UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC 20549





FORM 10-K





(Mark
      One)





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





For
the fiscal year ended December 31, 2008.





OR





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





For
the transition period from to





Commission
file number 0-13268





ASPYRA,
INC.


(Exact
Name of Registrant as Specified in Its Charter)





California
            
            95-3353465(State
      or Other Jurisdiction of
            
            (I.R.S.
      EmployerIncorporation
      or Organization)
            
            Identification
      No.)26115-A
      Mureau RoadCalabasas,
      California
            
            91302(Address
      of Principal Executive Offices)
            
            (Zip
      Code)Registrant’s
      Telephone Number, Including Area Code:
            
            (818)
      880-6700





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





Securities
registered under Section 12(g) of the Exchange Act:





Common
Stock, no par value


(Title of
class)








Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes £     No
R





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes R     No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See the definitions of "large accelerated filer",
"accelerated filer" and "smaller reporting company"  in Rule 12b-2 of
the Exchange Act.   (Check one):





Large
accelerated filer £               Accelerated
filer £             Non-accelerated
filer  £            Smaller
Reporting Company R








Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act) Yes £     No
R





As of
June 30, 2008, the aggregate market value of the issued and outstanding common
stock held by non-affiliates of the registrant, based upon the closing price of
the common stock as quoted on the NYSE Alternext of $.70 was approximately
$6,412,221.  For purposes of the above statement only, all directors,
executive officers and 10% shareholders are assumed to be
affiliates.  This determination of affiliate status is not necessarily
a conclusive determination for any other purpose.





The
number of shares of common stock outstanding as of March 30, 2009 were
12,437,150.






















Aspyra, Inc.





TABLE
OF CONTENTS





Part IItem
      1
                          Business
                          3Item
      1A
                          Risk
      Factors
                          14Item
      1B
                          Unresolved
      Staff Comments
                          21Item
      2
                          Properties
                          21Item
      3
                          Legal
      Proceedings
                          21Item
      4
                          Submission
      of Matters to a Vote of Security Holders
                          22Part IIItem
      5
                          Market
      for Registrant's Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
                          22Item
      6
                          Selected
      Financial DataItem
      7
                          Management’s
      Discussions and Analysis of Financial Condition and Results of
      Operations
                          23Item
      7A
                          Quantitative
      and Qualitative Disclosures About Market Risk
                          32Item
      8
                          Financial
      Statements and Supplementary Data
                          33Item
      9
                          Changes
      In and Disagreements with Accountants on Accounting and Financial
      Disclosure
                          33Item
      9A(T)
                          Controls
      and Procedures
                          33Item
      9B
                          Other
      Information
                          34Part IIIItem
      10
                          Directors,
      Executive Officers and Corporate Goverance
                          34Item
      11
                          Executive
      Compensation
                          34Item
      12
                          Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                          35Item
      13
                          Certain
      Relationships and Related Transactions, and Director
      Independence
                          35Item
      14
                          Principal
      Accountant Fees and Services
                          35Item
      15
                          Exhibits
      and Financial Statement Schedules
                          35Signatures
                          37






2




Special
Note Regarding Forward-Looking Statements





The
following Annual Report on Form 10-K contains forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. The SEC encourages companies to disclose forward-looking information so
that investors can better understand a company’s future prospects and make
informed investment decisions.





Words
such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,” “plan,”
“project,” “seek,” “will” and words and terms of similar 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-looking statements. These
forward-looking statements include, among others:





·     projections
of revenues and other financial items;





·     statements
of strategies and objectives for future operations;





·     statements
regarding integration plans following the merger with StorCOMM;





·     statements
concerning proposed applications or services;





·     statements
regarding future economic conditions, performance or business
prospects;





·     statements
regarding competitors or competitive actions; and





·     statements
of assumptions underlying any of the foregoing.





All
forward-looking statements are present expectations of future events and are
subject to a number of factors and uncertainties that could cause actual results
to differ materially from those described in the forward-looking statements. The
risks related to ASPYRA’s business discussed under “Risk Factors” of this Annual
Report on Form 10-K, among others, could cause actual results to differ
materially from those described in the forward-looking statements.





The
Company makes no representation as to whether any projected or estimated
information or results contained in any forward-looking statements will be
obtained or achieved. Shareholders are cautioned not to place undue reliance on
the forward-looking statements, which speak only as of the date of this Annual
Report on Form 10-K. The Company is under no obligation, and it expressly
disclaims any obligation, to update or alter any forward-looking statements
after the date of this Annual Report on Form 10-K, whether as a result of
new information, future events or otherwise.





PART I





Item
1.  Business.





Business
Description





Aspyra, Inc.
formerly known as Creative Computer Applications, Inc. (ASPYRA or the
Company) is a healthcare information technology and service provider that
specializes in Clinical Information Systems (CIS) and Diagnostic Information
Systems (DIS) for healthcare providers. As a result of its merger with
StorCOMM, Inc. a private company, on November 22, 2005, ASPYRA
broadened its portfolio of products to include the Picture Archive Communication
Systems (PACS) products that were developed and sold by StorCOMM. In connection
with the merger, the Company changed its name to Aspyra, Inc. and
StorCOMM’s name was changed to Aspyra Diagnostic Solutions, Inc.
(ADSI).






3







ASPYRA’s
software and services for hospitals and clinic-based laboratories, orthopedic
centers, and hospital imaging departments are highly scalable and can be used by
a broad variety of healthcare providers. Clinical information is data that is
gathered concerning each individual patient’s health condition, diagnosis, and
treatment that are used by doctors, nurses and other healthcare providers. Such
data may include laboratory test results, transcribed reports of radiological or
imaging procedures, digital diagnostic images, and other clinical and diagnostic
data. ASPYRA’s products are deployed to provide automation of clinical
information and digital diagnostic images that facilitate the operation of
clinical departments and allows the rapid recording and processing of
information that can be communicated, documented, and delivered to healthcare
providers.





Currently,
ASPYRA markets a product line that includes a Laboratory Information System
(LIS) under the trade name CyberLAB®, a
general purpose PACS system under the trade name AccessNETTM, a Radiology
Information System (RIS) under the trade name CyberRAD®, a
RIS/PACS integrated system under the trade name AccessRADTM, a specialty PACS
system under the trade name AccessMEDTM, an Anatomic Pathology System under the
trade name of CyberPATH®, a
WebGatewayTM portal for physician access to its CIS applications, and other
related clinical and diagnostic application modules. In February 2008 we
notified our customer base that we will discontinue support in
February 2009 of our Pharmacy Information System previously marketed under
the trade name CyberMED®.





ASPYRA’s
corporate offices are located at 26115-A Mureau Road, Calabasas, California
91302. The Company’s telephone number is (818) 880-6700 and its website address
is www.aspyra.com., the contents of this website are not incorporated into this
Report.  The Company’s business consists of three operational
areas:  (1) Clinical Information System and Diagnostic
Information System products, (2) service of its customer’s installations,
and (3) implementation services.  The Company generates revenues
from the licensing of application software, the sale of hardware, and the
provision of implementation and long-term post implementation services. The
Company sells its CIS and DIS systems directly through its own sales force in
North America, through channel partners and distributor programs with other
companies.





History
and 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 and
Diagnostic Information Systems that automate the collection and management of
patient clinical data for healthcare providers.





The
percentage of the Company’s net sales attributable to the sale, license, and
implementation of Clinical and Diagnostic Information Systems, accounted for
approximately 21% of total revenues in the fiscal year ended December 31,
2008. ASPYRA expects that its service revenues, which accounted for
approximately 79% of total revenues in the current fiscal year, will continue to
grow as additional new installations are added to the Company’s installed base.
As of December 31, 2008, the Company supported approximately 420 active
customers using our products in over 600 sites.





By
automating the collection and organization of patient clinical data and related
diagnostic images, the Company’s Clinical and Diagnostic Information Systems
reduce operating costs, assist in meeting compliance requirements, address
patient care and safety issues, improve the turnaround time of patients’
diagnosis and treatment, and increase the efficiency of healthcare providers
overall. The healthcare industry continues to operate under increasing pressure
from government regulatory agencies and third party payers of medical expense,
as well as from increased competition in the healthcare industry, to control
costs. The Company’s products and services are designed to improve the efficacy
and cost-effectiveness with which healthcare providers manage critical
information.





As part
of its business strategy, the Company has pursued the development of
enhancements and new modules to its existing products, as well as the
development of entirely new products and services. The Company has developed a
web-based clinician portal marketed as the ASPYRA WebGateway, which provides
online access to the Company’s LIS and RIS products so that physicians, nurses
and other caregivers can easily utilize them from virtually anywhere in the
world, and the Company is continuing to build upon this technology platform in
order to deploy other functionality. ASPYRA’s WebGateway provides access to
CyberLAB for order placement, patient inquiry, and results, and is compliant
with security and privacy issues pertaining to the Health Insurance Portability
and Accountability Act (HIPAA). WebGateway also provides access to CyberRAD for
orders, scheduling, exam inquiry, electronic signature, regulatory compliance,
and other functions. ASPYRA’s AccessNET family of products is designed to be
highly scalable and deployable in small standalone operations up to large
enterprise hospitals. Certain application modules can also be deployed in
facilities that currently have PACS installations to provide enhanced
capabilities for teleradiology using ASPYRA’s thin-client
technology.






4





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





Integration
of the two companies following the merger continued through 2006 and was
completed in 2007 and resulted in short-term increases in certain expenses but
also allowed for the elimination of redundant personnel and other expenses to
attain more efficient business synergies.  While some of these
expenses were non-recurring, others including the addition of key personnel in
product management, regulatory affairs, and product development, were important
additions to management in order to assure the success of the Company’s
integration strategy.





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





Business
Development Strategy





Our
strategy since completing the merger is to advance ASPYRA’s position to become a
leading company in the clinical and diagnostic sector of the healthcare
information technology marketplace, which is growing rapidly. We plan to
accomplish this goal through increased market penetration, internal product
development efforts, and selective product licenses from third parties or
acquisitions of additional technologies and/or product lines where
feasible.  Our goal is to evolve beyond the provision of departmental
applications and become an enterprise provider of integrated technologies and
services that improve the efficiency, safety, and quality of patient
care.





Our
business model is to establish long term relationships with our end-user
customers that are essential for their operational requirements. Our products
are mission critical clinical and diagnostic applications that our customers
rely upon to help them manage patient safety, diagnosis, and treatment. Our goal
is to generate recurring revenues from the provision of long term services,
upgrades, software add-ons and other revenue generating
opportunities.  Considering the capital budget constraints that are
imposed on healthcare providers who use our products, they plan to use them
typically for 5 to 10 years.  In order to service them we must keep
them current for competitive, clinical and diagnostic reasons, and regulatory
compliance.  Enhancements to our products in the form of software
upgrades are an integral part of this business model and are included as a
contract obligation in our warranty and extended service
agreements.  In order to generate such revenue opportunities our
investment in software enhancements is significant and is a key component of our
ongoing support obligations.





We plan
to increase market penetration through the expansion of our direct sales
activities domestically as well as selectively seeking new channel partners for
some of our products in sectors that are underserved by us, such as orthopedics.
We also plan to increase cross selling into our respective installed base of
customers.





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






5







We plan
on licensing or acquiring software applications that enhance our clinical and
diagnostic products and resell them to our end users, which will provide
additional capabilities such as multidimensional image visualization in PACS and
robotics in the laboratory.  In addition, we have formed relationships
with companies that offer EMR products that complement our solutions, providing
for additional market exposure. Following the recent presidential signing of the
American Reinvestment and Recovery Act (ARRA), there is industry demand for
healthcare technology solutions that create and deliver the electronic health
record.  Our products provide up to 70% of the information that make
up the electronic health record, and therefore, we expect to see an increase in
the automation and integration of the clinical and diagnostic information
systems.  Accordingly we plan on evolving our product offerings into
an EMR (Electronic Medical Record) solution by acquiring, developing, or
licensing the missing components.





Clinical
Information Systems





The
Company’s Clinical Information Systems are designed to provide cost effective,
robust application features to manage comprehensive clinical activities
throughout most sectors of the health care provider marketplace. The Company’s
systems are highly user definable and scalable, enabling a wide range of users
and different types of healthcare providers to employ them.





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





For
clinical laboratories, the Company has integrated its software applications and
data acquisition technology into Laboratory Information Systems (LIS), which are
sold under the trade name CyberLAB. Extensive applications for a wide variety of
laboratory testing, compliance, and quality control procedures, including
hematology, 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 and
management, database management, bedside specimen collections, point of care
testing, auto-verification of results, decision support tools, regulatory
adherence tools, remote communications and flexible user defined reporting
capabilities are also included. Additional modules are also available for
complete microbiology testing and CyberPATH, ASPYRA’s anatomic pathology system,
can be fully integrated with CyberLAB. The Company’s LIS are highly flexible and
scalable and are used by laboratories of varying size and
complexity.





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








6





Diagnostic
Information Systems





ASPYRA’s
AccessNET PACS and clinical image management systems achieve true
enterprise-wide connectivity for all types of images and equipment, while
providing leading edge product capabilities, support, and integration. ASPYRA’S
customers include hospitals of all sizes with associated remote locations;
independent and hospital-managed imaging centers; teaching and children’s
facilities; and radiology groups serving multiple locations. The scalability of
the AccessNET PACS system has 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 Digital Imaging and Communications
in Medicine (DICOM) and non-DICOM compliant imaging modalities and video
sources, storing this clinical information in a secure environment, and
distributing and displaying both clinical images and corresponding diagnostic
information throughout hospitals, clinics, and imaging centers. ASPYRA’S PACS
can integrate with existing hospital systems to share information as necessary.
For example, if a facility has a hospital information system that manages exam
appointments, this system can integrate with ASPYRA’S PACS to share information
about the scheduled exams. Typically, integration is accomplished using
communications standards such as DICOM and Health Level
Seven  (HL7).





ASPYRA
released version 6.4 of its AccessNET PACS software in January 2009. The
enhancements for PACS users in version 6.4 include enhanced tools for
radiologists reading from local and remote reading locations, improved handling
of outside studies, support of encounter based HL7 messaging and IHE
cross-enterprise sharing of documents and images (XDS, XDS-I), as well as
internal processes for improved IT support and PACS administration
tools.





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





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





During
the fiscal year ended December 31, 2008, development continued to provide
integration between CyberRAD and AccessNET,  for the integrated
RIS/PACS product that is sold under the trade name AccessRAD. Specifically
developed to enhance workflow and provide instant availability to clinical
information, AccessRAD is designed to meet the needs of acute-care hospitals,
enterprise-wide delivery networks, and large imaging enterprises. Furthering
increasing efficiency, the AccessRAD multisite module enables organizations to
manage the workflow and reporting needs at multiple facilities with a single
solution. AccessRAD provides radiologists with a central command center to
manage RIS and PACS functions. All the tools for reading images, dictating,
accessing images and reports, as well as electronically signing reports, are
available on the AccessRAD desktop. AccessRAD also helps organizations enhance
patient safety by reducing the errors that result from redundant data entry, and
the solution improves care delivery by providing clinicians with real-time
information. The most current release of AccessRAD includes an order creation
feature initiated from the PACS when incoming diagnostic
interpretation studies are received from outside referring facilities.
These orders are automatically processed by the RIS, thereby
optimizing workflow, as well as increasing revenue by preventing lost charges
due to missing or incorrect orders.





ASPYRA’s
AccessMED is a version of AccessNET that was designed for the specialty PACS
environment, such as orthopedic group practices. It mirrors the workflow and
tools specific to the needs of medical specialists to improve efficiency and
care delivery. Work lists of patients and exams can be viewed in multiple ways
based on the needs of clinicians or administrative users. In addition,
clinicians can bookmark interesting and special cases for quick and easy follow
up, or for collaboration with other specialists. AccessMED provides an unlimited
configuration of viewing options for images, work lists, reports, prior studies
and other clinical information. Content-sensitive help screens and tutorials can
be viewed on screen, providing users with a virtual expert at their fingertips
while they complete their tasks. Advanced workflow tools, such as embedded
dictation and report generation, combine diagnostic and reporting capabilities
into a single solution.








7





Specialized
modules within AccessMED offer enhanced image viewing options. The OrthoViewTM
module (a product of Meridian Technique, Ltd.) is integrated within AccessMED
and includes templates from virtually every major prosthetics manufacturer to
provide clinicians with digital surgical planning capabilities. In addition, the
AccessMED ImageSTITCH module provides the 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 open systems architecture and
to conform to computer industry standards, which enable them to be more easily
integrated with other vendors’ products. Healthcare industry standards,
including HL7 and American Society for Testing and Materials (ASTM), and DICOM
standards are employed throughout the Company’s software products and
interfaces. Aspyra is an active vendor participant with IHE (Integrating the
Healthcare Enterprise). IHE is an initiative by healthcare professionals and
industry to improve the way computer systems in healthcare share information.
IHE promotes the coordinated use of established standards such as DICOM and HL7
to address specific clinical needs in support of optimal patient care. Systems
developed in accordance with IHE communicate with one another better, are easier
to implement, and enable care providers to use information more
effectively.





The
Company’s Clinical and Diagnostic Information Systems support extensive
communication capabilities to various healthcare information systems including
Hospital Information Systems, nursing and practice management systems, EMR
Systems, for which the Company has developed over five hundred system-to-system
communication interfaces. The Company’s Clinical Information Systems are
employed in many settings that consist of multiple sites where testing or
medical procedures are seamlessly integrated. In addition, different types of
enterprises, such as hospital and affiliated outreach clinics, can use the
Company’s systems to integrate their activities thus enabling the execution of
their business strategies. The communication interfaces often support
bi-directional data communications, whereby demographic and order requests are
transmitted to the Clinical Information Systems and, in turn, billing
information and results are transmitted to the host system. The Company’s
Clinical Information Systems support their own order communications and test
subsystems that have been employed in other accounts that have relied on the
Clinical Information System’s communications capabilities. Management believes
that communications to other systems allowing connectivity between its CIS
applications and patient care, electronic medical record systems, and other
administrative information systems, are very important functional requirements
in the marketability of its products.  This is especially true with
the recent ARRA stimulus plan, which specifically refers to the use of EMRs with
a goal of creating a complete electronic health record.  The Company
has focused considerable attention on the communication, networking, and
connectivity capabilities of its products, and plans to further develop these
capabilities as opportunities present themselves.





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






8





Services





The
Company provides comprehensive services to its installed base of system
customers through its own service organization, and provides extensive training
and implementation of its systems to its customers. The Company offers software
support services, through a 24-hour “hotline,” and hardware repair under
extended service contracts. In most instances, the Company relies on third
parties to service the hardware components 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 to end users. The Company’s long-term
inventory requirements for its service and repair business have historically
been significant because it must retain a loaner pool of components used to
service its customer base. The Company has changed its data acquisition method
to utilize software only solutions.  In many instances ASPYRA’s
products include the hardware components that comprise a PACS system and in such
cases the Company includes a direct multi-year manufacturer’s warranty and
service with such hardware components.





The
Company’s service revenues for fiscal year ended December 31, 2008 was
consistent with the service revenues in the fiscal year ended December 31,
2007. The majority of the Company’s customers are under service contracts. The
Company believes that the ability to offer comprehensive services to its
customers is a very important facet of its business and solidifies a long-term
relationship with its customer accounts. The recurring revenue stream associated
with this activity is a significant part of the Company’s business. The ability
to offer long-term service often leads to add-on sales opportunities for
peripheral components, data acquisition products, and upgrades to newer
computers and software applications. In addition, the quality of service is an
important aspect of the end users buying decision when making a system
selection; therefore the Company is constantly fine-tuning the services it
provides and its service organization as part of its marketing
strategy.





The
Company has deployed technology to automate a company-wide helpdesk system in
order to more effectively service its customers and employs a “virtual company”
concept by linking outside personnel via the Internet directly into its own
internal network. This permits ASPYRA employees who are engaged in technical and
service related activities to telecommute through this venue. The Company
employs a customer relationship management system (CRM), integrated with its
current general accounting system.





The
Company believes that the service of its customers is of utmost importance to
its long-term success and business strategy. Accordingly, a great deal of
emphasis is placed on continuing to upgrade the service organization and on
expanding the services that the Company offers towards a goal of establishing a
higher degree of customer satisfaction. As part of this effort, the Company
routinely surveys its customers in an effort to obtain a “report card” on how
the service organization performs.  This proactive approach allows the
Company to further understand the relationship with the customer. Surveys are
based on varying subjects, including sales, implementation or support processes,
and corporate communication or product development.





Significant
Contracts and Programs





As part
of its overall marketing strategy, the Company is also pursuing strategic
relationships with organizations that operate multiple entity enterprises where
the Company may have the opportunity to offer its array of products and services
to the group.  The Company has also entered into business agreements
to resell products for other companies that provide complimentary offerings to
their existing product line including relationships with Allscripts, Inc. and
Dell.





During
the fiscal year ended December 31, 2008, there were no customers, contracts
or programs that generated over 10% of the Company’s net sales.






9





Product
Development





The
market for the Company’s products is characterized by rapid and significant
technological change.  The Company’s ability to compete in the market, and
to operate successfully, depends in part on its ability to react to such
change.  The Company continues to expend a significant amount of resources
for the development of new products, and for the development of additional
enhancements to existing products and intends to continue to expend such
resources in the future.





The
Company’s development plans are focused on evolving its clinical and diagnostic
application products to a common user interface based on industry standard
thin-client technology.  Utilization of this common user interface
architecture allows for easier deployment in a traditional enterprise
environment as well as projecting the applications natively over the
Internet.  Management believes that the total cost of ownership inherent in
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 is also migrating its products to an independent operating platform
and relational database technology. This architectural approach allows the
product suite to take advantage of all current and any potential future
relational database technologies. Management’s goal is to drive the product
suite to a total open systems environment, therefore allowing ASPYRA to take
advantage of new technologies as they appear. In addition, ASPYRA has planned
product development projects over the next three years that include additional
enhancements to all of its products.





Research
and development expenditures, net of capitalized software, amounted to
approximately $1,827,000 in fiscal year ended December 31, 2008, and
$2,354,000 in fiscal year ended December 31, 2007 or approximately 21.4%
and 22.9% of net sales, respectively.  Such expenditures were attributable
to systems development, including the development of new Laboratory and
Radiology Information Systems applications, and enhancements to those products.
The Company’s Clinical Information Systems are programmed using an OBJECT COBOL
language that provides a standard code structure for the business logic while
the graphical presentation is written in JAVA and HTML.  By employing
run-time modules for UNIX and Windows, the Company has been able to port to a
variety of hardware platforms with ease.   The Company’s
Diagnostic Information Systems are built upon the Microsoft.net platform and are
programmed using C# and C++. The Company currently supports its software
applications on Intel based Hewlett Packard servers, Dell servers and
IBM RISC 6000 servers, the most popular computer providers in
healthcare.  This capability has allowed the Company to become “platform
independent” in vending its software products where some customers may be
predisposed to certain hardware brands.  The Company also takes advantage
of using off the shelf software such as Microsoft Word for transcription and
document production and delivery.  All of the Company’s products are open
database compliant (ODBC), and the data structures support the use of standard
query language (SQL) report generators that allows a wide range of reporting
capabilities.





Sales
and Marketing





ASPYRA
sells its CIS and DIS systems directly through its own sales force in North
America, through channel partners and distributor programs with other companies,
and has reseller agreements in certain international markets. It also sells
directly in the United Kingdom through its office located in East Rickmansworth,
Herts.  As of the date of  this report, the Company’s
domestic direct field sales force is organized into 5 sales regions which are
supported by two clinical software consultants, and managed by a senior vice
president of sales.





In
addition to direct marketing, the Company promotes its products by attending
national industry trade meetings, through media advertising, publishing articles
in industry publications, telemarketing campaigns, and through its website. The
Company has also formed joint marketing arrangements with other companies that
have compatible products and services. The Company publishes newsletters and
articles, to expand communications with existing and potential customers, and
creates additional customer case studies that spotlight specific business or
clinical issues solved with the ASPYRA installed product(s).





The
Company has established and supports a periodic user symposium in order to
encourage users of its Clinical and Diagnostic Information Systems to
participate in helping the Company to better serve its customers. The focus of
the symposium is to encourage open group communications with the Company about a
range of subjects, including service and support and new product enhancements.
Since the Company has experienced success in vending multiple products to its
customers, the national symposium proves to be a good forum to discuss general
topics, such as the Company’s strategy and product direction, and provides an
opportunity to focus on specific application issues in breakout sessions,
special interest groups (SIGs) and roundtable discussions. The Company also
schedules advanced training courses as part of the symposium agenda that have
had considerable attendance by its customers.






10





Competition





The
Company has several significant competitors including McKesson, GE Medical
Systems, Siemens, Cerner, Amicas, Misys, Philips, and others, in the Clinical
and Diagnostic Information Systems business, many of which are much larger
companies that may offer a wider array of products and services in addition to
competitive clinical applications. These competitors have significantly greater
resources than we have, including greater name recognition, larger sales
operations, greater ability to finance research and development and proceedings
for regulatory approval, and more developed regulatory compliance and quality
control systems. Management believes, however, that few competing CIS and DIS
products offer the Company’s hybrid multisite capabilities, variety of data
interfaces, add-on capability, and flexibility that allows the systems to be
user definable, so that they can be employed in different types of settings. The
multisite and multi-disciplinary or hybrid nature of the Company’s products and
the responsiveness of its customer service and support are also strong selling
points.





The
principal competitive factors in the Company’s business are technological
competence, diversity of product line, price and performance characteristics,
product quality, capability and reliability, marketing and distribution
networks, service and support, ability to attract and retain trained technical
employees and business reputation. The Company believes that it has competitive
advantages in many of these areas. ASPYRA has also positioned itself to focus on
large multi-specialty clinics, imaging centers, and community based and rural
hospitals. Such entities typically have diverse outpatient populations and
operate in a number of locations that require special features designed in the
Company’s products that assist them in maximizing their operating
potential.





Manufacturing
and Suppliers





The
Company has utilized computers manufactured by several suppliers for its
Clinical and Diagnostic Information Systems in the past, and primarily uses
computers manufactured by Hewlett Packard, Dell, and IBM. Management believes
that other computers, which can be used in the Company’s systems, are readily
available from several suppliers. As part of a strategy to limit the amount of
hardware that the Company carries, it employs a “just in time” inventory program
whereby it purchases inventory when it has received an order from a customer
rather than stocking inventory on a routine basis. The Company still maintains
an inventory supply of certain items including spare parts and components for
both its CIS product line and for its data acquisition product line. In
addition, the Company maintains a long-term inventory pool of components and
parts to service customer’s hardware pursuant to its long term extended service
agreements.





ASPYRA’s
DIS systems are frequently integrated with a variety of third party specialized
hardware and software components, which are readily available from a variety of
manufacturers and distributors. To integrate the majority of our system
configurations the hardware is shipped to our location in Jacksonville, Florida
where it is configured with third party software and then installed with the
software manufactured by ASPYRA. Any other ancillary components that do not
require additional application software will be shipped direct to an
installation. When the DIS system has received all of the required software
components, it is then shipped to the customer’s site where it is installed,
integrated and tested at the customer site.





ASPYRA’s
vendor relationships are intended to provide affordable hardware, software, and
integration solutions that have been successfully tested with the AccessNET
system. ASPYRA’s vendors include:





·
            Allscripts.  Aspyra
      has a reciprocal agreement with Allscripts, allowing Aspyra to promote
      Allscripts' Practice Management (PM), Electronic Medical Record (EMR),
      Revenue Cycle Management (RCM) and Emergency Department solutions
      nationally to new and existing Aspyra customers. The reciprocal agreement
      also allows Allscripts to promote Aspyra's laboratory (LIS) and radiology
      (RIS) information systems, and Picture Archiving Communication System
      (PACS) solutions to new and existing Allscripts
  customers.








11





·
            Ciprico.
      Ciprico provides NAS storage with high redundancy, high speed, and high
      volume capabilities. Ciprico has been a provider for the entertainment
      industry and is moving into the healthcare arena. They specialize in
      handling large volumes of image
data.





·
            IMIX Americas.
      IMIX is a manufacturer/distributor of Digital Radiography (DR) systems for
      diagnostic use in hospitals, imaging centers and clinics. Aspyra resells
      and promotes IMIX’s DR systems nationally to new and existing ASPYRA
      AccessNET and AccessMED PACS
customers.





·
            InSite One.
      ASPYRA and InSite One, Inc. have formed an alliance to provide
      ASPYRA’s software to InSite One customers and InSite One’s remote and
      on-site archive and disaster recovery capabilities to ASPYRA customers.
      This partnership offers facilities another method of compliance with
      HIPAA’s requirements for the protection of patient information. It also
      provides a high level of redundancy and disaster recovery capabilities at
      an affordable price.





·
            Konica Minolta Medical
      Imaging USA. Konica is a manufacturer/distributor of digital and
      traditional imaging products for diagnostic use by hospitals, imaging
      centers, clinics and private practice physicians - the same audience
      Aspyra markets its RIS and PACS product solutions to. Aspyra resells
      Konica Minolta’s Xpress CR product line nationally to new and existing
      Aspyra PACS customers.





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





·
            Microsoft®.
      As a Microsoft®
      Certified Partner, the Company reached the highest level within the
      program by earning the ISV/Software Solutions Competency for its AccessNET
      PACS, and the Networking Infrastructure Solutions
    Competency.





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





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





Warranties
and Product Liability





The
Company warrants that its products conform to their respective functional
specifications for periods that vary according to product category. The Company
warrants its application software incorporated in its CIS and DIS products for
one year after installation. The warranty periods may differ depending on the
program that the products are sold under. However, customers may elect to enter
into extended service agreements with the Company that further extends such
warranties. The computers and other hardware components that the Company
currently sells as part of its CIS and DIS products are subject to the
warranties of their manufacturers. The manufacturers generally warrant their
products against faulty material and workmanship for one to three years. The
Company passes through the manufacturer’s warranties to the end users and in
most cases contracts with the manufacturers who are to provide onsite warranty
services through the manufacturer’s service network. The Company’s data
acquisition products and components are warranted against faulty materials and
workmanship for 90 days.








12





The
Company currently carries an aggregate of $5,000,000 in product liability
insurance. Management believes that this amount of insurance is adequate to
cover its risks. To further mitigate its risks, the Company’s standard hardware
sales/software license agreement as well as its service agreement expressly
limits its liabilities and the warranties of its products and services in
accordance with accepted provisions of the Uniform Commercial code as adopted in
most states.





Copyrights,
Patents and Trade Secrets





The
Company holds patents protecting some of its proprietary technology, which it
has either filed directly or received through assignment. The Company has
copyrighted the designs of its proprietary components and application software.
Patent or copyright protection may not be available for many of the Company’s
products. A significant portion of the Company’s proprietary technology is in
the form of software. The Company has relied 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 has registered trademarks for CyberLAB CyberMED,
CyberRAD, CyberPATH, CyberPRINT, CyberTERM, CyberLINK, CyberMATE,
WebGateway,  ImageWEB, ImageSTITCH and MedVIEW, and has applied to
register its trademarks on its other trade and company names. The Company has
retained special intellectual property counsel to advise management on the
appropriate course to follow with respect to these issues and has continued to
pursue measures to protect its intellectual property.





Governmental
Regulation





ASPYRA’s
products are subject to stringent government regulation in the United States and
other countries. These laws and regulations govern product testing, manufacture,
labeling, storage, record keeping, distribution, sale, marketing, advertising
and promotion. The Company is also required to register as a medical device
manufacturer with the Federal Drug Administration (FDA) and comply with FDA
regulations. The regulatory process can be lengthy, expensive and uncertain, and
securing clearances or approvals often requires the submission of extensive
testing and other supporting information. If we do not comply with regulatory
requirements, we may be subject to fines, recall or seizure of products, total
or partial suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notices and criminal
prosecution.





The
Federal Drug Administration (FDA) requires most Class I and Class II
medical devices, which include the Company’s Clinical Information System and
Picture Archive Communications System products, to comply with the FDA’s Quality
System Regulation (QSR).  Additionally, the FDA requires all medical
devices utilizing software to meet the design control requirements of the
QSR.  The Company completed an updated quality policy and a modification of
its internal policies to comply with this directive.  Management believes
that the QSR procedures have an impact on its business to the extent that there
are lengthened development cycles of new software and additional costs are
incurred.  However, all of its competitors are faced with the same
requirements. The Company’s Quality System will, however, allow for a higher
level of customer satisfaction, as the internal processes and software must go
through more rigorous audits and testing.





In
general, the Company and its products are subject to direct governmental
regulations applicable to manufacturers, including those regulations promulgated
under the Occupational Safety and Health Act, and by the Environmental
Protection Agency. The Company’s customers, however, are subject to significant
regulation by the FDA, the Centers for Medicare and Medicaid Services, the
Department of Health and Human Services , the Centers for Disease Control, and
by state and local governmental authorities. Such regulations require the
Company to comply with certain requirements in order to sell its systems, and
are a major focus of its development efforts in order to maintain the regulatory
compliance of its products. In addition, the HIPAA requirements indirectly and
directly are applicable to the Company and have been a focus of its new product
development efforts during the last two fiscal years.








13





Backlog





The
Company’s backlog at December 31, 2008 was approximately $522,000 for
software, hardware and interface products, and approximately $1,915,000 for
deferred services, compared to approximately $432,000 for software, hardware and
interface products, and $1,725,000 for deferred services, at December 31,
2007. The Company also has annually renewable extended service agreements under
contracts aggregating in excess of $6,000,000.





Employees





At
March 30, 2009, the Company had 69 full time and 2 part time employees of
whom 17 are involved in product development, 12 in sales and marketing, 34 in
technical services, training, and support, and 8 in administration. The Company
is not subject to any collective bargaining agreements and considers its
employee relations to be good.





Item
1A. Risk Factors.




An
investment in our shares involves a high degree of risk. Before making an
investment decision, you should carefully consider all of the risks described in
this Report. If any of the risks discussed in this Report actually occur, our
business, financial condition and results of operations could be materially and
adversely affected. If this were to happen, the price of our shares could
decline significantly and you may lose all or a part of your investment. The
risk factors described below are not the only ones that may affect us.
Additional risks and uncertainties that we do not currently know about or that
we currently deem immaterial may also adversely affect our business, financial
condition and results of operations. Our forward-looking statements in this
Report are subject to the following risks and uncertainties. Our actual results
could differ materially from those anticipated by our forward-looking statements
as a result of the risk factors below. See “Forward-Looking
Statements.”




RISKS
RELATED TO OUR BUSINESS





We
have incurred losses recently that may adversely impact liquidity.





We have
experienced operating losses and cash outflows.  For the fiscal year
ended December 31, 2008, our net loss was $5,189,900.  At
December 31, 2008, our cash and cash equivalents totaled $779,630 and our
working capital deficit was $3,874,415.  We cannot be certain that
Aspyra will become profitable and sustain profitability.  If Aspyra
does not become profitable and sustain profitability, the market price of our
common stock will decline.  The Company’s primary source of working
capital has been generated from the private placements and
borrowings.  The Company’s results of operations for the fiscal year
ended December 31, 2008 produced negative operating cash flow of
$1,686,024.  Any decline in sales, delays in implementations where
payments are tied to delivery and/or performance of services or cancellations of
contracts could have a negative effect on cash flow from operations and could in
turn increase our liquidity problem.  If sales are not as expected,
the Company will make certain cost cutting measures beginning June
2009.  We may require additional cash resources to sustain our
business.  The sale of convertible debt securities or additional
equity securities could result in additional dilution to our
shareholders.  The incurrence of additional indebtedness would result
in incurring debt service obligations and could result in operating and
financial covenants that would restrict our operations.  There can be
no assurance that any additional financing will be available on acceptable
terms, if at all.






14







Any
failure to successfully introduce future products into the market could
adversely affect our business.





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





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





The
market for our products is characterized by rapid technological advances,
changes in customer requirements and frequent new product introductions and
enhancements.  Our future success depends upon our ability to
introduce new products that keep pace with technological developments, enhance
current product lines and respond to evolving client requirements.  We
have incurred, and we will need to continue to incur, significant research and
development expenditures in future periods as we strive to remain
competitive.  Our failure to meet these demands could result in a loss
of our market share and competitiveness and could harm our revenues and results
of operations.





Our
success depends on our ability to attract, retain and motivate management and
other skilled employees.





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





If
we do not protect our proprietary information and prevent third parties from
making unauthorized use of our products and technology, our financial results
could be harmed.





We rely
on a combination of confidentiality agreements and procedures and copyright,
patent, trademark and trade secret laws to protect our proprietary information.
However, all of these measures afford only limited protection and may be
challenged, invalidated, or circumvented by third parties. Third parties may
copy aspects of our products or otherwise obtain and use our proprietary
information without authorization. Third parties may also develop similar or
superior technology independently, including by designing around our patents.
Furthermore, the laws of some foreign countries do not offer the same level of
protection of our proprietary rights as the laws of the United States, and we
may be subject to unauthorized use of our products in those countries. Any legal
action that we may bring to protect proprietary information could be expensive
and may distract management from day-to-day operations. Unauthorized copying or
use of our products or proprietary information could result in reduced sales of
our products.






15








Third
parties claiming that we infringe their proprietary rights could cause us to
incur significant legal expenses and prevent us from selling our
products.





From time
to time, we have received claims that we have infringed the intellectual
property 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 from our
  business;





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





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





In
addition, we license and use software from third parties in our business. These
third party software licenses may not continue to be available to us on
acceptable terms. Also, these third parties may from time to time receive claims
that they have infringed the intellectual property rights of others, including
patent and copyright infringement claims, which may affect our ability to
continue licensing their software. Our inability to use any of this third party
software could result in disruptions in our business, which could materially and
adversely affect our operating results.





ASPYRA
operates in a consolidating industry which creates barriers to market
penetration.





The
healthcare information technology industry in recent years has been
characterized by consolidation by both healthcare providers who are our
customers and by those companies that we compete against. Large hospital chains
and groups of affiliated hospitals prefer to negotiate comprehensive contracts
for all of their system needs with larger vendors who offer broader product
lines and services. The conveniences offered by these large vendors are
administrative and financial incentives that we cannot offer our
customers.





Our
products may be subject to government regulation in the future that could impair
our operations.





Our
products could be subject to stringent government regulation in the United
States and other countries in the future. Furthermore, we expect that the
integration of our product and service offering will require us to comply with
regulatory requirements and that we will devote significant time and resources
to this effort.  These regulatory processes can be lengthy, expensive
and uncertain. Additionally, securing necessary clearances or approvals may
require the submission of extensive data and other supporting
information.





Failure
to comply with applicable requirements could result in fines, recall, total or
partial suspension of distribution, withdrawal of existing product or our
inability to integrate our service and product offerings. If any of these things
occur, it could have a material adverse impact on our business.





Changes
in government regulation of the healthcare industry could adversely affect our
business.





Federal
and state legislative proposals are periodically introduced or proposed that
would affect major 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
other third-party payers could adversely affect the demand for our current or
future products and our ability to sell our products on a profitable basis.
Moreover, healthcare legislation is an area of extensive and dynamic change, and
we cannot predict future legislative changes in the healthcare field or their
impact on our industry or our business.






16





We
are subject to the Health Insurance Portability and Accountability Act (HIPAA)
and the cost of complying with HIPAA may negatively impact our net
income.





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





Defective
products or product failure may subject us to liability and could substantially
increase our costs.





Our
products are used to gather information for professionals to make medical
decisions, diagnosis, and treatment.  Accordingly, the manufacture and
sale of our products entails an inherent risk of product liability arising from
an inaccurate, or allegedly inaccurate, test or procedure result.  In
the past, we have discovered errors and failures in certain of our
product offerings after their introduction and have experienced delayed or lost
revenues during the period required to correct these errors.  Errors
and failures in products released by us could result in negative publicity,
product returns, loss of or delay in market acceptance of our products, loss of
competitive position or claims by customers or others.  Alleviating
any of these problems could require significant expenditures of our capital and
resources and could cause interruptions, delays or cessation of our sales, which
could cause us to lose existing or potential customers and would adversely
affect our operating results.  We may be subject to product liability
claims as a result of any failure or errors in our products.  If a
customer is successful in proving its damages, it could prove expensive and
time-consuming to defend against these claims, and we could be liable for the
damages suffered by our customers and other related expenses, which could
adversely affect our operating results.  We currently maintain product
liability insurance coverage for up to $2 million per incident and up to an
aggregate of $5 million per year.  Although management believes this
liability coverage is sufficient protection against future claims, there can be
no assurance of the sufficiency of these policies.  We have not
received any indication that our insurance carrier will not renew our product
liability insurance at or near current premiums; however, we cannot guarantee
that this will continue to be the case.





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





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





Our
evaluation of internal controls and remediation of potential problems will be
costly and time consuming and could expose weakness in our financial
reporting.





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





Factors
outside of our control may adversely affect our operations and operating
results.





Our
operations and operating results may be adversely affected by many different
factors which are outside of our control, including:








17





·
            deterioration
      in economic conditions in any of the healthcare information technology
      industry, which could reduce customer demand and ability to pay for our
      products and services;





·
            political
      and military instability, which could slow spending within our target
      markets, delay sales cycles and otherwise adversely affect our ability to
      generate revenues and operate
effectively;





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





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





·
            acts
      of war or terrorism; and





·
            inadvertent
      errors.





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





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





We expect
to generate approximately 10% of our revenues from customers located outside of
the United States in the fiscal year ending December 31,
2009.  Our international operations are subject to risks in addition
to those faced by our domestic operations, including:





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





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





·
            enactment
      of additional regulations or restrictions on imports and
      exports;





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





·
            limitations
      on future growth or inability to maintain current levels of revenues from
      international sales if we do not invest sufficiently in our international
      operations;





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





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





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





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





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








18





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





We
prepare our financial statements to conform with generally accepted accounting
principles, or GAAP, in the United States. These accounting principles are
subject to interpretation by the Public Company Accounting Oversight Board, the
SEC and various other bodies. A change in those policies could have a
significant effect on our reported results and may affect our reporting of
transactions completed before a change is announced.





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





Risks
Related to Our Common Stock





Future
sales of our common stock would be dilutive to our current shareholders and
could adversely affect our stock price.





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





On
March 26, 2008 the Company completed a private placement of promissory
notes and warrants pursuant to a  Securities Purchase Agreement (the
"Purchase Agreement") with various accredited investors.  Pursuant to
the Purchase Agreement, the Company issued secured promissory notes from the
Company in the principal amount of $2,775,000. The notes are convertible into up
to 5,427,273 shares of the Company’s Common Stock and have a maturity date of
March 26, 2010 and bear interest at the rate of 8% per annum compounded on
each July 15 and January 15. In April 2009, the note holders signed a
waiver extending the maturity date of the convertible notes to August 26,
2010.  Pursuant to the terms of the Purchase Agreement, the Company
issued warrants to purchase up to an additional 5,496,646 shares of Common
Stock. As a result, assuming the conversion of all promissory notes and exercise
of all the warrants, up to 10,923,919 shares of the Company’s Common Stock may
be issued.  On February 12, 2009 the Company entered into a
private placement transaction with various accredited
investors.  Pursuant to the Purchase Agreement, the investors
purchased secured promissory notes from the Company in the principal amount of
$1,000,000. The notes are convertible into up to 3,225,806 shares of the
Company’s Common Stock and have a maturity date of March 26, 2010 and bear
interest at the rate of 12% per annum compounded on each July 15 and January
15.  In April 2009, the purchasers signed a waiver extending the
maturity date of the convertible notes to August 26, 2010.  Pursuant
to the terms of the transaction, the Company issued warrants to purchase up
to an additional 5,774,194 shares of Common Stock. In addition, the Company
issued the placement agent warrants to purchase up to 129,032 shares of Common
Stock. As a result, assuming the conversion of all promissory notes and
exercise of all the warrants, up to 9,129,032 shares of the Company’s Common
Stock may be issued. Such issuances if it were to occur, would be highly
dilutive of existing shareholders and may, under certain conditions affect a
change of control of the Company.








19





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





The
market price of our common stock has experienced significant fluctuations and
our stock price may continue to fluctuate significantly, and you could lose the
value of your investment. The market price of our common stock may be affected
by a number of factors, including:





·
            announcements
      of quarterly operating results and 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 lower prices or on terms that are less favorable
      to us;





·
            rumors,
      announcements or press articles regarding changes in our management,
      organization, operations or prior financial
  statements;





·
            changes
      in revenue and earnings estimates by securities
  analysts;





·
            announcements
      of planned acquisitions by us or by our
  competitors;





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





·
            gain
      or loss of a significant customer;





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





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





The stock
market has experienced extreme price volatility, which has adversely affected
and may continue to adversely affect the market price of our common stock for
reasons unrelated to our business or operating results.





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





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





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





·
            effectively
      respond to competitive pressures;
and





·
            effectively
      manage our operating expense
levels.





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





·
            reduced
      demand for any of our products;





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








20





·
            cancellation,
      deferral or limitation of orders by
customers;





·
            fluctuations
      in foreign currency exchange rates;
and





·
            weakness
      or uncertainty in general economic or industry
  conditions.





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




Item
1B. Unresolved Staff Comments.





Not
Applicable.





Item
2. Properties.





ASPYRA’s
headquarters are located in a leased facility in Calabasas, California. The
facility was constructed in 1991 and comprises approximately 16,800 square feet
with an effective base rental of approximately $29,444 per month, plus common
area maintenance costs and property taxes. The facility is leased under an
extension of the original lease that has a five year term that ends in
October 2012 and is subject to cost of living adjustments in each year. All
other provisions of the original lease substantially remained the
same.





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





ASPYRA
also operates out of a leased facility in Jacksonville, Florida. The facility in
Jacksonville was constructed in 1991 and comprises approximately 8,422 square
feet with an effective base rental of approximately $11,010 per month, plus
common area maintenance costs and property taxes. The Jacksonville location is
leased under an extension of the original lease which has a five year term that
ends in January 2012 and is subject to cost of living adjustments in each
year.





The
Jacksonville facilities are used as general offices and for operations that
includes service and support, training, development, and product integration.
The Company carries adequate general liability insurance, as required by its
respective leases, to cover any risks concerning the facilities.





ASPYRA’s
United Kingdom subsidiary Aspyra Technologies, Ltd. is located in Rickmansworth,
United Kingdom. In August 2008, a new lease was entered into for 2
years.  The United Kingdom office is 285 square feet with a monthly
rent of $2,833. The facilities are used for general offices.





Item
3. Legal Proceedings.





There are
no material active, pending, or threatened legal proceedings to which the
Company is a party.





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







21










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





The
Company did not submit any matter to a vote of its security holders during the
fourth quarter of its fiscal year ended December 31, 2008.








PART II





Item
5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.





Market
information.





The
Company’s common shares trade publicly on the NYSE Alternext under the symbol
“APY”. The following table sets forth for the periods indicated, the range of
the high and low sale prices for the common shares as reported by the NYSE
Alternext. The prices do not include retail markups, markdowns, or
commissions.





High
                  
                  
                  LowFiscal
      2007 ending December 31,First
      Quarter
                  
                  $
                  2.45
                  
                  
                  $
                  1.60Second
      Quarter
                  
                  
                  2.45
                  
                  
                  
                  1.64Third
      Quarter
                  
                  
                  2.35
                  
                  
                  
                  1.60Fourth
      Quarter
                  
                  
                  2.61
                  
                  
                  
                  1.50Fiscal
      2008 ending December 31,First
      Quarter
                  
                  
                  1.79
                  
                  
                  
                  0.34Second
      Quarter
                  
                  
                  0.90
                  
                  
                  
                  0.32Third
      Quarter
                  
                  
                  0.82
                  
                  
                  
                  0.18Fourth
      Quarter
                  
                  
                  0.71
                  
                  
                  
                  0.01





Holders.





The
number of shareholders of record of Common Shares of the Company as of
March 30, 2009 was approximately 330. The Company also has approximately
975 beneficial holders of record whose shares are held in street name as of
March 30, 2009.





Dividends.





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





Securities
authorized for issuance under equity compensation plans.





The
following table represents securities authorized for issuance under our equity
compensation plans as of December 31, 2008:








22










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
      the firstcolumn)Equity
      Compensation Plans approved by security holders
                                  
                                  1,290,875
                                  
                                  $
                                  1.28
                                  
                                  255,875Equity
      Compensation Plans not approved by security holders
                                  
                                  1,750,000
                                  
                                  -
                                  
                                  1,750,000Total
                                  
                                  3,040,875
                                  
                                  1.28
                                  
                                  2,005,875





Recent
sales of unregistered securities.





From time
to time the Company has issued restricted common shares to its employees in lieu
of compensation for vacation pay. However, there were no such issuances of
unregistered Common Shares during the years ended December 31, 2008 and
2007. All sales of our of our restricted stock during 2008 have been
reported in a Current Report on Form 8-K or in a Quarterly Report on Form
10-Q.




Purchase
of equity securities.





During
the years ended December 31, 2008 and 2007, there were no repurchases of
Common Shares.




Item
6.Selected
Financial Data.




Not
Applicable.





Item
7. Management’s Discussions and Analysis of Financial Condition and Results of
Operations.





Overview





The
following discussion relates to the consolidated business of ASPYRA, which
includes the operations of its wholly owned subsidiary Aspyra Diagnostic
Solutions, Inc. (ADSI) formerly StorCOMM, Inc. and its wholly owned
subsidiary Aspyra Technologies, Ltd. (ATI) formerly StorCOMM Technologies,
Ltd.





ASPYRA
operates in one business segment determined in accordance with Statement of
Financial Accounting Standards (“SFAS”) No. 131, and generates revenues
primarily from the sale of its Clinical and Diagnostic Information Systems,
which includes the license of proprietary application software, and may include
the sale of servers and other hardware components to be integrated with its
application software. In connection with its sales of its products, the Company
provides implementation services for the installation, integration, and training
of end users’ personnel. The Company also generates sales of ancillary software
and hardware, to its customers and to third parties. We recognize these revenues
under system sales in our consolidated financial statements.  The
Company also generates recurring revenues from the provision of comprehensive
post implementation services to its customers, pursuant to extended service
agreements. We recognize these revenues under service revenues in our
consolidated financial statements.  This service relationship is
an important aspect of our business as the Company’s products are “mission
critical” systems that are used by healthcare providers in most cases 24 hours
per day and 7 days per week.  In order to retain this service
relationship we must keep our products current for competitive, clinical,
diagnostic, and regulatory compliance.  Enhancements to our products
in the form of software upgrades are an integral part of our business model and
are included as a contract obligation in our warranty and extended service
agreements.  In order to generate such revenue opportunities our
investment in software enhancements is significant and is a key component of our
on going support obligations.





Because
of the nature of our business, ASPYRA makes significant investments in research
and development for new products and enhancements to existing products.
Historically, ASPYRA has funded its research and development programs through
cash flow primarily generated from operations. Management anticipates that
future expenditures in research and development will continue at current
levels.





Aspyra
incurred a net loss applicable to shareholders of $5,189,900 or basic and
diluted loss per share of $0.42 for the year ended December 31, 2008 as
compared to a net loss applicable to shareholders of $5,006,032 or basic and
diluted loss per share of $0.44 for the year ended December 31,
2007.





The
operating losses incurred by the Company during the year ended December 31,
2008 were attributable to a decrease in sales compared to the same periods in
2007, partially offset by lower costs as a result of actions taken in the first
quarter of 2008 to reduce personnel and other expenses. The results are more
fully discussed in the following section “Results of Operations.”





This
management’s discussion and analysis compares the results of operation for the
fiscal year ended December 31, 2008 with the fiscal year ended
December 31, 2007.








23






Results
of Operations
 
 Year Ended December 31,
2008 Compared to Year Ended December31, 2007
 
 The
following table sets forth certain line items in our condensed consolidated
statement of operations as a percentage of total revenues for the periods
indicated:


Fiscal Year Ended
                    December 31, 2008
                  
                  
                  Fiscal Year Ended
                    December 31, 2007Revenues:System
      sales
                  
                  
                  20.6
                  %
                  
                  
                  31.5
                  %Service
      revenues
                  
                  
                  79.4
                  
                  
                  
                  68.5Total
      revenues
                  
                  
                  100.0
                  
                  
                  
                  100.0Cost
      of products and services sold:System
      sales
                  
                  
                  25.3
                  
                  
                  
                  24.9Service
      revenues
                  
                  
                  28.8
                  
                  
                  
                  27.7Total
      cost of products and services
                  
                  
                  54.1
                  
                  
                  
                  52.6Gross
      profit
                  
                  
                  45.9
                  
                  
                  
                  47.4Operating
      expenses:Selling,
      general and administrative
                  
                  
                  72.9
                  
                  
                  
                  65.4Impairment
      of goodwill
                  
                  
                  6.8
                  
                  
                  
                  —Research
      and development
                  
                  
                  21.4
                  
                  
                  
                  22.9Total
      operating
      expenses
                  
                  
                  101.1
                  
                  
                  
                  88.3Operating
      loss
                  
                  
                  (55.2
                  )
                  
                  
                  (40.9
                  )Loss
      before provision for income taxes
                  
                  
                  (60.8
                  )
                  
                  
                  (41.0
                  )Provision
      for income
      taxes
                  
                  
                  0.1
                  
                  
                  
                  —Net
      loss
                  
                  
                  (60.9
                  )
                  
                  
                  (41.0
                  )Deemed
      dividend
                  
                  
                  —
                  
                  
                  
                  (7.7
                  )Net
      loss applicable to common shareholders
                  
                  
                  (60.9
                  )
                  
                  
                  (48.7
                  )





Revenues





Sales for
the fiscal year ending December 31, 2008 were $8,526,042, as compared to
$10,272,247 for the fiscal year ending December 31, 2007, an overall
decrease of $1,746,205 or 17.0%. When analyzed by revenue category, sales of
Clinical Information Systems (CIS) and Diagnostic Information Systems (DIS)
decreased by $1,480,594 or 45.8% and service revenues decreased by $265,611 or
3.8%. The decrease in sales of DIS products was primarily attributable to the
reduction in sales through the Company’s distributors and channel
partners.  Additionally, due to market conditions, there has been a
slowing of sales cycles.  Management continues to believe that the
importance of imaging technologies such as the Company’s Radiology Information
System (“RIS”) / Picture Archive Communication System (“PACS”) products
justifies them as an investment by end users to improve
efficiencies.  The Company has been rebuilding its sales force and
hired several new experienced regional sales managers in an effort to capitalize
on market opportunities.





The
decrease in service revenues is primarily attributable to a reduced number of
post-implementation services provided.  If and when the Company’s
installed base of CIS and DIS installations increases, then service revenues
would be expected to increase as well.





Sales
cycles for Clinical Information Systems (CIS) and Diagnostic Information Systems
(DIS) products are generally lengthy and on average exceed six months from
inception to closure.  Because of the complexity of the sales process,
a number of factors that are beyond the control of the Company can delay the
closing of transactions.  Furthermore, market conditions have also
affected the length of the sales cycle.  Additionally, the Company has
been primarily reliant on distributors and channel partners for the sales of its
Diagnostic Systems and has been subject to inconsistent flow of
orders.  ASPYRA’s sales force is now focusing on a direct sales model
for the diagnostic system products to supplement the distribution and channel
network so that the Company will be less reliant on third parties for the sale
of its diagnostic systems.  ASPYRA has completed new versions of its
laboratory and radiology information systems products, as well as its AccessRAD
RIS/ PACS which it has begun marketing.









24






The
Company continues to seek strategic joint marketing partnerships with other
companies, and channel partners.  We expect that the Company’s future
operating results will continue to be subject to annual and quarterly variations
based upon a wide variety of factors, including the volume mix and timing of
orders received during any quarter or annual period.  In addition, the
Company’s revenues associated with CIS and DIS transactions may be delayed due
to customer related issues such as availability of funding, staff availability,
IT infrastructure readiness, and the performance of third party contractors, all
of which are issues outside of the control of ASPYRA.








Cost of
Products and Services Sold





Cost of
products and services sold decreased by $791,110 or 14.6% for the fiscal year
ended December 31, 2008 as compared to the fiscal year ended
December 31, 2007. The overall decrease in cost of sales was primarily
attributable to a decrease in labor costs of $348,366 or 12.2%, a decrease of
$290,045 or 42.0% in material costs, and a decrease in other costs of sales of
$152,700 or 8.2%. The decrease in labor costs and other costs of sales was
primarily attributable to reduction of personnel and overhead. The decrease in
material costs was attributable to the decrease in system sales requiring
hardware.





Cost of
sales as a percentage of sales increased to 54% for the fiscal year ended
December 31, 2008, as compared to 53% for the fiscal year ended
December 31, 2007. The overall percentage increase in cost of sales, as a
percentage of sales, was primarily attributable to reduction in revenues as
described above.  Management believes the gross profit margin will
improve in fiscal 2009 due to reduced operating expense; however, the Company
could experience quarterly variations in gross margin as a result of the factors
discussed above. Management was able to eliminate redundant personnel and
achieve operational synergies that yielded reductions in operating expenses
during the fiscal 2008 which we expect to be evident in 2009.





Selling,
General and Administrative Expenses





Selling,
general, and administrative expenses decreased by $499,567 or 7.4% for the
fiscal year ended December 31, 2008 as compared to the fiscal year ended
December 31, 2007.  The reduction of expenses was primarily
attributable to decreases of approximately $895,000 related to
salaries,  $28,000 in tradeshow expenses, $54,000 related to insurance
expenses, $136,000 in travel and lodging expenses, which were partially offset
by an increase of $69,000 in stock administration expenses, $211,000 in SFAS
123(R) stock-based compensation expense, $145,000 in recruitment fees,
$48,000 in legal and accounting expenses, and $140,000 consulting expenses
related to the documentation of the Company’s internal controls and consulting
fees compared to the same period in fiscal 2007. Management continues to
evaluate cost reductions in some of its selling, general and administrative
expenses while it also continues to plan further investment in its marketing
programs.





Impairment
of Goodwill





Under
SFAS 142 “Goodwill and Other Intangible Assets”, goodwill is not amortized but
tested for impairment on an annual basis, or whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable.   As a result of the annual testing of goodwill, the
Company recorded a goodwill impairment of $576,434 .








25





Research
and Development Expenses





Research
and development expenses decreased $526,787 or 22.4% during the fiscal year
ended December 31, 2008, as compared to the fiscal year ended
December 31, 2007. The decrease was primarily attributable to decreases in
salaries and expenses of personnel in product development.  Current
development expenses were attributable to the development of AccessRAD, the
RIS/PACS solution that integrates the Company’s CyberRAD radiology information
system with its AccessNET PACS system, and enhancements and new modules for the
Company’s CIS and DIS products.  For its current fiscal year ended
December 31, 2008 and fiscal year ended December 31, 2007, the Company
capitalized software costs of $530,313 and $825,412, respectively, which are
generally amortized over the estimated useful life not to exceed five
years.





Interest
and other income was $299,094 for the fiscal year ended December 31, 2008
as compared to $150,568 for the fiscal year ended December 31, 2007 due to
the settlement of an outstanding notes payable and outstanding accounts payable,
which was recorded in other income.





Interest
and other expense was $777,749 for the fiscal year ended December 31, 2008
as compared to $167,991 for the fiscal year ended December 31,
2007.  The increase was primarily due to non-cash interest charges
related to the value of outstanding warrants, beneficial conversion, and debt
issuance costs resulting from the private placement transaction completed on
March 26, 2008.  See “Liquidity and Capital Resources” for
additional information.





Income
tax provision was $8,599 for the fiscal year ended December 31, 2008 as
compared to $2,117 for the fiscal year ended December 31,
2007.





As a
result of the factors discussed above, the Company incurred a net loss
applicable to common shareholders of $5,189,900 or basic and diluted loss per
share of $0.42 for the fiscal year ended December 31, 2008 as compared to a
net loss applicable to common shareholders of $5,006,032 or basic and diluted
loss per share of $0.44 for the fiscal year ended December 31,
2007.





Internal
Revenue Code Section 382 imposes limitations on the utilization of net
operating loss and tax credit carryovers pursuant to an ownership change as a
consequence of the merger with StorCOMM. The annual loss limitation amount is
$770,000.  Accordingly the Company has reduced the state and federal
net operating loss of approximately $21,600,000 and $23,600,000,
respectively.  At December 31, 2008, the Company had state and
federal net operating loss carryforwards available to offset future taxable
income of approximately $17,900,000 and $20,000,000, respectively, which are net
of Internal Revenue Code Section 382 limitations. These operating loss
carryforwards expire at various dates through 2028, and general business tax
credit carryforwards available to offset future state and federal income tax
payable are approximately $552,000 and $936,000, respectively. While the Federal
general business tax credits expire at various dates through 2028, the state
general business tax credits can be carried forward indefinitely.





The
Company annually evaluates the realization of the net deferred tax asset, taking
into consideration prior earnings history, projected operating results and the
reversal of temporary tax differences.  At December 31, 2008, the
Company evaluated the net deferred tax asset taking into consideration operating
results and determined that a valuation allowance of approximately $8,031,300
should be maintained.





Capital
Resources and Liquidity





Historically,
the Company’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 $530,313 and $825,412, respectively, during
fiscal 2008 and 2007 in software development.  These expenditures
related to investment in the Company’s new RIS/PACS integrated system,
AccessRAD, enhancements to AccessNET, the new browser version of the Company’s
LIS product, CyberLAB, and other product enhancements. The Company anticipates
expending additional sums during fiscal 2009 on product enhancements to all its
products and the further development of AccessRAD.  During fiscal
2008, the Company invested an aggregate of $23,337 in fixed assets primarily
consisting of computers and software, as compared to an investment of $95,935 in
fixed assets primarily consisting of computers, network infrastructure,
telephone and data communications systems, and software in 2007.








26





As of
December 31, 2008, the Company’s working capital amounted to a deficit of
$3,874,415 compared to a working deficit of $4,007,912, as of December 31,
2007. The reduction in deficit was primarily attributable to the private
placement transaction completed on March 26, 2008 with various current and
new investors which is described in more detail below.





At
December 31, 2008, the Company’s credit facilities with its bank consisted
of a revolving line of credit of $1,300,000, of which $744,965 was outstanding.
 .  The revolving line of credit is secured by the Company’s accounts
receivable and inventory. Advances are on a formula based on eligible accounts
receivable and inventory balances.  The revolving line of credit is subject
to certain covenants.  As of December 31, 2008, the Company was not in
compliance with all covenants but had obtained a waiver from the bank.  On
March 31, 2009, the Company executed agreements renewing its revolving line
of credit in the aggregate amount of $1,300,000.  The renewed revolving
line of credit is subject to certain covenants, which includes revised financial
covenants and matures on May 27, 2010.  Management is considering
additional financing to accelerate its business development plans which in turn
may improve its working capital position.





Cash used
in operating activities was $1,686,024 for the fiscal year ended
December 31, 2008, compared to cash used in operating activities of
$1,618,035 for the fiscal year ended December 31, 2007.  The
increase in cash used for operating activities was primarily attributable to the
net change in receivables, accrued liabilities and deferred service
contract.





Net cash
used in investing activities totaled $553,650 for the 2008 fiscal year, compared
to $921,347 used in investing activities during the 2007 fiscal
year.  The change was primarily the result of a decrease in investment
in fixed assets and software capitalization costs compared to the prior fiscal
year.





Cash
provided by financing activities amounted to $2,142,004 during the 2008 fiscal
year compared to cash provided by financing activities of $2,344,731 in fiscal
2007.  The decrease was primarily attributable to the exercise of
outstanding warrants and the change in restricted cash in 2007, partially offset
by the Company completing the private placement transaction described below on
March 26, 2008.





The
Company’s primary source of working capital has been generated from private
placements of securities and from borrowings.  The Company has
experienced a history of losses due to the integration of its businesses and the
significant investment in new products since the quarter ended March 31,
2005 and negative cash flows from operations since the quarter ended
December 31, 2005.  An unanticipated decline in sales, delays in
implementations where payments are tied to delivery and/or performance of
services or cancellations of contracts have had and in the future could have a
negative effect on cash flow from operations and could in turn create short-term
liquidity problems.





On
March 26, 2008 the Company completed a private placement of promissory
notes and warrants pursuant to a Securities Purchase Agreement (the "Purchase
Agreement") entered into with various accredited
investors.  Under the terms of the Purchase Agreement, the investors
purchased secured promissory notes from the Company in the principal amount of
$2,775,000.  The notes are convertible into shares 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, and similar transactions. The notes
are convertible into up to 5,427,273 shares of the Company’s Common Stock, have
a maturity date of March 26, 2010 and bear interest at the rate of 8% per
annum compounded on each July 15 and January 15.  In April
2009, the note holders signed a waiver extending the maturity date of the
convertible notes to August 26, 2010. Under the terms of the Purchase Agreement,
the Company issued to the note holders three year warrants to purchase up to an
aggregate of 5,496,646 additional shares of Common Stock.  In February
2009, the Company and purchasers signed waivers extending the term of the
warrants to March 26, 2012.  As a result, assuming the conversion of
all promissory notes and exercise of all warrants issued in the private
placement, up to 10,923,919 shares of the Company’s Common Stock may be
issued.  Such an issuance if it were to occur, would be highly
dilutive to existing shareholders and may, under certain conditions, effect a
change of control of the Company. Simultaneously with the execution of the
Purchase Agreement, the Company and each of the investors entered into a
Registration Rights Agreement, pursuant to which each of the private placement
investors shall be entitled to certain registration rights for all of the shares
issuable in the transaction.








27





On
February 12, 2009 the Company entered into a private placement transaction
with various current and new shareholders.  Pursuant to the Purchase
Agreement, the investors purchased secured promissory notes from the Company in
the principal amount of $1,000,000. The notes are convertible into shares of the
Company’s Common Stock at a conversion price of $0.31 per share, subject to
adjustment in the event of stock splits, stock dividends, and similar
transactions. The notes are convertible up to 3,225,806 shares of the Company’s
common stock and have a maturity date of March 26, 2010 and bear interest
at the rate of 12% per annum compounded on each July 15 and
January 15.  In April 2009, the purchasers signed a waiver
extending the maturity date of the convertible notes to August 26,
2010.  Pursuant to the terms of the transaction, the Company will
issue three year warrants to purchase up to an additional 5,774,194 of shares of
Common Stock. In addition, the Company issued the placement agents warrants
to purchase up to 129,032 shares of Common Stock. As a result,
assuming the conversion of all promissory notes and exercise of all warrants, up
to 9,129,032 shares of the Company’s Common Stock may be issued. Such an
issuance if it were to occur, would be highly dilutive of existing shareholders
and may, under certain conditions effect a change of control of the
Company.





We
believe that our current cash and cash equivalents, and cash flow from
operations, will be sufficient to meet our current anticipated cash needs,
including for working capital purposes, capital expenditures and various
contractual obligations, for at least the next 12 months.  If the
Company is unable to generate cash from operations or meet revenue targets or
obtain new cash inflows from financing or equity offerings, the Company would
need to take action and reduce costs in order to operate for the next 12
months.  This requires the Company to plan for potential courses of
action to reduce costs and look for new sources of financings and capital
infusion.  The Company has a detailed strategic plan which outlines
short and long term plans to improve its operations.  If sales are not
as expected, the Company will make certain cost cutting measures beginning June
30, 2009.  We may also require additional cash resources 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 satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit facility with a
lender.  The sale of additional convertible debt securities or equity
securities could result in additional dilution to our
stockholders.  The incurrence of additional indebtedness would result
in increased debt service obligations and could result in additional operating
and financial covenants that would restrict our operations.  In
addition, there can be no assurance that any 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 other businesses, applications or technologies, we may from
time to time evaluate acquisitions of other businesses, applications or
technologies.





Contractual
Obligations





The
following summarizes our contractual obligations at December 31, 2008 and
the effects such obligations are expected to have on liquidity and cash flow in
future periods:





Contractual
                  Obligations
                
                Total
                
                
                Less than 1
                  Year
                
                
                1-3 Years
                
                
                4-5 Years
                
                
                After 5
                  YearsOperatingleases
                
                $
                1,923,386
                
                
                $
                533,512
                
                
                $
                1,063,547
                
                
                $
                326,327
                
                
                $
                —Debt
      (1)
                
                $
                845,525
                
                
                $
                845,525
                
                
                $
                —
                
                
                $
                —
                
                
                $
                —Convertible
      notes
                
                $
                2,460,000
                
                
                $
                —
                
                
                $
                2,460,000
                
                
                $
                —
                
                
                $
                —Capital
      lease
                
                $
                421,879
                
                
                $
                190,231
                
                
                $
                231,648
                
                
                $
                —
                
                
                $
                —Total
                
                $
                5,650,790
                
                
                $
                1,569,268
                
                
                $
                3,755,195
                
                
                $
                326,327
                
                
                $
                —




(1)
            Includes
      payment of interest of $50,560 in
2009.






28





Seasonality,
Inflation and Industry Trends





The
Company’s sales are generally higher in the spring and fall but are subject to a
number of factors related to its customers’ budgetary
cycles.  Inflation has not had a material effect on the Company’s
business since the Company has been able to adjust the prices of its products
and services in response to inflationary pressures.  Management
believes that most phases of the healthcare segment of the computer industry
will continue to be highly competitive, and that potential healthcare reforms
including the initiatives to establish a national standard for the electronic
health record may have a long-term positive impact on its
business.  The key issues driving demand for ASPYRA’s products are
industry concerns about patient care and safety issues, development of a
national standard for the electronic health record that will affect all clinical
data, a shift from analog to digital imaging technologies, and regulatory
compliance.  The Company has continued to invest heavily in new
application modules to assist its customers in addressing these
issues.  Management believes that new application modules and features
that concentrate on such issues will be key selling points and will provide a
competitive advantage.  In addition, management believes that the
healthcare information technology industry will be marked with more significant
technological advances, which will improve the quality of service and reduce
costs.








Critical
Accounting Policies and Estimates





Management’s
discussion and analysis of ASPYRA’s financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America.  The preparation of these
consolidated financial statements requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosures of contingent assets and
liabilities.  On an on-going basis, management evaluates estimates,
including those related to the valuation of inventory and the allowance for
uncollectible accounts receivable. We base our estimates on historical
experience and on various other assumptions that are believed to be reasonable
under the circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements:





Inventory





The
Company’s inventory is comprised of a current inventory account that consists of
items that are held for resale and a long-term inventory account that consists
of items that are held for repairs and replacement of hardware components that
are serviced by the Company under long-term extended service agreements with its
customers.  Current inventory is valued at the lower of cost to
purchase or the current estimated market value of the inventory
items.  Inventory is evaluated on a continual basis and reserve
adjustments are made based on management’s estimate of future sales value, or in
the case of the long-term component inventory, on management’s estimation of the
usage of specific inventory items and net realizable
value.  Management reviews inventory quantities on hand and makes
determination of the excess or obsolete items in the inventory, which are
specifically reserved.  In addition, reserve adjustments are made for
the difference between the cost of the inventory and the estimated market value
and charged to operations in the period in which the facts that give rise to the
adjustments become known.  At December 31, 2008 the inventory
reserve was $136,989.





Accounts
Receivable





Accounts
receivable balances are evaluated on a continual basis and allowances are
provided for potentially uncollectible accounts based on management’s estimate
of the collectability of customer accounts. If the financial condition of a
customer were to deteriorate, resulting in an impairment of their ability to
make payments, an additional allowance may be required. Allowance adjustments
are charged to operations in the period in which the facts that give rise to the
adjustments become known.  The accounts receivable balance at
December 31, 2008 was $806,996, net of an allowance for doubtful accounts
of $37,613.






29





Revenue
Recognition





Revenues
are derived primarily from the sale of CIS and DIS products and the provision of
services.  The components of the system sales revenues are the
licensing of computer software, installation, and the sale of computer hardware
and sublicensed software. The components of service revenues are software
support and hardware maintenance, training, and implementation
services.  The Company recognizes 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 “Revenue Recognition in Financial
Statements.”  SOP No 97-2, as amended, generally requires revenue
earned on software arrangements involving multiple-elements to be allocated to
each element based on the relative fair values of those elements.  The
Company allocates revenue to each element in a multiple-element arrangement
based on the element’s respective fair value, with the fair value determined by
the price charged when that element is sold separately and specifically defined
in a quotation or contract.  Deferred revenue related to CIS and DIS
sales are comprised of deferrals for license fees, hardware, and other services
for which the implementation has not yet been completed and revenues have not
been recognized.  Revenues are presented net of
discounts.  At December 31, 2008 deferred revenue was
$521,520.





Post
Implementation software and hardware maintenance services are marketed under
monthly, quarterly and annual arrangements and are recognized as revenue ratably
over the contracted maintenance term as services are provided.  The
Company determines the fair value of the maintenance portion of the arrangement
based on the renewal price of the maintenance charged to customers, professional
services portion of the arrangement, other than installation services, based on
hourly rates which the Company charges for these services when sold apart from a
software license, and the hardware and sublicense of software based on the
prices for these elements when they are sold separately from the
software.  At December 31, 2008, deferred service contract income
was $1,914,979.





Software
Development Costs





Costs
incurred internally in creating computer software products are expensed until
technological feasibility has been established upon completion of a program
design. Thereafter, applicable software development costs are capitalized and
subsequently reported at the lower of amortized cost or net realizable value.
Capitalized costs are amortized based on current and expected future revenue for
each product with minimum annual amortization equal to the straight-line
amortization over the estimated economic life of the product not to exceed five
years.  For the years ended December 31, 2008 and
December 31, 2007, the Company capitalized $530,313 and $825,412,
respectively.  For the year ended December 31, 2008, the balance
of capitalized software costs was $2,851,327 net of accumulated amortization of
$798,919.





Intangible
Assets





Intangible
assets, with definite and indefinite lives, consist of acquired technology,
customer relationships, channel partners, and goodwill.  They are
recorded at cost and are amortized, except goodwill, on a straight-line basis
based on the period of time the asset is expected to contribute directly or
indirectly to future cash flows, which range from four to
15 years.





In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 142, goodwill is tested for impairment on an annual basis or between
annual tests if an event occurs or circumstances change that would indicate the
carrying amount may be impaired.  In accordance with SFAS
No. 144, Accounting for Impairment of Long-Lived Assets, management reviews
definite life intangible assets to determine if events or circumstances have
occurred which may cause the carrying values of intangible assets to be
impaired. The purpose of these reviews is to identify any facts or
circumstances, either internal or external, which may indicate that the carrying
value of the assets may not be recoverable.




Goodwill
impairment is determined using a two-step process. The first step of the
goodwill impairment analysis is to identify a potential impairment by comparing
the book values of our reporting unit to the estimated fair values at the
valuation date. The estimate of fair value of our reporting unit is computed
using the present value of estimated future cash flows. This analysis utilizes a
multi-year forecast of estimated cash flows and a terminal value at the end of
the cash flow period. The forecast period assumptions consist of internal
projections that are based on our budget and long-range strategic plan. The
discount rate used at the valuation date is the Company’s weighted-average cost
of capital which reflects the overall level of inherent risk of the reporting
unit and the rate of return an outside investor would expect to
earn.




If the
fair value of our reporting unit exceeds its book value, goodwill of the
reporting unit is not deemed impaired and the second step of the impairment test
is not required to be completed. If the book value of a reporting unit exceeds
its fair value, the second step of the goodwill impairment analysis is required
to be performed to determine the amount of impairment loss, if any. The second
step of the goodwill impairment test compares the implied fair value of the
reporting unit’s goodwill with the carrying amount of that goodwill. The implied
fair value of goodwill is determined by allocating the estimated fair value of
the reporting unit to the estimated fair value of our existing tangible assets
and liabilities as well as existing identified intangible assets and previously
unrecognized intangible assets in a manner similar to a purchase price
allocation. The unallocated portion of the estimated fair value of the reporting
unit is the implied fair value of goodwill. If the carrying amount of the
reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.




As
discussed in Note 5 to the consolidated financial statements, the Company
performed its annual impairment analysis as of October 1, 2008. The
impairment analysis indicated that the goodwill associated the Company’s
reporting unit was impaired. Therefore, the Company recognized a $576,434
goodwill impairment charge during the fourth quarter of 2008. The assumptions
included in the impairment analysis require judgment; and changes to these
inputs could materially impact the results of the calculation. Other than
management’s internal projections of future earnings, the primary assumptions
used in the impairment analysis was the weighted-average cost of capital,
long-term growth rates and the control premium.




Although
our cash flow forecasts are based on assumptions that are considered reasonable
by management and consistent with the plans and estimates we are using to manage
the underlying businesses, there is significant judgment in determining the
expected future cash flows attributable to these businesses. In addition, as
discussed above, the determination of fair value requires that we make certain
judgments, estimates and assumptions. While the Company believes the fair values
we have estimated are reasonable, actual performance in the short-term and
long-term could be materially different from our forecasts, which could impact
future estimates of fair value of our reporting unit and may result in
additional impairments of goodwill.











30





Stock-based
Compensation





We have
two stock-based compensation plans, the 2005 Equity Incentive Plan and the 1997
Stock Option Plan, under which we may issue shares of our common stock to
employees, officers, directors and consultants. Upon the effectiveness of the
2005 Equity Incentive Plan on November 22, 2005, the 1997 Stock Option Plan
was terminated 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
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations, as permitted by SFAS No. 123,
Accounting for Stock-Based Compensation. Effective January 1, 2006, we
adopted the fair value 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, 2008 and 2007 includes; (a) compensation cost for all
share-based payments granted prior to, but not yet vested as of January 1,
2006, based on the grant date fair value estimated in accordance with the
original provisions of SFAS No. 123, and (b) compensation cost for all
share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). Results for prior periods have not been restated.





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





Income
Taxes





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








New
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 141 (Revised) (“SFAS
141(R)”),  Business Combinations. The provisions of this statement are
effective for business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning after
December 15, 2008. Earlier application is not permitted. SFAS
141(R) replaces SFAS 141 and provides new guidance for valuing assets and
liabilities acquired in a business combination. The Company will adopt SFAS
141(R) for all acquisitions after January 1, 2009.




In
September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" (SFAS 157). SFAS 157 establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. SFAS 157 is effective for financial statements issued
for fiscal years beginning after November 15, 2007. In February 2008,
the FASB staff issued a staff position that delayed the effective date of SFAS
No. 157 for all non-financial assets and liabilities except for those
recognized or disclosed at fair value annually. The FASB also issued FAS-157-1,
“Application of FASB Statement No. 157 to FASB Statement No. 13 and
other Accounting Pronouncements that address Fair Value Measurements for
Purposes of Lease Classifications or Measurements under SFAS Statement
No. 13”. The Company adopted the provision of SFAS 157, as applicable,
beginning in fiscal year 2008. The adoption of SFAS No. 157 did not have a
material effect on our consolidated operating results or financial
position.








31





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities”, which provides companies with
an option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for the Company as of
January 1, 2008.  The adoption of SFAS No. 159 did not have
a material effect on our consolidated operating results or financial
position.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains it controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS 160
is not expected to have a material impact on the Company’s consolidated
financial position, cash flows and results of operations.





In
March 2008, the FASB issued SFAS No. 161, "Disclosures about
Derivative Instruments and Hedging Activities which amends SFAS No. 133".
The statement is intended to improve transparency in financial reporting by
requiring enhanced disclosures of an entity’s derivative instruments and hedging
activities and their effects on the entity’s financial position, financial
performance, and cash flows. SFAS 161 is effective prospectively for financial
statements issued for fiscal years and interim periods beginning after
November 15, 2008. The adoption of SFAS No. 161 is not expected to
have a material impact on our consolidated financial statements.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States. This Statement was
effective on November 15, 2008. The adoption of SFAS 162 did not have
a material impact on the consolidated financial statements.





Off-Balance
      Sheet Arrangements





We do not
have any outstanding derivative financial instruments, off-balance sheet
guarantees, interest rate swap transactions or foreign currency forward
contracts, or any other off-balance sheet arrangements.





Item
7A.  Quantitative and Qualitative Disclosures about Market
Risk





Not
Applicable.






32







Item
8.  Financial Statements and Supplementry Data.





For a
list of financial statements filed as part of this report, see index to
Financial Statements on page 40.





Item
9.  Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.





None.





Item
9A (T).  Controls and Procedures





Attached
as exhibits to this Annual Report on Form 10-K are certifications of
ASPYRA’s Chief Executive Officer and Chief Financial Officer, which are required
in accordance with Rule 13a-14 of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). This “Controls and Procedures” section includes
information concerning the controls and controls evaluation referred to in the
certifications.  This section should be read in conjunction with the
certifications for a more complete understanding of the topics
presented.





Management’s
Annual Report on Internal Control over Financial Reporting





Management
is responsible for establishing and maintaining adequate internal control over
our financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) of the
Exchange Act). Internal control over financial reporting refers to the process
designed by, or under the supervision of, our Chief Executive Officer and Chief
Financial Officer, and effected by our board of directors, management and other
personnel, to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles, and
includes those policies and procedures that:





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





(2)  Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that our receipts and expenditures are being made
only in accordance with authorization of our management and directors;
and





(3)  Provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of our assets that could have a material effect
on the financial statements.





Internal
control over financial reporting cannot provide absolute assurance of achieving
financial reporting objectives because of its inherent limitations. Internal
control over financial reporting is a process that involves human diligence and
compliance and is subject to lapses in judgment and breakdowns resulting from
human failures. Internal control over financial reporting also can be
circumvented by collusion or improper management override. Because of such
limitations, there is a risk that material misstatements may not be prevented or
detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial
reporting process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk. Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for the Company.





Evaluation
of Disclosure Controls and Procedures





The
Company’s management, with the participation of the Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of the effectiveness of the
Company’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-K.  We conducted an evaluation of the
effectiveness of our internal controls over financial reporting based on the
framework in Internal Control-Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded that, as of
December  31, 2008, our disclosure controls and procedures are effective to
provide reasonable assurance that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission (“SEC”) rules and forms, and
(ii) is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to allow timely
decisions regarding required disclosure.






33





This
annual report does not include an attestation report of our independent
registered public accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to temporary
rules of the SEC that permit the Company to provide only management’s
report in this annual report.





Changes
in Internal Control over Financial Reporting





There
were no changes in our internal control over financial reporting that occurred
during the quarter ended December 31, 2008 that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.





Item
9B. Other Information





Not
Applicable.








PART III





Item
10.  Directors, Executive Officers and Corporate Governance.





The
information required by this Item is incorporated by reference from “Directors,
Executive Officers, Promoters and Control Persons” in the Definitive Proxy
Statement to be filed with the Securities and Exchange Commission for the 2009
Annual Meeting of the Company’s Shareholders.





Section 16(a) Beneficial
Ownership Reporting Compliance





Section 16(a) of
the Securities Exchange Act of 1934 (1934 Act) requires the Company’s directors
and officers, and persons who own more than 10% of a registered class of the
Company’s equity security, to file with the Securities and Exchange Commission
reports of ownership and changes in ownership 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 copies
of all Section 16(a) forms they file.





To the
Company’s knowledge, based solely on a review of the copies of such reports
furnished to the Company and written representations that no other reports were
required, during the fiscal year ended December 31, 2008, all
Section 16(a) filing requirements applicable to its officers,
directors and greater than ten percent beneficial owners were complied
with.





Item
11. Executive Compensation.





The
information required by this Item is incorporated by reference from “Executive
Compensation” in the Definitive Proxy Statement to be filed with the Securities
and Exchange Commission for the 2009 Annual Meeting of the Company’s
Shareholders.








34








Item
12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.





The
information required by this Item is incorporated by reference from “Security
Ownership of Certain Beneficial Owners and Management” in the Definitive Proxy
Statement to be filed with the Securities and Exchange Commission for the 2009
Annual Meeting of the Company’s Shareholders.





Item
13. Certain Relationships and Related Transactions, and Director Independence.





The
information required by this Item is incorporated by reference from “Certain
Relationships and Related Transactions and Director Independence” in the
Definitive Proxy Statement to be filed with the Securities and Exchange
Commission for the 2009 Annual Meeting of the Company’s
Shareholders.





Item
14.  Principal Accountant Fees and Services.





The
information required by this Item is incorporated by reference from Principal
Accountant Fees and Services in the Definitive Proxy Statement to be filed with
the Securities and Exchange Commission for the 2009 Annual Meeting of the
Company’s Shareholders.





Item
15.  Exhibits and Financial Statement Schedules.





The
following 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,
      2006.4.
      20
                                                                            
                                                                            (15)
                                                                            
                                                                            Form
      of Note issued in the Private Placement that closed on March 26,
      20084.
      21
                                                                            
                                                                            (15)
                                                                            
                                                                            Form
      of Warrant issued in the Private Placement that closed on March 26,
      20084.
      22
                                                                            
                                                                            (16)
                                                                            
                                                                            Form
      of  Secured Convertible Promissory Note issued in the Private
      Placement that closed on February 12, 20094.
      23
                                                                            
                                                                            (16)
                                                                            
                                                                            Form
      of Warrant issued in the Private Placement that closed on February 12,
      200910.
      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.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.








35










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.10.
      29
                  
                  (15)
                  
                  Securities
      Purchase Agreement, dated as of March 26, 200810.
      30
                  
                  (15)
                  
                  Security
      Agreement, dated as of March 26, 200810.
      31
                  
                  (15)
                  
                  Registration
      Rights Agreement, dated March 26, 200810.
      32
                  
                  (16)
                  
                  Securities
      Purchase Agreement, dated February 12, 200910.
      33
                  
                  (16)
                  
                  Security
      Agreement dated as of February 12, 200910.
      34
                  
                  (17)
                  
                  Separation
      Agreement and General Release, dated as of April 1, 2009 by and between
      Aspyra, Inc. and Bruce M. Miller.14.
      1
                  
                  (11)
                  
                  Code
      of Ethics.21.
      1
                  
                  (10)
                  
                  Subsidiaries
      of the Registrant.23.1
                  
                  *
                  
                  Consent
      of BDO Seidman, LLP31.
      1
                  
                  *
                  
                  Certification
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.
      2
                  
                  *
                  
                  Certification
      of Chief Accounting Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.
      1
                  
                  *
                  
                  Certification
      of Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.32.
      2
                  
                  *
                  
                  Certification
      of Chief Accounting Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002.
  (1)
              Included
      as an Annex to the joint proxy statement/prospectus that is part of the
      Company’s Registration Statement on Form S-4, originally filed on
      October 3, 2005, SEC File
  No. 333-128795.
 (2)
              Previously
      filed as an exhibit to the Company’s Form 8-K dated October 21,
      1992.
 (3)
              Previously
      filed as an exhibit to the Company’s Registration Statement on
      Form S-18 dated September 22, 1983, SEC File No. 2-
      85265.
 (4)
              Previously
      filed as an exhibit to the Company’s Registration Statement on
      Form S-1 dated October 1, 1985 SEC File
      No. 2-99878.
 (5)
              Previously
      filed as an addendum to the Company’s Proxy Statement and Notice of Annual
      Meeting of Shareholders dated April 10,
  1992.
 (6)
              Previously
      filed as an exhibit to the Company’s Proxy Statement and Notice of Annual
      Meeting of Shareholders dated March 24,
  1997.
 (7)
              Previously
      filed as an exhibit to the Company’s Form 10-K for the year ended
      August 31, 1992.
 (8)
              Previously
      filed as an exhibit to the Company’s Form 10-K for the year ended
      August 31, 1986.
 (9)
              Form of
      Change in Control Agreement previously filed as an exhibit to the
      Company’s Form 8-K dated February 9,
  2005.
 (10)
              Previously
      filed as an exhibit to the Company’s Registration Statement on
      Form S-4, originally filed on October 3, 2005 (SEC File
      No. 333-128795).
 (11)
              Previously
      filed as an exhibit to the Company’s Form 10-KSB for the year ended
      December 31, 2005.
 (12)
              Previously
      filed as an exhibit to the Company’s Form 8-K, dated May 18,
      2006.
 (13)
                Previously
      filed as an exhibit to the Company’s Registration Statement on
      Form S-3 dated June 9, 2006 SEC File
      No. 333-134926.(14)
                Previously
      filed as an exhibit to the Company’s Form 8-K/A, dated December 27,
      2007.(15)
                Previously
      filed as an exhibit to the Company’s Form 8-K, dated April 1,
    2008.(16)
                Previously
      filed as an exhibit to the Company’s Form 8-K, dated February 19,
      2009.(17)
                Previously
      filed as an exhibit to the Company’s Form 8-K, dated April 3,
    2009.
 
 †
              Executive
      compensation plans and
arrangements.
 *
              Filed
      with this Annual Report on
Form 10-K.








36






SIGNATURES





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





ASPYRA,
      INC.Dated:
       April 10, 2009
            By:/S/
      Rodney W. SchuttRodney
      W. SchuttChief
      Executive Officer(principal
      executive officer)





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





Signatures
            
            Title
            
            Date/S/Rodney
      W. Schutt
            
            Chief
      Executive Officer and Director
            
            April 10,
      2009Rodney
      W. Schutt
            
            (principal
      executive officer)/S/
      Anahita Villafane
            
            Chief
      Financial Officer and Secretary
            
            April 10,
      2009Anahita
      Villafane
            
            (principal
      accounting and financial officer)/S/
      Ademola Lawal
            
            Chief
      Operating Officer
            
            April 10,
      2009Ademola
      Lawal/S/
      James R. Helms
            
            Vice
      President of Strategic Analysis
            
            April 10,
      2009James
      R. Helms/S/
      Robert Pruter
            
            Senior
      Vice President, Sales and Marketing
            
            April 10,
      2009Robert
      Pruter/S/
      John Mutch
            
            Chairman
            
            April 10,
      2009John
      Mutch/S/
      James Zierick
            
            Director
            
            April 10,
      2009James
      Zierick/S/
      Lawrence S. Schmid
            
            Director
            
            April 10,
      2009Lawrence
      S. Schmid/S/
      Robert S. Fogerson, Jr.
            
            Director
            
            April 10,
      2009Robert
      S. Fogerson, Jr./S/
      Norman R. Cohen
            
            Director
            
            April 10,
      2009Norman
      R. Cohen/S/
      Jeffrey Tumbleson
            
            Director
            
            April 10,
      2009Jeffrey
      Tumbleson/S/
      C. Ian Sym-Smith
            
            Director
            
            April 10,
      2009C.
      Ian Sym-Smith










37






ASPYRA,
INC.










Consolidated
Financial Statements





For
the Year Ended December 31, 2008 and 2007














ASPYRA,
INC.





INDEX





Report
      of Independent Registered Public Accounting Firm
              
              39Consolidated
      Financial StatementsBalance
      Sheet - December 31, 2008 and 2007
              
              40Statements
      of Operations - Years ended December 31, 2008 and
2007
              
              41Statements
      of Shareholders’ Equity and Comprehensive Loss - Years ended
      December 31, 2008 and 2007
              
              42Statements
      of Cash Flows - Years ended December 31, 2008 and
2007
              
              43Notes
      to Consolidated Financial Statements
              
              44









38










Report
of Independent Registered Public Accounting Firm





Board of
Directors and Shareholders


Aspyra, Inc.
and Subsidiaries


Calabasas,
California





We have
audited the accompanying consolidated balance sheets of Aspyra, Inc., as of
December 31, 2008 and 2007 and the related consolidated statements of
operations, stockholders’ equity and comprehensive loss, and cash flows for each
of the two years in the period ended December 31, 2008.  These
financial statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of
Aspyra, Inc. at December 31, 2008, and the consolidated results
of its operations and comprehensive loss and its cash flows for each of the two
years in the period ended December 31, 2008, in conformity with accounting
principles generally accepted in the United States of America.








/s/
      BDO SEIDMAN, LLPLos
      Angeles, CaliforniaApril 10,
      2009








39






ASPYRA,
INC.





CONSOLIDATED
BALANCE SHEET





December 31,
                
                
                December 31,2008
                
                
                2007ASSETSCURRENT
      ASSETS:Cash
                
                $
                779,630
                
                
                $
                803,392Receivables,
      net
                
                
                806,996
                
                
                
                921,212Inventory
                
                
                27,358
                
                
                
                49,802Prepaid
      expenses
                
                
                225,971
                
                
                
                126,139TOTAL
      CURRENT ASSETS
                
                
                1,839,955
                
                
                
                1,900,545PROPERTY
      AND EQUIPMENT, net
                
                
                498,395
                
                
                
                839,889OTHER
      ASSETS
                
                
                182,698
                
                
                
                86,529INVENTORY
      OF COMPONENT PARTS
                
                
                27,693
                
                
                
                74,896CAPITALIZED
      SOFTWARE COSTS, net of accumulated amortization of $798,919 and
      $875,165, respectively
                
                
                2,851,327
                
                
                
                2,839,232INTANGIBLES,
      net
                
                
                3,072,490
                
                
                
                3,760,982GOODWILL
                
                
                6,692,000
                
                
                
                7,268,434$
                15,164,558
                
                
                $
                16,770,507LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Notes
      payable
                
                $
                794,965
                
                
                $
                1,200,605Accounts
      payable
                
                
                710,157
                
                
                
                784,735Accrued
      liabilities:Vacation
      pay
                
                
                357,798
                
                
                
                363,239Accrued
      compensation
                
                
                333,712
                
                
                
                518,737Accrued
      interest
                
                
                226,635
                
                
                
                106,646Deferred
      rent
                
                
                75,511
                
                
                
                65,143Cutomer
      deposits
                
                
                373,928
                
                
                
                218,994Other
                
                
                254,928
                
                
                
                343,725Deferred
      service contract income
                
                
                1,914,979
                
                
                
                1,724,650Deferred
      revenue on system sales
                
                
                521,520
                
                
                
                431,746Capital
      lease — current portion
                
                
                150,237
                
                
                
                150,237TOTAL
      CURRENT LIABILITIES
                
                
                5,714,370
                
                
                
                5,908,457CAPITAL
      LEASE, LESS CURRENT PORTION
                
                
                198,048
                
                
                
                348,285NOTES
      PAYABLE
                
                
                2,460,000
                
                
                
                —TOTAL
      LIABILITIES
                
                
                8,372,418
                
                
                
                6,256,742COMMITMENTS
      AND CONTINGENCIESSHAREHOLDERS’
      EQUITY:Common
      shares, no par value; 40,000,000 shares authorized; 12,437,150 shares
      issued and outstanding at December 31, 2008 and 2007
                
                
                22,761,951
                
                
                
                22,761,951Additional
      paid-in capital
                
                
                2,587,065
                
                
                
                1,178,354Accumulated
      deficit
                
                
                (18,556,512
                )
                
                
                (13,366,612
                )Accumulated
      other comprehensive loss
                
                
                (364
                )
                
                
                (59,928
                )TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                6,792,140
                
                
                
                10,513,765$
                15,164,558
                
                
                $
                16,770,507







See
notes to consolidated financial statements.






40








ASPYRA,
INC.





CONSOLIDATED
STATEMENTS OF OPERATIONS





Years endedDecember 31,
                  2008
                
                
                December 31,
                  2007NET
      SYSTEM SALES AND SERVICE REVENUE:System
      sales
                
                $
                1,755,276
                
                
                $
                3,235,870Service
      revenue
                
                
                6,770,766
                
                
                
                7,036,377TOTAL
      SYSTEM SALES AND SERVICE REVENUE
                
                
                8,526,042
                
                
                
                10,272,247COSTS
      OF PRODUCTS AND SERVICES SOLD:System
      sales
                
                
                2,156,384
                
                
                
                2,559,367Service
      revenue
                
                
                2,453,159
                
                
                
                2,841,286TOTAL
      COSTS OF PRODUCTS AND SERVICES SOLD
                
                
                4,609,543
                
                
                
                5,400,653GROSS
      PROFIT
                
                
                3,916,499
                
                
                
                4,871,594RESEARCH
      AND DEVELOPMENT EXPENSES
                
                
                1,826,787
                
                
                
                2,353,574IMPAIRMENT
      OF GOODWILL
                
                
                576,434
                
                
                
                —SELLING
      AND ADMINISTRATIVE EXPENSES
                
                
                6,215,924
                
                
                
                6,715,491TOTAL
      OPERATING EXPENSES
                
                
                8,619,145
                
                
                
                9,069,065OPERATING
      LOSS
                
                
                (4,702,646
                )
                
                
                (4,197,471
                )OTHER
      INCOME (EXPENSE):Interest
      income
                
                
                299,094
                
                
                
                150,568Interest
      and other expense
                
                
                (777,749
                )
                
                
                (167,991
                )TOTAL
      OTHER EXPENSE
                
                
                (478,655
                )
                
                
                (17,423
                )LOSS
      BEFORE PROVISION FOR INCOME TAXES
                
                
                (5,181,301
                )
                
                
                (4,214,894
                )PROVISION
      FOR INCOME TAXES
                
                
                8,599
                
                
                
                2,117NET
      LOSS
                
                $
                (5,189,900
                )
                
                $
                (4,217,011
                )DEEMED
      DIVIDEND ON EXERCISE OF WARRANTS
                
                
                —
                
                
                
                (789,021
                )NET
      LOSS APPLICABLE TO COMMON SHAREHOLDERS
                
                $
                (5,189,900
                )
                
                $
                (5,006,032
                )LOSS
      PER SHARE:Basic
      and Diluted
                
                $
                (.42
                )
                
                $
                (.44
                )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
      and Diluted
                
                
                12,437,150
                
                
                
                11,336,483









See
notes to consolidated financial statements.






41







ASPYRA,
INC.





CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS





Common
                                Shares
                              
                              
                              Common
                                Shares
                                Amount
                              
                              
                              Additional
                                Paid-In Capital
                              
                              
                              Accumulated
                                Deficit
                              
                              
                              Accumulated
                                Other
                                Comprehensive
                                Loss
                              
                              
                              Total
                                Shareholders’
                                EquityBALANCE,
      January 1,2007
                              
                              
                              10,783,150
                              
                              
                              $
                              21,044,071
                              
                              
                              $
                              160,572
                              
                              
                              $
                              (8,360,580
                              )
                              
                              $
                              (44,731
                              )
                              
                              $
                              12,799,332Components
      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
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              228,761Exercise
      of stock options
                              
                              
                              4,000
                              
                              
                              
                              2,880
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              2,880Exercise
      of warrants (net of $100,000 costs)
                              
                              
                              1,650,000
                              
                              
                              
                              1,715,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              1,715,000BALANCE,
      December 31, 2007
                              
                              
                              12,437,150
                              
                              
                              
                              22,761,951
                              
                              
                              
                              1,178,354
                              
                              
                              
                              (13,366,612
                              )
                              
                              
                              (59,928
                              )
                              
                              
                              10,513,765Components
      of comprehensive loss:Net
      loss
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              (5,189,900
                              )
                              
                              
                              —
                              
                              
                              
                              (5,189,900
                              )Foreign
      currency translation adjustment
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              59,564
                              
                              
                              
                              59,564Total
      comprehensive loss
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              
                              (5,130,336
                              )Compensation
      expense
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              435,711
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              435,711Beneficial
      conversion feature related to private placement
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              133,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              133,000Value
      of warrants granted in private placement
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              840,000
                              
                              
                              
                              —
                              
                              
                              
                              —
                              
                              
                              
                              840,000BALANCE,
      December 31,
                                2008
                              
                              
                              12,437,150
                              
                              
                              $
                              22,761,951
                              
                              
                              $
                              2,587,065
                              
                              
                              $
                              (18,556,512
                              )
                              
                              $
                              (364
                              )
                              
                              $
                              6,792,140








See
notes to consolidated financial statements.







42




ASPYRA,
INC.





CONSOLIDATED
STATEMENTS OF CASH FLOWS





Increase
(Decrease) in Cash





Years endedDecember 31,
                  2008
                
                
                December 31,
                  2007OPERATING
      ACTIVITIESNet
      loss
                
                $
                (5,189,900
                )
                
                $
                (4,217,011
                )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                
                
                350,487
                
                
                
                428,859Amortization
      of capitalized software costs
                
                
                518,218
                
                
                
                473,486Warrant
      discount and beneficial conversion amortization
                
                
                443,626
                
                
                
                —Amortization
      of acquired intangibles
                
                
                688,492
                
                
                
                688,500Impairment
      of goodwill
                
                
                576,434
                
                
                
                —Provision
      for doubtful accounts
                
                
                24,739
                
                
                
                65,993Stock
      based compensation
                
                
                435,711
                
                
                
                228,761Increase
      (decrease) from changes in:Receivables
                
                
                89,477
                
                
                
                346,948Inventories
                
                
                69,648
                
                
                
                111,711Prepaid
      expenses and other assets
                
                
                18,374
                
                
                
                121,679Accounts
      payable
                
                
                (74,578
                )
                
                
                (102,282
                )Accrued
      liabilities
                
                
                83,145
                
                
                
                365,767Deferred
      service contract income
                
                
                190,329
                
                
                
                215,608Deferred
      revenue on system sales
                
                
                89,774
                
                
                
                (346,054
                )Net
      cash used in operating activities
                
                
                (1,686,024
                )
                
                
                (1,618,035
                )INVESTING
      ACTIVITIESAdditions
      to property and equipment
                
                
                (23,337
                )
                
                
                (95,935
                )Additions
      to capitalized software costs
                
                
                (530,313
                )
                
                
                (825,412
                )Net
      cash used in investing activities
                
                
                (553,650
                )
                
                
                (921,347
                )FINANCING
      ACTIVITIESBorrowings
      on line of credit and notes payable
                
                
                2,775,000
                
                
                
                1,026,477Forgiveness
      of debt
                
                
                (171,197
                )
                
                
                (96,929
                )Payments
      on line of credit and notes payable
                
                
                (311,562
                )
                
                
                (1,152,460
                )Payments
      on capital lease obligations
                
                
                (150,237
                )
                
                
                (150,237
                )Decrease
      in restricted cash
                
                
                —
                
                
                
                1,000,000Exercise
      of stock options and warrants
                
                
                —
                
                
                
                1,717,880Net
      cash provided by financing activities
                
                
                2,142,004
                
                
                
                2,344,731Foreign
      currency translation adjustment
                
                
                73,908
                
                
                
                (16,589
                )NET
      DECREASE IN CASH
                
                
                (23,762
                )
                
                
                (211,240
                )CASH,
      beginning of year
                
                
                803,392
                
                
                
                1,014,632CASH,
      end of year
                
                $
                779,630
                
                
                $
                803,392







See
notes to consolidated financial statements.








43








NOTE
1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Business
Activities





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





The
Company’s software and services for hospitals and clinic-based laboratories,
pharmacies, orthopedic centers, and imaging departments are highly scalable and
can be used by a broad variety of healthcare providers.  Clinical
information is data that is gathered concerning each individual patient’s health
condition, diagnosis, and treatment that are used by doctors, nurses and other
healthcare providers.  Such data may include laboratory test results,
transcribed reports of radiological or imaging procedures, digital diagnostic
images, and other clinical and diagnostic data.  The Company’s
products are deployed to provide automation of clinical information and digital
diagnostic images that facilitates the operation of clinical departments and
allows the rapid recording and processing of information that can be
communicated, documented, and delivered to healthcare providers.





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





On
November 22, 2005, the Company completed the merger of
Xymed.com, Inc., a Delaware corporation and wholly owned subsidiary of
ASPYRA, with and into StorCOMM, Inc. (“StorCOMM”), a Delaware corporation,
pursuant to the terms of the Agreement and 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 private placement whereby the Company issued 1,500,000 Common Shares
and warrants to purchase 300,000 Common Shares pursuant to a Common Stock and
Warrant Purchase Agreement.





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





Principles
of Consolidation





The
consolidated financial statements include the accounts of ASPYRA and its
subsidiaries after elimination of all intercompany accounts and
transactions.





Cash
and Cash Equivalents





The
Company considers all liquid assets with an initial maturity of three months or
less to be cash equivalents.





Receivables
and Concentration of Credit Risk





Receivables
potentially expose the Company to concentrations of credit risk. The Company
provides credit to a large number of hospitals, clinics, reference laboratories
and other healthcare institutions in various geographical areas.  The
Company performs ongoing credit evaluations and maintains a general security
interest in the item sold until full payment is received.








44





The
Company maintains the majority of its cash and cash equivalents in a number of
commercial bank accounts.  Accounts at these banks are guaranteed by
the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000 at each
bank.  From time to time, deposits may exceed FDIC coverage
limits.





Inventories





Inventories
consist primarily of computer hardware stated at the lower of cost or market
(net realizable value).  Cost is determined using the first-in,
first-out method. Supplies are charged to expense as incurred.





The
Company also maintains an inventory pool of component parts to service systems
previously sold, which is classified as non-current in the accompanying
consolidated balance sheets.  Such inventory is carried at the
lower of cost or market and is charged to cost of sales based on
usage.  Allowances are made for quantities on hand in excess of
estimated future usage.  At December 31, 2008 and 2007 and
the inventory allowance was $136,989 and $166,781, respectively.





Property
and Equipment





Property,
equipment, and leasehold improvements are stated at cost less accumulated
depreciation.  Depreciation of machinery and equipment, furniture and
fixtures, and data processing equipment is computed for financial reporting
purposes using the straight-line method over the estimated useful life of the
related asset, ranging from three to five years.  Amortization of
leasehold improvements is computed using the straight-line method over the
lesser of the estimated useful life or the lease term.  Accelerated
depreciation methods are used for income tax reporting purposes.  The
Company periodically reviews such assets for possible impairments and expected
losses, if any, are recorded currently.  Expenditures for maintenance
and repairs are expensed as incurred.





Capitalized
Software Costs





In
accordance with SFAS No. 86, “Accounting for the Costs of Computer Software
to be Sold, Leased or Otherwise Marketed”‘ software costs incurred internally in
creating computer software products are expensed until technological feasibility
has been established upon completion of a detailed program
design.  Thereafter, all software development costs are capitalized
until the point that the product is ready for sale and subsequently reported at
the lower of unamortized cost or net realizable value.  The Company
considers annual amortization of capitalized software costs based on the ratio
of current year revenues by product to the product’s total estimated revenues
method, subject to an annual minimum based on straight-line amortization over
the product’s estimated economic useful life, not to exceed five
years.  The Company reviews capitalized software costs for impairment
on an annual basis.  To the extent that the carrying amount exceeds
the estimated net realizable value of the capitalized software cost, an
impairment charge is recorded.





During
the years ended December 31, 2008, and 2007, the Company capitalized
$530,313 and $825,412, respectively of software development
costs.  Amortization expense of capitalized software development
costs, included in cost of sales, for the years ended December 31, 2008 and
2007 amounted to $518,219 and $473,486, respectively.





Revenue
Recognition





System
Sales





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








45





As a
result of the above provisions, the Company recorded deferred revenue on system
sales of $521,520 and $431,746 at December 31, 2008 and 2007,
respectively.





Service
Revenue





Service
revenues are recognized ratably over the contractual period (usually one year)
or as the services are provided.  These services are not essential to
the functionality of any other elements and are separately stated.  At
December 31, 2008 and 2007, the Company had deferred service revenues of
$1,914,979 and $1,724,650, respectively.





Deferred
Revenue and Income





Deferred
revenue on system sales and deferred service contract income represent cash
received in advance or accounts receivable from system and service sales of
which the above criteria have not been met for the current reporting of
income.





Stock
Based Compensation





On
January 1, 2006, we adopted Statement of Financial Accounting Standards
(SFAS) No. 123 (Revised 2004), “Share−Based Payment,” (SFAS 123R), which
requires the measurement and recognition of compensation expense for all
share−based payment awards made to employees and directors based on estimated
fair values at the date of grant using an option−pricing model. SFAS 123R
replaces SFAS 123, “Accounting for Stock−Based Compensation” (SFAS No. 123)
for awards granted to employees and directors and supersedes Accounting
Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”
(APB 25).  Under the provisions of SFAS 123R, share based compensation
expense is recognized over the employee’s requisite service period (generally
the vesting period of the equity grant) using the accelerated method, and is
reduced for estimated forfeitures. SFAS 123R requires forfeitures to be
estimated at the time of grant and revised, if necessary, in subsequent periods
if actual forfeitures differ from those estimates.




Share−based
compensation expense recognized under SFAS 123R for employees and directors for
2008 and 2007 was $435,711, and $228,761, respectively, which impacted
our basic and diluted loss per share by $0.04 and $0.02,
respectively.





The fair
value of option grants is estimated on the date of grants utilizing the
Black-Scholes option pricing with the following weighted average assumptions for
grants in 2008 and 2007: expected life of options ranging from 3 to 5 years;
expected volatility ranging from 72% to 81%; no dividends; and risk-free
interest rate ranging 2.5% to 4.3%.  The weighted average fair value
on the date of grants for options granted during the years ended
December 31, 2008 and 2007 was $0.50 and $1.04, respectively.





Earnings
Per Share





The
Company computes earnings (loss) per common share under Statement of Financial
Accounting Standards No. 128, “Earnings per Share” (SFAS No. 128),
which requires presentation of Basic and Diluted earnings (loss) per
share.  Basic earnings (loss) per share includes no dilution and is
computed by dividing income (loss) available to common shareholders by the
weighted average number of common shares outstanding for the period. Diluted
earnings (loss) per share reflects the potential dilution of securities that
could share in the earnings of an entity, such as stock options, warrants or
convertible debentures, unless antidilutive (see Note 10).




Income
Taxes
 
 The
Company accounts for income taxes in accordance with the Statement of Financial
Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes. SFAS
No. 109 requires a Company to use the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of “temporary differences”
by applying enacted statutory tax rates applicable to future years to
differences between the financial statement carrying amounts and the tax bases
of existing assets and liabilities. Under SFAS No. 109, the effect on
deferred income taxes of a change in tax rates is recognized in income in the
period that includes the enactment date.
 
 Foreign
Currency Translation
 
 Assets
and liabilities of the foreign subsidiary with functional currency other than
the U.S. dollar are translated into U.S. dollars using the exchange rate in
effect at the balance sheet date. Results of their operations are translated
using the average exchange rates during the period. The resulting foreign
currency translation adjustment is included in stockholders’ equity as a
component of accumulated other comprehensive loss.


46




Accounting
Estimates





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





Goodwill
and Other Intangible Assets





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




In
accordance with SFAS 142, the Company evaluates goodwill and intangible assets
with indefinite lives for impairment at the reporting unit level during the
fourth quarter of each year and on an interim date if events occur or
circumstances change that would more likely than not reduce the fair value below
its carrying amount.
  Goodwill
impairment is determined using a two-step process. The first step of the
goodwill impairment analysis is to identify a potential impairment by comparing
the book values of our reporting unit to the estimated fair values at the
valuation date. The estimate of fair value of our reporting unit is computed
using the present value of estimated future cash flows. This analysis utilizes a
multi-year forecast of estimated cash flows and a terminal value at the end of
the cash flow period. The forecast period assumptions consist of internal
projections that are based on our budget and long-range strategic plan. The
discount rate used at the valuation date is the Company’s weighted-average cost
of capital which reflects the overall level of inherent risk of the reporting
unit and the rate of return an outside investor would expect to
earn.
  If the
fair value of our reporting unit exceeds its book value, goodwill of the
reporting unit is not deemed impaired and the second step of the impairment test
is not required to be completed. If the book value of a reporting unit exceeds
its fair value, the second step of the goodwill impairment analysis is required
to be performed to determine the amount of impairment loss, if any. The second
step of the goodwill impairment test compares the implied fair value of the
reporting unit’s goodwill with the carrying amount of that goodwill. The implied
fair value of goodwill is determined by allocating the estimated fair value of
the reporting unit to the estimated fair value of our existing tangible assets
and liabilities as well as existing identified intangible assets and previously
unrecognized intangible assets in a manner similar to a purchase price
allocation. The unallocated portion of the estimated fair value of the reporting
unit is the implied fair value of goodwill. If the carrying amount of the
reporting unit’s goodwill exceeds the implied fair value of that goodwill, an
impairment loss is recognized in an amount equal to that excess.
  As
discussed in Note 5 to the consolidated financial statements, the Company
performed its annual impairment analysis as of October 1, 2008. The
impairment analysis indicated that the goodwill associated the Company’s
reporting unit was impaired. Therefore, the Company recognized a $576,434
goodwill impairment charge during the fourth quarter of 2008. The assumptions
included in the impairment analysis require judgment; and changes to these
inputs could materially impact the results of the calculation. Other than
management’s internal projections of future earnings, the primary assumptions
used in the impairment analysis was the weighted-average cost of capital,
long-term growth rates and the control premium.
  Although
our cash flow forecasts are based on assumptions that are considered reasonable
by management and consistent with the plans and estimates we are using to manage
the underlying businesses, there is significant judgment in determining the
expected future cash flows attributable to these businesses. In addition, as
discussed above, the determination of fair value requires that we make certain
judgments, estimates and assumptions. While the Company believes the fair values
we have estimated are reasonable, actual performance in the short-term and
long-term could be materially different from our forecasts, which could impact
future estimates of fair value of our reporting unit and may result in
additional impairments of goodwill.





Capital
Leases





Assets
held under capital leases are  included as computer equipment, and are
recorded at the lower of the net present value of the minimum lease payments or
the fair value of the leased asset at the inception of the lease. Depreciation
expense is computed using the straight−line method over the estimated useful
lives of the assets. All lease agreements contain bargain purchase options at
termination of the lease.







47




Fair
Value of Financial Instruments





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





Reclassifications





Certain
amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation.





Recent
Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 141 (Revised) (“SFAS
141(R)”), Business Combinations. The provisions of this statement are effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15,
2008. Earlier application is not permitted. SFAS 141(R) replaces SFAS 141
and provides new guidance for valuing assets and liabilities acquired in a
business combination. The Company will adopt SFAS 141(R) in calendar year
2009, for all acquisitions after January 1, 2009.




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. SFAS 157 is effective for financial statements issued for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB staff issued a staff position that delayed the effective date of SFAS
No. 157 for all non-financial assets and liabilities except for those
recognized or disclosed at fair value annually. The FASB also issued
FAS-157-1, “application of FASB Statement No. 157 to FASB Statement
No. 13 and other Accounting Pronouncements that address Fair Value
Measurements for Purposes of Lease Classifications or Measurements under SFAS
Statement No. 13”. The Company adopted the provision of SFAS 157, as
applicable, beginning in fiscal year 2008. The adoption of SFAS No. 157 did
not have a material effect on our operating results or financial
position.





In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option
for Financial Assets and Financial Liabilities”, which provides companies with
an option to report selected financial assets and liabilities at fair value. The
objective of SFAS No. 159 is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS No. 159 also establishes
presentation and disclosure requirements designed to facilitate comparisons
between companies that choose different measurement attributes for similar types
of assets and liabilities. SFAS No. 159 is effective for the Company as of
January 1, 2008.  The adoption of SFAS No. 159 did not have
a material effect on our operating results or financial position.





In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest
in Consolidated Financial Statements” (“SFAS 160”). SFAS 160 establishes new
accounting and reporting standards for the noncontrolling interest in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, this
statement requires the recognition of a noncontrolling interest (minority
interest) as equity in the consolidated financial statements and separate from
the parent’s equity. The amount of net income attributable to the noncontrolling
interest will be included in consolidated net income on the face of the income
statement. SFAS 160 clarifies that changes in a parent’s ownership interest in a
subsidiary that do not result in deconsolidation are equity transactions if the
parent retains its controlling financial interest. In addition, this statement
requires that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss will be measured using the fair value of
the noncontrolling equity investment on the deconsolidation date. SFAS 160 also
includes expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interest. SFAS 160 is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. Earlier adoption is prohibited. The adoption of SFAS 160
is not expected to have a material impact on the Company’s consolidated
financial position, cash flows and results of operations.








48





In
March 2008, the FASB issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities which amends SFAS No. 133. The statement
is intended to improve transparency in financial reporting by requiring enhanced
disclosures of an entity’s derivative instruments and hedging activities and
their effects on the entity’s financial position, financial performance, and
cash flows. SFAS 161 is effective prospectively for financial statements issued
for fiscal years and interim periods beginning after November 15, 2008. The
adoption of SFAS No. 161 is not expected to have a material impact on our
consolidated financial statements.





In
May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally
Accepted Accounting Principles” (SFAS 162). This statement identifies the
sources of accounting principles and the framework for selecting the principles
to be used in the preparation of financial statements of nongovernmental
entities that are presented in conformity with generally accepted accounting
principles (GAAP) in the United States. This Statement was effective
November 15, 2008. The adoption of SFAS 162 did not have a material impact on
the consolidated financial statements.





NOTE
2 – LIQUIDITY




As of
December 31, 2008, the Company’s working deficit of $3,874,415 compared to
a working deficit of $4,007,912, as of December 31, 2007. At
December 31, 2008, the Company’s credit facilities with its bank consisted
of a revolving line of credit of $1,300,000, of which $744,965 was outstanding.
 .  The revolving line of credit is secured by the Company’s accounts
receivable and inventory. Advances are on a formula based on eligible accounts
receivable and inventory balances.  The revolving line of credit is subject
to certain covenants.  As of December 31, 2008, the Company was not in
compliance with all covenants but had obtained a waiver from the bank.  On
March 31, 2009, the Company executed agreements renewing its revolving line
of credit in the aggregate amount of $1,300,000.  The renewed revolving
line of credit is subject to certain covenants, which includes revised financial
covenants and matures on May 27, 2010.  Management is considering
additional financing to accelerate its business development plans which in turn
may improve its working capital position.  At December 31, 2008,
the Company had $348,285 outstanding on its capital leases of which $150,237 is
due in the next twelve months.





The
Company’s primary source of working capital has been generated from private
placements of securities and from borrowings.  The Company has been
experiencing a history of losses due to the integration of its businesses and
the significant investment in new products since the quarter ended
March 31, 2005 and negative cash flows from operations since the quarter
ended December 31, 2005.  An unanticipated decline in sales,
delays in implementations where payments are tied to delivery and/or performance
of services or cancellations of contracts have had, and in the future could have
a negative effect on cash flow from operations and could in turn create
short-term liquidity problems.





On
March 26, 2008 the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with various accredited
investors.  Pursuant to the Purchase Agreement, the investors
purchased secured promissory notes from the Company in the principal amount of
$2,775,000. The notes are convertible up to 5,427,273 shares of the Company’s
Common Stock and have a maturity date of March 26, 2010 and bear interest
at the rate of 8% per annum compounded on each July 15 and
January 15.  In April 2009, the note holders signed a waiver
extending the maturity date of the convertible notes to August 26, 2010.
Pursuant to the terms of the Purchase Agreement, the Company issued three
year warrants to purchase up to 5,496,646 of shares of Common
Stock.  In February 2009, the Company and purchasers signed waivers
extending the term of the warrants to March 26, 2012.  As a result,
assuming the conversion of all promissory notes and exercise of all warrants, up
to 10,923,919 shares of the Company’s Common Stock may be
issued.  Such an issuance if it were to occur, would be highly
dilutive of existing shareholders and may, under certain conditions effect a
change of control of the Company.








49





We
believe that our current cash and cash equivalents, and cash flow from
operations, will be sufficient to meet our current anticipated cash needs,
including for working capital purposes, capital expenditures and various
contractual obligations, for at least the next 12 months.  If the
Company is unable to generate cash from operations or meet revenue targets or
obtain new cash inflows from financing or equity offerings, the Company would
need to take action and reduce costs in order to operate for the next 12
months.  This requires the Company to plan for potential courses of
action to reduce costs and look for new sources of financings and capital
infusion.  The Company has a detailed strategic plan which outlines
short and long term plans to improve its operations.  If sales are not
as expected, the Company will make certain cost cutting measures beginning June
30, 2009.  We may, also, require additional cash resources 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 satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit facility with a
lender.  The sale of additional convertible debt securities or
additional equity securities could result in additional dilution to our
stockholders.  The incurrence of additional indebtedness would result
in increased debt service obligations and could result in additional operating
and financial covenants that would restrict our operations.  In
addition, there can be no assurance that any 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 other businesses, applications or technologies, we may from
time to time, evaluate acquisitions of other businesses, applications or
technologies.





NOTE
3 - RECEIVABLES





Receivables
are summarized as follows:





December 31,
                
                
                December 31,2008
                
                
                2007Billed
      receivables
                
                $
                258,236
                
                
                $
                854,901Unbilled
      receivables
                
                
                586,373
                
                
                
                214,143Allowance
      for doubtful accounts
                
                
                (37,613
                )
                
                
                (147,832
                )$
                806,996
                
                
                $
                921,212





Unbilled
receivables are billed when milestone events are reached, as agreed upon and
established in sales contracts.





Allowance
for doubtful accounts is summarized as follows:





December 31,
                
                
                December 31,2008
                
                
                2007Beginning
      of year balance
                
                $
                (147,832
                )
                
                $
                (82,840
                )Charged
      to costs and expenses
                
                
                (24,739
                )
                
                
                (65,993
                )Write
      offs
                
                
                134,958
                
                
                
                1,001End
      of year balance
                
                $
                (37,613
                )
                
                $
                (147,832
                )









50






NOTE
4 - PROPERTY AND EQUIPMENT





Property
and equipment are summarized as follows:





December 31,
                
                
                December 31,2008
                
                
                2007Machinery
      and equipment
                
                $
                264,549
                
                
                $
                264,001Furniture
      and fixtures
                
                
                476,650
                
                
                
                476,650Data
      processing equipment
                
                
                2,315,046
                
                
                
                2,511,366Leasehold
      improvements
                
                
                106,330
                
                
                
                106,3303,162,575
                
                
                
                3,358,347Accumulated
      depreciation
                
                
                (2,664,180
                )
                
                
                (2,518,458
                )$
                498,395
                
                
                $
                839,889





Computer
equipment under capital lease of $751,182 are included in data processing
equipment.  Depreciation and amortization expense for property and
equipment for the years ended December 31, 2008 and 2007 was $350,487 and
$428,859.





NOTE
5 — GOODWILL AND INTANGIBLE ASSETS




In
accordance with SFAS 142, the Company evaluates its goodwill and other
intangible assets for impairment during the fourth quarter of each year and on
an interim date should factors or indicators become apparent that would require
an impairment test.
  The
Company performed their annual impairment test as of October 1, 2008. The
estimated fair value of reporting unit included a combination of factors,
including the current economic environment, our operating results, and a decline
in our market capitalization. As a result of these factors and the related risks
associated with our business, the fair value of our reporting unit was
negatively impacted. The estimated fair value of our reporting unit was less
than its related book value and the Company determined that its goodwill was
impaired. Accordingly, in accordance with SFAS 142 the Company completed step
two of the goodwill impairment on its reporting unit, which resulted in an
impairment charge totaling $576,434 in the fourth quarter of 2008.


Intangible
assets are summarized as follows:





December 31,
                
                
                December 31,2008
                
                
                2007Acquired
      technology
                
                $
                3,080,000
                
                
                $
                3,080,000Customer
      relationships
                
                
                2,000,000
                
                
                
                2,000,000Channel
      partners
                
                
                110,000
                
                
                
                110,0005,190,000
                
                
                
                5,190,000Accumulated
      amortization
                
                
                (2,117,510
                )
                
                
                (1,429,018
                )Intangible
      assets, net
                
                $
                3,072,490
                
                
                $
                3,760,982Goodwill
                
                $
                6,692,000
                
                
                $
                7,268,434





Amortization
expense for intangible assets for the year ended December 31, 2008 and 2007
was $688,492 and $688,500 respectively. Under SFAS 142, goodwill is not
amortized but tested for impairment on an annual basis, or whenever events or
changes in circumstances indicate that the carrying value may not be
recoverable.




Annual
estimated amortization expense for each of the five succeeding fiscal years and
thereafter is as follows:





Fiscal year ending December 31,2009
                  
                  $
                  685,6352010
                  
                  661,0002011
                  
                  539,7442012
                  
                  133,3332013
                  
                  133,333Thereafter
                  
                  919,445Total
                  
                  $
                  3,072,490











51






NOTE
6 - DEBT





Long-term
debt at December 31, 2008 and 2007 consists of the
following:





December 31,
                
                
                December 31,2008
                
                
                2007Line
      of credit in the aggregate amount of $1,300,000 with a bank with interest
      at rate of prime plus 3.00% (prime at 12/31/08 was 3.25%).
                  The
      line matures on May 27, 2010
                
                $
                744,965
                
                
                $
                1,026,477Unsecured
      note acquired in conjunction with StorCOMM merger with interest rate of
      8.00%. This note is due upon demand
                
                
                50,000
                
                
                
                174,128Convertible
      notes issued in private placement transaction on March 26, 2008 at
      interest rate of 8.00% net of discount of $525,000.  The notes
      mature on August 26, 2010
                
                
                2,460,000
                
                
                
                —Total
                
                
                3,254,965
                
                
                
                1,200,605Less:
      current portion
                
                
                794,965
                
                
                
                1,200,605Long-term
      portion
                
                $
                2,460,000
                
                
                $
                —





The
carrying amounts of the other debt listed above approximate its fair value based
on its terms and short maturities.




The
Company is subject to certain covenants, including financial covenants, under
the revolving line of credit.  As of December 31, 2008, the
Company was not in compliance with all covenants but had obtained a waiver from
the bank.  On March 31, 2009, the Company executed agreements to
renew its revolving line of credit in the aggregate amount of
$1,300,000.  The revolving line of credit is secured by the Company’s
accounts receivable and inventory and matures on May 27,
2010.  The revolving line of credit is subject to certain covenants,
including revised financial covenants.  Advances under the revolving
line of credit are on a formula based on eligible accounts receivable and
inventory balances.




Future
minimum debt payments, by year and in the aggregate, as of December 31, 2008 are
as follows:





Fiscal year ending December 31,2009
                      
                      $
                      50,0002010
                      
                      3,204,965Total
                      
                      $
                      3,254,965







NOTE
7 — COMMITMENTS AND CONTINGENCIES





Operating
Leases





The
Company leases office and warehouse space in Calabasas, California,
Jacksonville, Florida, and the United Kingdom under non-cancelable operating
leases expiring in October, 2012, January 2012, and July 2010,
respectively.





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





OperatingFiscal year ending December 31,
                    
                    Leases2009
                    
                    $
                    533,5122010
                    
                    534,0982011
                    
                    529,4492012
                    
                    326,327Total
      minimum lease payments
                    
                    $
                    1,923,386





Rent
expense for the years ended December 31, 2008 and 2007 was approximately
$521,000 and $482,000, respectively.






52







Capital
Leases





The
Company entered into a master agreement to lease equipment as of
October 26, 2005. The equipment is being used for the Company’s
infrastructure and has facilitated the integration of the three locations. The
cost of the computer equipment under capital leases is included in the
consolidated balance sheet in property and equipment and was $751,182 at
December 31, 2008.  Accumulated amortization of the leased
equipment at December 31, 2008 was $402,936.  Amortization of
assets under capital leases is included in depreciation expense.  The
equipment lease provides for an option to purchase at the end of the lease
term.





The
future minimum lease payments required under the capital leases and the present
value of the net minimum lease payments, as of December 31, 2008 are as
follows:





CapitalFiscal year ending December 31,
                
                Leases2009
                
                $
                190,2312010
                
                174,9672011
                
                56,680Total
      minimum lease payments
                
                421,878Less:
      Amount representing maintenance
                
                15,264Less:
      Amount representing interest
                
                58,329Total
      capital lease obligations
                
                348,285Less:
      current maturities of capital lease obligations
                
                150,237Long
      term capital lease obligations
                
                $
                198,048





Employee
Benefit Plan





The
Company maintains a 401(k) profit sharing plan that allows eligible
employees to defer up to 100% of their earnings, on a pre-tax basis, subject to
dollar limitations of the Internal Revenue Code. The Company provides a
discretionary match on eligible employee contributions, which is determined on
an annual basis. The amount of matching contribution for 2008 and 2007 was 25%
of the eligible employee’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 year of employment. For the years ended December 31, 2008 and
2007 contributions were $36,362 and $50,908, respectively.





Guarantees
and Indemnifications





In
accordance with the bylaws of the Company, officers and directors are
indemnified for certain events or occurrences arising as a result of the officer
or director’s serving in such capacity. The term of the indemnification period
is for the lifetime of the officer or director. The maximum potential amount of
future payments the Company could be required to make under the indemnification
provisions of its bylaws is unlimited. However, the Company has a director and
officer liability insurance policy that reduces its exposure and enables it to
recover a portion of any future amounts paid. As a result of its insurance
policy coverage, the Company believes the estimated fair value of the
indemnification provisions of its bylaws is minimal and therefore, the Company
has not recorded any related liabilities.





The
Company enters into indemnification provisions under agreements with various
parties in the normal course of business, typically with customers and
landlords. Under these provisions, the Company generally indemnifies and holds
harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Company’s activities or, in some cases, as
a result of the indemnified party’s activities under the agreement. These
indemnification provisions often include indemnifications relating to
representations made by the Company with regard to intellectual property rights.
These indemnification provisions generally survive termination of the underlying
agreement. The maximum potential amount of future payments the Company could be
required to make under these indemnification provisions is unlimited. The
Company maintains general liability, errors and omissions, and professional
liability insurance in order to mitigate such risks. The Company has not
incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has not recorded
any related liabilities.








53





Warranties
and Product Liability





The
Company warrants that its products conform to their respective functional
specifications. The Company’s data acquisition products and components are
warranted against faulty materials and workmanship for 90 days. The Company also
warrants its application software incorporated in its Laboratory, Radiology, and
Pharmacy Information Systems for 90 days and its application software
incorporated in its PACS systems for 1 year. However, such warranties are
extended throughout the term of extended service agreements that customers
may elect to enter into with the Company. Direct costs associated with the
initial warranties have been insignificant. The computers that the Company
currently sells as part of its Clinical Information and Diagnostic Systems
are subject to the warranties of their manufacturers. The manufacturers
generally warrant their products against faulty material and workmanship for one
to three years. The Company passes through the manufacturers warranties to the
end users and in most cases contracts with the manufacturers are to provide
onsite warranty services through the manufacturers service network.





The
Company currently carries an aggregate of $5,000,000 in product liability
insurance. Management believes that this amount of insurance is adequate to
cover its risks. To further mitigate its risks, the Company’s standard hardware
sales/software license agreement as well as its service agreement expressly
limits its liabilities and the warranties of its products and services in
accordance with accepted provisions of the Uniform Commercial code as
adopted in most states.





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 is to encourage ownership in the Company by key personnel
whose long-term service is considered essential to the Company’s continued
progress and, thereby, encourage recipients to act in the shareholders’ interest
and share in the Company’s success. Under the Plan, the Company may award
to eligible participants the following kinds of equity-based compensation,
collectively referred to as “Awards”: stock options— both incentive stock
options (ISO) and non-statutory stock options; stock awards — both restricted
stock awards and restricted stock unit awards; stock appreciation rights; and
cash awards. During the year ended December 31, 2008, the Company’s board of
directors approved an amendment to the 2005 Equity Incentive Plan increasing the
number of available shares.  The increase has not yet been ratified by
the Company’s shareholders, accordingly any grant made from shares included in
the increase are subject to shareholder approval.  The amended plan
has up to 3,040,875 shares of common stock may be available under the Plan.
The maximum aggregate number of shares that may be issued under the amended
Plan through the exercise of ISOs is also 3,040,875. The exercise price cannot
be less than 100% of the fair market value of common stock on the date the
option is granted.  At December 31, 2008, the 2005 plan has
1,035,000 options outstanding and 466,664 options exercisable. The plan expires
in 2015.








54





A summary
of option activities under the stock option plans through December 31, 2008
and 2007 is presented as follows:





WeightedAverageWeighted-
                                    
                                    Remaining
                                    
                                    AggregateAverage
                                    
                                    Contractual
                                    
                                    IntrinsicStock Options
                                    
                                    Shares
                                    
                                    Exercise Price
                                    
                                    Term
                                    
                                    ValueOutstanding
      at January 1, 2007
                                    
                                    631,898
                                    
                                    $
                                    
                                    2.20
                                    
                                    30.7
      mos.
                                    
                                    $
                                    62,175Granted
                                    
                                    310,000
                                    
                                    $
                                    
                                    1.83Exercised
                                    
                                    (4,000
                                    )
                                    $
                                    
                                    0.72Canceled
      or Expired
                                    
                                    (154,883
                                    )
                                    $
                                    
                                    2.54Outstanding
      at December 31, 2007
                                    
                                    783,015
                                    
                                    $
                                    
                                    2.00
                                    
                                    30.8
      mos.
                                    
                                    $
                                    22,088Granted
                                    
                                    565,000
                                    
                                    $
                                    
                                    0.80Exercised
                                    
                                    —
                                    
                                    $
                                    
                                    —Canceled
      or Expired
                                    
                                    (313,015
                                    )
                                    $
                                    
                                    2.20Outstanding
      at December 31, 2008
                                    
                                    1,035,000
                                    
                                    $
                                    
                                    1.28
                                    
                                    41.4
      mos.
                                    
                                    $
                                    —Exercisable
      at December 31, 2008
                                    
                                    466,664
                                    
                                    $
                                    
                                    1.39
                                    
                                    38.1
      mos.
                                    
                                    $
                                    —





The
aggregate intrinsic value is calculated as the difference between the exercise
price of the underlying awards and the quoted price of our common stock for the
121,250 options that were in-the-money at December 31,
2007.  As of December 31, 2008, there were no options that were
in-the-money.  As of December 31, 2008, there was $350,537 of
total unrecognized compensation cost related to unvested share-based
compensation arrangements granted under our stock awards plans. That cost is
expected to be recognized over a weighted-average period of two and a half
years.  The share-based compensation will be amortized based on the
accelerated method over the vesting period.  During the year ended
December 31, 2008, the Company granted 565,000 options at a weighted
average fair value of $0.50 per share.





A summary
of the status of the Company’s non-vested stock options during the year ended
December 31, 2008 is presented below:





Non-vested Options
                
                Shares
                
                
                Weighted-
                  Average
                  Grant-Date
                  Fair ValueNon-vested
      at January 1, 2008
                
                
                425,833
                
                
                $
                1.87Granted
                
                
                565,000
                
                
                
                0.80Vested
                
                
                (374,997
                )
                
                
                1.30Forfeited
      or expired
                
                
                (47,500
                )
                
                
                1.75Non-vested
      at December 31, 2008
                
                
                568,336
                
                
                $
                1.19








55








Information
relating to stock options and warrants at December 31, 2008 summarized by
exercise price is as follows:





Outstanding
                                                                                    
                                                                                    ExercisableWeighted Average
                                                                                    
                                                                                    Weighted AverageExercise Price
                                                                                      Per Share
                                                                                    
                                                                                    Shares
                                                                                    
                                                                                    Life
                                                                                      (Months)
                                                                                    
                                                                                    Exercise
                                                                                      Price
                                                                                    
                                                                                    Shares
                                                                                    
                                                                                    Exercise
                                                                                      PriceIncentive
      Stock Option Plan:$
                                                                                    1.51
                                                                                    
                                                                                    10,000
                                                                                    
                                                                                    2.0
                                                                                    
                                                                                    $
                                                                                    1.51
                                                                                    
                                                                                    10,000
                                                                                    
                                                                                    $
                                                                                    1.51$
                                                                                    1.66
                                                                                    
                                                                                    10,000
                                                                                    
                                                                                    2.0
                                                                                    
                                                                                    $
                                                                                    1.66
                                                                                    
                                                                                    10,000
                                                                                    
                                                                                    $
                                                                                    1.66$
                                                                                    1.76
                                                                                    
                                                                                    60,000
                                                                                    
                                                                                    31.5
                                                                                    
                                                                                    $
                                                                                    1.76
                                                                                    
                                                                                    30,000
                                                                                    
                                                                                    $
                                                                                    1.76$
                                                                                    0.36
                                                                                    
                                                                                    125,000
                                                                                    
                                                                                    51.8
                                                                                    
                                                                                    $
                                                                                    0.36
                                                                                    
                                                                                    —
                                                                                    
                                                                                    $
                                                                                    0.36$
                                                                                    0.70
                                                                                    
                                                                                    150,000
                                                                                    
                                                                                    53.9
                                                                                    
                                                                                    $
                                                                                    0.70
                                                                                    
                                                                                    —
                                                                                    
                                                                                    $
                                                                                    0.70$
                                                                                    0.56
                                                                                    
                                                                                    15,000
                                                                                    
                                                                                    54.7
                                                                                    
                                                                                    $
                                                                                    0.56
                                                                                    
                                                                                    —
                                                                                    
                                                                                    $
                                                                                    0.56370,000
                                                                                    
                                                                                    46.8
                                                                                    
                                                                                    $
                                                                                    0.80
                                                                                    
                                                                                    50,000
                                                                                    
                                                                                    $
                                                                                    1.69Non-Qualified
      Stock Option Plan:$
                                                                                    1.51
                                                                                    
                                                                                    30,000
                                                                                    
                                                                                    2.0
                                                                                    
                                                                                    $
                                                                                    1.51
                                                                                    
                                                                                    30,000
                                                                                    
                                                                                    $
                                                                                    1.51$
                                                                                    2.48
                                                                                    
                                                                                    50,000
                                                                                    
                                                                                    30.0
                                                                                    
                                                                                    $
                                                                                    2.48
                                                                                    
                                                                                    25,000
                                                                                    
                                                                                    $
                                                                                    2.48$
                                                                                    1.82
                                                                                    
                                                                                    300,000
                                                                                    
                                                                                    32.0
                                                                                    
                                                                                    $
                                                                                    1.82
                                                                                    
                                                                                    133,331
                                                                                    
                                                                                    $
                                                                                    1.82$
                                                                                    2.25
                                                                                    
                                                                                    10,000
                                                                                    
                                                                                    32.5
                                                                                    
                                                                                    $
                                                                                    2.25
                                                                                    
                                                                                    3,333
                                                                                    
                                                                                    $
                                                                                    2.25$
                                                                                    1.75
                                                                                    
                                                                                    50,000
                                                                                    
                                                                                    48.1
                                                                                    
                                                                                    $
                                                                                    1.75
                                                                                    
                                                                                    —
                                                                                    
                                                                                    $
                                                                                    1.75$
                                                                                    1.05
                                                                                    
                                                                                    112,500
                                                                                    
                                                                                    50.0
                                                                                    
                                                                                    $
                                                                                    1.05
                                                                                    
                                                                                    112,500
                                                                                    
                                                                                    $
                                                                                    1.05$
                                                                                    0.80
                                                                                    
                                                                                    112,500
                                                                                    
                                                                                    53.2
                                                                                    
                                                                                    $
                                                                                    0.80
                                                                                    
                                                                                    112,500
                                                                                    
                                                                                    $
                                                                                    0.80665,000
                                                                                    
                                                                                    38.3
                                                                                    
                                                                                    $
                                                                                    1.55
                                                                                    
                                                                                    416,664
                                                                                    
                                                                                    $
                                                                                    1.36Warrants:$
                                                                                    0.55
                                                                                    
                                                                                    5,496,646
                                                                                    
                                                                                    27.16
                                                                                    
                                                                                    $
                                                                                    0.55
                                                                                    
                                                                                    5,496,646
                                                                                    
                                                                                    $
                                                                                    0.55





The fair
value of option grants is estimated on the date of grants utilizing the
Black-Scholes option pricing with the following weighted average assumptions for
grants in 2008 and 2007: expected life of options ranging from 3 to 5 years;
expected volatility ranging from 72% to 81%; no dividends; and risk-free
interest rate ranging 2.5% to 4.3%.  The weighted average fair value
on the date of grants for options granted during the years ended
December 31, 2008 and 2007 was $0.50 and $1.04, respectively.





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





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








56





The
warrants were originally issued in November 2005 and May 2006 in
connection with two private placements of the Company’s securities, pursuant to
the terms of a Common Stock and Warrant Purchase Agreement dated as of
August 18, 2005 and a Common Stock and Warrant Purchase Agreement dated as
of May 4, 2006.  All remaining warrants originally issued in
these private placements were exercised as of August 31, 2007, and none
remain outstanding.





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





On March
26, 2008, pursuant to the terms of a private placement transaction, the Company
issued to the note holders three year warrants to purchase up to an additional
5,496,646 of shares of Common Stock.  In February 2009, the Company
and purchasers signed waivers extending the term of the warrants to March 26,
2012 (see Note 12).





NOTE
9 - INCOME TAX PROVISION (BENEFIT)





The
provision (benefit) for income taxes for the years ended December 31, 2008
and 2007 consists of the following:





Year Ended December 312008
                
                
                2007Current
      taxes:Federal
                
                $
                —
                
                
                $
                —State
                
                
                8,599
                
                
                
                2,1178,599
                
                
                
                2,117DeferredFederal
                
                
                (1,112,400
                )
                
                
                (2,219,200
                )State
                
                
                —
                
                
                
                —(1,112,400
                )
                
                
                (2,219,200
                )Change
      in valuation allowance
                
                
                1,112,400
                
                
                
                2,219,200Income
      tax provision
                
                $
                8,559
                
                
                $
                2,117





For the
years ended December 31, 2008 and 2007, net loss consists of the
following:





Year Ended December 312008
                
                
                2007Net
      loss:Domestic
                
                
                5,167,865
                
                
                
                4,765,821Foreign
                
                
                (22,035
                )
                
                
                240,211Total
                
                
                5,189,900
                
                
                
                5,006,032






57






Income
tax provision differs from the amount obtained by applying the statutory federal
income tax rate to income before income tax expense for the years ended
December 31, 2008 and 2007 as follows:





Year Ended December 31,2008
                
                
                2007Computed
      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
                
                
                24.1
                
                
                
                38.0Permanent
      differences and other
                
                
                10.1
                
                
                
                (3.9
                )0.2
                %
                
                
                0.1
                %





Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Significant components of the
Company’s deferred tax assets and liabilities as of December 31, 2008 and
2007 are approximately as follows:





December 31,2008
                
                
                2007Deferred
      tax assets:Allowance
      for doubtful accounts
                
                $
                15,000
                
                
                $
                59,100Inventory
      uniform capitalization and reserve
                
                
                57,700
                
                
                
                72,000Accrued
      vacation
                
                
                134,500
                
                
                
                103,000Accrued
      bonus
                
                
                4,200
                
                
                
                —Deferred
      revenue
                
                
                395,400
                
                
                
                341,900Depreciation
      and amortization
                
                
                10,900
                
                
                
                —Unexercised
      vested stock options
                
                
                199,900
                
                
                
                84,300Net
      operating loss carryforwards
                
                
                8,074,100
                
                
                
                6,822,100Tax
      credits
                
                
                1,488,200
                
                
                
                1,323,100Other
                
                
                20,900
                
                
                
                72,300Gross
      deferred tax assets
                
                
                10,400,800
                
                
                
                8,877,800Deferred
      tax liability:Deferred
      tax liability on intangible assets
                
                
                (1,229,000
                )
                
                
                (1,504,400
                )Depreciation
      and amortization
                
                
                —
                
                
                
                (16,900
                )Capitalized
      software costs
                
                
                (1,140,500
                )
                
                
                (880,800
                )Gross
      deferred tax liability
                
                
                (2,369,500
                )
                
                
                (2,402,100
                )Valuation
      allowance
                
                
                (8,031,300
                )
                
                
                (6,475,700
                )Net
      deferred tax assets
                
                $
                —
                
                
                $
                —





Internal
Revenue Code Section 382 imposes limitations on the utilization of net
operating loss and tax credit carryovers pursuant to an ownership change as a
consequence of the merger with StorCOMM. The annual loss limitation amount is
$770,000.  Accordingly the Company has reduced the state and federal
net operating loss of approximately $21,600,000 and $23,600,000, respectively.
At December 31, 2008, the Company had state and federal net operating loss
carryforwards available to offset future taxable income of approximately
$17,900,000 and $20,000,000, which are net of Internal Revenue Code
Section 382 Limitations. These net operating loss carryforwards expire at
various dates through 2028, and general business tax credit carryforwards
available to offset future state and federal income tax payable of approximately
$552,000 and $936,000, respectively. While the Federal general business tax
credits expire at various dates through 2028, the state general business tax
credits can be carried forward indefinitely.








58





The
Company annually evaluates the realization of the net deferred tax asset, taking
into consideration prior earnings history, projected operating results and the
reversal of temporary tax differences. At December 31, 2008, the Company
evaluated the net deferred tax asset taking into consideration operating results
and determined that a valuation allowance of approximately $8,031,300 should be
maintained.





During
the year ended January 1, 2007, the Company adopted FIN 48 which clarifies the
accounting for income taxes by prescribing the minimum threshold a tax position
is required to meet before being recognized in the financial statements as well
as guidance on de-recognition, measurement, classification and disclosure of tax
positions. The adoption of FIN 48 by the Company did not have an effect on the
Company’s financial condition or results of operations and resulted in no
cumulative effect of accounting change being recorded as of January 1,
2007. The Company files income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. Due to the net operating loss, all the
tax years are open for tax examination. There are no current income tax
audits in any jurisdictions for open tax years and, as of December 31, 2008,
there have been no material changes to our FIN 48 position.





NOTE
10 — EARNINGS (LOSS) PER SHARE





Years EndedDecember 31,
                  2008
                
                
                December 31,
                  2007Basic
      weighted average shares outstanding
                
                
                12,437,150
                
                
                
                11,336,483Dilutive
      effect of stock options and warrants
                
                
                —
                
                
                
                —Diluted
      weighted average shares outstanding
                
                
                12,437,150
                
                
                
                11,336,483





At
December 31, 2008 and 2007, options and warrants to purchase 6,531,646 and
783,015 shares, respectively, were outstanding and could affect future periods,
but were not included in the computation of diluted loss per common share
because the effect would be antidilutive.





NOTE
11 — SEGMENT INFORMATION AND MAJOR CUSTOMERS





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





During
the fiscal year ended December 31, 2008, there were no customers, contracts
or programs that generated over 10% of the Company’s net sales.  The
Company had sales through a distribution arrangement with Merry X-Ray that
generated approximately $39,000 in aggregate sales or 2% of system
revenues.  The Company terminated its distribution arrangement with
Merry X-Ray effective January 2009.  The Company had no customers that
accounted for more than 10% of the Company’s sales during the years ended
December 31, 2007 other than through a distribution arrangement with Merry
X-Ray that generated approximately $336,000 in aggregate sales or 10% of total
revenues.









59






NOTE
12 — PRIVATE PLACEMENT





On
January 28, 2008, the Company entered into a Note Purchase Agreement with
two of the Company’s current stockholders, C. Ian Sym-Smith, who is also a
director, and TITAB, LLC.  Pursuant to the Purchase Agreement, the
purchasers each purchased a secured promissory note from the Company in the
principal amounts of $200,000 and $100,000, respectively.  The two
notes each have a maturity of six months from the date of issuance and bear
interest at the rate of LIBOR plus 2.5% per annum. These notes automatically
converted to the terms and conditions of the subsequent transaction completed on
March 26, 2008 discussed below.  On March 13, 2008, the
Company entered into a Note Purchase Agreement with one of the Company’s current
stockholders, J. Shawn Chalmers.  Pursuant to the Purchase Agreement
Mr. Chalmers purchased a secured promissory 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. Chalmers had the option and exercised the option to convert to the
terms and conditions of the subsequent transaction completed on March 26,
2008 discussed below.





On
March 26, 2008 the Company completed a private placement of promissory
notes and warrants pursuant to a Securities Purchase Agreement (the "Purchase
Agreement") with various accredited investors.  Pursuant to the
Purchase Agreement, the investors purchased secured promissory notes from the
Company in the principal amount of $2,775,000. The notes are convertible into
shares 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, and similar
transactions. The notes are convertible into up to 5,427,273 shares of the
Company’s Common Stock, have a maturity date of March 26, 2010 and bear
interest at the rate of 8% per annum compounded on each July 15 and
January 15.  In April 2009, the note holders signed a waiver
extending the maturity date of the convertible notes to August 26,
2010.  Pursuant to the terms of the Purchase Agreement, the Company
issued to the note holders three year warrants to purchase up to an additional
5,496,646 of shares of Common Stock. In February 2009, the Company and
purchasers signed waivers extending the term of the warrants to March 26,
2012.  Assuming the conversion of all promissory notes and exercise of
all warrants, up to 10,923,919 shares of the Company’s Common Stock may be
issued as a result of the private placement. Such an issuance, if it were to
occur, would be highly dilutive to existing shareholders and may, under certain
conditions, effect a change of control of the Company. The Company’s obligations
under the notes are secured by a security interest in substantially all of the
Company’s tangible and intangible assets, pursuant to the terms of a Security
Agreement dated March 26, 2008. In addition, the Company entered into a
note purchase agreement with Great American Investors (GAI) for the amount of
the transaction fees of $210,000.  Pursuant to the terms of an
agreement between the Company and GAI, the Company issued warrants to purchase
such number of shares of Common Stock equal to the total number of shares of
Common Stock which shall be initially issuable upon conversion of the related
Note plus an additional 69,375 warrants.  The transfer fee of $210,000
will be recognized over the shorter term of debt or date of conversion based on
the effective interest method. As of December 31, 2008, $78,750 of the transfer
fee was charged to earnings.  During the year ended December 31, 2008,
the Company valued the warrants issued in the private placement and purchase
agreement with GAI utilizing the Black-Scholes Model and determined that the
value of the warrants is $840,000.  The Company allocated the value of
the warrants as a contra discount to the principal amount of the notes and it is
being recognized over the term of the notes.  As of December 31, 2008,
$315,000 of the value of the warrants was charged to earnings.  In
addition, the warrant holders are getting a discount of $.025 per share, which
gives rise to a beneficial conversion feature of $133,000 that is being charged
to earnings over the period from the date of issuance to the date of which the
holder can realize a return.  As of December 31, 2008 $49,875 of the
beneficial conversion was charged to earnings.





The
obligations under the note and the security interest created by the Security
Agreement are subordinate and junior in right of payment to the senior lien on
the Company’s assets held by Western Commercial Bank in connection with the
Company’s existing line of credit.





Simultaneously
with the execution of the Purchase Agreement, the Company and each of the
investors entered into a Registration Rights Agreement, pursuant to which each
of the investors shall be entitled to certain registration rights.








60








NOTE
13 - RELATED PARTY TRANSACTIONS





On June
26, 2008, the Company renewed its 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.  This agreement
replaced the agreement which was to expire on August 29, 2008.  Under
the agreement, MV Advisors will provide strategic consulting services to the
Company and will receive an annual fee of $75,000, payable in non-refundable
quarterly advances, offset by the amount of any retainer or meeting fees paid to
Mr. Mutch for his board service.  In addition, MV Advisors will be
paid a success fee based upon the value of certain customer contracts secured by
the Company as a result of the efforts of MV Advisors. MV Advisors will also be
granted rights to purchase certain offerings of future Company equity
securities.  In his capacity as a consultant to the Company through MV
Advisors, Mr. Mutch was also awarded a non-qualified stock option under the
Company’s 2005 Stock Incentive Plan exercisable for 240,000 shares of the
Company’s Common Stock, vesting in equal monthly 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 31, 2009, the Company executed an agreement to renew its revolving
line of credit in the aggregate amount of $1,300,000.  The revolving
line of credit is secured by the Company’s accounts receivable and inventory and
matures on May 27, 2010.  The revolving line of credit is subject
to certain covenants including revised financial covenants. Advances under the
revolving line of credit are on a formula based on eligible accounts receivable
and inventory balances.





On
February 12, 2009 the Company entered into a private placement transaction
with various accredited investors.  Pursuant to the Purchase
Agreement, the investors purchased secured promissory notes from the Company in
the principal amount of $1,000,000. The notes are convertible into shares of the
Company’s Common Stock at a conversion price of $0.31 per share, subject to
adjustment in the event of stock splits, stock dividends, and similar
transactions. The notes are convertible up to 3,225,806 shares of the Company’s
common stock and have a maturity date of March 26, 2010 and bear interest
at the rate of 12% per annum compounded on each July 15 and
January 15.  In April 2009, the purchasers signed a waiver
extending the maturity date of the convertible notes to August 26,
2010.  Pursuant to the terms of the Purchase Agreement, the Company
will issue three year warrants to purchase up to an additional 5,774,194 of
shares of Common Stock. In addition, the Company issued the placement agent
warrants to purchase up to 129,032 shares of Common Stock. As a result,
assuming the conversion of all promissory notes and exercise of all warrants, up
to 9,129,032 shares of the Company’s Common Stock may be issued. Such an
issuance if it were to occur, would be highly dilutive of existing shareholders
and may, under certain conditions effect a change of control of the
Company.  Pursuant to an Intercreditor Agreement between the Company
and the collateral Agent for the purchasers, the purchasers were granted a
security interest in the Company’s assets that is pari passu to that of the
purchasers who are parties to the Securities Purchase Agreement, dated
March 26, 2008.  During the quarter ended March 31, 2009, the
Company will value the warrants received in the private placement utilizing the
Black-Scholes Model. Based on the analysis, the Company will recognize
beneficial conversion over the term of the debt. The obligations under the note
and the security interest created by the Security Agreement are subordinate and
junior in right of payment to the senior lien on the Company’s assets held by
Western Commercial Bank in connection with the Company’s existing line of
credit.





The
Company issued the placement agent for the private placement, Great American
Investors (GAI), warrants to purchase 129,032 shares of common
stock.   The broker warrants have the same terms as the purchaser
warrants.  The Company also paid the placement agent a non-refundable
due diligence fee of $5,000 and a cash fee of $40,000.  We also agreed
to placement agent’s expenses up to $12,500.








61





NOTE
15 - SUPPLEMENTAL CASH FLOW INFORMATION





Supplemental
cash flow information is as follows:





Year EndedDecember 31,
                  2008
                
                
                December 31,
                  2007Supplemental
      cash flow disclosure:Interest
                
                $
                107,086
                
                
                $
                118,193Income
      taxes
                
                $
                17,154
                
                
                $
                6,935