**UNITEDSTATES 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 March 31, 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 000-28440**

 

**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 area code

 

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 May 14, 2008,there were 12,437,150 shares of the registrant’s only class of common stockoutstanding.

 

 

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**ASPYRA, INC.**

 

**QUARTERLY REPORT ON FORM 10-Q**

 

**March 31, 2008**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                                | ** **                                                                                  | **Page** |
|-----------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **PART I – FINANCIAL INFORMATION**                                                              | ** **                                                                                  |
| Item 1.                                                                                                   | Condensed Consolidated Financial  Statements (Unaudited)                                    | 1        |
| Condensed consolidated  balance sheets at March 31, 2008 and December 31, 2007                  | 1                                                                                           |
| Condensed consolidated  statements of operations for the three months ended March 31, 2008 and  2007 | 2                                                                                           |
| Condensed consolidated  statements of cash flows for the three months ended March 31, 2008 and  2007 | 3                                                                                           |
| Notes to  Condensed Consolidated Financial Statements                                                     | 4                                                                                           |
| Item 2.                                                                                                   | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 9        |
| Item 4T.                                                                                                  | Controls and  Procedures                                                                    | 17       |
|                                                                                                      |                                                                                        |     |
| **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                                                            | 19       |
| Item 4.                                                                                                   | Submission  of Matters to a Vote of Security Holders                                        | 19       |
| Item 5.                                                                                                   | Other Information                                                                           | 19       |
| Item 6.                                                                                                   | Exhibits                                                                                    | 19       |
| Signatures                                                                                                | 20                                                                                          |
| Exhibit Index                                                                                        | 21                                                                                          |
|                                                                                                           |                                                                                             |          |  |

 

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**ASPYRA,INC.**

 

**PART I- FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**CONDENSED CONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                           | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                           | ** ** | **2008**           | ** ** | **2007**              | ** ** |
| ** **                                                                                           | ** ** | **(Unaudited)**    | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                           | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT ASSETS:                                                                                      |       |               |       |                  |       |
| Cash                                                                                                 |       | $                  | 2,819,918  |                  | $          | 803,392 |   |
| Receivables, net                                                                                     |       | 671,558            |       | 921,212               |       |
| Inventory                                                                                            |       | 66,444             |       | 49,802                |       |
| Prepaid expenses and other assets                                                                    |       | 271,486            |       | 126,139               |       |
| TOTAL CURRENT ASSETS                                                                                 |       | 3,829,406          |       | 1,900,545             |       |
|                                                                                                 |       |               |       |                  |       |
| PROPERTY AND EQUIPMENT, net                                                                          |       | 737,428            |       | 839,889               |       |
| OTHER ASSETS                                                                                         |       | 296,525            |       | 86,529                |       |
| INVENTORY OF COMPONENT PARTS                                                                         |       | 59,897             |       | 74,896                |       |
| CAPITALIZED SOFTWARE COSTS, net of  accumulated amortization of $1,000,286 and $875,165         |       | 2,870,508          |       | 2,839,232             |       |
| INTANGIBLES, net                                                                                     |       | 3,588,857          |       | 3,760,982             |       |
| GOODWILL                                                                                             |       | 7,268,434          |       | 7,268,434             |       |
|                                                                                                 |       | $                  | 18,651,055 |                  | $          | 16,770,507 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                        | ** ** | ** **         | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                 |       |               |       |                  |       |
| Notes payable                                                                                        |       | $                  | 950,555    |                  | $          | 1,200,605 |   |
| Accounts payable                                                                                     |       | 798,929            |       | 784,735               |       |
| Accrued liabilities:                                                                                 |       |               |       |                  |       |
| Vacation pay                                                                                         |       | 331,459            |       | 363,239               |       |
| Accrued compensation                                                                                 |       | 320,941            |       | 518,737               |       |
| Accrued interest                                                                                     |       | 117,254            |       | 106,646               |       |
| Deferred rent                                                                                        |       | 68,413             |       | 65,143                |       |
| Customer deposits                                                                                    |       | 262,812            |       | 218,994               |       |
| Other                                                                                                |       | 240,374            |       | 343,725               |       |
| Deferred service contract income                                                                     |       | 2,143,726          |       | 1,724,650             |       |
| Deferred revenue on system sales                                                                     |       | 401,397            |       | 431,746               |       |
| Capital lease — current portion                                                                 |       | 150,237            |       | 150,237               |       |
| TOTAL CURRENT LIABILITIES                                                                            |       | 5,786,097          |       | 5,908,457             |       |
|                                                                                                 |       |               |       |                  |       |
| CAPITAL LEASE, LESS CURRENT PORTION                                                                  |       | 310,726            |       | 348,285               |       |
| NOTES PAYABLE                                                                                        |       | 2,145,000          |       | —                |       |
|                                                                                                 |       |               |       |                  |       |
| TOTAL LIABILITIES                                                                                    |       | 8,241,823          |       | 6,256,742             |       |
|                                                                                                 |       |               |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                           |       |               |       |                  |       |
| Common shares, no par value; 20,000,000  shares authorized; 12,437,150 shares issued and outstanding |       | 22,761,951         |       | 22,761,951            |       |
| Additional paid-in-capital                                                                           |       | 2,268,868          |       | 1,178,354             |       |
| Accumulated deficit                                                                                  |       | (14,561,011        | )          | (13,366,612           | )          |
| Accumulated other comprehensive loss                                                                 |       | (60,576            | )          | (59,928               | )          |
| TOTAL SHAREHOLDERS’ EQUITY                                                                      |       | 10,409,232         |       | 10,513,765            |       |
|                                                                                                 |       |               |       |                  |       |
|                                                                                                 |       | $                  | 18,651,055 |                  | $          | 16,770,507 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

** **

**1**

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** **

**ASPYRA,INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

** **

**(unaudited)**

 
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                            |       |                                                 |       |   |   |
| NET SYSTEM SALES AND SERVICE REVENUE:           |       |                                                 |       |   |   |
| System sales                                    |       | $                                                    | 448,768    |   | $ | 571,399 |   |
| Service revenue                                 |       | 1,715,797                                            |       | 1,630,569 |   |
|                                            |       | 2,164,565                                            |       | 2,201,968 |   |
|                                            |       |                                                 |       |   |   |
| COSTS OF PRODUCTS AND SERVICES SOLD:            |       |                                                 |       |   |   |
| System sales                                    |       | 560,255                                              |       | 536,525 |   |
| Service revenue                                 |       | 657,559                                              |       | 763,043 |   |
|                                            |       | 1,217,814                                            |       | 1,299,568 |   |
|                                            |       |                                                 |       |   |   |
| Gross profit                                    |       | 946,751                                              |       | 902,400 |   |
|                                            |       |                                                 |       |   |   |
| OPERATING EXPENSES                              |       |                                                 |       |   |   |
| Selling, general and administrative             |       | 1,480,847                                            |       | 1,620,233 |   |
|                                            |       |                                                 |       |   |   |
| Research and development                        |       | 596,451                                              |       | 566,856 |   |
|                                            |       |                                                 |       |   |   |
| Total operating expenses                        |       | 2,077,298                                            |       | 2,187,089 |   |
|                                            |       |                                                 |       |   |   |
| Operating loss                                  |       | (1,130,547                                           | )          | (1,284,689 | ) |
|                                            |       |                                                 |       |   |   |
| INTEREST AND OTHER INCOME                       |       | 4,646                                                |       | 17,321 |   |
|                                            |       |                                                 |       |   |   |
| INTEREST EXPENSE                                |       | (68,498                                              | )          | (48,492 | ) |
|                                            |       |                                                 |       |   |   |
| Loss before provision for income taxes          |       | (1,194,399                                           | )          | (1,315,860 | ) |
|                                            |       |                                                 |       |   |   |
| PROVISION FOR INCOME TAXES                      |       | —                                               |       | 603 |   |
|                                            |       |                                                 |       |   |   |
| NET LOSS                                        |       | $                                                    | (1,194,399 | ) | $ | (1,315,257 | ) |
|                                            |       |                                                 |       |   |   |
| LOSS PER SHARE:                                 |       |                                                 |       |   |   |
|                                            |       |                                                 |       |   |   |
| Basic                                           |       | $                                                    | (.10       | ) | $ | (.12 | ) |
| Diluted                                         |       | (.10                                                 | )          | (.12 | ) |
|                                            |       |                                                 |       |   |   |
| WEIGHTED AVERAGE NUMBER OF SHARES  OUTSTANDING: |       |                                                 |       |   |   |
| Basic                                           |       | 12,437,150                                           |       | 10,784,483 |   |
| Diluted                                         |       | 12,437,150                                           |       | 10,784,483 |   |

 

**See Notes to Condensed Consolidated FinancialStatements.**

** **

**2**

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** **

**ASPYRA,INC.**

** **

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**Increase (Decrease) in Cash**

** **

**(unaudited)**

 
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                                                                                       |       |                                                 |       |   |   |
| OPERATING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Net loss                                                                                   |       | $                                                    | (1,194,399 | ) | $ | (1,315,257 | ) |
| Adjustments to reconcile net loss to net  cash provided by (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation and amortization                                                              |       | 113,492                                              |       | 111,085 |   |
| Amortization of acquired intangibles                                                       |       | 172,125                                              |       | 172,125 |   |
| Provision for doubtful accounts                                                            |       | 767                                                  |       | — |   |
| Amortization of capitalized software costs                                                 |       | 125,121                                              |       | 102,105 |   |
| Stock based compensation                                                                   |       | 117,514                                              |       | 45,179 |   |
| Increase (decrease) from changes in:                                                       |       |                                                 |       |   |   |
| Receivables                                                                                |       | 248,887                                              |       | 143,755 |   |
| Inventories                                                                                |       | (1,643                                               | )          | (40,514 | ) |
| Prepaid expenses and other assets                                                          |       | (12,342                                              | )          | 88,644 |   |
| Accounts payable                                                                           |       | 14,194                                               |       | (26,247 | ) |
| Accrued liabilities                                                                        |       | (275,233                                             | )          | 32,295 |   |
| Deferred service contract income                                                           |       | 419,076                                              |       | 460,062 |   |
| Deferred revenue on system sales                                                           |       | (30,349                                              | )          | (36,705 | ) |
| Net cash used in operating activities                                                      |       | (302,790                                             | )          | (263,473 | ) |
|                                                                                       |       |                                                 |       |   |   |
| INVESTING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Additions to property and equipment                                                        |       | (11,849                                              | )          | (20,424 | ) |
| Additions to capitalized software costs                                                    |       | (156,396                                             | )          | (230,051 | ) |
| Net cash used in investing activities                                                      |       | (168,245                                             | )          | (250,475 | ) |
|                                                                                       |       |                                                 |       |   |   |
| FINANCING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Borrowings on notes payable                                                                |       | 2,775,000                                            |       | 1,026,477 |   |
| Payments on notes payable                                                                  |       | (250,050                                             | )          | (1,023,517 | ) |
| Payments on capital leases                                                                 |       | (37,559                                              | )          | (37,560 | ) |
| Decrease in restricted cash                                                                |       | —                                               |       | 1,000,000 |   |
| Exercise of stock options                                                                  |       | —                                               |       | 2,880 |   |
| Net cash provided by financing activities                                                  |       | 2,487,391                                            |       | 968,280 |   |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Foreign currency translation adjustment                                                    |       | 170                                                  |       | (2,612 | ) |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| NET INCREASE (DECREASE) IN CASH                                                            |       | 2,016,526                                            |       | 451,720 | ) |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| CASH, beginning of period                                                             |       | 803,392                                              |       | 1,014,632 |   |
|                                                                                       |       |                                                 |       |   |   |
| CASH, end of period                                                                        |       | $                                                    | 2,819,918  |   | $ | 1,466,352 |   |

 

**See notes to Condensed Consolidated FinancialStatements.**

 

3

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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 March 31,2008, the results of its operations for the three months ended March 31,2008 and 2007, and cash flows for the three months ended March 31, 2008and 2007.  These results have beendetermined on the basis of accounting principles generally accepted in theUnited States and practices applied consistently with those used in preparationof the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2007.

 

The results of operations for the three months ended March 31,2008 are not necessarily indicative of the results expected for any otherperiod or for the entire year.

 

**Note 2-Liquidity**

 

As of March 31, 2008, the Company’s working deficit of$1,956,691 compared to a working deficit of $4,007,912, as of December 31,2007. At March 31, 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 March 31, 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 March 31,2008, the Company had $460,963 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 the conversionof all promissory notes and exercise of all warrants, up to 10,923,919 sharesof the Company’s Common Stock may be issued. Such an issuance if it were to occur, would be highly dilutive ofexisting shareholders and may, under certain conditions effect a change ofcontrol 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 

 

4

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requires the Company to have ongoing courses of action toreduce costs and look for new sources of financings and capital infusion.  We may, also, required additional cashresources due to changed business conditions or other future developments,including any investments or acquisitions we may decide to pursue.  If these sources are insufficient to 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 stockholders.  The incurrence of indebtedness would resultin incurring debt service obligations and could result in operating andfinancial covenants that would restrict our operations.  In addition, there can be no assurance thatany additional financing will be available on acceptable terms, if at all.  Although there are no present understandings,commitments or agreements with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time, evaluateacquisitions of other businesses, applications or technologies.

 

**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 March 31, 2008, theinventory allowance was $181,781.

 

**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 March 31,2008, the net carrying value of goodwill and intangible assets were $7,268,434and $3,588,857, 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 reportingperiod.  Diluted earnings per sharereflect the potential dilution that could occur if securities or othercontracts, such as stock options, to issue common stock were exercised orconverted into common stock.

 

5

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Earnings per share have been computed as follows:

 
| ** **                                                                              | ** ** | **Three Months   Ended   March 31, 2008** | ** ** | **Three Months   Ended   March 31, 2007** | ** ** |
|-----------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|
|                                                                                    |       |                                                               |       |                                                               |       |
| NET LOSS, as reported                                                                   |       | $                                                                  | (1,194,399 | )                                                                  | $          | (1,315,257 | ) |
| Basic weighted average number of common  shares outstanding, as reported and restated   |       | 12,437,150                                                         |       | 10,784,483                                                         |       |
| Dilutive effect of stock options, as  reported and restated                             |       | —                                                             |       | —                                                             |       |
| Diluted weighted average number of common  shares outstanding, as reported and restated |       | 12,437,150                                                         |       | 10,784,483                                                         |       |
| Basic and diluted loss per share, as  reported                                          |       | $                                                                  | (.10       | )                                                                  | $          | (.12 | ) |

 

For the three months ended March 31, 2008, options to purchase868,626 shares of common stock at per share prices ranging from $1.05 to $2.75were not included in the computation of diluted loss per share becauseinclusion would have been anti-dilutive. For the three months ended March 31,2007, options to purchase 575,433 shares of common stock at per share pricesranging from $1.51 to $2.75 were not included in the computation of dilutedloss per share because inclusion would have been anti-dilutive.

 

**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 March 31, 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 March 31,2008, the total amount due to the bank was $776,477.

 

**Note7-Stock-Based Compensation**

 

Equity Incentive and Stock Option Plans: At March 31,2008, 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. There were 162,500 options granted inthe three months ended March 31, 2008. There were no options granted in the three months ended March 31,2007.  No stock options were exercised inthe period ending March 31, 2008. There were 4,000 options exercised in the period ending March 31,2007 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 $117,514 and $45,179 for the periods ended March 31, 2008 and2007, respectively.

 

**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 insurance policythat reduces its exposure and enables it to recover a portion of any futureamounts paid.  As a result of itsinsurance policy coverage, the Company believes the estimated exposure for theindemnification provisions of its bylaws is minimal and, therefore, the Companyhas not recorded any related liabilities.

 

6

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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 indemnificationprovisions cannot be estimated.  TheCompany maintains general liability, errors and omissions, and professionalliability insurance in order to mitigate such risks.  The Company has not incurred material coststo defend lawsuits or settle claims related to these indemnificationagreements.  As a result, the Companybelieves the estimated exposure under these agreements is minimal.  Accordingly, the Company has not recorded anyrelated liabilities.

 

**Note 9-Income Taxes**

 

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 bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.

 

**Note 10-Private Placement**

 

OnJanuary 28, 2008, the Company entered into a Note Purchase Agreement withtwo of 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 enteredinto with these investors, the investors purchased secured promissory notesfrom the Company in the principal amount of $2,775,000. The notes areconvertible into shares of the Company’s Common Stock at a conversion price of$0.55 per share, subject to adjustment in the event of stock splits, stockdividends, and similar transactions. The notes are convertible into up to5,427,273 shares of the Company’s Common Stock, have a maturity date of March 26,2010 and bear interest at the rate of 8% per annum compounded on each July 15and January 15.  Pursuant to theterms of the transaction, the Company issued to the note holders 3 yearwarrants to purchase up to an additional 5,496,646 of shares of Common Stock.Assuming the conversion of all promissory notes and exercise of all warrants,up to 10,923,919 shares of the Company’s Common Stock may be issued as a resultof the private placement. Such an issuance, if it were to occur, would behighly dilutive to existing shareholders and may, under certain conditions,effect a change of control of the Company. The Company’s obligations under thenotes are secured by a security interest in substantially all of the Company’stangible and intangible assets, pursuant to the terms of a Security Agreementdated March 26, 2008. In addition, Company entered into a note purchaseagreement with Great American Investors (GAI) for the amount of the transactionfees of $210,000.  Pursuant to the termsof an agreement between the Company and GAI, the Company issued warrants topurchase such number of shares of Common Stock equal to the total number ofshares of Common Stock which shall be initially issuable upon conversion of therelated Note plus and additional 69,375 warrants.  The transfer fee of $210,000 will be recognizedover the shorter term of debt or date of conversion based on the effectiveinterest method. During the quarter ended March 31, 2008, the Company valuedthe warrants received in the private placement and purchase agreement with GAIutilizing the Black-Scholes Model and determined that the value of the warrantsis $840,000.  The Company allocated thevalue of the warrants as a contra discount to the principal amount of the notesand it is being recognized over the term of the notes.  In addition, the warrant holders are gettinga discount of $.025 per share, which gives rise to a beneficial conversionfeature of $133,000 that is being charged to earnings over the period from thedate of issuance to the date of which the holder can realize a return.  As of March 31, 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.

 

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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 AccountingPronouncements**

 

In December 2007, the FinancialAccounting Standards Board issued Statement of Financial Accounting Standard No. 141(Revised) (“FAS 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. FAS141(R) replaces FAS 141 and provides newguidance for valuing assets and liabilities acquired in a business combination.We will adopt FAS141(R) in calendar year 2009.

 

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 AccountingPronouncements that address Fair Value Measurements for Purposes of LeaseClassifications or Measurements under SFAS Statement No. 13”. We arerequired to adopt the provision of SFAS 157, as applicable, beginning in fiscalyear 2008. The adoption of SFAS No. 157 did not have a material effect onour operating 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 the noncontrollinginterest in a subsidiary and for the deconsolidation of a subsidiary.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.

 

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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.

 

**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.

 

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 theforward-looking statements. The risks related to ASPYRA’s business discussedunder “Risk Factors” of this Quarterly Report on Form 10-Q, among others,could cause actual results to differ materially from those described in theforward-looking statements.  Such risksinclude, among others: the competitive environment; unexpected technical andmarketing difficulties inherent in major product development efforts; the potentialneed for changes in our long-term strategy in response to future developments;future advances in clinical information technology and procedures, as well aspotential changes in government regulations and healthcare policies, both ofwhich could adversely affect the economics of the products offered by ASPYRA;and rapid technological change in the microelectronics and software industries.

 

The Company makes 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 anyforward-looking statements after the date of this Quarterly Report on Form 10-Q,whether as a result of new information, future events or otherwise.

 

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**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 comprehensive postimplementation 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 24 hoursper day and 7 days per week.  In order toretain 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 a keycomponent of our ongoing support obligations.

 

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’s results of operations for the quarter ended March 31,2008 were marked by a slight decrease in sales and a decrease in operating lossthat are more fully discussed in the following section “Results of Operations”.  Sales cycles for Clinical Information Systems(CIS) and Diagnostic Information Systems (DIS) products are generally lengthyand on average exceed six months from inception to closure.  Because of the complexity of the salesprocess, a number of factors that are beyond the control of the Company candelay the closing of transactions. Furthermore, the Company has been primarily reliant on distributors andchannel partners for the sales of its Diagnostic Systems and has been subjectto inconsistent flow of orders.  ASPYRA’ssales force is now focusing on a direct sales model for some of the diagnosticsystem products to supplement the distribution and channel network so that itwill be less reliant on third parties for the sale of its diagnosticsystems.  ASPYRA has completed newversions of its laboratory and radiology information systems products, as wellas its new AccessRAD Radiology Information System (“RIS”) / Picture ArchiveCommunication Systems (“PACS”) which it has begun marketing.  At March 31, 2008, the Company had$401,397 in deferred revenue.

 

The operating losses incurred by the Company during the quarter ended March 31,2008 were attributable to the uneven sales performance previouslydiscussed.  The decrease in operatingloss for the quarter ended March 31, 2008 as compared to the same periodof 2007 is a result of reductions in redundant personnel and other expenses.

 

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**Resultsof Operations**

 

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

 

| ** **                             | ** ** | **Three Months  Ended  March 31, 2008** | ** ** | **Three Months  Ended  March 31, 2007** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Revenues:                              |       |                                                   |       |                                                   |       |
| System sales                           |       | 20.7                                                   | %          | 25.9                                                   | %          |
| Service revenues                       |       | 79.3                                                   |       | 74.1                                                   |       |
| Total revenues                         |       | 100.0                                                  |       | 100.0                                                  |       |
| Cost of products and services sold:    |       |                                                   |       |                                                   |       |
| System sales                           |       | 25.9                                                   |       | 24.3                                                   |       |
| Service revenues                       |       | 30.4                                                   |       | 34.7                                                   |       |
| Total cost of products and services    |       | 56.3                                                   |       | 59.0                                                   |       |
| Gross profit                           |       | 43.7                                                   |       | 41.0                                                   |       |
| Operating expenses:                    |       |                                                   |       |                                                   |       |
| Selling, general and administrative    |       | 68.4                                                   |       | 73.6                                                   |       |
| Research and development               |       | 27.6                                                   |       | 25.7                                                   |       |
| Total operating expenses               |       | 96.0                                                   |       | 99.3                                                   |       |
| Operating loss                         |       | (52.2                                                  | )          | (58.3                                                  | )          |
|                                   |       |                                                   |       |                                                   |       |
| Loss before provision for income taxes |       | (55.2                                                  | )          | (59.7                                                  | )          |
| Provision for income taxes             |       | —                                                 |       | —                                                 |       |
|                                   |       |                                                   |       |                                                   |       |
| Net loss                               |       | (55.2                                                  | )          | (59.7                                                  | )          |

 

*Revenues*

 

Salesfor the quarter ended March 31, 2008 were $2,164,565, as compared to$2,201,968 for the quarter ended March 31, 2007, an overall decrease of$37,403 or 1.7%. When analyzed by revenue category, sales of ClinicalInformation Systems (CIS) and Diagnostic Information Systems (DIS) decreased by$122,631 or 21.5%, partially offset by an increase in services of $85,228 or5.2%. As described above under “Overview”, 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 PACS products justifies them as an investment by end users toimprove efficiencies.  The increase inservice revenues is primarily attributable to continued high levels of renewalsof extended maintenance contracts and an increasing level ofpost-implementation services provided. If and when the Company’s installed base of CIS and DIS installationsincreases, then service revenues would be expected to increase as well.

 

TheCompany intends to expand its sales and marketing activities, directing itsfocus towards larger customers and multi-product sales as well as selling newproducts into its installed customer base. The Company continues to seekstrategic 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*

 

Costof products and services sold decreased by $81,753 or 6.3% for the quarterended March 31, 2008 as compared to the quarter ended March 31, 2007.The overall decrease in cost of sales was primarily attributable to a decreasein labor costs of $30,580 or 4.3% and a decrease in other costs of sales of$62,302 or 12.7%, partially offset by an increase in material costs of $11,129or 10.7%. The decrease in labor costs and other costs of sales was primarilyattributable to reduction of personnel and overhead.

 

Costof products and services sold as a percentage of sales decreased to 56% for thequarter ended March 31, 2008, as compared to 59% for the quarter ended March 31,2007. The overall percentage decrease in cost of sales, as a percentage ofsales, was primarily attributable to reduction in personnel.  Management believes the gross profit marginwill improve in the remainder of fiscal 2008; however, the Company couldexperience quarterly variations in 

 

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grossmargin as a result of the factors discussed above. Management was able toeliminate redundant personnel and achieve operational synergies that yieldedreductions in operating expenses during the first quarter of 2008 which weexpect to be evident in the remainder of fiscal 2008.

 

*Selling, general and administrative expenses*

 

Selling,general, and administrative expenses decreased by $139,386 or 8.6% for thequarter ended March 31, 2008 as compared to the quarter ended March 31,2007.  The reduction of expenses wasprimarily attributable to decreases of approximately $250,000 related tosalaries, $47,000 in travel and lodging expenses, which were partially offsetby an increase of $125,000 in legal and accounting expenses, and $46,000consulting expenses related to the documentation of the Company’s internalcontrols and consulting fees compared to the same period in fiscal 2006.Management continues to evaluate cost reductions in some of its selling,general and administrative expenses while it also continues to plan furtherinvestment in its marketing programs.

 

*Research and development expenses*

 

Researchand development expenses increased $29,595 or 5.2% during the quarter ended March 31,2008, as compared to the quarter ended March 31, 2007. The increase wasprimarily attributable to a reduction in the capitalized software costs relatedto new development as the Company spent additional time on existingsoftware.  This was partially offset bydecreases in salaries of personnel in product development.  Current development expenses wereattributable to the development of AccessRAD, the RIS/PACS platform thatintegrates the Company’s radiology information system CyberRAD with itsAccessNET PACS system, and enhancements and new modules for the Company’s CISand DIS products.  For the quarter ended March 31,2008 and the quarter ended March 31, 2007, the Company’s capitalizedsoftware costs were $156,396 and $230,051, respectively, which are generallyamortized over the estimated useful life not to exceed five years.

 

*Interest Expense*

 

Interestand other income was $4,646 for the quarter ended March 31, 2008 ascompared to $17,321 for the quarter ended March 31, 2007 due to improvedcollection activity and therefore a decrease in finance charges levied oncustomers who were late in their payments on accounts receivable.

 

Interestexpense was $68,498 for the quarter ended March 31, 2008 as compared to$48,492 for the quarter ended March 31, 2007.  The increase was primarily due to theincreased level of borrowings during the current quarter as compared to thesame period of fiscal 2007.

 

*Net loss*

 

Asa result of the factors discussed above, the Company incurred a net loss of$1,194,399 or basic and diluted loss per share of $0.10 for the quarter ended March 31,2008 as compared to a net loss of $1,315,257 or basic and diluted loss pershare of $0.12 for the quarter ended March 31, 2007.

 

**Liquidityand Capital Resources**

** **

Historically,the Company’s primary need for capital has been to invest in softwaredevelopment, and in computers and related equipment for its internal use.  The Company invested $156,396 and $230,051,respectively, during quarter ended March 31, 2008 and 2007 in softwaredevelopment.  These expenditures relatedto investment in the Company’s RIS/PACS integrated system, AccessRAD,enhancements to AccessNET, the new browser version of the Company’s LISproduct, CyberLAB, and other product enhancements. The Company anticipatesexpending additional sums during fiscal 2008 on product enhancements to all itsproducts and the further development of AccessRAD.  During the quarter ended March 31, 2008,the Company invested an aggregate of $11,849 in fixed assets primarily consistingof computers and software, as compared to an investment of $20,424 in fixedassets primarily consisting of computers, network infrastructure, telephone anddata communications systems, and software in the quarter ended March 31,2007.

 

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Asof March 31, 2008, the Company’s working capital amounted to a deficit of$1,956,691 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.  As described in more detail below,on March 26, 2008 the Company entered into a Note Purchase Agreement withvarious current and new investors.  Underthe terms of the private placement, the investors purchased secured promissorynotes from the Company in the principal amount of $2,775,000 together withwarrants executable for additional shares of Common Stock.

 

OnMarch 26, 2008, the Company executed agreements renewing its revolvingline 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 March 31,2008, the balance outstanding on the Company’s revolving line of credit was$776,477.  As of March 31, 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.

 

Cashused in operating activities was $302,790 for the quarter ended March 31,2008, compared to cash used in operating activities of $263,473 for the quarterended March 31, 2007.  The increasein cash used for operating activities was primarily attributable to the netchange in accrued liabilities and prepaid expenses, which was partially offsetby the change in receivables and increased amortization of capitalized softwareand stock based compensation.

 

Netcash used in investing activities totaled $168,245 for the quarter ended March 31,2008, compared to $250,475 used in investing activities during the same periodof 2007.  The change was primarily theresult of a decrease in investment in fixed assets and software capitalizationcosts compared to the same period of 2007.

 

Cashprovided by financing activities amounted to $2,487,391 during the quarterended March 31, 2008 compared to cash provided by financing activities of$968,280 in the same period of 2007.  Theincrease was primarily attributable to the Company completing the privateplacement transaction described below on March 26, 2008, partially offsetby the payments on notes payable in the first quarter ended March 31,2008.

 

TheCompany’s primary source of working capital has been generated from privateplacements of securities and from borrowings. The Company has been experiencing a history of losses due to theintegration of its businesses and the significant investment in new productssince the quarter ended March 31, 2005 and negative cash flows fromoperations 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.

 

OnMarch 26, 2008 the Company completed a private placement of promissorynotes and warrants pursuant to a Note Purchase Agreement entered into withvarious current and new investors.  Underthe terms of the Purchase Agreement, the investors purchased secured promissorynotes from the Company in the principal amount of $2,775,000.  The notes are convertible into shares of theCompany’s Common Stock at a conversion price of $0.55 per share, subject toadjustment in the event of stock splits, stock dividends, and similartransactions. The notes are convertible into up to 5,427,273 shares of theCompany’s Common Stock, 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.  Under the terms of the transaction, theCompany issued to the note holders 3 year warrants to purchase up to anaggregate of 5,496,646 of 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 investors shall beentitled to certain registration rights.

 

Webelieve that our current cash and cash equivalents, and cash flow fromoperations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and 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 

 

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takeaction and reduce costs in order to operate for the next 12 months.  This requires the Company to have ongoingcourses of action to reduce costs and look for new sources of financings 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 our operations.  In addition, there can be no assurance thatany additional financing will be available on acceptable terms, if at all.  Although there are no present understandings,commitments or agreements with respect to the acquisition of any otherbusinesses, applications or technologies, we may from time to time evaluateacquisitions of other businesses, applications or technologies.

 

**Seasonality,Inflation and Industry Trends**

** **

TheCompany’s sales are generally higher in the spring and fall but are subject toa 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 the initiatives toestablish a national standard for the electronic health record 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 the electronic health record that will affect all clinical data, ashift from analog to digital imaging technologies, and regulatorycompliance.  The Company has continued toinvest heavily in new application modules to assist its customers in addressingthese issues.  Management believes thatnew application modules and features that concentrate on such issues will bekey selling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company anticipates it willbe able to meet these challenges.

 

**CriticalAccounting Policies and Estimates**

** **

Management’sdiscussion and analysis of ASPYRA’s financial condition and results ofoperations are based upon the condensed consolidated financial statementscontained in this Quarterly Report on Form 10-Q, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates.  The preparation of thesefinancial statements requires management to make estimates and judgments thataffect the reported amounts of assets, liabilities, revenues and expenses, andrelated 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*

 

TheCompany’s inventory is comprised of a current inventory account that consists ofitems that are held for resale and a long-term inventory account that consistsof items that are held for repairs and replacement of hardware components thatare serviced by the Company under long-term Extended Service Agreements withsome of its customers.  Current inventoryis valued at the lower of cost to purchase or the current estimated marketvalue of the inventory items.  Inventoryis evaluated on a continual basis and adjustments to recorded costs are madebased on management’s estimate of future sales value, or in the case of thelong-term component inventory, on management’s estimation of the usage ofspecific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes a determination of the excess or obsolete items in theinventory, which, are specifically reserved. In addition, adjustments are made for the difference between the cost ofthe inventory and the estimated market value and charged to operations in theperiod in which the facts that give rise to the adjustments become known.  At March 31, 2008, the inventory reservewas approximately $181,781.

 

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*Accounts Receivable*

 

Accountsreceivable balances are evaluated on a continual basis and allowances areprovided for potentially uncollectible accounts based on management’s estimateof the collectability of customer accounts. If the financial condition of acustomer were to deteriorate, resulting in an impairment of their ability tomake payments, an additional allowance may be required. Allowance adjustmentsare charged to operations in the period in which the facts that give rise tothe adjustments become known.  Theaccounts receivable balance at March 31, 2008 was $671,558, net of anallowance for doubtful accounts of approximately $55,990.

 

*Revenue Recognition*

 

Revenuesare derived primarily from the sale of CIS and DIS products and the provisionof services.  The components of thesystem sales revenues are the licensing of computer software, installation, andthe sale of computer hardware and sublicensed software. The components ofservice revenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4,SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “RevenueRecognition in Financial Statements.” SOP No 97-2, as amended, generally requires revenue earned on softwarearrangements involving multiple-elements to be allocated to each element basedon the relative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold separately andspecifically defined in a quotation or contract.  Deferred revenue related to CIS and DIS salesare comprised of deferrals for license fees, hardware, and other services forwhich the implementation has not yet been completed and revenues have not beenrecognized.  Revenues are presented netof discounts.  At March 31, 2008deferred revenue was $401,397.

 

Post-implementationsoftware and hardware maintenance services are marketed under monthly,quarterly and annual arrangements and are recognized as revenue ratably overthe 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 March 31, 2008, deferred servicecontract income was $2,143,726.

 

*Software Development Costs*

 

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the three months ended March 31,2008 and 2007, the Company capitalized $156,396 and $230,051,respectively.  At March 31, 2008,the balance of capitalized software costs was $2,870,508, net of accumulatedamortization of $1,000,286.

 

*Intangible Assets*

 

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

 

15

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

 

*Stock-based Compensation*

 

Wehave two stock-based compensation plans, the 2005 Equity Incentive Plan and the1997 Stock Option Plan, under which we may issue shares of our common stock toemployees, officers, directors and consultants. Upon effectiveness of the 2005Equity Incentive Plan on November 22, 2005, the 1997 Stock Option Plan wasterminated for purposes of new grants. Both of these plans have been approved by our shareholders.

 

Priorto January 1, 2006, we accounted for these plans under the recognition andmeasurement provisions of APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. Effective January 1, 2006, we adopted the fair value recognitionprovisions of SFAS No. 123(R), Share-Based Payment, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three months ended March 31, 2008 and2007 includes: (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grantdate fair value estimated in accordance with the original provisions of SFAS No. 123,and (b) compensation cost for all share-based payments granted subsequentto January 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods have not been restated.

 

SFASNo. 123(R) requires us to make certain assumptions and judgmentsregarding 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.

 

*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 bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.  The Company hasevaluated the net deferred tax asset taking into consideration operatingresults and determined 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) (“FAS 141(R)”),  Business Combinations . The provisions ofthis statement are effective for business combinations for which theacquisition date is on or after the beginning of the first annual reportingperiod beginning after December 15, 2008. Earlier application is notpermitted. FAS141(R) replaces FAS 141 and provides new guidance forvaluing assets and liabilities acquired in a business combination. We willadopt FAS141(R) in calendar year 2009.

 

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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 arerequired to adopt the provision of SFAS 157, as applicable, beginning in fiscalyear 2008. The adoption of SFAS No. 157 did not have a material effect onour operating 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 effective prospectivelyfor financial 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.

 

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

 

*Disclosure Controls and Procedures*

 

Our management, with the participation of our chiefexecutive officer and chief financial officer, evaluated the effectiveness ofour disclosure controls and procedures as of March 31, 2008. The term “disclosurecontrols and procedures,” 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 March 31, 2008, our chief executive officer and chieffinancial officer concluded that, as of such date, our disclosure controls andprocedures were effective.

 

17

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*Internal Control Over Financial Reporting*

 

During the quarter ended March 31, 2008, therehave been no changes in our internal control over financial reporting (asdefined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act)that have materially affected, or are reasonably likely to materially affect,our internal control over financial reporting.

 

This quarterly report doesnot include an attestation report of the company’s registered public accountingfirm regarding internal control over financial reporting. Management’s reportwas not subject to attestation by the company’s registered public accountingfirm pursuant to temporary rules of the Securities and Exchange Commissionthat permit the company to provide only management’s report in this quarterlyreport.

 

**Part II – OTHER INFORMATION**

 

**Item 1.    ****Legal Proceedings******

 

None.

 

**Item 2.    ****Unregistered Sales Of Equity Securities And Use Of Proceeds.******

 

As described above in Note10 to our condensed consolidated financial statements and in “Management’sDiscussion and Analysis of Financial Condition and Results of Operations —Liquidity and Capital Resources,” the Company entered into the followingtransactions in the fiscal quarter ended March 31, 2008. Other than theconvertible note and warrant issued in the private placement described below toGreat American Investors as payment for their fees of $210,000 as placementagent for that transaction, all proceeds from the sale of these securities wereused for the Company’s general working capital purposes:

 

·                  Thesale on January 28, 2008 of secured promissory notes convertible intoshares of our common stock in the aggregate principal amount of $300,000 to twoof our current shareholders: C. Ian Sym-Smith, who is also a director of theCompany, and TITAB, LLC. The material terms of this transaction are describedin the Company’s Current Report on Form 8-K filed with the Securities andExchange Commission on February 1, 2008 which is hereby incorporated byreference herein.

 

·                  Thesale on March 13, 2008 of a secured promissory note in the aggregateprincipal amount of $300,000 to one of our current shareholders, J. ShawnChalmers, which note was subsequently rolled over and converted to a promissorynote issued in the private placement described below. The material terms ofthis transaction are described in the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on March 17, 2008 whichis hereby incorporated by reference herein.

 

·                  Thesale on March 26, 2008 of secured promissory notes in the aggregateprincipal amount of $2,775,000 to certain current and new Company investors,convertible at $0.55 per share into an aggregate of 5,427,273 shares of ourcommon stock, together with accompanying 3-year warrants exercisable for anadditional 5,496,646 shares of our common stock at an exercise price of $0.55per share. The notes are secured by a lien on substantially all of the Company’sassets, and all shares of our common stock issuable upon conversion ofprincipal and accrued interest under the notes and upon exercise of thewarrants have rights of registration pursuant to a Registration RightsAgreement entered into between the Company and these private placementinvestors. The material terms of this transaction are described in the Company’sCurrent Report on Form 8-K filed with the Securities and ExchangeCommission on April 1, 2008 which is hereby incorporated by referenceherein.

 

18

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**Item 3.    ****Defaults Upon Senior Securities.******

 

None.

 

**Item 4.    Submission Of Matters To A Vote Of SecurityHolders.**

 

None.

 

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

 

None.

 

**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)        |            | Note Purchase Agreement dated as of  January 28, 2008 |
|                 |       |            |   |
| 10.2                 | (3)        |            | Security Agreement dated as of January 28,  2008 |
|                 |       |            |   |
| 10.3                 | (4)        |            | Agreement dated  February 25, 2008 by and between Aspyra, Inc. and James Zierick |
|                 |       |            |   |
| 10.4                 | (5)        |            | Note Purchase Agreement dated as of March 13,  2008 |
|                 |       |            |   |
| 10.5                 | (5)        |            | Security Agreement dated as of March 13, 2008 |
|                 |       |            |   |
| 10.6                 | (6)        |            | Securities Purchase Agreement dated as of  March 26, 2008 |
|                 |       |            |   |
| 10.7                 | (6)        |            | Form of Note |
|                 |       |            |   |
| 10.8                 | (6)        |            | Form of Warrant |
|                 |       |            |   |
| 10.9                 | (6)        |            | Registration Rights Agreement dated as of  March 26, 2008 |
|                 |       |            |   |
| 10.10                | (6)        |            | Security Agreement dated as of March 26, 2008 |
|                 |       |            |   |
| 10.11                | (6)        |            | Business Loan Agreement |
|                 |       |            |   |
| 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. |

 

----

(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 February 1, 2008.

 

(4)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on February 28, 2008.

 

(5)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on March 17, 2008.

 

(6)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on April 1, 2008.

 

*               Filedherewith.

 

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**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
| ** **              | ** ** | **ASPYRA,  INC.**                             |
|-------------------------|------------|-----------------------------------------------|
|                    |       |                                          |
| Date: May 15, 2008 |       | /s/ James Zierick                             |
|                    |       | Chief Executive Officer                       |
|                    |       | (Principal Executive  Officer)                |
|                    |       |                                          |
| Date: May 15, 2008 |       | /s/ Anahita Villafane                         |
|                    |       | Chief Financial Officer                       |
|                    |       | (Principal Financial and  Accounting Officer) |

 

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**EXHIBIT INDEX**

 
| **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)        |            | Note Purchase Agreement dated as of  January 28, 2008 |
|                 |       |            |   |
| 10.2                 | (3)        |            | Security Agreement dated as of January 28,  2008 |
|                 |       |            |   |
| 10.3                 | (4)        |            | Agreement dated  February 25, 2008 by and between Aspyra, Inc. and James Zierick |
|                 |       |            |   |
| 10.4                 | (5)        |            | Note Purchase Agreement dated as of March 13,  2008 |
|                 |       |            |   |
| 10.5                 | (5)        |            | Security Agreement dated as of March 13, 2008 |
|                 |       |            |   |
| 10.6                 | (6)        |            | Securities Purchase Agreement dated as of  March 26, 2008 |
|                 |       |            |   |
| 10.7                 | (6)        |            | Form of Note |
|                 |       |            |   |
| 10.8                 | (6)        |            | Form of Warrant |
|                 |       |            |   |
| 10.9                 | (6)        |            | Registration Rights Agreement dated as of  March 26, 2008 |
|                 |       |            |   |
| 10.10                | (6)        |            | Security Agreement dated as of March 26, 2008 |
|                 |       |            |   |
| 10.11                | (6)        |            | Business Loan Agreement |
|                 |       |            |   |
| 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. |

 

----

(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 February 1, 2008.

 

(4)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on February 28, 2008.

 

(5)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on March 17, 2008.

 

(6)          Previously filed as an exhibit to the Company’s Current Report on Form 8-Kfiled with the Securities and Exchange Commission on April 1, 2008.

 

*               Filedherewith.

 

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