Table of Contents

 

 

 

**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

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**FORM 10-Q**

 
| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES****EXCHANGE  ACT OF 1934**  |
|------------|------------|-------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                        |
| ** ** | ** ** | **For the quarterly period ended June 30, 2008.**                                                      |
|       |       |                                                                                                        |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES****EXCHANGE  ACT OF 1934** |

 

**For the transition period from             to             **

 

**Commission file number 001-13268**

 

**ASPYRA,INC.**

(Exact name of Registrant as specified in itscharter)

 

| **California**                  | ** ** | **95-3353465**         |
|---------------------------------|------------|------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer       |
| incorporation or organization)  |       | Identification Number) |

 

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

(Address of principal executive offices)

 

**(818) 880-6700**

Registrant’s telephone number, including areacode

 

Indicate by check markwhether the Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the Registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.

Yes x    No o

 

Indicate bycheck mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See definitionsof “large accelerated filer,” “accelerated filer,” and “smaller reportingcompany” in Rule 12b-2 of the Exchange Act. (Check one):

 

| Large accelerated filer o                      |   | Accelerated filer o         |
|------------------------------------------------|--------|-----------------------------|
|                                           |   |                        |
| Non-accelerated filer o                        |   | Smaller reporting company x |
| (Do not check if a smaller reporting  company) |   |                        |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act). Yes o      No x

 

As of August 7, 2008,there were 12,437,150 shares of the registrant’s common stock outstanding.

 

 

 

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Table of Contents

 

**ASPYRA, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**June 30, 2008**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                               | ** **                                                                                  | **Page** |
|----------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION**                                                             | ** **                                                                                  |
| Item 1.                                                                                                  | Condensed Consolidated Financial  Statements (Unaudited)                                    | 1        |
| Condensed  consolidated balance sheets at June 30, 2008 and December 31, 2007                  | 1                                                                                           |
| Condensed  consolidated statements of operations for the three months ended  June 30, 2008 and 2007 | 2                                                                                           |
| Condensed  consolidated statements of operations for the six months ended June 30,  2008 and 2007   | 3                                                                                           |
| Condensed  consolidated statements of cash flows for the six months ended June 30,  2008 and 2007   | 4                                                                                           |
| Notes  to Condensed Consolidated Financial Statements                                                    | 5                                                                                           |
| Item  2.                                                                                                 | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9        |
| Item  4T.                                                                                                | Controls and  Procedures                                                                    | 18       |
|                                                                                                     |                                                                                        |     |
| **PART II – OTHER  INFORMATION**                                                               | ** **                                                                                  |
| Item 1.                                                                                                  | Legal Proceedings                                                                           | 18       |
| Item  2.                                                                                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 18       |
| Item  3.                                                                                                 | Defaults  Upon Senior Securities                                                            | 18       |
| Item  4.                                                                                                 | Submission  of Matters to a Vote of Security Holders                                        | 18       |
| Item 5.                                                                                                  | Other Information                                                                           | 19       |
| Item 6.                                                                                                  | Exhibits                                                                                    | 20       |
| Signatures                                                                                               | 21                                                                                          |
| Exhibit Index                                                                                       | 22                                                                                          |

 

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Table of Contents

 

**ASPYRA,INC.**

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**          | ** ** | **2007**              | ** ** |
| ** **                                                                                           | ** ** | **(Unaudited)**   | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                      |       |              |       |                  |       |
| Cash                                                                                                 |       | $                 | 2,102,526  |                  | $          | 803,392 |   |
| Receivables, net                                                                                     |       | 849,027           |       | 921,212               |       |
| Inventory                                                                                            |       | 45,335            |       | 49,802                |       |
| Prepaid expenses and other assets                                                                    |       | 372,666           |       | 126,139               |       |
| TOTAL CURRENT ASSETS                                                                                 |       | 3,369,554         |       | 1,900,545             |       |
|                                                                                                 |       |              |       |                  |       |
| PROPERTY AND EQUIPMENT, net                                                                          |       | 652,481           |       | 839,889               |       |
| OTHER ASSETS                                                                                         |       | 275,463           |       | 86,529                |       |
| INVENTORY OF COMPONENT PARTS                                                                         |       | 55,448            |       | 74,896                |       |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,121,477 and $875,165         |       | 2,881,008         |       | 2,839,232             |       |
| INTANGIBLES, net                                                                                     |       | 3,416,732         |       | 3,760,982             |       |
| GOODWILL                                                                                             |       | 7,268,434         |       | 7,268,434             |       |
|                                                                                                 |       | $                 | 17,919,120 |                  | $          | 16,770,507 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                 |       |              |       |                  |       |
| Notes payable                                                                                        |       | $                 | 950,555    |                  | $          | 1,200,605 |   |
| Accounts payable                                                                                     |       | 678,782           |       | 784,735               |       |
| Accrued liabilities:                                                                                 |       |              |       |                  |       |
| Vacation pay                                                                                         |       | 320,252           |       | 363,239               |       |
| Accrued compensation                                                                                 |       | 438,920           |       | 518,737               |       |
| Accrued interest                                                                                     |       | 181,103           |       | 106,646               |       |
| Deferred rent                                                                                        |       | 71,339            |       | 65,143                |       |
| Customer deposits                                                                                    |       | 287,010           |       | 218,994               |       |
| Other                                                                                                |       | 294,547           |       | 343,725               |       |
| Deferred service contract income                                                                     |       | 2,202,940         |       | 1,724,650             |       |
| Deferred revenue on system sales                                                                     |       | 483,047           |       | 431,746               |       |
| Capital lease — current portion                                                                 |       | 150,237           |       | 150,237               |       |
| TOTAL CURRENT LIABILITIES                                                                            |       | 6,058,732         |       | 5,908,457             |       |
|                                                                                                 |       |              |       |                  |       |
| CAPITAL LEASE, LESS CURRENT PORTION                                                                  |       | 273,167           |       | 348,285               |       |
| NOTES PAYABLE                                                                                        |       | 2,250,000         |       | —                |       |
|                                                                                                 |       |              |       |                  |       |
| TOTAL LIABILITIES                                                                                    |       | 8,581,899         |       | 6,256,742             |       |
|                                                                                                 |       |              |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                           |       |              |       |                  |       |
| Common shares, no par value; 40,000,000  shares authorized; 12,437,150 shares issued and outstanding |       | 22,761,951        |       | 22,761,951            |       |
| Additional paid-in-capital                                                                           |       | 2,397,207         |       | 1,178,354             |       |
| Accumulated deficit                                                                                  |       | (15,761,295       | )          | (13,366,612           | )          |
| Accumulated other comprehensive loss                                                                 |       | (60,642           | )          | (59,928               | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                      |       | 9,337,221         |       | 10,513,765            |       |
|                                                                                                 |       |              |       |                  |       |
|                                                                                                 |       | $                 | 17,919,120 |                  | $          | 16,770,507 |   |

 

**See Notes toCondensed Consolidated Financial Statements.**

 

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**Table of Contents**

** **

**ASPYRA,INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 
| ** **                                     | ** ** | **Three Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                     | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
|                                           |       |                                                |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:          |       |                                                |       |   |   |
| System sales                                   |       | $                                                   | 632,015    |   | $ | 841,872 |   |
| Service revenue                                |       | 1,684,792                                           |       | 1,808,785 |   |
|                                           |       | 2,316,807                                           |       | 2,650,657 |   |
|                                           |       |                                                |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:           |       |                                                |       |   |   |
| System sales                                   |       | 649,980                                             |       | 610,447 |   |
| Service revenue                                |       | 603,407                                             |       | 694,808 |   |
|                                           |       | 1,253,387                                           |       | 1,305,255 |   |
|                                           |       |                                                |       |   |   |
| Gross profit                                   |       | 1,063,420                                           |       | 1,345,402 |   |
|                                           |       |                                                |       |   |   |
| OPERATING EXPENSES                             |       |                                                |       |   |   |
| Selling, general and administrative            |       | 1,672,741                                           |       | 1,664,754 |   |
|                                           |       |                                                |       |   |   |
| Research and development                       |       | 381,272                                             |       | 541,117 |   |
|                                           |       |                                                |       |   |   |
| Total operating expenses                       |       | 2,054,013                                           |       | 2,205,871 |   |
|                                           |       |                                                |       |   |   |
| Operating loss                                 |       | (990,593                                            | )          | (860,469 | ) |
|                                           |       |                                                |       |   |   |
| INTEREST AND OTHER INCOME                      |       | 15,261                                              |       | 11,223 |   |
|                                           |       |                                                |       |   |   |
| INTEREST EXPENSE                               |       | (224,951                                            | )          | (44,410 | ) |
|                                           |       |                                                |       |   |   |
| Loss before provision for income taxes         |       | (1,200,283                                          | )          | (893,656 | ) |
|                                           |       |                                                |       |   |   |
| PROVISION FOR INCOME TAXES                     |       | —                                              |       | — |   |
|                                           |       |                                                |       |   |   |
| NET LOSS                                       |       | $                                                   | (1,200,283 | ) | $ | (893,656 | ) |
|                                           |       |                                                |       |   |   |
| LOSS PER SHARE:                                |       |                                                |       |   |   |
|                                           |       |                                                |       |   |   |
| Basic                                          |       | $                                                   | (.10       | ) | $ | (.08 | ) |
| Diluted                                        |       | (.10                                                | )          | (.08 | ) |
|                                           |       |                                                |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING: |       |                                                |       |   |   |
| Basic                                          |       | 12,437,150                                          |       | 10,787,150 |   |
| Diluted                                        |       | 12,437,150                                          |       | 10,787,150 |   |

 

**See Notes toCondensed Consolidated Financial Statements.**

 

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**ASPYRA,INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 
| ** **                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                            |       |                                              |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                              |       |   |   |
| System sales                                    |       | $                                                 | 1,080,784  |   | $ | 1,413,271 |   |
| Service revenue                                 |       | 3,400,588                                         |       | 3,439,354 |   |
|                                            |       | 4,481,372                                         |       | 4,852,625 |   |
|                                            |       |                                              |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                              |       |   |   |
| System sales                                    |       | 1,210,235                                         |       | 1,146,972 |   |
| Service revenue                                 |       | 1,260,967                                         |       | 1,457,851 |   |
|                                            |       | 2,471,202                                         |       | 2,604,823 |   |
|                                            |       |                                              |       |   |   |
| Gross profit                                    |       | 2,010,170                                         |       | 2,247,802 |   |
|                                            |       |                                              |       |   |   |
| OPERATING EXPENSES                              |       |                                              |       |   |   |
| Selling, general and administrative             |       | 3,153,588                                         |       | 3,284,986 |   |
|                                            |       |                                              |       |   |   |
| Research and development                        |       | 977,723                                           |       | 1,107,974 |   |
|                                            |       |                                              |       |   |   |
| Total operating expenses                        |       | 4,131,311                                         |       | 4,392,960 |   |
|                                            |       |                                              |       |   |   |
| Operating loss                                  |       | (2,121,141                                        | )          | (2,145,158 | ) |
|                                            |       |                                              |       |   |   |
| INTEREST AND OTHER INCOME                       |       | 19,907                                            |       | 28,544 |   |
|                                            |       |                                              |       |   |   |
| INTEREST EXPENSE                                |       | (293,449                                          | )          | (92,902 | ) |
|                                            |       |                                              |       |   |   |
| Loss before provision for income taxes          |       | (2,394,683                                        | )          | (2,209,516 | ) |
|                                            |       |                                              |       |   |   |
| PROVISION FOR INCOME TAXES                      |       | —                                            |       | 603 |   |
|                                            |       |                                              |       |   |   |
| NET LOSS                                        |       | $                                                 | (2,394,683 | ) | $ | (2,208,913 | ) |
|                                            |       |                                              |       |   |   |
| LOSS PER SHARE:                                 |       |                                              |       |   |   |
|                                            |       |                                              |       |   |   |
| Basic                                           |       | $                                                 | (.19       | ) | $ | (.20 | ) |
| Diluted                                         |       | (.19                                              | )          | (.20 | ) |
|                                            |       |                                              |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING: |       |                                              |       |   |   |
| Basic                                           |       | 12,437,150                                        |       | 10,785,817 |   |
| Diluted                                         |       | 12,437,150                                        |       | 10,785,817 |   |

 

**See Notes toCondensed Consolidated Financial Statements.**

 

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**ASPYRA,INC.**

** **

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**Increase(Decrease) in Cash**

** **

**(unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                          | ** ** | **2007** | ** ** |
|                                                                                       |       |                                              |       |   |   |
| OPERATING ACTIVITIES                                                                       |       |                                              |       |   |   |
| Net loss                                                                                   |       | $                                                 | (2,394,683 | ) | $ | (2,208,913 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                              |       | 335,278                                           |       | 220,853 |   |
| Amortization of acquired intangibles                                                       |       | 344,250                                           |       | 344,250 |   |
| Provision for doubtful accounts                                                            |       | 13,337                                            |       | — |   |
| Amortization of capitalized software costs                                                 |       | 246,313                                           |       | 202,609 |   |
| Stock based compensation                                                                   |       | 245,853                                           |       | 83,065 |   |
| Increase (decrease) from changes in:                                                       |       |                                              |       |   |   |
| Receivables                                                                                |       | 58,848                                            |       | 71,612 |   |
| Inventories                                                                                |       | 23,916                                            |       | 46,151 |   |
| Prepaid expenses and other assets                                                          |       | (118,711                                          | )          | 49,759 |   |
| Accounts payable                                                                           |       | (105,953                                          | )          | (31,584 | ) |
| Accrued liabilities                                                                        |       | (23,316                                           | )          | 57,401 |   |
| Deferred service contract income                                                           |       | 478,290                                           |       | 695,701 |   |
| Deferred revenue on system sales                                                           |       | 51,301                                            |       | 107,600 |   |
| Net cash used in operating activities                                                      |       | (845,277                                          | )          | (361,496 | ) |
|                                                                                       |       |                                              |       |   |   |
| INVESTING ACTIVITIES                                                                       |       |                                              |       |   |   |
| Additions to property and equipment                                                        |       | (17,447                                           | )          | (38,762 | ) |
| Additions to capitalized software costs                                                    |       | (288,087                                          | )          | (454,941 | ) |
| Net cash used in investing activities                                                      |       | (305,534                                          | )          | (493,703 | ) |
|                                                                                       |       |                                              |       |   |   |
| FINANCING ACTIVITIES                                                                       |       |                                              |       |   |   |
| Borrowings on notes payable                                                                |       | 2,775,000                                         |       | 1,026,477 |   |
| Payments on notes payable                                                                  |       | (250,050                                          | )          | (1,070,823 | ) |
| Payments on capital leases                                                                 |       | (75,118                                           | )          | (75,119 | ) |
| Decrease in restricted cash                                                                |       | —                                            |       | 1,000,000 |   |
| Exercise of stock options                                                                  |       | —                                            |       | 2,880 |   |
| Net cash provided by financing activities                                                  |       | 2,449,832                                         |       | 883,415 |   |
| ** **                                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Foreign currency translation adjustment                                                    |       | 113                                               |       | (10,623 | ) |
| ** **                                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| NET INCREASE IN CASH                                                                       |       | 1,299,134                                         |       | 17,593 |   |
| ** **                                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| CASH, beginning of period                                                             |       | 803,392                                           |       | 1,014,632 |   |
|                                                                                       |       |                                              |       |   |   |
| CASH, end of period                                                                        |       | $                                                 | 2,102,526  |   | $ | 1,032,225 |   |

 

**See notes toCondensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

** **

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

** **

**Note 1-Presentation of Financial Statements**

 

In the opinion of management of Aspyra, Inc. (the “Company”or “ASPYRA”), the accompanying unaudited condensed consolidated financialstatements reflect all adjustments (which include only normal recurringaccruals) necessary to present fairly the Company’s financial position as of June 30,2008, the results of its operations for the three and six months ended June 30,2008 and 2007, and cash flows for the six months ended June 30, 2008 and2007.  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 31,2007.

 

The results of operations for the three and six months ended June 30,2008 are not necessarily indicative of the results expected for any otherperiod or for the entire year.

 

**Note 2-Liquidity**

 

As of June 30, 2008, the Company’s working deficit of$2,689,178 compared to a working deficit of $4,007,912, as of December 31,2007. At June 30, 2008, the Company’s credit facilities with its bankconsisted of a revolving line of credit of $1,300,000, of which $776,477 wasoutstanding. On March 26, 2008, the Company executed agreements renewingits 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 27,2009.  The revolving line of credit issubject to certain covenants, including revised financial covenants.  As of June 30, 2008, the Company was incompliance with all covenants.  Advancesunder the revolving line of credit are on a formula, based on eligible accountsreceivable and inventory balances.  At June 30,2008, the Company had $423,404 outstanding on its capital leases of which$150,237 is due in the next twelve months.

 

The Company’s primary source of working capital has beengenerated 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 andnegative cash flows from operations since the quarter ended December 31,2005.  An unanticipated decline in sales,delays in implementations where payments are tied to delivery and/orperformance of services or cancellations of contracts have had, and in thefuture could have, a negative effect on cash flow from operations and could inturn create short-term liquidity problems.

 

On March 26, 2008 the Company entered into a NotePurchase Agreement with various current and new shareholders.  Pursuant to the Purchase Agreement, theinvestors purchased secured promissory notes from the Company in the principalamount of $2,775,000. The notes are convertible up to 5,427,273 shares of theCompany’s Common Stock and have a maturity date of March 26, 2010 and bearinterest at the rate of 8% per annum compounded on each July 15 and January 15.  Pursuant to the terms of the transaction, theCompany issued 3 year warrants to purchase up to 5,496,646 of shares of CommonStock.  As a result, assuming theconversion of all promissory notes and exercise of all warrants, up to10,923,919 shares of the Company’s Common Stock may be issued.  Such an issuance if it were to occur, wouldbe highly dilutive of existing shareholders and may, under certain conditionseffect a change of control of the Company.

 

We believe that our current cash and cash equivalents, andcash flow from operations, will be sufficient to meet our current anticipatedcash needs, including for working capital purposes, capital expenditures andvarious contractual obligations, for at least the next 12 months.  If the Company is unable to generate cashfrom operations or meet revenue targets or obtain new cash inflows fromfinancing or equity offerings, the Company would need to take action and reducecosts in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings andcapital infusion.  We may, also, requireadditional cash resources due to changed business conditions or other futuredevelopments, including any investments or acquisitions we may decide to pursue.  If these sources are insufficient to satisfyour cash requirements, we may seek to sell debt securities or additional equitysecurities or to obtain a credit facility. The sale of convertible debt securities or additional equity securitiescould result in additional dilution to our 

 

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stockholders.  Theincurrence of indebtedness would result in incurring debt service obligationsand could result 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.

 

**Note 3-Inventories**

 

Inventories consist primarily of computer hardware held forresale and are stated at the lower of cost or market (net realizablevalue).  Cost is determined using thefirst-in, first-out method. Supplies are charged to expense as incurred.  The Company also maintains an inventory poolof component parts to service systems previously sold, which is classified asnon-current in the accompanying balance sheets. Such inventory is carried at the lower of cost or market and is chargedto cost of sales based on usage. Allowances are made for quantities on hand in excess of estimated futureusage.  At June 30, 2008, theinventory allowance was $186,230.

 

**Note 4-Goodwill and Intangible Assets**

 

In accordance with Statement of Financial Accounting Standards (“SFAS”)No. 142, goodwill is tested for impairment on an annual basis or betweenannual tests if an event occurs or circumstances change that would indicate thecarrying amount may be impaired.  Inaccordance with SFAS No. 144, Accounting for Impairment of Long-LivedAssets, management reviews definite life intangible assets to determine ifevents or circumstances have occurred which may cause the carrying values ofintangible assets to be impaired. The purpose of these reviews is to identifyany facts and circumstances, either internal or external, which may indicatethat the carrying values of the assets may not be recoverable.  There was no impairment when the Company didits annual impairment testing and no events have occurred since that time thatwould trigger a reevaluation.  At June 30,2008, the net carrying value of goodwill and intangible assets were $7,268,434and $3,416,732, respectively.

 

**Note5-Earnings per Share**

 

The Company accounts for its earnings per share in accordance with SFASNo.128, which requires presentation of basic and diluted earnings pershare.  Basic earnings per share iscomputed by dividing income or loss available to common shareholders by theweighted average number of common shares outstanding for the reporting period.  Diluted earnings per share reflect thepotential dilution that could occur if securities or other contracts, such asstock options, to issue common stock were exercised or converted into commonstock.

 

Earnings per share have been computed as follows:

 
| ** **                                                                 | ** ** | **Three Months   Ended   June 30, 2008** | ** ** | **Three Months   Ended   June 30, 2007** | ** ** | **Six Months   Ended   June 30, 2008** | ** ** | **Six Months   Ended   June 30, 2007** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
|                                                                       |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| NET LOSS, as reported                                                      |       | $                                                                 | (1,200,283 | )                                                                 | $          | (893,656                                                        | )          | $                                                               | (2,394,683 | ) | $ | (2,208,913 | ) |
| Basic weighted average number of common  shares outstanding, as reported   |       | 12,437,150                                                        |       | 10,787,150                                                        |       | 12,437,150                                                      |       | 10,785,817                                                      |       |
| Dilutive effect of stock options, as  reported                             |       | —                                                            |       | —                                                            |       | —                                                          |       | —                                                          |       |
| Diluted weighted average number of common  shares outstanding, as reported |       | 12,437,150                                                        |       | 10,787,150                                                        |       | 12,437,150                                                      |       | 10,785,817                                                      |       |
| Basic and diluted loss per share, as  reported                             |       | $                                                                 | (.10       | )                                                                 | $          | (.08                                                            | )          | $                                                               | (.19       | ) | $ | (.20 | ) |

 

For the three and six months ended June 30, 2008, options topurchase 1,414,084 shares of common stock at per share prices ranging from$0.36 to $2.75 were not included in the computation of diluted loss per sharebecause inclusion would have been anti-dilutive. For the three and six monthsended June 30, 2007, options to purchase 564,870 shares of common stock atper share prices ranging from $1.51 to $2.75 were not included in thecomputation of diluted loss per share because inclusion would have beenanti-dilutive.

 

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**Note 6-DebtObligations**

 

On March 26, 2008, the Company executedagreements to renew its revolving line of credit in the aggregate amount of$1,300,000.  The revolving line of creditis secured by the Company’s accounts receivable and inventory and matures on February 27,2009.  The revolving line of credit issubject to certain covenants, including revised financial covenants.  As of June 30, 2008, the Company was incompliance with all covenants.  Advancesunder the revolving line of credit are on a formula, based on eligible accountsreceivable and inventory balances.  On June 30,2008, the total amount due to the bank was $776,477 which is included in notespayable.

 

**Note7-Stock-Based Compensation**

 

Equity Incentive and Stock Option Plans: At June 30,2008, the Company has two stock-based compensation plans. Readers should referto both Item 6, Note 1 and Note 8 of the Company’s financial statements, whichare included in the Company’s Annual Report on Form 10-KSB for the yearended December 31, 2007, for additional information related to thesestock-based compensation plans. During the quarter ended June 30,2008, the Company’s board of directors approved an amendment to the 2005 EquityIncentive Plan increasing the number of available shares.  The increase has not yet been ratified by theCompany’s shareholders, accordingly any grant made from shares included in theincrease are subject to shareholder approval. There were 637,500 and 800,000 options granted in the three and sixmonths ended June 30, 2008.  Therewere 50,000 options granted in the three and six months ended June 30,2007.  No stock options were exercised inthe six months ended June 30, 2008. There were 4,000 options exercised in the six months ended June 30,2007 by one option holder and the Company received $2,880.  The Company accounts for stock option grantsin accordance with FASB Statement 123(R), Share-Based Payment. Compensationcosts related to share-based payments recognized in the Condensed Statements ofIncome were $128,339 and $245,853 for the three and six months ended June 30,2008 and $37,887 and $83,066 for the three and six months ended  June 30, 2007.

 

**Note8-Commitments and Contingencies**

 

In accordance withthe bylaws of the Company, officers and directors are indemnified for certainevents or occurrences arising as a result of the officer or director’s servingin such capacity.  The term of theindemnification period is for the lifetime of the officer or director.  The maximum potential amount of futurepayments the Company could be required to make under the indemnificationprovisions of its bylaws is unlimited. However, the Company has a director and officer liability insurancepolicy that reduces its exposure and enables it to recover a portion of 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 provisions under agreementswith various parties in the normal course of business, typically with customersand landlords.  Under these provisions,the Company generally indemnifies and holds harmless the indemnified party forlosses suffered or incurred by the indemnified party as a result of the Company’sactivities or, in some cases, as a result of the indemnified party’s activitiesunder the agreement.  Theseindemnification provisions often include indemnifications relating torepresentations made by the Company with regard to intellectual propertyrights.  These indemnification provisionsgenerally survive termination of the underlying agreement.  The maximum potential amount of futurepayments the Company could be required to make under these indemnification provisionscannot be estimated.  The Companymaintains general liability, errors and omissions, and professional liabilityinsurance in order to mitigate such risks. The Company has not incurred material costs to defend lawsuits or settleclaims related to these indemnification agreements.  As a result, the Company believes theestimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

**Note 9-Income Taxes**

 

TheCompany accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financialstatements and the tax basis 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.

 

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**Note 10-Private Placement**

 

OnJanuary 28, 2008, the Company entered into a Note Purchase Agreement with twoof the Company’s current stockholders, C. Ian Sym-Smith, who is also adirector, and TITAB, LLC.  Pursuant tothe Purchase Agreement, the purchasers each purchased a secured promissory notefrom the Company in the principal amounts of $200,000 and $100,000,respectively.  The two notes each have amaturity of six months from the date of issuance and bear interest at the rateof LIBOR plus 2.5% per annum. These notes automatically converted to the termsand conditions of the subsequent transaction completed on March 26, 2008discussed below.  On March 13, 2008,the Company entered into a Note Purchase Agreement with one of the Company’scurrent stockholders, J. Shawn Chalmers. Pursuant to the Purchase Agreement Mr. Chalmers purchased a securedpromissory note from the Company in the principal amounts of $300,000.  The note has a maturity date of July 28,2008 and bears interest at the rate of LIBOR plus 2.5% per annum. Mr. Chalmershad the option and exercised the option to convert to the terms and conditionsof the subsequent transaction completed on March 26, 2008 discussed below.

 

OnMarch 26, 2008 the Company entered into a private placement transactionwith various current and new investors in the Company.  Pursuant to the Purchase Agreement entered intowith these investors, the investors purchased secured promissory notes from theCompany in the principal amount of $2,775,000. The notes are convertible intoshares of the Company’s Common Stock at a conversion price of $0.55 per share,subject to adjustment in the event of stock splits, stock dividends, andsimilar transactions. The notes are convertible into up to 5,427,273 shares ofthe Company’s Common Stock, have a maturity date of March 26, 2010 andbear interest at the rate of 8% per annum compounded on each July 15 and January 15.  Pursuant to the terms of the transaction, theCompany issued to the note holders 3 year warrants to purchase up to anadditional 5,496,646 of shares of Common Stock. Assuming the conversion of allpromissory notes and exercise of all warrants, up to 10,923,919 shares of theCompany’s Common Stock may be issued as a result of the private placement. Suchan issuance, if it were to occur, would be highly dilutive to existingshareholders and may, under certain conditions, effect a change of control ofthe Company. The Company’s obligations under the notes are secured by asecurity interest in substantially all of the Company’s tangible and intangibleassets, pursuant to the terms of a Security Agreement dated March 26, 2008.In addition, the Company entered into a note purchase agreement with GreatAmerican Investors (GAI) for the amount of the transaction fees of$210,000.  Pursuant to the terms of anagreement between the Company and GAI, the Company issued warrants to purchasesuch number of shares of Common Stock equal to the total number of shares ofCommon Stock which shall be initially issuable upon conversion of the relatedNote plus and additional 69,375 warrants. The transfer fee of $210,000 will be recognized over the shorter term ofdebt or date of conversion based on the effective interest method. As of June 30,2008, $26,250 of the transfer fee was charged to earnings.  During the six months ended June 30,2008, the Company valued the warrants received in the private placement andpurchase agreement with GAI utilizing the Black-Scholes Model and determinedthat the value of the warrants is $840,000. The Company allocated the value of the warrants as a contra discount tothe principal amount of the notes and it is being recognized over the term ofthe notes.  As of June 30, 2008,$105,000 of the value of the warrants was charged to earnings.  In addition, the warrant holders are gettinga discount of $.025 per share, which gives rise to a beneficial conversion featureof $133,000 that is being charged to earnings over the period from the date ofissuance to the date of which the holder can realize a return.  As of June 30, 2008 $30,324 of thebeneficial conversion was charged to earnings.

 

Theobligations under the note and the security interest created by the SecurityAgreement are subordinate and junior in right of payment to the senior lien onthe Company’s assets held by Western Commercial Bank in connection with theCompany’s existing line of credit.

 

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

 

**Note 11-New Accounting Pronouncements**

 

In December 2007, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standard No. 141(Revised) (“SFAS 141(R)”),  BusinessCombinations. The provisions of this statement are effective for businesscombinations for which the acquisition date is on or after the beginning of thefirst annual reporting period beginning after December 15, 2008. Earlierapplication is not permitted. SFAS 141(R) replaces SFAS 141 and providesnew guidance for valuing assets and liabilities acquired in a businesscombination. The Company will adopt SFAS 141(R) in calendar year2009.  The adoption of SFAS No. 141is not expected to have a material impact on our consolidated financialstatements.

 

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

 

In February 2007, the FinancialAccounting Standards Board (“FASB”) issued SFAS No. 159, “The Fair ValueOption for Financial Assets and Financial Liabilities”, which providescompanies with an option to report selected financial assets and liabilities atfair value. The objective of SFAS No. 159 is to reduce both complexity inaccounting for financial instruments and the volatility in earnings caused bymeasuring related assets and liabilities differently. SFAS No. 159 alsoestablishes presentation and disclosure requirements designed to facilitatecomparisons between companies that choose different measurement attributes forsimilar types of assets and liabilities. SFAS No. 159 is effective for theCompany as of January 1, 2008.  Theadoption of SFAS No. 159 did not have a material effect on our operatingresults or financial position.

 

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

 

In March 2008, the Financial AccountingStandards Board or FASB issued SFAS No. 161, Disclosures about DerivativeInstruments and Hedging Activities which amends SFAS No. 133. Thestatement is intended to improve transparency in financial reporting byrequiring enhanced disclosures of an entity’s derivative instruments andhedging activities and their effects on the entity’s financial position,financial performance, and cash flows. SFAS 161 is effective prospectively forfinancial statements issued for fiscal years and interim periods beginningafter November 15, 2008. The adoption of SFAS No. 161 is not expectedto have a material impact on our consolidated financial statements.

 

In May 2008, the FASB issued SFAS No. 162,“The Hierarchy of Generally Accepted Accounting Principles” (SFAS 162). Thisstatement identifies the sources of accounting principles and the framework forselecting the principles to be used in the preparation of financial statementsof nongovernmental entities that are presented in conformity with generallyaccepted accounting principles (GAAP) in the United States. This Statementshall be effective 60 days following the SEC’s approval of the PublicCompany Accounting Oversight Board (PCAOB) amendments to AU Section 411,“The Meaning of Present Fairly in Conformity With Generally Accepted AccountingPrinciples”. The Company does not believe the adoption of SFAS 162 will have amaterial impact on the consolidated financial statements.

 

**Item 2.Management’s Discussion and Analysis of Financial Condition and Results****ofOperations**

 

**Forward Looking Statements**

 

The SEC encourages companies to disclose forward-looking information sothat investors can better understand a company’s future prospects and makeinformed investment decisions. This Quarterly Report on Form 10-Q containssuch “forward-looking statements” within the meaning of the Private SecuritiesLitigation Reform Act of 1995, Section 27A of the Securities Act of 1933and Section 21E of the Securities Exchange Act of 1934.

 

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Words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “may,”“plan,” “project,” “seek,” “will” and words and terms of similar substance usedin connection with any discussion of future events, operating or financialperformance, financing sources, product development, capital requirements,market growth and the like, identify forward-looking statements.Forward-looking statements are merely predictions and therefore inherentlysubject to uncertainties and other factors which could cause the actual resultsto differ materially from the forward-looking statement.  These forward-looking statements include,among others:

 

·                    projectionsof revenues and other financial items;

 

·                    statementsof strategies and objectives for future operations;

 

·                    statementsconcerning proposed applications or services;

 

·                    statementsregarding future economic conditions, performance or business prospects;

 

·                    statementsregarding competitors or competitive actions; and

 

·                    statementsof assumptions underlying any of the foregoing.

 

All forward-looking statements are present expectations of futureevents and are subject to a number of factors and uncertainties that couldcause actual results to differ materially from those described in the forward-lookingstatements. The risks related to ASPYRA’s business discussed under “RiskFactors” in our Annual Report on Form 10-KSB filed March 31, 2008,among others, could cause actual results to differ materially from thosedescribed in the forward-looking statements. Such risks include, among others: the competitive environment;unexpected technical and marketing difficulties inherent in major productdevelopment efforts; the potential need for changes in our long-term strategyin response to future developments; future advances in clinical informationtechnology and procedures, as well as potential changes in governmentregulations and healthcare policies, both of which could adversely affect theeconomics of the products offered by ASPYRA; and rapid technological change inthe microelectronics and software industries.

 

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

 

**Overview**

 

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

 

ASPYRA operates in one business segment determined in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 131, andgenerates revenues primarily from the sale of its Clinical and DiagnosticInformation Systems, which includes the license of proprietary applicationsoftware, and may include the sale of servers and other hardware components tobe integrated with its application software. In connection with its sales ofits products, the Company provides implementation services for theinstallation, integration, and training of end users’ personnel. The Companyalso generates sales of ancillary software and hardware, to its customers andto third parties. We recognize these revenues under system sales in ourfinancial statements.  The Company alsogenerates recurring revenues from the provision of comprehensivepost-implementation services to its customers, pursuant to extended serviceagreements. We recognize these revenues under service revenues in our financialstatements.  This service relationship isan important aspect of our business, as the Company’s products are “missioncritical” systems that are used by healthcare providers, in most cases, 24hours per day and 7 days per week.  Inorder to retain this service relationship we must keep our products current forcompetitive, clinical, diagnostic, and regulatory compliance.  Enhancements to our products in the form ofsoftware upgrades are an integral part of our business model and are includedas a contract obligation in our warranty and extended service agreements.  In order to generate such revenueopportunities our investment in software enhancements is significant and is akey component of our ongoing support obligations.

 

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Because of the nature of our business, ASPYRA makes significantinvestments in research and development for new products and enhancements toexisting products. Historically, ASPYRA has funded its research and developmentprograms through cash flow primarily generated from operations. Managementanticipates that future expenditures in research and development will continueat current levels.

 

Aspyra incurred a net loss of $1,200,283 or basic and diluted loss pershare of $0.10 for the quarter ended June 30, 2008 as compared to a netloss of $893,656 or basic and diluted loss per share of $0.08 for the quarterended June 30, 2007.  For the sixmonths ended June 30, 2008, the Company incurred a net loss of $2,394,683or basic and diluted loss per share of $0.19 as compared to a net loss of$2,208,913 or basic and diluted loss per share of $0.20 for the same period offiscal 2007.

 

The operating losses incurred by the Company during the three and sixmonths ended June 30, 2008 were attributable to a decrease in salescompared to the same periods in 2007, partially offset by lower costs as aresult of actions taken in the first quarter of 2008  to reduce personnel and other expenses. Theresults are more fully discussed in the following section “Results ofOperations”.

 

**Results of Operations**

 

The following table sets forth certain line items in our condensedconsolidated statement of operations as a percentage of total revenues for theperiods indicated:

 
| ** **                             | ** ** | **Three Months   Ended   June 30, 2008** | ** ** | **Three Months   Ended   June 30, 2007** | ** ** | **Six Months   Ended   June 30, 2008** | ** ** | **Six Months   Ended   June 30, 2007** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| Revenues:                              |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| System sales                           |       | 27.3                                                              | %          | 31.8                                                              | %          | 24.1                                                            | %          | 29.1                                                            | %          |
| Service revenues                       |       | 72.7                                                              |       | 68.2                                                              |       | 75.9                                                            |       | 70.9                                                            |       |
| Total revenues                         |       | 100.0                                                             |       | 100.0                                                             |       | 100.0                                                           |       | 100.0                                                           |       |
| Cost of products and services sold:    |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| System sales                           |       | 28.1                                                              |       | 23.0                                                              |       | 27.0                                                            |       | 23.6                                                            |       |
| Service revenues                       |       | 26.0                                                              |       | 26.2                                                              |       | 28.1                                                            |       | 30.1                                                            |       |
| Total cost of products and services    |       | 54.1                                                              |       | 49.2                                                              |       | 55.1                                                            |       | 53.7                                                            |       |
| Gross profit                           |       | 45.9                                                              |       | 50.8                                                              |       | 44.9                                                            |       | 46.3                                                            |       |
| Operating expenses:                    |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| Selling, general and administrative    |       | 72.2                                                              |       | 62.8                                                              |       | 70.4                                                            |       | 67.7                                                            |       |
| Research and development               |       | 16.5                                                              |       | 20.4                                                              |       | 21.8                                                            |       | 22.8                                                            |       |
| Total operating expenses               |       | 88.7                                                              |       | 83.2                                                              |       | 92.2                                                            |       | 90.5                                                            |       |
| Operating loss                         |       | (42.8                                                             | )          | (32.4                                                             | )          | (47.3                                                           | )          | (44.2                                                           | )          |
|                                   |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| Loss before provision for income taxes |       | (51.8                                                             | )          | (33.7                                                             | )          | (53.4                                                           | )          | (45.5                                                           | )          |
| Provision for income taxes             |       | —                                                            |       | —                                                            |       | —                                                          |       | —                                                          |       |
|                                   |       |                                                              |       |                                                              |       |                                                            |       |                                                            |       |
| Net loss                               |       | (51.8                                                             | )          | (33.7                                                             | )          | (53.4                                                           | )          | (45.5                                                           | )          |

 

*Revenues*

 

Sales for the quarter ended June 30, 2008 were $2,316,807, ascompared to $2,650,657 for the quarter ended June 30, 2007, an overalldecrease of $333,850 or 12.6%. For the six months ended June 30, 2008,sales decreased to $4,481,372, as compared to $4,852,625 for the comparablesix-month period ended June 30, 2007, an overall decrease of $371,253 or7.7%.

 

When analyzed by revenue category for the quarter and six-month periodended June 30, 2008, sales of Clinical Information Systems (CIS) andDiagnostic Information Systems (DIS) decreased by $209,857 or 24.9% and$332,487 or 23.5%, respectively, and a decrease in service revenues of $123,993or 6.9% and $38,766 or 1.1%, respectively. The decrease in sales of DISproducts was primarily attributable to the reduction in sales through theCompany’s distributors and channel partners. Management believes that the importance of imaging technologies such asthe Company’s Radiology Information System (“RIS”) / Picture ArchiveCommunication System (“PACS”) products justifies them as an investment by endusers to improve efficiencies.  TheCompany has been rebuilding its sales force and hired several new experiencedregional sales managers in an effort to capitalize on market opportunities.

 

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

 

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Sales cycles for Clinical Information Systems (CIS) and DiagnosticInformation Systems (DIS) products are generally lengthy and on average exceedsix months from inception to closure. Because of the complexity of the sales process, a number of factors thatare beyond the control of the Company can delay the closing oftransactions.  Furthermore, the Companyhas been primarily reliant on distributors and channel partners for the salesof its Diagnostic Systems and has been subject to inconsistent flow oforders.  ASPYRA’s sales force is nowfocusing on a direct sales model for some of the diagnostic system products tosupplement the distribution and channel network so that the Company will beless reliant on third parties for the sale of its diagnostic systems.  ASPYRA has completed new versions of itslaboratory and radiology information systems products, as well as its newAccessRAD RIS/ PACS which it has begun marketing.

 

The Company intends to expand its sales and marketing activities,directing its focus towards larger customers and multi-product sales as well asselling new products into its installed customer base. The Company continues toseek strategic joint marketing partnerships with other companies, and channelpartners.  We expect that the Company’sfuture operating results will continue to be subject to annual and quarterlyvariations based upon a wide variety of factors, including the volume mix andtiming of orders received during any quarter or annual period.  In addition, the Company’s revenuesassociated with CIS and DIS transactions may be delayed due to customer relatedissues such as availability of funding, staff availability, IT infrastructurereadiness, and the performance of third party contractors, all of which areissues outside of the control of ASPYRA.

 

*Costs of products and services sold*

 

Cost of products and services sold decreased by $51,868 or 4.0% for thequarter ended June 30, 2008 as compared to the quarter ended June 30,2007. Cost of products and services sold decreased by $133,621 or 5.1% for thesix months ended June 30, 2008 as compared to the six months ended June 30,2007.  For the quarter, the overalldecrease in cost of sales was primarily attributable to a decrease in laborcosts of $100,341 or 13.7%, partially offset by an increase in material costsof $5,682 or 3.2% and an increase other costs of sales of $42,792 or10.9%.  For the six-month period, theoverall decrease in cost of sales was primarily attributable to a decrease inlabor costs of $130,922 or 9.1% and a decrease in other costs of sales of$19,510 or 2.2%, partially offset by an increase in material costs of $16,811or 6.0%. The decrease in labor costs and other costs was primarily attributableto reduction of personnel and overhead. The slight increase in material costs was attributable to the mix ofsystem sales requiring hardware.

 

For the quarter and six months ended June 30, 2008, cost ofproducts and services sold as a percentage of sales was 54% and 55%, ascompared to 49% and 54% for the quarter and six months ended June 30,2007. The overall percentage increase in cost of sales, as a percentage ofsales, was primarily attributable to reduction in revenues as describedabove.  Management believes the grossprofit margin will improve in the remainder of fiscal 2008; however, theCompany could experience quarterly variations in gross margin as a result ofthe factors discussed above. Management was able to eliminate redundantpersonnel and achieve operational synergies that yielded reductions inoperating expenses during the first quarter of 2008 which we expect to beevident in the remainder of fiscal 2008.

 

*Selling, general and administrative expenses*

 

Selling, general, and administrative expenses increased by $7,987 or0.5% for the quarter ended June 30, 2008 as compared to the quarter ended June 30,2007. For the six months ended June 30, 2008, selling, general, andadministrative expenses decreased by $131,398 or 4.0%, as compared to the sixmonths ended June 30, 2007.

 

For the quarter ended June 30, 2008, the increase in selling,general, and administrative expenses was primarily related to the increase ofapproximately $90,000 in SFAS 123(R) expense, stock administration of$48,000, and consulting expense of $80,000, recruitment expense of $103,000,which was partially offset by a decrease in salaries of $186,000, legal andaccounting expense of $50,000, trade show expenses of $35,000 and travel andlodging expenses of $50,000 compared to the same period in fiscal 2007.

 

 For the six-month period, thereduction of expenses was primarily attributable to decreases of approximately$501,000 related to salaries, $46,000 in trade show expense, and $105,000 intravel and lodging expenses, which were partially offset by an increase of$78,000 in legal and accounting expenses,$163,000 in SFAS 123(R) stockcompensation expense,  $50,000 in stockadministration expenses, $103,000 in recruitment fees and $126,000 consultingexpenses related to the documentation of the Company’s internal controls andconsulting fees compared to the same period in fiscal 2007. Managementcontinues to evaluate cost reductions in some of its selling, general andadministrative expenses while it also continues to plan further investment inits marketing programs.

 

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*Research and development expenses*

 

For the quarter and six months ended June 30, 2008, research anddevelopment expenses decreased $159,845 or 29.5% and $130,251 or 11.8%,respectively, as compared to the quarter and six months ended June 30,2007. The decrease was primarily attributable to decreases in salaries ofpersonnel in product development. Current development expenses were attributable to the development ofAccessRAD, the RIS/PACS solution that integrates the Company’s CyberRADradiology information system with its AccessNET PACS system, and enhancementsand new modules for the Company’s CIS and DIS products.  For the quarter ended June 30, 2008 and2007, the Company’s capitalized software costs were $131,691 and $224,890,respectively, which are generally amortized over the estimated useful life notto exceed five years.  For the six monthsended June 30, 2008 and 2007, the Company’s capitalized software costswere $288,087 and $454,941, respectively, which are generally amortized overthe estimated useful life not to exceed five years.

 

*Interest expense and other income*

 

Interest and other income was $15,261 and $19,907 for the quarter andsix months ended June 30, 2008 as compared to $11,223 and $28,544 for thequarter and six months ended June 30, 2007 due to the collection activityand therefore finance charges levied on customers who were late in theirpayments on accounts receivable.

 

Interest expense was $224,951 and $293,449 for the quarter and sixmonths ended June 30, 2008 as compared to $44,410 and $92,902 for thequarter and six months ended June 30, 2007.  The increase was primarily due to non-cashinterest charges related to the value of warrants, beneficial conversion, anddebt issuance costs resulting from the private placement transaction completedon March 26, 2008 see “Liquidity and Capital Resources” for additionalinformation.

 

*Net loss*

 

As a result of the factors discussed above, the Company incurred a netloss of $1,200,283 or basic and diluted loss per share of $0.10 for the quarterended June 30, 2008 as compared to a net loss of $893,656 or basic anddiluted loss per share of $0.08 for the quarter ended June 30, 2007.  For the six months ended June 30, 2008,the Company incurred a net loss of $2,394,683 or basic and diluted loss pershare of $0.19 as compared to a net loss of $2,208,913 or basic and dilutedloss per share of $0.20 for the same period of fiscal 2007.

 

**Liquidityand Capital Resources**

** **

Historically, the Company’s primary need for capital has been to investin software development, and in computers and related equipment for itsinternal use.  The Company invested$288,087 and $454,941, respectively, in software development during the sixmonths ended June 30, 2008 and 2007. These expenditures related to investment in the Company’s RIS/PACSintegrated system, AccessRAD, enhancements to AccessNET PACS, the new browserversion of the Company’s LIS product, CyberLAB, and other product enhancements.The Company anticipates expending additional sums during fiscal 2008 on productenhancements to all its products and the further development of AccessRAD.  During the six months ended June 30,2008, the Company invested an aggregate of $17,447 in fixed assets primarilyconsisting of computers and software, as compared to an investment of $38,762in fixed assets primarily consisting of computers, network infrastructure,telephone and data communications systems, and software in the quarter ended June 30,2007.

 

As of June 30, 2008, the Company’s working capital amounted to adeficit of $2,689,178 as compared to a deficit of $4,007,912 as of December 31,2007.  The reduction in deficit wasprimarily attributable to the private placement transaction completed on March 26,2008 with various current and new investors which is described in more detailbelow.

 

On March 26, 2008, the Company also executed agreements renewingits 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 27,2009.  The revolving line of credit issubject to certain covenants including revised financial covenants. At June 30,2008, the balance outstanding on the Company’s revolving line of credit was$776,477.  As of June 30, 2008, theCompany was in compliance with all covenants. Advances under the revolving line of credit are on a formula based oneligible accounts receivable and inventory balances.

 

Cash used in operating activities was $845,277 for the six months endedJune 30, 2008, compared to cash used in operating activities of $361,496for the six months ended June 30, 2007. The increase in cash used for operating activities was primarilyattributable to the net change in accounts payable, accrued liabilities andprepaid expenses, which was partially offset by the change in receivables anddeferred revenue on system sales along with increased amortization ofcapitalized software and stock based compensation.

 

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Net cash used in investing activities totaled $305,534 for the sixmonths ended June 30, 2008, compared to $493,703 used in investingactivities during the same period of 2007. The change was primarily the result of a decrease in investment in fixedassets and software capitalization costs compared to the same period of 2007.

 

Cash provided by financing activities amounted to $2,449,832 during thesix months ended June 30, 2008 compared to cash provided by financingactivities of $883,415 in the same period of 2007.  The increase was primarily attributable tothe Company completing the private placement transaction described below on March 26,2008, partially offset by the payments on notes payable and capital leases inthe six months ended June 30, 2008.

 

The Company’s primary source of working capital has been generated fromprivate placements of securities and from borrowings.  The Company has experienced a history oflosses due to the integration of its businesses and the significant investmentin new products since the quarter ended March 31, 2005 and negative cashflows 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 have had and in the future could have anegative effect on cash flow from operations and could in turn createshort-term liquidity problems.

 

On March 26, 2008 the Company completed a private placement ofpromissory notes and warrants pursuant to a Note Purchase Agreement enteredinto with various current and new investors. Under the terms of the Purchase Agreement, the investors purchasedsecured promissory notes from the Company in the principal amount of$2,775,000.  The notes are convertibleinto shares of the Company’s Common Stock at a conversion price of $0.55 pershare, subject to adjustment in the event of stock splits, stock dividends, andsimilar transactions. The notes are convertible into up to 5,427,273 shares ofthe Company’s Common Stock, have a maturity date of March 26, 2010 andbear interest at the rate of 8% per annum compounded on each July 15 and January 15.  Under the terms of the transaction, theCompany issued to the note holders 3-year warrants to purchase up to anaggregate of 5,496,646 additional shares of Common Stock.  As a result, assuming the conversion of allpromissory notes and exercise of all warrants issued in the private placement,up to 10,923,919 shares of the Company’s Common Stock may be issued.  Such an issuance if it were to occur, wouldbe highly dilutive to existing shareholders and may, under certain conditions,effect a change of control of the Company. Simultaneously with the execution ofthe Purchase Agreement, the Company and each of the investors entered into aRegistration Rights Agreement, pursuant to which each of the private placementinvestors shall be entitled to certain registration rights for all of theshares issuable in the transaction.

 

We believe that our current cash and cash equivalents, and cash flowfrom operations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and variouscontractual obligations, for at least the next 12 months.  If the Company is unable to generate cashfrom operations or meet revenue targets or obtain new cash inflows fromfinancing or equity offerings, the Company would need to take action and reducecosts in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings andcapital infusion.    We may also requireadditional cash resources due to changed business conditions or other futuredevelopments, including any investments or acquisitions we may decide topursue.  If these sources areinsufficient to satisfy our cash requirements, we may seek to sell debtsecurities or additional equity securities or to obtain a credit facility.  The sale of additional convertible debtsecurities or equity securities could result in additional dilution to ourstockholders.  The incurrence ofindebtedness would result in incurring debt service obligations and couldresult in operating and financial covenants that would restrict 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 timeevaluate acquisitions of other businesses, applications or technologies.

 

**Seasonality,Inflation and Industry Trends**

** **

The Company’s sales are generally higher in the spring and fall but aresubject to a number of factors related to its customers’ budgetary cycles.  Inflation has not had a material effect onthe Company’s business since the Company has been able to adjust the prices ofits products and services in response to inflationary pressures.  Management believes that most phases of thehealthcare segment of the computer industry will continue to be highlycompetitive, and that potential healthcare reforms including initiatives toestablish a national standard for electronic health records may have along-term positive impact on its business. The key issues driving demand for ASPYRA’s products are industryconcerns about patient care and safety issues, development of a nationalstandard for electronic health records that will affect all clinical data, ashift from analog to digital imaging technologies, and regulatorycompliance.  The Company has continued toinvest heavily in 

 

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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.

 

**CriticalAccounting Policies and Estimates**

** **

Management’s discussion and analysis of ASPYRA’s financial conditionand results of operations are based upon the condensed consolidated financialstatements contained in this Quarterly Report on Form 10-Q, which havebeen prepared in accordance with accounting principles generally accepted inthe United States.  The preparation ofthese financial statements requires management to make estimates and judgmentsthat affect the reported amounts of assets, liabilities, revenues and expenses,and related disclosures of contingent assets and liabilities.  On an on-going basis, management evaluatesestimates, including those related to the valuation of inventory and theallowance for uncollectible accounts receivable. We base our estimates onhistorical experience and on various other assumptions that management believesto be reasonable under the circumstances, the results of which form the basisfor making judgments about the carrying values of assets and liabilities thatare not readily apparent from other sources. Actual results may differ from these estimates under differentassumptions or conditions. We believe the following critical accountingpolicies affect our more significant judgments and estimates used in thepreparation of our consolidated financial statements:

 

*Inventory*

 

The Company’s inventory is comprised of a current inventory accountthat consists of items that are held for resale and a long-term inventoryaccount that consists of items that are held for repairs and replacement ofhardware components that are serviced by the Company under long-term ExtendedService Agreements with some of its customers. Current inventory is valued at the lower of cost to purchase or thecurrent estimated market value of the inventory items.  Inventory is evaluated on a continual basisand adjustments to recorded costs are made based on management’s estimate offuture sales value, or in the case of the long-term component inventory, onmanagement’s estimation of the usage of specific inventory items and netrealizable value.  Management reviewsinventory quantities on hand and makes a determination of the excess orobsolete items in the inventory, which, are specifically reserved.  In addition, adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.  At June 30,2008, the inventory reserve was approximately $186,230.

 

*Accounts Receivable*

 

Accounts receivable balances are evaluated on a continual basis andallowances are provided for potentially uncollectible accounts based onmanagement’s estimate of the collectability of customer accounts. If thefinancial condition of a customer were to deteriorate, resulting in animpairment of their ability to make payments, an additional allowance may berequired. Allowance adjustments are charged to operations in the period in whichthe facts that give rise to the adjustments become known.  The accounts receivable balance at June 30,2008 was $849,027, net of an allowance for doubtful accounts of approximately$66,239.

 

*Revenue Recognition*

 

Revenues are derived primarily from the sale of CIS and DIS productsand the provision of services.  Thecomponents of the system sales revenues are the licensing of computer software,installation, and the sale of computer hardware and sublicensed software. Thecomponents of service revenues are software support and hardware maintenance,training, and implementation services. The Company recognizes revenue in accordance with the provisions ofStatement of Position (SOP) No. 97-2, “Software Revenue Recognition,” asamended by SOP No. 98-4, SOP 98-9 and clarified by Staff AccountingBulletin (SAB) 104 “Revenue Recognition in Financial Statements.”  SOP No 97-2, as amended, generally requiresrevenue earned on software arrangements involving multiple-elements to beallocated to each element based on the relative fair values of thoseelements.  The Company allocates revenueto each element in a multiple-element arrangement based on the element’srespective fair value, with the fair value determined by the price charged whenthat element is sold separately and specifically defined in a quotation orcontract.  Deferred revenue related toCIS and DIS sales are comprised of deferrals for license fees, hardware, andother services for which the implementation has not yet been completed andrevenues have not been recognized. Revenues are presented net of discounts. At June 30, 2008 deferred revenue was $483,047.

 

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Post-implementation software and hardware maintenance services aremarketed under monthly, quarterly and annual arrangements and are recognized asrevenue ratably over the contracted maintenance term as services are provided.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to customers, the professional services portion of thearrangement (other than installation services) based on hourly rates which theCompany charges for these services when sold apart from a software license, andthe hardware and sublicense of software based on the prices for these elementswhen they are sold separately from the software.  At June 30, 2008, deferred servicecontract income was $2,202,940.

 

*Software Development Costs*

 

Costs incurred internally in creating computer software products areexpensed until technological feasibility has been established upon completionof a program design. Thereafter, applicable software development costs arecapitalized and subsequently reported at the lower of amortized cost or netrealizable value.  Capitalized costs areamortized based on current and expected future revenue for each product withminimum annual amortization equal to the straight-line amortization over theestimated economic life of the product, not to exceed five years.  For the six months ended June 30, 2008and 2007, the Company capitalized $288,087 and $454,941, respectively.  At June 30, 2008, the balance ofcapitalized software costs was $2,881,008, net of accumulated amortization of$1,121,477.

 

*Intangible Assets*

 

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

 

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

 

*Stock-based Compensation*

 

We have two stock-based compensation plans, the 2005 Equity IncentivePlan and the 1997 Stock Option Plan, under which we may issue shares of ourcommon stock to employees, officers, directors and consultants. Uponeffectiveness 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.  On June 26, 2008, theBoard approved an increase in the number of shares available for grant underthe 2005 Equity Incentive Plan which has not yet been approved by theshareholders, and the grants under which will be subject to shareholderapproval.

 

Prior to January 1, 2006, we accounted for these plans under therecognition and measurement provisions of APB Opinion No. 25, Accountingfor Stock Issued to Employees, and related Interpretations, as permitted bySFAS No. 123, Accounting for Stock-Based Compensation.  Effective January 1, 2006, we adoptedthe fair value recognition provisions of SFAS No. 123(R), Share-BasedPayment, using the modified-prospective-transition method. Under that transitionmethod, compensation cost recognized in the three and six months ended June 30,2008 and 2007 includes: (a) compensation cost for all share-based paymentsgranted prior to, but not yet vested as of January 1, 2006, based on thegrant date fair value estimated in accordance with the original provisions ofSFAS No. 123, and (b) compensation cost for all share-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123(R). Resultsfor prior periods have not been restated.

 

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

 

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*Income Taxes*

 

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

 

### **New Accounting Pronouncements**

 

In December 2007,the Financial Accounting Standards Board issued Statement of FinancialAccounting Standard No. 141 (Revised) (“SFAS 141(R)”), BusinessCombinations.  The provisions of thisstatement are effective for business combinations for which the acquisitiondate is on or after the beginning of the first annual reporting periodbeginning after December 15, 2008. Earlier application is not permitted.SFAS 141(R) replaces SFAS 141 and provides new guidance for valuing assetsand liabilities acquired in a business combination. We will adopt SFAS 141(R) incalendar year 2009.  The adoption of SFASNo. 141 is not expected to have a material impact on our consolidatedfinancial statements.

 

In September 2006,the FASB issued SFAS No. 157, Fair Value Measurements (SFAS 157). SFAS 157establishes a framework for measuring fair value in generally acceptedaccounting principles, and expands disclosures about fair value measurements.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB staffissued a staff position that delayed the effective date of SFAS No. 157for all non-financial assets and liabilities except for those recognized ordisclosed annually. The FASB also issued FAS-157-1, “application of FASBStatement No. 157 to FASB Statement No. 13 and other AccountingPronouncements that address Fair Value Measurements for Purposes of LeaseClassifications or Measurements under SFAS Statement No. 13”. We are requiredto adopt the provision of SFAS 157, as applicable, beginning in fiscal year2008. The adoption of SFAS No. 157 did not have a material effect on ouroperating results or financial position.

 

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

 

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

 

In March 2008, theFinancial Accounting Standards Board or FASB issued SFAS No. 161,Disclosures about Derivative Instruments and Hedging Activities which amendsSFAS No. 133. The statement is intended to improve transparency infinancial reporting by requiring enhanced disclosures of an entity’s derivativeinstruments and hedging activities and their effects on the entity’s financialposition, financial performance, and cash flows. SFAS 161 is effectiveprospectively for financial statements issued for fiscal years and interimperiods beginning after November 15, 2008. The adoption of SFAS No. 161is not expected to have a material impact on our consolidated financialstatements.

 

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In May 2008, theFASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (SFAS 162). This statement identifies the sources of accountingprinciples and the framework for selecting the principles to be used in thepreparation of financial statements of nongovernmental entities that arepresented in conformity with generally accepted accounting principles(GAAP) in the United States. This Statement shall be effective60 days following the SEC’s approval of the Public Company AccountingOversight Board (PCAOB) amendments to AU Section 411, “The Meaning ofPresent Fairly in Conformity With Generally Accepted Accounting Principles”.The Company does not believe the adoption of SFAS 162 will have a materialimpact on the consolidated financial statements.

 

**Item 4T.Controls and Procedures.**

 

*Disclosure Controls and Procedures*

 

Ourmanagement, with the participation of our chief executive officer and chieffinancial officer, evaluated the effectiveness of our disclosure controls andprocedures as of June 30, 2008. The term “disclosure controls andprocedures,” as defined in Rules 13a-15(e) and 15d-15(e) underthe Securities Exchange Act of 1934, as amended, means controls and otherprocedures of a company that are designed to ensure that information requiredto be disclosed by a company in the reports that it files or submits under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms. Disclosure controls andprocedures include, without limitation, controls and procedures designed toensure that information required to be disclosed by a company in the reportsthat it files or submits under the Exchange Act is accumulated and communicatedto the company’s management, including its principal executive and principalfinancial officers, as appropriate, to allow timely decisions regardingrequired disclosure. Based on the evaluation of our disclosure controlsand procedures as of June 30, 2008, our chief executive officer and chieffinancial officer concluded that, as of such date, our disclosure controls andprocedures were effective.

 

*Internal Control Over Financial Reporting*

 

Duringthe quarter ended June 30, 2008, there have been no changes in ourinternal control over financial reporting (as defined in Rule 13a-15(f) and15d-15(f) under the Exchange Act) that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

This quarterly report does not include anattestation report of the company’s registered public accounting firm regardinginternal control over financial reporting. Management’s report was not subjectto attestation by the company’s registered public accounting firm pursuant totemporary rules of the Securities and Exchange Commission that permit thecompany to provide only management’s report in this quarterly report.

 

**Part II – OTHER INFORMATION**

 

**Item 1.    ****LegalProceedings******

 

None.

 

**Item 2.    ****UnregisteredSales Of Equity Securities And Use Of Proceeds.******

 

None.

 

**Item 3.    ****Defaults UponSenior Securities.******

 

None.

 

**Item 4.    SubmissionOf Matters To A Vote Of Security Holders.**

 

On June 26, 2008, we held our 2008 annual meeting of stockholders.  At the annual meeting, there were 12,437,150shares entitled to vote, and 10,920,576 shares (87.81%) were represented at themeeting in person or by proxy. Immediately prior to the meeting, the Board of Directors was comprisedof John Mutch, Lawrence S. Schmid, Robert S. Fogerson, Jr., Norman R.Cohen, James Zierick, C. Ian Sym-Smith, and Jeffrey Tumbleson, all of whom werere-elected at the meeting to serve on the Board.  The following summarizes vote results forthose matters submitted to our stockholders for action at the Annual Meeting:

 

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1.               Proposal to elect Mr. JohnMutch, Mr. Lawrence S. Schmid, Mr. Robert S. Fogerson, Jr., Mr. NormanR. Cohen, Mr. James Zierick, Mr. C. Ian Sym-Smith, and Mr. JeffreyTumbleson as directors to hold office until the 2009 annual meeting or untiltheir successors are elected and qualified.

 
| **Director**                 | ** ** | **For**    | ** ** | **Withheld** | ** ** |
|------------------------------|------------|------------|------------|--------------|------------|
|                         |       |       |       |         |       |
| John Mutch                   |       | 10,754,280 |       | 166,296      |       |
| Lawrence S. Schmid           |       | 8,883,372  |       | 2,037,204    |       |
| Robert S. Fogerson, Jr. |       | 8,883,372  |       | 2,037,204    |       |
| Norman R. Cohen              |       | 10,629,640 |       | 290,936      |       |
| James Zierick                |       | 10,756,980 |       | 163,596      |       |
| C. Ian Sym-Smith             |       | 8,875,778  |       | 2,044,798    |       |
| Jeffrey Tumbleson            |       | 10,754,280 |       | 166,296      |       |

 

2.               Proposal to ratifythe potential issuance of up to 10,923,919 shares of the Company’s common stockat a price below the current book value issued in connection with a privateplacement of convertible notes and warrants conducted in March 2008.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|      |       |        |       |        |       |                      |       |
| 7,306,799 |       | 176,039     |       | 1,750,688   |       | 1,687,050                 |       |

 

3.               Proposal to ratifythe amendment to the Company’s amended and restated articles of incorporationin order to increase the total number of authorized shares of common stock from20,000,000 to 40,000,000.

 
| **For**   | ** ** | **Against** | ** ** | **Abstain** | ** ** | **Broker Non-Votes** | ** ** |
|-----------|------------|-------------|------------|-------------|------------|---------------------------|------------|
|      |       |        |       |        |       |                      |       |
| 9,066,307 |       | 158,819     |       | 8,400       |       | 1,687,050                 |       |

 

 

4.               Proposal to ratifythe appointment of the accounting firm of BDO Seidman, LLP as independentauditors of the company for the fiscal year ending December 31, 2008.

 
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
|       |       |        |       |        |       |
| 10,784,952 |       | 133,635     |       | 1,988       |       |

 

**Item 5.    ****OtherInformation.******

 

None.

 

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**Item 6.Exhibits.**

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
|                 |       |            |   |
| 3.1                  |  (1)  |            | Restated  Articles of Incorporation, as amended. |
|                 |       |            |   |
| 3.2                  |  (2)  |            | Amendment to the  Restated Articles of Incorporation filed with the Secretary of the State of  California on November 21, 2005. |
|                 |       |            |   |
| 3.3                  |  (1)  |            | By-Laws, as  amended. |
|                 |       |            |   |
| 10.1                 |  (3)  |            | Agreement  dated June 6, 2008 by and between Aspyra, Inc. and James Zierick. |
|                 |       |            |   |
| 10.2                 |  (4)  |            | Summary  of Terms dated June 26, 2008 for Engagement of MV Advisors II, LLC by  Aspyra, Inc. |
|                 |       |            |   |
| 31.1                 |  *    |            | Certification of  Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |       |            |   |
| 31.2                 |  *    |            | Certification of  Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |       |            |   |
| 32.1                 |  *    |            | Certification of  Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
|                 |       |            |   |
| 32.2                 |  *    |            | Certification of  Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |

 

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(1)          Previously filed as an exhibit to the Company’s Registration Statementon Form S-18 dated September 22, 1983, SEC File No. 2- 85265.

 

(2)          Included as an Annex to the joint proxy statement/prospectus that ispart of the Company’s Registration Statement on Form S-4, originally filedon October 3, 2005, SEC File No. 333-128795.

 

(3)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on June 9, 2008.

 

(4)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on July 2, 2008.

 

*               Filed herewith.

 

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**SIGNATURES**

 

Pursuant to the requirementsof the Securities Exchange Act of 1934, the registrant has duly caused thisreport to be signed on its behalf by the undersigned thereunto duly authorized.

 
| ** **                 | ** ** | **ASPYRA,  INC.**                             |
|----------------------------|------------|-----------------------------------------------|
|                       |       |                                          |
| Date: August 11, 2008 |       | /s/ James Zierick                             |
|                       |       | Chief Executive Officer                       |
|                       |       | (Principal Executive  Officer)                |
|                       |       |                                          |
| Date: August 11, 2008 |       | /s/ Anahita Villafane                         |
|                       |       | Chief Financial Officer                       |
|                       |       | (Principal Financial and  Accounting Officer) |

 

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**EXHIBITINDEX**

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| ** **           | ** ** | ** **      | ** ** |
| 3.1                  |  (1)  |            | Restated  Articles of Incorporation, as amended. |
|                 |       |            |   |
| 3.2                  |  (2)  |            | Amendment to the  Restated Articles of Incorporation filed with the Secretary of the State of  California on November 21, 2005. |
|                 |       |            |   |
| 3.3                  |  (1)  |            | By-Laws, as  amended. |
|                 |       |            |   |
| 10.1                 |  (3)  |            | Agreement  dated June 6, 2008 by and between Aspyra, Inc. and James Zierick. |
|                 |       |            |   |
| 10.2                 |  (4)  |            | Summary  of Terms dated June 26, 2008 for Engagement of MV Advisors II, LLC by  Aspyra, Inc. |
|                 |       |            |   |
| 31.1                 |  *    |            | Certification of  Chief Executive Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |       |            |   |
| 31.2                 |  *    |            | Certification of  Chief Financial Officer Pursuant to Rule 13a-14(a)/15d-14(a) of the  Securities Exchange Act of 1934. |
|                 |       |            |   |
| 32.1                 |  *    |            | Certification of  Chief Executive Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |
|                 |       |            |   |
| 32.2                 |  *    |            | Certification of  Chief Financial Officer Pursuant to Rule 13a-14(b)/15d-14(b) of the  Securities Exchange Act of 1934 and 18 U.S.C. Section 1350. |

 

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| (1)    |   | Previously filed as an exhibit to the Company’s Registration Statement  on Form S-18 dated September 22, 1983, SEC File No. 2- 85265.                                                          |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                               |
| (2)    |   | Included as an Annex to the joint proxy statement/prospectus that is  part of the Company’s Registration Statement on Form S-4, originally  filed on October 3, 2005, SEC File No. 333-128795. |
|   |   |                                                                                                                                                                                                               |
| (3)    |   | Previously filed as an exhibit to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on  June 9, 2008.                                                     |
|   |   |                                                                                                                                                                                                               |
| (4)    |   | Previously filed as an exhibit to the Company’s Current Report on  Form 8-K filed with the Securities and Exchange Commission on  July 2, 2008.                                                     |
|   |   |                                                                                                                                                                                                               |
| *      |   | Filed  herewith.                                                                                                                                                                                                   |

 

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