**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC20549**

**FORM 10-QSB**

| **(Mark One)** |
|----------------|
| **x**          | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** |
| ** **     | **For the quarterly period ended March 31, 2007.** |
| ** **     | ** ** |
| **o**          | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT** |
| ** **     | ** ** |
| ** **     | **For the transition period  from                      to                    ** |

 

**Commission file number****0-12551**

**ASPYRA, INC.**

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

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

 

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

(Address of principal executive offices)

**(818) 880-6700**

(Issuer’s telephone number, including area code)

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

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

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

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

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:  10,787,150 common shares as of May 18, 2007.

Transitional Small Business Disclosure Format (check one):

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

 

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**ASPYRA, INC.**

**FORM10-QSB**

**I N D E X**
| **PART I - Financial  Information:** |                                                                                                           |
|--------------------------------------|----------------------------------------------------------------------------------------------------------------|
| ** **                           | ** **                                                                                                     |   |
| **Item  1.**                         | **Financial  Statements (unaudited)**                                                                          |   |
| ** **                           | ** **                                                                                                     |   |
|                                 | Condensed  Consolidated Balance Sheets, at March 31, 2007                                                      |   |
|                                 |                                                                                                           |   |
|                                 | Condensed  Consolidated Statements of Operations for the three months ended March 31,  2007 and March 31, 2006 |   |
|                                 |                                                                                                           |   |
|                                 | Condensed  Consolidated Statements of Cash Flows for the three months ended March 31,  2007 and March 31, 2006 |   |
|                                 |                                                                                                           |   |
|                                 | Notes  to Condensed Consolidated Financial Statements                                                          |   |
|                                 |                                                                                                           |   |
| **Item 2.**                          | **Management’s Discussion and  Analysis or Plan of Operation**                                            |   |
| ** **                           | ** **                                                                                                     |   |
| **Item 3.**                          | **Controls and  Procedures**                                                                                   |   |
| ** **                           | ** **                                                                                                     |   |
| **PART II - Other  Information:**    |                                                                                                           |
|                                 |                                                                                                           |   |
| **Item  6.**                         | **Exhibits**                                                                                                   |   |
| ** **                           | ** **                                                                                                     |   |
| **Signatures**                       |                                                                                                           |
| ** **                           |                                                                                                           |   |
| **Exhibit  Index**                   |                                                                                                           |

 

 

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**ASPYRA, INC.**

**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                            | ** ** | **March 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|--------------------|------------|
| ** **                                                                                            | ** ** | **2007**           | ** ** |
| ** **                                                                                            | ** ** | **(Unaudited)**    | ** ** |
| **ASSETS**                                                                                            | ** ** | ** **         | ** ** |
| CURRENT ASSETS:                                                                                       |       |               |       |
| Cash                                                                                                  |       | $                  | 1,466,352  |   |
| Receivables, net                                                                                      |       | 1,447,742          |       |
| Inventory                                                                                             |       | 166,871            |       |
| Prepaid expenses  and other assets                                                                    |       | 159,238            |       |
| TOTAL CURRENT ASSETS                                                                                  |       | 3,240,203          |       |
|                                                                                                  |       |               |       |
| PROPERTY AND EQUIPMENT,  net                                                                          |       | 1,080,961          |       |
| OTHER ASSETS                                                                                          |       | 86,465             |       |
| INVENTORY OF COMPONENT  PARTS                                                                         |       | 110,053            |       |
| CAPITALIZED SOFTWARE  COSTS, net of accumulated amortization of $977,270                         |       | 2,615,253          |       |
| INTANGIBLES, net                                                                                      |       | 4,277,357          |       |
| GOODWILL                                                                                              |       | 7,268,434          |       |
|                                                                                                  |       | $                  | 18,678,726 |   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                         | ** ** | ** **         | ** ** |
| CURRENT LIABILITIES:                                                                                  |       |               |       |
| Notes payable                                                                                         |       | $                  | 1,426,477  |   |
| Accounts payable                                                                                      |       | 860,770            |       |
| Accrued  liabilities:                                                                                 |       |               |       |
| Vacation pay                                                                                          |       | 380,624            |       |
| Accrued payroll                                                                                       |       | 179,138            |       |
| Accrued interest                                                                                      |       | 99,209             |       |
| Deferred rent                                                                                         |       | 65,269             |       |
| Customer  deposits                                                                                    |       | 159,230            |       |
| Other                                                                                                 |       | 299,544            |       |
| Deferred service  contract income                                                                     |       | 1,947,782          |       |
| Deferred revenue  on system sales                                                                     |       | 741,095            |       |
| Capital lease —  current portion                                                                 |       | 150,237            |       |
| TOTAL CURRENT  LIABILITIES                                                                            |       | 6,309,375          |       |
|                                                                                                  |       |               |       |
| CAPITAL LEASE, LESS  CURRENT PORTION                                                                  |       | 460,962            |       |
|                                                                                                  |       |               |       |
| TOTAL LIABILITIES                                                                                     |       | 6,770,337          |       |
|                                                                                                  |       |               |       |
| SHAREHOLDERS’ EQUITY:                                                                            |       |               |       |
| Common shares,  no par value; 20,000,000 shares authorized; 10,787,150 shares issued and  outstanding |       | 21,046,951         |       |
| Additional  paid-in-capital                                                                           |       | 205,751            |       |
| Accumulated  deficit                                                                                  |       | (9,297,171         | )          |
| Accumulated  other comprehensive loss                                                                 |       | (47,142            | )          |
| TOTAL SHAREHOLDERS’  EQUITY                                                                      |       | 11,908,389         |       |
|                                                                                                  |       |               |       |
|                                                                                                  |       | $                  | 18,738,726 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**
| ** **                                      | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                      | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                      | ** ** |
| NET SYSTEM SALES AND  SERVICE REVENUE:          |       |                                                 |       |   |   |
| System sales                                    |       | $                                                    | 571,399    |   | $ | 971,842 |   |
| Service revenue                                 |       | 1,909,235                                            |       | 1,730,233 |   |
|                                            |       | 2,480,634                                            |       | 2,702,075 |   |
|                                            |       |                                                 |       |   |   |
| COSTS OF PRODUCTS AND  SERVICES SOLD:           |       |                                                 |       |   |   |
| System sales                                    |       | 536,525                                              |       | 788,459 |   |
| Service revenue                                 |       | 763,043                                              |       | 758,335 |   |
|                                            |       | 1,299,568                                            |       | 1,546,794 |   |
|                                            |       |                                                 |       |   |   |
| Gross profit                                    |       | 1,181,066                                            |       | 1,155,281 |   |
|                                            |       |                                                 |       |   |   |
| OPERATING EXPENSES                              |       |                                                 |       |   |   |
| Selling, general  and administrative            |       | 1,520,233                                            |       | 1,952,856 |   |
|                                            |       |                                                 |       |   |   |
| Research and  development                       |       | 566,856                                              |       | 488,468 |   |
|                                            |       |                                                 |       |   |   |
| Total operating  expenses                       |       | 2,087,089                                            |       | 2,441,324 |   |
|                                            |       |                                                 |       |   |   |
| Operating loss                                  |       | (906,023                                             | )          | (1,286,043 | ) |
|                                            |       |                                                 |       |   |   |
| INTEREST AND OTHER  INCOME                      |       | 17,321                                               |       | 4,739 |   |
|                                            |       |                                                 |       |   |   |
| INTEREST EXPENSE                                |       | (48,492                                              | )          | (32,414 | ) |
|                                            |       |                                                 |       |   |   |
| Loss before  provision for income taxes         |       | (937,194                                             | )          | (1,313,718 | ) |
|                                            |       |                                                 |       |   |   |
| PROVISION FOR INCOME  TAXES                     |       | (603                                                 | )          | — |   |
|                                            |       |                                                 |       |   |   |
| NET LOSS                                        |       | $                                                    | (936,591   | ) | $ | (1,313,718 | ) |
|                                            |       |                                                 |       |   |   |
| LOSS PER SHARE:                                 |       |                                                 |       |   |   |
|                                            |       |                                                 |       |   |   |
| Basic                                           |       | $                                                    | (.09       | ) | $ | (.15 | ) |
| Diluted                                         |       | (.09                                                 | )          | (.15 | ) |
|                                            |       |                                                 |       |   |   |
| WEIGHTED AVERAGE NUMBER  OF SHARES OUTSTANDING: |       |                                                 |       |   |   |
| Basic                                           |       | 10,784,483                                           |       | 8,489,400 |   |
| Diluted                                         |       | 10,784,483                                           |       | 8,489,400 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWSIncrease (Decrease) in Cash**
| ** **                                                                                 | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                                      | ** ** |
| OPERATING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Net loss                                                                                   |       | $                                                    | (936,591   | ) | $ | (1,313,718 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                 |       |   |   |
| Depreciation and  amortization                                                             |       | 283,210                                              |       | 209,014 |   |
| Provision for  doubtful accounts                                                           |       | —                                               |       | 17,019 |   |
| Amortization of  capitalized software costs                                                |       | 102,105                                              |       | 74,636 |   |
| Stock based  compensation                                                                  |       | 45,179                                               |       | 114,553 |   |
| Increase  (decrease) from changes in:                                                      |       |                                                 |       |   |   |
| Receivables                                                                                |       | (113,589                                             | )          | (559,401 | ) |
| Inventories                                                                                |       | (40,514                                              | )          | (38,108 | ) |
| Prepaid expenses  and other assets                                                         |       | 88,644                                               |       | 248,515 |   |
| Accounts payable                                                                           |       | (26,247                                              | )          | (216,362 | ) |
| Accrued  liabilities                                                                       |       | (67,705                                              | )          | (122,754 | ) |
| Deferred service  contract income                                                          |       | 438,740                                              |       | 769,451 |   |
| Deferred revenue  on system sales                                                          |       | (36,705                                              | )          | 594,270 |   |
| Net cash used in  operating activities                                                     |       | (263,473                                             | )          | (222,885 | ) |
|                                                                                       |       |                                                 |       |   |   |
| INVESTING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Additions to  property and equipment                                                       |       | (20,424                                              | )          | (113,068 | ) |
| Additions to  capitalized software costs                                                   |       | (230,051                                             | )          | (267,219 | ) |
| Net cash used in  investing activities                                                     |       | (250,475                                             | )          | (380,287 | ) |
|                                                                                       |       |                                                 |       |   |   |
| FINANCING ACTIVITIES                                                                       |       |                                                 |       |   |   |
| Borrowings on  line of credit                                                              |       | 1,026,477                                            |       | 300,000 |   |
| Payments on  notes payable                                                                 |       | (1,023,517                                           | )          | (87,445 | ) |
| Payments on  capital leases                                                                |       | (37,560                                              | )          | — |   |
| Decrease in  restricted cash                                                               |       | 1,000,000                                            |       | — |   |
| Buyback of  fractional shares related to merger                                            |       | —                                               |       | (234 | ) |
| Exercise of  stock options                                                                 |       | 2,880                                                |       | — |   |
| Net cash  provided by financing activities                                                 |       | 968,280                                              |       | 212,321 |   |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Foreign currency  translation adjustment                                                   |       | (2,612                                               | )          | (4,170 | ) |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| NET INCREASE (DECREASE)  IN CASH                                                           |       | 451,720                                              |       | (395,021 | ) |
| ** **                                                                                 | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| CASH, beginning of  period                                                            |       | 1,014,632                                            |       | 1,329,753 |   |
|                                                                                       |       |                                                 |       |   |   |
| CASH, end of period                                                                        |       | $                                                    | 1,466,352  |   | $ | 934,732 |   |

 

**Seenotes to Condensed Consolidated Financial Statements.**

 

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**ASPYRA, INC.**

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

**Note1-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 ofMarch 31, 2007, the results of its operations for the three months ended March31, 2007 and 2006, and cash flows for the three months ended March 31, 2007 and2006.  These results have been determinedon the basis of accounting principles generally accepted in the United Statesand practices applied consistently with those used in preparation of theCompany’s Annual Report on Form 10-KSB for the fiscal year ended December 31,2006.

The results of operations for the three months ended March31, 2007 are not necessarily indicative of the results expected for any otherperiod or for the entire year.

**Note 2-Liquidity**

As of March 31, 2007, the Company’s working capital amountedto a deficit of $3,069,172 compared to a deficit of $2,256,352, as of December31, 2006.  At March 31, 2007, theCompany’s credit facilities with its bank consisted of a revolving line ofcredit of $1,300,000, of which $1,026,477 was outstanding. On February 27,2007, the Company entered into a new banking relationship whereby the bankprovided a revolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2008.  The revolving line of credit issubject to certain covenants.  As ofMarch 31, 2007, the Company is in compliance with the covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventory balances.  At March 31, 2007, the Company had $611,199outstanding on its capital leases of which $150,237 is due in the next twelvemonths.  Management is consideringadditional financing to accelerate its business development plans which in turnmay improve its working capital position.

The Company’s primary source of working capital has beengenerated from private placements of securities and from borrowings. TheCompany’s results of operations for the three months ended March 31, 2007produced negative operating cash flow of $263,473.  An unanticipated decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices, or cancellations of contracts could have a negative effect on cashflow from operations and could in turn create short-term liquidity problems. Webelieve that our current cash and cash equivalents, and cash flow fromoperations, will be sufficient to meet our current anticipated cash needs,including for working capital purposes, capital expenditures and variouscontractual obligations, for at least the next 12 months. We may, however,require additional cash resources due to changed business conditions or otherfuture developments, including any investments or acquisitions wemay decide to pursue. If these sources are insufficient to satisfy ourcash requirements, we may seek to sell debt securities or additionalequity securities or to obtain a credit facility. The sale of convertible debtsecurities or additional equity securities could result in additional dilutionto our stockholders. The incurrence of indebtedness would result in incurringdebt service obligations and could result in operating and financial covenantsthat 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 withrespect to the acquisition of any other businesses, applications ortechnologies, we may, from time to time, evaluate acquisitions of otherbusinesses, applications or technologies.

**Note3-Inventories**

Inventories consist primarily of computer hardwareheld for resale 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.

 

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The Company also maintains an inventory pool ofcomponent parts to service systems previously sold, which is classified asnon-current in the accompanying balance sheets. Such inventory is carried at the lower of cost or market and is chargedto cost of sales based on usage. Allowances are made for quantities on hand in excess of estimated futureusage.  At March 31, 2007, the inventoryallowance was $130,504.

**Note4-Goodwill and Intangible Assets**

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired.  In accordance with SFAS No.144, Accounting for Impairment of Long-Lived Assets, management reviewsdefinite life intangible assets to determine if events or circumstances haveoccurred which may cause the carrying values of intangible assets to beimpaired. The purpose of these reviews is to identify any facts andcircumstances, either internal or external, which may indicate that thecarrying 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 March31, 2007, the net carrying value of goodwill and intangible assets were$7,268,434 and $4,277,357, respectively.

**Note5-Earnings per Share**

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

Earnings per share havebeen computed as follows:
|                                                               | ** ** | **Three Months  Ended  March 31, 2007** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** |
|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
|                                                          |       |                                                   |       |                                                   |       |
| NET LOSS                                                      |       | $                                                      | (936,591   | )                                                      | $          | (1,313,718 | ) |
| Basic weighted average  number of common shares outstanding   |       | 10,784,483                                             |       | 8,489,400                                              |       |
| Dilutive effect of  stock options                             |       | —                                                 |       | —                                                 |       |
| Diluted weighted  average number of common shares outstanding |       | 10,784,483                                             |       | 8,489,400                                              |       |
| Basic loss per share                                          |       | $                                                      | (.09       | )                                                      | $          | (.15 | ) |
| Diluted loss per share                                        |       | $                                                      | (.09       | )                                                      | $          | (.15 | ) |

 

For the three monthsended March 31, 2007, options to purchase 575,433 shares of common stock at pershare prices ranging from $1.51 to $2.75 were not included in the computationof diluted loss per share because inclusion would have been anti-dilutive. Forthe three months ended March 31, 2006, options to purchase 521,670 shares ofcommon stock at per share prices ranging from $.72 to $2.75 were not includedin the computation of diluted loss per share because inclusion would have beenanti-dilutive.

**Note6-Debt Obligations**

On February 27, 2007, theCompany entered into a new banking relationship whereby the bank provided arevolving line of credit in the aggregate amount of $1,300,000.  The revolving line of credit is secured bythe Company’s accounts receivable and inventory and matures on February 27,2008.  The revolving line of credit issubject to certain covenants.  At March31, 2007, the Company was in compliance with the covenants.  Advances under the revolving line of creditare on a formula based on eligible accounts receivable and inventorybalances.  The Company used the initialadvance on the revolving line of credit to pay in full a previous note fromanother bank that was secured by a $1,000,000 certificate of deposit as carriedon the December 31, 2006 balance sheet under restricted cash.  The pay off released the certificate ofdeposit previously held by the former bank. On March 31, 2007, the total amount due to the bank was $1,026,477.

 

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The Company acquired anote in conjunction with the merger with Aspyra Diagnostic Solutions, Inc.(formerly StorCOMM, Inc.), with an interest rate of 7% with payments in theamount of $25,000 due monthly.  As ofMarch 31, 2007, the total amount due on this note was $225,922.  The Company also acquired unsecured notes inconjunction with the merger with interest rates ranging from 7% to 8%.  These notes are due upon demand and thebalance outstanding at March 31, 2007 was $174,078.

**Note7-Stock-Based Compensation**

EquityIncentive and Stock Option Plans: At March 31, 2007, the Company has twostock-based compensation plans. Readers should refer to both Item 6, Note 1 andNote 8 of the Company's financial statements, which are included in theCompany's Annual Report on Form 10-KSB for the year ended December 31, 2006,for additional information related to these stock-based compensation plans. There were no options granted in theperiods ending March 31, 2007 and 2006. There was 4,000 option exercised in the period ending March 31, 2007 byone option holder and the Company received $2,880.  No stock options were exercised in the periodending March 31, 2006.  The Companyaccounts for stock option grants in accordance with FASB Statement 123(R),Share-Based Payment. Compensation costs related to share-based payments recognizedin the Condensed Statements of Income were $45,179 and $114,553 for the periodsended March 31, 2007 and 2006, respectively.

 

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**Note8-Commitments and Contingencies**

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

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

 

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**Note 9-Income Taxes**

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

**Note 10-New Accounting Pronouncements**

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

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

In July 2006, the FASB issued FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes, (“FIN 48”) an interpretationof FASB Statement No. 109, Accounting for Income Taxes. FIN 48requires that a position taken or expected to be taken in a tax return berecognized in the financial statements when it is more likely than not(i.e. a likelihood of more than fifty percent) that the position would besustained upon examination by tax authorities. A recognized tax position isthen measured at the largest amount of benefit that is greater than fiftypercent likely of being realized upon ultimate settlement. Upon adoption, thecumulative effect of applying the recognition and measurement provisions ofFIN 48, if any, shall be reflected as an adjustment to the opening balanceof retained earnings. FIN 48 requires that subsequent to initial adoptiona change in judgment that results in subsequent recognition, derecognition orchange in a measurement of a tax position taken in a prior annual period(including any related interest and penalties) be recognized as a discrete itemin the period in which the change occurs. Currently, we record such changes injudgment, including audit settlements, as a component of the Company’s incometax provision. Thus, the Company’s reported quarterly income tax rate maybecome more volatile upon adoption of FIN 48. This change will not impactthe manner in which we record income tax expense on an annual basis.FIN 48 also requires expanded disclosures including identification of taxpositions for which it is reasonably possible that total amounts ofunrecognized tax benefits will significantly change in the next twelve months,a description of tax years that remain subject to examination by major taxjurisdiction, a tabular reconciliation of the total amount of unrecognized taxbenefits at the beginning and end of each annual reporting period, the totalamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate and the total amounts of interest and penalties recognizedin the statements of operations and financial position. FIN 48 iseffective for fiscal years beginning after December 15, 2006. The standarddid not have an impact on the Consolidated Financial Statements.

**Item2.****            Management’sDiscussion and Analysis or Plan of Operation**

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

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

·                    projections ofrevenues and other financial items;

·                    statements ofstrategies and objectives for future operations;

·                    statementsconcerning proposed applications or services;

·                    statementsregarding future economic conditions, performance or business prospects;

·                    statementsregarding competitors or competitive actions; and

·                    statements ofassumptions underlying any of the foregoing.

 

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

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

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

**Overview**

The followingdiscussion relates to the business of ASPYRA, which includes the operations ofits wholly owned subsidiaries Aspyra Diagnostic Solutions, Inc. (ADSI)(formerly StorCOMM, Inc.) and Aspyra Technologies, Ltd. (ATI) (formerlyStorCOMM Technologies, Ltd.).  The merger,which resulted in the acquisition of ADSI, was consummated on November 22,2005.

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

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

ASPYRA’s results of operation for the first fiscalquarter ended March 31, 2007 were marked by a decrease in sales and a decreasein operating loss that are more fully discussed in the following section “Resultsof Operations.”  The Company’s decreasein revenues was due to the Company concluding sales late in the quarter, which,due to timing issues, were not fully implemented and recognized in thequarter.  At March 31, 2007, the Companyhad $741,095 in deferred revenue as well as a backlog of approximately $590,000in backlog system sales which were received in the first quarter but will beprocessed and included in the fiscal quarter ended June 30, 2007.  Generally, sales cycles for CIS and DISproducts are lengthy and on average exceed six months from inception toclosure.  Because of the complexity ofthe sales process, a number of factors

 

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thatare beyond the control of the Company can delay the closing oftransactions.  Furthermore, the Companyhas been primarily reliant on distributors and channel partners for the salesof its diagnostic systems and has been subject to inconsistencies in theperformance of such third parties and the timely consummation of orders.  ASPYRA completed a unification of its salesforce to focus more on a direct sales model for some of the diagnostic systemproducts to supplement the distribution and channel network so that it will beless reliant on third parties for the sale of its diagnostic systems.  ASPYRA also has completed new versions of itslaboratory and radiology information systems products, as well as its newAccessRAD Radiology Information System (“RIS”) / Picture Archive CommunicationSystems (“PACS”) which it has begun marketing and anticipates increased salesrelated to such new product releases in the future.

The operating losses incurred by the Company duringthe fiscal quarter ended March 31, 2007 were attributable to the uneven salesperformance previously discussed.  TheCompany completed the integration and restructuring of the merged businessesand incurred certain costs associated with such activities which were onlypartially offset by reductions in redundant personnel and other expenses duringthe quarter ended March 31, 2007.  Forthe three months ended March 31, 2007, the Company reduced its net operatingloss by approximately $380,000 over the same period in 2006 as a result ofsynergies and cost reductions in its business as it completed integration andrestructuring of the merged business.

**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, 2007** | ** ** | **Three Months  Ended  March 31, 2006** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------|------------|--------------------------------------------------------|------------|
| Revenues:                               |       |                                                   |       |                                                   |       |
| System sales                            |       | 23.0                                                   | %          | 36.0                                                   | %          |
| Service revenues                        |       | 77.0                                                   |       | 64.0                                                   |       |
| Total revenues                          |       | 100.0                                                  |       | 100.0                                                  |       |
| Cost of products  and services sold:    |       |                                                   |       |                                                   |       |
| System sales                            |       | 21.6                                                   |       | 29.2                                                   |       |
| Service revenues                        |       | 30.8                                                   |       | 28.0                                                   |       |
| Total cost of  products and services    |       | 52.4                                                   |       | 57.2                                                   |       |
| Gross profit                            |       | 47.6                                                   |       | 42.8                                                   |       |
| Operating  expenses:                    |       |                                                   |       |                                                   |       |
| Selling, general and administrative     |       | 61.3                                                   |       | 72.3                                                   |       |
| Research and development                |       | 22.8                                                   |       | 18.1                                                   |       |
| Total operating  expenses               |       | 84.1                                                   |       | 90.4                                                   |       |
| Operating loss                          |       | (36.5                                                  | )          | (47.6                                                  | )          |
|                                    |       |                                                   |       |                                                   |       |
| Loss before  provision for income taxes |       | (37.8                                                  | )          | (48.6                                                  | )          |
| Provision for  income taxes             |       | —                                                 |       | —                                                 |       |
|                                    |       |                                                   |       |                                                   |       |
| Net loss                                |       | (37.8                                                  | )          | (48.6                                                  | )          |

 

*Revenues*

Salesfor the fiscal quarter ended March 31, 2007 decreased to $2,480,634, ascompared to $2,702,075 for the comparable quarter ended March 31, 2006, anoverall decrease of $221,441 or 8.2%. When analyzed by revenue category for the quarter, sales of CIS and DISproducts decreased by $400,443, or 41.2%. Service revenues increased by $179,002 or 10.3%.  The decrease in sales of CIS and DIS productswas primarily attributable to the completion of sales late in the quarter forwhich the Company was unable to recognize revenue due to the timing of the sale,described above under “Overview”.  Theincrease in service revenues is attributable to a greater number of clientaccounts under contract.  Servicerevenues are expected to continue to increase as and when the Company’sinstalled base of CIS and DIS installations increases.

TheCompany continues to invest in sales and marketing activities focused onincreasing its transaction pipeline and transitioning to more of a direct salesmodel to supplement the third party sales of its CIS and DIS products while newand improved product versions are being introduced.  While this transition is being completed,management is cautiously optimistic about the near-term outlook for its salesof CIS and DIS products.  The Company hasinvested additional funds

 

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into marketingactivities to further build its sales pipeline as well as to launch the companyinto new market opportunities.  TheCompany’s future operating results will continue to be subject to quarterlyvariations based upon a wide variety of factors, including the volume mix andtiming of orders received during any quarter, and the temporary delays in theclosing of new CIS and DIS sales.  Inaddition, the Company’s revenues associated with CIS and DIS sales may bedelayed due to client related issues such as client staff availability fortraining, information technology infrastructure readiness, and the performanceof third party contractors, all of which are issues outside of the control ofASPYRA.

*Costsof products and services sold*

Costof sales for the quarter ended March 31, 2007 decreased by $247,226 or 16.0% to$1,299,568, as compared to $1,546,794 for the same quarter of fiscal 2006.  The decrease in cost of sales was primarilyattributable to a decrease in labor costs of $108,070 or 13.3%, a decrease inmaterial costs of $140,743 or 57.5%, which was partially offset by a slightincrease in other costs.  The decrease inlabor costs was attributable to the reduction of personnel as a result ofintegration of our business since the merger in November 2005. For the currentquarter, cost of sales as a percentage of sales was 52% as compared to 57% forthe comparable period of 2006.  Theoverall percentage decrease in cost of sales, as a percentage of sales, wasattributable to the volume and mix of sales and the reduction of staff andother overhead during the quarter.  TheCompany could potentially experience quarterly variations in gross margin as aresult of the factors discussed above.

*Selling,general and administrative expenses*

Selling,general and administrative expenses decreased by $432,623 or 22.2% for thecurrent fiscal quarter ended March 31, 2007 as compared to the same quarter infiscal 2006.  The decreases in selling,general and administrative expenses were primarily attributable to thereduction of expenses as a result of the integration of the business asdiscussed above.  The reduction ofexpenses was primarily attributable to a decrease compared to the same quarterin fiscal 2006 of approximately $255,000 related to salaries, $72,000 relatedto user symposium expenses, $76,000 in tradeshow expenses, $20,000 in legal andaccounting expenses, and $10,000 related to consulting expenses.  Management continues to evaluate costreductions in some of its selling, general and administrative expenses while italso continues to plan further investment in its marketing programs during thebalance of its 2007 fiscal year.

*Researchand development expenses*

Researchand development expenses increased by $78,388, or 16.0% for the current fiscalquarter ended March 31, 2007 as compared to the same period in fiscal2006.  The increase is primarilyattributable to increases in salaries and expenses of new personnel in productdevelopment.  For the comparable firstquarters of 2007 and 2006, the Company capitalized software costs of $230,051and $267,219, respectively, which are generally amortized over the estimateduseful life, not to exceed five years. Such costs were attributable to the development of AccessRAD the newRIS/PACS platform that integrates the Company’s radiology information systemCyberRAD with its AccessNET PACS system, and enhancements and new modules forthe Company’s CIS and DIS products.  TheCompany plans to continue significant product development activities at currentexpense levels throughout the 2007 fiscal year.

*InterestExpense*

Interest expensefor the current quarter ended March 31, 2007 increased by $16,078 or 49.6% ascompared to the same quarter of fiscal 2006. The increase is a primarily result of the increased borrowings duringthe current quarter as compared to the same period of fiscal 2006.

*Netincome (loss)*

As aresult of the factors discussed above, the Company incurred a net loss of$936,591 or basic and diluted loss per share of $.09 in the first fiscalquarter of 2007 as compared to a net loss of $1,313,718 or basic and dilutedloss per share of $.15 for the same quarter of 2006.

**Liquidity and Capital Resources**

Historically,the Company’s primary need for capital has been to invest in softwaredevelopment, and in computers and related equipment for the Company’s internaluse.  The Company invested $230,051 and$267,219 respectively during the three months ended March 31, 2007 and 2006 insoftware development.  These expendituresrelated to investment in the Company’s new

 

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RIS/PACSintegrated system AccessRAD, enhancements to AccessNET, the new browser versionof the Company’s LIS product, CyberLAB, and other product enhancements.  The Company anticipates expending additionalsums during the remainder of fiscal 2007 on product enhancements to all itsproducts and the further development of AccessRAD and CyberLAB.  During the three months ended March 31, 2007and 2006, the Company invested an aggregate of $20,424 and $113,068,respectively, in fixed assets primarily consisting of computers, networkinfrastructure, telephone and data communications systems, and software.

Asof March 31, 2007, the Company’s working capital amounted to a deficit of$3,069,172 compared to a deficit of $2,256,352, as of December 31, 2006.  At March 31, 2007, the Company’s creditfacilities with its bank consisted of a revolving line of credit of $1,300,000,of which $1,026,477 was outstanding. On February 27, 2007, the Company enteredinto a new banking relationship whereby the bank provided a revolving line ofcredit in the aggregate amount of $1,300,000. The revolving line of credit is secured by the Company’s accounts receivableand inventory and matures on February 27, 2008. The revolving line of credit is subject to certain covenants.  At March 31, 2007, the Company was incompliance with the covenants.  Advancesunder the revolving line of credit are on a formula based on eligible accountsreceivable and inventory balances.  AtMarch 31, 2007, the Company had $611,199 outstanding on its capital leases ofwhich $150,237 is due in the next twelve months.  Management is considering additionalfinancing to accelerate its business development plans which in turn mayimprove its working capital position.

Cashused in operating activities was $263,473 for the three months ended March 31,2007 compared to cash used of $222,885 for the comparable period of fiscal2006.  The increase in cash used foroperating activities was primarily attributable to the net change in accruedreceivables, inventories, payables and deferred revenues compared to the sameperiod of fiscal 2006.

Netcash used in investing activities totaled $250,475 for the three months endedMarch 31, 2007, compared to $380,287 used in investing activities during thecomparable period of fiscal 2006.  Thedecrease in cash used in investing activities was due to the reduction ininvestment in capitalized software and fixed assets.

Cashflows from financing activities amounted to $968,280 during the three monthsended March 31, 2007 compared to $212,321 provided during the comparable periodof fiscal 2006.  The increase wasprimarily attributable to borrowings on its revolving line of credit with thebank and the release of its restricted cash partially offset by payments onnotes payable.

TheCompany’s primary source of working capital has been generated from privateplacements of securities and from borrowings. The Company’s results ofoperations for the three months ended March 31, 2007 produced negativeoperating cash flow of $263,473.  Anunanticipated decline in sales, delays in implementations where payments aretied to delivery and/or performance of services, or cancellations of contractscould have a negative effect on cash flow from operations and could in turncreate short-term liquidity problems. We believe that our current cash and cashequivalents, and cash flow from operations, will be sufficient to meet our currentanticipated cash needs, including for working capital purposes, capitalexpenditures and various contractual obligations, for at least the next12 months. We may, however, require additional cash resources due tochanged business conditions or other future developments, including anyinvestments or acquisitions we may decide to pursue. 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. Thesale of convertible debt securities or additional equity securities couldresult in additional dilution to our stockholders. 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 that any additional financing will beavailable on acceptable terms, if at all. Although there are no presentunderstandings, commitments or agreements with respect to the acquisition ofany other businesses, applications or technologies, we may, from time to time,evaluate acquisitions of other businesses, applications or technologies.

**Seasonality, Inflation and Industry Trends**

The Company’ssales are generally higher in the winter and spring.  Inflation has not had a material effect onthe Company’s business since the Company has been able to adjust the prices ofits products and services in response to inflationary pressures.  Management believes that most phases of the healthcaresegment of the computer industry will continue to be highly competitive, andthat potential healthcare reforms including those promulgated by HealthInsurance Portability and Accountability Act may have a long-term positiveimpact on its business.  The key issuesdriving demand for ASPYRA’s products are industry concerns about patient careand safety issues, development of a national standard for the electronic healthrecord that will affect all clinical data, a paradigm shift from analog todigital imaging technologies, and regulatory compliance.  The Company has continued to invest heavilyin new application modules to assist its customers in

 

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addressing theseissues.  Management believes that newapplication modules and features that concentrate on such issues will be keyselling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company anticipates it willbe able to meet these challenges.

**Critical Accounting Policies and Estimates**

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

*Inventory*

TheCompany’s inventory is comprised of a current inventory account that consistsof items that are held for resale and a long-term inventory account thatconsists of items that are held for repairs and replacement of hardwarecomponents that are serviced by the Company under long-term Extended ServiceAgreements with some of its customers. Current inventory is valued at the lower of cost to purchase or thecurrent estimated market value of the inventory items.  Inventory is evaluated on a continual basisand adjustments to recorded costs are made based on management’s estimate offuture sales value, or in the case of the long-term component inventory, onmanagement’s estimation of the usage of specific inventory items and netrealizable value.  Management reviewsinventory quantities on hand and makes a determination of the excess orobsolete items in the inventory, which, are specifically reserved.  In addition, adjustments are made for thedifference between the cost of the inventory and the estimated market value andcharged to operations in the period in which the facts that give rise to theadjustments become known.  At March 31,2007, the inventory reserve was approximately $130,500.

*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, 2007 was $1,477,742, net of anallowance for doubtful accounts of approximately $82,840.

*RevenueRecognition*

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, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.”  SOP No 97-2,as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on the relativefair values of those elements.  TheCompany allocates revenue to each element in a multiple-element arrangementbased on the element’s respective fair value, with the fair value determined bythe price charged when that element is sold seperately and specifically definedin a quotation or contract.  Deferredrevenue related to CIS and DIS sales are comprised of deferrals for licensefees, hardware, and other services for which the implementation has not yetbeen completed and revenues have not been recognized.  Revenues are presented net of discounts.  At March 31, 2007 deferred revenue was$741,095.

 

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PostImplementation software and hardware maintenance services are marketed undermonthly, quarterly and annual arrangements and are recognized as revenue ratablyover the contracted maintenance term as services are provided.  The Company determines the fair value of themaintenance portion of the arrangement based on the renewal price of themaintenance charged to customers, 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, 2007, deferred service contractincome was $1,947,782.

*SoftwareDevelopment Costs*

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the three months ended March 31, 2007 and2006, the Company capitalized $230,051 and $267,219, respectively.  At March 31, 2007, the balance of capitalizedsoftware costs was $2,615,253, net of accumulated amortization of $977,270.

*IntangibleAssets*

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.

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, management reviewsdefinite life intangible assets to determine if events or circumstances haveoccurred which may cause the carrying values of intangible assets to beimpaired. The purpose of these reviews is to identify any facts orcircumstances, either internal or external, which may indicate that thecarrying value of the assets may not be recoverable.

*Stock-basedCompensation*

We have two stock-basedcompensation plans, the 2005 Equity Incentive Plan and the 1997 Stock OptionPlan, under which we may issue shares of our common stock to employees,officers, directors and consultants. Upon effectiveness of the 2005 EquityIncentive Plan on November 22. 2005, the 1997 Stock Option Plan was terminatedfor purposes of new grants.  Both ofthese plans have been approved by our shareholders.

Priorto January 1, 2006, we accounted for those plans under the recognition andmeasurement provisions of APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. 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, 2007 includes;(a) compensation cost for all share-based payments granted prior to, butnot yet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123, and(b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods have not been restated.

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

 

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*IncomeTaxes*

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

### **Risk Factors**

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

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

Wehave experienced operating losses and cash outflows.  For the three months ended March 31, 2007,our net loss was $936,591.  At March 31,2007, our cash and cash equivalents totaled $1,466,352 and our working capitaldeficit was $3,069,172.  We cannot becertain that ASPYRA will become profitable and sustain profitability.  If ASPYRA does not become profitable andsustain profitability, the market price of our common stock will decline.  The Company’s primary source of workingcapital has been generated from the private placements and borrowings.  The Company’s results of operations for thethree months ended March 31, 2007 produced negative operating cash flow ofapproximately $263,473.  Any decline insales, delays in implementations where payments are tied to delivery and/orperformance of services or cancellations of contracts could have a negativeeffect on cash flow from operations and could in turn increase our liquidityproblem.  If sales are not as expected,the Company will consider certain cost cutting measures.  We may require additional cash resources tosustain our business.  The sale ofconvertible debt securities or additional equity securities could result inadditional dilution to our shareholders. The incurrence of additional indebtedness would result in incurring debtservice obligations and could result in operating and financial covenants thatwould restrict our operations.  There canbe no assurance that any additional financing will be available on acceptableterms, if at all.

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

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

·      failure to successfullymanage relationships with customers and other important relationships;

·      failure of customers toaccept new services or to continue using the products and services of thecombined company;

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

·      challenges encountered inmanaging larger, more geographically dispersed operations;

 

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·      the loss of key employees;

·      diversion of the attentionof management from other ongoing business concerns;

·      potential incompatibilitiesof technologies and systems;

·      potential difficultiesintegrating and harmonizing financial reporting systems; and

·      potential incompatibility ofbusiness cultures.

If the combinedcompany’s operations do not meet the expectations of customers of ASPYRA orADSI then these customers may cease doing business with the combined companyaltogether, which would harm the results of operations and financial conditionof ASPYRA.

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

·      the integration of ASPYRAand ADSI is unsuccessful;

·      the combined company doesnot achieve the expected benefits of the merger as quickly as anticipated orthe costs of or operational difficulties arising from the merger are greaterthan anticipated;

·      the combined company’sfinancial results after the merger are not consistent with the expectations offinancial or industry analysts;

·      the anticipated operatingand product synergies of the merger are not realized; or

·      the combined companyexperiences the loss of significant customers or employees as a result of themerger.

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

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

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

·      our ability to adapteffectively to the continued development, acquisition or licensing oftechnology or product rights by our competitors;

·      our ability to enhance ourproducts or develop new products;

·      our ability to adapt tochanging technological demands; and

·      our strategic decisionsregarding the best allocation of our limited resources.

Several of ourcurrent and potential competitors have greater financial, technical, sales,marketing and other resources than we do and consequentially may have anability to influence customers to purchase their products that compete withours.

 

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Our future and existingcompetitors could introduce products with superior features, scalability andfunctionality at lower prices than our products, and could also bundle existingor new products with other more established products in order to compete withus. Our competitors could also gain market share by acquiring or formingstrategic alliances with our other competitors. If we do not adapt our businessin the face of this competition, our business and operating results may beharmed.

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

The commercialsuccess of future products depends upon their acceptance by the medicalcommunity.  Our future product plansinclude capital-intensive clinical information systems.  We believe that these products can significantlyreduce labor costs, improve patient care and offer other distinctive benefitsto the medical community.  However, thereis often market resistance to products that require significant capitalexpenditures or which eliminate jobs through automation. We can make noassurance that the market will accept our future products and systems, or thosesales of our future products and systems will grow at the rates expected by ourmanagement.

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

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

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

Our future successand growth depend on the continued services of our key management andemployees, including Steven M. Besbeck, Bruce M. Miller, and James R.Helms.  The loss of the services of anyof these individuals or any other key employee could materially affect ourbusiness. Our future success also depends on our ability to identify, attractand retain additional qualified personnel. Competition for employees in ourindustry is intense and we may not be successful in attracting or retainingthem.  There are a limited number ofpeople with knowledge of, and experience in, our industry.  We do not have employment agreements withmost of our key employees.  However, wegenerally enter into agreements with our employees regarding patents,confidentiality and related matters.  Wedo not maintain life insurance polices on our employees.  Our loss of key personnel, especially withoutadvance notice, or our inability to hire or retain qualified personnel, couldhave a material adverse effect on sales and our ability to maintain ourtechnological edge.  We cannot guaranteethat we will continue to retain our key management and skilled personnel, orthat we will be able to attract, assimilate and retain other highly qualifiedpersonnel in the future.

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

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

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

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

·      be time consuming to defend;

·      result in costly litigation;

·      divert management’s time andattention from our business;

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

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

 

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

While we believethat we currently have adequate internal control procedures in place, we arestill exposed to potential risks from recent legislation requiring companies toevaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002. We areevaluating our internal controls system in order to allow management to reporton, and our independent registered public accounting firm to attest to, ourinternal controls over financial reporting, as required by Section 404 of theSarbanes-Oxley Act of 2002 beginning in our fiscal year 2008.

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

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

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

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

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

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

·      acts of war or terrorism;and

·      inadvertent errors.

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

 

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

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

·      potential loss ofproprietary information due to piracy, misappropriation or laws that may beless protective of our intellectual property rights;

·      imposition of foreign lawsand other governmental controls, including trade and employment restrictions;

·      enactment of additionalregulations or restrictions on imports and exports;

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

·      limitations on future growthor inability to maintain current levels of revenues from international sales ifwe do not invest sufficiently in our international operations;

·      longer payment cycles forsales in foreign countries and difficulties in collecting accounts receivable;

·      difficulties in staffing,managing and operating our international operations;

·      difficulties in coordinatingthe activities of our geographically dispersed and culturally diverse operations;and

·      political unrest, war orterrorism, particularly in areas in which we have facilities.

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

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

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

For example, wehave used stock options and other long-term equity incentives as a fundamentalcomponent of our employee compensation packages. We believe that stock optionsand other long-term equity incentives directly motivate our employees to maximizelong-term shareholder value and, through the use of vesting, encourageemployees to remain with our Company. The Financial Accounting Standards Boardhas issued Statement of Financial Accounting Standards 123R that will requireus to record a charge to earnings for employee stock option grants. Inaddition, regulations implemented by the American Stock Exchange generallyrequire shareholder approval for all stock option plans, which could make itmore difficult or expensive for us to grant stock options to employees. We may,as a result of these changes, incur increased compensation costs, change ourequity compensation strategy or find it difficult to attract, retain andmotivate employees, each of which could materially and adversely affect our business,operating results and financial condition.

 

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

For the threemonths ended March 31, 2007 and 2006, ADSI received approximately 80% of itsrevenues through third party distribution arrangements. We expect that we willcontinue to generate a significant portion of our revenues through a limitednumber of distribution arrangements for the foreseeable future. A significantportion of the Company’s outstanding accounts receivable is with such thirdparty distributors, which will result in a concentration of our credit risk. Ifany of these third party distributors decides not to market or distribute ourproducts or decides to terminate or not renew its agreement with us, we may beunable to replace the affected agreements with acceptable alternatives, whichcould materially harm our business, operating results and financial condition.

**RisksRelated to Our Common Stock**

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

Future sales ofsubstantial amounts of shares of our common stock in the public market, or theperception that these sales could occur, may cause the market price of ourcommon stock to decline. In addition, we may be required to issue additionalshares upon exercise of previously granted options or warrants such as thewarrants to purchase up to 1,650,000 shares of ASPYRA common stock that ASPYRAissued in two private placements completed in November 2005 and May 2006.  Increased sales of our common stock in themarket after exercise of stock options or warrants could exert significant downwardpressure on our stock price. These sales also might make it more difficult forus to sell equity or equity-related securities in the future at a time andprice we deem appropriate.

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

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

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

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

·      rumors, announcements orpress articles regarding changes in our management, organization, operations orprior financial statements;

·      changes in revenue andearnings estimates by securities analysts;

·      announcements of plannedacquisitions by us or by our competitors;

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

·      gain or loss of asignificant customer;

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

·      acts of terrorism, thethreat of war and economic slowdowns in general.

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

 

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

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

·      effectively align salesresources to meet customer needs and address market opportunities;

·      effectively respond tocompetitive pressures; and

·      effectively manage ouroperating expense levels.

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

·      reduced demand for any ofour products;

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

·      cancellation, deferral orlimitation of orders by customers;

·      fluctuations in foreigncurrency exchange rates; and

·      weakness or uncertainty ingeneral economic or industry conditions.

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

### **New Accounting Pronouncements**

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

In February 2007, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities”, which provides companies with an option to reportselected financial assets and liabilities at fair value. The objective of SFASNo. 159 is to reduce both complexity in accounting for financialinstruments and the volatility in earnings caused by measuring related assetsand liabilities differently. SFAS No. 159 also establishes presentationand disclosure requirements designed to facilitate comparisons betweencompanies that choose different measurement attributes for similar types ofassets and liabilities. SFAS No. 159 is effective for the Company as ofJanuary 1, 2008. We have not completed our evaluation of SFAS No. 159but do not expect the adoption of SFAS No. 159 to have a material effecton our operating results or financial position.

In July 2006, theFASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, (“FIN 48”) an interpretation of FASB Statement No. 109,Accounting for Income Taxes. FIN 48 requires that a position taken orexpected to be taken in a tax return be recognized in the financial statementswhen it is more likely than not (i.e. a likelihood of more than fiftypercent) that the position would be sustained upon examination by tax authorities.A recognized tax position is then measured at the largest amount of benefitthat is greater than fifty percent likely of being realized upon ultimatesettlement. Upon adoption, the cumulative effect of applying the recognitionand measurement provisions of FIN 48, if any, shall be reflected as anadjustment to the opening balance of retained earnings. FIN 48 requiresthat subsequent to initial adoption a change in judgment that results insubsequent recognition, derecognition or change in a measurement of a taxposition taken in a prior annual period (including any related interest andpenalties) be recognized as a discrete item in the period in which the changeoccurs. Currently, we record such changes in judgment, including auditsettlements, as a component of the Company’s income tax provision. Thus, theCompany’s reported quarterly income tax rate may become more volatile uponadoption of FIN 48. This change will not impact the manner in which werecord income tax expense on an annual basis. FIN 48 also requiresexpanded disclosures including identification of tax positions for which it isreasonably possible that total amounts of unrecognized tax benefits willsignificantly change in the next twelve months, a description of tax years thatremain subject to examination by major tax jurisdiction, a tabularreconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective forfiscal years beginning after December 15, 2006. The standard did not havean impact on the Consolidated Financial Statements.

 

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**Item 3.****            Controls andProcedures**

Attached asexhibits to this Quarterly Report on Form 10-QSB are certifications of ASPYRA’sChief Executive Officer and Chief Financial Officer, which are required inaccordance with Rule 13a-14 of the Securities Exchange Act of 1934, asamended (the “Exchange Act”). This “Controls and Procedures” section includesinformation concerning the controls and controls evaluation referred to in thecertifications.  This section should be readin conjunction with the certifications for a more complete understanding of thetopics presented.

**Evaluationof Disclosure Controls and Procedures**

The Company’smanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, conducted an evaluation of the effectiveness of the Company’sdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Form 10-QSB.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of March 31, 2007, ourdisclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act (i) is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

**Changesin Internal Control over Financial Reporting**

There were nochanges in our internal control over financial reporting that occurred duringthe quarter ended March 31, 2007 that have materially affected, or arereasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II — OTHER INFORMATION**

**Item1.****            ****LegalProceedings******

None.

**Item2.****            ****UnregisteredSales Of Equity Securities And Use Of Proceeds.******

None.

**Item3.****            ****Defaults UponSenior Securities.******

None.

**Item4.****            ****Submission OfMatters To A Vote Of Security Holders.******

None.

**Item5.****            ****OtherInformation.******

None.

**Item6.****            Exhibits**

Exhibit 3.1      Restated Articles ofIncorporation, as Amended (previously filed as an exhibit to the Company’sRegistration Statement on Form S-18 dated September 22, 1983, SEC File No.2-85265 and incorporated herein by reference).

Exhibit 3.2      Amendment to the RestatedArticles of Incorporation (incorporated by reference to Annex E to the jointproxy statement/prospectus that is part of the Company’s Registration Statementon Form S-4, originally filed on October 3, 2005, SEC file No. 333-128795).

Exhibit 3.3      By-Laws, as amended(previously filed as an exhibit to the Company’s Registration Statement on FormS-18 dated September 22, 1983, SEC File No. 2-85265 and incorporated herein byreference).

Exhibit 31.1    Certification of ChiefExecutive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of1934.*

Exhibit 31.2            Certification of ChiefFinancial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of1934.*

Exhibit 32.1            Certification of ChiefExecutive Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of1934.*

Exhibit 32.2            Certification of ChiefFinancial Officer pursuant to Rule 13a-14(b) of the Securities Exchange Act of1934.*

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*** Filedherewith.**

**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
| ASPYRA, INC.       |   |                                                   |
|--------------------|--------|--------------------------------------------------------|
| (Registrant)       |   |                                                   |
|               |   |                                                   |
|               |   |                                                   |
| Date: May 21, 2007 |   | /S/ Steven M. Besbeck                                  |
|               |   | Steven M. Besbeck, President and                       |
|               |   | Chief Executive Officer (Principal Executive  Officer) |
|               |   |                                                   |
|               |   |                                                   |
| Date: May 21, 2007 |   | /S/ Anahita Villafane                                  |
|               |   | Anahita Villafane,                                     |
|               |   | Chief Financial Officer (Principal Financial and       |
|               |   | Accounting Officer)                                    |

 

 

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

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* Filed herewith.

 

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