations up to large enterprise hospitals. Certain applicationmodules can also be deployed in facilities that currently have PACSinstallations to provide enhanced capabilities for teleradiology using ASPYRA’sthin-client technology.

 

One of the principal reasons for the Company’s merger withStorCOMM was to merge clinical systems product technology with a businessoffering PACS, to better address the changes that were occurring in thehealthcare market place.

 

Integration of the two companiesfollowing the merger continued through 2006 and was completed in 2007 andresulted in short-term increases in certain expenses but also allowed for theelimination of redundant personnel and other expenses to attain more efficientbusiness synergies.  While some of theseexpenses were non-recurring, others including the addition of key personnel inproduct management, regulatory affairs, and product development, were importantadditions to management in order to assure the success of the Company’sintegration strategy.

 

Ourfirst integrated product, AccessRAD, which combines our RIS system and PACSsystem technologies, is substantially complete and is now being marketed.AccessRAD addresses a growing demand for integrating the clinical work flow anddiagnostic activities in acute care hospitals, clinics, and imaging centers.With the completion of the integration, the Company has eliminated remainingredundant personnel to reduce our ongoing cost structure and fully realize thesynergies of the merger.

 

**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/orproduct lines where feasible.  Our goalis to evolve 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 mission criticalclinical and diagnostic applications that our customers rely upon to help themmanage patient safety, diagnosis, and treatment. Our goal is to generaterecurring revenues from the provision of long term services, upgrades, softwareadd-ons and other revenue generating opportunities.  Considering the capital budget constraintsthat are imposed on healthcare providers who use our products, they plan to use

 

5

----

 

them typically for 5 to10 years.  In order to service them wemust keep them current for competitive, clinical and diagnostic reasons, andregulatory compliance.  Enhancements toour products in the form of software upgrades are an integral part of thisbusiness 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 ongoing support obligations.

 

We plan to increase market penetration through theexpansion of our direct sales activities domestically as well as selectivelyseeking new channel partners for some of our products in sectors that areunderserved by us, such as orthopedics. We also plan to increase cross sellinginto 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 andclinics. In the same instance there is a growing demand to integrate PACStechnology with anatomic pathology and laboratory systems that we can createfrom our product portfolio. We also plan to continue to further develop ourclinical and diagnostic applications.

 

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 our productofferings into an EMR (Electronic Medical Record) solution by acquiring,developing, or licensing the missing 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 scalable, 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 employs thin-client technology at the point ofuser interface. ASPYRA’s use of this technology allows easy integration intoexisting networks, as well as seamless integration with other systems. ASPYRA’ssuite of Clinical Information System applications allows for scalability andflexibility ensuring that as the needs of a healthcare provider change, thesystems can easily be adapted. The Company’s clinical applications are designedaround flexible parameterized software, which enables the end user to tailorthe software for its individual needs, adapting to the facility’s internal  policies, and allows us to sell across themarketplace into various niches.

 

For clinicallaboratories, the Company has integrated its software applications and dataacquisition technology into Laboratory Information Systems (“LIS”), which aresold under the trade name CyberLAB. Extensive applications for a wide varietyof laboratory 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.

 

6

----

 

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 and clinical image management systemsachieve true enterprise-wide connectivity for all types of images andequipment, while providing leading edge product capabilities, support, andintegration. ASPYRA’S customers include hospitals of all sizes with associatedremote locations; independent and hospital-managed imaging centers; orthopedicfacilities and specialists; teaching and children’s facilities; and radiologygroups serving multiple locations. The scalability of the AccessNET PACS systemhas enabled it to be deployed into a diverse installed base.

 

PACS coordinates all aspects of digital imaging in hospitals,clinics, and imaging centers. This includes capturing images from DigitalImaging and Communications in Medicine (DICOM) and non-DICOM compliant imagingmodalities and video sources, storing this clinical information in a secureenvironment, and distributing and displaying both clinical images andcorresponding diagnostic information throughout hospitals, clinics, and imagingcenters. ASPYRA’S PACS can integrate with existing hospital systems to shareinformation as necessary. For example, if a facility has a hospital informationsystem that manages exam appointments, this system can integrate with ASPYRA’SPACS to share information about the scheduled exams. Typically, integration isaccomplished using communications standards such as DICOM and Health LevelSeven  (HL7).

 

ASPYRA released version 6.3 of its AccessNET PACS software inJanuary 2008. The enhancements for PACS users in version 6.3 includeenhanced tools for radiologists reading from local and remote readinglocations, improved handling of outside studies, support of encounter based HL7messaging and IHE cross-enterprise sharing of documents and images (XDS,XDS-I), as well as internal processes for improved IT support and PACS administrationtools.

 

IHE (Integrating the Healthcare Enterprise) is an initiativeby healthcare professionals and industry to improve the way computer systems inhealthcare share information. IHE promotes the coordinated use of establishedstandards such as DICOM and HL7 to address specific clinical need in support ofoptimal patient care. According to IHE, systems developed in accordance withIHE communicate with one another better, are easier to implement, and enablecare providers to use information more effectively.  Aspyra continues to participate with IHE,adding functionality to the AccessNET product that follows the requirements setforth by IHE.

 

In December 2007, ASPYRA (a Microsoft Gold Certified Partner), announced  AccessNET v 6.2.1.61 had been tested andmeets the criteria for the Microsoft “Platform Test for ISV Solutions” program:Windows Server and Windows Client. The Company was required to provide adefined number of customer references in order to meet the Customer ReferenceRequirement for the ISV / Software Solution Competency. Testing was conductedindependently by VeriTest, a testing service of Lionbridge Technologies.

 

During the fiscal year ended December 31, 2007,development continued to provide integration between CyberRAD and AccessNET,  for the integrated RIS/PACS product that issold under the trade name AccessRAD. Specifically developed to enhance workflowand provide instant availability to clinical information, AccessRAD is designedto meet the needs of acute-care hospitals, enterprise-wide delivery networks,and large imaging enterprises. Furthering increasing efficiency, the AccessRADmultisite module enables organizations to manage the workflow and reportingneeds at multiple facilities with a single solution. AccessRAD providesradiologists with a central command center to manage RIS and PACS functions.All the tools for reading images, dictating, accessing images and reports, aswell as electronically signing reports, are available on the AccessRAD desktop.AccessRAD also helps organizations enhance patient safety by reducing theerrors that result from redundant data entry, and the solution improves caredelivery by providing clinicians with real-time information.

 

ASPYRA’s AccessMED is a version of AccessNET that was designedfor the specialty PACS environment, such as orthopedics. It mirrors theworkflow and tools specific to the needs of medical specialists to improveefficiency and care delivery. Work lists of patients and exams can be viewed inmultiple ways based on the needs of clinicians or administrative users. Inaddition, clinicians can bookmark interesting and special cases for quick andeasy follow up, or for collaboration 

 

7

----

 

withother specialists. AccessMED provides an unlimited configuration of viewingoptions for images, work lists, reports, prior studies and other clinicalinformation. Content-sensitive help screens and tutorials can be viewed onscreen, providing users with a virtual expert at their fingertips while theycomplete their tasks. Advanced workflow tools, such as embedded dictation andreport generation, combine diagnostic and reporting capabilities into a singlesolution.

 

Specialized modules within AccessMED offer enhanced imageviewing options. The OrthoViewTM module (a product of Meridian Technique, Ltd.)is integrated within AccessMED and includes templates from virtually everymajor prosthetics manufacturer to provide clinicians with digital surgicalplanning capabilities. In addition, the AccessMED ImageSTITCH module providesthe tools needed to combine multiple images into a single image for review,which is especially valuable for long bone and spinal images.

 

**Integration**

 

The Company has designed its products to incorporate opensystems architecture and to conform to computer industry standards, whichenable them to be more easily integrated with other vendors’ products.Healthcare industry standards, including HL7 and American Society for Testingand Materials (ASTM), and DICOM standards are employed throughout the Company’ssoftware products and interfaces. Aspyra is an active vendor participant withIHE (Integrating the Healthcare Enterprise). IHE is an initiative by healthcareprofessionals and industry to improve the way computer systems in healthcareshare information. IHE promotes the coordinated use of established standardssuch as DICOM and HL7 to address specific clinical needs in support of optimalpatient care. Systems developed in accordance with IHE communicate with oneanother better, are easier to implement, and enable care providers to useinformation more effectively.

 

The Company’s Clinical and Diagnostic Information Systemssupport extensive communication capabilities to various healthcare informationsystems including Hospital Information Systems, nursing and practice managementsystems, EMR Systems, for which the Company has developed over five hundredsystem-to-system communication interfaces. The Company’s Clinical InformationSystems are employed in many settings that consist of multiple sites wheretesting or medical procedures are seamlessly integrated. In addition, differenttypes of enterprises, such as hospital and affiliated outreach clinics, can usethe Company’s systems to integrate their activities thus enabling the executionof their business strategies. The communication interfaces often supportbi-directional data communications, whereby demographic and order requests aretransmitted to the Clinical Information Systems and, in turn, billinginformation and results are transmitted to the host system. The Company’sClinical Information Systems support their own order communications and testsubsystems that have been employed in other accounts that have relied on theClinical Information System’s communications capabilities. Management believesthat communications to other systems allowing connectivity between its CISapplications and patient care, electronic medical record systems, and otheradministrative information systems, are very important functional requirementsin the marketability of its products. The Company has focused considerableattention on the communication, networking, and connectivity capabilities ofits products, and plans to further develop these capabilities as opportunitiespresent themselves.

 

The Company has developed standard seamless integration andnetwork connectivity for all its products through user selected networktopologies, network protocols, and network operating systems. Although eachapplication has been configured to operate as a stand-alone product, all can beoperated as an integrated package, residing on a shared platform or network,thereby eliminating the need for multiple interfaces, duplicate informationhandling, and their associated costs. ASPYRA continues the development ofenhancements to its software integration and communications module thatintegrates all of its own clinical applications and provides a singlecommunications gateway to or from other vendors’ systems.

 

**Services**

 

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, througha 24-hour “hotline,” and hardware repair under extended service contracts. Inmost instances, the Company relies on third parties to service the hardwarecomponents that it sells but may assume responsibility for first call support.The Company services its own data acquisition products and related software,used as part of its CIS product offerings, under service contracts offered toend users. The Company’s long-term inventory requirements for its service andrepair business have historically been significant because it must retain aloaner pool of components used to service its customer base. However, in recentyears, the Company has de-emphasized providing hardware in connection with thesale of its CIS products and currently only provides the servers and a fewspecialty components for which it relies on the manufacturer to service. Inmany instances ASPYRA’s products include the hardware components that comprisea PACS system and in such cases the Company includes a direct multi-yearmanufacturers warranty and service with such hardware components.

 

8

----

 

The Company’s servicerevenues for fiscal year ended December 31, 2007 was consistent with theservice revenues in the fiscal year ended December 31, 2006. The majorityof the Company’s customers are under service contracts. The Company believesthat the ability to offer comprehensive services to its customers is a veryimportant facet of its business and solidifies a long-term relationship withits customer accounts. The recurring revenue stream associated with thisactivity is a significant part of the Company’s business. The ability to offerlong-term service often leads to add-on sales opportunities for peripheralcomponents, data acquisition products, and upgrades to newer computers andsoftware applications. In addition, the quality of service is an importantaspect of the end users buying decision when making a system selection;therefore the Company is constantly fine-tuning the services it provides andits service organization as 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. The Company employs acustomer relationship management system (CRM), integrated with its currentgeneral accounting system.

 

TheCompany believes that the service of its customers is of utmost importance toits long-term success and business strategy. Accordingly, a great deal ofemphasis is placed on continuing to upgrade the service organization and onexpanding the services that the Company offers towards a goal of establishing ahigher degree of customer satisfaction. As part of this effort, the Companyroutinely surveys its customers in an effort to obtain a “report card” on howthe service organization performs.  Thisproactive approach allows the Company to further understand the relationshipwith the customer. Surveys are based on varying subjects, including sales,implementation or support processes, and corporate communication or productdevelopment.

 

**SignificantContracts and Programs**

 

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.  The Company has also entered into businessagreements to resell products for other companies that provide complimentaryofferings to their existing product line including relationships with KonicaMinolta USA and Imaging Dynamics Corporation.

 

During the fiscal yearended December 31, 2007, there were no customers, contracts or programsthat generated over 10% of the Company’s net sales other than through adistribution arrangement with Merry X-Ray that generated approximately $336,000in aggregate sales or 10% of system 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.  TheCompany continues to expend a significant amount of resources for thedevelopment of new products, and for the development of additional enhancementsto existing products and intends to continue to expend such resources in thefuture.

 

The Company’sdevelopment plans are focused on evolving its clinical and diagnosticapplication products to a common user interface based on industry standardthin-client technology.  Utilization of this common user interfacearchitecture allows for easier deployment in a traditional enterpriseenvironment as well as projecting the applications natively over theInternet.  Management believes that the total cost of ownership inherentin thin client architecture is very attractive to both current and future users. As the product suite continues to migrate to a common look and feel, ASPYRA isalso migrating its products to an independent operating platform and relationaldatabase technology. This architectural 

 

9

----

 

approach allows theproduct suite to take advantage of all current and any potential futurerelational database technologies. Management’s goal is to drive the productsuite to a total open systems environment, therefore allowing ASPYRA to takeadvantage of new technologies as they appear. In addition, ASPYRA has plannedproduct development projects over the next three years that include additionalenhancements to all of its products.

 

Researchand development expenditures, net of capitalized software, amounted toapproximately $2,354,000 in fiscal year ended December 31, 2007, and$1,981,000 in fiscal year ended December 31, 2006 or approximately 22.9%and 15.6% of net sales, respectively.  Such expenditures were attributableto systems development, including the development of new Laboratory, Radiology,and Pharmacy Information Systems applications, and enhancements to thoseproducts. The Company’s Clinical Information Systems are programmed using anOBJECT COBOL language that provides a standard code structure for the businesslogic while the graphical presentation is written in JAVA and HTML.  Byemploying run-time modules for UNIX and Windows, the Company has been able toport to a variety of hardware platforms with ease.   The Company’s Diagnostic Information Systemsare built upon the Microsoft.net platform and are programmed using C# and C++.The Company currently supports its software applications on Intel based HewlettPackard servers, Dell servers and IBM RISC 6000 servers, the most popularcomputer providers in healthcare.  This capability has allowed the Companyto become “platform independent” in vending its software products where somecustomers may be predisposed to certain hardware brands.  The Company alsotakes advantage of using off the shelf software such as Microsoft Word fortranscription and document production and delivery.  All of the Company’sproducts are open database compliant (ODBC), and the data structures supportthe use of standard query language (SQL) report generators that allows a widerange of reporting capabilities.

 

**Sales andMarketing**

 

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 office located in East Grinstead, West Sussex. Asof the date of  this report, the Company’sdomestic direct field sales force is organized into 5 sales regions which aresupported by two clinical software consultants, and managed by a vice presidentof sales.

 

In addition to directmarketing, the Company promotes its products by attending national industrytrade meetings, through media advertising, publishing articles in industrypublications, telemarketing campaigns, and through its website. The Company hasalso formed joint marketing arrangements with other companies that havecompatible products and services. The Company publishes newsletters andarticles, to expand communications with existing and potential customers, and createsadditional customer case studies that spotlight specific business or clinicalissues solved with the ASPYRA installed product(s).

 

The Company hasestablished and supports a periodic user symposium in order to encourage usersof its Clinical and Diagnostic Information Systems to participate in helpingthe Company to better serve its customers. The focus of the symposium is toencourage open group communications with the Company about a range of subjects,including service and support and new product enhancements. Since the Companyhas experienced success in vending multiple products to its customers, thenational symposium proves to be a good forum to discuss general topics, such asthe Company’s strategy and product direction, and provides an opportunity tofocus on specific application issues in breakout sessions, special interestgroups (SIGs) and roundtable discussions. The Company also schedules advancedtraining courses as part of the symposium agenda that have had considerableattendance by its customers.

 

10

----

 

**Competition**

 

TheCompany has several significant competitors including McKesson, GE MedicalSystems, Siemens, Cerner, Merge Healthcare, Amicas, Misys, Philips, and others,in the Clinical and Diagnostic Information Systems business, many of which aremuch larger 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 and DIS products offer the Company’s hybridmultisite capabilities, variety of data interfaces, add-on capability, andflexibility that allows the systems to be user definable, so that they can beemployed in different types of settings. The multisite and multi-disciplinaryor hybrid nature of the Company’s products and the responsiveness of itscustomer service and support are also strong selling points.

 

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, imaging centers, and community based andrural hospitals. Such entities typically have diverse outpatient populationsand operate in a number of locations that require special features designed inthe Company’s products that assist them in maximizing their operatingpotential.

 

**Manufacturingand Suppliers**

 

The Company has utilizedcomputers manufactured by several suppliers for its Clinical and DiagnosticInformation Systems in the past, and primarily uses computers manufactured byHewlett Packard, Dell, and IBM. Management believes that other computers, whichcan be used in the Company’s systems, are readily available from severalsuppliers. As part of a strategy to limit the amount of hardware that theCompany carries, it employs a “just in time” inventory program whereby it purchasesinventory when it has received an order from a customer rather than stockinginventory on a routine basis. The Company still maintains an inventory supplyof certain items including spare parts and components for both its CIS productline and for its data acquisition product line. In addition, the Companymaintains a long-term inventory pool of components and parts to servicecustomer’s hardware pursuant to 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 thesoftware manufactured by ASPYRA. Any other ancillary components that do notrequire additional application software will be shipped direct to aninstallation. When the DIS system has received all of the required softwarecomponents, it is then shipped to the customer’s site where it is installed,integrated and tested at the customer site.

 

ASPYRA’s vendor relationshipsare intended to provide affordable hardware, software, and integrationsolutions that have been successfully tested with the AccessNET system. ASPYRA’svendors 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.  IDC is a manufacturer/distributor of Digital Radiography (DR) systems fordiagnostic use in hospitals, imaging centers and clinics. Aspyra resells and promotes IDC’s DR systemsnationally to new and existing ASPYRA AccessNET and AccessMED PACS customers.

 

·                  InSite One. ASPYRA and InSite One, Inc. have formed analliance to provide ASPYRA’s software to InSite One customers and InSite One’sremote and on-site archive and disaster recovery capabilities to ASPYRAcustomers. This partnership offers facilities another method of compliance withHIPAA’s requirements for the protection of patient information. It alsoprovides a high level of redundancy and disaster recovery capabilities at anaffordable price.

 

11

----

 

·                  Konica Minolta 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 hasformed a partner relationship with Meridian Technique to provide customers withtheir OrthoView® product for orthopedic templating. Meridian’s OrthoViewprovides access to templates from prosthetic manufacturer.

 

·                  Microsoft®. ASPYRA has recentlyattained the Gold Certified level of the Microsoft®Partner Program. As a Microsoft® Certified Partner, theCompany reached the highest level within the program by earning theISV/Software Solutions Competency for its AccessNET PACS, and the NetworkingInfrastructure Solutions Competency.

 

·                  NAI Tech Products. NAI TechProducts provides DICOM connectivity solutions for non-DICOM compliant imagingmodalities.

 

·                  Barco / Voxar®. Post processing options provide additionalmethods to review patient information and make a diagnosis. MedVIEW®5.0 integrates with Voxar’s 3D Plug n’ View to provide image post-processingoptions.

 

**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 suchwarranties. The computers and other hardware components that the Companycurrently sells as part of its CIS and DIS products 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 who are to provide onsite warrantyservices through the manufacturer’s service network. The Company’s dataacquisition products and components are warranted against faulty materials andworkmanship 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, ImageSTITCH and MedVIEW, and has applied to register itstrademarks on its other trade and company names. The Company has retainedspecial intellectual property counsel to advise management on the appropriatecourse to follow with respect to these issues and has continued to pursuemeasures to protect its intellectual 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 or approvalsoften requires the submission of extensive testing and other supportinginformation. If we do not comply with regulatory requirements, we may besubject to fines, recall or seizure of products, total or partial suspension ofproduction, withdrawal of existing product approvals or clearances, refusal toapprove or clear new applications or notices and criminal prosecution.

 

12

----

 

The Federal Drug Administration (FDA) requires most Class Iand Class II medical devices, which include the Company’s ClinicalInformation System and Picture Archive Communications System products, tocomply with the FDA’s Quality System Regulation (QSR).  Additionally, theFDA requires 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.

 

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 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 itsdevelopment efforts in order to maintain the regulatory compliance of itsproducts. In addition, the 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, 2007 was approximately $432,000 for software, hardware andinterface products, and approximately $1,725,000 for deferred services,compared to approximately $778,000 for software, hardware and interfaceproducts, and $1,509,000 for deferred services, at December 31, 2006. TheCompany also has annually renewable extended service agreements under contractsaggregating in excess of $6,000,000.

 

**Employees**

 

At March 28, 2008,the Company had 67 full time and 3 part time employees of whom 18 are involvedin product development, 13 in sales and marketing, 34 in technical services,training, and support, and 5 in administration. The Company is not subject toany collective bargaining agreements and considers its employee relations to begood.

 

13

----

 

**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 $29,444 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 2012and is subject to cost of living adjustments in each year. All other provisionsof the 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 $11,010 permonth, plus common area maintenance costs and property taxes. The Jacksonvillelocation is leasedunder an extension of the original lease which has a five year term that endsin January 2012 and is subject to cost of living adjustments 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 the facilities.

 

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 litigation relating to claims of alleged infringement, misuse ormisappropriation of intellectual property rights of third parties. We may alsobe subject to claims arising out of our operations in the normal course of business.As of the date of this Form 10-KSB, we are not a party to any such otherlitigation that would have a material adverse effect on us or our business.

 

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

 

The Company did notsubmit any matter to a vote of its security holders during the fourth quarterof its fiscal year ended December 31, 2007.

 

14

----

 

**PART II**

 

**Item 5.Market for Common Equity, Related Stockholder Matters and Small Business IssuerPurchases of Equity Securities.**

 

**(a) Market information.**

 

The Company’s common shares trade publicly on theAmerican Stock Exchange under the symbol “APY”. The following table sets forthfor the periods indicated, the range of the high and low sale prices for thecommon shares as reported by the American Stock Exchange. The prices do notinclude retail markups, markdowns, or commissions.

 

 
| ** **                            | ** ** | **High** | ** ** | **Low** | ** ** |
|---------------------------------------|------------|----------|------------|---------|------------|
| 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    |       |
|                                  |       |     |       |    |       |
| Fiscal 2007 ending  December 31, |       |     |       |    |       |
| First Quarter                         |       | 2.45     |       | 1.60    |       |
| Second Quarter                        |       | 2.45     |       | 1.64    |       |
| Third Quarter                         |       | 2.35     |       | 1.60    |       |
| Fourth Quarter                        |       | 2.61     |       | 1.50    |       |
|                                       |            |          |            |         |            |  |  |

 

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

 

The number of shareholders of record of Common Sharesof the Company as of March 28, 2008 was approximately 338. The Companyalso has approximately 1100 beneficial holders of record whose shares are heldin street name as of March 28, 2008.

 

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

 

Holders of Common Shares are entitled to receive suchdividends as may be declared by the Company’s Board of Directors. The Companyhas never paid a cash dividend on its Common Shares and the Board of Directorscurrently intends to retain any earnings for use in the Company’s business.

 

**(d) Securities authorized for issuance under equity compensation plans.**

 

The following tablerepresents securities authorized for issuance under our equity compensationplans as of December 31, 2007:

 

**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                                                                                                               |       | $                                                                                                            | 2.00       |                                                                                                                                                                                                | 783,015    |   |
|                                                        |       |                                                                                                                    |       |                                                                                                         |       |                                                                                                                                                                                                |       |
| Equity  Compensation Plans not approved by security holders |       | 0                                                                                                                       |       |                                                                                                         |       | 0                                                                                                                                                                                                   |       |
| Total                                                       |       |                                                                                                                    |       |                                                                                                         |       |                                                                                                                                                                                                |       |
|                                                             |            |                                                                                                                         |            |                                                                                                              |            |                                                                                                                                                                                                     |            |  |

 

**(e) ****Recent sales of unregistered securities.**

 

From time to time theCompany has issued restricted common shares to its employees in lieu ofcompensation for vacation pay. However, there were no such issuances ofunregistered Common Shares during the years ended December 31, 2007, 2006and 2005.

 

**(f) ****Small business issuer purchase of equitysecurities.**

 

During the years ended December 31,2007 and 2006, there were no repurchases of Common Shares.

 

15

----

 

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

 

**Overview**

 

Thefollowing discussion relates to the consolidated business of ASPYRA, whichincludes the operations of its wholly owned subsidiary Aspyra DiagnosticSolutions, Inc. (ADSI) formerly StorCOMM, Inc. and its wholly ownedsubsidiary Aspyra Technologies, Ltd. (ATI) formerly StorCOMM Technologies, Ltd.

 

ASPYRAoperates in one business segment determined in accordance with Statement of Financial Accounting 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.  In order to retain thisservice relationship we must keep our products current for competitive,clinical, diagnostic, and regulatory compliance.  Enhancements to our products in the form ofsoftware upgrades are an integral part of our business model and are includedas a contract obligation in our warranty and extended service agreements.  In order to generate such revenueopportunities our investment in software enhancements is significant and is akey 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 continue at currentlevels.

 

ASPYRA’sresults of operation for the fiscal year ended December 31, 2007 weremarked by a decrease in sales and a increase in operating loss that are morefully discussed in the following section “Results of Operations”.  The enactment of the Deficit Reduction Act(DRA) in 2006 continued to slow contract signings as the marketplace adjustedto changes in reimbursement of some imaging procedures.  Additionally, sales cycles for CIS and DISproducts are generally lengthy and on average exceed six months from inceptionto closure.  Because of the complexity ofthe sales process, a number of factors that are beyond the control of theCompany can delay 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 timely consummation of orders.  ASPYRAhas completed new versions of its laboratory and radiology information systemsproducts, as well as its new AccessRAD Radiology Information System (“RIS”) /Picture Archive Communication Systems (“PACS”) which it has begun marketing.  At December 31, 2007, the Company had$431,746 in deferred revenue.

 

Theoperating losses incurred by the Company during the fiscal year ended December 31,2007 were attributable to the uneven sales performance previouslydiscussed.  The Company completed theintegration and restructuring of the merged businesses and incurred certaincosts associated with such activities which were only partially offset byreductions in redundant personnel and other expenses during the fiscal yearended December 31, 2007.

 

This management’s discussion and analysis comparesthe results of operation for the fiscal year ended December 31, 2007 withthe fiscal year ended December 31, 2006.

 

16

----

 

**Resultsof Operations**

 

*Year Ended December 31, 2007 Compared to YearEnded December31, 2006*

 

Thefollowing table sets forth certain line items in our condensed consolidatedstatement of operations as a percentage of total revenues for the periodsindicated:

 
| ** **                                 | ** ** | **Fiscal Year Ended  December 31, 2007** | ** ** | **Fiscal Year Ended  December 31, 2006** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| Revenues:                                  |       |                                                         |       |                                                         |       |
| System sales                               |       | 31.5                                                         | %          | 44.6                                                         | %          |
| Service revenues                           |       | 68.5                                                         |       | 55.4                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Total revenues                             |       | 100.0                                                        |       | 100.0                                                        |       |
|                                       |       |                                                         |       |                                                         |       |
| Cost of products and services sold:        |       |                                                         |       |                                                         |       |
| System sales                               |       | 24.9                                                         |       | 30.8                                                         |       |
| Service revenues                           |       | 27.7                                                         |       | 22.8                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Total cost of products and services        |       | 52.6                                                         |       | 53.6                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Gross profit                               |       | 47.4                                                         |       | 46.4                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Operating expenses:                        |       |                                                         |       |                                                         |       |
| Selling, general  and administrative       |       | 65.4                                                         |       | 57.1                                                         |       |
| Research and  development                  |       | 22.9                                                         |       | 15.6                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Total operating expenses                   |       | 88.3                                                         |       | 72.7                                                         |       |
|                                       |       |                                                         |       |                                                         |       |
| Operating loss                             |       | (40.9                                                        | )          | (26.3                                                        | )          |
|                                       |       |                                                         |       |                                                         |       |
| Loss before provision for income taxes     |       | (41.0                                                        | )          | (28.1                                                        | )          |
|                                       |       |                                                         |       |                                                         |       |
| Provision for income taxes                 |       | —                                                       |       | —                                                       |       |
|                                       |       |                                                         |       |                                                         |       |
| Net loss                                   |       | (41.0                                                        | )          | (28.1                                                        | )          |
|                                       |       |                                                         |       |                                                         |       |
| Deemed dividend                            |       | (7.7                                                         | )          | —                                                       |       |
|                                       |       |                                                         |       |                                                         |       |
| Net loss applicable to common shareholders |       | (48.7                                                        | )          | (28.1                                                        | )          |

 

Revenues

 

Salesfor the fiscal year ending December 31, 2007 were $10,272,247, as comparedto $12,689,217 for the fiscal year ending December 31, 2006, an overalldecrease of $2,416,970 or 19.0%. When analyzed by revenue category, sales ofClinical Information Systems (CIS) and Diagnostic Information Systems (DIS)decreased by $2,429,759 or 42.9%, partially offset by an increase in servicesof $12,789 or 0.2%. As described above under “Overview”, the decrease in salesof DIS products was primarily attributable to the enactment of the DeficitReduction Act (DRA) in 2006 continuing to slow contract signings as themarketplace adjusted to changes in reimbursement for some imaging procedures.  Management believes that the importance ofimaging technologies such as the Company’s PACS products is justified as aninvestment by end users to improve efficiencies.  The increase in service revenues is primarilyattributable to continued high levels of renewals of extended maintenancecontracts and an increasing  level ofpost-implementation services provided. If and when the Company’s installed base of CIS and DIS installationsincreases, then service revenues would be expected to increase as well.

 

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.  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.  Inaddition, the Company’s revenues associated with CIS and DIS transactions maybe delayed due to customer related issues such as availability of funding,staff availability, IT infrastructure readiness, and the performance of thirdparty contractors, all of which are issues outside of the control of ASPYRA.

 

17

----

 

Cost of Products andServices Sold

 

Cost of products andservices sold decreased by $1,404,443 or 20.6% for the fiscal year ended December 31, 2007 ascompared to the fiscal year ended December 31, 2006. The overall decreasein cost of sales was primarily attributable to a decrease in labor costs of$219,451 or 7.1%, a decrease of $897,219 or 56.5% in material costs, and adecrease in other costs of sales of $287,773 or 13.4%. The decrease in laborcosts and other costs of sales was primarily attributable to reduction ofpersonnel and overhead. The decrease in material costs was attributable to adecrease in the sales of CIS and DIS products.

 

Costof sales as a percentage of sales decreased to 53% for the fiscal year ended December 31,2007, as compared to 54% for the fiscal year ended December 31, 2006. Theoverall percentage decrease in cost of sales, as a percentage of sales, wasprimarily attributable to reduction in personnel.  Management believes the gross profit marginwill improve in fiscal 2008; however, the Company could experience quarterlyvariations in gross margin as a result of the factors discussed above.Management was able to eliminate redundant personnel and achieve operationalsynergies that yielded reductions in operating expenses during fiscal 2007which we expect to be evident in 2008.

 

Selling, General andAdministrative Expenses

 

Selling,general, and administrative expenses decreased by $531,147 or 7.3% for thefiscal year ended December 31, 2007 as compared to the fiscal year ended December 31,2006.  The reduction of expenses wasprimarily attributable to decreases of approximately $360,000 related tosalaries,  $120,000 in tradeshowexpenses, $72,000 related to user symposium expenses, $179,000 in travel andlodging expenses, which were partially offset by an increase of $80,000 inlegal and accounting expenses, and $136,000 consulting expenses related to thedocumentation of the Company’s internal controls and consulting fees comparedto the same period in fiscal 2006. Management continues to evaluate costreductions in some of its selling, general and administrative expenses while italso continues to plan further investment in its marketing programs.

 

Research and DevelopmentExpenses

 

Research and developmentexpenses increased $372,180 or 18.8% during the fiscal year ended December 31,2007, as compared to the fiscal year ended December 31, 2006. The increasewas primarily attributable to  increasesin salaries and expenses of new personnel in product development. Suchincreased expenses were attributable to the development of AccessRAD, the newRIS/PACS platform that integrates the Company’s radiology information systemCyberRAD with its AccessNET PACS system, and enhancements and new modules forthe Company’s CIS and DIS products.  Forits current fiscal year ended December 31, 2007 and fiscal year ended December 31,2006, the Company capitalized software costs of $825,412 and $930,810,respectively, which are generally amortized over the estimated useful life notto exceed five years.

 

Interest and otherincome was $150,568 for the fiscal year ended December 31, 2007as compared to $99,962 for the fiscal year ended December 31, 2006due 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 other expense was $167,991for the fiscal year ended December 31, 2007 as compared to $321,679 forthe fiscal year ended December 31, 2006. The decrease is primarily due to the nonrecurring penalty imposed as aresult of a delay in the registration of the securities underlying the privateequity placements, which was paid by the Company in October 2006.

 

Incometax provision was $2,117 for the fiscal year ended December 31, 2007 ascompared to $4,810 for the fiscal year ended December 31, 2006.

 

As a result of thefactors discussed above, the Company incurred a net loss applicable to commonshareholders of $5,006,032 which includes a deemed dividend of $789,021 orbasic and diluted loss per share of $0.44 for the fiscal year ended December 31, 2007as compared to a net loss applicable to common shareholders of $3,570,438 orbasic and diluted loss per share of $0.36 for the fiscal year ended December 31, 2006.

 

At December 31,2007, the Company had state and federal net operating loss carryforwardsavailable to offset future taxable income of approximately $34,000,000 and$40,577,000, respectively, that are subject to Internal Revenue Code Section 382limitations. These operating loss carryforwards expire at various dates through2027, and general business tax credit carryforwards available to offset futurestate and federal income tax payable of approximately $464,000 and $858,000, 

 

18

----

 

respectively. While theFederal general business tax credits expire at various dates through 2027, thestate general business tax credits can be carried forward indefinitely. TheCompany also has alternative minimum tax (AMT) net operating loss carryforwardsof approximately $39,527,000 to offset future AMT taxable income that expiresthrough various dates through 2027. Internal Revenue Code Section 382imposes limitations on the utilization of net operating loss and tax creditcarryovers pursuant to an ownership change as a consequence of the merger withADSI. The annual loss limitation amount is $385,000.

 

The major temporary taxdifferences that are expected to reverse in 2008 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 temporary differences.

 

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, the Companypurchased intangible assets that were not deductible for tax purposes, and adeferred tax liability of $1,806,734 was recorded. In addition, the Companyrecorded a deferred tax asset of $1,806,734 which is expected to be realizedover the term of the deferred tax liability. The deferred tax asset anddeferred tax liability were included in goodwill. At December 31, 2007,the Company evaluated the net deferred tax asset taking into considerationoperating results and determined that a valuation allowance of approximately$6,862,700 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 $825,412 and $930,810,respectively, during fiscal 2007 and 2006 in software development.  These expenditures related to investment inthe Company’s new RIS/PACS integrated system, AccessRAD, enhancements toAccessNET, the new browser version of the Company’s LIS product, CyberLAB, andother product enhancements. The Company anticipates expending additional sumsduring fiscal 2008 on product enhancements to all its products and the furtherdevelopment of AccessRAD.  During fiscal2007, the Company invested an aggregate of $95,935 in fixed assets primarilyconsisting of computers and software, as compared to an investment of $285,837in fixed assets primarily consisting of computers, network infrastructure,telephone and data communications systems, and software in 2006.

 

As of December 31,2007, the Company’s working capital amounted to a deficit of $4,007,912.  At December 31, 2007, the Company’scredit facilities with its bank consisted of a revolving line of credit of$1,300,000, of which $1,026,477 was outstanding. The bank credit agreement wasdue to expire on February 27, 2008. On March 26, 2008, the Company executed agreements renewing itsrevolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2009.  The revolving line of credit issubject to certain covenants including revised financial covenants. As of December 31,2007, the Company was not in compliance with all covenants but had obtained awaiver from the bank.  Advances under therevolving line of credit are on a formula based on eligible accounts receivableand inventory balances.  Management isconsidering additional financing to accelerate its business development planswhich in turn may improve its working capital position.

 

Cash used in operatingactivities was $1,618,035 for the fiscal year ended December 31, 2007,compared to cash used in operating activities of $2,231,102 for the fiscal yearended December 31, 2006.  Thedecrease in cash used for operating activities was primarily attributable tothe net change in receivables, accrued liabilites and deferred service contractincome which was partially offset by the increase in net loss.

 

Net cash used in investingactivities totaled $921,347 for the 2007 fiscal year, compared to $1,216,647used in investing activities during the 2006 fiscal year.  The change was primarily the result of adecrease in investment in fixed assets and software capitalization costscompared to the prior fiscal year.

 

Cash provided byfinancing activities amounted to $2,344,731 during the 2007 fiscal yearcompared to cash provided by financing activities of $3,174,669 in fiscal2006.  The decrease was primarilyattributable to the Company completing a private placement transaction infiscal 2006, partially offset by the exercise of warrants in fiscal 2007, andthe change in restricted cash.

 

19

----

 

The Company’s primarysource of working capital has been generated from private placements ofsecurities and from borrowings.  TheCompany has been experiencing a history of losses due to the integration of itsbusinesses and the significant investment in new products since the quarterended March 31, 2005 and negative cash flows from operations since thequarter ended December 31, 2005.  Anunanticipated decline in sales, delays in implementations where payments aretied to delivery and/or performance of services or cancellations of contractshave had and in the future could have a negative effect on cash flow fromoperations and could in turn create short-term liquidity problems. 

 

On March 26, 2008the Company entered into a Note Purchase Agreement with various current and newshareholders. Pursuant to the Purchase Agreement, the investors purchasedsecured promissory notes from the Company in the principal amount of$2,775,000.  The notes are convertible intoshares of the Company’s Common Stock at a conversion price of $0.55 per share,subject to adjustment in the event of stock splits, stock dividends, andsimilar transactions. The notes are convertible up to 5,427,273 shares of theCompany’s Common Stock and have a maturity date of March 26, 2010 and bearinterest at the rate of 8% per annum compounded on each July 15 and January15.  Pursuant to the terms of thetransaction, the Company will issue 3 year warrants to purchase up to 5,496,647of shares of Common Stock.  As a result,assuming the conversion of all promissory notes and exercise of all warrants,up to 10,923,920 shares of the Company’s Common Stock may be issued.  Such an issuance if it were to occur, wouldbe highly dilutive of existing shareholders and may, under certain conditionseffect a change of control of the Company. Simultaneously with the execution ofthe Purchase Agreement, the Company and each of the investors entered into aRegistration Rights Agreement, pursuant to which each of the investors shall beentitled to certain registration rights. We believe that our current cash andcash equivalents, and cash flow from operations, will be sufficient to meet ourcurrent anticipated cash needs, including for working capital purposes, capitalexpenditures and various contractual obligations, for at least the next 12months.  If the company is unable togenerate cash from operations or meet revenue targets or obtain new cashinflows from financing or equity offerings, the Company would need to takeaction and reduce costs in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings andcapital infusion.    We may also requireadditional cash resources due to changed business conditions or other futuredevelopments, including any investments or acquisitions we may decide topursue.  If these sources areinsufficient to satisfy our cash requirements, we may seek to sell debtsecurities or additional equity securities or to obtain a credit facility.  The sale of convertible debt securities oradditional equity securities could result in additional dilution to ourstockholders.  The incurrence ofindebtedness would result in incurring debt service obligations and couldresult in operating and financial covenants that 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 with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time evaluateacquisitions of other businesses, applications or technologies.

 

**ContractualObligations**

 

The following summarizes our contractual obligationsat December 31, 2007 and the effects such obligations are expected to haveon liquidity and cash flow in future periods:

 
| **Contractual   Obligations** | ** ** | **Total** | ** ** | **Less than 1   Year** | ** ** | **1-3 Years** | ** ** | **4-5 Years** | ** ** | **After 5   Years** | ** ** |
|------------------------------------|------------|-----------|------------|---------------------------------------|------------|--------------------|------------|--------------------|------------|-------------------------------|------------|
| Operating leases                   |       | $         | 2,464,167  |                                  | $          | 528,804            |       | $                  | 1,079,587  |                          | $          | 855,776 |   | $ | — |   |
| Debt (1)                           |       | $         | 1,302,755  |                                  | $          | 1,302,755          |       | $                  | —     |                          | $          | — |   | $ | — |   |
| Capital lease                      |       | $         | 649,140    |                                  | $          | 227,262            |       | $                  | 365,198    |                          | $          | 56,680 |   | $ | — |   |

 

----

(1)          Includespayment of interest of $102,150 in 2008.

 

**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 these financialstatements requires management to make estimates and judgments that affect thereported amounts of assets, liabilities, revenues and expenses, and relateddisclosures of contingent assets and liabilities.  On an on-going basis, management evaluates estimates,including those related to the valuation of inventory and the allowance foruncollectible accounts receivable. We base our estimates on historicalexperience and on 

 

20

----

 

various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourconsolidated 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 evaluatedon a continual basis and reserve adjustments are made based on management’sestimate of future sales value, or in the case of the long-term componentinventory, on management’s estimation of the usage of specific inventory itemsand net realizable value.  Managementreviews inventory quantities on hand and makes determination of the excess orobsolete items in the inventory, which are specifically reserved.  In addition, reserve adjustments are made forthe difference between the cost of the inventory and the estimated market valueand charged to operations in the period in which the facts that give rise tothe adjustments become known.  At December 31,2007 the inventory reserve was $166,781.

 

*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, 2007 was $921,212, net of an allowancefor doubtful accounts of $147,832.

 

*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,SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “RevenueRecognition in Financial Statements.” SOP No 97-2, as amended, generally requires revenue earned on softwarearrangements involving multiple-elements to be allocated to each element basedon the relative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold seperately andspecifically defined in a quotation or contract.  Deferred revenue related to CIS and DIS salesare comprised of deferrals for license fees, hardware, and other services forwhich the implementation has not yet been completed and revenues have not beenrecognized.  Revenues are presented netof discounts.  At December 31, 2007deferred revenue was $431,746.

 

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, 2007, deferred servicecontract income was $1,724,650.

 

*Software Development Costs*

 

Costs incurred internallyin creating computer software products are expensed until technologicalfeasibility has been established upon completion of a program design.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 

 

21

----

 

and expected futurerevenue for each product with minimum annual amortization equal to thestraight-line amortization over the estimated economic life of the product notto exceed five years.  For the yearsended December 31, 2007 and December 31, 2006, the Companycapitalized $825,412 and $930,810, respectively.  For the year ended December 31, 2007,the balance of capitalized software costs was $2,839,232 net of accumulatedamortization 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.

 

*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 the effectiveness of the 2005 EquityIncentive Plan on November 22, 2005, the 1997 Stock Option Plan wasterminated for purposes of new grants. Both of these 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 to Employees,and related Interpretations, as permitted by SFAS No. 123, Accounting forStock-Based Compensation. Effective January 1, 2006, we adopted the fairvalue recognition provisions of SFAS No. 123(R), Share-Based Payment,using the modified prospective transition method. Under that transition method,compensation cost recognized in the years ended December 31, 2007 and 2006includes; (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of SFAS No. 123,and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods 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, expectedoption 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,”which requires recognition of deferred tax liabilities and assets for theexpected future tax consequences of events that have been included in thefinancial statements or tax returns. Under this method, deferred tax liabilities and assets are determinedbased on the differences between the financial statements and the tax bases ofassets and liabilities using enacted tax rates in effect for the year in whichthe differences 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**

 

*In evaluating the Company, various risk factors and otherinformation should be carefully considered. The risks and uncertainties described below are not the only ones thatimpact the Company.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also have an adverse impact on us. Among other things, this discussion contains forward-looking statementsthat are based on certain assumptions about future risks anduncertainties.  We believe that ourassumptions are reasonable.  Nonetheless,it is likely that at least some of these assumptions will not come true.*

 

22

----

 

**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 31,2007, our net loss was $5,006,032.  At December 31,2007, our cash and cash equivalents totaled $803,392 and our working capitaldeficit was $4,007,912.  We cannot becertain that Aspyra will become profitable and sustain profitability.  If Aspyra does not become profitable andsustain profitability, the market price of our common stock will decline.  The Company’s primary source of workingcapital has been generated from the private placements and borrowings.  The Company’s results of operations for thefiscal year ended December 31, 2007 produced negative operating cash flowof $1,618,035.  Any decline in sales,delays in implementations where payments are tied to delivery and/or performanceof services 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 ofadditional indebtedness would result in incurring debt service obligations andcould result in operating and financial covenants that would restrict ouroperations.  There can be no assurancethat any additional financing will be available on acceptable terms, if at all.

 

***Any failure to successfullyintroduce future products into the market could adversely affect our business.***

 

Thecommercial success of future products depends upon their acceptance by themedical community.  Our future productplans include capital-intensive clinical and diagnostic informationsystems.  We believe that these productscan significantly reduce labor costs, improve patient care and offer otherdistinctive benefits to the medical community. However, there is often market resistance to products that requiresignificant capital expenditures or which eliminate jobs through automation. Wecan make no assurance that the market will accept our future products andsystems, or those sales of our future products and systems will grow at therates expected by our management.

 

***If we fail to meet changing demandsof technology, we may not continue to be able to compete successfully withcompetitors.***

 

Themarket for our products is characterized by rapid technological advances,changes in customer requirements and frequent new product introductions andenhancements.  Our future success dependsupon our ability to introduce new products that keep pace with technologicaldevelopments, enhance current product lines and respond to evolving clientrequirements.  ASPYRA has incurred, andwe will need to continue to incur, significant research and developmentexpenditures in future periods as we strive to remain competitive.  Our failure to meet these demands couldresult in a loss of our market share and competitiveness and could harm ourrevenues and results of operations.

 

***Our success depends on our abilityto attract, retain and motivate management and other skilled employees.***

 

Our future success and growth depend on the continuedservices of our key management and employees. The loss of the services of any of these individuals or any other keyemployee could materially affect our business. Our future success also dependson our ability to identify, attract and retain additional qualified personnel.Competition for employees in our industry is intense and we may not besuccessful in attracting or retaining them. There are a limited number of people with knowledge of, and experiencein, our industry.  We do not haveemployment agreements with most of our key employees.  However, we generally enter into agreementswith our employees regarding patents, confidentiality and related matters.  We do not maintain life insurance polices onour employees.  Our loss of keypersonnel, especially without advance notice, or our inability to hire orretain qualified personnel, could have a material adverse effect on sales andour ability to maintain our technological edge. We cannot guarantee that we will continue to retain our key managementand skilled personnel, or that we will be able to attract, assimilate and retainother highly qualified personnel in the future.

 

23

----

 

***If we do not protect our proprietaryinformation and prevent third parties from making unauthorized use of ourproducts and technology, our financial results could be harmed.***

 

Werely on a combination of confidentiality agreements and procedures andcopyright, patent, trademark and trade secret laws to protect our proprietaryinformation. However, all of these measures afford only limited protection andmay be challenged, invalidated, or circumvented by third parties. Third partiesmay copy aspects of our products or otherwise obtain and use our proprietaryinformation without authorization. Third parties may also develop similar orsuperior technology independently, including by designing around our patents.Furthermore, the laws of some foreign countries do not offer the same level ofprotection of our proprietary rights as the laws of the United States, and wemay be subject to unauthorized use of our products in those countries. Anylegal action that we may bring to protect proprietary information could beexpensive and may distract management from day-to-day operations. Unauthorizedcopying or use of our products or proprietary information could result inreduced sales of our products.

 

***Third parties claiming that weinfringe their proprietary rights could cause us to incur significant legalexpenses and prevent us from selling our products.***

 

Fromtime to time, we have received claims that we have infringed the intellectualproperty rights of others 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 and attention fromour business;

 

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

 

·                  require us to pay monetary amounts as damagesto our customers.

 

Inaddition, we license and use software from third parties in our business. Thesethird party software licenses may not continue to be available to us onacceptable terms. Also, these third parties may from time to time receiveclaims that they have infringed the intellectual property rights of others,including patent and copyright infringement claims, which may affect ourability to continue licensing their software. Our inability to use any of thisthird party software could result in disruptions in our business, which couldmaterially and adversely affect our operating results.

 

***ASPYRA operates in aconsolidating industry which creates barriers to market penetration.***

 

The healthcare information technology industry in recentyears has been characterized by consolidation by both healthcare providers whoare our customers and by those companies that we compete against. Largehospital chains and groups of affiliated hospitals prefer to negotiatecomprehensive contracts for all of their system needs with larger vendors whooffer broader product lines and services. The conveniences offered by these largevendors are administrative and financial incentives that we cannot offer ourcustomers.

 

***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 complywith regulatory requirements and that we will devote significant time andresources to this effort.  Theseregulatory processes can be lengthy, expensive and uncertain. Additionally,securing necessary clearances or approvals may require the submission ofextensive data and 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.

 

24

----

 

***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 HealthInsurance Portability and Accountability Act (HIPAA) and the cost of complyingwith HIPAA may negatively impact our net income.***

 

Ourbusiness is substantially impacted by the requirements of HIPAA and ourproducts must maintain the confidentiality of a patient’s medical records andinformation. 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 productfailure may subject us to liability and could substantially increase our costs.***

 

Ourproducts are used to gather information for professionals to make medicaldecisions, diagnosis, and treatment. Accordingly, the manufacture and sale of our products entails aninherent risk of product liability arising from an inaccurate, or allegedlyinaccurate, test or procedure result.  Inthe past, ASPYRA has discovered errors and failures in certain of our productofferings after their introduction and have experienced delayed or lostrevenues during the period required to correct these errors.  Errors and failures in products released byus could result in negative publicity, product returns, loss of or delay inmarket acceptance of our products, loss of competitive position or claims bycustomers or others.  Alleviating any ofthese problems could require significant expenditures of our capital andresources and could cause interruptions, delays or cessation of our sales,which could cause us to lose existing or potential customers and wouldadversely 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.

 

***System or network failurescould reduce our sales, increase costs or result in a loss of customers.***

 

We rely on our management information systems to operate ourbusiness and to track our operating results. Our management information systemswill require modification and refinement as we grow and our business needschange. If we experience a significant system failure or if we are unable tomodify our management information systems to respond to changes in our businessneeds, then our ability to properly run our business could be adverselyaffected and could lead to a reduction in our sales, increase costs and a lossof customers.

 

***Our evaluation of internalcontrols and remediation of potential problems will be costly and timeconsuming and could expose weakness in our financial reporting.***

 

While we believe that we currently have adequate internalcontrol procedures in place, we are still exposed to potential risks fromrecent legislation requiring companies to evaluate controls under Section 404of the Sarbanes-Oxley Act of 2002. We have evaluated our internal controlssystem to allow management to report on in the current year and determined ourcontrols  are effective.

 

25

----

 

***Factors outside of our control mayadversely affect our operations and operating results.***

 

Ouroperations and operating results may be adversely affected by many differentfactors which are outside of our control, including:

 

·                  deterioration in economic conditions in anyof the healthcare information technology industry, which could reduce customerdemand and ability to pay for our products and services;

 

·                  political and military instability, whichcould slow spending within our target markets, delay sales cycles and otherwiseadversely affect our ability to generate revenues and operate effectively;

 

·                  budgetary constraints of customers, which areinfluenced by corporate earnings and spending objectives;

 

·                  earthquakes, floods or other naturaldisasters affecting our headquarters located in Calabasas, California, an areaknown for seismic activity, or our other locations worldwide;

 

·                  acts of war or terrorism; and

 

·                  inadvertent errors.

 

Anyof these factors could result in a loss of revenues and/or higher expenses,which could adversely affect our financial results.

 

***Our international operations involvespecial risks that could increase our expenses, adversely affect our operatingresults and require increased time and attention of our management.***

 

Weexpect to generate approximately 10% of our revenues from customers locatedoutside of the United States in the fiscal year ending December 31,2008.  Our international operations aresubject to risks in addition to those faced by our domestic operations,including:

 

·                  potential loss of proprietary information dueto piracy, misappropriation or laws that may be less protective of ourintellectual property rights;

 

·                  imposition of foreign laws and othergovernmental controls, including trade and employment restrictions;

 

·                  enactment of additional regulations orrestrictions on imports and exports;

 

·                  fluctuations in currency exchange rates andeconomic instability such as higher interest rates and inflation, which couldmake our products more expensive in those countries;

 

·                  limitations on future growth or inability tomaintain current levels of revenues from international sales if we do notinvest sufficiently in our international operations;

 

·                  longer payment cycles for sales in foreigncountries and difficulties in collecting accounts receivable;

 

·                  difficulties in staffing, managing andoperating our international operations;

 

·                  difficulties in coordinating the activitiesof our geographically dispersed and culturally diverse operations; and

 

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

 

Aportion of the Company’s transactions outside of the United States aredenominated in foreign currencies. Our functional currency is the U.S.dollar.  Accordingly, our futureoperating results will continue to be subject to fluctuations in foreigncurrency rates. Hedging foreign currency transaction exposures is complex andsubject to uncertainty. We may be negatively affected by fluctuations inforeign currency rates in the future, especially if international salescontinue to grow as a percentage of our total sales.

 

***Changes to financial accountingstandards and new exchange rules could make it more expensive to issuestock options to employees, which would increase compensation costs and maycause us to change our business practices.***

 

Weprepare our financial statements to conform with generally accepted accountingprinciples, or GAAP, in the United States. These accounting principles aresubject to interpretation by the Public Company Accounting Oversight Board, theSEC and various other bodies. A change in those policies could have asignificant effect on our reported results and may affect our reporting oftransactions completed before a change is announced.

 

26

----

 

Forexample, we have used stock options and other long-term equity incentives as afundamental component of our employee compensation packages. We believe thatstock options and other long-term equity incentives directly motivate ouremployees to maximize long-term shareholder value and, through the use ofvesting, encourage employees to remain with our Company. The FinancialAccounting Standards Board has issued Statement of Financial AccountingStandards 123R that requires us to record a charge to earnings for employeestock option grants. In addition, regulations implemented by the American StockExchange generally require shareholder approval for all stock option plans,which could make it more difficult or expensive for us to grant stock optionsto employees. We may, as a result of these changes, incur increasedcompensation costs, change our equity compensation strategy or find itdifficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business, operating results and financialcondition.

 

***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, 2007and 2006, ADSI received approximately 17% and 90% of its revenues,respectively, through third party distribution arrangements. We expect that wewill continue to generate a significant portion of our revenues through a limitednumber of distribution arrangements for the foreseeable future. A significantportion of the Company’s outstanding accounts receivable is with such thirdparty distributors, which will result in a concentration of our credit risk. Ifany of 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 commonstock would be dilutive to our current shareholders and could adversely affectour stock price.***

 

Future sales of substantial amounts of shares of our commonstock in the public market, or the perception that these sales could occur, maycause the market price of our common stock to decline. Increased sales of ourcommon stock in the market after exercise of stock options or warrants couldexert significant downward pressure on our stock price. These sales also mightmake it more difficult for us to sell equity or equity-related securities inthe future at a time and price we deem appropriate.

 

On March 26, 2008 the Company entered into a privateplacement transaction with various current and new shareholders.  Pursuant to the Purchase Agreement, theinvestors purchased secured promissory notes from the Company in the principalamount of $2,775,000. The notes are convertible into up to 5,427,273 shares of theCompany’s Common Stock and have a maturity date of March 26, 2010 and bearinterest at the rate of 8% per annum compounded on each July 15 and January 15.Pursuant to the terms of the transaction, the Company will issue warrants topurchase up to an additional 5,496,647 shares of Common Stock. As a result,assuming the conversion of all promissory notes and exercise of all thewarrants, up to 10,923,920 shares of the Company’s Common Stock may be issued. Suchissuance if it were to occur, would be highly dilutive of existing shareholdersand may, under certain conditions affect a change of control of the Company.

 

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

 

Themarket prices of the common stock for ASPYRA have experienced significantfluctuations and our stock price may continue to fluctuate significantly, andyou could lose the value of your investment. The market price of our commonstock may be affected by a number of factors, including:

 

·                  announcements of quarterly operating resultsand revenue and earnings forecasts by us, our competitors or our customers;

 

·                  failure to achieve financial forecasts,either because expected sales do not occur or because they occur at lowerprices or on terms that are less favorable to us;

 

·                  rumors, announcements or press articlesregarding changes in our management, organization, operations or priorfinancial statements;

 

·                  changes in revenue and earnings estimates bysecurities analysts;

 

·                  announcements of planned acquisitions by usor by our competitors;

 

·                  announcements of new or planned products byus, our competitors or our customers;

 

·                  gain or loss of a significant customer;

 

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

 

·                  acts of terrorism, the threat of war andeconomic slowdowns in general.

 

27

----

 

Thestock market has experienced extreme price volatility, which has adverselyaffected and may continue to adversely affect the market price of our commonstock for reasons unrelated to our business or operating results.

 

***Fluctuations in our quarterlyfinancial results have affected the stock prices of ASPYRA in the past andcould affect our stock price in the future.***

 

Thequarterly financial results of ASPYRA have fluctuated in the past, and thequarterly financial results of the combined company are likely to varysignificantly in the future. A number of factors associated with the operationof our business may cause our quarterly financial results to fluctuate,including our ability to:

 

·                  effectively align sales resources to meetcustomer needs and address market opportunities;

 

·                  effectively respond to competitive pressures;and

 

·                  effectively manage our operating expenselevels.

 

A number of factorsassociated with our industry and the markets for our products, many of whichare outside our control, may cause our quarterly financial results tofluctuate, including:

 

·                  reduced demand for any of our products;

 

·                  timing and amount of orders by customers andseasonality in the buying patterns of customers;

 

·                  cancellation, deferral or limitation oforders by customers;

 

·                  fluctuations in foreign currency exchangerates; and

 

·                  weakness or uncertainty in general economicor 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 September 2006, theFASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB staff issued astaff position that delayed the effective date of SFAS No. 157 for allnon-financial assets and liabilities except for those recognized or disclosedannually. The FASB also issued FAS-157-1, “application of FASB Statement No.157 to FASB Statement No. 13 and other Accounting Pronouncements that addressFair Value Measurements for Purposes of Lease Classifications or Measurementsunder SFAS Statement No. 13”. We are required to adopt the provision of SFAS157, as applicable, beginning in fiscal year 2008. We are currently in theprocess of evaluating the expected effect of SFAS 157 on our results ofoperations and financial position.

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities”, whichprovides companies with an option to report selected financial assets andliabilities at fair value. The objective of SFAS No. 159 is to reduce bothcomplexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently. SFAS No. 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159 iseffective for the Company as of January 1, 2008. We have not completed ourevaluation of SFAS No. 159 but do not expect the adoption of SFAS No. 159to have a material effect on our operating results or financial position.

 

28

----

 

In July 2006, theFASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, (“FIN 48”) an interpretation of FASB Statement No. 109,Accounting for Income Taxes. FIN 48 requires that a position taken orexpected to be taken in a tax return be recognized in the financial statementswhen it is more likely than not (i.e. a likelihood of more than fiftypercent) that the position would be sustained upon examination by taxauthorities. A recognized tax position is then measured at the largest amountof benefit that is greater than fifty percent likely of being realized uponultimate 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 forfiscal years beginning after December 15, 2006. The standard did not havean impact on the Consolidated Financial Statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interest in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement. SFAS160 clarifies that changes in a parent’s ownership interest in a subsidiarythat do not result in deconsolidation are equity transactions if the parentretains it controlling financial interest. In addition, this statement requiresthat a parent recognize a gain or loss in net income when a subsidiary isdeconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date. SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest. SFAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The adoption of SFAS 160 is not expectedto have a material impact on the Company’s consolidated financial position,cash flows and results of operations.

 

In December 2007,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 141 (Revised) (“FAS 141(R)”),  Business Combinations . The provisions ofthis statement are effective for business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning after December 15, 2008. Earlier application is notpermitted. FAS141(R) replaces FAS 141 and provides new guidance forvaluing assets and liabilities acquired in a business combination. We willadopt FAS141(R) in calendar year 2009.

 

**Off-Balance Sheet Arrangements**

** **

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 on page 34.

 

**Item8.  Changes in and Disagreements withAccountants on Accounting and Financial Disclosure.**

 

None.

 

**Item 8A.  Controls andProcedures**

 

Attachedas exhibits to this Annual Report on Form 10-KSB are certifications ofASPYRA’s Chief Executive Officer and Chief Financial Officer, which arerequired in accordance with Rule 13a-14 of the Securities Exchange Act of1934, as amended (the “Exchange Act”). This “Controls and Procedures” sectionincludes information concerning the controls and controls evaluation referredto in the certifications.  This sectionshould be read in conjunction with the certifications for a more completeunderstanding of the topics presented.

 

29

----

 

**Management’s Annual Report on Internal Controlover Financial Reporting**

** **

Management is responsible for establishing andmaintaining adequate internal control over our financial reporting (as definedin Rule 13a-15(f) and 15d-15(f) of the Exchange Act). Internal control overfinancial reporting refers to the process designed by, or under the supervisionof, our Chief Executive Officer and Chief Financial Officer, and effected byour board of directors, management and other personnel, to provide reasonableassurance regarding the reliability of financial reporting and the preparationof financial statements for external purposes in accordance with generallyaccepted accounting principles, and includes those policies and proceduresthat:

 

(1)  Pertain to the maintenanceof records that in reasonable detail accurately and fairly reflect thetransactions and dispositions of our assets;

 

(2)  Provide reasonable assurancethat transactions are recorded as necessary to permit preparation of financialstatements in accordance with generally accepted accounting principles, andthat our receipts and expenditures are being made only in accordance withauthorization of our management and directors; and

 

(3)  Provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisitions, use ordisposition of our assets that could have a material effect on the financialstatements.

 

Internal control over financial reporting cannotprovide absolute assurance of achieving financial reporting objectives becauseof its inherent limitations. Internal control over financial reporting is aprocess that involves human diligence and compliance and is subject to lapsesin judgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or impropermanagement override. Because of such limitations, there is a risk that materialmisstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore, it is possible todesign into the process safeguards to reduce, though not eliminate, this risk.Management is responsible for establishing and maintaining adequate internalcontrol over financial reporting for the Company.

** **

**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 Rule 13a-15(e),as of the end of the fiscal year covered by this Annual Report on Form 10-KSB.  We conducted an evaluation of the effectivenessof our internal controls over financial reporting based on the framework ininternal controls over finanacial reporting based on the framework in InternalControl-Integrated Framework issued by the Committee of SponsoringOrganizations of the Treadwary Commission. Based on that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, as of December 31, 2007, our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by us in thereports that we file or submit under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission (“SEC”) rules and forms, and (ii) isaccumulated and communicated to our management, including our Chief ExecutiveOfficer and Chief Financial Officer, as appropriate, to allow timely decisionsregarding required disclosure.

 

ThisAnnual Report does not include an attestation report of our independentregistered public accounting firm regarding internal control over financialreporting.  Management’s report was notsubject to attestation by the Company’s independent registered publicaccounting firm pursuant to temporary rules of the SEC that permit theCompany to provide only management’s report in this annual report.

 

**Changesin Internal Control over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting that occurredduring the year ended December 31, 2007 that have materially affected, orare reasonably 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 theExchange Act.**

 

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 2008 Annual Meeting of the Company’s Shareholders.

 

**Section 16(a) Beneficial OwnershipReporting Compliance**

 

Section 16(a) ofthe Securities Exchange Act of 1934 (1934 Act) requires the Company’s directorsand officers, and persons who own more than 10% of a registered class of theCompany’s equity security, to file with the Securities and Exchange Commissionand the American Stock Exchange (AMEX) reports of ownership and changes inownership of common stock and other equity securities of the Company.  Officers, directors and greater than 10%shareholders are required by SEC regulation to furnish the Company with copiesof 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, 2007, 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 2008 AnnualMeeting of the Company’s Shareholders.

 

30

----

 

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

 

Incorporatedby reference from “Security Ownership of Certain Beneficial Owners andManagement” in the Definitive Proxy Statement to be filed with the Securitiesand Exchange Commission for the 2008 Annual Meeting of the Company’sShareholders.

 

**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 2008 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)       |   | Amendment to the Restated Articles of Incorporation  filed with the Secretary of the State of California on November 21, 2005.                                                        |
| 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.                                                                                                                                               |
| 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.                                                                                                                      |

 

31

----

 
| 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.                                                                                                                                      |
| 10. 28 |   | (14)       |   | Separation Agreement and General Release, dated as  of December 20, 2007 by and between Aspyra, Inc. and Steven M. Besbeck.                                                                  |
| 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)                                Includedas an Annex to the joint proxy statement/prospectus that is part of theCompany’s Registration Statement on Form S-4, originally filed on October 3,2005, SEC File No. 333-128795.

(2)                                Previouslyfiled as an exhibit to the Company’s Form 8-K dated October 21, 1992.

(3)                                Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-18dated September 22, 1983, SEC File No. 2- 85265.

(4)                                Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-1dated October 1, 1985 SEC File No. 2-99878.

(5)                                Previouslyfiled as an addendum to the Company’s Proxy Statement and Notice of AnnualMeeting of Shareholders dated April 10, 1992.

(6)                                Previouslyfiled as an exhibit to the Company’s Proxy Statement and Notice of AnnualMeeting of Shareholders dated March 24, 1997.

(7)                                Previouslyfiled as an exhibit to the Company’s Form 10-K for the year ended August 31,1992.

(8)                                Previouslyfiled as an exhibit to the Company’s Form 10-K for the year ended August 31,1986.

(9)                                Form ofChange in Control Agreement previously filed as an exhibit to the Company’s Form 8-Kdated February 9, 2005.

(10)                          Previouslyfiled 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)                          Previouslyfiled as an exhibit to the Company’s Form 10-KSB for the year ended December 31,2005.

(12)                          Previouslyfiled as an exhibit to the Company’s Form 8-K, dated May 18, 2006.

(13)                          Previouslyfiled as an exhibit to the Company’s Registration Statement on Form S-3dated June 9, 2006 SEC File No. 333-134926.

(14)                            Previouslyfiled as an exhibit to the Company’s Form 8-K/A, dated December 27, 2007.

 †                                       Executivecompensation plans and arrangements.

*                                         Filedwith 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 the2008 Annual Meeting of the Company’s Shareholders.

 

**SIGNATURES**

 

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

 
|                                  | ASPYRA, INC. |
|----------------------------------|--------------|
|                             |         |   |
|                             |         |   |
| Dated:  March 31, 2008 | By:          |   |
|                             |         | /S/ James Zierick |
|                             |         | James Zierick, |
|                             |         | Interim 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/James Zierick                 |       | Interim Chief Executive Officer and Director |       | March 31, 2008 |
| James Zierick                    |       | (principal executive officer)                |       |                |
|                             |       |                                         |       |                |
| /S/ Bruce M. Miller              |       | Chief Technology Officer                     |       | March 31, 2008 |
| Bruce M. Miller                  |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ James R. Helms               |       | Chief Operations Officer                     |       | March 31, 2008 |
| James R. Helms                   |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ Anahita Villafane            |       | Chief Financial Officer and Secretary        |       | March 31, 2008 |
| Anahita Villafane                |       | (principal accounting and financial officer) |       |                |
|                             |       |                                         |       |                |
| /S/ John Mutch                   |       | Chairman                                     |       | March 31, 2008 |
| John Mutch                       |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ Lawrence S. Schmid           |       | Director                                     |       | March 31, 2008 |
| Lawrence S. Schmid               |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ Robert S. Fogerson, Jr. |       | Director                                     |       | March 31, 2008 |
| Robert S. Fogerson, Jr.     |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ Norman R. Cohen              |       | Director                                     |       | March 31, 2008 |
| Norman R. Cohen                  |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ Jeffrey Tumbleson            |       | Director                                     |       | March 31, 2008 |
| Jeffrey Tumbleson                |       |                                         |       |                |
|                             |       |                                         |       |                |
| /S/ C. Ian Sym-Smith             |       | Director                                     |       | March 31, 2008 |
| C. Ian Sym-Smith                 |       |                                         |       |                |

 

33

----

 

**ASPYRA, INC.**

 

----

 

**Consolidated Financial Statements**

 

**For the Year Ended December 31, 2007**

 

----

 

ASPYRA, INC.

 

INDEX

 
| **Report of Independent  Registered Public Accounting Firm**                                                   |       | 35         |
|----------------------------------------------------------------------------------------------------------------|------------|------------|
|                                                                                                           |       |       |
| **Consolidated Financial Statements**                                                                          | ** ** | ** ** |
|                                                                                                           |       |       |
| Balance Sheet - December 31,  2007                                                                        |       | 36         |
|                                                                                                           |       |       |
| Statements of Operations -  Years ended December 31, 2007 and 2006                                        |       | 37         |
|                                                                                                           |       |       |
| Statements  of Shareholders’ Equity and Comprehensive Loss - Years ended  December 31, 2007 and 2006 |       | 38         |
|                                                                                                           |       |       |
| Statements of Cash Flows - Years ended  December 31, 2007 and 2006                                        |       | 39         |
|                                                                                                           |       |       |
| **Notes to Consolidated Financial Statements**                                                                 |       | 40         |

 

34

----

 

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

####  

Boardof Directors and Shareholders

Aspyra, Inc.and Subsidiaries

Calabasas,California

 

We have audited the accompanying consolidated balancesheets of Aspyra, Inc., as of December 31, 2007 and the relatedstatements of operations, stockholders’ equity and comprehensive loss, and cashflows for each of the two years in the period then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express anopinion on these financial statements based on our audits.

 

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States).Those standards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our 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. at December 31, 2007, and the results of itsoperations and comprehensive loss and its cash flows for each of the two yearsin the period then ended December 31, 2007,  in conformity with accounting principlesgenerally accepted in the United States of America.

 

 
| /s/ BDO SEIDMAN, LLP     |   |
|--------------------------|--------|
| Los Angeles,  California |   |
| March 31,  2008     |   |

 

35

----

 

**ASPYRA, INC.**

 

**CONSOLIDATED BALANCE SHEET**

 
| ** **                                                                                                                      | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                      | ** ** | **2007**              | ** ** |
| **ASSETS**                                                                                                                      | ** ** | ** **            | ** ** |
|                                                                                                                            |       |                  |       |
| CURRENT ASSETS:                                                                                                                 |       |                  |       |
| Cash                                                                                                                            |       | $                     | 803,392    |   |
| Receivables, net                                                                                                                |       | 921,212               |       |
| Inventory                                                                                                                       |       | 49,802                |       |
| Prepaid expenses                                                                                                                |       | 126,139               |       |
|                                                                                                                            |       |                  |       |
| TOTAL CURRENT  ASSETS                                                                                                           |       | 1,900,545             |       |
|                                                                                                                            |       |                  |       |
| PROPERTY AND  EQUIPMENT, net                                                                                                    |       | 839,889               |       |
| OTHER ASSETS                                                                                                                    |       | 86,529                |       |
| INVENTORY OF  COMPONENT PARTS                                                                                                   |       | 74,896                |       |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $875,165                                                   |       | 2,839,232             |       |
| INTANGIBLES, net                                                                                                                |       | 3,760,982             |       |
| GOODWILL                                                                                                                        |       | 7,268,434             |       |
|                                                                                                                            |       | $                     | 16,770,507 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                  | ** ** | ** **            | ** ** |
|                                                                                                                            |       |                  |       |
| CURRENT  LIABILITIES:                                                                                                           |       |                  |       |
| Notes payable                                                                                                                   |       | $                     | 1,200,605  |   |
| Accounts payable                                                                                                                |       | 784,735               |       |
| Accrued  liabilities:                                                                                                           |       |                  |       |
| Vacation pay                                                                                                                    |       | 363,239               |       |
| Accrued  compensation                                                                                                           |       | 518,737               |       |
| Accrued interest                                                                                                                |       | 106,646               |       |
| Deferred rent                                                                                                                   |       | 65,143                |       |
| Cutomer deposits                                                                                                                |       | 218,994               |       |
| Other                                                                                                                           |       | 343,725               |       |
| Deferred service  contract income                                                                                               |       | 1,724,650             |       |
| Deferred revenue  on system sales                                                                                               |       | 431,746               |       |
| Capital lease —  current portion                                                                                           |       | 150,237               |       |
|                                                                                                                            |       |                  |       |
| TOTAL CURRENT  LIABILITIES                                                                                                      |       | 5,908,457             |       |
|                                                                                                                            |       |                  |       |
| CAPITAL LEASE,  LESS CURRENT PORTION                                                                                            |       | 348,285               |       |
|                                                                                                                            |       |                  |       |
| TOTAL  LIABILITIES                                                                                                              |       | 6,256,742             |       |
|                                                                                                                            |       |                  |       |
| COMMITMENTS AND  CONTINGENCIES(Note 7)                                                                                          |       |                  |       |
|                                                                                                                            |       |                  |       |
| SHAREHOLDERS’  EQUITY:                                                                                                     |       |                  |       |
| Common shares,  no par value; 20,000,000 shares authorized; 12,437,150 shares issued and  outstanding at December 31, 2007 |       | 22,761,951            |       |
| Additional  paid-in capital                                                                                                     |       | 1,178,354             |       |
| Accumulated  deficit                                                                                                            |       | (13,366,612           | )          |
| Accumulated  other comprehensive loss                                                                                           |       | (59,928               | )          |
|                                                                                                                            |       |                  |       |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                                                |       | 10,513,765            |       |
|                                                                                                                            |       | $                     | 16,770,507 |   |

 

*See notes to consolidated financial statements.*

 

36

----

 

**ASPYRA, INC.**

 

**CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Years ended**        | ** ** |
|-------------------------------------------------|------------|-----------------------------|------------|
| ** **                                      | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                        |       |   |   |
| System sales                                    |       | $                           | 3,235,870  |   | $ | 5,665,629 |   |
| Service revenue                                 |       | 7,036,377                   |       | 7,023,588 |   |
| TOTAL SYSTEM  SALES AND SERVICE REVENUE         |       | 10,272,247                  |       | 12,689,217 |   |
|                                            |       |                        |       |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                        |       |   |   |
| System sales                                    |       | 2,559,367                   |       | 3,905,703 |   |
| Service revenue                                 |       | 2,841,286                   |       | 2,899,393 |   |
| TOTAL COSTS OF  PRODUCTS AND SERVICES SOLD      |       | 5,400,653                   |       | 6,805,096 |   |
|                                            |       |                        |       |   |   |
| GROSS PROFIT                                    |       | 4,871,594                   |       | 5,884,121 |   |
|                                            |       |                        |       |   |   |
| RESEARCH AND  DEVELOPMENT EXPENSES              |       | 2,353,574                   |       | 1,981,394 |   |
| SELLING AND  ADMINISTRATIVE EXPENSES            |       | 6,715,491                   |       | 7,246,638 |   |
| TOTAL OPERATING  EXPENSES                       |       | 9,069,065                   |       | 9,228,032 |   |
|                                            |       |                        |       |   |   |
| OPERATING LOSS                                  |       | (4,197,471                  | )          | (3,343,911 | ) |
|                                            |       |                        |       |   |   |
| OTHER INCOME  (EXPENSE):                        |       |                        |       |   |   |
| Interest income                                 |       | 150,568                     |       | 99,962 |   |
| Interest and  other expense                     |       | (167,991                    | )          | (321,679 | ) |
| TOTAL OTHER  EXPENSE                            |       | (17,423                     | )          | (221,717 | ) |
|                                            |       |                        |       |   |   |
| LOSS BEFORE  PROVISION FOR INCOME TAXES         |       | (4,214,894                  | )          | (3,565,628 | ) |
|                                            |       |                        |       |   |   |
| PROVISION FOR  INCOME TAXES                     |       | 2,117                       |       | 4,810 |   |
|                                            |       |                        |       |   |   |
| NET LOSS                                        |       | $                           | (4,217,011 | ) | $ | (3,570,438 | ) |
|                                            |       |                        |       |   |   |
| DEEMED DIVIDEND  ON EXERCISE OF WARRANTS        |       | (789,021                    | )          | — |   |
|                                            |       |                        |       |   |   |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS     |       | $                           | (5,006,032 | ) | $ | (3,570,438 | ) |
|                                            |       |                        |       |   |   |
| LOSS PER SHARE:                                 |       |                        |       |   |   |
|                                            |       |                        |       |   |   |
| Basic and  Diluted                              |       | $                           | (.44       | ) | $ | (.36 | ) |
|                                            |       |                        |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                        |       |   |   |
|                                            |       |                        |       |   |   |
| Basic and  Diluted                              |       | 11,336,483                  |       | 9,914,916 |   |

 

*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, 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                                  |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Components of  comprehensive loss:                                                   |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Net loss                                                                             |       | —                   |       | —                                 |       | —                               |       | (4,217,011               | )          | —                                            |        | (4,217,011                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Foreign currency  translation adjustment                                             |       | —                   |       | —                                 |       | —                               |       | —                   |       | (15,197                                           | )           | (15,197                                     | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Total  comprehensive loss                                                            |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        | (4,232,208                                  | )          |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Deemed dividend  on exercise of warrants                                             |       | —                   |       | —                                 |       | 789,021                              |       | (789,021                 | )          | —                                            |        | —                                      |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Compensation  expense                                                                |       | —                   |       | —                                 |       | 228,761                              |       | —                   |       | —                                            |        | 228,761                                     |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Exercise of stock  options                                                           |       | 4,000                    |       | 2,880                                  |       | —                               |       | —                   |       | —                                            |        | 2,880                                       |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| Exercise of  warrants (net of $100,000 costs)                                        |       | 1,650,000                |       | 1,715,000                              |       | —                               |       | —                   |       | —                                            |        | 1,715,000                                   |       |
|                                                                                 |       |                     |       |                                   |       |                                 |       |                     |       |                                              |        |                                        |       |
| BALANCE,  December 31, 2007                                                     |       | 12,437,150               |       | $                                      | 22,761,951 |                                 | $          | 1,178,354                |       | $                                                 | (13,366,612 | )                                           | $          | (59,928 | ) | $ | 10,513,765 |   |

 

*See notes to consolidated financial statements.*

 

38

----

** **

**ASPYRA, INC.**

 

**CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

 

**Increase(Decrease) in Cash**

 
| ** **                                                                   | ** ** | **Years ended**                    | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                   | ** ** | **December 31,    2007** | ** ** | **December 31,    2006** | ** ** |
| OPERATING  ACTIVITIES                                                        |       |                                    |       |   |   |
|                                                                         |       |                                    |       |   |   |
| Net loss                                                                     |       | $                                       | (4,217,011 | ) | $ | (3,570,438 | ) |
| Adjustments to  reconcile net loss to net cash used in operating activities: |       |                                    |       |   |   |
| Depreciation and  amortization                                               |       | 428,859                                 |       | 377,517 |   |
| Amortization of  capitalized software costs                                  |       | 473,486                                 |       | 329,390 |   |
| Amortization of  acquired intangibles                                        |       | 688,500                                 |       | 677,758 |   |
| Provision for  doubtful accounts                                             |       | 65,993                                  |       | 18,371 |   |
| Stock based  compensation                                                    |       | 228,761                                 |       | 160,572 |   |
| Increase  (decrease) from changes in:                                        |       |                                    |       |   |   |
| Receivables                                                                  |       | 346,948                                 |       | 195,175 |   |
| Inventories                                                                  |       | 111,711                                 |       | 129,237 |   |
| Prepaid expenses  and other assets                                           |       | 121,679                                 |       | 255,163 |   |
| Accounts payable                                                             |       | (102,282                                | )          | (331,681 | ) |
| Accrued  liabilities                                                         |       | 365,767                                 |       | 18,157 |   |
| Deferred service  contract income                                            |       | 215,608                                 |       | (102,602 | ) |
| Deferred revenue  on system sales                                            |       | (346,054                                | )          | (387,721 | ) |
|                                                                         |       |                                    |       |   |   |
| Net cash used in  operating activities                                       |       | (1,618,035                              | )          | (2,231,102 | ) |
|                                                                         |       |                                    |       |   |   |
| INVESTING  ACTIVITIES                                                        |       |                                    |       |   |   |
| Additions to  property and equipment                                         |       | (95,935                                 | )          | (285,837 | ) |
| Additions to  capitalized software costs                                     |       | (825,412                                | )          | (930,810 | ) |
|                                                                         |       |                                    |       |   |   |
| Net cash used in  investing activities                                       |       | (921,347                                | )          | (1,216,647 | ) |
|                                                                         |       |                                    |       |   |   |
| FINANCING ACTIVITIES                                                         |       |                                    |       |   |   |
| Borrowings on  line of credit                                                |       | 1,026,477                               |       | 500,000 |   |
| Forgiveness of  debt                                                         |       | (96,929                                 | )          | — |   |
| Payments on line  of credit and notes payable                                |       | (1,152,460                              | )          | (292,757 | ) |
| Payments on  capital lease obligations                                       |       | (150,237                                | )          | (102,423 | ) |
| Increase in  restricted cash                                                 |       | —                                  |       | (1,000,000 | ) |
| Decrease in  restricted cash                                                 |       | 1,000,000                               |       | — |   |
| Gross proceeds  from sale of stock in private placement                      |       | —                                  |       | 4,500,000 |   |
| Payments made  for private placement transaction                             |       | —                                  |       | (466,117 | ) |
| Buyback of  fractional shares related to merger                              |       | —                                  |       | (234 | ) |
| Exercise of  stock options and warrants                                      |       | 1,717,880                               |       | 36,200 |   |
|                                                                         |       |                                    |       |   |   |
| Net cash  provided by financing activities                                   |       | 2,344,731                               |       | 3,174,669 |   |
|                                                                         |       |                                    |       |   |   |
| Foreign currency  translation adjustment                                     |       | (16,589                                 | )          | (42,041 | ) |
|                                                                         |       |                                    |       |   |   |
| NET DECREASE IN  CASH                                                        |       | (211,240                                | )          | (315,121 | ) |
| CASH, beginning  of year                                                     |       | 1,014,632                               |       | 1,329,753 |   |
| CASH, end of  year                                                           |       | $                                       | 803,392    |   | $ | 1,014,632 |   |

 

*See notes to consolidated financial statements.*

 

39

----

 

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

#  

**BusinessActivities**

 

Aspyra, Inc.(formerly known as Creative Computer Applications, Inc.) (the Company orASPYRA), a California corporation, was formed in 1978.  The Company is a healthcare informationtechnology and service provider that specializes in Clinical InformationSystems (CIS) and Diagnostic Information Systems (DIS) for healthcareproviders.

 

The Company’s softwareand services for hospitals and clinic-based laboratories, pharmacies,orthopedic centers, and imaging departments are highly scalable and can be usedby a broad variety of healthcare providers. Clinical information is data that is gathered concerning each individualpatient’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 ofradiological or imaging procedures, digital diagnostic images, and otherclinical and diagnostic data.  TheCompany’s products are deployed to provide automation of clinical informationand digital diagnostic images that facilitates the operation of clinicaldepartments and allows the rapid recording and processing of information thatcan 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 Delawarecorporation and wholly owned subsidiary of ASPYRA, with and into StorCOMM, Inc.(“StorCOMM”), a Delaware corporation, pursuant to the terms of the Agreementand Plan of Reorganization, dated August 16, 2005 (the “Merger Agreement”),by and among ASPYRA, Xymed.com, Inc. and StorCOMM.

 

On November 22,2005, simultaneously with the closing of the merger, ASPYRA completed a privateplacement whereby the Company issued 1,500,000 Common Shares and warrants topurchase 300,000 Common Shares pursuant to a Common Stock and Warrant PurchaseAgreement.

 

On May 17,2006, the Company sold in a private placement 2,250,000 of its Common Sharesand warrants to purchase up to 1,350,000 Common Shares pursuant to the terms ofthe Common Stock and Warrant Purchase Agreement.

 

**Principlesof Consolidation**

 

Theconsolidated financial statements include the accounts of ASPYRA and itssubsidiaries after 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 to concentrationsof credit risk. The Company provides credit to a large number of hospitals,clinics, reference laboratories and other healthcare institutions in variousgeographical areas.  The Company performsongoing credit evaluations and maintains a general security interest in theitem sold until full payment is received.

 

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 December 31,2007, the Company had approximately $472,000 at a bank that was in excess ofthe FDIC insurance limit.

 

40

----

 

**Inventories**

 

Inventoriesconsist primarily of computer hardware stated at the lower of cost or market(net realizable value).  Cost isdetermined using the first-in, first-out method. Supplies are charged toexpense 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.  At December 31,2007 the inventory allowance was $166,781.

 

**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 ComputerSoftware to be Sold, Leased or Otherwise Marketed”‘ software costs incurredinternally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a detailedprogram design.  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 software costsfor impairment on an annual basis.  Tothe extent that the carrying amount exceeds the estimated net realizable valueof the capitalized software cost, an impairment charge is recorded.

 

Duringthe years ended December 31, 2007 and 2006, the Company capitalized$825,412 and $930,810, respectively of software development costs.  Amortization expense of capitalized softwaredevelopment costs, included in cost of sales, for the years ended December 31,2007 and 2006 amounted to $473,486 and $329,390, 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 Companyrecognizes revenue on sales of Clinical Information Systems and dataacquisition products when the following criteria are met: (i) persuasiveevidence of an arrangement exists, (ii) delivery has occurred and thesystem is functional, (iii) the vendor’s fee is fixed or determinable and (iv) collectabilityis probable.  Also in accordance with SOP97-2, as amended, the Company allocates the fee of a multiple element contractto the various elements based on vendor-specific objective evidence of fairvalue.  Revenue allocated to a specificelement is recognized when the basic revenue recognition criteria above is metfor that element.  If sufficient vendor-specificobjective evidence for all elements does not exist to allocate revenue to theelements, all revenue from the arrangement generally is deferred until suchevidence does exist or until all elements have been delivered.  Implementation revenue, consisting primarilyof installation and training, is recognized as revenue as the services areperformed.

 

As aresult of the above provisions, the Company recorded deferred revenue on systemsales of $431,746 at December 31, 2007.

 

*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 31,2007, the Company had deferred service revenues of $1,724,650.

 

41

----

 

*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**

 

On January 1,2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123(Revised 2004), “Share-Based Payment,” (SFAS 123R), which requires themeasurement and recognition of compensation expense for all share-basedpayment awards made to employees and directors based on estimated fair valuesat the date of grant using an option-pricing model. SFAS 123R replacesSFAS 123, “Accounting for Stock-Based Compensation” (SFAS No. 123)for awards granted to employees and directors and supersedes AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees”(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 ourconsolidated statements of operations for awards to employees and directorsbecause the exercise price of our stock options equaled the fair market valueof the underlying stock at the date of grant. Under the provisions of SFAS123R, share based compensation expense is recognized over the employee’srequisite service period (generally the vesting period of the equity grant)using the accelerated method, and is reduced for estimated forfeitures. SFAS123R requires forfeitures to be estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures differ from those estimates.

 

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 onthe grant date fair value estimated in accordance with the pro-formaprovisions of SFAS 123. As a result of adopting SFAS 123R on January 1,2006, share-based compensation expense recognized under SFAS 123R for employeesand directors for 2007 was $228,761, which impacted our basic and diluted lossper share by $0.02.

 

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 2007 and2006: expected life of options ranging from 3 to 5 years; expected volatilityranging from 72% 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 December 31,2007 and 2006, was $1.04 and $1.51, respectively.

 

**EarningsPer Share**

 

TheCompany computes earnings (loss) per common share under Statement of FinancialAccounting Standards No. 128, “Earnings per Share” (SFAS No. 128),which requires presentation of Basic and Diluted earnings (loss) pershare.  Basic earnings (loss) per shareincludes no dilution and is computed by dividing income (loss) available tocommon shareholders by the weighted average number of common shares outstandingfor the period. Diluted earnings (loss) per share reflects the potentialdilution of securities that could share in the earnings of an entity, such asstock options, warrants or convertible debentures, unless antidilutive (see Note10).

 

**IncomeTaxes**

 

TheCompany accounts for income taxes in accordance with the Statement of FinancialAccounting Standards (SFAS) No. 109, “Accounting for Income Taxes. SFAS No. 109requires a Company to use the asset and liability method of accounting forincome taxes. Under the asset and liability method, deferred income taxes arerecognized for the tax consequences of “temporary differences” by applyingenacted statutory tax rates applicable to future years to differences betweenthe financial statement carrying amounts and the tax bases of existing assetsand liabilities. Under SFAS No. 109, the effect on deferred income taxesof a change in tax rates is recognized in income in the period that includesthe enactment date.

 

42

----

 

**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**

 

Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expensesduring the reporting period. Actual results could differ from those estimates.

 

**Goodwilland Other Intangible Assets**

 

Goodwillrepresents the residual purchase price after allocation of the purchase priceof assets acquired. Other intangible assets consist primarily of purchasedtechnology and customer relationships. The Company accounts for goodwill andother intangible assets in accordance with SFAS 142 “Goodwill and OtherIntangible Assets”. Under SFAS 142, goodwill is not amortized but tested forimpairment on an annual basis, or whenever events or changes in circumstancesindicate that the carrying value may not be recoverable. Other intangibleassets are carried at cost less accumulated amortization. Amortization iscomputed using the straight-line method over the estimated useful lives of fourto fifteen years.

 

**CapitalLeases**

 

Assetsheld under capital leases are  includedas computer equipment, and are recorded at the lower of the net present valueof the minimum lease payments or the fair value of the leased asset at theinception 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**

 

InSeptember 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS157). SFAS 157 establishes a framework for measuring fair value in generallyaccepted accounting principles, and expands disclosures about fair valuemeasurements. SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB staff issued astaff position that delayed the effective date of SFAS No. 157 for allnon-financial assets and liabilities except for those recognized or disclosedannually. The FASB also issued FAS-157-1, “application of FASB Statement No.157 to FASB Statement No. 13 and other Accounting Pronouncements that addressFair Value Measurements for Purposes of Lease Classifications or Measurementsunder SFAS Statement No. 13”. We are required to adopt the provision of SFAS157, as applicable, beginning in fiscal year 2008. We are currently in theprocess of evaluating the expected effect of SFAS 157 on our results ofoperations and financial position.

 

In February 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities”, whichprovides companies with an option to report selected financial assets andliabilities at fair value. The objective of SFAS No. 159 is to reduce bothcomplexity in accounting for financial instruments and the volatility inearnings caused by measuring related assets and liabilities differently. SFAS No. 159also establishes presentation and disclosure requirements designed tofacilitate comparisons between companies that choose different measurementattributes for similar types of assets and liabilities. SFAS No. 159 iseffective for the Company as of January 1, 2008. We have not completed ourevaluation of SFAS No. 159 but do not expect the adoption of SFAS No. 159to have a material effect on our operating results or financial position.

 

43

----

 

In July 2006,the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, (“FIN 48”) an interpretation of FASB Statement No. 109,Accounting for Income Taxes. FIN 48 requires that a position taken orexpected to be taken in a tax return be recognized in the financial statementswhen it is more likely than not (i.e. a likelihood of more than fiftypercent) that the position would be sustained upon examination by taxauthorities. A recognized tax position is then measured at the largest amountof benefit that is greater than fifty percent likely of being realized uponultimate 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 forfiscal years beginning after December 15, 2006. The standard did not havean impact on the Consolidated Financial Statements.

 

In December 2007,the FASB issued SFAS No. 160, “Noncontrolling Interest in ConsolidatedFinancial Statements” (“SFAS 160”). SFAS 160 establishes new accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires therecognition of a noncontrolling interest (minority interest) as equity in theconsolidated financial statements and separate from the parent’s equity. Theamount of net income attributable to the noncontrolling interest will beincluded in consolidated net income on the face of the income statement. SFAS160 clarifies that changes in a parent’s ownership interest in a subsidiarythat do not result in deconsolidation are equity transactions if the parentretains it controlling financial interest. In addition, this statement requiresthat a parent recognize a gain or loss in net income when a subsidiary isdeconsolidated. Such gain or loss will be measured using the fair value of thenoncontrolling equity investment on the deconsolidation date. SFAS 160 alsoincludes expanded disclosure requirements regarding the interests of the parentand its noncontrolling interest. SFAS 160 is effective for fiscal years, andinterim periods within those fiscal years, beginning on or after December 15,2008. Earlier adoption is prohibited. The adoption of SFAS 160 is not expected tohave a material impact on the Company’s consolidated financial position, cashflows and results of operations.

 

In December 2007,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 141 (Revised) (“FAS 141(R)”),  Business Combinations . The provisions ofthis statement are effective for business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning after December 15, 2008. Earlier application is notpermitted. FAS141(R) replaces FAS 141 and provides new guidance forvaluing assets and liabilities acquired in a business combination. We willadopt FAS141(R) in calendar year 2009.

 

## **NOTE 2 - LIQUIDITY**

##  

As of December 31,2007, the Company’s working deficit of $4,007,912 compared to a working deficitof $2,256,352, as of December 31, 2006. At December 31, 2007, theCompany’s credit facilities with its bank consisted of a revolving line ofcredit of $1,300,000, of which $1,026,477 was outstanding. On March 26,2008, the Company executed agreements renewing its revolving line of credit inthe aggregate amount of $1,300,000.  Therevolving line of credit is secured by the Company’s accounts receivable andinventory and matures on February 27, 2009.  The revolving line of credit is subject tocertain covenants, including revised financial covenants.  As of December 31, 2007, the Company wasnot in compliance with all covenants but had obtained a waiver from thebank.  Advances under the revolving lineof credit are on a formula based on eligible accounts receivable and inventorybalances.  At December 31, 2007, theCompany had $498,522 outstanding on its capital leases of which $150,237 is duein the next twelve months.  Management isconsidering additional financing to accelerate its business development planswhich in turn may improve its working capital position (see Note 14).

 

The Company’s primarysource of working capital has been generated from private placements ofsecurities and from borrowings.  The Companyhas been experiencing a history of losses due to the integration of itsbusinesses and the significant investment in new products since the quarterended March 31, 2005 and negative cash flows from operations since thequarter ended December 31, 2005.  Anunanticipated decline in sales, delays in implementations where payments aretied 

 

44

----

 

to delivery and/orperformance of services or cancellations of contracts have had and in thefuture could have a negative effect on cash flow from operations and could inturn create short-term liquidity problems. We believe that 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.  If the company is unable to generate cashfrom operations or meet revenue targets or obtain new cash inflows fromfinancing or equity offerings, the company would need to take action and reducecosts in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings andcapital infusion.  On March 26, 2008the Company entered into a Note Purchase Agreement with various current and newshareholders.  Pursuant to the PurchaseAgreement, the investors purchased secured promissory notes from the Company inthe principal amount of $2,775,000 (see Note 14). The notes are convertible upto 5,427,273 shares of the Company’s Common Stock and have a maturity date ofMarch 26, 2010 and bear interest at the rate of 8% per annum compounded on eachJuly 15 and January 15.  Pursuant to theterms of the transaction, the Company will issue 3 year warrants to purchase upto 5,496,647 of shares of Common Stock. As a result, assuming the conversion of all promissory notes andexercise of all warrants, up to 10,923,920 shares of the Company’s Common Stockmay be issued.  Such an issuance if itwere to occur, would be highly dilutive of existing shareholders and may, undercertain conditions effect a change of control of the Company.  We may, also, required 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 to satisfyour cash requirements, we may seek to sell debt securities or additional equitysecurities or to obtain a credit facility. The sale of convertible debt securities or additional equity securitiescould result in additional dilution to our stockholders.  The incurrence of indebtedness would resultin incurring debt service obligations and could result in operating andfinancial covenants that 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 with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time, evaluateacquisitions of other businesses, applications or technologies.

 

## **NOTE 3 - RECEIVABLES**

##  

Receivables are summarized as follows:

 
| Billed receivables               |   | $        | 854,901 |   |
|----------------------------------|--------|----------|---------|--------|
| Unbilled  receivables            |   | 214,143  |    |
| Allowance for  doubtful accounts |   | (147,832 | )       |
|                             |   |     |    |
|                             |   | $        | 921,212 |   |

 

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   |   | $          | 264,001 |   |
|----------------------------|--------|------------|---------|--------|
| Furniture and  fixtures    |   | 476,650    |    |
| Data processing  equipment |   | 2,511,366  |    |
| Leasehold  improvements    |   | 106,330    |    |
|                       |   |       |    |
|                       |   | 3,358,347  |    |
| Accumulated  depreciation  |   | (2,518,458 | )       |
|                       |   |       |    |
|                       |   | $          | 839,889 |   |

 

Computer equipment under capital lease of $751,182 areincluded in data processing equipment. Depreciation and amortization expense for property and equipment for theyears ended December 31, 2007 and 2006 was $428,859 and $377,517.

 

45

----

 

**NOTE 5 — GOODWILL AND INTANGIBLE ASSETS**

 

Intangible assets are summarized as follows:

 
| ** **                | ** ** | **December 31,** | ** ** |
|---------------------------|------------|-----------------------|------------|
| ** **                | ** ** | **2007**              | ** ** |
| Acquired  technology      |       | $                     | 3,080,000  |   |
| Customer relationships    |       | 2,000,000             |       |
| Channel partners          |       | 110,000               |       |
|                      |       |                  |       |
|                      |       | 5,190,000             |       |
| Accumulated  amortization |       | (1,429,018            | )          |
|                      |       |                  |       |
| Intangible  assets, net   |       | $                     | 3,760,982  |   |
|                      |       |                  |       |
| Goodwill                  |       | $                     | 7,268,434  |   |

 

Amortization expense for intangible assets for theyear ended December 31, 2007 and 2006 was $688,500 and $677,758. Annualestimated amortization expense for each of the five succeeding fiscal years andthereafter is as follows:

 
| **Fiscal year ending December 31,** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|------------|------------|
| 2008                                                    |       | $          | 688,500    |   |
| 2009                                                    |       | 685,627    |       |
| 2010                                                    |       | 660,996    |       |
| 2011                                                    |       | 539,750    |       |
| 2012                                                    |       | 133,332    |       |
| Thereafter                                              |       | 1,052,777  |       |
| Total                                                   |       | $          | 3,760,982  |   |

 

## **NOTE 6 - DEBT**

##  

Long-termdebt at December 31, 2007 consists of the following:

 
| ** **                                                                                                                                                                              | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                                                              | ** ** | **2007**              | ** ** |
| Line of credit  in the aggregate amount of $1,300,000 with a bank with interest at rate of  prime plus 0.75% (prime at 12/31/07 was 7.25%). The line matures on  February 27, 2008 |       | $                     | 1,026,477  |   |
| Unsecured notes  acquired in conjunction with StorCOMM merger with interest ranging from 7.00%  to 8.00%. These notes are due upon demand                                               |       | 174,128               |       |
| Total                                                                                                                                                                                   |       | 1,200,605             |       |
|                                                                                                                                                                                    |       |                  |       |
| Less: current  portion                                                                                                                                                                  |       | 1,200,605             |       |
|                                                                                                                                                                                    |       |                  |       |
| Long-term  portion                                                                                                                                                                      |       | $                     | —     |   |

 

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

 

On March 26,2008, the Company executed agreements to renew its revolving line of credit inthe aggregate amount of $1,300,000.  Therevolving line of credit is secured by the Company’s accounts receivable andinventory and matures on February 27, 2009.  The revolving line of credit is subject tocertain covenants, including revised financial covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventory balances.

 

46

----

# ** **

# **NOTE 7 —COMMITMENTS AND CONTINGENCIES**

#  

**OperatingLeases**

 

The Company leases officeand warehouse space in Calabasas, California, Jacksonville, Florida, and theUnited Kingdom under non-cancelable operating leases expiring in October, 2012,January 2012, and June 2010, respectively.

 

Future minimum leasepayments, by year and in the aggregate, under the facility leases with initialor remaining terms of one year or more are as follows:

 
| ** **                                              | ** ** | **Operating** | ** ** |
|---------------------------------------------------------|------------|---------------|------------|
| **Fiscal year ending December 31,** | ** ** | **Leases**    | ** ** |
| 2008                                                    |       | $             | 528,804    |   |
| 2009                                                    |       | 543,386       |       |
| 2010                                                    |       | 536,201       |       |
| 2011                                                    |       | 529,449       |       |
| 2012                                                    |       | 326,327       |       |
|                                                    |       |          |       |
| Total minimum  lease payments                           |       | $             | 2,464,167  |   |

 

Rent expense for theyears ended December 31, 2007 and 2006 was approximately $482,000 and$463,000, respectively.

 

**CapitalLeases**

 

The Company entered intoa master agreement to lease equipment as of October 26, 2005. Theequipment is being used for the Company’s infrastructure and has facilitatedthe integration of the three locations. The cost of the computer equipmentunder capital leases is included in the consolidated balance sheet in propertyand equipment and was $751,182 at December 31, 2007.  Accumulated amortization of the leasedequipment at December 31, 2007 was $252,660.  Amortization of assets under capital leasesis included in depreciation expense.  Theequipment lease provides for an option to purchase at the end of the leaseterm.

 

The future minimum leasepayments required under the capital leases and the present value of the netminimum lease payments, as of December 31, 2007 are as follows:

 
| ** **                                              | ** ** | **Capital** | ** ** |
|---------------------------------------------------------|------------|-------------|------------|
| **Fiscal year ending December 31,** | ** ** | **Leases**  | ** ** |
| 2008                                                    |       | $           | 227,262    |   |
| 2009                                                    |       | 190,231     |       |
| 2010                                                    |       | 174,967     |       |
| 2011                                                    |       | 56,680      |       |
| Total minimum  lease payments                           |       | 649,140     |       |
| Less: Amount  representing maintenance                  |       | 67,559      |       |
| Less: Amount representing  interest                     |       | 83,059      |       |
| Total capital  lease obligations                        |       | 498,522     |       |
| Less: current  maturities of capital lease obligations  |       | 150,237     |       |
| Long term  capital lease obligations                    |       | $           | 348,285    |   |

 

**EmployeeBenefit Plan**

 

The Company maintains a401(k) profit sharing plan that allows eligible employees to defer up to100% of their earnings, on a pre-tax basis, subject to dollar limitations ofthe Internal Revenue Code. The Company provides a discretionary match oneligible employee contributions, which is determined on an annual basis. Theamount of matching contribution for 2007 and 2006 was 25% of the eligibleemployee’s contribution up to 4% of the eligible employee’s total salary.Vesting of the matching contributions by the Company is 20% for each full yearof employment. For the years ended December 31, 2007 and 2006contributions were $50,908 and $45,495, respectively.

 

47

----

 

**Guaranteesand Indemnifications**

 

In accordance with the bylaws of the Company,officers and directors are indemnified for certain events or occurrencesarising as a result of the officer or director’s serving in such capacity. Theterm of the indemnification period is for the lifetime of the officer ordirector. The maximum potential amount of future payments the Company could berequired to make under the indemnification provisions of its bylaws isunlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of anyfuture amounts paid. As a result of its insurance policy coverage, the Companybelieves the estimated fair value of the indemnification provisions of itsbylaws is minimal and therefore, the Company has not recorded any relatedliabilities.

 

The Company enters into indemnificationprovisions under agreements with various parties in the normal course ofbusiness, typically with customers and landlords. Under these provisions, theCompany generally indemnifies and holds harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of the Company’sactivities or, in some cases, as a result of the indemnified party’s activitiesunder the agreement. These indemnification provisions often includeindemnifications relating to representations made by the Company with regard tointellectual property rights. These indemnification provisions generallysurvive termination of the underlying agreement. The maximum potential amountof future payments the Company could be required to make under theseindemnification 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 defend lawsuitsor settle claims related to these indemnification agreements. As a result, theCompany believes the estimated fair value of these agreements is minimal.Accordingly, the Company has not recorded any related liabilities.

 

**Warrantiesand Product Liability**

 

The Company warrants that its productsconform to their respective functional specifications. The Company’s dataacquisition products and components are warranted against faulty materials andworkmanship for 90 days. The Company also warrants its application softwareincorporated in its Laboratory, Radiology, and Pharmacy Information Systems for90 days and its application software incorporated in its PACS systems for 1year. However, such warranties are extended throughout the term of extendedservice agreements that customers may elect to enter into with theCompany. Direct costs associated with the initial warranties have beeninsignificant. The computers that the Company currently sells as part ofits Clinical Information and Diagnostic Systems are subject to the warrantiesof their manufacturers. The manufacturers generally warrant their productsagainst faulty material and workmanship for one to three years. The Companypasses through the manufacturers warranties to the end users and in most casescontracts with the manufacturers are to provide onsite warranty servicesthrough the manufacturers service network.

 

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 moststates.

 

48

----

 

**NOTE 8 — SHAREHOLDERS’ EQUITY**

 

**Stock Option Plan and Warrants**

 

In November 2005,the Company adopted the 2005 Equity Incentive Plan. The purpose of the Plan isto encourage ownership in the Company by key personnel whose long-term serviceis considered essential to the Company’s continued progress and, thereby,encourage recipients to act in the shareholders’ interest and share in theCompany’s success. Under the Plan, the Company may award to eligibleparticipants the following kinds of equity-based compensation, collectivelyreferred to as “Awards”: stock options— both incentive stock options (ISO) andnon-statutory stock options; stock awards — both restricted stock awards andrestricted stock unit awards; stock appreciation rights; and cash awards. Up to1,290,875 shares of common stock may be available under the Plan. Themaximum aggregate number of shares that may be issued under the Planthrough the exercise of ISOs is also 1,290,875. The exercise price cannot beless than 100% of the fair market value of common stock on the date the optionis granted. At December 31, 2007, the 2005 plan has 783,015 optionsoutstanding and 357,182 options exercisable. The plan expires in 2015.

 

A summary of optionactivities under the stock option plans through December 31, 2007 and 2006is 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 |   |
| Granted                                |       | 310,000    |       | $                       | 1.83       |            |           |          |       |   |
| Exercised                              |       | (4,000     | )          | $                       | 0.72       |            |           |          |       |   |
| Canceled or  Expired                   |       | (154,883   | )          | $                       | 2.54       |            |           |          |       |   |
|                                   |       |       |       |                    |       |            |           |          |       |
| Outstanding at  December 31, 2007 |       | 783,015    |       | $                       | 2.00       |            | 30.8 mos.      |          | $          | 22,088 |   |
|                                   |       |       |       |                    |       |            |           |          |       |
| Exercisable at  December 31, 2007 |       | 357,182    |       | $                       | 2.15       |            | 16.7 mos.      |          | $          | 106,363 |   |

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of the underlyingawards and the quoted price of our common stock for the 121,250 and281,250 options that were in-the-money at December 31, 2007 and2006.  As of December 31, 2007,there was $317,499 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements granted under our stock awards plans.That cost is expected to be recognized over a weighted-average period of twoyears.  The share-based compensation willbe amortized based on the accelerated method over the vesting period.  During the year ended December 31, 2007,the Company granted 310,000 options at a weighted average fair value of $1.83per share.

 

A summary of the statusof the Company’s non-vested stock options during the year ended December 31,2007 is presented below:

 
| **Non-vested Options**           | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|---------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2007   |       | 344,074    |       | $                                                   | 2.18       |   |
| Granted                               |       | 310,000    |       | 1.83                                                |       |
| Vested                                |       | (181,763   | )          | 2.19                                                |       |
| Forfeited or  expired                 |       | (46,478    | )          | 2.75                                                |       |
|                                  |       |       |       |                                                |       |
| Non-vested at  December 31, 2007 |       | 425,833    |       | $                                                   | 1.87       |   |

 

49

----

 

Information relating tostock options and warrants at December 31, 2007 summarized by exerciseprice 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:           |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
| $ 1.51                             |       | 20,000          |       | 14.0                      |       | $ | 1.51 |   | 15,000 |   | $ | 1.51 |   |
| $ 1.60                             |       | 41,250          |       | 5.5                       |       | $ | 1.60 |   | 41,250 |   | $ | 1.60 |   |
| $ 1.66                             |       | 10,000          |       | 14.0                      |       | $ | 1.66 |   | 7,500 |   | $ | 1.66 |   |
| $ 1.76                             |       | 20,000          |       | 5.5                       |       | $ | 1.76 |   | 20,000 |   | $ | 1.76 |   |
| $ 1.76                             |       | 120,000         |       | 43.5                      |       | $ | 1.76 |   | 30,000 |   | $ | 1.76 |   |
| $ 2.65                             |       | 60,000          |       | 12.0                      |       | $ | 2.65 |   | 60,000 |   | $ | 2.65 |   |
| $ 2.75                             |       | 48,173          |       | 11.0                      |       | $ | 2.75 |   | 48,173 |   | $ | 2.75 |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       | 319,423         |       | 22.6                      |       | $ | 2.04 |   | 221,923 |   | $ | 2.17 |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
| Non-Qualified  Stock Option Plan:       |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
| $ 1.51                             |       | 30,000          |       | 14.0                      |       | $ | 1.51 |   | 22,500 |   | $ | 1.51 |   |
| $ 1.60                             |       | 20,000          |       | 5.5                       |       | $ | 1.60 |   | 20,000 |   | $ | 1.60 |   |
| $ 1.82                             |       | 300,000         |       | 44.0                      |       | $ | 1.82 |   | 26,667 |   | $ | 1.82 |   |
| $ 2.25                             |       | 10,000          |       | 44.5                      |       | $ | 2.25 |   | — |   | $ | 2.25 |   |
| $ 2.48                             |       | 50,000          |       | 42.0                      |       | $ | 2.48 |   | 12,500 |   | $ | 2.48 |   |
| $ 2.65                             |       | 50,000          |       | 12.0                      |       | $ | 2.65 |   | 50,000 |   | $ | 2.65 |   |
| $ 2.75                             |       | 3,592           |       | 11.0                      |       | $ | 2.75 |   | 3,592 |   | $ | 2.75 |   |
|                                    |       |            |       |                      |       |   |   |   |   |   |   |
|                                    |       | 463,592         |       | 36.5                      |       | $ | 1.97 |   | 135,259 |   | $ | 2.13 |   |

 

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 2007 and2006: expected life of options ranging from 3 to 5 years; expected volatilityranging from 72% 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 December 31,2007 and 2006, was $1.04 and $1.51, 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.

 

On August 31, 2007, holders of outstandingwarrants exercisable for an aggregate of 1,650,000 shares of the Common Stockof the Company exercised all of such warrants, resulting in the issuance of1,650,000 shares of the Company’s Common Stock. Net proceeds to the Company from the exercise of these warrants, afterthe payment of certain third party expenses, were approximately$1,700,000.  The warrants were exercisedin connection with the offer by the Company to all such warrant holders of aone-time temporary reduction in the exercise price of the warrants from $3.00per share to $1.10 per share of Common Stock which was below fair market valueon the date of exercise.  The inducementwas revalued under the black-scholes model which resulted in the Companyrecording a deemed dividend of approximately $789,000 as the fair market value ofthe Company’s Common Stock exceeded the exercise price on the date ofconversion.

 

The warrants were originally issued in November 2005and May 2006 in connection with two private placements of the Company’ssecurities, pursuant to the terms of a Common Stock and Warrant PurchaseAgreement dated as of August 18, 2005 and a Common Stock and WarrantPurchase Agreement dated as of May 4, 2006.  All remaining warrants originally issued inthese private placements were exercised as of August 31, 2007, and noneremain outstanding.

 

The 1,650,000 shares of the Company’s Common Stockissued upon exercise of the warrants were registered by the Company pursuant toa Registration Statement on Form S-3 under the Securities Act of 1933, asamended, which was declared effective by the Securities and Exchange Commissionon September 22, 2006. The warrant holders are identified as the SellingShareholders in the registration statement, together with the number of sharesof Common Stock issuable upon the exercise of each warrant.

 

50

----

 

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

 

The provision (benefit)for income taxes for the years ended December 31, 2007 and 2006 consistsof the following:

 
| ** **                     | ** ** | **Year Ended December 31** | ** ** |
|--------------------------------|------------|-------------------------------------------|------------|
| ** **                     | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
|                           |       |                                      |       |   |   |
| Current taxes:                 |       |                                      |       |   |   |
| Federal                        |       | $                                         | —     |   | $ | — |   |
| State                          |       | 2,117                                     |       | 4,810 |   |
|                           |       | 2,117                                     |       | 4,810 |   |
|                           |       |                                      |       |   |   |
| Deferred                       |       |                                      |       |   |   |
| Federal                        |       | (2,219,200                                | )          | (1,448,300 | ) |
| State                          |       | —                                    |       | — |   |
|                           |       |                                      |       |   |   |
|                           |       | (2,219,200                                | )          | (1,448,300 | ) |
|                           |       |                                      |       |   |   |
| Change in  valuation allowance |       | 2,219,200                                 |       | 1,448,300 |   |
|                           |       |                                      |       |   |   |
| Income tax  provision          |       | $                                         | 2,117      |   | $ | 4,810 |   |

 

For the years ended December 31, 2007 and 2006,pretax loss consists of the following:

 
| ** **   | ** ** | **Year Ended December 31** | ** ** |
|--------------|------------|-------------------------------------------|------------|
| ** **   | ** ** | **2007**                                  | ** ** | **2006** | ** ** |
| Pretax loss: |       |                                      |       |   |   |
| Domestic     |       | 4,765,821                                 |       | 3,102,963 |   |
| Foreign      |       | 240,211                                   |       | 462,665 |   |
| Total        |       | 5,006,032                                 |       | 3,565,628 |   |

 

Income tax provisiondiffers from the amount obtained by applying the statutory federal income taxrate to income before income tax expense for the years ended December 31,2007 and 2006 as follows:

 
| ** **                                                                | ** ** | **Year Ended December 31,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
|                                                                      |       |                                       |       |   |   |
| 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     |       | —                                     |       | — |   |
|                                                                      |       |                                       |       |   |   |
| Change in  valuation allowance                                            |       | 38.0                                       |       | 40.6 |   |
|                                                                      |       |                                       |       |   |   |
| Permanent  differences and other                                          |       | (3.9                                       | )          | (6.5 | ) |
|                                                                      |       |                                       |       |   |   |
|                                                                      |       | 0.1                                        | %          | 0.1 | % |

 

51

----

 

Deferred income taxesreflect the net tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. Significant components of the Company’sdeferred tax assets and liabilities as of December 31, 2007 and 2006 areapproximately as follows:

 
| ** **                                         | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|-----------------------|------------|
| ** **                                         | ** ** | **2007**              | ** ** | **2006** | ** ** |
|                                               |       |                  |       |   |   |
| Deferred tax  assets:                              |       |                  |       |   |   |
| Allowance for  doubtful accounts                   |       | $                     | 59,100     |   | $ | 33,100 |   |
| Inventory  uniform capitalization and reserve |       | 72,000                |       | 53,200 |   |
| Accrued vacation                                   |       | 103,000               |       | 123,300 |   |
| Deferred revenue                                   |       | 341,900               |       | 312,700 |   |
| Depreciation and  amortization                     |       | —                |       | — |   |
| Unexercised  vested stock options                  |       | 471,300               |       | 60,400 |   |
| Net operating  loss carryforwards                  |       | 6,822,100             |       | 5,597,400 |   |
| Tax credits                                        |       | 1,323,100             |       | 1,122,300 |   |
| Other                                              |       | 72,300                |       | 3,400 |   |
|                                               |       |                  |       |   |   |
| Gross deferred  tax assets                         |       | 9,264,800             |       | 7,305,800 |   |
|                                               |       |                  |       |   |   |
| Deferred tax  liability:                           |       |                  |       |   |   |
| Deferred tax  liability on intangible assets       |       | (1,504,400            | )          | (1,779,800 | ) |
| Depreciation and  amortization                     |       | (16,900               | )          | (24,000 | ) |
| Capitalized  software costs                        |       | (880,800              | )          | (858,500 | ) |
|                                               |       |                  |       |   |   |
| Gross deferred  tax liability                      |       | (2,402,100            | )          | (2,662,300 | ) |
|                                               |       |                  |       |   |   |
| Valuation  allowance                               |       | (6,862,700            | )          | (4,643,500 | ) |
|                                               |       |                  |       |   |   |
| Net deferred tax  assets                           |       | $                     | —     |   | $ | — |   |

 

Inconjunction with the merger with StorCOMM, the Company purchased intangibleassets that were not deductible for tax purposes, and a deferred tax liabilityof $1,806,734 was recorded. In addition, the Company recorded a deferred taxasset of $1,806,734 which is expected to be realized over the term of thedeferred tax liability. The deferred tax asset and deferred tax liability wereincluded in goodwill.

 

At December 31,2007, the Company had state and federal net operating loss carryforwardsavailable to offset future taxable income of approximately $34,000,000 and$40,577,000, that are subject to Internal Revenue Code Section 382Limitations. These net operating loss carryforwards expire at various datesthrough 2027, and general business tax credit carryforwards available to offsetfuture state and federal income tax payable of approximately $464,000 and$858,000, respectively. While the Federal general business tax credits expireat various dates through 2027, the state general business tax credits can becarried forward indefinitely. The Company also has alternative minimum tax(AMT) net operating loss carryforwards of approximately $39,527,000 to offsetfuture AMT taxable income that expires through various dates through 2027.Internal Revenue Code Section 382 imposes limitations on the utilizationof net operating loss and tax credit carryovers pursuant to an ownership changeas a consequence of the merger with StorCOMM. The annual loss limitation amountis $385,000.

 

The major temporary tax differences that areexpected to reverse next year are deferred revenue, allowance for doubtfulaccounts, accrued vacation, Section 263A Unicap inventory, amortization ofintangible assets, and component inventory reserve. However, the Companyexpects new temporary differences to be established in these years, which willeither reduce or exceed the reversing temporary differences.

 

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, 2007, the Companyevaluated the net deferred tax asset taking into consideration operatingresults and determined that a valuation allowance of approximately $6,862,700should be maintained.

 

52

----

 

During the year ended December 31,2007, the Company adopted FIN 48 which clarifies the accounting for incometaxes by prescribing the minimum threshold a tax position is required to meetbefore being recognized in the financial statements as well as guidance onde-recognition, measurement, classification and disclosure of tax positions.The adoption of FIN 48 by the Company did not have an effect on the Company’sfinancial condition or results of operations and resulted in no cumulativeeffect of accounting change being recorded as of January 1, 2007

 

# **NOTE 10 — EARNINGS (LOSS) PERSHARE**

 
| ** **                                     | ** ** | **Years Ended**        | ** ** |
|------------------------------------------------|------------|-----------------------------|------------|
| ** **                                     | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|                                           |       |                        |       |   |   |
| Basic weighted  average shares outstanding     |       | 11,336,483                  |       | 9,914,916 |   |
|                                           |       |                        |       |   |   |
| Dilutive effect  of stock options and warrants |       | —                      |       | — |   |
|                                           |       |                        |       |   |   |
| Diluted weighted  average shares outstanding   |       | 11,336,483                  |       | 9,914,916 |   |

 

At December 31, 2007and 2006, options and warrants to purchase 783,015, and 2,281,898 shares,respectively, were outstanding and could affect future periods, but were notincluded in the computation of diluted loss per common share because the effectwould be antidilutive.

 

# **NOTE 11 — SEGMENT INFORMATION ANDMAJOR CUSTOMERS**

#  

The Company determinesand discloses its segments in accordance with SFAS 131, “Disclosures aboutSegments 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 year ended December 31,2007, there were no customers, contracts or programs that generated over 10% ofthe Company’s net sales.  The Company hadsales through a distribution arrangement with Merry X-Ray that generated approximately$336,000 in aggregate sales or 10% of system revenues.  The Company had no customers that accountedfor more than 10% of the Company’s sales during the years ended December 31,2006 other than through a distribution arrangement with Merry X-Ray thatgenerated approximately $2.3 million in aggregate sales or 18% of totalrevenues.

 

**NOTE 12 —PRIVATE PLACEMENT**

 

On May 17, 2006, ASPYRA sold in a privateplacement 2,250,000 shares of its common stock and warrants to purchase up to1,350,000 shares of its common stock pursuant to the terms of a Common Stockand Warrant Purchase Agreement.  Theshares of common stock and warrants were sold in units, with each unitconsisting 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 the execution of the Purchase Agreement,ASPYRA and each of the Purchasers entered into a Registration RightsAgreement,  pursuant to which each of thePurchasers shall be entitled to certain registration rights.

 

During the year ended December 31, 2006, theCompany expensed approximately $192,000 to interest expense which wasattributable to a penalty related to the private placement transactions thatwere completed in November 2005 and May 2006, whereby the investorswere entitled to receive a penalty in the amount of 1% per month of the privateplacement of $3,000,000 and $4,500,000 if the Company’s registration statementhad not been declared effective within 120 days of the closing dates of therespective private placements.  TheCompany’s registration statement was declared effective on September 22,2006.  The Company elected to early adoptFSP-00-19 “Accounting for Registration Payment Arrangements” effective for theaudited consolidated financial statements as of December 31, 2006, whichhad no impact on the consolidated financial statements.

 

53

----

 

**NOTE 13 - RELATED PARTYTRANSACTIONS**

 

On August 29, 2007, theCompany engaged and entered into a consulting agreement with MV Advisors II,LLC (“MV Advisors”), a consulting firm of which one of the Company’s directors,John Mutch is the sole member and Managing Partner.  Under the agreement, MV Advisors will providestrategic consulting services to the Company and will receive an annual fee of$75,000, payable in non-refundable quarterly advances, offset by the amount ofany retainer or meeting fees paid to Mr. Mutch for his board service.  In addition, MV Advisors will be paid asuccess fee based upon the value of certain customer contracts secured by theCompany as a result of the efforts of MV Advisors. MV Advisors will also begranted rights to purchase certain offerings of future Company equitysecurities.  In his capacity as aconsultant to the Company through MV Advisors, Mr. Mutch was also awarded anon-qualified stock option under the Company’s 2005 Stock Incentive Planexercisable for 240,000 shares of the Company’s Common Stock, vesting in equalmonthly installments over three years, subject to full acceleration upon a“Change in Control,” as defined in the consulting agreement.

 

**NOTE 14 —SUBSEQUENT EVENTS**

 

On March 26, 2008,the Company executed an agreement to renew its revolving line of credit in theaggregate amount of $1,300,000.  Therevolving line of credit is secured by the Company’s accounts receivable andinventory and matures on February 27, 2009.  The revolving line of credit is subject tocertain covenants including revised financial covenants. Advances under therevolving line of credit are on a formula based on eligible accounts receivableand inventory balances.

 

During February 2008, theCompany made certain expense reductions to be in line with the new businessstrategies. This will have a cost reduction of approximately $1,735,000annually.

 

On January 28, 2008,entered into a Note Purchase Agreement with two of the Company’s currentstockholders, C. Ian Sym-Smith, who is also a director, and TITAB, LLC.  Pursuant to the Purchase Agreement thepurchasers each purchased a secured promissory note from the Company in theprincipal amounts of $200,000 and $100,000, respectively.  The two notes each have a maturity of sixmonths from the date of issuance and bear interest at the rate of LIBOR plus2.5% per annum. These notes automatically converted to the terms and conditionsof the subsequent transaction completed on March 24, 2008 discussedbelow.  On March 13, 2008, theCompany entered into a Note Purchase Agreement with one of the Company’scurrent stockholders, J. Shawn Chalmers. Pursuant to the Purchase Agreement Mr. Chalmers purchased a securedpromissory note from the Company in the principal amounts of $300,000.  The note has a maturity date of July 28,2008 and bears interest at the rate of LIBOR plus 2.5% per annum. Mr. Chalmershas the option to convert to the terms and conditions of the subsequenttranaction completed on March 26, 2008 discussed below.    On March 26, 2008 the Company enteredinto a private placement transaction with various current and newshareholders.  Pursuant to the PurchaseAgreement, the investors purchased secured promissory notes from the Company inthe principal amount of $2,775,000. The notes are convertible into shares ofthe Company’s Common Stock at a conversion price of $0.55 per share, subject toadjustment in the event of stock splits, stock dividends, and similartransactions. The notes are convertible up to 5,427,273 shares of the Company’scommon stock and have a maturity date of March 26, 2010 and bear interestat the rate of 8% per annum compounded on each July 15 and January 15.  Pursuant to the terms of the transaction, theCompany will issue 3 year warrants to purchase up to an additional 5,496,647 ofshares of Common Stock. As a result, assuming the conversion of all promissorynotes and exercise of all warrants, up to 10,923,920 shares of the Company’s CommonStock may be issued. Such an issuance if it were to occur, would be highly dilutiveof existing shareholders and may, under certain conditions effect a change ofcontrol of the Company. The Company’s obligations under the notes are securedby a security interest in substantially all of the Company’s tangible andintangible assets, pursuant to the terms of a Security Agreement dated March 26,2008 (the “Security Agreement”).  Duringthe quarter ended March 31, 2008, the Company will value the warrants receivedin the private placement utilizing the Black-Scholes Model. Based on theanalysis, the Company will recognize beneficial conversion over the term of thedebt. The obligations under the note and the security interest created by theSecurity Agreement are subordinate and junior in right of payment to the seniorlien on the Company’s assets held by Western Commercial Bank in connection withthe Company’s existing line of credit.  

Simultaneously with theexecution of the Purchase Agreement, the Company and each of the investorsentered into a Registration Rights Agreement, pursuant to which each of theinvestors shall be entitled to certain registration rights.  Lastly, the Company entered into a notepurchase agreement with Great American Investors (GAI) for the amount of thetranaction fees of $210,000.  Pursuant tothe terms of an agreement between the Company and GAI, the Company will issuewarrants to purchase such number of shares of Common Stock equal to the totalnumber of shares of Common Stock which shall be initially issuable uponconversion of the related Note plus and additional 69,375 warrants.

 

**NOTE 15 -SUPPLEMENTAL CASH FLOW INFORMATION**

 

Supplemental cash flowinformation is as follows:

 
| ** **                                    | ** ** | **Year Ended**         | ** ** |
|-----------------------------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **December 31,  2007** | ** ** | **December 31,  2006** | ** ** |
| ** **                                    | ** ** | ** **                  | ** ** | ** ** | ** ** |
| Supplemental  cash flow disclosure:           |       |                        |       |   |   |
| Interest                                      |       | $                           | 118,193    |   | $ | 104,363 |   |
| Penalty interest  paid for private placements |       | $                           | —     |   | $ | 191,998 |   |
| Income taxes                                  |       | $                           | 6,935      |   | $ | 13,215 |   |
| Noncash  transactions:                        |       |                        |       |   |   |
| Assets acquired  under capital leases         |       | $                           | —     |   | $ | 751,182 |   |

 

54

----