**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

**FORM10-QSB**

** **

| **(Mark One)**                                                                                                                                                   | ** ** | ** **                                                                             |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|
| **x**                                                                                                                                                            | ** ** | **QUARTERLY REPORT UNDER SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                       | ** ** | ** **                                                                             |
| **For the  quarterly period ended September 30, 2007.**                                                                                                          |
| ** **                                                                                                                                                       | ** ** | ** **                                                                             |
| **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.**

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

 

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

** **

**26115-A Mureau Road,Calabasas, California 91302**

(Address of principal executive offices)

 

**(818) 880-6700**

(Issuer’s telephone number, including area code)

 

Check whether the Issuer (1)filed all reports required to be filed by Section 13 or 15(d) of the ExchangeAct during the past 12 months (or for such shorter period that the registrantwas required to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

 

**Yes  *   ***x*  *No    o

** **

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

 

**Yes  *   ***o*  *No    x

** **

State the number of sharesoutstanding of each of the issuer’s classes of common equity, as of the latestpracticable date:  12,437,150 commonshares as of November 12, 2007.

 

Transitional Small BusinessDisclosure Format (check one):

 

**Yes  *   ***o*  *No    x

 

 

 

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**ASPYRA,INC.**

**FORM 10-QSB**

**I N D E X**
| **PART I - Financial Information:** |
|-------------------------------------|
|                                |   |
| **Item 1.**                         | **Financial Statements (unaudited)** |
|                                |   |
|                                | Condensed Consolidated  Balance Sheets, at September 30, 2007 |
|                                |   |
|                                | Condensed Consolidated  Statements of Operations for the three months ended September 30, 2007 and  September 30, 2006 |
|                                |   |
|                                | Condensed Consolidated  Statements of Operations for the nine months ended September 30, 2007 and  September 30, 2006 |
|                                |   |
|                                | Condensed Consolidated  Statements of Cash Flows for the nine months ended September 30, 2007 and  September 30, 2006 |
|                                |   |
|                                | 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 4.**                         | **Submission Of  Matters To A Vote Of Security Holders** |
| ** **                          | ** ** |
| **Item 6.**                         | **Exhibits** |
| ** **                          |
| **Signatures**                      |
| ** **                          |
| **Exhibit Index**                   |

 

2

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** **

**ASPYRA, INC.**

**PART I - FINANCIAL INFORMATION**

**Item 1.            Financial Statements**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                            | ** ** | **September 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                                            | ** ** | **2007**               | ** ** |
| ** **                                                                                            | ** ** | **(Unaudited)**        | ** ** |
| **ASSETS**                                                                                            | ** ** | ** **             | ** ** |
| CURRENT ASSETS:                                                                                       |       |                   |       |
| Cash                                                                                                  |       | $                      | 2,051,701  |   |
| Receivables, net                                                                                      |       | 1,092,980              |       |
| Inventory                                                                                             |       | 84,651                 |       |
| Prepaid expenses  and other assets                                                                    |       | 197,138                |       |
| TOTAL CURRENT  ASSETS                                                                                 |       | 3,426,470              |       |
|                                                                                                  |       |                   |       |
| PROPERTY AND  EQUIPMENT, net                                                                          |       | 907,454                |       |
| OTHER ASSETS                                                                                          |       | 86,621                 |       |
| INVENTORY OF  COMPONENT PARTS                                                                         |       | 80,053                 |       |
| CAPITALIZED  SOFTWARE COSTS, net of accumulated amortization of $954,839                         |       | 2,832,498              |       |
| INTANGIBLES, net                                                                                      |       | 3,933,107              |       |
| GOODWILL                                                                                              |       | 7,268,434              |       |
|                                                                                                  |       | $                      | 18,534,637 |   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                        | ** ** | ** **             | ** ** |
| CURRENT  LIABILITIES:                                                                                 |       |                   |       |
| Notes payable                                                                                         |       | $                      | 1,379,171  |   |
| Accounts payable                                                                                      |       | 861,294                |       |
| Accrued  liabilities:                                                                                 |       |                   |       |
| Vacation pay                                                                                          |       | 390,477                |       |
| Accrued payroll                                                                                       |       | 164,195                |       |
| Accrued interest                                                                                      |       | 107,862                |       |
| Deferred rent                                                                                         |       | 62,899                 |       |
| Customer  deposits                                                                                    |       | 151,595                |       |
| Other                                                                                                 |       | 290,952                |       |
| Deferred service  contract income                                                                     |       | 2,115,216              |       |
| Deferred revenue  on system sales                                                                     |       | 736,458                |       |
| Capital lease —  current portion                                                                 |       | 150,237                |       |
| TOTAL CURRENT  LIABILITIES                                                                            |       | 6,410,356              |       |
|                                                                                                  |       |                   |       |
| CAPITAL LEASE,  LESS CURRENT PORTION                                                                  |       | 385,844                |       |
|                                                                                                  |       |                   |       |
| TOTAL  LIABILITIES                                                                                    |       | 6,796,200              |       |
|                                                                                                  |       |                   |       |
| SHAREHOLDERS’  EQUITY:                                                                           |       |                   |       |
| Common shares,  no par value; 20,000,000 shares authorized; 12,437,150 shares issued and  outstanding |       | 22,761,951             |       |
| Additional  paid-in-capital                                                                           |       | 1,084,861              |       |
| Accumulated  deficit                                                                                  |       | (12,031,277            | )          |
| Accumulated  other comprehensive loss                                                                 |       | (77,098                | )          |
| TOTAL  SHAREHOLDERS’ EQUITY                                                                      |       | 11,738,437             |       |
|                                                                                                  |       |                   |       |
|                                                                                                  |       | $                      | 18,534,637 |   |
|                                                                                                       |            |                        |            |  |  |  |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

3

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                      | ** ** | **Three Months Ended September 30,** | ** **       |
|-------------------------------------------------|------------|----------------------------------------------------------|------------------|
| ** **                                      | ** ** | **2007**                                                 | ** **       | **2006** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                          | ** **       |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                                                     |             |   |   |
| System sales                                    |       | $                                                        |  1,034,946  |   | $ |  1,508,056 |   |
| Service revenue                                 |       | 1,857,979                                                |             | 1,773,985 |   |
|                                            |       | 2,892,925                                                |             | 3,282,041 |   |
|                                            |       |                                                     |             |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                                     |             |   |   |
| System sales                                    |       | 720,931                                                  |             | 964,343 |   |
| Service revenue                                 |       | 690,853                                                  |             | 779,871 |   |
|                                            |       | 1,411,784                                                |             | 1,744,214 |   |
|                                            |       |                                                     |             |   |   |
| Gross profit                                    |       | 1,481,141                                                |             | 1,537,827 |   |
|                                            |       |                                                     |             |   |   |
| OPERATING  EXPENSES                             |       |                                                     |             |   |   |
| Selling, general  and administrative            |       | 1,547,318                                                |             | 1,664,784 |   |
|                                            |       |                                                     |             |   |   |
| Research and development                        |       | 580,388                                                  |             | 499,084 |   |
|                                            |       |                                                     |             |   |   |
| Total operating  expenses                       |       | 2,127,706                                                |             | 2,163,868 |   |
|                                            |       |                                                     |             |   |   |
| Operating loss                                  |       | (646,565                                                 | )                | (626,041 | ) |
|                                            |       |                                                     |             |   |   |
| INTEREST AND  OTHER INCOME                      |       | 12,187                                                   |             | 43,938 |   |
|                                            |       |                                                     |             |   |   |
| INTEREST EXPENSE                                |       | (38,385                                                  | )                | (125,921 | ) |
|                                            |       |                                                     |             |   |   |
| Loss before  provision for income taxes         |       | (672,763                                                 | )                | (708,024 | ) |
|                                            |       |                                                     |             |   |   |
| PROVISION FOR  INCOME TAXES                     |       | —                                                   |             | 2,039 |   |
|                                            |       |                                                     |             |   |   |
| NET LOSS                                        |       | $                                                        |  (672,763   | ) | $ |  (710,063 | ) |
|                                            |       |                                                     |             |   |   |
| DEEMED DIVIDEND  ON EXERCISE OF WARRANTS        |       | (789,021                                                 | )                | — |   |
|                                            |       |                                                     |             |   |   |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS     |       | $                                                        |  (1,461,784 | ) | $ |  (710,063 | ) |
|                                            |       |                                                     |             |   |   |
| LOSS PER SHARE:                                 |       |                                                     |             |   |   |
|                                            |       |                                                     |             |   |   |
| Basic                                           |       | $                                                        |  (.13       | ) | $ |  (.07 | ) |
| Diluted                                         |       | (.13                                                     | )                | (.07 | ) |
|                                            |       |                                                     |             |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                                     |             |   |   |
| Basic                                           |       | 11,337,150                                               |             | 10,772,914 |   |
| Diluted                                         |       | 11,337,150                                               |             | 10,772,914 |   |
|                                                 |            |                                                          |                  |  |  |  |  |  |  |  |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

4

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                      | ** ** | **Nine Months Ended September 30,** | ** **       |
|-------------------------------------------------|------------|---------------------------------------------------------|------------------|
| ** **                                      | ** ** | **2007**                                                | ** **       | **2006** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                         | ** **       |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                                                    |             |   |   |
| System sales                                    |       | $                                                       |  2,448,218  |   | $ |  3,881,308 |   |
| Service revenue                                 |       | 5,297,332                                               |             | 5,320,629 |   |
|                                            |       | 7,745,550                                               |             | 9,201,937 |   |
|                                            |       |                                                    |             |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                                    |             |   |   |
| System sales                                    |       | 1,867,902                                               |             | 2,874,810 |   |
| Service revenue                                 |       | 2,148,705                                               |             | 2,176,019 |   |
|                                            |       | 4,016,607                                               |             | 5,050,829 |   |
|                                            |       |                                                    |             |   |   |
| Gross profit                                    |       | 3,728,943                                               |             | 4,151,108 |   |
|                                            |       |                                                    |             |   |   |
| OPERATING  EXPENSES                             |       |                                                    |             |   |   |
| Selling, general  and administrative            |       | 4,832,304                                               |             | 5,548,953 |   |
|                                            |       |                                                    |             |   |   |
| Research and  development                       |       | 1,688,362                                               |             | 1,460,776 |   |
|                                            |       |                                                    |             |   |   |
| Total operating  expenses                       |       | 6,520,666                                               |             | 7,009,729 |   |
|                                            |       |                                                    |             |   |   |
| Operating loss                                  |       | (2,791,723                                              | )                | (2,858,621 | ) |
|                                            |       |                                                    |             |   |   |
| INTEREST AND  OTHER INCOME                      |       | 40,731                                                  |             | 64,862 |   |
|                                            |       |                                                    |             |   |   |
| INTEREST EXPENSE                                |       | (131,287                                                | )                | (292,163 | ) |
|                                            |       |                                                    |             |   |   |
| Loss before provision  for income taxes         |       | (2,882,279                                              | )                | (3,085,922 | ) |
|                                            |       |                                                    |             |   |   |
| PROVISION FOR  INCOME TAXES                     |       | 603                                                     |             | 2,039 |   |
|                                            |       |                                                    |             |   |   |
| NET LOSS                                        |       | $                                                       |  (2,881,676 | ) | $ |  (3,087,961 | ) |
|                                            |       |                                                    |             |   |   |
| DEEMED DIVIDEND  ON EXERCISE OF WARRANTS        |       | (789,021                                                | )                | — |   |
|                                            |       |                                                    |             |   |   |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS     |       | $                                                       |  (3,670,697 | ) | $ |  (3,087,961 | ) |
|                                            |       |                                                    |             |   |   |
| LOSS PER SHARE:                                 |       |                                                    |             |   |   |
|                                            |       |                                                    |             |   |   |
| Basic                                           |       | $                                                       | (.33             | ) | $ |  (.32 | ) |
| Diluted                                         |       | (.33                                                    | )                | (.32 | ) |
|                                            |       |                                                    |             |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                                    |             |   |   |
| Basic                                           |       | 10,969,594                                              |             | 9,625,505 |   |
| Diluted                                         |       | 10,969,594                                              |             | 9,625,505 |   |
|                                                 |            |                                                         |                  |  |  |  |  |  |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

5

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**ASPYRA, INC.**

**CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**Increase(Decrease) in Cash**
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                                | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                                         | ** ** |
| OPERATING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Net loss                                                                                   |       | $                                                       | (2,881,676 | ) | $ | (3,087,961 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                    |       |   |   |
| Depreciation and  amortization                                                             |       | 848,612                                                 |       | 724,085 |   |
| Provision for  doubtful accounts                                                           |       | 47,406                                                  |       | 18,371 |   |
| Amortization of  capitalized software costs                                                |       | 316,846                                                 |       | 218,574 |   |
| Stock based  compensation                                                                  |       | 135,268                                                 |       | 276,871 |   |
| Increase  (decrease) from changes in:                                                      |       |                                                    |       |   |   |
| Receivables                                                                                |       | 193,767                                                 |       | (861,693 | ) |
| Inventories                                                                                |       | 71,706                                                  |       | 48,646 |   |
| Prepaid expenses  and other assets                                                         |       | 50,588                                                  |       | 154,978 |   |
| Accounts payable                                                                           |       | (25,723                                                 | )          | (398,795 | ) |
| Accrued  liabilities                                                                       |       | (82,739                                                 | )          | 43,596 |   |
| Deferred service  contract income                                                          |       | 606,174                                                 |       | 448,824 |   |
| Deferred revenue  on system sales                                                          |       | (41,342                                                 | )          | 765,437 |   |
| Net cash used in  operating activities                                                     |       | (761,113                                                | )          | (1,649,067 | ) |
|                                                                                       |       |                                                    |       |   |   |
| INVESTING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Additions to  property and equipment                                                       |       | (66,534                                                 | )          | (253,831 | ) |
| Additions to  capitalized software costs                                                   |       | (662,037                                                | )          | (715,946 | ) |
| Net cash used in  investing activities                                                     |       | (728,571                                                | )          | (969,777 | ) |
|                                                                                       |       |                                                    |       |   |   |
| FINANCING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Borrowings on  line of credit                                                              |       | 1,026,477                                               |       | 500,000 |   |
| Payments on  notes payable                                                                 |       | (1,070,823                                              | )          | (223,141 | ) |
| Payments on  capital leases                                                                |       | (112,678                                                | )          | (70,599 | ) |
| Change in  restricted cash                                                                 |       | 1,000,000                                               |       | (1,000,000 | ) |
| Net proceeds  from sales of stock in private placement                                     |       | —                                                  |       | 4,033,883 |   |
| Buyback of  fractional shares related to merger                                            |       | —                                                  |       | (234 | ) |
| Exercise of  stock options and warrants                                                    |       | 1,717,880                                               |       | 36,200 |   |
| Net cash  provided by financing activities                                                 |       | 2,560,856                                               |       | 3,276,109 |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Foreign currency  translation adjustment                                                   |       | (34,103                                                 | )          | (22,473 | ) |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| NET INCREASE IN  CASH                                                                      |       | 1,037,069                                               |       | 634,792 |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| CASH, beginning  of period                                                            |       | 1,014,632                                               |       | 1,329,753 |   |
|                                                                                       |       |                                                    |       |   |   |
| CASH, end of  period                                                                       |       | $                                                       | 2,051,701  |   | $ | 1,964,545 |   |
|                                                                                            |            |                                                         |            |  |  |  |  |  |  |

 

**Seenotes to Condensed Consolidated Financial Statements.**

** **

**6**

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** **

**ASPYRA, INC.**

**NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

**Note1-Presentation of Financial Statements**

In theopinion of management of Aspyra, Inc. (the “Company” or “ASPYRA”), theaccompanying unaudited condensed consolidated financial statements reflect alladjustments (which include only normal recurring accruals) necessary to presentfairly the Company’s financial position as of September 30, 2007, the resultsof its operations for the three and nine-month periods ended September 30, 2007and 2006, and cash flows for the nine months ended September 30, 2007 and2006.  These results have been determinedon the basis of accounting principles generally accepted in the United Statesand practices applied consistently with those used in preparation of theCompany’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2006.

Theresults of operations for the three and nine months ended September 30, 2007are not necessarily indicative of the results expected for any other period orfor the entire year.

**Note 2-Liquidity**

TheCompany’s working capital continues to deteriorate with a deficit of $2,983,886at September 30, 2007 compared to a deficit of $2,256,352 at December 31,2006.  At September 30, 2007, theCompany’s credit facilities with its bank consisted of a revolving line ofcredit of $1,300,000, of which $1,026,477 was outstanding. On February 27,2007, the Company entered into a new banking relationship whereby the bankprovided a revolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2008.  The revolving line of credit issubject to certain covenants.  As ofSeptember 30, 2007, the Company was in compliance with all covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventorybalances.  At September 30, 2007, theCompany had $536,081 outstanding on its capital leases of which $150,237 is duein the next twelve months.  Management isconsidering additional financing to accelerate its business development planswhich in turn may improve its working capital position.

TheCompany’s primary source of working capital has been generated from privateplacements of securities and from borrowings. The Company has been experiencing a history of losses due to theintegration of its businesses and the significant investment in new productssince the quarter ended March 31, 2005 and negative cash flows from operationssince the quarter ended December 31, 2005. 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 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.  If the company is unable togenerate cash from operations or meet revenue targets or obtain new cashinflows from financing or equity offerings, the company would need to takeaction and reduce costs in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings and capitalinfusion.  The Company’s cash positionand liquidity needs to improve prior to December 31, 2007 or there is apossibility that the Company’s independent registered public accountants mayissue a going concern opinion that raises substantial doubt about the Company’sability to continue as a going concern. We may, also, required additional cash resources due to changed businessconditions or other future developments, including any investments oracquisitions we may decide to pursue.  Ifthese sources are insufficient to satisfy our cash requirements, we may seek tosell debt securities or additional equity securities or to obtain a creditfacility.  The sale of convertible debtsecurities or additional equity securities could result in additional dilutionto our stockholders.  The incurrence ofindebtedness would result in incurring debt service obligations and couldresult in operating and financial covenants that would restrict ouroperations.  In addition, there can be noassurance that any additional financing will be available on acceptable terms,if at all.  Although there are no presentunderstandings, commitments or agreements with respect to the acquisition ofany other businesses, applications or technologies, we may from time to time,evaluate acquisitions of other businesses, applications or technologies.

 

7

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**Note3-Inventories**

Inventories consistprimarily of computer hardware held for resale and are stated at the lower ofcost or market (net realizable value). Cost is determined using the first-in, first-out method. Supplies arecharged to expense as incurred.  TheCompany also maintains an inventory pool of component parts to service systemspreviously sold, which is classified as non-current in the accompanying balancesheets.  Such inventory is carried at thelower of cost or market and is charged to cost of sales based on usage.  Allowances are made for quantities on hand inexcess of estimated future usage.  AtSeptember 30, 2007, the inventory allowance was $160,504.

**Note 4-Goodwilland Intangible Assets**

In accordance with Statement of Financial AccountingStandards (“SFAS”) No. 142, goodwill is tested for impairment on an annualbasis or between annual tests if an event occurs or circumstances change thatwould indicate the carrying amount may be impaired.  In accordance with SFAS No. 144, Accountingfor Impairment of Long-Lived Assets, management reviews definite lifeintangible assets to determine if events or circumstances have occurred whichmay cause the carrying values of intangible assets to be impaired. The purposeof these reviews is to identify any facts and circumstances, either internal orexternal, which may indicate that the carrying values of the assets may not berecoverable.  There was no impairmentwhen the Company did its annual impairment testing on October 1, 2006 and noevents have occurred since that time that would trigger a reevaluation.  At September 30, 2007, the net carrying valueof goodwill and intangible assets were $7,268,434 and $3,933,107, respectively.

**Note5-Earnings per Share**

The Company accounts for its earnings per share inaccordance with SFAS No.128, which requires presentation of basic and dilutedearnings per share.  Basic earnings pershare is computed by dividing income or loss available to common shareholdersby the weighted average number of common shares outstanding for the reportingperiod.  Diluted earnings per sharereflect the potential dilution that could occur if securities or other contracts,such as stock options, to issue common stock were exercised or converted intocommon stock.

Earnings per share have been computed as follows:
| ** **                                                    | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** |
|---------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|                                                          |       |                                                       |       |                                                      |       |                                                       |       |                                                      |       |
| NET LOSS  APPLICABLE TO COMMON SHAREHOLDERS                   |       | $                                                          | (1,461,784 | )                                                         | $          | (3,670,697                                                 | )          | $                                                         | (710,063   | ) | $ | (3,087,961 | ) |
| Basic weighted  average number of common shares outstanding   |       | 11,337,150                                                 |       | 10,969,594                                                |       | 10,772,914                                                 |       | 9,625,505                                                 |       |
| Dilutive effect  of stock options                             |       | —                                                     |       | —                                                    |       | —                                                     |       | —                                                    |       |
| Diluted weighted  average number of common shares outstanding |       | 11,337,150                                                 |       | 10,969,594                                                |       | 10,772,914                                                 |       | 9,625,505                                                 |       |
| Basic loss per  share                                         |       | $                                                          | (.13       | )                                                         | $          | (.33                                                       | )          | $                                                         | (.07       | ) | $ | (.32 | ) |
| Diluted loss per  share                                       |       | $                                                          | (.13       | )                                                         | $          | (.33                                                       | )          | $                                                         | (.07       | ) | $ | (.32 | ) |

 

For the three and nine months ended September 30,2007, options to purchase 839,965 shares of common stock at per share pricesranging from $1.51 to $2.75 were not included in the computation of dilutedloss per share because inclusion would have been anti-dilutive. For the threeand nine months ended September 30, 2006, options to purchase 636,898 shares ofcommon stock at per share prices ranging from $.72 to $2.75 were not includedin the computation of diluted loss per share because inclusion would have beenanti-dilutive.

**Note6-Debt Obligations**

On February 27, 2007, theCompany entered into a new banking relationship whereby the bank provided arevolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2008.  The revolving line of credit issubject to certain covenants.  As ofSeptember 30, 2007, the Company was in compliance with the covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventory balances.  The

 

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Company used the initial advance on the revolving lineof credit to pay in full a previous note from another bank that was secured bya $1,000,000 certificate of deposit as carried on the December 31, 2006 balancesheet under restricted cash.  The pay offreleased the certificate of deposit previously held by the former bank.  On September 30, 2007, the total amount dueto the bank was $1,026,477.

The Company acquired a note in conjunction with themerger with Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM, Inc.), withan interest rate of 7% with payments in the amount of $25,000 due monthly.  As of September 30, 2007, the total amount dueon this note was $178,616.  The Companyalso acquired unsecured notes in conjunction with the merger with interestrates ranging from 7% to 8%.  These notesare due upon demand and the balance outstanding at September 30, 2007 was$174,078.

**Note7-Exercise of Warrants**

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

The warrants were originally issued in November 2005and May 2006 in connection with two private placements of the Company’ssecurities, pursuant to the terms of a Common Stock and Warrant PurchaseAgreement dated as of August 18, 2005 and a Common Stock and Warrant PurchaseAgreement dated as of May 4, 2006.  Allremaining warrants originally issued in these private placements were exercisedas of August 31, 2007, and none remain outstanding.

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

**Note8-Stock-Based Compensation**

Equity Incentive and StockOption Plans: At September 30, 2007, the Company has two stock-basedcompensation plans. Readers should refer to both Item 6, Note 1 and Note 8 ofthe Company’s financial statements, which are included in the Company’s AnnualReport on Form 10-KSB for the year ended December 31, 2006, for additional informationrelated to these stock-based compensation plans. There were310,000 options granted in the three and nine-month periods ending September30, 2007.  There were 120,000 and 170,000options granted in the three and nine-month periods ended September 30, 2006,respectively.  There was 4,000 optionsexercised in the nine-month period ending September 30, 2007 by one optionholder and the Company received $2,880. There were 43,750 options exercised in the nine-month period endingSeptember 30, 2006.  The Company accountsfor stock option grants in accordance with FASB Statement 123(R), Share-BasedPayment. Compensation costs related to share-based payments recognized in theCondensed Statements of Income were $52,203 and $135,268 for the three and ninemonths ended September 30, 2007 and $69,456 and $276,871 for the three and ninemonths ended September 30, 2006.

**Note9-Commitments and Contingencies**

In accordance with the bylaws of theCompany, officers and directors are indemnified for certain events or occurrencesarising as a result of the officer or director’s serving in such capacity.  The term of the indemnification period is forthe lifetime of the officer or director. The maximum potential amount of future payments the Company could berequired to make under the indemnification provisions of its bylaws isunlimited.  However, the Company has adirector and officer liability insurance policy that reduces its exposure andenables it to recover a portion of

 

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anyfuture amounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

The Company enters into indemnification provisionsunder agreements with various parties in the normal course of business,typically with customers and landlords. Under these provisions, the Company generally indemnifies and holdsharmless 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.  These indemnification provisions ofteninclude indemnifications relating to representations made by the Company withregard to intellectual property rights. These indemnification provisions generally survive termination of theunderlying agreement.  The maximumpotential amount of future payments the Company could be required to make underthese indemnification provisions cannot be estimated.  The Company maintains general liability,errors and omissions, and professional liability insurance in order to mitigatesuch risks.  The Company has not incurredmaterial costs to defend lawsuits or settle claims related to theseindemnification agreements.  As a result,the Company believes the estimated exposure under these agreements isminimal.  Accordingly, the Company hasnot recorded any related liabilities.

**Note 10-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 liabilitiesand assets are determined based on the differences between the financialstatements and the tax bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.

**Note 11-New Accounting Pronouncements**

In September 2006, the FASBissued SFAS No. 157, Fair Value Measurements. This statement defines fairvalue, establishes a framework for measuring fair value in generally acceptedaccounting principles (“GAAP”), and expands disclosures about fair valuemeasurements. This statement is effective for financial statements issued forfiscal years beginning after November 15, 2007. The Company does notcurrently believe that the adoption of SFAS 157 will have a material impact onthe consolidated financial statements.

In February 2007, the Financial AccountingStandards Board (“FASB”) issued SFAS No. 159, “The Fair Value Option forFinancial Assets and Financial Liabilities”, which provides companies with anoption to report selected financial assets and liabilities at fair value. Theobjective of SFAS No. 159 is to reduce both complexity in accounting forfinancial instruments and the volatility in earnings caused by measuringrelated assets and liabilities differently. SFAS No. 159 also establishespresentation and disclosure requirements designed to facilitate comparisonsbetween companies that choose different measurement attributes for similartypes of assets and liabilities. SFAS No. 159 is effective for the Companyas of January 1, 2008. We have not completed our evaluation of SFASNo. 159 but do not expect the adoption of SFAS No. 159 to have amaterial effect on our operating results or financial position.

In July 2006, the FASB issued FASB InterpretationNo. 48, Accounting for Uncertainty in Income Taxes, (“FIN 48”) aninterpretation of FASB Statement No. 109, Accounting for Income Taxes.FIN 48 requires that a position taken or expected to be taken in a taxreturn be recognized in the financial statements when it is more likely thannot (i.e. a likelihood of more than fifty percent) that the position wouldbe sustained upon examination by tax authorities. A recognized tax position isthen measured at the largest amount of benefit that is greater than fiftypercent likely of being realized upon ultimate settlement. Upon adoption, thecumulative effect of applying the recognition and measurement provisions ofFIN 48, if any, shall be reflected as an adjustment to the opening balanceof retained earnings. FIN 48 requires that subsequent to initial adoptiona change in judgment that results in subsequent recognition, derecognition orchange in a measurement of a tax position taken in a prior annual period(including any related interest and penalties) be recognized as a discrete itemin the period in which the change occurs. Currently, we record such changes injudgment, including audit settlements, as a component of the Company’s incometax provision. Thus, the Company’s reported quarterly income tax rate maybecome more

 

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volatile upon adoption of FIN 48. This change will not impact themanner in which we record income tax expense on an annual basis. FIN 48also requires expanded disclosures including identification of tax positionsfor which it is reasonably possible that total amounts of unrecognized taxbenefits will significantly change in the next twelve months, a description oftax years that remain subject to examination by major tax jurisdiction, atabular reconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective forfiscal years beginning after December 15, 2006. The standard did not havean impact on the Consolidated Financial Statements.

**Item2.            Management’s Discussionand Analysis or Plan of Operation**

The SEC encouragescompanies to disclose forward-looking information so that investors can betterunderstand a company’s future prospects and make informed investment decisions.This Quarterly Report on Form 10-QSB contains such “forward-looking statements”within the meaning of the Private Securities Litigation Reform Act of 1995,Section 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934.

Words such as “anticipate,”“believe,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “will”and words and terms of similar substance used in connection with any discussionof future events, operating or financial performance, financing sources,product development, capital requirements, market growth and the like, identifyforward-looking statements. Forward-looking statements are merely predictionsand therefore inherently subject to uncertainties and other factors which couldcause the actual results to differ materially from the forward-lookingstatement.  These forward-lookingstatements include, among others:

•                    projections of revenues and otherfinancial items;

•                    statements of strategies and objectivesfor future operations;

•                    statements concerning proposedapplications or services;

•                    statements regarding future economicconditions, performance or business prospects;

•                    statements regarding competitors orcompetitive actions; and

•                    statements of assumptions underlying anyof the foregoing.

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

The Company makes norepresentation as to whether any projected or estimated information or resultscontained in any forward-looking statements will be obtained or achieved.Shareholders are cautioned not to place undue reliance on the forward-lookingstatements, which speak only as of the date of this Quarterly Report on Form10-QSB. The Company is under no obligation, and it expressly disclaims anyobligation, to update or alter any forward-looking statements after the date ofthis Quarterly Report on Form 10-QSB, whether as a result of new information,future events or otherwise.

 

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

**Overview**

The followingdiscussion relates to the business of ASPYRA, which includes the operations ofits wholly owned subsidiaries Aspyra Diagnostic Solutions, Inc. (ADSI)(formerly StorCOMM, Inc.) and Aspyra Technologies, Ltd. (ATI) (formerlyStorCOMM Technologies, Ltd.).  Themerger, which resulted in the acquisition of ADSI, was consummated on November22, 2005.

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

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

ASPYRA’sresults of operation for the third fiscal quarter and nine months endedSeptember 30, 2007 were marked by a decrease in sales and a decrease inoperating loss that are more fully discussed in the following section “Resultsof Operations.”  The enactment of theDeficit Reduction Act (DRA) in 2006 continued to slow contract signings as themarketplace adjusted to changes in reimbursement of some imagingprocedures.  Additionally, sales cyclesfor CIS and DIS products are generally lengthy and on average exceed six monthsfrom inception to closure.  Because ofthe complexity of the sales process, a number of factors that are beyond thecontrol of the Company can delay the closing of transactions.  Furthermore, the Company has been primarilyreliant on distributors and channel partners for the sales of its diagnosticsystems and has been subject to inconsistencies in the performance of suchthird parties and the timely consummation of orders.  ASPYRA completed a unification of its salesforce to focus more on a direct sales model for some of the diagnostic systemproducts to supplement the distribution and channel network so that it will beless reliant on third parties for the sale of its diagnostic systems.  ASPYRA also has completed new versions of itslaboratory and radiology information systems products, as well as its newAccessRAD Radiology Information System (“RIS”) / Picture Archive CommunicationSystems (“PACS”) which it has begun marketing. At September 30, 2007, the Company had $736,458 in deferred revenue aswell as a backlog of approximately $241,000 in backlog system sales which werereceived in the third quarter but will be processed and included in the fiscalquarter ended December 31, 2007.

The operating lossesincurred by the Company during the fiscal quarter and nine months endedSeptember 30, 2007 were attributable to the uneven sales performance previouslydiscussed.  The Company completed theintegration and restructuring of the merged businesses and incurred certaincosts associated with such activities which were only partially offset byreductions in redundant personnel and other expenses during the quarter andnine months ended September 30, 2007. For the three and nine months ended September 30, 2007, the Companyreduced its net operating loss by approximately $37,300 and $206,000, respectively,over the same periods in 2006 as a result of synergies and cost reductions inits business as it completed integration and restructuring of the mergedbusiness.

 

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**Resultsof Operations**

The following table setsforth certain line items in our condensed consolidated statement of operationsas a percentage of total revenues for the periods indicated:
| ** **                                  | ** ** | **Three Months  Ended  September 30, 2007** | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2007** | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Revenues:                                   |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                                |       | 35.8                                                       | %          | 45.9                                                       | %          | 31.6                                                      | %          | 42.2                                                      | %          |
| Service revenues                            |       | 64.2                                                       |       | 54.1                                                       |       | 68.4                                                      |       | 57.8                                                      |       |
| Total revenues                              |       | 100.0                                                      |       | 100.0                                                      |       | 100.0                                                     |       | 100.0                                                     |       |
| Cost of products  and services sold:        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                                |       | 24.9                                                       |       | 29.4                                                       |       | 24.1                                                      |       | 31.2                                                      |       |
| Service revenues                            |       | 23.9                                                       |       | 23.7                                                       |       | 27.8                                                      |       | 23.7                                                      |       |
| Total cost of  products and services        |       | 48.8                                                       |       | 53.1                                                       |       | 51.9                                                      |       | 54.9                                                      |       |
| Gross profit                                |       | 51.2                                                       |       | 46.9                                                       |       | 48.1                                                      |       | 45.1                                                      |       |
| Operating  expenses:                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Selling, general  and administrative        |       | 53.5                                                       |       | 50.7                                                       |       | 62.4                                                      |       | 60.3                                                      |       |
| Research and  development                   |       | 20.0                                                       |       | 15.2                                                       |       | 21.8                                                      |       | 15.9                                                      |       |
| Total operating  expenses                   |       | 73.5                                                       |       | 65.9                                                       |       | 84.2                                                      |       | 76.2                                                      |       |
| Operating loss                              |       | (22.3                                                      | )          | (19.0                                                      | )          | (36.1                                                     | )          | (31.1                                                     | )          |
|                                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Loss before  provision for income taxes     |       | (23.3                                                      | )          | (21.6                                                      | )          | (37.2                                                     | )          | (33.5                                                     | )          |
| Provision for  income taxes                 |       | —                                                     |       | —                                                     |       | —                                                    |       | —                                                    |       |
|                                        |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Net loss                                    |       | (23.3                                                      | )          | (21.6                                                      | )          | (37.2                                                     | )          | (33.5                                                     | )          |
| Deemed dividend                             |       | (27.2                                                      | )          | —                                                     |       | (10.2                                                     | )          | —                                                    |       |
| Net loss  applicable to common shareholders |       | (50.5                                                      | )          | (21.6                                                      | )          | (47.4                                                     | )          | (33.5                                                     | )          |

 

*Revenues*

Sales for the fiscalquarter ended September 30, 2007 decreased to $2,892,925, as compared to$3,282,041 for the comparable quarter ended September 30, 2006, an overalldecrease of $389,116 or 11.9%.  For thenine-month period ended September 30, 2007, sales decreased to $7,745,550, ascompared to $9,201,937 for the comparable nine-month period ended September 30,2006, an overall decrease of $1,456,387 or 15.8%.  When analyzed by revenue category for thequarter and nine-month period, sales of CIS and DIS products decreased by$473,109, or 31.4% and $1,433,090 or 36.9%, respectively.  For the quarter, service revenues increasedby $83,993 or 4.7%.  For the nine-monthperiod service revenues decreased by $23,297 or 0.4%.  As described above under “Overview”, thedecrease in sales of CIS and DIS products was primarily attributable to theenactment of the Deficit Reduction Act (DRA) in 2006 continuing to slowcontract signings as the marketplace adjusted to changes in reimbursement forsome imaging procedures.  Management believesthat the importance of imaging technologies such as the Company’s PACS productsis justified as an investment by end users to improve efficiencies.  Although the completion time of sales hasslowed, the Company’s sales pipeline has increased.  The increase in service revenues is primarilyattributable to a level of post-implementation services provided during thequarter but for the nine-month period, there was a reduced level ofpost-implemenation services when compared to the same period of 2006.  If and when the Company’s installed base ofCIS and DIS installations increases, then service revenues would be expected toincrease as well.

The Company continues toinvest in sales and marketing activities focused on increasing its transactionpipeline and transitioning to more of a direct sales model to supplement thethird party sales of its CIS and DIS products while new and improved productversions are being introduced.  TheCompany has invested additional funds into marketing activities to further buildits sales pipeline as well as to launch the company into new marketopportunities.  The Company’s futureoperating results will continue to be subject to quarterly variations basedupon a wide variety of factors, including the volume mix and timing of ordersreceived during any quarter, and the temporary delays in the closing of new CISand DIS sales.  In addition, the Company’srevenues associated with CIS and DIS sales may be delayed due to client relatedissues such as client staff availability for training, information technologyinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of ASPYRA.

*Costsof products and services sold*

Cost of sales for the quarter ended September 30, 2007decreased by $332,430 or 19.1% to $1,411,784, as compared to $1,744,214 for thesame quarter of fiscal 2006.  Cost ofsales for the nine-month period decreased by $1,034,222 or 20.5% to

 

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$4,016,607 compared to$5,050,829 for the same period of fiscal 2006. For the quarter and nine-month period, the decreases in cost of saleswere primarily attributable to a decrease in labor costs of $60,059  or 7.9% and $203,686 or 8.7%, respectively;decreases in material costs of $148,940 or 39.0% and $561,465 or 52.1%,respectively; and decreases in other costs of $123,431 or 20.5% and $269,071 or16.5%, respectively.  The decreases inlabor costs and other costs were attributable to the reduction of personnel andoverhead as a result of integration of our business since the merger inNovember 2005. The decrease in materials costs was due to the reduced number ofCIS and DIS sales.  For the currentquarter and nine-month period, cost of sales as a percentage of sales wasapproximately 49% and 52%, respectively, as compared to 53% and 55%,respectively, for the comparable periods of 2006.  The overall percentage decrease in cost ofsales, as a percentage of sales, was attributable to the volume and mix ofsales and the reduction of staff and other overhead during the quarter andnine-month period.  The Company couldpotentially experience quarterly variations in gross margin as a result of thefactors discussed above.

*Selling,general and administrative expenses*

Selling, general andadministrative expenses decreased by $117,466 or 7.1% for the current fiscalquarter ended September 30, 2007 as compared to the same quarter in fiscal2006.  For the nine-month period,selling, general and administrative expenses decreased by $716,649 or 12.9% ascompared to the same period in fiscal 2006. For the quarter and nine-month period, the decreases in selling, generaland administrative expenses were primarily attributable to the reduction of expensesas a result of the integration of the business as discussed above.  For the quarter, the reduction of expenseswas primarily attributable to decreases of approximately $105,000 related tosalaries,  $28,000 in tradeshow expenses,$39,000 in travel and lodging expenses, which were partially offset by anincrease of $24,000 in general insurance expenses, and $31,000 related toexpenses to outside consultants compared to the same quarter in fiscal2006.  For the nine-month period, thereduction of expenses was primarily attributable to decreases of approximately$395,000 related to salaries,  $103,000in tradeshow expenses, $69,000 in SFAS 123(R) expenses, $72,000 related to usersymposium expenses, $127,000 in travel and lodging expenses, which were partiallyoffset by an increase of $48,000 in legal and accounting expenses compared tothe same period in fiscal 2006. Management continues to evaluate costreductions in some of its selling, general and administrative expenses while italso continues to plan further investment in its marketing programs during thebalance of its 2007 fiscal year.

*Researchand development expenses*

Research and developmentexpenses increased by $81,304, or 16.3% for the current fiscal quarter endedSeptember 30, 2007 as compared to the same quarter in fiscal 2006.  For the nine-month period, research anddevelopment expense increased $227,586 or 15.6%, as compared to the same periodin fiscal 2006.  For the quarter andnine-month period, the increase is primarily attributable to increases insalaries and expenses of new personnel in product development.  For the comparable third quarters of 2007 and2006, the Company capitalized software costs of $207,096 and $216,360,respectively, which are generally amortized over the estimated useful life, notto exceed five years.  For the comparablenine-month periods of 2007 and 2006, the Company capitalized software costs of$662,037 and $715,946, respectively, which are generally amortized over theestimated useful life, not to exceed five years.  Such costs were attributable to thedevelopment of AccessRAD, the new RIS/PACS platform that integrates the Company’sradiology information system CyberRAD with its AccessNET PACS system, andenhancements and new modules for the Company’s CIS and DIS products.  The Company plans to continue significantproduct development activities at current expense levels throughout the 2007fiscal year.

*InterestExpense*

Interest expense for the current quarter and nine-month period endedSeptember 30, 2007 decreased by $87,536 or 69.5% and $160,876 or 55.1%,respectively, as compared to the same periods of fiscal 2006.  The decrease is primarily due to thenonrecurring penalty imposed as a result of a delay in theregistration of the securities underlying the private equity placements, whichwas paid by the Company in October 2006.

*Netincome (loss)*

As a result of the factors discussed above, theCompany incurred a net loss applicable to common shareholders of $1,461,784 orbasic and diluted loss per share of $.13 in the third fiscal quarter of 2007 ascompared to a net loss applicable to common shareholders of $710,063 or basicand diluted loss per share of $.07 for the third quarter of 2006.  For the nine-month period ended September 30,2007, the Company incurred a net loss applicable to common shareholders of $3,670,697or basic and diluted loss per share of $.33 as compared to a net loss applicableto common shareholders of $3,087,961 or basic and diluted loss per share of$.32 for the same period of 2006.

** **

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**Liquidityand Capital Resources**

Historically, the Company’sprimary need for capital has been to invest in software development, and incomputers and related equipment for the Company’s internal use.  The Company invested $662,037 and $715,946 respectivelyduring the nine months ended September 30, 2007 and 2006 in softwaredevelopment.  These expenditures relatedto investment in the Company’s new RIS/PACS integrated system, AccessRAD,enhancements to AccessNET, the new browser version of the Company’s LISproduct, CyberLAB, and other product enhancements.  The Company anticipates expending additionalsums during the remainder of fiscal 2007 on product enhancements to all itsproducts and the further development of AccessRAD and CyberLAB.  During the nine months ended September 30,2007 and 2006, the Company invested an aggregate of $66,534 and $253,831,respectively, in fixed assets primarily consisting of computers, networkinfrastructure, telephone and data communications systems, and software.

The Company’s workingcapital continues to deteriorate with a deficit of $2,983,886 at September 30,2007 compared to a deficit of $2,256,352 at December 31, 2006.  On February 27, 2007, the Company enteredinto a new banking relationship whereby the bank provided a revolving line ofcredit in the aggregate amount of $1,300,000. The revolving line of credit is secured by the Company’s accountsreceivable and inventory and matures on February 27, 2008.  At September 30, 2007, the Company’scredit facilities with its bank consisted of a revolving line of credit of$1,300,000, of which $1,026,477 was outstanding. The revolving line of creditis subject to certain covenants.  As ofSeptember 30, 2007, the Company was in compliance with all covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventorybalances.  At September 30, 2007, theCompany had $536,081 outstanding on its capital leases of which $150,237 is duein the next twelve months.  Management isconsidering additional financing to accelerate its business development planswhich in turn may improve its working capital position.

Cash used in operatingactivities was $761,113 for the nine months ended September 30, 2007 comparedto cash used of $1,649,067 for the comparable period of fiscal 2006.  The decrease in cash used for operatingactivities was primarily attributable to the net change in accrued receivables,payables and deferred revenues compared to the same period of fiscal 2006.

Net cash used ininvesting activities totaled $728,571 for the nine months ended September 30,2007, compared to $969,777 used in investing activities during the comparableperiod of fiscal 2006.  The decrease incash used in investing activities was primatily due to the reduction ininvestment in fixed assets.

Cash flows from financingactivities amounted to $2,560,856 during the nine months ended September 30,2007 compared to $3,276,109 provided during the comparable period of fiscal2006.  The decrease was primarilyattributable to the Company completing a private placement transaction in thecomparable period of fiscal 2006, partially offset by the exercise of warrantsin 2007, and the change in restricted cash.

The Company’s primary source of working capital hasbeen generated from private placements of securities and from borrowings.  The Company has been experiencing a historyof losses due to the integration of its businesses and the significantinvestment in new products since the quarter ended March 31, 2005 and negativecash flows from operations since the quarter ended December 31, 2005.  An unanticipated decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices or cancellations of contracts could have a negative effect on cashflow from operations and could in turn create short-term liquidityproblems.  We believe that 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.  If the companyis unable to generate cash from operations or meet revenue targets or obtainnew cash inflows from financing or equity offerings, the company would need totake action and reduce costs in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings andcapital infusion.  The Company’s cashposition and liquidity needs to improve prior to December 31, 2007 or there isa possibility that the Company’s independent registered public accountants mayissue a going concern opinion that raises substantial doubt about the Company’sability to continue as a going concern. We may, also, required additional cash resources due to changed businessconditions or other future developments, including any investments oracquisitions we may decide to pursue.  Ifthese sources are insufficient to satisfy our cash requirements, we may seek tosell debt securities or additional equity securities or to obtain a creditfacility.  The sale of convertible debtsecurities or additional equity securities could result in additional dilutionto our stockholders.  The incurrence ofindebtedness would result in incurring debt service obligations and

 

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could result in operatingand financial covenants that would restrict our operations.  In addition, there can be no assurance thatany additional financing will be available on acceptable terms, if at all.  Although there are no present understandings,commitments or agreements with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time, evaluateacquisitions of other businesses, applications or technologies.

 

**Seasonality, Inflation and Industry Trends**

The Company’s sales aregenerally higher in the winter and spring. Inflation has not had a material effect on the Company’s business sincethe Company has been able to adjust the prices of its products and services inresponse to inflationary pressures. Management believes that most phases of the healthcare segment of thecomputer industry will continue to be highly competitive, and that potentialhealthcare reforms including those promulgated by Health Insurance Portabilityand Accountability Act may have a long-term positive impact on itsbusiness.  The key issues driving demandfor ASPYRA’s products are industry concerns about patient care and safetyissues, development of a national standard for the electronic health recordthat will affect all clinical data, a paradigm shift from analog to digitalimaging technologies, and regulatory compliance.  The Company has continued to invest heavilyin new application modules to assist its customers in addressing theseissues.  Management believes that newapplication modules and features that concentrate on such issues will be keyselling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company anticipates it willbe able to meet these challenges.

** **

**Critical Accounting Policies and Estimates**

Management’s discussionand analysis of ASPYRA’s financial condition and results of operations arebased upon the condensed consolidated financial statements contained in thisQuarterly Report on Form 10-QSB, which have been prepared in accordance withaccounting principles generally accepted in the United States.  The preparation of these financial statementsrequires management to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosuresof contingent assets and liabilities.  Onan on-going basis, management evaluates estimates, including those related tothe valuation of inventory and the allowance for uncollectible accountsreceivable. We base our estimates on historical experience and on various otherassumptions that management believes to be reasonable under the circumstances,the results of which form the basis for making judgments about the carryingvalues of assets and liabilities that are not readily apparent from othersources.  Actual results may differ fromthese estimates under different assumptions or conditions. We believe thefollowing critical accounting policies affect our more significant judgmentsand estimates used in the preparation of our consolidated financial statements:

*Inventory*

The Company’s inventoryis comprised of a current inventory account that consists of items that areheld for resale and a long-term inventory account that consists of items thatare held for repairs and replacement of hardware components that are servicedby the Company under long-term Extended Service Agreements with some of itscustomers.  Current inventory is valuedat the lower of cost to purchase or the current estimated market value of theinventory items.  Inventory is evaluatedon a continual basis and adjustments to recorded costs are made based onmanagement’s estimate of future sales value, or in the case of the long-termcomponent inventory, on management’s estimation of the usage of specificinventory items and net realizable value. Management reviews inventory quantities on hand and makes adetermination of the excess or obsolete items in the inventory, which, are specificallyreserved.  In addition, adjustments aremade for the difference between the cost of the inventory and the estimatedmarket value and charged to operations in the period in which the facts thatgive rise to the adjustments become known. At September 30, 2007, the inventory reserve was approximately $160,500.

*Accounts Receivable*

Accounts receivable balances are evaluated on acontinual 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

 

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known.  The accounts receivable balance at September30, 2007 was $1,092,980, net of an allowance for doubtful accounts ofapproximately $130,000.

*RevenueRecognition*

Revenues are derivedprimarily from the sale of CIS and DIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.”  SOP No 97-2,as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on therelative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold separately andspecifically defined in a quotation or contract.  Deferred revenue related to CIS and DIS salesare comprised of deferrals for license fees, hardware, and other services forwhich the implementation has not yet been completed and revenues have not beenrecognized.  Revenues are presented netof discounts.  At September 30, 2007deferred revenue was $736,458.

Post Implementationsoftware and hardware maintenance services are marketed under monthly, quarterlyand annual arrangements and are recognized as revenue ratably over thecontracted maintenance term as services are provided.  The Company determines the fair value of themaintenance portion 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.  AtSeptember 30, 2007, deferred service contract income was $2,115,216.

*SoftwareDevelopment Costs*

Costs incurred internallyin creating computer software products are expensed until technologicalfeasibility has been established upon completion of a program design.Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizable value.  Capitalized costs are amortized based oncurrent and expected future revenue for each product with minimum annualamortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the nine months ended September 30, 2007and 2006, the Company capitalized $662,037 and $715,946, respectively.  At September 30, 2007, the balance ofcapitalized software costs was $2,832,498, net of accumulated amortization of$954,839.

*IntangibleAssets*

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

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired.  In accordance with SFAS No.144, Accounting for Impairment of Long-Lived Assets, management reviewsdefinite life intangible assets to determine if events or circumstances haveoccurred which may cause the carrying values of intangible assets to beimpaired. The purpose of these reviews is to identify any facts orcircumstances, either internal or external, which may indicate that the carryingvalue of the assets may not be recoverable.

*Stock-basedCompensation*

We have two stock-based compensation plans, the 2005Equity Incentive Plan and the 1997 Stock Option Plan, under which we may issueshares of our common stock to employees, officers, directors and consultants.Upon effectiveness of the 2005 Equity Incentive Plan on November 22, 2005, the1997 Stock Option Plan was terminated for purposes of new grants.  Both of these plans have been approved by ourshareholders.

 

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Prior to January 1,2006, we accounted for these plans under the recognition and measurementprovisions of APB Opinion No. 25, Accounting for Stock Issued toEmployees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. Effective January 1, 2006, we adopted the fair value recognitionprovisions of SFAS No. 123(R), Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three and nine months ended September 30,2007 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123,and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods have not been restated.

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

*IncomeTaxes*

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

### **Risk Factors**

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

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

Wehave experienced operating losses and cash outflows.  For the three and nine months ended September30, 2007, our net loss applicable to common shareholders was $1,461,784 and $3,670,697.  At September 30, 2007, our cash totaled$2,051,701 and our working capital deficit was $2,983,886.  We cannot be certain that ASPYRA will becomeprofitable and sustain profitability.  IfASPYRA does not become profitable and sustain profitability, the market price ofour common stock will decline.  In addition,if the Company’s liquidity and cash position do not improve prior to December31, 2007, there is a possibility that the Company’s independent registeredpublic accountants may issue a going concern opinion, raising substantialdoubts as to the Company’s ability to continue as a going concern.  The Company’s primary source of workingcapital has been generated from the private placements and borrowings.  The Company’s results of operations for thenine months ended September 30, 2007 produced negative operating cash flow ofapproximately $761,113.  Any decline insales, delays in implementations where payments are tied to delivery and/orperformance of services or cancellations of contracts could have a negativeeffect on cash flow from operations and could in turn increase our liquidityproblem.  If sales are not as expected,the Company will consider certain cost cutting measures.  We may require additional cash resources tosustain our business.  The sale ofconvertible debt securities or additional equity securities could result inadditional dilution to our shareholders. The incurrence of additional indebtedness would result in incurring debtservice obligations and could result in operating and financial covenants thatwould restrict our operations.  There canbe no assurance that any additional financing will be available on acceptableterms, if at all.

***If ASPYRA and Aspyra Diagnostic Solutions, Inc. fail toeffectively integrate their operations, the combined company may not realizethe potential benefits of the merger.***

The integration of ASPYRAand Aspyra Diagnostic Solutions, Inc. (ADSI) 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

 

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integration isstill in process.  If this integrationeffort is not successful, the combined company’s results of operations could beharmed, employee morale could decline, key employees could leave, customerscould cancel existing orders or choose not to place new ones and the combinedcompany could have difficulty complying with regulatory requirements. Inaddition, the combined company may not achieve anticipated synergies or otherbenefits of the merger. ASPYRA and ADSI must operate as a combined organizationutilizing common information and communication systems, operating procedures,financial controls and human resources practices. The combined company mayencounter the following difficulties, costs and delays involved in integratingtheir operations:

•                  failure to successfully manage relationships withcustomers and other important relationships;

•                  failure of customers to accept new services or tocontinue using the products and services of the combined company;

•                  difficulties in successfully integrating themanagement teams and employees of ASPYRA and Aspyra Diagnostic Solutions, Inc.;

•                  challenges encountered in managing larger, moregeographically dispersed operations;

•                  the loss of key employees;

•                  diversion of the attention of management from otherongoing business concerns;

•                  potential incompatibilities of technologies andsystems;

•                  potential difficulties integrating and harmonizingfinancial reporting systems; and

•                  potential incompatibility of business cultures.

If the combined company’soperations do not meet the expectations of customers of ASPYRA or ADSI thenthese customers may cease doing business with the combined company altogether,which would harm the results of operations and financial condition of ASPYRA.

If the anticipated benefitsof the merger are not realized or do not meet the expectations of financial orindustry analysts, the market price of ASPYRA common stock may decline. Themarket price of ASPYRA common stock may decline as a result of the merger if:

•                  the integration of ASPYRA and ADSI is unsuccessful;

•                  the combined company does not achieve the expectedbenefits of the merger as quickly as anticipated or the costs of or operationaldifficulties arising from the merger are greater than anticipated;

•                  the combined company’s financial results after themerger are not consistent with the expectations of financial or industryanalysts;

•                  the anticipated operating and product synergies of themerger are not realized; or

•                  the combined company experiences the loss of significantcustomers or employees as a result of the merger.

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

Our markets are competitive. There are many companieswith active research and development programs both in and outside of thehealthcare information technology industry. Many of these companies have considerable experience in areas ofcompeting interest to us.  Additionally,we cannot 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, new product introductions, productenhancements and the use of other technologies by our competitors could lead toa loss of market acceptance and cause a decline in sales or gross margins.

 

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

•                  our ability to adapt effectively to the continueddevelopment, acquisition or licensing of technology or product rights by ourcompetitors;

•                  our ability to enhance our products or develop newproducts;

•                  our ability to adapt to changing technologicaldemands; and

•                  our strategic decisions regarding the best allocationof our limited resources.

Several of our currentand potential competitors have greater financial, technical, sales, marketingand other resources than we do and consequentially may have an ability toinfluence customers to purchase their products that compete with ours. Ourfuture and existing competitors could introduce products with superiorfeatures, scalability and functionality at lower prices than our products, andcould also bundle existing or new products with other more established productsin order to compete with us. Our competitors could also gain market share byacquiring or forming strategic alliances with our other competitors. If we donot adapt our business in the face of this competition, our business andoperating results may be harmed.

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

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

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

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

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

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

 

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

We rely on a combinationof confidentiality agreements and procedures and copyright, patent, trademarkand trade secret laws to protect our proprietary information. However, all ofthese measures afford only limited protection and may be challenged,invalidated, or circumvented by third parties. Third parties may copy aspectsof our products or otherwise obtain and use our proprietary information withoutauthorization. Third parties may also develop similar or superior technologyindependently, including by designing around our patents. Furthermore, the lawsof some foreign countries do not offer the same level of protection of ourproprietary rights as the laws of the United States, and we may be subject tounauthorized use of our products in those countries. Any legal action that wemay bring to protect proprietary information could be expensive and maydistract management from day-to-day operations. Unauthorized copying or use ofour products or proprietary information could result in reduced sales of ourproducts.

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

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

•                  be time consuming to defend;

•                  result in costly litigation;

•                  divert management’s time and attention from ourbusiness;

•                  require us to stop selling, to delay shipping or toredesign our products; or

•                  require us to pay monetary amounts as damages to ourcustomers.

In addition, we licenseand use software from third parties in our business. These third party softwarelicenses may not continue to be available to us on acceptable terms. Also,these third parties may from time to time receive claims that they haveinfringed the intellectual property rights of others, including patent andcopyright infringement claims, which may affect our ability to continuelicensing their software. Our inability to use any of this third party softwarecould result in disruptions in our business, which could materially andadversely affect our operating results.

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

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

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

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

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

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

Federal and statelegislative proposals are periodically introduced or proposed that would affectmajor changes in the healthcare system, nationally, at the state level or both.The enactment of the Deficit Reduction Act in 2006 made changes to reimbursementpolicies for some imaging procedures which negatively affected some of ourcustomers and potential customers and slowed our ability to secure new customercontracts.  Such regulation could furtherhurt sales and financial results in the future. Future legislation, regulationor payment policies of Medicare,

 

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Medicaid, private health insurance plans, health maintenanceorganizations and other third-party payers could adversely affect the demandfor our current or future products and our ability to sell our products on aprofitable basis. Moreover, healthcare legislation is an area of extensive anddynamic change, and we cannot predict future legislative changes in thehealthcare field or their impact on our industry or our business.

***We are subject to the Health Insurance Portability andAccountability Act (HIPAA) and the cost of complying with HIPAA may negativelyimpact our net income.***

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

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

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

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

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

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

While we believe that wecurrently have adequate internal control procedures in place, we are stillexposed to potential risks from recent legislation requiring companies toevaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. We areevaluating our internal controls system in order to allow management to reporton the internal controls over financial reporting as of December 31, 2007.  Our independent registered public accountingfirm will attest to, our internal controls over financial reporting, asrequired by Section 404 of the Sarbanes-Oxley Act of 2002 beginning in ourfiscal year 2008.

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

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

 

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•                  deterioration in economic conditions in any of thehealthcare information technology industry, which could reduce customer demandand ability to pay for our products and services;

•                  political and military instability, which could slowspending within our target markets, delay sales cycles and otherwise adverselyaffect our ability to generate revenues and operate effectively;

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

•                  earthquakes, floods or other natural disastersaffecting our headquarters located in Calabasas, California, an area known forseismic activity, or our other locations worldwide;

•                  acts of war or terrorism; and

•                  inadvertent errors.

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

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

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

•                  potential loss of proprietary information due topiracy, misappropriation or laws that may be less protective of ourintellectual property rights;

•                  imposition of foreign laws and other governmentalcontrols, including trade and employment restrictions;

•                  enactment of additional regulations or restrictions onimports and exports;

•                  fluctuations in currency exchange rates and economicinstability such as higher interest rates and inflation, which could make ourproducts more expensive in those countries;

•                  limitations on future growth or inability to maintaincurrent levels of revenues from international sales if we do not investsufficiently in our international operations;

•                  longer payment cycles for sales in foreign countriesand difficulties in collecting accounts receivable;

•                  difficulties in staffing, managing and operating ourinternational operations;

•                  difficulties in coordinating the activities of ourgeographically dispersed and culturally diverse operations; and

•                  political unrest, war or terrorism, particularly inareas in which we have facilities.

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

 

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

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

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

***ADSI currently relies on third party distributionarrangements to distribute its products. The loss of any of these relationships, or a material change in any ofthem, could materially harm our business.***

For the three and ninemonths ended September 30, 2007 and 2006, ADSI received approximately 50% and80%, respectively, of its revenues through third party distributionarrangements. We expect that we will continue to generate a significant portionof our revenues through a limited number of distribution arrangements for theforeseeable future. A significant portion of the Company’s outstanding accountsreceivable is with such third party distributors, which will result in aconcentration of our credit risk. If any of these third party distributorsdecides not to market or distribute our products or decides to terminate or notrenew its agreement with us, we may be unable to replace the affectedagreements with acceptable alternatives, which could materially harm ourbusiness, operating results and financial condition.

**RisksRelated to Our Common Stock**

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

Future sales ofsubstantial amounts of shares of our common stock in the public market, or theperception that these sales could occur, may cause the market price of ourcommon stock to decline.  We have issueda large number of additional shares of our common stock in private placementsfor capital-raising purposes in the past two years and may do so again in thefuture.  In August 2007 we also made aone-time offer to reduce the exercise price of outstanding warrants exercisablefor 1,650,000 shares of our common stock resulting in all such shares beingissued and further dilution for our stockholders. 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 may be volatile in the future, and you couldlose the value of your investment.***

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

•                  announcements of quarterly operating results andrevenue and earnings forecasts by us, our competitors or our customers;

•                  failure to achieve financial forecasts, either becauseexpected sales do not occur or because they occur at lower prices or on termsthat are less favorable to us;

•                  rumors, announcements or press articles regardingchanges in our management, organization, operations or prior financialstatements;

•                  changes in revenue and earnings estimates bysecurities analysts;

•                  announcements of planned acquisitions by us or by ourcompetitors;

•                  announcements of new or planned products by us, ourcompetitors or our customers;

•                  gain or loss of a significant customer;

 

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•                  inquiries by the SEC, American Stock Exchange, lawenforcement or other regulatory bodies; and

•                  acts of terrorism, the threat of war and economicslowdowns in general.

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

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

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

•                  effectively align sales resources to meet customerneeds and address market opportunities;

•                  effectively respond to competitive pressures; and

•                  effectively manage our operating expense levels.

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

•                  reduced demand for any of our products;

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

•                  cancellation, deferral or limitation of orders bycustomers;

•                  fluctuations in foreign currency exchange rates; and

•                  weakness or uncertainty in general economic or industryconditions.

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

### **New Accounting Pronouncements**

In September 2006, theFASB issued SFAS No. 157, Fair Value Measurements. This statement definesfair value, establishes a framework for measuring fair value in generallyaccepted accounting principles (“GAAP”), and expands disclosures about fairvalue measurements. This statement is effective for financial statements issuedfor fiscal years beginning after November 15, 2007. The Company does notcurrently believe that the adoption of SFAS 157 will have a material impact onthe consolidated financial statements.

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

 

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

**Item3.            Controls and Procedures**

Attached as exhibits tothis Quarterly Report on Form 10-QSB are certifications of ASPYRA’s ChiefExecutive Officer and Chief Financial Officer, which are required in accordancewith Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). This “Controls and Procedures” section includes information concerningthe controls and controls evaluation referred to in the certifications.  This section should be read in conjunctionwith the certifications for a more complete understanding of the topicspresented.

**Evaluationof Disclosure Controls and Procedures**

The Company’s management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, conducted an evaluation of the effectiveness of the Company’sdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Form 10-QSB.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of September 30, 2007,our disclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act (i) is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

**Changesin Internal Control over Financial Reporting**

There were no changes in our internal control overfinancial reporting that occurred during the quarter ended September 30, 2007that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

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**PART II — OTHER INFORMATION**

**Item1.            ****Legal Proceedings******

  None.

**Item2.            ****Unregistered Sales Of Equity SecuritiesAnd Use Of Proceeds.******

  None.

**Item3.            ****Defaults Upon Senior Securities.******

  None.

**Item4.            ****Submission Of Matters To A Vote OfSecurity Holders.******

  None.

**Item5.            ****Other Information.******

  None.

**Item6.            Exhibits**

Exhibit 3.1      Restated Articles of Incorporation, asAmended (previously filed as an exhibit to the Company’s Registration Statementon Form S-18 dated September 22, 1983, SEC File No. 2-85265 and incorporatedherein by reference).

Exhibit 3.2      Amendment to the Restated Articles ofIncorporation (incorporated by reference to Annex E to the joint proxystatement/prospectus that is part of the Company’s Registration Statement onForm S-4, originally filed on October 3, 2005, SEC file No. 333-128795).

Exhibit 3.3      By-Laws, as amended (previously filed asan exhibit to the Company’s Registration Statement on Form S-18 dated September22, 1983, SEC File No. 2-85265 and incorporated herein by reference).

Exhibit 31.1    Certification of Chief Executive Officerpursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.*

Exhibit 31.2            Certification of Chief Financial Officer pursuant toRule 13a-14(a) of the Securities Exchange Act of 1934.*

Exhibit 32.1            Certification of Chief Executive Officer pursuant toRule 13a-14(b) of the Securities Exchange Act of 1934.*

Exhibit 32.2            Certification of Chief Financial Officer pursuant toRule 13a-14(b) of the Securities Exchange Act of 1934.*

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*** Filed herewith.**

** **

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** **

**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
| ASPYRA, INC.            |   |                                                   |
|-------------------------|--------|--------------------------------------------------------|
| (Registrant)            |   |                                                   |
|                    |   |                                                   |
|                    |   |                                                   |
| Date: November 14, 2007 |   | /S/ Steven M. Besbeck                                  |
|                    |   | Steven M. Besbeck, President and                       |
|                    |   | Chief Executive Officer (Principal Executive  Officer) |
|                    |   |                                                   |
|                    |   |                                                   |
| Date: November 14, 2007 |   | /S/ Anahita Villafane                                  |
|                    |   | Anahita Villafane,                                     |
|                    |   | Chief Financial Officer (Principal Financial and       |
|                    |   | Accounting Officer)                                    |

 

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**EXHIBITINDEX**
| 3.1    |   | Restated Articles of  Incorporation, as Amended (previously filed as an exhibit to the Company’s  Registration Statement on Form S-18 dated September 22, 1983, SEC File No.  2-85265).                                                                                |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                                                        |
| 3.2    |   | Amendment to the  Restated Articles of Incorporation (incorporated by reference to Annex E to  the joint proxy statement/prospectus that is part of the Company’s  Registration Statement on Form S-4, originally filed on October 3, 2005, SEC  file No. 333-128795). |
|   |   |                                                                                                                                                                                                                                                                        |
| 3.3    |   | By-Laws, as amended  (previously filed as an exhibit to the Company’s Registration Statement on  Form S-18 dated September 22, 1983, SEC File No. 2-85265).                                                                                                            |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.*                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                        |
| 31.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act  of 1934.*                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.1   |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.*                                                                                                                                                              |
|   |   |                                                                                                                                                                                                                                                                        |
| 32.2   |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act  of 1934.*                                                                                                                                                              |

 

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* Filed herewith.

** **

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