** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM10-QSB**

 

**(Mark One)**

 
| **ý**                                          | ** ** | **QUARTERLY  REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE** |
|-----------------------------------------------------|------------|----------------------------------------------------------------------------|
| ** **                                          | ** ** | **ACT OF  1934**                                                           |
| **For the quarterly period ended March 31,  2006.** |
| ** **                                          |
| **o**                                               | ** ** | **TRANSITION  REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT**       |

 

**For the transition period from                       to                      **

 

**Commission file number 0-12551**

 

**ASPYRA,INC. formerly known as CREATIVE COMPUTER APPLICATIONS, INC.**

(Exact name of small businessissuer as specified in its charter)

 

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

 

**26115-A Mureau Road, Calabasas, California91302**

(Address of principal executiveoffices)

 

**(818) 880-6700**

(Issuer’s telephone number,including area code)

 

**Check whether the Issuer (1) filed allreports required to be filed by Section 13 or 15(d) of the Exchange Act duringthe past 12 months (or for such shorter period that the registrant was requiredto file such reports), and (2) has been subject to such filing requirements forthe past 90 days.**

 
| **Yes** | **  ****ý** | **No** |   o |
|---------|----------------------------|--------|---------------|

 

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

 
| **Yes** | **  ****o** | **No** |   ý |
|---------|-----------------------|--------|--------------------|

** **

**State the number of shares outstanding ofeach of the issuer’s classes of common equity, as of the latest practicabledate:  8,489,400 common shares as of May12, 2006.**

 

**Transitional Small Business Disclosure Format(check one):**

 
| **Yes** | **  ****o** | **No** |   ý |
|---------|-----------------------|--------|--------------------|

 

 

----

 

**ASPYRA, INC.**

 

 

**FORM 10-QSB**

 

 

### **IN D E X**

 
| **PART I - Financial Information:**                                                            |   |
|------------------------------------------------------------------------------------------------|--------|
|                                                                                           |   |
| **Item 1. Financial Statements (unaudited)**                                                   |   |
|                                                                                           |   |
| Condensed Consolidated  Balance Sheets, at March 31, 2006 and December 31, 2005                |   |
|                                                                                           |   |
| Condensed Consolidated Statements of Operations for the three months  ended March 31, 2006 and |   |
| March 31, 2005                                                                                 |   |
|                                                                                           |   |
| Condensed Consolidated Statements of Cash Flows for the three months  ended March 31, 2006 and |   |
| March 31, 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 5. Other  Information**                                                                 |   |
|                                                                                           |   |
| **Item 6. Exhibits**                                                                           |   |
|                                                                                           |   |
| **Signatures**                                                                                 |   |
|                                                                                           |   |
| **Exhibit Index**                                                                              |   |

 

2

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**ASPYRA, INC.**

 

**PARTI - FINANCIAL INFORMATION**

 

#### **Item1. Financial Statements**

#### ** **

#### **CONDENSEDCONSOLIDATED BALANCE SHEETS**

#### ** **

| ** **                                                                                                        | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                        | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                        | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                        |       |               |       |                  |       |
|                                                                                                              |       |               |       |                  |       |
| CURRENT ASSETS:                                                                                                   |       |               |       |                  |       |
| Cash                                                                                                              |       | $                  | 934,732    |                  | $          | 1,329,753 |   |
| Receivables, net                                                                                                  |       | 2,090,081          |       | 1,547,699             |       |
| Inventory                                                                                                         |       | 265,907            |       | 207,345               |       |
| Prepaid expenses and other assets                                                                                 |       | 340,995            |       | 589,510               |       |
| TOTAL CURRENT ASSETS                                                                                              |       | 3,631,715          |       | 3,674,307             |       |
|                                                                                                              |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT, net                                                                                       |       | 566,600            |       | 511,919               |       |
| INVENTORY OF COMPONENT PARTS                                                                                      |       | 137,848            |       | 158,302               |       |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,286,081 and $1,211,445                    |       | 2,078,470          |       | 1,885,887             |       |
| INTANGIBLES, net                                                                                                  |       | 4,546,613          |       | 4,697,240             |       |
| GOODWILL                                                                                                          |       | 7,698,434          |       | 7,698,434             |       |
|                                                                                                              |       | $                  | 18,659,680 |                  | $          | 18,626,089 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                     |       |               |       |                  |       |
|                                                                                                              |       |               |       |                  |       |
| CURRENT LIABILITIES:                                                                                              |       |               |       |                  |       |
| Notes payable (Note 6)                                                                                            |       | $                  | 1,274,078  |                  | $          | 995,403 |   |
| Accounts payable                                                                                                  |       | 1,002,336          |       | 1,218,698             |       |
| Accrued liabilities:                                                                                              |       |               |       |                  |       |
| Vacation pay                                                                                                      |       | 407,419            |       | 384,887               |       |
| Accrued payroll                                                                                                   |       | 210,647            |       | 355,277               |       |
| Accrued settlement                                                                                                |       | 79,300             |       | 154,300               |       |
| Other                                                                                                             |       | 412,442            |       | 338,098               |       |
| Deferred service contract income                                                                                  |       | 2,381,095          |       | 1,611,644             |       |
| Deferred revenue on system sales                                                                                  |       | 1,759,791          |       | 1,165,521             |       |
| TOTAL CURRENT LIABILITIES                                                                                         |       | 7,527,108          |       | 6,223,828             |       |
|                                                                                                              |       |               |       |                  |       |
| NOTES PAYABLE                                                                                                     |       | 154,751            |       | 220,871               |       |
|                                                                                                              |       |               |       |                  |       |
| TOTAL LIABILITIES                                                                                                 |       | 7,681,859          |       | 6,444,699             |       |
|                                                                                                              |       |               |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                                        |       |               |       |                  |       |
| Common shares, no par value; 20,000,000 shares  authorized; 8,489,400 and 8,489,400 shares issued and outstanding |       | 16,973,988         |       | 16,974,222            |       |
| Additional paid-in-capital                                                                                        |       | 114,553            |       | —                |       |
| Accumulated deficit                                                                                               |       | (6,103,860         | )          | (4,790,142            | )          |
| Accumulated other comprehensive loss                                                                              |       | (6,860             | )          | (2,690                | )          |
|                                                                                                              |       |               |       |                  |       |
| TOTAL SHAREHOLDERS’ EQUITY                                                                                   |       | 10,977,821         |       | 12,181,390            |       |
|                                                                                                              |       | $                  | 18,659,680 |                  | $          | 18,626,089 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

3

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**ASPYRA, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                      | ** ** |
|                                            |       |                                                 |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                                 |       |   |   |
| System sales                                    |       | $                                                    | 971,842    |   | $ | 587,107 |   |
| Service revenue                                 |       | 1,730,233                                            |       | 1,238,181 |   |
|                                            |       | 2,702,075                                            |       | 1,825,288 |   |
|                                            |       |                                                 |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                                 |       |   |   |
| System sales                                    |       | 788,459                                              |       | 453,350 |   |
| Service revenue                                 |       | 758,335                                              |       | 414,862 |   |
|                                            |       | 1,546,794                                            |       | 868,212 |   |
|                                            |       |                                                 |       |   |   |
| Gross profit                                    |       | 1,155,281                                            |       | 957,076 |   |
|                                            |       |                                                 |       |   |   |
| OPERATING EXPENSES                              |       |                                                 |       |   |   |
| Selling, general and administrative             |       | 1,952,856                                            |       | 828,732 |   |
|                                            |       |                                                 |       |   |   |
| Research and development                        |       | 488,468                                              |       | 314,843 |   |
|                                            |       |                                                 |       |   |   |
| Total operating expenses                        |       | 2,441,324                                            |       | 1,143,575 |   |
|                                            |       |                                                 |       |   |   |
| Operating loss                                  |       | (1,286,043                                           | )          | (186,499 | ) |
|                                            |       |                                                 |       |   |   |
| INTEREST AND OTHER INCOME                       |       | 4,739                                                |       | 4,727 |   |
|                                            |       |                                                 |       |   |   |
| INTEREST EXPENSE                                |       | (32,414                                              | )          | (5,192 | ) |
|                                            |       |                                                 |       |   |   |
| Loss before provision for income taxes          |       | (1,313,718                                           | )          | (186,964 | ) |
|                                            |       |                                                 |       |   |   |
| PROVISION FOR INCOME TAXES                      |       | —                                               |       | — |   |
|                                            |       |                                                 |       |   |   |
| NET LOSS                                        |       | $                                                    | (1,313,718 | ) | $ | (186,964 | ) |
|                                            |       |                                                 |       |   |   |
| LOSS PER SHARE (Note 5):                        |       |                                                 |       |   |   |
|                                            |       |                                                 |       |   |   |
| Basic                                           |       | $                                                    | (.15       | ) | $ | (.06 | ) |
| Diluted                                         |       | (.15                                                 | )          | (.06 | ) |
|                                            |       |                                                 |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING: |       |                                                 |       |   |   |
| Basic                                           |       | 8,489,400                                            |       | 3,353,900 |   |
| Diluted                                         |       | 8,489,400                                            |       | 3,353,900 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

 

4

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**ASPYRA, INC.**

 

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

 

**Increase (Decrease) in Cash**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                             | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                                      | ** ** |
| OPERATING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Net loss                                                                                   |       | $                                                    | (1,313,718 | ) | $ | (186,964 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                              |       | 209,014                                              |       | 34,397 |   |
| Provision for doubtful accounts                                                            |       | 17,019                                               |       | — |   |
| Amortization of capitalized software costs                                                 |       | 74,636                                               |       | 90,139 |   |
| Stock based compensation                                                                   |       | 114,553                                              |       | — |   |
| Increase (decrease) from changes in:                                                       |       |                                                 |       |   |   |
| Receivables                                                                                |       | (559,401                                             | )          | 330,173 |   |
| Inventories                                                                                |       | (38,108                                              | )          | (57,348 | ) |
| Prepaid expenses and other assets                                                          |       | 248,515                                              |       | 1,967 |   |
| Accounts payable                                                                           |       | (216,362                                             | )          | 89,821 |   |
| Accrued liabilities                                                                        |       | (122,754                                             | )          | 33,871 |   |
| Deferred service contract income                                                           |       | 769,451                                              |       | 191,664 |   |
| Deferred revenue on system sales                                                           |       | 594,270                                              |       | (91,564 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Net cash provided by (used in) operating  activities                                       |       | (222,885                                             | )          | 436,156 |   |
|                                                                                       |       |                                                 |       |   |   |
| INVESTING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Additions to property and equipment                                                        |       | (113,068                                             | )          | (81,088 | ) |
| Additions to deferred merger costs                                                         |       | —                                               |       | (69,626 | ) |
| Additions to capitalized software costs                                                    |       | (267,219                                             | )          | (126,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Net cash used in investing activities                                                      |       | (380,287                                             | )          | (276,714 | ) |
|                                                                                       |       |                                                 |       |   |   |
| FINANCING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Borrowings on line of credit                                                               |       | 300,000                                              |       | — |   |
| Payments on notes payable                                                                  |       | (87,445                                              | )          | (100,000 | ) |
| Buyback of fractional shares related to  merger                                            |       | (234                                                 | )          | — |   |
| Exercise of stock options                                                                  |       | —                                               |       | 52,000 |   |
|                                                                                       |       |                                                 |       |   |   |
| Net cash provided by (used in) financing  activities                                       |       | 212,321                                              |       | (48,000 | ) |
|                                                                                       |       |                                                 |       |   |   |
| Foreign currency translation adjustment                                                    |       | (4,170                                               | )          | — |   |
|                                                                                       |       |                                                 |       |   |   |
| NET INCREASE (DECREASE) IN CASH                                                            |       | (395,021                                             | )          | 111,442 |   |
|                                                                                       |       |                                                 |       |   |   |
| CASH, beginning of period                                                             |       | 1,329,753                                            |       | 1,655,063 |   |
|                                                                                       |       |                                                 |       |   |   |
| CASH, end of period                                                                        |       | $                                                    | 934,732    |   | $ | 1,766,505 |   |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

5

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**ASPYRA, INC.**

 

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**Note 1-Presentation of Financial Statements**

 

In the opinion of management of Aspyra, Inc. (the “Company” or “ASPYRA”),the accompanying unaudited condensed consolidated financial statements reflectall adjustments (which include only normal recurring accruals) necessary topresent fairly the Company’s financial position as of March 31, 2006, theresults of its operations and cash flows for the three months ended March 31,2006 and 2005. These results have been determined on the basis of accountingprinciples generally accepted in the United States and practices appliedconsistently with those used in preparation of the Company’s Annual Report onForm 10-KSB for the fiscal year ended December 31, 2005.

 

The results of operations for the three months ended March 31, 2006 arenot necessarily indicative of the results expected for any other period or forthe entire year.

 

**Note 2-Liquidity**

 

As of March 31, 2006, the Company’s working capital amounted to adeficit of $3,895,393 compared to a deficit of $2,549,521, as of December 31,2005. The deficit working capital position on a consolidated basis is theresult of ASPYRA merging with Aspyra Diagnostic Solutions, Inc. (formerlyStorCOMM, Inc.) which had a substantial negative working capital position atthe time of the merger and the increase in deferred revenues which in theaggregate amounted to approximately $4,140,000 at March 31, 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 placement generated $4.5 million and improvesthe Company’s working capital position.

 

The Company’s primary source of working capital has been generated fromthe private placement, which was completed in November 2005, and fromborrowings. The Company’s results of operations for the current fiscal quarterended March 31, 2006 produced negative operating cash flow of approximately $222,885.An unanticipated 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. 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, 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 thatwould restrict 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.

 

**Note 3- Inventories**

 

Inventories consist primarily of computer hardware held for resale andare stated at the lower of cost or market (net realizable value). Cost isdetermined using the first-in, first-out method. Supplies are charged toexpense as incurred.

 

The Company also maintains an inventory pool of component parts toservice systems previously sold, which is classified as non-current in theaccompanying balance sheets. Such inventory is carried at the lower of cost ormarket and is charged to cost of sales based on usage. Allowances are made forquantities on hand in excess of estimated future usage. At March 31, 2006and December 31, 2005 the inventory allowance was $131,781 and $116,781,respectively.

 

6

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**Note 4-Goodwill and Intangible Assets**

 

In accordance with SFAS No. 142 and SFASNo. 144, management monitors intangible assets for impairment on aperiodic basis. On an annual basis, unless circumstances indicate impairmentmay have occurred between annual dates, management performs an impairmentanalysis of goodwill and its indefinite life intangible assets. On a quarterlybasis, management reviews definite life intangible assets to determine if thecarrying values of intangible assets are impaired. The purpose of these reviewsis to identify any facts and circumstances, either internal or external, whichmay indicate that the carrying values of the assets may not be recoverable. AtMarch 31, 2006, the net carrying value of goodwill and intangible assets were$7,698,434 and $4,546,613, respectively.

 

**Note 5-Earnings perShare**

 

The Company accounts for its earnings per share in accordance with SFASNo.128, which requires presentation of basic and diluted earnings per share. Basicearnings per share is computed by dividing income or loss available to commonshareholders by the weighted average number of common shares outstanding forthe reporting period. Diluted earnings per share reflect the potential dilutionthat could occur if securities or other contracts, such as stock options, toissue common stock were exercised or converted into common stock.

 

Earnings per share has been computed as follows:

 
| ** **                                                    | ** ** | **Three Months  Ended  March 31, 2006** | ** ** | **Three Months  Ended  March 31, 2005** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                          |       |                                                   |       |                                                   |       |
| NET LOSS                                                      |       | $                                                      | (1,313,718 | )                                                      | $          | (186,964 | ) |
| Basic weighted average number of common  shares outstanding   |       | 8,489,400                                              |       | 3,353,900                                              |       |
| Dilutive effect of stock options                              |       | —                                                 |       | —                                                 |       |
| Diluted weighted average number of common  shares outstanding |       | 8,489,400                                              |       | 3,353,900                                              |       |
|                                                          |       |                                                   |       |                                                   |       |
| Basic loss per share                                          |       | $                                                      | (.15       | )                                                      | $          | (.06 | ) |
|                                                          |       |                                                   |       |                                                   |       |
| Diluted loss per share                                        |       | $                                                      | (.15       | )                                                      | $          | (.06 | ) |

 

For the three months ended March 31, 2006 and 2005, options to purchase821,670 and 354,000 shares of common stock at per share prices ranging from$.72 to $2.75 were not included in the computation of diluted loss per sharebecause inclusion would have been anti-dilutive.

 

**Note 6-Debt Obligations**

 

The Company’s line of credit with its bank provides for $800,000 on arevolving basis through June 15, 2006. On March 31, 2006, the total amount dueto the bank was $800,000. The Company acquired a note in conjunction with themerger with an interest rate of 7% with payments in the amount of $25,000 duemonthly. As of March 31, 2006, the total amount due on this note was $454,751. TheCompany also acquired unsecured notes in conjunction with the merger withinterest rates ranging from 7% to 8%. These notes are due upon demand and thebalance at March 31, 2006 was $174,078.

 

7

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**Note 7-Stock-BasedCompensation**

 

As of March 31, 2006, the Company has two stock-based compensationplans, the 2005 Equity Incentive Plan and the 1997 Stock Option Plan, underwhich we may issue shares of our common stock to employees, officers, directorsand consultants. Upon effectiveness of the 2005 Equity Incentive Plan, the 1997Stock Option Plan was closed for purposes of new grants. Both of these planshave been approved by our shareholders.

 

Prior to January 1, 2006, we accounted for those plans under therecognition and measurement provisions of APB Opinion No. 25, *Accounting for Stock Issued to Employees*,and related Interpretations, as permitted by FASB Statement No. 123, *Accounting for Stock-Based Compensation*(StatementNo. 123). No stock-based employee compensation cost was recognized in ourStatement of Operations for the three months ended March 31, 2005 as alloptions granted under our plans had an exercise price equal to the market valueof the underlying common stock on the date of grant. Effective January 1,2006, we adopted the fair value recognition provisions of FASB StatementNo. 123(R), *Share-Based Payment*(StatementNo. 123(R)), using the modified-prospective-transition method. Under thattransition method, compensation cost recognized in the three months ended March31, 2006 includes; (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions ofStatement No. 123, and (b) compensation cost for all share-basedpayments granted subsequent to January 1, 2006, based on the grant-datefair value estimated in accordance with the provisions of StatementNo. 123(R). As SFAS No. 123(R) requires that stock-based compensationexpense be based on awards that are ultimately expected to vest, stock-basedcompensation for the three months ended March 31, 2006 has been reduced byestimated forfeitures based on historical trends of option forfeitures. TheCompany has recorded approximately $114,500 of stock-based compensation expenseduring the first quarter of 2006 as a result of the adoption of SFAS No. 123(R).The Company did not record any excess tax benefits as a result of adopting SFASNo. 123(R) in the three months ended March 31, 2006 because the Company iscurrently providing a valuation on future tax benefits realized until it cansustain a level of profitability that demonstrates its ability to utilize theassets. Results for prior periods have not been restated.

 

A summary of option activities under the stock option plans during thethree months ended March 31, 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                             |       | —     |       | $                                               | —     |                                                |           |                                |       |   |
| Exercised                           |       | —     |       | $                                               | —     |                                                |           |                                |       |   |
| Canceled or Expired                 |       | —     |       | $                                               | —     |                                                |           |                                |       |   |
|                                |       |       |       |                                            |       |                                                |           |                                |       |
| Outstanding at March 31, 2006  |       | 521,670    |       | $                                               | 2.17       |                                                | 31.7 mos.      |                                | $          | 230,600 |   |
|                                |       |       |       |                                            |       |                                                |           |                                |       |
| Exercisable at March 31, 2006  |       | 190,000    |       | $                                               | 1.63       |                                                | 28.3 mos.      |                                | $          | 166,500 |   |

 

The aggregate intrinsic value is calculated as the difference betweenthe exercise price of the underlying awards and the quoted price of our commonstock for the 210,000 options that were in-the-money at March 31, 2006. Asof March 31, 2006, there was approximately $320,385 of total unrecognizedcompensation cost related to unvested share-based compensation arrangementsgranted under our stock awards plans. That cost is expected to be recognizedover a weighted-average period of two years. The share-based compensation willbe amortized based on the accelerated method over the vesting period.

 

8

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A summary of the status of the Company’s non-vested stock optionsduring the three months ended March 31, 2006 is presented below:

 
| **Non-vested Options**        | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Non-vested at January 1, 2006 |       | 361,670    |       | $                                                   | 2.36       |   |
| Granted                            |       | —     |       | —                                              |       |
| Exercised                          |       | —     |       | —                                              |       |
| Vested                             |       | 30,000     |       | 1.14                                                |       |
| Forfeited or expired               |       | —     |       | —                                              |       |
|                               |       |       |       |                                                |       |
| Non-vested at March 31, 2006  |       | 331,670    |       | $                                                   | 2.47       |   |

 

The following table illustrates the proforma effect on net loss and netloss per share if we had applied the fair value recognition provisions ofStatement 123(R) to all periods presented.

 
| ** **                                                                                                     | ** ** | ** ** | ** ** | **Three Months  Ended**

**March 31, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Net loss before stock-based compensation  expense                                                              | ** ** |       |       |                                                       | $          | (186,964 | ) |
| Less: total stock based employee  compensation expense determined under fair value based method for all awards | ** ** |       |       | (11,011                                                    | )          |
| Net loss                                                                                                       |       |       |       |                                                       | $          | (197,975 | ) |
|                                                                                                           |       |       |       |                                                       |       |
| Basic net loss per share:                                                                                      |       |       |       |                                                       |       |
| Net loss before stock-based compensation                                                                       |       |       |       |                                                       | $          | (.06 | ) |
| Stock-based compensation                                                                                       |       |       |       | (.00                                                       | )          |
| Basic net loss per share                                                                                       |       |       |       |                                                       | $          | (.06 | ) |
| Diluted net loss per share:                                                                                    |       |       |       |                                                       |       |
| Net loss before stock-based compensation                                                                       |       |       |       |                                                       | $          | (.06 | ) |
| Stock-based compensation                                                                                       |       |       |       | (.00                                                       | )          |
| Diluted net loss per share                                                                                     |       |       |       |                                                       | $          | (.06 | ) |

 

The Company issues all of its options at fair market value at the timeof grant. The fair value of each option was estimated on the date of grantusing a Black-Scholes option-pricing model with the following weighted averageassumptions: risk free interest rates ranging from 3.4% to 6.1%, expected lifeof options ranging from 3 to 5 years; volatility ranging from 67% to 126% andno assumed dividends. The weighted-average grant-date fair value of optionsgranted during 2005 was estimated to be $1.80. There were no options granted inthe three months ended March 31, 2006.

 

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

 

9

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**Note 8-Commitmentsand 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 the indemnification period is for the lifetime ofthe officer or director. The maximum potential amount of future payments theCompany could be required to make under the indemnification provisions of itsbylaws is unlimited. However, the Company has a director and officer liabilityinsurance policy that reduces its exposure and enables it to recover a portionof any future amounts paid. As a result of its insurance policy coverage, theCompany believes the estimated exposure for the indemnification provisions ofits bylaws is minimal and, therefore, the Company has not recorded any relatedliabilities.

 

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

 

**Note 9-Income Taxes**

 

The Company 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 liabilities and assets are determined based on the differencesbetween the financial statements and the tax bases of assets and liabilitiesusing enacted tax rates in effect for the year in which the differences areexpected to reverse. Valuation allowances are established when necessary toreduce deferred tax assets to the amount expected to be realized. Income taxexpense represents the tax payable for the period and the change during theperiod in deferred tax assets and liabilities

 

**Note 10-Acquisitionof StorCOMM, Inc.**

 

On November 22, 2005, the Companyacquired StorCOMM, Inc. pursuant to an Agreement and Plan of Reorganizationdated August 16, 2005 (the “Merger Agreement”). Simultaneously with theclosing of the merger, ASPYRA sold in a private placement 1,500,000 shares ofits common stock and warrants to purchase up to 300,000 shares of its commonstock for $3,000,000 pursuant to the terms of the Common Stock and WarrantPurchase Agreement dated August 18, 2005. The private placement closed andbecame effective on November 22, 2005.

 

Pursuant to the Merger Agreement, the Companyissued 3,498,000 shares of common stock in exchange for the business and assetsof StorCOMM. Based upon the average closing price of the common stock forAugust 11, 2005 through August 19, 2005, the value of the commonstock was $7,765,560. In addition, the Company paid approximately $1,157,000 intransaction costs and had advanced StorCOMM $595,387.

 

The acquisition of StorCOMM is accounted foras a purchase business combination in accordance with Statement of FinancialAccounting Standards (SFAS) no. 141, “Business Combinations.” The totalpurchase price related to the acquisition of StorCOMM was $9,517,590.

 

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

 

The following table summarizes the estimatedfair values of the assets acquired and liabilities assumed at the date ofacquisition. The allocation of the purchase price was based on an independentthird-party valuation of certain intangible assets. The excess purchase priceover the estimated fair value of the assets acquired and liabilities assumed isrecorded as goodwill.

 

10

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**At November 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 technology is comprised ofinternally created software, which was valued by the independent third-partywho assigned an expected useful life of 6 years.

 

The other intangible assets are primarilycomprised of customer relationships valued by the independent third-party. Theexpected useful life assigned is 15 years.

 

The excess of the purchase price over theestimated fair value of the assets acquired and the liabilities assumed wasrecorded as goodwill.

 

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 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 109, the change in valuation allowance was offsetagainst goodwill.

 

The following summarized unaudited pro formaconsolidated results of operations are presented as if the acquisition ofStorCOMM occurred on January 1, 2005. The unaudited pro forma results arenot necessarily indicative of future earnings or earnings that would have beenreported had the acquisition been completed and presented.

 
| ** **                       | ** ** | **Three Months Ended  March 31, 2005** | ** ** |
|----------------------------------|------------|------------------------------------------------------------|------------|
| ** **                       | ** ** | **(unaudited)**                                            | ** ** |
|                             |       |                                                       |       |
| Revenues                         |       | 3,360,352                                                  |       |
| Net Loss                         |       | (564,645                                                   | )          |
| Loss per share-basic and diluted |       | (.17                                                       | )          |

 

In January 2006, StorCOMM, Inc. changed its name to Aspyra DiagnosticSolutions, Inc.

 

**Note 11-NewAccounting Pronouncements**

 

In December 2004, the FASB issued SFAS No. 151, “Inventory Costs, anamendment of ARB No. 43, Chapter 4,” which requires that abnormal amounts ofidle facility expense, freight, handling costs and wasted material (spoilage)be recognized as current-period charges. In addition, the statement requiresthat allocation of fixed production overheads to the costs of conversion bebased on the normal capacity of the production facilities. SFAS No. 151 iseffective for fiscal years beginning after June 15, 2005. The adoption of thisstandard did not have a material impact on our results of operations orfinancial position.

 

11

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In December 2004, the FASB issued Statement No. 153, *Exchanges of Nonmonetary Assets*, asamendment of APB Opinion No. 29 Accounting for Nonmonetary Transactions.This statement amends the principle that exchanges of nonmonetary assets shouldbe measured based on the fair value of the assets exchanged and more broadlyprovides for exceptions regarding exchanges of nonmonetary assets that do nothave commercial substance. This Statement is effective for nonmonetary asset exchangesoccurring during our fiscal year beginning January 1, 2006. The adoptionof this standard did not have a material impact on our results of operations orfinancial position.

 

In May 2005, the FASB issued Statement No. 154, *Accounting Changes and Error Corrections*,which changes the accounting for and reporting of a change in accountingprinciple. This statement applies to all voluntary changes in accountingprinciple and changes required by an accounting pronouncement in the usualinstance 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.

 

**Note 12-SubsequentEvents**

 

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 $4.5 million. The exercise price of the warrants is $3.00 per share.  These shares wereissued and sold pursuant to the exemption from registration under theSecurities Act of 1933, as amended (the “Securities Act”) that is available foroffers and sales to accredited investors pursuant to Rule 506 ofRegulation D under the Securities Act and Section 4(2) of theSecurities Act. Simultaneously with the execution of the Purchase Agreement,ASPYRA and each of the Purchasers entered into a Registration Rights Agreement,dated May 4, 2006, pursuant to which each of the Purchasers shall be entitledto certain registration rights.

 

**Item 2.****            Management’s Discussion and Analysis orPlan of Operation**

 

The SEC encourages companies to disclose forward-looking information sothat investors can better understand a company’s future prospects and makeinformed investment decisions. This Quarterly Report on Form 10-QSB containssuch “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, Section 27A of the Securities Act of 1933and Section 21E of the 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 usedin connection with any discussion of future events, operating or financialperformance, financing sources, product development, capital requirements,market growth and the like, identify forward-looking statements.Forward-looking statements are merely predictions and therefore inherentlysubject to uncertainties and other factors which could cause the actual resultsto differ materially from the forward-looking statement. These forward-lookingstatements include, among others:

 

•       projectionsof revenues and other financial items;

 

•       statementsof strategies and objectives for future operations;

 

•       statementsconcerning proposed applications or services;

 

•       statementsregarding future economic conditions, performance or business prospects;

 

•       statementsregarding competitors or competitive actions; and

 

•       statementsof assumptions underlying any of the foregoing.

 

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All forward-looking statements are present expectations of futureevents and are subject to a number of factors and uncertainties that couldcause actual results to differ materially from those described in theforward-looking statements. The risks related to ASPYRA’s business discussedunder “Risk Factors” of this Quarterly Report on Form 10-QSB, among others,could cause actual results to differ materially from those described in theforward-looking statements. Such risks include, among others: the competitiveenvironment; unexpected technical and marketing difficulties inherent in majorproduct development efforts; the potential need for changes in our long-termstrategy in response to future developments; future advances in clinicalinformation technology and procedures, as well as potential changes ingovernment regulations and healthcare policies, both of which could adverselyaffect the economics of the products offered by ASPYRA; and rapid technologicalchange in the microelectronics and software industries.

 

The Company makes no representation as to whether any projected orestimated information or results contained in any forward-looking statementswill be obtained or achieved. Shareholders are cautioned not to place unduereliance on the forward-looking statements, which speak only as of the date ofthis Quarterly Report on Form 10-QSB. The Company is under no obligation, andit expressly disclaims any obligation, to update or alter any forward-lookingstatements after the date of this Quarterly Report on Form 10-QSB, whether as aresult of new information, future events or otherwise.

 

**Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

**Overview**

 

The following discussion relates to the newly merged business ofASPYRA, which includes the operations of its wholly owned subsidiaries AspyraDiagnostic Systems, Inc. and Aspyra Technologies, Ltd. The merger wasconsummated on November 22, 2005 and this first fiscal quarter of 2006 is thefirst full quarterly report since the merger was consummated.

 

ASPYRA operates in one business segment and generates revenuesprimarily from the sale of its Clinical and Diagnostic Information Systems (CISand DIS), which includes the license of proprietary application software, andmay include the sale of servers and other hardware components to be integratedwith its application software. In connection with its sales of its products,the Company provides implementation services for the installation, integration,and training of end users’ personnel. The Company also generates sales ofancillary software and hardware, including its data acquisition products, toits customers and to third parties. The Company also generates recurringrevenues from the provision of comprehensive post implementation services toits customers, pursuant to extended service agreements. This is an importantaspect of its business as the Company’s products are “mission critical” systemsthat are used by healthcare providers in most cases 24 hours per day and 7 daysper week. The ability to provide comprehensive services is crucial to sellingnew customers and maintaining existing customers.

 

Because of the nature of its business, ASPYRA makes significantinvestments in research and development for new products and enhancements toexisting products. Historically, ASPYRA has funded its research and developmentprograms through cash flow primarily generated from operations. Managementanticipates that future expenditures in research and development will eithercontinue at current levels or may increase for the foreseeable future, and willbe funded primarily out of the Company’s cash flow.

 

ASPYRA’s results of operations for the first fiscal quarter ended March31, 2006 were marked by an increase in sales and an increase in operating lossover the comparable period of 2005 that are more fully discussed in thefollowing section “Results of Operations.” The Company’s increase in revenues was due to the addition of the revenuesfrom ASPYRA’s wholly owned subsidiary, Aspyra Diagnostic Solutions, Inc.(formerly StorCOMM, Inc.). The Company had sales, which due to timing issues,were not fully implemented and recognized in the quarter. Despite the shortfallin our new system sales recognized, there were positive areas in our business. Forinstance, service revenues increased for the quarter by $492,052 or 39.7%. Generally,sales cycles for CIS and DIS products are lengthy and on average exceed sixmonths from inception to closure. Because of the complexity of the salesprocess, a number of factors that are beyond the control of the Company candelay the closing of transactions.

 

The operating losses incurred by the Company during the three-monthperiod ended March 31, 2006 were primarily a result of two factors. First, theCompany experienced delays related to implementation of systems, whichprevented it from recognizing revenue on many of its DIS sales, which increasedthe Company’s deferred revenue as of March 31, 2006. Only a fraction of thesales booked in the quarter ended March 31, 2006, were actually recognized asrevenue in that quarter. The backlog of deferred revenue associated with suchsales increased to $1,759,791 as of March 31, 2006, which will be recognized infuture periods. Second, the Company is engaged in executing an integration andrestructuring of the merged business and incurred certain costs associated withsuch activities which were only partially offset by reductions in redundantpersonnel and other expenses during the quarter ended March 31, 2006. TheCompany expects to achieve synergies and cost reductions in its business as itcompletes further integration and restructuring in the next two fiscalquarters.

 

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**Results of Operations**

 

The following table sets forth certain lineitems in our condensed consolidated statement of operations as a percentage oftotal revenues for the periods indicated:

 
| ** **                             | ** ** | **Three Months  Ended****March 31, 2006** | ** ** | **Three Months  Ended****March 31, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| Revenues:                              |       |                                                     |       |                                                     |       |
| System sales                           |       | 36.0                                                     | %          | 32.2                                                     | %          |
| Service revenues                       |       | 64.0                                                     |       | 67.8                                                     |       |
| Total revenues                         |       | 100.0                                                    |       | 100.0                                                    |       |
| Cost of products and services sold:    | ** ** | ** **                                               | ** ** | ** **                                               | ** ** |
| System sales                           | ** ** | 29.2                                                     | ** ** | 24.8                                                     | ** ** |
| Service revenues                       | ** ** | 28.0                                                     | ** ** | 22.7                                                     | ** ** |
|                                   |       |                                                     |       |                                                     |       |
| Total cost of products and services    |       | 57.2                                                     |       | 47.5                                                     |       |
| Gross profit                           |       | 42.8                                                     |       | 52.5                                                     |       |
| Operating expenses:                    | ** ** |                                                     |       |                                                     |       |
| Selling, general and administrative    | ** ** | 72.3                                                     |       | 45.4                                                     |       |
| Research and development               | ** ** | 18.1                                                     |       | 17.2                                                     |       |
| Total operating expenses               |       | 90.4                                                     |       | 62.6                                                     |       |
| Operating loss                         |       | (47.6                                                    | )          | (10.2                                                    | )          |
|                                   |       |                                                     |       |                                                     |       |
| Loss before provision for income taxes |       | (48.6                                                    | )          | (10.2                                                    | )          |
| Provision for income taxes             |       | —                                                   |       | —                                                   |       |
| Net loss                               |       | (48.6                                                    | )          | (10.2                                                    | )          |

 

*Revenues*

 

Sales for the first fiscal quarter endedMarch 31, 2006 increased to $2,702,075, as compared to $1,825,288 for thecomparable quarter ended March 31, 2005, an overall increase of approximately$876,787 or 48.0%. When analyzed by product category for the quarter, sales ofCIS and DIS products increased by $384,735, or 65.5%, and service revenuesincreased by $492,052 or 39.7%. The increase in sales of CIS and DIS productswas primarily attributable to the addition of the revenues from ASPYRA’s whollyowned subsidiary, Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM, Inc.)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 areexpected to continue to increase as and when the Company’s installed base ofCIS and DIS installations increases.

 

Although the Company continues to invest insales and marketing activities, management is cautious about the near-termoutlook for its sales of CIS and DIS products as it focuses on increasing itstransaction pipeline. The Company has invested additional funds into marketingactivities to further build its sales pipeline as well as to launch the newlymerged company. The Company’s future operating results will continue to besubject to quarterly variations based upon a wide variety of factors, includingthe volume mix and timing of orders received during any quarter, and thetemporary delays in the closing of new 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.

 

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*Costs of products and services sold*

 

Cost of sales for the first quarter endedMarch 31, 2006 increased by $678,582 or 78.2% as compared to the same period offiscal 2005. The increase in cost of sales was primarily attributable to anincrease in material costs of $143,617 or 142.1%, an increase in labor costs of$349,240 or 75.4%, and an increase in other costs of $185,725 or 61.1%. Theincrease in material costs was attributable to the increase in sales of CIS andDIS products discussed above. The increase in labor costs was attributable tothe consolidation of addition of personnel of Aspyra Diagnostic Solutions, Inc.The increase to other costs was also a result of the addition of the operationsof the subsidiary. For the current quarter, cost of sales as a percentage ofsales was 57%, as compared to 48% for the comparable period of 2005. Theoverall percentage increase in cost of sales, as a percentage of sales, in thequarter was attributable to a reduced number of sales of CIS and DIS productsrecognized. As a result, gross margins decreased from 52% for the three monthsended March 31, 2005 to 43% for the three months ended March 31, 2006. TheCompany could potentially experience quarterly variations in gross margin as aresult of the factors discussed above.

 

*Selling, general and administrative expenses*

 

Selling, general and administrative expensesincreased by $1,124,124 or 135.6% for the current fiscal quarter ended March31, 2006 as compared to the same period of fiscal 2005. The increases inselling, general and administrative expenses were primarily attributable to theaddition of expenses from the consolidation of the subsidiaries ofapproximately  $629,000 as well asadditional expenses incurred during the quarter ended March 31, 2006, asfollows:  legal and accounting fees ofapproximately $71,000, tradeshow expenses of approximately $90,000 and expensesrelated to the Company’s user symposium of approximately $72,000 in the currentquarter. Also included in the current quarter as additional expense wasapproximately $150,000 attributable to amortization of intangible assets, andcompensation expense of approximately $114,000 associated with the adoption ofFASB Statement 123R. The Company’s plans include increased further investment inits marketing and sales programs during the balance of its 2006 fiscal year.

 

*Research and development expenses*

 

Research and development expenses increasedby $173,625, or 55.1% for the current fiscal quarter ended March 31, 2006 ascompared to the same period of fiscal 2005. The increase is attributable toincreases in salaries as a result of the addition of the personnel in theconsolidated subsidiaries, which amounted to approximately $142,000 during thecurrent quarter. For the comparable first quarters of 2006 and 2005, theCompany capitalized software costs of $267,219 and $126,000, respectively,which are generally amortized over the estimated useful life, not to exceedfive years. Such costs were attributable to the development of AccessRAD the newRIS/PACs platform that integrates the Company’s radiology information systemCyberRAD with its AccessNET PACS system, and enhancements and new modules forthe Company’s CIS and DIS products. The Company plans to continue significantproduct development activities at current expense levels throughout the 2006fiscal year.

 

*Interest Expense*

 

Interestexpense for the three months ended March 31, 2006 increased by $27,222 or524.3% as compared to the same period of fiscal 2005. The increase is a resultof the increased borrowings at March 31, 2006 as compared to March 31, 2005.

 

*Net income (loss)*

 

As a result of the factors discussed above,the Company incurred a net loss of $1,313,718 or basic and diluted loss pershare of $.15 in the first fiscal quarter of 2006 as compared to net loss of$186,964 or basic and diluted loss per share of $.06 for the first fiscalquarter of 2005.

 

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### **Liquidityand Capital Resources**

 

Historically, the Company’s primary need forcapital has been to invest in software development, and in computers andrelated equipment for its internal use. The Company invested $267,219 and$126,000 respectively during three months ended March 31, 2006 and 2005 insoftware development. These expenditures related to investment in the Company’snew RIS/PACS integrated system AccessRAD, and the new browser version of theCompany’s LIS product, CyberLAB, and other product enhancements. The Companyanticipates expending additional sums during fiscal 2006 on productenhancements to all its products and the further development of AccessRAD, andthe new browser version of the Company’s LIS product, CyberLAB. During threemonths ended March 31, 2006 and 2005, the Company invested an aggregate of$113,068 and $81,088, respectively, in fixed assets primarily consisting ofcomputers and software.

 

As of March 31, 2006, the Company’s workingcapital amounted to a deficit of $3,895,393 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 $4,140,000 at March31, 2006. On May 17, 2006, the Company sold in a private placement transaction2,250,000 shares of its common stock and warrants to purchase up to 1,350,000shares of its common stock pursuant to the terms of the Common Stock andWarrant Purchase Agreement, dated May 4, 2006. The private placement generated$4.5 million and improves the Company’s working capital position.

 

Cash used in operating activities were$222,885 for the three-month period ended March 31, 2006 compared to cashprovided by operations of $436,156 for the comparable period of fiscal 2005. Thedecrease in cash flow from operating activities was primarily attributable tothe net loss incurred and the net change in accrued receivables, payables, anddeferred revenues compared to the same period of fiscal 2005.

 

Net cash used in investing activities totaled$380,287 for the three-month period ended March 31, 2006, compared to $276,714used in investing activities during the comparable period of 2005. The increasein cash used in investing activities was due to increased investment inproperty and equipment and additional investment in capitalized software, andadditions to capitalized acquisition costs.

 

Cash flows from financing activities amountedto $212,321 during the three-month period ended March 31, 2006 compared to$48,000 used during the comparable period of fiscal 2005. The increase wasprimarily from borrowings on its revolving line of credit with the bank offsetby cash flows from payments on notes payable.

 

The Company’s primary source of working capital has been generated fromthe private placement, which was completed in November 2005, and fromborrowings. The Company’s results of operations for the current fiscal quarterended March 31, 2006 produced negative operating cash flow of approximately$222,885. An unanticipated decline in sales, delays in implementations wherepayments are tied to delivery and/or performance of services, or cancellationsof contracts could have a negative effect on cash flow from operations andcould in turn create short-term liquidity problems. We believe that our currentcash and cash equivalents, and cash flow from operations, will be sufficient tomeet our current anticipated cash needs, including for working capitalpurposes, capital expenditures and various contractual obligations, for atleast the next 12 months. We may, however, require additional cash resourcesdue to changed business conditions or other future developments, including anyinvestments or acquisitions 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 thatwould restrict 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’s sales are generally higher inthe winter and spring. Inflation has not had a material effect on the Company’sbusiness since the Company has been able to adjust the prices of its productsand services in response to inflationary pressures. Management believes thatmost phases of the healthcare segment of the computer industry will continue tobe highly competitive, and that potential healthcare reforms including thosepromulgated by HIPAA may have a long-term positive impact on its business. Thekey issues driving demand for ASPYRA’s products are industry concerns aboutpatient care and safety issues, development of a national standard for theelectronic health record that will affect all clinical data, a paradigm shift fromanalog to digital imaging technologies, and regulatory compliance. The Companyhas continued to invest heavily in new application modules to assist itscustomers in addressing these issues. Management believes that new applicationmodules and features that concentrate on such issues will be key selling pointsand will provide a competitive advantage. In addition, management believes thatthe healthcare information technology industry will be marked with moresignificant technological advances, which will improve the quality of serviceand reduce costs. The Company anticipates it will be able to meet thesechallenges.

 

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### **CriticalAccounting Policies and Estimates**

 

Management’s discussion and analysis of ASPYRA’sfinancial condition and results of operations are based upon the condensedconsolidated financial statements, which have been prepared in accordance withaccounting principles generally accepted in the United States. The preparationof these financial statements requires management to make estimates andjudgments that affect the reported amounts of assets, liabilities, revenues andexpenses, and related disclosures of contingent assets and liabilities. On anon-going basis, management evaluates estimates, including those related to thevaluation of inventory and the allowance for uncollectible accounts receivable.We base our estimates on historical experience and on various other assumptionsthat are believed to be reasonable under the circumstances, the results ofwhich form the basis for making judgments about the carrying values of assetsand liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates under different assumptions orconditions. We believe the following critical accounting policies affect ourmore significant judgments and estimates used in the preparation of ourconsolidated financial statements:

 

*Inventory*

 

The Company’s inventory is comprised of acurrent inventory account that consists of items that are held for resale and along-term inventory account that consists of items that are held for repairsand replacement of hardware components that are serviced by the Company underlong-term Extended Service Agreements with its clients. Current inventory isvalued at the lower of cost to purchase or the current estimated market valueof the inventory items. Inventory is evaluated on a continual basis andadjustments to recorded costs are made based on management’s estimate of futuresales value, or in the case of the long-term component inventory, on management’sestimation of the usage of specific inventory items and net realizable value. Managementreviews inventory quantities on hand and makes determination of the excess orobsolete items in the inventory, which, are specifically reserved. In addition,adjustments are made for the difference between the cost of the inventory andthe estimated market value and charged to operations in the period in which thefacts that give rise to the adjustments become known. At March 31, 2006, theinventory reserve was approximately $131,800.

 

*AccountsReceivable*

 

Accounts receivable balances are evaluated ona continual basis and allowances are provided for potentially uncollectibleaccounts based on management’s estimate of the collectability of customeraccounts. If the financial condition of a customer were to deteriorate,resulting in an impairment of their ability to make payments, an additionalallowance may be required. Allowance adjustments are charged to operations inthe period in which the facts that give rise to the adjustments become known. Theaccounts receivable balance at March 31, 2006 was $2,090,081, net of anallowance for doubtful accounts of approximately $68,500.

 

*Revenue Recognition*

 

Revenues are derived primarily from the saleof CIS and DIS products and the provision of services. The components of thesystem sales revenues are the licensing of computer software, installation, andthe sale of computer hardware and sublicensed software. The components ofservice revenues are software support and hardware maintenance, training, andimplementation services. The Company recognizes revenue in accordance with theprovisions of Statement of Position (SOP) No. 97-2, “Software Revenue Recognition,”as amended by SOP No. 98-4, SOP 98-9 and clarified by Staff Accounting Bulletin(SAB) 104 “Revenue Recognition in Financial Statements.”  SOP No 97-2, as amended, generally requiresrevenue earned on software arrangements involving multiple-elements to beallocated to each element based on the relative fair values of those elements. TheCompany allocates revenue to each element in a multiple-element arrangementbased on the element’s respective fair value, with the fair value determined bythe price charged when that element is sold and specifically defined in aquotation or contract. The Company determines the fair value of the maintenanceportion of the arrangement based on the renewal price of the maintenancecharged to customers, professional services portion of the arrangement, otherthan installation services, based on hourly rates which the Company charges forthese services when sold apart from a software license, and the hardware andsublicense of software based on the prices for these elements when they aresold separately from the software. At March 31, 2006 deferred revenue was$1,759,791.

 

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Post Implementation software and hardwaremaintenance services are marketed under monthly, quarterly and annualarrangements and are recognized as revenue ratably over the contractedmaintenance term as services are provided. Deferred revenue related to CIS andDIS sales are comprised of deferrals for license fees, hardware, and otherservices for which the implementation has not yet been completed and revenueshave not been recognized. At March 31, 2006 deferred service contract incomewas $2,381,095.

 

*Software Development Costs*

 

Costs incurred internally in creatingcomputer software products are expensed until technological feasibility hasbeen established upon completion of a program design. Thereafter, applicablesoftware development costs are capitalized and subsequently reported at thelower of amortized cost or net realizable value. Capitalized costs areamortized based on current and expected future revenue for each product withminimum annual amortization equal to the straight-line amortization over theestimated economic life of the product, not to exceed five years. For thethree-month periods ended March 31, 2006 and 2005, the Company capitalized$267,219 and $126,000, respectively. At March 31, 2006, the balance ofcapitalized software costs was $2,078,470, net of accumulated amortization of$1,286,081.

 

*Intangible Assets*

 

Intangible assets, with definite andindefinite lives, consist of acquired technology, customer relationships,channel partners, and goodwill. They are recorded at cost and are amortized,except goodwill, on a straight-line basis based on the period of time the assetis expected to contribute directly or indirectly to future cash flows, whichrange from 4 to 15 years.

 

Under SFAS No. 142, “Goodwill and OtherIntangible Assets”, goodwill and indefinite life intangible assets are nolonger amortized but are subject to periodic impairment tests. Other intangibleassets with definite lives, such as acquired technology, customerrelationships, channel partners continue to be amortized over their usefullives. Management monitors intangible assets for impairment on a periodicbasis. On an annual basis, unless circumstances indicate impairment may haveoccurred between annual dates, management performs an impairment analysis ofgoodwill and its indefinite life intangible asset. On a quarterly basis,management reviews definite life intangible assets to determine if the carryingvalues of intangible assets are impaired. The purpose of these reviews is toidentify any facts or circumstances, either internal or external, which mayindicate that the carrying value of the assets may not be recoverable.

 

*Stock-based Compensation*

 

We have two stock-based compensation plans,the 2005 Equity Incentive Plan and the 1997 Stock Option Plan, under which wemay issue 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 planshave been approved by our shareholders.

 

Prior to January 1, 2006, we accountedfor those plans under the recognition and measurement provisions of APB OpinionNo. 25, Accounting for Stock Issued to Employees, and relatedInterpretations, as permitted by FASB Statement No. 123, Accounting forStock-Based Compensation (Statement No. 123). No stock-based employeecompensation cost was recognized in our Statement of Operations for the threemonths ended March 31, 2005 as all options granted under our plans had anexercise price equal to the market value of the underlying common stock on thedate of grant. Effective January 1, 2006, we adopted the fair valuerecognition provisions of FASB Statement No. 123(R), Share-Based Payment(Statement No. 123(R)), using the modified-prospective-transition method.Under that transition method, compensation cost recognized in the three monthsended March 31, 2006 includes; (a) compensation cost for all share-basedpayments granted prior to, but not yet vested as of January 1, 2006, basedon the grant date fair value estimated in accordance with the originalprovisions of Statement No. 123, and (b) compensation cost for allshare-based payments granted subsequent to January 1, 2006, based on thegrant-date fair value estimated in accordance with the provisions of StatementNo. 123(R). Results for prior periods have not been restated.

 

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FASB Statement No 123(R) requires us to makecertain assumptions and judgments regarding the grant date fair value. Thesejudgments include expected volatility, risk free interest rate, expected optionlife, dividend yield and vesting percentage. These estimations and judgmentsare determined by us using many different variables that in many cases areoutside of our control. The changes in these variables or trends, includingstock price volatility and risk free interest rate may significantly impact thegrant date fair value resulting in a significant impact to our financialresults.

 

*Income Taxes*

 

The Company accounts for income taxes inaccordance with SFAS No. 109 “Accounting for Income Taxes,” which requiresrecognition of deferred tax liabilities and assets for the expected future taxconsequences of events that have been included in the financial statements ortax returns. Under this method, deferred tax liabilities and assets aredetermined based on the differences between the financial statements and thetax bases of assets and liabilities using enacted tax rates in effect for theyear in which the differences are expected to reverse. Valuation allowances areestablished when necessary to reduce deferred tax assets to the amount expectedto be realized. Income tax expense represents the tax payable for the periodand the change during the period in deferred tax assets and liabilities.

 

### **Risk Factors**

 

In evaluating the Company, various riskfactors and other information should be carefully considered. The risks anduncertainties described below are not the only ones that impact the Company. Additionalrisks and uncertainties not presently known to us or that we currently deemimmaterial may also have an adverse impact on us. Among other things, thisdiscussion contains forward-looking statements that are based on certainassumptions about future risks and uncertainties. We believe that ourassumptions are reasonable. Nonetheless, it is likely that at least some ofthese assumptions will not come true.

 

***We have incurredlosses recently that may adversely impact liquidity.***

 

We have experience operating losses and cash outflows. At March 31,2006, our net loss was $1,313,718, our cash and cash equivalents totaled$934,732, and our working capital deficit was $3,895,393. We cannot be certainthat ASPYRA will become profitable and sustain profitability. If ASPYRA doesnot become profitable and sustain profitability, the market price of our commonstock will likely decline.

 

***If ASPYRA and AspyraDiagnostic Solutions, Inc. (formerly StorCOMM) fail to effectively integratetheir operations, the combined company may not realize the potential benefitsof the merger.***

 

The integration of ASPYRA and AspyraDiagnostic Solutions, Inc. (formerly StorCOMM) has been a time consuming andexpensive process and may disrupt the combined company’s operations if it isnot completed in a timely and efficient manner. The integration is still inprocess. If this integration effort is not successful, the combined company’sresults of operations could be harmed, employee morale could decline, keyemployees could leave, customers could cancel existing orders or choose not toplace new ones and 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:

 

•       failureto successfully manage relationships with customers and other importantrelationships;

 

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

 

•       difficultiesin successfully integrating the management teams and employees of ASPYRA andAspyra Diagnostic Solutions, Inc. (formerly StorCOMM);

 

•       challengesencountered in managing larger, more geographically dispersed operations;

 

•       theloss of key employees;

 

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

 

•       potentialincompatibilities of technologies and systems;

 

•       potentialdifficulties integrating and harmonizing financial reporting systems; and

 

•       potentialincompatibility of business cultures.

 

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If the combined company’s operations do notmeet the expectations of customers of ASPYRA or Aspyra Diagnostic Solutions,Inc. (formerly StorCOMM) then these customers may cease doing business with thecombined company altogether, which would harm the results of operations andfinancial condition of ASPYRA.

 

If the anticipated benefits of the merger arenot realized or do not meet the expectations of financial or industry analysts,the market price of ASPYRA common stock may decline. The market price of ASPYRAcommon stock may decline as a result of the merger if:

 

•       theintegration of ASPYRA and Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM)is unsuccessful;

 

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

 

•       thecombined company’s financial results after the merger are not consistent withthe expectations of financial or industry analysts;

 

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

 

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

 

***We face intensecompetition from both established entities and new entries in the market thatmay adversely affect our revenues and profitability.***

 

Our markets are competitive. There are manycompanies with active research and development programs both in and outside ofthe healthcare information technology industry. Many of these companies haveconsiderable experience in areas of competing interest to us. Additionally, wecannot determine if other firms are conducting potentially competitiveresearch, which could result in the development and introduction of productsthat are either comparable or superior to 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 unable to anticipate or react tocompetition or if existing or new competitors gain market share, our sales maydecline or be impaired and we may experience a decline in the prices we cancharge for our products, which could adversely affect our operating results.Our competitive position depends on several factors, including:

 

•       ourability to adapt effectively to the continued development, acquisition orlicensing of technology or product rights by our competitors;

 

•       ourability to enhance our products or develop new products;

 

•       ourability to adapt to changing technological demands; and

 

•       ourstrategic decisions regarding the best allocation of our limited resources.

 

Several of our current and potentialcompetitors have greater financial, technical, sales, marketing and otherresources than we do and consequentially may have an ability to influencecustomers to purchase their products that compete with ours. Our future andexisting competitors could introduce products with superior features,scalability and functionality at lower prices than our products, and could alsobundle existing or new products with other more established products in orderto compete with us. Our competitors could also gain market share by acquiring orforming strategic alliances with our other competitors. If we do not adapt ourbusiness in the face of this competition, our business and operating resultsmay be harmed.

 

***Any failure tosuccessfully introduce future products into the market could adversely affectour business.***

 

The commercial success of future productsdepends upon their acceptance by the medical community. Our future productplans include capital-intensive clinical information systems. We believe thatthese products can significantly reduce labor costs, improve patient care andoffer other distinctive benefits to the medical community. However, there isoften market resistance to products that require significant capitalexpenditures or which eliminate jobs through automation. We can make noassurance that the market will accept our future products and systems, or thosesales of our future products and systems will grow at the rates expected by ourmanagement.

 

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***If we fail to meetchanging demands of technology, we may not continue to be able to competesuccessfully with competitors.***

 

The market for our products is characterizedby rapid technological advances, changes in customer requirements and frequentnew product introductions and enhancements. Our future success depends upon ourability to introduce new products that keep pace with technologicaldevelopments, enhance current product lines and respond to evolving clientrequirements. ASPYRA has incurred, and we will need to continue to incur,significant research and development expenditures in future periods as westrive to remain competitive. Our failure to meet these demands could result ina loss of our market share and competitiveness and could harm our revenues andresults of operations.

 

***Our success dependson our ability to attract, retain and motivate management and other skilledemployees.***

 

Our future success and growth depend on thecontinued services of our key management and employees, including Steven M.Besbeck, Bruce M. Miller, James R. Helms, Samuel G. Elliott, and William W.Peterson. The loss of the services of any of these individuals or any other keyemployee could materially affect our business. Our future success also dependson our ability to identify, attract and retain additional qualified personnel.Competition for employees in our industry is intense and we may not besuccessful in attracting or retaining them. There are a limited number ofpeople with knowledge of, and experience in, our industry. We do not haveemployment agreements with most of our key employees. However, we generallyenter into agreements with our employees regarding patents, confidentiality andrelated matters. We do not maintain life insurance polices on our employees. Ourloss of key personnel, especially without advance notice, or our inability tohire or retain qualified personnel, could have a material adverse effect onsales and our ability to maintain our technological edge. We cannot guaranteethat we will continue to retain our key management and skilled personnel, orthat we will be able to attract, assimilate and retain other highly qualifiedpersonnel in the future.

 

***If we do not protectour proprietary information and prevent third parties from making unauthorizeduse of our products and technology, our financial results could be harmed.***

 

We rely on a combination of confidentialityagreements and procedures and copyright, patent, trademark and trade secretlaws to protect our proprietary information. However, all of these measures affordonly limited protection and may be challenged, invalidated, or circumvented bythird parties. Third parties may copy aspects of our products or otherwiseobtain and use our proprietary information without authorization. Third partiesmay also develop similar or superior technology independently, including bydesigning around our patents. Furthermore, the laws of some foreign countriesdo not offer the same level of protection of our proprietary rights as the lawsof the United States, and we may be subject to unauthorized use of our productsin those countries. Any legal action that we may bring to protect proprietaryinformation could be expensive and may distract management from day-to-dayoperations. Unauthorized copying or use of our products or proprietaryinformation could result in reduced sales of our products.

 

***Third partiesclaiming that we infringe their proprietary rights could cause us to incursignificant legal expenses and prevent us from selling our products.***

 

From time to time, we have received claimsthat we have infringed the intellectual property rights of others and mayreceive additional claims in the future. Any such claim, with or without merit,could:

 

•       betime consuming to defend;

 

•       resultin costly litigation;

 

•       divertmanagement’s time and attention from our business;

 

•       requireus to stop selling, to delay shipping or to redesign our products; or

 

•       requireus to pay monetary amounts as damages to our customers.

 

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In addition, we license and use software fromthird parties in our business. These third party software licenses may notcontinue to be available to us on acceptable terms. Also, these third partiesmay from time to time receive claims that they have infringed the intellectualproperty rights of others, including patent and copyright infringement claims,which may affect our ability to continue licensing their software. Ourinability to use any of this third party software could result in disruptionsin our business, which could materially and adversely affect our operatingresults.

 

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

 

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

 

***Our products may be subject to governmentregulation in the future that could impair our operations.***

 

Ourproducts could be subject to stringent government regulation in the UnitedStates and other countries in the future. Furthermore, we expect that theintegration of our product and service offering will require us to comply with regulatoryrequirements and that we will devote significant time and resources to thiseffort. 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.

 

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

 

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

 

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

 

***We are subject tothe Health Insurance Portability and Accountability Act (HIPAA) and the cost ofcomplying with HIPAA may negatively impact our net income.***

 

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

 

***Defective productsor product failure may subject us to liability and could substantially increaseour costs.***

 

Our products are used to gather information forprofessionals 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, ASPYRA has discovered errors and failures incertain of our product offerings after their introduction and have experienceddelayed or lost revenues during the period required to correct these errors. Errorsand failures in products released by us could result in negative publicity,product returns, loss of or delay in market acceptance of our products, loss ofcompetitive position or claims by customers or others. Alleviating any of theseproblems could require significant expenditures of our capital and resourcesand could cause interruptions, delays or cessation of our sales, which couldcause us to lose existing or potential customers and would adversely affect ouroperating results. We may be subject to product liability claims as a result ofany failure or errors in our products. If a customer is successful in provingits damages, it could prove expensive and time-consuming

 

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to defend against these claims,and we could be liable for the damages suffered by our customers and otherrelated expenses, which could adversely affect our operating results. Wecurrently maintain product liability insurance coverage for up to $2 millionper incident and up to an aggregate of $4 million per year. Although managementbelieves this liability coverage is sufficient protection against futureclaims, there can be no assurance of the sufficiency of these policies. We havenot received any indication that our insurance carrier will not renew ourproduct liability insurance at or near current premiums; however, we cannotguarantee that this will continue to be the case.

 

***System or networkfailures could reduce our sales, increase costs or result in a loss ofcustomers.***

 

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

 

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

 

While we believe that we currently haveadequate internal control procedures in place, we are still exposed to potentialrisks from recent legislation requiring companies to evaluate controls underSection 404 of the Sarbanes-Oxley Act of 2002. We are evaluating our internalcontrols system in order to allow management to report on, and our independentregistered public accounting firm to attest to, our internal controls overfinancial reporting, as required by Section 404 of the Sarbanes-Oxley Act of2002 beginning in our fiscal year 2007.

 

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

 

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

 

•       deteriorationin economic conditions in any of the healthcare information technologyindustry, which could reduce customer demand and ability to pay for ourproducts and services;

 

•       politicaland military instability, which could slow spending within our target markets,delay sales cycles and otherwise adversely affect our ability to generaterevenues and operate effectively;

 

•       budgetaryconstraints of customers, which are influenced by corporate earnings andspending objectives;

 

•       earthquakes,floods or other natural disasters affecting our headquarters located inCalabasas, California, an area known for seismic activity, or our otherlocations worldwide;

 

•       actsof war or terrorism; and

 

•       inadvertenterrors.

 

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

 

***Our internationaloperations involve special risks that could increase our expenses, adverselyaffect our operating results and require increased time and attention of ourmanagement.***

 

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

 

•       potentialloss of proprietary information due to piracy, misappropriation or laws thatmay be less protective of our intellectual property rights;

 

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•       impositionof foreign laws and other governmental controls, including trade and employmentrestrictions;

 

•       enactmentof additional regulations or restrictions on imports and exports;

 

•       fluctuationsin currency exchange rates and economic instability such as higher interestrates and inflation, which could make our products more expensive in thosecountries;

 

•       limitationson future growth or inability to maintain current levels of revenues frominternational sales if we do not invest sufficiently in our internationaloperations;

 

•       longerpayment cycles for sales in foreign countries and difficulties in collectingaccounts receivable;

 

•       difficultiesin staffing, managing and operating our international operations;

 

•       difficultiesin coordinating the activities of our geographically dispersed and culturallydiverse operations; and

 

•       politicalunrest, war or terrorism, particularly in areas in which we have facilities.

 

A portion of the Company’s transactionsoutside of the United States are denominated in foreign currencies. Ourfunctional currency is the U.S. dollar. Accordingly, our future operatingresults will continue to be subject to fluctuations in foreign currency rates.Hedging foreign currency transaction exposures is complex and subject touncertainty. We may be negatively affected by fluctuations in foreign currencyrates in the future, especially if international sales continue to grow as apercentage of our total sales.

 

***Changes to financialaccounting standards and new exchange rules could make it more expensive toissue stock options to employees, which would increase compensation costs andmay cause us to change our business practices.***

 

We prepare our financial statements toconform with generally accepted accounting principles, or GAAP, in the UnitedStates. These accounting principles are subject to interpretation by the PublicCompany Accounting Oversight Board, the SEC and various other bodies. A changein those policies could have a significant effect on our reported results andmay affect our reporting of transactions completed before a change isannounced.

 

For example, we have used stock options andother long-term equity incentives as a fundamental component of our employeecompensation packages. We believe that stock options and other long-term equityincentives directly motivate our employees to maximize long-term shareholdervalue and, through the use of vesting, encourage employees to remain with ourCompany. The Financial Accounting Standards Board has issued Statement ofFinancial Accounting Standards 123R that will require us to record a charge toearnings for employee stock option grants. In addition, regulations implementedby the American Stock Exchange generally require shareholder approval for allstock option plans, which could make it more difficult or expensive for us togrant stock options to employees. We may, as a result of these changes, incurincreased compensation costs, change our equity compensation strategy or findit difficult to attract, retain and motivate employees, each of which couldmaterially and adversely affect our business, operating results and financialcondition.

 

***Aspyra DiagnosticSolutions, Inc. (formerly StorCOMM) currently relies on third partydistribution arrangements to distribute its products. The loss of any of theserelationships, or a material change in any of them, could materially harm ourbusiness.***

 

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For the three months ended March 31, 2006 andMarch 31, 2005, Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM) receivedapproximately 90% and 80% of its revenues, respectively, through third partydistribution arrangements. We expect that we will continue to generate asignificant portion of our revenues through a limited number of distributionarrangements for the foreseeable future. A significant portion of the Company’soutstanding accounts receivable is with such third party distributors, whichwill result in a concentration of our credit risk. If any of these third partydistributors decides not to market or distribute our products or decides toterminate or not renew its agreement with us, we may be unable to replace theaffected agreements with acceptable alternatives, which could materially harmour business, operating results and financial condition.

 

***We depend on channelpartners and distributors for a significant portion of our revenues.***

 

In each of fiscal 2005 and 2004, AspyraDiagnostic Solutions, Inc. (formerly StorCOMM) generated approximately 90%,respectively, of its revenues from medical imaging related products. We expectto continue to derive a substantial portion of our revenues from this singleproduct category. If this product category is not successful in the future orwe are unable to develop new applications that are as successful, our futurerevenues could be limited and our business may suffer.

 

**Risks Related to Our Common Stock**

 

***Future sales of ourcommon stock could adversely affect our stock price.***

 

Future sales of substantial amounts of sharesof our common stock in the public market, or the perception that these salescould occur, may cause the market price of our common stock to decline. Inaddition, we may be required to issue additional shares upon exercise ofpreviously granted options or warrants such as the warrants to purchase up to300,000 shares of ASPYRA common stock that ASPYRA issued a private placementpursuant to the Common Stock and Warrant Purchase Agreement dated August 18,2005 by and among ASPYRA and each of the selling shareholders (the “SecuritiesAgreement”), and the ASPYRA options and warrants to be issued in exchange forStorCOMM’s options and warrants pursuant to the merger. Increased sales of ourcommon stock in the market after exercise of stock options or warrants could exertsignificant downward pressure on our stock price. These sales also might makeit more difficult for us to sell equity or equity-related securities in thefuture at a time and price we deem appropriate.

 

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

 

The market prices of the common stock forASPYRA have experienced significant fluctuations and our stock price maycontinue to fluctuate significantly, and you could lose the value of yourinvestment. The market price of our common stock may be affected by a number offactors, including:

 

•       announcementsof quarterly operating results and revenue and earnings forecasts by us, ourcompetitors or our customers;

 

•       failureto achieve financial forecasts, either because expected sales do not occur orbecause they occur at lower prices or on terms that are less favorable to us;

 

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

 

•       changesin revenue and earnings estimates by securities analysts;

 

•       announcementsof planned acquisitions by us or by our competitors;

 

•       announcementsof new or planned products by us, our competitors or our customers;

 

•       gainor loss of a significant customer;

 

•       inquiriesby the SEC, American Stock Exchange, law enforcement or other regulatorybodies; and

 

•       actsof terrorism, the threat of war and economic slowdowns in general.

 

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

 

***Fluctuations in ourquarterly financial results have affected the stock prices of ASPYRA in thepast and could affect our stock price in the future.***

 

The quarterly financial results of ASPYRAhave fluctuated in the past, and the quarterly financial results of thecombined company are likely to vary significantly in the future. A number offactors associated with the operations of our business may cause our quarterlyfinancial results to fluctuate, including our ability to:

 

•       effectivelyalign sales resources to meet customer needs and address market opportunities;

 

•       effectivelyrespond to competitive pressures; and

 

•       effectivelymanage our operating expense levels.

 

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

 

•       reduceddemand for any of our products;

 

•       timingand amount of orders by customers and seasonality in the buying patterns ofcustomers;

 

•       cancellation,deferral or limitation of orders by customers;

 

•       fluctuationsin foreign currency exchange rates; and

 

•       weaknessor uncertainty in general economic or industry conditions.

 

Quarterly changes in our financial resultscould cause the trading price of our common stock to fluctuate significantlyafter the merger. If our quarterly financial results or our predictions offuture financial results fail to meet the expectations of securities analystsand investors, our stock price could be negatively affected. Any volatility inour quarterly financial results may make it more difficult for us to raisecapital in the future or pursue acquisitions that involve issuances of ourstock or securities convertible into or exercisable for our stock. You shouldnot rely on the results of prior periods as predictors of our futureperformance.

 

### **New AccountingPronouncements**

 

In December 2004, theFASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter4,” which requires that abnormal amounts of idle facility expense, freight,handling costs and wasted material (spoilage) be recognized as current-periodcharges. In addition, the statement requires that allocation of fixedproduction overheads to the costs of conversion be based on the normal capacityof the production facilities. SFAS No. 151 is effective for fiscal yearsbeginning after June 15, 2005. The adoption of this standard did not have amaterial impact on our results of operations or financial position.

 

In December 2004, the FASB issued StatementNo. 153, *Exchanges of NonmonetaryAssets*, as amendment of APB Opinion No. 29 Accounting forNonmonetary Transactions. This statement amends the principle that exchanges ofnonmonetary 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.

 

In May 2005, the FASB issued StatementNo. 154, *Accounting Changes and ErrorCorrections*, which changes the accounting for and reporting of achange in accounting principle. This statement applies to all voluntary changesin

 

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accounting principle andchanges required by an accounting pronouncement in the usual instance that thepronouncement does not include specific transition provisions. This statementrequires retrospective application to prior period financial statements ofchanges in accounting principle, unless it is impractical to determine eitherthe period-specific or cumulative effects of the change. Statement No. 154is effective for accounting changes made in our fiscal year beginningJanuary 1, 2006. The adoption of this standard did not have a materialimpact on our results of operations or financial position.

 

**Item 3.****            Controls and Procedures**

 

Attached as exhibits to this Quarterly Reporton Form 10-QSB are certifications of ASPYRA’s Chief Executive Officer and ChiefFinancial Officer, which are required in accordance with Rule 13a-14 ofthe Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controlsand Procedures” section includes information concerning the controls andcontrols evaluation referred to in the certifications. This section should beread in conjunction with the certifications for a more complete understandingof the topics presented.

 

**Evaluation of Disclosure Controls andProcedures**

 

The Company’s management, with theparticipation of the Chief Executive Officer and Chief Financial Officer,conducted an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures, as defined in Exchange Act Rule 13a-15(e), as of theend of the period covered by this Form 10-QSB. Based on that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that, as of March31, 2006, our disclosure controls and procedures are effective to providereasonable assurance that information required to be disclosed by us in thereports that we file or submit under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified in theSecurities and Exchange Commission rules and forms, and (ii) is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure.

 

**Changes in Internal Control over FinancialReporting**

 

There were no changes in our internal controlover financial reporting that occurred during the period covered by thisQuarterly Report on Form 10-QSB that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

**PARTII – OTHER INFORMATION**

 

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**Item 5.****            Other Information**

 

As previously reported on the Current Reporton Form 8-K, filed with the Securities and Exchange Commission on May 18, 2006,on May 17, 2006, ASPYRA sold in a private placement 2,250,000 shares of itscommon 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 listed on Schedule 1 thereto. The shares of common stockand warrants were sold in units, with each unit consisting of a single share ofASPYRA common stock and three-fifths of a warrant to purchase one share ofASPYRA common stock. The price per unit was $2.00 for an aggregate purchaseprice of $4.5 million.  The exercise price of the warrants is $3.00 pershare.  These shares were issued and sold pursuant to the exemption fromregistration under the Securities Act of 1933, as amended (the “Securities Act”)that is available for offers and sales to accredited investors pursuant toRule 506 of Regulation D under the Securities Act andSection 4(2) of the Securities Act. Simultaneously with the executionof the Purchase Agreement, ASPYRA and each of the Purchasers entered into aRegistration Rights Agreement, dated May 4, 2006, pursuant to which each of thePurchasers shall be entitled to certain registration rights. There is nomaterial relationship between the Registrant and purchasers.

 

**Item 6.****            Exhibits**

 

Exhibit 3.1      RestatedArticles of Incorporation, as Amended (previously filed as an exhibit to theCompany’s Registration Statement on Form S-18 dated September 22, 1983, SECFile No. 2-85265).

 

Exhibit 3.2      By-Laws, asamended (previously filed as an exhibit to the Company’s Registration Statementon Form S-18 dated September 22, 1983, SEC File No. 2-85265).

 

Exhibit 11       Statement re:computation of per share earnings.

 

Exhibit 31.1    Certification ofChief Executive Officer pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934.

 

Exhibit 31.2    Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

Exhibit 32.1    Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

Exhibit 32.2    Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

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### **SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
| ASPYRA, INC. |         |                                                                  |
|--------------|--------------|-----------------------------------------------------------------------|
| (Registrant) |         |
|         |         |
| Date:        | May 18, 2006 |                                                                  | /S/ Steven M. Besbeck |   |
|         |         | Steven. M. Besbeck, President and                                     |
|         |         | Chief  Executive Officer (Principal Executive Officer)                |
|         |         |
|         |         |
| Date:        | May 18, 2006 |                                                                  | /S/ Anahita Villafane |   |
|         |         | Anahita  Villafane,                                                   |
|         |         | Chief  Financial Officer (Principal Financial and  Accounting Officer |
|              |              |                                                                       |  |  |  |  |  |

 

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#### **EXHIBITINDEX**

#### ** **

3.1           RestatedArticles of Incorporation, as Amended (previously filed as an exhibit to theCompany’s Registration Statement on Form S-18 dated September 22, 1983, SECFile No. 2-85265).

 

3.2           By-Laws,as amended (previously filed as an exhibit to the Company’s RegistrationStatement on Form S-18 dated September 22, 1983, SEC File No. 2-85265).

 

11            Statementre: computation of per share earnings.

 

31.1         Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

31.2         Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

 

32.1         Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

32.2         Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

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