**UNITED STATES SECURITIESAND EXCHANGE COMMISSION**

**Washington, DC 20549**

**FORM 10-QSB**

**(MarkOne)**
| **x** | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
|-------|------------|----------------------------------------------------------------------------------------|

**Forthe quarterly period ended June 30, 2006.**
| **o** | ** ** | **TRANSITION REPORT UNDER SECTION 13  OR 15(d) OF THE EXCHANGE ACT** |
|-------|------------|----------------------------------------------------------------------|

** **

**Forthe transition period from                     to                    **

**Commissionfile number 0-12551**

**ASPYRA, INC.**

**(formerlyknown as CREATIVE COMPUTER APPLICATIONS, INC.)**

(Exact name of small business issuer as specified inits charter)

 

| **California**                   |   | **95-3353465**       |
|----------------------------------|--------|----------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer     |
| incorporation or  organization)  |   | Identification  No.) |

** **

**26115-AMureau Road, Calabasas, California 91302**

(Address of principal executive offices)

** **

**(818)880-6700**

(Issuer’s telephone number, including area code)

 

Check whether the Issuer (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Act during the past12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.

Yes  x            No  o

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

Yes  o            No  x

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:  10,769,400 common shares as of August 10,2006.

Transitional Small Business Disclosure Format (check one):

Yes  o            No  x

 

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**ASPYRA, INC.**

**FORM 10-QSB**

**I N D E X**

** **
|                                                                                                              | ** ** | ** ** | ** ** |
|--------------------------------------------------------------------------------------------------------------|------------|------------|------------|
| **PART  I—Financial Information:**                                                                      |       |       |       |
| **Item  1. Financial Statements (unaudited)**                                                                | ** ** | ** ** | ** ** |
| Condensed Consolidated Balance Sheets, at June 30,  2006 and December 31, 2005                               |       |       |       |
| Condensed  Consolidated Statements of Operations for the three months ended June 30,  2006 and June 30, 2005 |       |       |       |
| Condensed  Consolidated Statements of Operations for the six months ended June 30, 2006  and June 30, 2005   |       |       |       |
| Condensed  Consolidated Statements of Cash Flows for the six months ended June 30, 2006  and June 30, 2005   |       |       |       |
| Notes to Condensed Consolidated Financial Statements                                                         |       |       |       |
| **Item 2. Management’s Discussion and Analysis or Plan  of Operation**                                  |       |       |       |
| **Item 3. Controls and Procedures**                                                                          | ** ** | ** ** | ** ** |
| **PART  II—Other Information:**                                                                         | ** ** | ** ** | ** ** |
| **Item 6.  Exhibits**                                                                                        | ** ** | ** ** | ** ** |
| **Signatures**                                                                                               | ** ** | ** ** | ** ** |
| **Exhibit  Index**                                                                                           |       |       |       |

 

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**ASPYRA,INC.**

**PART I - FINANCIALINFORMATION**

**Item 1.  Financial Statements**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                          | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                          | ** ** | **(Unaudited**)         | ** ** | ** **                  | ** ** |
| **ASSETS**                                                                                                          |       |                    |       |                        |       |
| CURRENT ASSETS:                                                                                                     |       |                    |       |                        |       |
| Cash                                                                                                                |       | $                       | 3,338,547  |                        | $          | 1,329,753 |   |
| Restricted cash  (Note 6)                                                                                           |       | 1,000,000               |       | —                      |       |
| Receivables, net                                                                                                    |       | 1,879,960               |       | 1,547,699                   |       |
| Inventory                                                                                                           |       | 308,591                 |       | 207,345                     |       |
| Prepaid expenses  and other assets                                                                                  |       | 559,526                 |       | 589,510                     |       |
| TOTAL CURRENT ASSETS                                                                                                |       | 7,086,624               |       | 3,674,307                   |       |
| PROPERTY AND  EQUIPMENT, net                                                                                        |       | 1,160,558               |       | 511,919                     |       |
| INVENTORY OF COMPONENT  PARTS                                                                                       |       | 126,301                 |       | 158,302                     |       |
| CAPITALIZED SOFTWARE  COSTS, net of accumulated amortization of $930,974 and $1,211,445                        |       | 2,237,104               |       | 1,885,887                   |       |
| INTANGIBLES, net                                                                                                    |       | 4,395,986               |       | 4,697,240                   |       |
| GOODWILL                                                                                                            |       | 7,698,434               |       | 7,698,434                   |       |
|                                                                                                                |       | $                       | 22,705,007 |                        | $          | 18,626,089 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| CURRENT LIABILITIES:                                                                                                |       |                    |       |                        |       |
| Notes payable  (Note 6)                                                                                             |       | $                       | 1,374,078  |                        | $          | 995,403 |   |
| Accounts payable                                                                                                    |       | 1,023,972               |       | 1,218,698                   |       |
| Accrued  liabilities:                                                                                               |       |                    |       |                        |       |
| Vacation pay                                                                                                        |       | 373,800                 |       | 384,887                     |       |
| Accrued payroll                                                                                                     |       | 293,850                 |       | 355,277                     |       |
| Accrued  settlement                                                                                                 |       | —                  |       | 154,300                     |       |
| Accrued interest  and penalty                                                                                       |       | 184,876                 |       | —                      |       |
| Other                                                                                                               |       | 389,222                 |       | 338,098                     |       |
| Deferred service  contract income                                                                                   |       | 2,492,013               |       | 1,611,644                   |       |
| Deferred revenue  on system sales                                                                                   |       | 1,773,136               |       | 1,165,521                   |       |
| Capital lease —  current portion                                                                               |       | 127,297                 |       | —                      |       |
| TOTAL CURRENT  LIABILITIES                                                                                          |       | 8,032,244               |       | 6,223,828                   |       |
| CAPITAL LEASE                                                                                                       |       | 470,413                 |       | —                      |       |
| NOTES PAYABLE                                                                                                       |       | 87,486                  |       | 220,871                     |       |
| TOTAL LIABILITIES                                                                                                   |       | 8,590,143               |       | 6,444,699                   |       |
| SHAREHOLDERS’  EQUITY:                                                                                         |       |                    |       |                        |       |
| Common shares,  no par value; 20,000,000 shares authorized; 10,769,400 and 8,489,400 shares  issued and outstanding |       | 21,098,076              |       | 16,974,222                  |       |
| Additional  paid-in-capital                                                                                         |       | 207,415                 |       | —                      |       |
| Accumulated  deficit                                                                                                |       | (7,168,039              | )          | (4,790,142                  | )          |
| Accumulated  other comprehensive loss                                                                               |       | (22,588                 | )          | (2,690                      | )          |
| TOTAL SHAREHOLDERS’  EQUITY                                                                                    |       | 14,114,864              |       | 12,181,390                  |       |
|                                                                                                                |       | $                       | 22,705,007 |                        | $          | 18,626,089 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                     | ** ** |
| NET SYSTEM SALES AND  SERVICE REVENUE:          |       |                                                |       |   |   |
| System sales                                    |       | $                                                   | 1,401,410  |   | $ | 296,600 |   |
| Service revenue                                 |       | 1,816,411                                           |       | 1,259,407 |   |
|                                            |       | 3,217,821                                           |       | 1,556,007 |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                                |       |   |   |
| System sales                                    |       | 1,122,008                                           |       | 371,218 |   |
| Service revenue                                 |       | 637,813                                             |       | 409,831 |   |
|                                            |       | 1,759,821                                           |       | 781,049 |   |
| Gross profit                                    |       | 1,458,000                                           |       | 774,958 |   |
| OPERATING  EXPENSES                             |       |                                                |       |   |   |
| Selling, general  and administrative            |       | 1,931,313                                           |       | 771,245 |   |
| Research and  development                       |       | 473,224                                             |       | 244,097 |   |
| Total operating  expenses                       |       | 2,404,537                                           |       | 1,015,342 |   |
| Operating loss                                  |       | (946,537                                            | )          | (240,384 | ) |
| INTEREST AND  OTHER INCOME                      |       | 16,185                                              |       | 4,415 |   |
| INTEREST EXPENSE                                |       | (133,828                                            | )          | (2,569 | ) |
| Loss before  provision for income taxes         |       | (1,064,180                                          | )          | (238,538 | ) |
| PROVISION FOR  INCOME TAXES                     |       | —                                              |       | — |   |
| NET LOSS                                        |       | $                                                   | (1,064,180 | ) | $ | (238,538 | ) |
| LOSS PER SHARE (Note  5):                       |       |                                                |       |   |   |
| Basic                                           |       | $                                                   | (.11       | ) | $ | (.07 | ) |
| Diluted                                         |       | (.11                                                | )          | (.07 | ) |
| WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING: |       |                                                |       |   |   |
| Basic                                           |       | 9,614,200                                           |       | 3,383,233 |   |
| Diluted                                         |       | 9,614,200                                           |       | 3,383,233 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                   | ** ** |
| NET SYSTEM SALES AND  SERVICE REVENUE:          |       |                                              |       |   |   |
| System sales                                    |       | $                                                 | 2,373,252  |   | $ | 883,707 |   |
| Service revenue                                 |       | 3,546,644                                         |       | 2,497,588 |   |
|                                            |       | 5,919,896                                         |       | 3,381,295 |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                              |       |   |   |
| System sales                                    |       | 1,910,467                                         |       | 824,568 |   |
| Service revenue                                 |       | 1,396,148                                         |       | 824,693 |   |
|                                            |       | 3,306,615                                         |       | 1,649,261 |   |
| Gross profit                                    |       | 2,613,281                                         |       | 1,732,034 |   |
| OPERATING  EXPENSES                             |       |                                              |       |   |   |
| Selling, general  and administrative            |       | 3,884,169                                         |       | 1,599,977 |   |
| Research and  development                       |       | 961,692                                           |       | 558,940 |   |
| Total operating  expenses                       |       | 4,845,861                                         |       | 2,158,917 |   |
| Operating loss                                  |       | (2,232,580                                        | )          | (426,883 | ) |
| INTEREST AND  OTHER INCOME                      |       | 20,924                                            |       | 9,142 |   |
| INTEREST EXPENSE                                |       | (166,242                                          | )          | (7,761 | ) |
| Loss before  provision for income taxes         |       | (2,377,898                                        | )          | (425,502 | ) |
| PROVISION FOR  INCOME TAXES                     |       | —                                            |       | — |   |
| NET LOSS                                        |       | $                                                 | (2,377,898 | ) | $ | (425,502 | ) |
| LOSS PER SHARE  (Note 5):                       |       |                                              |       |   |   |
| Basic                                           |       | $                                                 | (.26       | ) | $ | (.13 | ) |
| Diluted                                         |       | (.26                                              | )          | (.13 | ) |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                              |       |   |   |
| Basic                                           |       | 9,051,800                                         |       | 3,368,567 |   |
| Diluted                                         |       | 9,051,800                                         |       | 3,368,567 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Increase(Decrease) in Cash**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                                   | ** ** |
| OPERATING ACTIVITIES                                                                       |       |                                              |       |   |   |
| Net loss                                                                                   |       | $                                                 | (2,377,898 | ) | $ | (425,502 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                              |       |   |   |
| Depreciation and  amortization                                                             |       | 470,737                                           |       | 67,260 |   |
| Provision for  doubtful accounts                                                           |       | 18,371                                            |       | 21,528 |   |
| Amortization of  capitalized software costs                                                |       | 148,369                                           |       | 178,636 |   |
| Stock based  compensation                                                                  |       | 207,415                                           |       | — |   |
| Increase  (decrease) from changes in:                                                      |       |                                              |       |   |   |
| Receivables                                                                                |       | (350,632                                          | )          | 1,004,680 |   |
| Inventories                                                                                |       | (69,245                                           | )          | (40,339 | ) |
| Prepaid expenses  and other assets                                                         |       | 29,985                                            |       | (58,517 | ) |
| Accounts payable                                                                           |       | (194,726                                          | )          | (68,349 | ) |
| Accrued  liabilities                                                                       |       | 9,186                                             |       | (9,485 | ) |
| Deferred service  contract income                                                          |       | 161,492                                           |       | (396,285 | ) |
| Deferred revenue  on system sales                                                          |       | 1,326,492                                         |       | 143,785 |   |
| Net cash  provided by (used in) operating activities                                       |       | (620,454                                          | )          | 417,412 |   |
| INVESTING  ACTIVITIES                                                                      |       |                                              |       |   |   |
| Additions to  property and equipment                                                       |       | (181,637                                          | )          | (169,759 | ) |
| Additions to  deferred merger costs                                                        |       | —                                            |       | (199,790 | ) |
| Additions to  capitalized software costs                                                   |       | (499,586                                          | )          | (340,421 | ) |
| Net cash used in  investing activities                                                     |       | (681,223                                          | )          | (709,970 | ) |
| FINANCING  ACTIVITIES                                                                      |       |                                              |       |   |   |
| Borrowings on  line of credit                                                              |       | 400,000                                           |       | — |   |
| Payments on  notes payable                                                                 |       | (154,710                                          | )          | (100,000 | ) |
| Payments on  capital leases                                                                |       | (38,775                                           | )          | — |   |
| Increase in  restricted cash                                                               |       | (1,000,000                                        | )          |   |   |
| Net proceeds  from sales of stock in private placement                                     |       | 4,101,088                                         |       | — |   |
| Buyback of  fractional shares related to merger                                            |       | (234                                              | )          | — |   |
| Exercise of  stock options                                                                 |       | 23,000                                            |       | 92,000 |   |
| Net cash  provided by (used in) financing activities                                       |       | 3,330,369                                         |       | (8,000 | ) |
| Foreign currency  translation adjustment                                                   |       | (19,898                                           | )          | — |   |
| NET INCREASE  (DECREASE) IN CASH                                                           |       | 2,008,794                                         |       | (300,558 | ) |
| CASH, beginning  of period                                                            |       | 1,329,753                                         |       | 1,655,063 |   |
| CASH, end of period                                                                        |       | $                                                 | 3,338,547  |   | $ | 1,354,505 |   |

 

**Seenotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

**Note1-Presentation of Financial Statements**

In the opinion of management ofAspyra, Inc. (the “Company” or “ASPYRA”), the accompanying unaudited condensedconsolidated financial statements reflect all adjustments (which include onlynormal recurring accruals) necessary to present fairly the Company’s financialposition as of June 30, 2006, the results of its operations for the three andsix-month periods ended June 30, 2006 and 2005, and cash flows for the sixmonths ended June 30, 2006 and 2005. These results have been determined on the basis of accounting principlesgenerally accepted in the United States and practices applied consistently withthose used in preparation of the Company’s Annual Report on Form 10-KSB for thefiscal year ended December 31, 2005.

The results of operations forthe three and six months ended June 30, 2006 are not necessarily indicative ofthe results expected for any other period or for the entire year.

**Note 2-Liquidity**

As of June 30, 2006, the Company’s working capitalamounted to a deficit of $945,620 compared to a deficit of $2,549,521, as ofDecember 31, 2005.  The deficit workingcapital position on a consolidated basis is the result of ASPYRA merging withAspyra Diagnostic Solutions, Inc. (formerly StorCOMM, Inc.), which had asubstantial negative working capital position at the time of the merger and theincrease in deferred revenues, which in the aggregate amounted to approximately$4,265,000 at June 30, 2006.  On May 17,2006, the Company sold in a private placement transaction 2,250,000 shares ofits common stock and warrants to purchase up to 1,350,000 shares of its commonstock pursuant to the terms of the Common Stock and Warrant Purchase Agreement,dated May 4, 2006.  The private placementgenerated $4,500,000, less costs, and improved the Company’s working capitalposition.

The Company’s primary source of working capital hasbeen generated from the private placements, which were completed in November2005 and May 2006, and from borrowings. The private placement that was completed in November 2005 generated$3,000,000, less costs.  The Company’sresults of operations for the six months ended June 30, 2006 produced negativeoperating cash flow of $620,454.  Anunanticipated decline in sales, delays in implementations where payments aretied to delivery and/or performance of services, or cancellations of contractscould have a negative effect on cash flow from operations and could in turncreate short-term liquidity problems.  Webelieve that our current cash and cash equivalents, and cash flow fromoperations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and various contractualobligations, for at least the next 12 months. We may, however, require additional cash resources due to changedbusiness conditions or other future developments, including any investments oracquisitions we may decide to pursue.  The sale of convertible debt securitiesor additional equity securities could result in additional dilution to ourshareholders. The incurrence of indebtedness would result in incurring debtservice obligations and could result in operating and financial covenants that wouldrestrict our operations. In addition, there can be no assurance that anyadditional financing will be available on acceptable terms, if at all. Althoughthere are no present understandings, commitments or agreements with respect tothe acquisition of any other businesses, applications or technologies, we may,from time to time, evaluate acquisitions of other businesses, applications ortechnologies.

**Note3-Inventories**

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

The Company also maintains an inventory pool ofcomponent parts to service systems previously sold, which is classified asnon-current in the accompanying balance sheets. Such inventory is carried at the lower of cost or market and is chargedto cost of sales based on usage.  Allowancesare made for quantities on hand in excess of estimated future usage.  At June 30, 2006 and December 31, 2005the inventory allowance was $146,781 and $116,781, respectively.

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**Note4-Goodwill and Intangible Assets**

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired. In accordance with SFAS No. 144, Accounting for Impairment ofLong-Lived Assets, management reviews definite life intangible assets todetermine if events or circumstances have occurred which may cause the carryingvalues of intangible assets to be impaired. The purpose of these reviews is toidentify any facts and circumstances, either internal or external, which mayindicate that the carrying values of the assets may not be recoverable.  At June 30, 2006, the net carrying value ofgoodwill and intangible assets were $7,698,434 and $4,395,986, respectively.

**Note5-Earnings per Share**

The Company accounts forits earnings per share in accordance with SFAS No.128, which requirespresentation of basic and diluted earnings per share.  Basic earnings per share is computed bydividing income or loss available to common shareholders by the weightedaverage number of common shares outstanding for the reporting period.  Diluted earnings per share reflect thepotential dilution that could occur if securities or other contracts, such asstock options, to issue common stock were exercised or converted into commonstock.

Earnings per share hasbeen computed as follows:
| ** **                                                    | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| NET LOSS                                                      |       | $                                                     | (1,064,180 | )                                                   | $          | (2,377,898                                            | )          | $                                                   | (238,538   | ) | $ | (425,502 | ) |
| Basic weighted  average number of common shares outstanding   |       | 9,614,200                                             |       | 9,051,800                                           |       | 3,383,233                                             |       | 3,368,567                                           |       |
| Dilutive effect  of stock options                             |       | —                                                |       | —                                              |       | —                                                |       | —                                              |       |
| Diluted weighted  average number of common shares outstanding |       | 9,614,200                                             |       | 9,051,800                                           |       | 3,383,233                                             |       | 3,368,567                                           |       |
| Basic loss per  share                                         |       | $                                                     | (.11       | )                                                   | $          | (.26                                                  | )          | $                                                   | (.07       | ) | $ | (.13 | ) |
| Diluted loss per  share                                       |       | $                                                     | (.11       | )                                                   | $          | (.26                                                  | )          | $                                                   | (.07       | ) | $ | (.13 | ) |

For the three and sixmonths ended June 30, 2006, options to purchase 482,485 and 532,485 shares ofcommon stock at per share prices ranging from $.72 to $2.75 were not includedin the computation of diluted loss per share because inclusion would have been anti-dilutive.  For the three and six months ended June 30,2005, options to purchase 314,000 shares of common stock at per share pricesranging from $.72 to $2.75 were not included in the computation of diluted lossper share because inclusion would have been anti-dilutive.

**Note6-Debt Obligations**

The Company’s line ofcredit with its bank provides for $1,000,000 on a revolving basis through May19, 2007.  The line of credit is securedby a $1,000,000 time deposit account.  OnJune 30, 2006, the total amount due to the bank was $900,000.  The Company acquired a note in conjunctionwith the merger with Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM,Inc.), with an interest rate of 7% with payments in the amount of $25,000 duemonthly.  As of June 30, 2006, the totalamount due on this note was $387,486. The Company also acquired unsecured notes in conjunction with the mergerwith interest rates ranging from 7% to 8%. These notes are due upon demand and the balance outstanding at June 30,2006 was $174,078.

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**Note7-Stock-Based Compensation**

As of June 30, 2006, the Company has two stock-basedcompensation plans, the 2005 Equity Incentive Plan and the 1997 Stock OptionPlan, under which we may issue shares of our common stock to employees,officers, directors and consultants. Upon effectiveness of the 2005 EquityIncentive Plan, the 1997 Stock Option Plan was terminated for purposes of newgrants.  Both of these plans have beenapproved by our shareholders.

Prior to January 1, 2006, we accounted for thoseplans under the recognition and measurement provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees*”*, and related Interpretations, aspermitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Nostock-based employee compensation cost was recognized in our Statement ofOperations for the three and six months ended June 30, 2005 as all optionsgranted under our plans had an exercise price equal to the market value of theunderlying common stock on the date of grant. Effective January 1, 2006,we adopted the fair value recognition provisions of SFAS No. 123(R), “Share-BasedPayment*”*, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three and six months ended June 30, 2006includes; (a) compensation cost for all share-based payments granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated in accordance with the original provisions of SFASNo. 123, and (b) compensation cost for all share-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123(R).  As SFAS No. 123(R) requires that stock-basedcompensation expense be based on awards that are ultimately expected to vest,stock-based compensation for the three and six months ended June 30, 2006 hasbeen reduced by estimated forfeitures based on historical trends of optionforfeitures.  The Company has recordedapproximately $92,862 and $207,415 of stock-based compensation expense duringthe three and six months ended June 30, 2006 as a result of the adoption ofSFAS No. 123(R).  The Company did notrecord any excess tax benefits as a result of adopting SFAS No. 123(R) in thethree and six months ended June 30, 2006 because the Company is currentlyproviding a valuation on future tax benefits realized until it can sustain alevel of profitability that demonstrates its ability to utilize the assets.  Results for prior periods have not beenrestated.

A summary of option activities under the stock optionplans during the six months ended June 30, 2006 is presented as follows:
| **Stock Options**               | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** **     | **Weighted  Average  Remaining  Contractual  Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|--------------------------------------|------------|------------|------------|------------|------------|---------------------------------------------|----------------|-----------------------------------------------------|------------|-------------------------------------|------------|
| Outstanding at  January 1, 2006 |       | 521,670    |       | $          | 2.17       |                                        | 34.7 mos. |                                                | $          | 251,600                             |       |
| Granted                              |       | 50,000     |       | $          | 2.48       |                                        |           |                                                |       |                                |
| Exercised                            |       | (30,000    | )          | $          | 0.77       |                                        |           |                                                |       |                                |
| Canceled or  Expired                 |       | (9,185     | )          | $          | 2.75       |                                        |           |                                                |       |                                |
| Outstanding at June 30, 2006    |       | 532,485    |       | $          | 2.26       |                                        | 32.8 mos.      |                                                | $          | 181,900                             |       |
| Exercisable at  June 30, 2006   |       | 230,621    |       | $          | 1.98       |                                        | 28.2 mos.      |                                                | $          | 135,600                             |       |

The aggregate intrinsicvalue is calculated as the difference between the exercise price of theunderlying awards and the quoted price of our common stock for the180,000 options that were in-the-money at June 30, 2006.  As of June 30, 2006, there was approximately$318,421 of total unrecognized compensation cost related to unvestedshare-based compensation arrangements granted under our stock awards plans.That cost is expected to be recognized over a weighted-average period of twoyears.  The share-based compensation willbe amortized based on the accelerated method over the vesting period.  During the three months ended June 30, 2006,the Company granted 50,000 options at a weighted average fair value price of$2.48 per share.

9

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A summary of the status of the Company’s non-vestedstock options during the six months ended June 30, 2006 is presentedbelow:
| **Non-vested Options**         | ** ** | ** ** | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|-------------------------------------|------------|------------|------------|------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2006 |       | 361,670    |       | $          | 2.36       |                                                |
| Granted                             |       | 50,000     |       | 2.48       |       |
| Exercised                           |       | —     |       | —     |       |
| Vested                              |       | (100,621   | )          | 2.39       |       |
| Forfeited or  expired               |       | (9,185     | )          | 2.75       |       |
| Non-vested at  June 30, 2006   |       | 301,864    |       | $          | 2.48       |                                                |

The following tableillustrates the proforma effect on net loss and net loss per share if we hadapplied the fair value recognition provisions of SFAS No. 123(R) to all periodspresented.
| ** **                                                                                                     | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Net loss before  stock-based compensation expense                                                              | ** ** | $                                                     | (238,538   | )                                                   | $          | (425,502 | ) |
| Less: total stock based employee compensation  expense determined under fair value based method for all awards | ** ** | (11,011                                               | )          | (22,021                                             | )          |
| Net loss                                                                                                       | ** ** | $                                                     | (249,549   | )                                                   | $          | (447,523 | ) |
| Basic net loss per share:                                                                                      |       |                                                  |       |                                                |       |
| Net loss before stock-based compensation                                                                       | ** ** | $                                                     | (.07       | )                                                   | $          | (.13 | ) |
| Stock-based compensation                                                                                       | ** ** | (.00                                                  | )          | (.00                                                | )          |
| Basic net loss per share                                                                                       | ** ** | $                                                     | (.07       | )                                                   | $          | (.13 | ) |
| Diluted net loss  per share:                                                                                   |       |                                                  |       |                                                |       |
| Net loss before stock-based compensation                                                                       | ** ** | $                                                     | (.07       | )                                                   | $          | (.13 | ) |
| Stock-based compensation                                                                                       | ** ** | (.00                                                  | )          | (.00                                                | )          |
| Diluted net loss  per share                                                                                    | ** ** | $                                                     | (.07       | )                                                   | $          | (.13 | ) |

The Company issues all ofits options at fair market value at the time of grant.  The fair value of each option was estimatedon the date of grant using a Black-Scholes option-pricing model with thefollowing weighted average assumptions: risk free interest rates ranging from3.4% to 4.5%, expected life of options ranging from 3 to 5 years; volatilityranging from 70% to 106% and no assumed dividends.  The weighted-average grant-date fair value ofoptions granted during 2005 was estimated to be $1.80.  There were 50,000 options granted in the sixmonths ended June 30, 2006 at a weighted average fair value of $2.48 per share.  For the six months ended June 30, 2006, theCompany used a forfeiture rate of 0% and 4% for non-qualified stock options andincentive stock options, respectively.

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

**Note8-Commitments and Contingencies**

In accordance with thebylaws of the Company, officers and directors are indemnified for certainevents or occurrences arising as a result of the officer or director’s servingin such capacity.  The term of theindemnification period is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurance policythat reduces its exposure and enables it to recover a portion of any futureamounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

The Company enters intoindemnification provisions under agreements with various parties in the normalcourse of business, typically with customers and landlords.  Under these provisions, the Company generallyindemnifies and holds harmless the indemnified party for losses suffered orincurred 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 theagreement.  These indemnificationprovisions often include indemnifications relating to representations made bythe Company with regard to intellectual property rights.  These indemnification provisions generallysurvive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material coststo defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

**Note 9-Income Taxes**

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

**Note 10-Acquisition of StorCOMM, Inc.**

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

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

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The acquisition ofStorCOMM is accounted for as a purchase business combination in accordance withStatement of SFAS No. 141, “Business Combinations.” The total purchaseprice related to the acquisition of StorCOMM was $9,517,590.

StorCOMM operates as awholly owned subsidiary of ASPYRA and the Company’s financial statementsinclude the results of StorCOMM from the closing date of the acquisition(November 22, 2005).

The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition. The allocation of the purchase price wasbased on an independent third-party valuation of certain intangible assets. Theexcess purchase price over the estimated fair value of the assets acquired andliabilities assumed is recorded as goodwill.

**AtNovember 22, 2005**
| ** **                 | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|
| Current assets             |       | $          | 1,286,767  |   |
| Purchased  technology      |       | 1,976,836  |       |
| Other intangible  assets   |       | 2,110,000  |       |
| Goodwill                   |       | 7,698,434  |       |
| Total assets  acquired     |       | 13,072,037 |       |
| Current  liabilities       |       | 3,554,447  |       |
| Total  liabilities assumed |       | 3,554,447  |       |
| Net assets acquired        |       | $          | 9,517,590  |   |

The purchased technologyis comprised of internally created software, which was valued by theindependent third-party who assigned an expected useful life of six years.

The other intangibleassets are primarily comprised of customer relationships valued by theindependent third-party. The expected useful life assigned is fifteen years.

The excess of thepurchase price over the estimated fair value of the assets acquired and the liabilitiesassumed was recorded as goodwill, which is expected to be deductible for incometax purposes.

Sincethere is no step up in basis of the acquired intangible assets for taxpurposes, amortization of purchased technology and other intangible assets isnot deductible for tax purposes. A $1,634,734 deferred tax liability iscalculated at the blended tax rate of 40% applied to the $1,976,836 purchasedtechnology and $2,110,000 other intangible assets. At December 31, 2005,in accordance with SFAS No. 141, $1,634,734 of the deferred tax liability isexpected to be realized over the term as the deferred tax asset, therefore$1,634,734 of the deferred tax liability was offset against the deferred taxasset of ASPYRA as part of the consolidated income tax provision. As aresult of the transaction, ASPYRA’S deferred tax asset valuation was reduced.In accordance with SFAS No. 109, the change in valuation allowance was offsetagainst goodwill.

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

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| ** **                        | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **June 30, 2005**      | ** ** | **June 30, 2005**    | ** ** |
| ** **                        | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                | ** ** |
| Revenues                          |       | $                                | 3,468,530  |                           | $          | 6,828,882 |   |
| Net Loss                          |       | (601,662                         | )          | (1,166,307                     | )          |
| Loss per share-basic  and diluted |       | (.07                             | )          | (.14                           | )          |
|                                   |            |                                  |            |                                |            |  |  |

 

In January 2006, StorCOMM, Inc. changed its name toAspyra Diagnostic Solutions, Inc.

**Note 11-Private Placement**

On May 17, 2006, ASPYRA sold in a private placement 2,250,000 shares ofits common stock and warrants to purchase up to 1,350,000 shares of its commonstock pursuant to the terms of the Common Stock and Warrant Purchase Agreement,dated May 4, 2006 (the “Purchase Agreement”), by and among ASPYRA and each ofthe Purchasers. The shares of common stock and warrants were sold in units,with each unit consisting of a single share of ASPYRA common stock andthree-fifths of a warrant to purchase one share of ASPYRA common stock. Theprice per unit was $2.00 for an aggregate purchase price of $4,500,000, lesscosts.  The exercise price of the warrants is $3.00 per share.  Theseshares were issued and sold pursuant to the exemption from registration underthe Securities Act of 1933, as amended (the “Securities Act”) that is availablefor offers and sales to accredited investors pursuant to Rule 506 ofRegulation D under the Securities Act and Section 4(2) of theSecurities Act.  Simultaneously with theexecution of the Purchase Agreement, ASPYRA and each of the Purchasers enteredinto a Registration Rights Agreement, dated May 4, 2006, pursuant to which eachof the Purchasers shall be entitled to certain registration rights.

During the second quarter ended June 30, 2006 the Company accruedapproximately $98,000 which is attributable to a penalty related to the privateplacement transaction that was completed in November 2005, whereby theinvestors were entitled to receive an amount of 1% per month of the privateplacement of $3,000,000 if the Company’s registration statement had not beendeclared effective within 120 days of the closing of the private placement.

**Note 12-Supplemental Cash Flow**

During the six months ended June 30, 2006, the Company entered intocapital leases for the purchase of equipment totaling $636,485 of which $38,775was paid during the period.

**Note 13-Subsequent Events**

On August 3, 2006, Aspyra Diagnostic Solutions, Inc. (formerlyStorCOMM, Inc.) executed an amendment to its operating lease for theJacksonville office location.  Theamendment extends the term of the lease, which expires on October 31, 2006 toJanuary 31, 2012 with an effective base rental of approximately $11,534 permonth, plus common area maintenance costs, sales tax and property taxes.

**Note 14-New Accounting Pronouncements**

In December 2004, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 151, “InventoryCosts, an amendment of APB No. 43, Chapter 4,” which requires that abnormalamounts of idle facility expense, freight, handling costs and wasted material(spoilage) be recognized as current-period charges. In addition, the statementrequires that allocation of fixed production overheads to the costs ofconversion be based on the normal capacity of the production facilities. SFASNo. 151 is effective for fiscal years beginning after June 15, 2005. Theadoption of this standard did not have a material impact on our results of operationsor financial position.

In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets,” as amendment of APB Opinion No. 29 “Accounting forNonmonetary Transactions”. This statement amends the principle that exchangesof nonmonetary assets should be measured based on the fair value of the assetsexchanged and more broadly provides for exceptions regarding exchanges ofnonmonetary assets that do not have commercial substance. This Statement iseffective for nonmonetary asset exchanges occurring during our fiscal yearbeginning January 1, 2006. The adoption of this standard did not have amaterial impact on our results of operations or financial position.

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In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections,” which changes the accounting for and reportingof a change in accounting principle. This statement applies to all voluntarychanges in accounting principle and changes required by an accountingpronouncement in the usual instance that the pronouncement does not includespecific transition provisions. This statement requires retrospectiveapplication to prior period financial statements of changes in accountingprinciple, unless it is impractical to determine either the period-specific orcumulative effects of the change. Statement No. 154 is effective foraccounting changes made in our fiscal year beginning January 1, 2006. Theadoption of this standard did not have a material impact on our results ofoperations or financial position.

SFAS No. 156, “Accounting for Servicing of Financial Assets - anamendment of FASB Statement No. 140.” SFAS No. 156 requires an entity torecognize a servicing asset or servicing liability each time it undertakes acontractual obligation to service a financial asset in certain circumstances.All separately recognized servicing assets and servicing liabilities arerequired to be initially measured at fair value. Subsequent measurement methodsinclude the **amortization****method, whereby servicing assets orservicing liabilities are amortized in proportion to and over the period ofestimated net servicing income or net servicing loss, or the **fair value**method, whereby servicing assets or servicing liabilities are measured at fairvalue at each reporting date and changes in fair value are reported in earningsin the period in which they occur. If the amortization method is used, anentity must assess servicing assets or servicing liabilities for impairment orincreased obligation based on the fair value at each reporting date. SFAS No.156 is effective for fiscal years beginning after December 15, 2006. We arecurrently evaluating the impact of SFAS No. 156 on our consolidated financialstatements.

InJune 2006, the FASB issued FASB Interpretation No. 48, Accounting forUncertainty in Income Taxes, (FIN 48) an interpretation of FASB StatementNo. 109, Accounting for Income Taxes. FIN 48 requires that a positiontaken or expected to be taken in a tax return be recognized in the financialstatements when it is more likely than not (i.e. a likelihood of more thanfifty percent) that the position would be sustained upon examination by taxauthorities. A recognized tax position is then measured at the largest amountof benefit that is greater than fifty percent likely of being realized uponultimate settlement. Upon adoption, the cumulative effect of applying therecognition and measurement provisions of FIN 48, if any, shall be reflected asan adjustment to the opening balance of retained earnings.

FIN 48 requires that subsequent to initial adoption a change injudgment that results in subsequent recognition, derecognition or change in ameasurement of a tax position taken in a prior annual period (including anyrelated interest and penalties) be recognized as a discrete item in the periodin which the change occurs. Currently, we record such changes in judgment,including audit settlements, as a component of our income tax provision. Thus,our reported quarterly income tax rate may become more volatile upon adoptionof FIN 48. This change will not impact the manner in which we record income taxexpense on an annual basis.

FIN 48 also requires expanded disclosures including identification oftax positions for which it is reasonably possible that total amounts ofunrecognized tax benefits will significantly change in the next twelve months,a description of tax years that remain subject to examination by major taxjurisdiction, a tabular reconciliation of the total amount of unrecognized taxbenefits at the beginning and end of each annual reporting period, the totalamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate and the total amounts of interest and penalties recognizedin the statements of operations and financial position. FIN 48 is effective forfiscal years beginning after December 15, 2006. We are currentlyevaluating the impact of this standard on our consolidated financialstatements.

**Item 2.**                          Management’sDiscussion and Analysis or Plan of Operation

TheSEC encourages companies to disclose forward-looking information so thatinvestors can better understand a company’s future prospects and make informedinvestment decisions. This Quarterly Report on Form 10-QSB contains such “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933 and Section 21E ofthe Securities Exchange Act of 1934.

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 discussionof future events, operating or financial performance, financing sources,product development, capital requirements, market growth and the like, identifyforward-looking statements. Forward-looking statements are merely predictionsand therefore inherently subject to uncertainties

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and other factors whichcould cause the actual results to differ materially from the forward-lookingstatement.  These forward-lookingstatements include, among others:

·       projections of revenues andother financial items;

·       statements of strategiesand objectives for future operations;

·       statements concerningproposed applications or services;

·       statements regarding futureeconomic conditions, performance or business prospects;

·       statements regardingcompetitors or competitive actions; and

·       statements of assumptionsunderlying any of the foregoing.

Allforward-looking statements are present expectations of future events and aresubject to a number of factors and uncertainties that could cause actualresults to differ materially from those described in the forward-lookingstatements. The risks related to ASPYRA’s business discussed under “RiskFactors” of this Quarterly Report on Form 10-QSB, among others, could causeactual results to differ materially from those described in the forward-lookingstatements.  Such risks include, amongothers: the competitive environment; unexpected technical and marketingdifficulties inherent in major product development efforts; the potential needfor changes in our long-term strategy in response to future developments;future advances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by ASPYRA;and rapid technological change in the microelectronics and software industries.

The Company makesno representation as to whether any projected or estimated information orresults contained in any forward-looking statements will be obtained orachieved. Shareholders are cautioned not to place undue reliance on theforward-looking statements, which speak only as of the date of this QuarterlyReport on Form 10-QSB. The Company is under no obligation, and it expresslydisclaims any obligation, to update or alter any forward-looking statementsafter the date of this Quarterly Report on Form 10-QSB, whether as a result ofnew information, future events or otherwise.

**Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

**Overview**

The followingdiscussion relates to the newly merged business of ASPYRA, which includes theoperations of its wholly owned subsidiaries Aspyra Diagnostic Solutions, Inc.(formerly StorCOMM, Inc.) and Aspyra Technologies, Ltd. (formerly StorCOMMTechnologies, Ltd.).  The merger, whichresulted in the acquisition of StorCOMM, was consummated on November 22, 2005and this second fiscal quarter and six-month period of 2006 is the second fullquarterly report since the merger was consummated.

ASPYRA operates inone business segment and generates revenues primarily from the sale of itsClinical and Diagnostic Information Systems (CIS and DIS), which includes thelicense of proprietary application software, and may include the sale ofservers and other hardware components to be integrated with its applicationsoftware. In connection with its sales of its products, the Company providesimplementation services for the installation, integration, and training of endusers’ personnel. The Company also generates sales of ancillary software andhardware, including its data acquisition products, to its customers and tothird parties. We recognize these revenues under system sales in our financialstatements.  The Company also generatesrecurring revenues from the provision of comprehensive post implementationservices to its customers, pursuant to extended service agreements. Werecognize these revenues under service revenues in our financialstatements.  This is an important aspectof its business as the Company’s products are “mission critical” systems thatare used by healthcare providers in most cases 24 hours per day and 7 days perweek. The ability to provide comprehensive services is crucial to obtaining newcustomers and maintaining existing customers.

Because of thenature of its business, ASPYRA makes significant investments in research anddevelopment for new products and enhancements to existing products.Historically, ASPYRA has funded its research and development programs throughcash flow primarily generated from operations. Management anticipates that future expenditures in research anddevelopment will either continue at current levels or may increase for theforeseeable future, and will be funded primarily out of the Company’s cashflow.

ASPYRA’sresults of operations for the second fiscal quarter and six-month period endedJune 30, 2006 were marked by an increase in sales and an increase in operatingloss over the comparable period of 2005 that are more fully 

15

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discussed in thefollowing section “Results of Operations.” The Company’s increase in revenues was due to the addition of therevenues from ASPYRA’s wholly owned subsidiaries, Aspyra Diagnostic Solutions,Inc. (formerly StorCOMM, Inc.) and Aspyra Technologies, Ltd. (formerly StorCOMMTechnologies, Ltd..).  The Company hadsales, which due to timing issues, were not fully implemented and recognized inthe quarter resulting in deferred revenue of approximately $1.8 million at June30, 2006.  Generally, sales cycles forCIS and DIS products are lengthy and on average exceed six months frominception to closure.  Because of thecomplexity of the sales process, a number of factors that are beyond thecontrol of the Company can delay the closing of transactions.

Theoperating losses incurred by the Company during the current quarter andsix-month period ended June 30, 2006 were primarily a result of threefactors.  First, the Company continued toexperience delays related to implementation of systems, which prevented it fromrecognizing revenue on many of its DIS sales. Only a fraction of the sales booked in the quarter ended June 30, 2006,were actually recognized as revenue in that quarter.  The backlog of deferred revenue associatedwith such sales increased to $1,773,791 as of June 30, 2006, which will berecognized in future periods.  Second,the Company is completing the integration and restructuring of the mergedbusiness and incurred certain costs associated with such activities which wereonly partially offset by reductions in redundant personnel and other expensesduring the quarter ended June 30, 2006. The Company expects to achieve synergies and cost reductions in itsbusiness as it completes further integration and restructuring in the next twofiscal quarters.  Third, the Company hasbeen primarily reliant on distributors and channel partners for the sales ofits diagnostic systems and has been subject to inconsistencies in theperformance of such third parties and the timely consummation of orders.  Aspyra is addressing this by implementing adirect sales model for some of the diagnostic system products to supplement thedistribution and channel network so that it is less reliant on third parties inthe sale of its diagnostic systems.

Overallthe Company’s operating losses declined by approximately $340,000 to $946,537during the second fiscal quarter ended June 30, 2006 as compared to $1,286,043during the first fiscal quarter ended March 31, 2006.  Management believes that the operating losseswill continue to decline as the integration plan is concluded and the Companyreaches it sales objectives.

**Results ofOperations**

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

 
| ** **                             | ** ** | **Three Months  Ended  June 30, 2006** | ** ** | **Six Months  Ended  June 30, 2006** | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Revenues:                              |       |                                                  |       |                                                |       |                                                  |       |                                                |       |
| System sales                           |       | 43.6                                                  | %          | 40.1                                                | %          | 19.1                                                  | %          | 26.1                                                | %          |
| Service revenues                       |       | 56.4                                                  |       | 59.9                                                |       | 80.9                                                  |       | 73.9                                                |       |
| Total revenues                         |       | 100.0                                                 |       | 100.0                                               |       | 100.0                                                 |       | 100.0                                               |       |
| Cost of products and services sold:    |       |                                                  |       |                                                |       |                                                  |       |                                                |       |
| System sales                           |       | 34.9                                                  |       | 32.3                                                | ** ** | 23.9                                                  |       | 24.4                                                |       |
| Service revenues                       |       | 19.8                                                  |       | 23.6                                                |       | 26.3                                                  |       | 24.4                                                |       |
| Total cost of products and services    |       | 54.7                                                  |       | 55.9                                                |       | 50.2                                                  |       | 48.8                                                |       |
| Gross profit                           |       | 45.3                                                  |       | 44.1                                                |       | 49.8                                                  |       | 51.2                                                |       |
| Operating  expenses:                   |       |                                                  |       |                                                |       |                                                  |       |                                                |       |
| Selling, general and administrative    |       | 60.0                                                  |       | 65.6                                                |       | 49.6                                                  |       | 47.3                                                |       |
| Research and development               |       | 14.7                                                  |       | 16.2                                                |       | 15.7                                                  |       | 16.5                                                |       |
| Total operating  expenses              |       | 74.7                                                  |       | 81.8                                                |       | 65.3                                                  |       | 63.8                                                |       |
| Operating loss                         |       | (29.4                                                 | )          | (37.7                                               | )          | (15.5                                                 | )          | (12.6                                               | )          |
| Loss before provision for income taxes |       | (33.1                                                 | )          | (40.2                                               | )          | (15.3                                                 | )          | (12.6                                               | )          |
| Provision for income taxes             | ** ** | **—**                                            | ** ** | **—**                                          | ** ** | **—**                                            | ** ** | **—**                                          | ** ** |
| Net loss                               |       | (33.1                                                 | )          | (40.2                                               | )          | (15.3                                                 | )          | (12.6                                               | )          |

 

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*Revenues*

Salesfor the fiscal quarter ended June 30, 2006 increased to $3,217,821, as comparedto $1,556,007 for the comparable quarter ended June 30, 2005, an overallincrease of approximately $1,661,814 or 106.80%. For the six-month period endedJune 30, 2006 sales increased to $5,919,896, as compared to $3,381,295, anoverall increase of $2,538,601 or 75.1%.  When analyzed by revenue category for the quarter and six-month period,sales of CIS and DIS products increased by $1,104,810, or 372.49%, and $1,489,545or 168.6% respectively.  For the quarterand six-month period, service revenues increased by $557,004 or 44.23% and$1,049,056 or 42% respectively. The increase in sales of CIS and DIS productswas primarily attributable to the addition of the revenues from ASPYRA’s whollyowned subsidiaries, described above under “Overview”.  The increase in service revenues isattributable to the consolidation of service revenues from the subsidiaries anda greater number of client accounts under contract.  Service revenues are expected to continue toincrease as and when the Company’s installed base of CIS and DIS installationsincreases.

TheCompany continues to invest heavily in sales and marketing activities focusedon increasing its transaction pipeline and transitioning to more of a directsales model so that it is less reliant on third parties in the sale of its CISand DIS products.  While this transitionis being completed management is cautious about the near-term outlook for itssales of CIS and DIS products.  TheCompany has invested additional funds into marketing activities to furtherbuild its sales pipeline as well as to launch the newly merged company into newmarket opportunities.  The Company’sfuture operating results will continue to be subject to quarterly variationsbased upon a wide variety of factors, including the volume mix and timing oforders received during any quarter, and the temporary delays in the closing ofnew CIS and DIS sales.  In addition, theCompany’s revenues associated with CIS and DIS sales may be delayed due toclient related issues such as client staff availability for training,information technology infrastructure readiness, and the performance of thirdparty contractors, all of which are issues outside of the control of ASPYRA.

*Costsof products and services sold*

Costof sales for the quarter ended June 30, 2006 increased by $978,772 or 125.3% to$1,759,821, as compared to $781,049 for the same quarter of fiscal 2005.  Cost of sales for the six-month periodincreased by $1,657,354 or 100.5% to $3,306,615 for the six-month periodcompared to $1,649,261 for the same period of fiscal 2005.  For the quarter and six-month period, theincreases in cost of sales were primarily attributable to an increase in laborcosts of $319,307 or 70.9%, and $668,547 or 73.2% respectively, increases inmaterial costs of $394,832 or 713.6%, and $538,450 or 344.3% respectively; andincreases in other costs of $264,631 or 96.2% and $450,357 or 77.8%respectively, as compared to the same periods in fiscal 2005.  The increase in material costs wasattributable to the increase in sales of CIS and DIS products discussedabove.  The increase in labor costs wasattributable to the consolidation of addition of personnel of Aspyra DiagnosticSolutions, Inc. The increase to other costs was also a result of the additionof the operations of the subsidiaries. For the current quarter and six-month period, cost of sales as apercentage of sales was 55% and 56% respectively, as compared to 50% and 49%respectively for the comparable periods of 2005.  The overall percentage increase in cost ofsales, as a percentage of sales, in the quarter was attributable to the volumeand mix of sales during the periods discussed and the cost of sales relatedthereto.  The Company could potentiallyexperience quarterly variations in gross margin as a result of the factorsdiscussed above.

*Selling,general and administrative expenses*

Selling,general and administrative expenses increased by $1,160,068 or 150% for thecurrent fiscal quarter ended June 30, 2006 as compared to the same quarter infiscal 2005.  For the six-month period,selling, general and administrative expenses increased by $2,284,192 or 142.8%as compared to the same period in fiscal 2005. For the quarter the increases inselling, general and administrative expenses were primarily attributable to theaddition of expenses from the consolidation of the subsidiaries ofapproximately $753,000 as well as additional expenses incurred during thequarter ended June 30, 2006, as follows: legal and accounting fees of approximately $119,000, corporategovernance expenses of $63,000 tradeshow expenses of approximately $38,000,additional personnel in regulatory affairs and accounting of approximately$35,000 depreciation expense of $28,000,and compensation expense ofapproximately $69,000 associated with the adoption of SFAS No. 123(R).  Also included in the current quarter, asadditional expense consolidated from our subsidiaries was approximately$150,000 attributable to amortization of intangible assets.

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Forthe six-month period the increases in selling, general and administrativeexpenses were primarily attributable to the addition of expenses from theconsolidation of the subsidiaries of approximately $1,533,000 as well asadditional expenses incurred during the period as follows:  legal and accounting fees of approximately$145,000, corporate governance expenses of $83,000, tradeshow expenses ofapproximately $90,000, additional personnel in regulatory affairs and accountingof approximately $88,000, depreciation expense of $35,000, compensation expenseof approximately $156,000 associated with the adoption of SFAS No. 123(R),  and expenses related to the Company’s usersymposium of approximately $72,000.  Alsoincluded in the current six-month period as additional expense consolidatedfrom our subsidiaries was approximately $300,000 attributable to amortizationof intangible assets

TheCompany’s plans include increased further investment in its marketing and salesprograms during the balance of its 2006 fiscal year.

*Researchand development expenses*

Researchand development expenses increased by $402,752, or 72.1% for the current fiscalquarter ended June 30, 2006 as compared to the same period in fiscal 2005.  For the six-month period research anddevelopment expense increased $403,022 or 72.1%, as compared to the same periodin fiscal 2005.  The increase isattributable to increases in salaries and related personnel expense as a resultof the addition of the personnel in the consolidated subsidiaries, whichamounted to approximately $153,000 during the current quarter and $295,000 forthe six-month period.  In addition therewere other personnel additions, which amounted to $56,000 and $100,000 for thecurrent quarter and six-month period. For the comparable second quarters of 2006 and 2005, the Companycapitalized software costs of $232,367 and $214,421, respectively, which aregenerally amortized over the estimated useful life, not to exceed fiveyears.  For the comparable six-monthperiods of 2006 and 2005, the Company capitalized software costs of $499,586and $340,021 respectively.  Such costswere attributable to the development of AccessRAD the new Radiology InformationSystem (“RIS”)/Picture Archive Communication Systems (“PACS”) platform thatintegrates the Company’s radiology information system CyberRAD with itsAccessNET PACS system, and enhancements and new modules for the Company’s CISand DIS products.  The Company plans tocontinue significant product development activities at current expense levelsthroughout the 2006 fiscal year.

*InterestExpense*

Interestexpense for the current quarter ended June 30, 2006 increased by $131,259 or5,109% as compared to the same quarter of fiscal 2005.  Interest expense for the current six-monthperiod increased $158,481 or 2,042% over the comparable six-month period offiscal 2005. Of this amount approximately $98,000 was attributable to a penaltyrelated to the private placement transaction that was completed in November 2005whereby the investors were entitled to receive an amount of 1% per month if theCompany’s registration had not been declared effective within 120 days of theclosing of the private placement.  Thebalance of the increase is a result of the increased borrowings during thecurrent quarter and six-month periods as compared to the second quarter andsix-month period of fiscal 2005.

*Netincome (loss)*

As aresult of the factors discussed above, the Company incurred a net loss of$1,064,180 or basic and diluted loss per share of $.11 in the second fiscalquarter of 2006 as compared to net loss of $238,538 or basic and diluted lossper share of $.07 for the second fiscal quarter of 2005.  For the six-month period ended June 30, 2006,the Company incurred a net loss of $2,377,898 or basic and diluted loss pershare of $.26 as compared to net loss of $425,502 or basic and diluted loss pershare of $.13 for the same period of 2005.

### **Liquidity and Capital Resources**

Historically,the Company’s primary need for capital has been to invest in softwaredevelopment, and in computers and related equipment for its internal use.  The Company invested $499,586 and $340,421respectively during the six months ended June 30, 2006 and 2005 in softwaredevelopment.  These expenditures relatedto investment in the Company’s new RIS/PACS integrated system AccessRAD,enhancements to AccessNET, and the new browser version 

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of the Company’sLaboratory Information Systems (“LIS”) product, CyberLAB, and other productenhancements.  The Company anticipatesexpending additional sums during fiscal 2006 on product enhancements to all itsproducts and the further development of AccessRAD, and the new browser versionof the Company’s LIS product, CyberLAB. During the six months ended June 30 2006 and 2005, the Company investedan aggregate of $818,022, of which $636,485 was under capital leases and$169,759, respectively, in fixed assets primarily consisting of computers,network infrastructure, telephone and data communications systems, and software.

Asof June 30, 2006, the Company’s working capital amounted to a deficit of$945,620 compared to a deficit of $2,549,521, as of December 31, 2005.  The deficit working capital position on aconsolidated basis is the result of ASPYRA merging with Aspyra DiagnosticSolutions, Inc. (formerly StorCOMM, Inc.), which had a substantial negativeworking capital position at the time of the merger and the increase in deferredrevenues, which in the aggregate amounted to approximately $4,265,000 at June30, 2006.  On May 17, 2006, the Companysold in a private placement transaction 2,250,000 shares of its common stockand warrants to purchase up to 1,350,000 shares of its common stock pursuant tothe terms of the Common Stock and Warrant Purchase Agreement, dated May 4,2006.  The private placement generated$4.5 million and improves the Company’s working capital position.

Cashused in operating activities was $620,454 for the six-month period ended June30, 2006 compared to cash provided by operations of $417,412 for the comparableperiod of fiscal 2005.  The decrease incash flow from operating activities was primarily attributable to the net lossincurred and the net change in accrued receivables, payables, and deferredrevenues compared to the same period of fiscal 2005.

Netcash used in investing activities totaled $681,223 for the six-month periodended June 30, 2006, compared to $709,970 used in investing activities duringthe comparable period of 2005.  Theincrease in cash used in investing activities was due to increased investmentin property and equipment and additional investment in capitalized software,and additions to capitalized acquisition costs.

Cashflows from financing activities amounted to $3,330,369 during the six-monthperiod ended June 30, 2006 compared to $8,000 used during the comparable periodof fiscal 2005.  The increase wasprimarily attributable to proceeds from the private placement discussed aboveand from borrowings on its revolving line of credit with the bank offset bypayments on notes payable and an increase in restricted cash.

The Company’s primary source of working capital hasbeen generated from the private placement, which was completed in May 2006, andfrom borrowings.  The Company’s resultsof operations for the current fiscal quarter ended June 30,2006 producednegative operating cash flow of approximately $620,454.  An unanticipated decline in sales, delays inimplementations where payments are tied to delivery and/or performance of services,or cancellations of contracts could have a negative effect on cash flow fromoperations and could in turn create short-term liquidity problems.  We believe that our current cash and cashequivalents, and cash flow from operations, will be sufficient to meet ourcurrent anticipated cash needs, including for working capital purposes, capitalexpenditures and various contractual obligations, for at least the next 12months.  We may, however, requireadditional cash resources due to changed business conditions or other futuredevelopments, including any investments or acquisitions we may decide topursue.  The sale of convertible debt securitiesor additional equity securities could result in additional dilution to ourshareholders. The incurrence of indebtedness would result in incurring debt serviceobligations and could result in operating and financial covenants that wouldrestrict our operations. In addition, there can be no assurance that anyadditional financing will be available on acceptable terms, if at all. Althoughthere are no present understandings, commitments or agreements with respect tothe acquisition of any other businesses, applications or technologies, we may,from time to time, evaluate acquisitions of other businesses, applications ortechnologies.

### **Seasonality, Inflation and Industry Trends**

The Company’ssales are generally higher in the winter and spring.  Inflation has not had a material effect onthe Company’s business since the Company has been able to adjust the prices ofits products and services in response to inflationary pressures.  Management believes that most phases of thehealthcare segment of the computer industry will continue to be highlycompetitive, and that potential healthcare reforms including those promulgatedby Health Insurance Portability and Accountability Act may have a long-termpositive impact on its business.  The keyissues driving demand for ASPYRA’s products are industry concerns about patientcare and safety issues, development of a national standard for the electronichealth record that will affect all clinical data, a paradigm shift from analogto digital imaging technologies, 

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and regulatorycompliance.  The Company has continued toinvest heavily in new application modules to assist its customers in addressingthese issues.  Management believes thatnew application modules and features that concentrate on such issues will bekey selling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company anticipates it willbe able to meet these challenges.

### **Critical Accounting Policies and Estimates**

Management’sdiscussion and analysis of ASPYRA’s financial condition and results ofoperations are based upon the condensed consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States.  Thepreparation of these financial statements requires management to make estimatesand judgments that affect the reported amounts of assets, liabilities, revenuesand expenses, and related disclosures of contingent assets andliabilities.  On an on-going basis,management evaluates estimates, including those related to the valuation ofinventory and the allowance for uncollectible accounts receivable. We base ourestimates on historical experience and on various other assumptions that arebelieved to be reasonable under the circumstances, the results of which formthe basis for making judgments about the carrying values of assets andliabilities that are not readily apparent from other sources.  Actual results may differ from theseestimates under different assumptions or conditions. We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements:

*Inventory*

TheCompany’s inventory is comprised of a current inventory account that consistsof items that are held for resale and a long-term inventory account thatconsists of items that are held for repairs and replacement of hardwarecomponents that are serviced by the Company under long-term Extended ServiceAgreements with its clients.  Currentinventory is valued at the lower of cost to purchase or the current estimatedmarket value of the inventory items. Inventory is evaluated on a continual basis and adjustments to recordedcosts are made based on management’s estimate of future sales value, or in thecase of the long-term component inventory, on management’s estimation of theusage of specific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which, are specifically reserved.  Inaddition, adjustments are made for the difference between the cost of theinventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At June 30, 2006, the inventory reserve wasapproximately $146,800.

*Accounts Receivable*

Accountsreceivable balances are evaluated on a continual basis and allowances areprovided for potentially uncollectible accounts based on management’s estimateof the collectability of customer accounts. If the financial condition of acustomer were to deteriorate, resulting in an impairment of their ability tomake payments, an additional allowance may be required. Allowance adjustmentsare charged to operations in the period in which the facts that give rise tothe adjustments become known.  Theaccounts receivable balance at June 30, 2006 was $1,879,960, net of anallowance for doubtful accounts of approximately $82,840.

*RevenueRecognition*

Revenues arederived primarily from the sale of CIS and DIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position (SOP)No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP 98-9and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognition inFinancial Statements.”  SOP No 97-2, asamended, generally requires revenue earned on software arrangements involvingmultiple-elements to be allocated to each element based on the relative fairvalues of those elements.  The Companyallocates revenue to each element in a multiple-element arrangement based onthe element’s respective fair value, with the fair value determined by the pricecharged when that element is sold and specifically defined in a quotation orcontract.  The Company determines thefair value of the maintenance portion of the arrangement based on the renewalprice of the maintenance charged to customers, 

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professional servicesportion of the arrangement, other than installation services, based on hourlyrates which the Company charges for these services when sold apart from asoftware license, and the hardware and sublicense of software based on theprices for these elements when they are sold separately from the software.  At June 30, 2006 deferred revenue was$1,773,136.

PostImplementation software and hardware maintenance services are marketed undermonthly, quarterly and annual arrangements and are recognized as revenueratably over the contracted maintenance term as services are provided.  Deferred revenue related to CIS and DIS salesare comprised of deferrals for license fees, hardware, and other services forwhich the implementation has not yet been completed and revenues have not beenrecognized.  At June 30, 2006 deferredservice contract income was $2,492,013.

*SoftwareDevelopment Costs*

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the six-month periods ended June 30, 2006and 2005, the Company capitalized $499,586 and $340,421, respectively.  At June 30, 2006, the balance of capitalizedsoftware costs was $2,237,104, net of accumulated amortization of $930,974.

*Intangible Assets*

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

In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, goodwill is tested for impairment on an annualbasis or between annual tests if an event occurs or circumstances change thatwould indicate the carrying amount may be impaired. In accordance with SFAS No.144, Accounting for Impairment of Long-Lived Assets, management reviewsdefinite life intangible assets to determine if events or circumstances have occurredwhich may cause the carrying values of intangible assets to be impaired. Thepurpose of these reviews is to identify any facts or circumstances, eitherinternal or external, which may indicate that the carrying value of the assetsmay not be recoverable.

*Stock-basedCompensation*

We have two stock-based compensation plans, the2005 Equity Incentive Plan and the 1997 Stock Option Plan, under which we mayissue shares of our common stock to employees, officers, directors andconsultants. Upon effectiveness of the 2005 Equity Incentive Plan, the 1997Stock Option Plan was closed for purposes of new grants.  Both of these plans have been approved by ourshareholders.

Priorto January 1, 2006, we accounted for those plans under the recognition andmeasurement provisions of APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. No stock-based employee compensationcost was recognized in our Statement of Operations for the three and six monthsended June 30, 2005 as all options granted under our plans had an exerciseprice equal to the market value of the underlying common stock on the date ofgrant. Effective January 1, 2006, we adopted the fair value recognitionprovisions of SFAS No. 123(R), Share-Based Payment, using themodified-prospective-transition method. Under that transition method, compensationcost recognized in the three and six months ended June 30, 2006 includes;(a) compensation cost for all share-based payments granted prior to, butnot yet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123, and(b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods have not been restated.

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SFASNo 123(R) requires us to make certain assumptions and judgments regarding thegrant date fair value. These judgments include expected volatility, risk freeinterest rate, expected option life, dividend yield and vesting percentage.These estimations and judgments are determined by us using many differentvariables that in many cases are outside of our control. The changes in thesevariables or trends, including stock price volatility and risk free interestrate may significantly impact the grant date fair value resulting in asignificant impact to our financial results.

*IncomeTaxes*

TheCompany accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financial statementsand the tax bases of assets and liabilities using enacted tax rates in effectfor the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.

### **Risk Factors**

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

***We have incurred losses recently that may adversely impactliquidity.***

We haveexperienced operating losses and cash outflows. For the six months ended June 30, 2006, our net loss was$2,377,898.  At June 30, 2006, our cashand cash equivalents totaled $4,338,547 and our working capital deficit was$945,620.  We cannot be certain thatAspyra will become profitable and sustain profitability.  If Aspyra does not become profitable andsustain profitability, the market price of our common stock will decline.  The Company’s primary source of workingcapital has been generated from the private placement and borrowings.  The Company’s results of operations for thesix months ended June 30, 2006 produced negative operating cash flow ofapproximately $620,454.  Any decline insales, delays in implementations where payments are tied to delivery and/orperformance of services, or cancellations of contracts could have a negativeeffect on cash flow from operations and could in turn increase our liquidityproblem.  We may require additional cashresources to sustain our business.  Thesale of convertible debt securities or additional equity securities couldresult in additional dilution to our shareholders.  The incurrence of additional indebtednesswould result in incurring debt service obligations and could result inoperating and financial covenants that would restrict our operations.  There can be no assurance that any additionalfinancing will be available on acceptable terms, if at all.

***If ASPYRA and Aspyra Diagnostic Solutions, Inc. (formerlyStorCOMM) fail to effectively integrate their operations, the combined companymay not realize the potential benefits of the merger.***

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

·              failure to successfully managerelationships with customers and other important relationships;

·              failure of customers to accept newservices or to continue using the products and services of the combinedcompany;

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·              difficulties in successfullyintegrating the management teams and employees of ASPYRA and Aspyra DiagnosticSolutions, Inc. (formerly StorCOMM);

·              challenges encountered in managinglarger, more geographically dispersed operations;

·              the loss of key employees;

·              diversion of the attention ofmanagement from other ongoing business concerns;

·              potential incompatibilities oftechnologies and systems;

·              potential difficulties integratingand harmonizing financial reporting systems; and

·              potential incompatibility ofbusiness cultures.

If the combinedcompany’s operations do not meet the expectations of customers of ASPYRA orAspyra Diagnostic Solutions, Inc. (formerly StorCOMM) then these customers maycease doing business with the combined company altogether, which would harm theresults of operations and financial condition of ASPYRA.

If the anticipatedbenefits of the merger are not realized or do not meet the expectations offinancial or industry analysts, the market price of ASPYRA common stock maydecline. The market price of ASPYRA common stock may decline as a result of themerger if:

·              the integration of ASPYRA andAspyra Diagnostic Solutions, Inc. (formerly StorCOMM) is unsuccessful;

·              the combined company does notachieve the expected benefits of the merger as quickly as anticipated or thecosts of or operational difficulties arising from the merger are greater thananticipated;

·              the combined company’s financialresults after the merger are not consistent with the expectations of financialor industry analysts;

·              the anticipated operating andproduct synergies of the merger are not realized; or

·              the combined company experiencesthe loss of significant customers or employees as a result of the merger.

***We face intense competition from both established entitiesand new entries in the market that may adversely affect our revenues and profitability.***

Our markets arecompetitive. There are many companies with active research and developmentprograms both in and outside of the healthcare information technologyindustry.  Many of these companies haveconsiderable experience in areas of competing interest to us.  Additionally, we cannot determine if otherfirms are conducting potentially competitive research, which could result inthe development and introduction of products that are either comparable or superiorto the products we sell.  Further, newproduct introductions, product enhancements and the use of other technologiesby our competitors could lead to a loss of market acceptance and cause adecline in sales or gross margins.

If we are unableto anticipate or react to competition or if existing or new competitors gainmarket share, our sales may decline or be impaired and we may experience adecline in the prices we can charge for our products, which could adverselyaffect our operating results. Our competitive position depends on several factors,including:

·              our ability to adapt effectivelyto the continued development, acquisition or licensing of technology or productrights by our competitors;

·              our ability to enhance ourproducts or develop new products;

·              our ability to adapt to changingtechnological demands; and

·              our strategic decisions regardingthe best allocation of our limited resources.

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Several of ourcurrent and potential competitors have greater financial, technical, sales,marketing and other resources than we do and consequentially may have anability to influence customers to purchase their products that compete withours. Our future and existing competitors could introduce products withsuperior features, scalability and functionality at lower prices than ourproducts, and could also bundle existing or new products with other moreestablished products in order to compete with us. Our competitors could alsogain market share by acquiring or forming strategic alliances with our othercompetitors. If we do not adapt our business in the face of this competition,our business and operating results may be harmed.

***Any failure to successfully introduce future products intothe market could adversely affect our business.***

The commercialsuccess of future products depends upon their acceptance by the medicalcommunity.  Our future product plansinclude capital-intensive clinical information systems.  We believe that these products cansignificantly reduce labor costs, improve patient care and offer otherdistinctive benefits to the medical community. However, there is often market resistance to products that requiresignificant capital expenditures or which eliminate jobs through automation. Wecan make no assurance that the market will accept our future products andsystems, or those sales of our future products and systems will grow at therates expected by our management.

***If we fail to meet changing demands of technology, we maynot continue to be able to compete successfully with competitors.***

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

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

Our future successand growth depend on the continued services of our key management andemployees, including Steven M. Besbeck, Bruce M. Miller, James R. Helms, SamuelG. Elliott, and William W. Peterson.  Theloss of the services of any of these individuals or any other key employeecould materially affect our business. Our future success also depends on ourability to identify, attract and retain additional qualified personnel.Competition for employees in our industry is intense and we may not besuccessful in attracting or retaining them. There are a limited number of people with knowledge of, and experiencein, our industry.  We do not haveemployment agreements with most of our key employees.  However, we generally enter into agreementswith our employees regarding patents, confidentiality and related matters.  We do not maintain life insurance polices onour employees.  Our loss of keypersonnel, especially without advance notice, or our inability to hire orretain qualified personnel, could have a material adverse effect on sales andour ability to maintain our technological edge. We cannot guarantee that we will continue to retain our key managementand skilled personnel, or that we will be able to attract, assimilate andretain other highly qualified personnel in the future.

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

We rely on acombination 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 bechallenged, invalidated, or circumvented by third parties. Third parties maycopy aspects of our products or otherwise obtain and use our proprietaryinformation without authorization. Third parties may also develop similar orsuperior technology independently, including by designing around our patents.Furthermore, the laws of some foreign countries do not offer the same level ofprotection of our proprietary rights as the laws of the United States, and wemay be subject to unauthorized use of our products in those countries. Anylegal action that we may bring to protect proprietary information could beexpensive and may distract management from day-to-day operations. Unauthorizedcopying or use of our products or proprietary information could result inreduced sales of our products.

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***Third parties claiming that we infringe their proprietaryrights could cause us to incur significant legal expenses and prevent us fromselling our products.***

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

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

·              require us to pay monetary amountsas damages to our customers.

In addition, welicense and use software from third parties in our business. These third partysoftware 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 haveinfringed the intellectual property rights of others, including patent andcopyright infringement claims, which may affect our ability to continuelicensing their software. Our inability to use any of this third party softwarecould result in disruptions in our business, which could materially andadversely affect our operating results.

***ASPYRA operates in a consolidating industry which createsbarriers to market penetration.***

The healthcareinformation technology industry in recent years has been characterized byconsolidation by both healthcare providers who are our customers and by thosecompanies that we compete against. Large hospital chains and groups ofaffiliated hospitals prefer to negotiate comprehensive contracts for all oftheir system needs with larger vendors who offer broader product lines andservices. The conveniences offered by these large vendors are administrativeand financial incentives that we cannot offer our customers.

***Our productsmay be subject to government regulation in the future that could impair ouroperations.***

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

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

***Changes ingovernment regulation of the healthcare industry could adversely affect ourbusiness.***

Federal and state legislative proposals are periodically introduced orproposed that would affect major changes in the healthcare system, nationally,at the state level or both. Future legislation, regulation or payment policiesof Medicare, Medicaid, private health insurance plans, health maintenanceorganizations and other third-party payers could adversely affect the demandfor our current or future products and our ability to sell our products on aprofitable basis. Moreover, healthcare legislation is an area of extensive anddynamic change, and we cannot predict future legislative changes in thehealthcare field or their impact on our industry or our business.

***We are subject to the Health InsurancePortability and Accountability Act (HIPAA) and the cost of complying with HIPAAmay negatively impact our net income.***

Ourbusiness is substantially impacted by the requirements of HIPAA and ourproducts must maintain the confidentiality of a patient’s medical records andinformation. These requirements also apply to most of our customers.  We believe our products meet the standards ofHIPAA and may require our customers to upgrade their systems, but our 

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customers’preoccupation with HIPAA may adversely impact sales of our products, and thecosts of compliance with HIPAA could have an impact on our product margins andselling, general and administrative expenses incurred by us and couldnegatively impact our net income.

***Defective products or product failure may subject us toliability and could substantially increase our costs.***

Our products areused 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 productliability arising from an inaccurate, or allegedly inaccurate, test orprocedure result.  In the past, ASPYRAhas discovered errors and failures in certain of our product offerings aftertheir introduction and have experienced delayed or lost revenues during theperiod required to correct these errors. Errors and failures in products released by us could result in negativepublicity, product returns, loss of or delay in market acceptance of ourproducts, loss of competitive position or claims by customers or others.  Alleviating any of these problems couldrequire significant expenditures of our capital and resources and could causeinterruptions, delays or cessation of our sales, which could cause us to loseexisting or potential customers and would adversely affect our operatingresults.  We may be subject to productliability claims as a result of any failure or errors in our products.  If a customer is successful in proving itsdamages, it could prove expensive and time-consuming to defend against theseclaims, and we could be liable for the damages suffered by our customers andother related expenses, which could adversely affect our operatingresults.  We currently maintain productliability insurance coverage for up to $2 million per incident and up to anaggregate of $4 million per year. Although management believes this liability coverage is sufficientprotection against future claims, there can be no assurance of the sufficiencyof these policies.  We have not receivedany indication that our insurance carrier will not renew our product liabilityinsurance at or near current premiums; however, we cannot guarantee that thiswill continue to be the case.

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

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

***Our evaluation of internal controls and remediation ofpotential problems will be costly and time consuming and could expose weaknessin our financial reporting.***

While we believethat we currently have adequate internal control procedures in place, we arestill exposed to potential risks from recent legislation requiring companies toevaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. We areevaluating our internal controls system in order to allow management to reporton our internal controls over financial reporting, as required by Section 404of the Sarbanes-Oxley Act of 2002 beginning in our fiscal year 2007.

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

Our operations andoperating results may be adversely affected by many different factors which areoutside of our control, including:

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

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

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

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

·              acts of war or terrorism; and

·              inadvertent errors.

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

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***Our international operations involve special risks thatcould increase our expenses, adversely affect our operating results and requireincreased time and attention of our management.***

We expect togenerate approximately 10% of our revenues from customers located outside ofthe United States in the fiscal year ending December 31, 2006.  We expect to expand our internationaloperations and such expansion is contingent upon the successful growth of ourinternational revenues. Our international operations are subject to risks inaddition to those faced by our domestic operations, including:

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

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

·              enactment of additionalregulations or restrictions on imports and exports;

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

·              limitations on future growth orinability to maintain current levels of revenues from international sales if wedo not invest sufficiently in our international operations;

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

·              difficulties in staffing, managingand operating our international operations;

·              difficulties in coordinating theactivities 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 theCompany’s transactions outside of the United States are denominated in foreigncurrencies. Our functional currency is the U.S. dollar.  Accordingly, our future operating resultswill continue to be subject to fluctuations in foreign currency rates. Hedgingforeign currency transaction exposures is complex and subject to uncertainty.We may be negatively affected by fluctuations in foreign currency rates in thefuture, especially if international sales continue to grow as a percentage ofour total sales.

***Changes to financial accounting standards and new exchangerules could make it more expensive to issue stock options to employees, whichwould increase compensation costs and may cause us to change our businesspractices.***

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

For example, wehave used stock options and other long-term equity incentives as a fundamentalcomponent of our employee compensation packages. We believe that stock optionsand other long-term equity incentives directly motivate our employees tomaximize long-term shareholder value and, through the use of vesting, encourageemployees to remain with our Company. The Financial Accounting Standards Boardhas issued Statement of Financial Accounting Standards 123R that will requireus to record a charge to earnings for employee stock option grants. Inaddition, regulations implemented by the American Stock Exchange generallyrequire shareholder approval for all stock option plans, which could make itmore difficult or expensive for us to grant stock options to employees. We may,as a result of these 

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changes, incur increasedcompensation costs, change our equity compensation strategy or find itdifficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business, operating results and financialcondition.

***Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM)currently relies on third party distribution arrangements to distribute itsproducts.  The loss of any of theserelationships, or a material change in any of them, could materially harm ourbusiness.***

For the three andsix months ended June 30, 2006 and June 30, 2005, Aspyra Diagnostic Solutions,Inc. (formerly StorCOMM) received approximately 90% and 80% of its revenues,respectively, through third party distribution arrangements. We expect that wewill continue to generate a significant portion of our revenues through alimited number of distribution arrangements for the foreseeable future. Asignificant portion of the Company’s outstanding accounts receivable is withsuch third party distributors, which will result in a concentration of ourcredit risk. If any of these third party distributors decides not to market ordistribute our products or decides to terminate or not renew its agreement withus, we may be unable to replace the affected agreements with acceptablealternatives, which could materially harm our business, operating results andfinancial condition.

***We depend on channel partners and distributors for asignificant portion of our revenues.***

In each of fiscal2005 and 2004, Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM) generatedapproximately 90%, respectively, of its revenues from medical imaging relatedproducts. We expect to continue to derive a substantial portion of our revenuesfrom this single product category. If this product category is not successfulin the future or we are unable to develop new applications that are assuccessful, our future revenues could be limited and our business may suffer.

**RisksRelated to Our Common Stock**

***Future sales of our common stock could adversely affect ourstock price.***

Future sales ofsubstantial amounts of shares of our common stock in the public market, or theperception that these sales could occur, may cause the market price of ourcommon stock to decline.  In addition, wemay be required to issue additional shares upon exercise of previously grantedoptions or warrants such as the warrants to purchase up to 300,000 shares ofAspyra common stock that Aspyra issued in a private placement pursuant to theCommon Stock and Warrant Purchase Agreement dated August 18, 2005 by and amongAspyra and each of the purchasers named therein, the Aspyra options andwarrants to be issued in exchange for StorCOMM’s options and warrants pursuantto the merger, and the warrants to purchase up to 1,350,000 shares of Aspyracommon stock that Aspyra issued in a private placement pursuant to the CommonStock and Warrant Purchase Agreement dated May 4, 2006 by and among Aspyra andeach of the purchasers named therein. Increased sales of our common stock in the market after exercise ofstock options or warrants could exert significant downward pressure on ourstock price.  These sales also might makeit more difficult for us to sell equity or equity-related securities in the futureat a time and price we deem appropriate.

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

The market pricesof the common stock for ASPYRA have experienced significant fluctuations andour stock price may continue to fluctuate significantly, and you could lose thevalue of your investment. The market price of our common stock may be affectedby a number of factors, including:

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

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

·              rumors, announcements or pressarticles regarding changes in our management, organization, operations or priorfinancial statements;

·              changes in revenue and earningsestimates by securities analysts;

 

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·              announcements of plannedacquisitions by us or by our competitors;

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

·              gain or loss of a significantcustomer;

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

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

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

***Fluctuations in our quarterly financial results haveaffected the stock prices of ASPYRA in the past and could affect our stockprice in the future.***

The quarterlyfinancial results of ASPYRA have fluctuated in the past, and the quarterlyfinancial results of the combined company are likely to vary significantly inthe future. A number of factors associated with the operations of our businessmay cause our quarterly financial results to fluctuate, including our abilityto:

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

·              effectively respond to competitivepressures; and

·              effectively manage our operatingexpense levels.

A number offactors associated with our industry and the markets for our products, many ofwhich are outside our control, may cause our quarterly financial results tofluctuate, including:

·              reduced demand for any of ourproducts;

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

·              cancellation, deferral orlimitation of orders by customers;

·              fluctuations in foreign currencyexchange rates; and

·              weakness or uncertainty in generaleconomic or industry conditions.

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

### **New Accounting Pronouncements**

In December 2004, the Financial Accounting StandardsBoard (“FASB”) issued SFAS No. 151, “Inventory Costs, an amendment of APB No.43, Chapter 4,” which requires that abnormal amounts of idle facility expense,freight, handling costs and wasted material (spoilage) be recognized ascurrent-period charges. In addition, the statement requires that allocation offixed production overheads to the costs of conversion be based on the normalcapacity of the production facilities. SFAS No. 151 is effective for fiscalyears beginning after June 15, 2005. The adoption of this standard did not havea material impact on our results of operations or financial position.

 

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In December 2004, the FASB issued SFAS No. 153, “Exchangesof Nonmonetary Assets,” as amendment of APB Opinion No. 29 “Accounting forNonmonetary Transactions”. This statement amends the principle that exchangesof nonmonetary assets should be measured based on the fair value of the assetsexchanged and more broadly provides for exceptions regarding exchanges ofnonmonetary assets that do not have commercial substance. This Statement iseffective for nonmonetary asset exchanges occurring during our fiscal yearbeginning January 1, 2006. The adoption of this standard did not have a materialimpact on our results of operations or financial position.

InMay 2005, the FASB issued SFAS No. 154, “Accounting Changes and ErrorCorrections,” which changes the accounting for and reporting of a change inaccounting principle. This statement applies to all voluntary changes inaccounting principle and changes required by an accounting pronouncement in theusual instance that the pronouncement does not include specific transitionprovisions. This statement requires retrospective application to prior periodfinancial statements of changes in accounting principle, unless it isimpractical to determine either the period-specific or cumulative effects ofthe change. Statement No. 154 is effective for accounting changes made inour fiscal year beginning January 1, 2006. The adoption of this standarddid not have a material impact on our results of operations or financialposition.

SFAS No. 156, “Accountingfor Servicing of Financial Assets - an amendment of FASB Statement No. 140.”SFAS No. 156 requires an entity to recognize a servicing asset orservicing liability each time it undertakes a contractual obligation to servicea financial asset in certain circumstances. All separately recognized servicingassets and servicing liabilities are required to be initially measured at fairvalue. Subsequent measurement methods include the **amortization****method, whereby servicing assets orservicing liabilities are amortized in proportion to and over the period ofestimated net servicing income or net servicing loss, or the **fair value**method, whereby servicing assets or servicing liabilities are measured at fairvalue at each reporting date and changes in fair value are reported in earningsin the period in which they occur. If the amortization method is used, an entitymust assess servicing assets or servicing liabilities for impairment orincreased obligation based on the fair value at each reporting date.SFAS No. 156 is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact of SFAS No. 156 on ourconsolidated financial statements.

In June 2006, the FASBissued FASB Interpretation No. 48, Accounting for Uncertainty in IncomeTaxes, (FIN 48) an interpretation of FASB Statement No. 109, Accountingfor Income Taxes. FIN 48 requires that a position taken or expected to be takenin a tax return be recognized in the financial statements when it is morelikely than not (i.e. a likelihood of more than fifty percent) that theposition would be sustained upon examination by tax authorities. A recognizedtax position is then measured at the largest amount of benefit that is greaterthan fifty percent likely of being realized upon ultimate settlement. Uponadoption, the cumulative effect of applying the recognition and measurement provisionsof FIN 48, if any, shall be reflected as an adjustment to the opening balanceof retained earnings.

FIN 48 requiresthat subsequent to initial adoption a change in judgment that results insubsequent recognition, derecognition or change in a measurement of a taxposition taken in a prior annual period (including any related interest andpenalties) be recognized as a discrete item in the period in which the changeoccurs. Currently, we record such changes in judgment, including auditsettlements, as a component of our income tax provision. Thus, our reportedquarterly income tax rate may become more volatile upon adoption of FIN 48.This change will not impact the manner in which we record income tax expense onan annual basis.

FIN 48 alsorequires expanded disclosures including identification of tax positions forwhich it is reasonably possible that total amounts of unrecognized tax benefitswill significantly change in the next twelve months, a description of tax yearsthat remain subject to examination by major tax jurisdiction, a tabularreconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective for fiscalyears beginning after December 15, 2006. We are currently evaluating theimpact of this standard on our consolidated financial statements.

**Item 3.**                          Controlsand Procedures

Attached asexhibits to this Quarterly Report on Form 10-QSB are certifications of ASPYRA’sChief Executive Officer and Chief Financial Officer, which are required inaccordance with Rule 13a-14 of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). This “Controls and Procedures” section includesinformation concerning the controls and 

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controls evaluationreferred to in the certifications.  Thissection should be read in conjunction with the certifications for a morecomplete understanding of the topics presented.

**Evaluationof Disclosure Controls and Procedures**

The Company’smanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, conducted an evaluation of the effectiveness of the Company’sdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Form 10-QSB.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of June 30, 2006, ourdisclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act (i) is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

**Changesin Internal Control over Financial Reporting**

Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended June 30, 2006 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

**PART II — OTHERINFORMATION**

**Item 6.**                          Exhibits**
| Exhibit 3.1  |   | Restated Articles of Incorporation, as Amended  (previously filed as an exhibit to the Company’s Registration Statement on  Form S-18 dated September 22, 1983, SEC File No. 2-85265 and incorporated  herein by reference).                                           |
|--------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.2  |   | Amendment to the  Restated Articles of Incorporation (incorporated by reference to Annex E 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). |
| Exhibit 3.3  |   | By-Laws, as amended  (previously filed as an exhibit to the Company’s Registration Statement on  Form S-18 dated September 22, 1983, SEC File No. 2-85265 and incorporated  herein by reference).                                                                      |
| Exhibit 10.1 |   | Common Stock and  Warrant Purchase Agreement dated May 4, 2006 (incorporated by reference to Exhibit  10.1 on the Company’s Current Report on Form 8-K filed with the SEC on May  18, 2006).                                                                           |
| Exhibit 10.2 |   | Registration Rights  Agreement dated May 4, 2006 (incorporated by reference to Exhibit 10.2 on the  Company’s Current Report on Form 8-K filed with the SEC on May 18, 2006).                                                                                          |
| Exhibit 11   |   | Statement re:  computation of per share earnings.                                                                                                                                                                                                                           |
| Exhibit 31.1 |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| Exhibit 31.2 |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| Exhibit 32.1 |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| Exhibit 32.2 |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.                                                                                                                                                               |

 

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**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

ASPYRA, INC.

(Registrant)

 
| Date: August 14, 2006 |   | /s/ Steven M. Besbeck                            |
|-----------------------|--------|--------------------------------------------------|
|                  |   | Steven M. Besbeck,                               |
|                  |   |  President and  Chief Executive Officer     |
|                  |   | (Principal Executive Officer)                    |
| Date: August 14, 2006 |   | /s/ Anahita Villafane                            |
|                  |   | Anahita Villafane,                               |
|                  |   | Chief Financial Officer (Principal Financial and |
|                  |   | Accounting Officer)                              |

 

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**ASPYRA, INC.**

**EXHIBIT INDEX**
| 3.1   |   | Restated Articles of Incorporation, as Amended  (previously filed as an exhibit to the Company’s Registration Statement on  Form S-18 dated September 22, 1983, SEC File No. 2-85265).                                                                                 |
|-------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.2   |   | Amendment to the  Restated Articles of Incorporation (incorporated by reference to Annex E 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). |
| 3.3.1 |   | By-Laws, as amended  (previously filed as an exhibit to the Company’s Registration Statement on  Form S-18 dated September 22, 1983, SEC File No. 2-85265).                                                                                                            |
| 10.1  |   | Common Stock and  Warrant Purchase Agreement dated May 4, 2006 (incorporated by reference to  Exhibit 10.1 on the Company’s Current Report on Form 8-K filed with the SEC  on May 18, 2006).                                                                           |
| 10.2  |   | Registration Rights  Agreement dated May 4, 2006 (incorporated by reference to Exhibit 10.2 on the  Company’s Current Report on Form 8-K filed with the SEC on May 18, 2006).                                                                                          |
| 11    |   | Statement re:  computation of per share earnings.                                                                                                                                                                                                                           |
| 31.1  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| 31.2  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| 32.1  |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.                                                                                                                                                               |
| 32.2  |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.                                                                                                                                                               |

 

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