UNITED
STATES SECURITIES AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM 10-Q





x
            
            QUARTERLY REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 30, 2009.o
            
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
      1934





For
the transition period from
             to





Commission
file number 001-13268





ASPYRA,
INC.


(Exact
name of Registrant as specified in its charter)





California
            
            95-3353465(State
      or other jurisdiction of
            
            (I.R.S.
      Employerincorporation
      or organization)
            
            Identification
      Number)





4360
Park Terrace Drive, Suite 220, Westlake Village, California 91361


(Address
of principal executive offices)





(818)
880-6700


Registrant’s
telephone number, including area code





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


Yes x    No
o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or such shorter period that the registrant was required to submit and
post such files. Yes / / No / /





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





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





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





As of
November 19, 2009, there were 17,201,327 shares of the registrant’s only
class of common stock outstanding.




1








ASPYRA,
INC.





QUARTERLY
REPORT ON FORM 10-Q





September 30,
2009





TABLE
OF CONTENTS





PagePART I
      – FINANCIAL INFORMATIONItem
      1.
            Condensed
      Consolidated Financial Statements (Unaudited)
            3Condensed
      consolidated balance sheets at September 30, 2009 and
      December 31, 2008
            3Condensed
      consolidated statements of operations for the three months ended
      September 30, 2009 and 2008
            4Condensed
      consolidated statements of operations for the nine months ended
      September 30, 2009 and 2008
            5Condensed
      consolidated statements of cash flows for the nine months ended
      September 30, 2009 and 2008
            6Notes
      to Condensed Consolidated Financial Statements
            7Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            16Item
      4T.
            Controls
      and Procedures
            26PART II
      – OTHER INFORMATIONItem
      1.
            Legal
      Proceedings
            26Item
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            27Item
      3.
            Defaults
      Upon Senior Securities
            27Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            27Item
      5.
            Other
      Information
            27Item
      6.
            Exhibits
            27Signatures
            30Exhibit Index
            31





2


ASPYRA,
INC.





PART I
- FINANCIAL INFORMATION





Item
1.  Financial Statements





CONDENSED
CONSOLIDATED BALANCE SHEETS





September 30,
            
            
            December 31,2009
            
            
            2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
            
            $
            564,862
            
            
            $
            779,630Receivables,
      net
            
            
            1,147,534
            
            
            
            806,996Inventory
            
            
            9,865
            
            
            
            27,358Prepaid
      expenses and other assets
            
            
            258,826
            
            
            
            225,971TOTAL
      CURRENT ASSETS
            
            
            1,981,087
            
            
            
            1,839,955PROPERTY
      AND EQUIPMENT, net
            
            
            335,880
            
            
            
            498,395OTHER
      ASSETS
            
            
            385,101
            
            
            
            182,698INVENTORY
      OF COMPONENT PARTS, net
            
            
            —
            
            
            
            27,693CAPITALIZED
      SOFTWARE COSTS, net of accumulated amortization of $1,259,529 and
      $798,919
            
            
            2,682,570
            
            
            
            2,851,327INTANGIBLES,
      net
            
            
            2,556,115
            
            
            
            3,072,490GOODWILL
            
            
            6,692,000
            
            
            
            6,692,000$
            14,632,753
            
            
            $
            15,164,558LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Notes
      payable
            
            $
            4,363,021
            
            
            $
            794,965Accounts
      payable
            
            
            732,611
            
            
            
            710,157Accrued
      liabilities:Vacation
      pay
            
            
            375,244
            
            
            
            357,798Accrued
      compensation
            
            
            384,232
            
            
            
            333,712Accrued
      interest
            
            
            498,574
            
            
            
            226,635Deferred
      rent
            
            
            43,736
            
            
            
            75,511Customer
      deposits
            
            
            442,392
            
            
            
            373,928Other
            
            
            415,625
            
            
            
            254,928Deferred
      service contract income
            
            
            2,022,222
            
            
            
            1,914,979Deferred
      revenue on system sales
            
            
            920,242
            
            
            
            521,520Capital
      lease — current portion
            
            
            150,237
            
            
            
            150,237TOTAL
      CURRENT LIABILITIES
            
            
            10,348,136
            
            
            
            5,714,370CAPITAL
      LEASE, LESS CURRENT PORTION
            
            
            85,371
            
            
            
            198,048NOTES
      PAYABLE
            
            
            —
            
            
            
            2,460,000TOTAL
      LIABILITIES
            
            
            10,433,507
            
            
            
            8,372,418SHAREHOLDERS’
      EQUITY:Common
      shares, no par value; 75,000,000 shares authorized;
      17,201,327 (including 4,602,639 shares to be issued) and 12,437,150
      shares issued and outstanding
            
            
            23,494,346
            
            
            
            22,761,951Additional
      paid-in-capital
            
            
            4,061,994
            
            
            
            2,587,065Accumulated
      deficit
            
            
            (23,345,528
            )
            
            
            (18,556,512Accumulated
      other comprehensive loss
            
            
            (11,566
            )
            
            
            (364
            )TOTAL
      SHAREHOLDERS’ EQUITY
            
            
            4,199,246
            
            
            
            6,792,140$
            14,632,753
            
            
            $
            15,164,558





See
Notes to Condensed Consolidated Financial Statements.




3





ASPYRA,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(unaudited)





Three Months Ended September 30,2009
            
            
            2008NET
      SYSTEM SALES AND SERVICE REVENUE:System
      sales
            
            $
            256,789
            
            
            $
            469,961Service
      revenue
            
            
            1,550,710
            
            
            
            1,705,7921,807,499
            
            
            
            2,175,753COSTS
      OF PRODUCTS AND SERVICES SOLD:System
      sales
            
            
            528,343
            
            
            
            465,837Service
      revenue
            
            
            599,378
            
            
            
            593,1411,127,721
            
            
            
            1,058,978Gross
      profit
            
            
            679,778
            
            
            
            1,116,775OPERATING
      EXPENSESSelling,
      general and administrative
            
            
            1,410,268
            
            
            
            1,397,834Research
      and development
            
            
            286,178
            
            
            
            393,569Total
      operating expenses
            
            
            1,696,446
            
            
            
            1,791,403OPERATING
      LOSS
            
            
            (1,016,668
            )
            
            
            (674,628
            )INTEREST
      AND OTHER INCOME
            
            
            878
            
            
            
            179,104INTEREST
      EXPENSE
            
            
            (479,905
            )
            
            
            (223,710
            )Loss
      before provision for income taxes
            
            
            (1,495,695
            )
            
            
            (719,234PROVISION
      FOR INCOME TAXES
            
            
            —
            
            
            
            (228
            )NET
      LOSS
            
            $
            (1,401,695
            )
            
            $
            (719,462
            )DEEMED
      DIVIDEND ON EXERCISE OF WARRANTS
            
            
            (225,295
            )
            
            
            —NET
      LOSS APPLICABLE TO COMMON SHAREHOLDERS
            
            $
            (1,720,990
            )
            
            $
            (719,462
            )LOSS
      PER SHARE:Basic
            
            $
            (.11
            )
            
            $
            (.06
            )Diluted
            
            
            (.11
            )
            
            
            (.06
            )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
            
            
            16,204,089
            
            
            
            12,437,150Diluted
            
            
            16,204,089
            
            
            
            12,437,150





See
Notes to Condensed Consolidated Financial Statements.




4





ASPYRA,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(unaudited)





Nine Months Ended September 30,2009
            
            
            2008NET
      SYSTEM SALES AND SERVICE REVENUE:System
      sales
            
            $
            938,306
            
            
            $
            1,550,744Service
      revenue
            
            
            4,940,103
            
            
            
            5,106,3815,878,409
            
            
            
            6,657,125COSTS
      OF PRODUCTS AND SERVICES SOLD:System
      sales
            
            
            1,619,432
            
            
            
            1,676,073Service
      revenue
            
            
            1,723,453
            
            
            
            1,854,1073,342,885
            
            
            
            3,530,180Gross
      profit
            
            
            2,535,524
            
            
            
            3,126,945OPERATING
      EXPENSESSelling,
      general and administrative
            
            
            4,494,039
            
            
            
            4,551,421Research
      and development
            
            
            1,327,095
            
            
            
            1,371,292Total
      operating expenses
            
            
            5,821,134
            
            
            
            5,922,713OPERATING
      LOSS
            
            
            (3,285,610
            )
            
            
            (2,795,768
            )INTEREST
      AND OTHER INCOME
            
            
            4,727
            
            
            
            199,011INTEREST
      EXPENSE
            
            
            (1,282,838
            )
            
            
            (517,160
            )Loss
      before provision for income taxes
            
            
            (4,563,721
            )
            
            
            (3,113,917
            )PROVISION
      FOR INCOME TAXES
            
            
            —
            
            
            
            (228
            )NET
      LOSS
            
            $
            (4,563,721
            )
            
            $
            (3,114,145
            )DEEMED
      DIVIDEND ON EXERCISE OF WARRANTS
            
            
            (225,295
            )
            
            
            —NET
      LOSS APPLICABLE TO COMMON SHAREHOLDERS
            
            $
            (4,789,016
            )
            
            $
            (3,114,145
            )LOSS
      PER SHARE:Basic
            
            $
            (.35
            )
            
            $
            (.25
            )Diluted
            
            
            (.35
            )
            
            
            (.25
            )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
            
            
            13,695,786
            
            
            
            12,437,150Diluted
            
            
            13,695,786
            
            
            
            12,437,150





See
Notes to Condensed Consolidated Financial Statements.




5





ASPYRA,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


Increase
(Decrease) in Cash





(unaudited)





Nine Months Ended September 30,2009
            
            
            2008OPERATING
      ACTIVITIESNet
      loss
            
            $
            (4,563,721
            )
            
            $
            (3,114,145
            )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
            
            
            197,187
            
            
            
            279,051Amortization
      of capitalized software costs
            
            
            484,245
            
            
            
            364,162Warrant
      discount and beneficial conversion amortization
            
            
            938,134
            
            
            
            262,500Amortization
      of acquired intangibles
            
            
            516,375
            
            
            
            516,367Provision
      for doubtful accounts
            
            
            18,257
            
            
            
            15,737Stock
      based compensation
            
            
            185,543
            
            
            
            355,757Increase
      (decrease) from changes in:Receivables
            
            
            (358,795
            )
            
            
            (22,582
            )Inventories
            
            
            45,186
            
            
            
            34,152Prepaid
      expenses and other assets
            
            
            (139,246
            )
            
            
            (76,524Accounts
      payable
            
            
            22,454
            
            
            
            (163,168
            )Accrued
      liabilities
            
            
            537,292
            
            
            
            (153,324
            )Deferred
      service contract income
            
            
            107,243
            
            
            
            363,398Deferred
      revenue on system sales
            
            
            398,722
            
            
            
            (19,634
            )Net
      cash used in operating activities
            
            
            (1,611,124
            )
            
            
            (1,358,253
            )INVESTING
      ACTIVITIESAdditions
      to property and equipment
            
            
            (34,981
            )
            
            
            (19,501
            )Additions
      to capitalized software costs
            
            
            (315,488
            )
            
            
            (443,854
            )Net
      cash used in investing activities
            
            
            (350,469
            )
            
            
            (463,355
            )FINANCING
      ACTIVITIESBorrowings
      on line of credit and notes payable
            
            
            1,180,000
            
            
            
            2,775,000Forgiveness
      of debt
            
            
            —
            
            
            
            (171,197
            )Payments
      on line of credit and notes payable
            
            
            —
            
            
            
            (281,562
            )Payments
      on capital leases
            
            
            (112,677
            )
            
            
            (112,677
            )Proceeds
      form exercise of warrants
            
            
            690,395
            
            
            
            —Net
      cash provided by financing activities
            
            
            1,757,718
            
            
            
            2,209,564Foreign
      currency translation adjustment
            
            
            (10,893
            )
            
            
            34,029NET
      INCREASE (DECREASE) IN CASH
            
            
            (214,768
            )
            
            
            421,985CASH, beginning
      of period
            
            
            779,630
            
            
            
            803,392CASH,
      end of period
            
            $
            564,862
            
            
            $
            1,225,377





See
notes to Condensed Consolidated Financial Statements.




6








ASPYRA,
INC.





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(unaudited)





Note
1 - Presentation of Financial Statements





In the
opinion of management of Aspyra, Inc. (the “Company” or “ASPYRA”), the
accompanying unaudited condensed consolidated financial statements reflect all
adjustments (which include only normal recurring accruals) necessary to present
fairly the Company’s financial position as of September 30, 2009, the
results of its operations for the three and nine months ended September 30,
2009 and 2008, and cash flows for the nine months ended September 30, 2009
and 2008.  These results have been determined on the basis of
accounting principles generally accepted in the United States and practices
applied consistently with those used in preparation of the Company’s Annual
Report on Form 10-K for the fiscal year ended December 31,
2008.





The
results of operations for the three and nine months ended September 30,
2009 are not necessarily indicative of the results expected for any other period
or for the entire year.





Note
2 - Liquidity





We expect
to incur negative cash flows and net losses for the foreseeable future. Based
upon our current plans, we believe that our existing cash reserves will not be
sufficient to meet our current liabilities and other obligations as they become
due and payable.  As of September 30, 2009, our average monthly cash
usage is approximately $265,000.  Accordingly, we need to seek to
obtain additional debt or equity financing through a public or private placement
of shares of our preferred or common stock, through a public or private
financing, or obtain a credit facility with a lender.  However, the
Company has a detailed contingent strategic plan which outlines short and long
term plans to improve its operations.  If by the end of the year,
revenues are not at the level anticipated, the Company would implement
significant cost cutting measures.  Our ability to meet such
obligations will depend on our ability to sell securities, borrow funds, reduce
operating costs, or some combination thereof.  We may not be
successful in obtaining necessary financing on acceptable terms, if at
all.  The sale of additional convertible debt securities or additional
equity securities could result in additional dilution to our
stockholders.  The incurrence of additional indebtedness would result
in increased debt service obligations and could result in additional operating
and financial covenants.  Although there are no present
understandings, commitments or agreements with respect to the acquisition of any
other businesses, applications or technologies, we may from time to time,
evaluate acquisitions of other businesses, applications or
technologies.  As of September 30, 2009, we had negative working
capital of $8,367,049 and accumulated deficit of $23,345,528.  Cash
used in operations for the nine months ended September 30, 2009 was
$1,611,124.  As a result of these conditions, there is substantial
doubt about our ability to continue as a going concern.  The financial
statements filed as part of this Quarterly Report on Form 10-Q does not include
any adjustments that might result from the outcome of this
uncertainty.  See Note 12 for additional information.





The
Company’s primary source of working capital has been generated from private
placements of securities and from borrowings.  The Company has been
experiencing a history of losses due to the integration of its businesses and
the significant investment in new products since the quarter ended
March 31, 2005 and negative cash flows from operations since the quarter
ended December 31, 2005.  An unanticipated decline in sales,
delays in implementations where payments are tied to delivery and/or performance
of services or cancellations of contracts have had and in the future could have
a negative effect on cash flow from operations and could in turn create
short-term liquidity problems.




7





As of
September 30, 2009, the Company’s working deficit of $8,367,049 compared to
a working deficit of $3,874,415, as of December 31, 2008. At
September 30, 2009, the Company has the following obligations:




·
            On
      March 26, 2008 the Company entered into a private placement transaction
      with various investors in the Company, whereby the investors purchased
      promissory notes from the Company in the principal amount of $2,775,000
      and mature on August 26, 2010. In addition to the 2008 private placement
      transaction, the Company entered into a note purchase agreement with Great
      American Investors for the amount of the transaction fees of $210,000 that
      matures on August 26, 2010.


·
            On
      March 31, 2009, the Company executed agreements renewing its
      revolving line of credit in the aggregate amount of $1,300,000, of which
      $924,965 was outstanding as of September 30, 2009.  The
      revolving line of credit is secured by the Company’s accounts receivable
      and inventory and matures on May 27, 2010.  The revolving
      line of credit is subject to certain covenants, including revised
      financial covenants.  As of September 30, 2009, the Company
      was not compliant with some of the covenants, but had obtained a
      waiver.  Advances under the revolving line of credit are on a
      formula, based on eligible accounts receivable and inventory
      balances.  This revolving credit line will need to be renewed
      prior to its maturity.  If the Company does not raise additional
      capital in the fourth quarter, the Company may not be in compliance with
      its covenants at December 31, 2009.


·
            On
      February 12, 2009 the Company entered into a securities purchase agreement
      with various accredited investors, whereby the investors purchased secured
      promissory notes from the Company in the principal amount of $1,000,000
      and mature on August 26, 2010.


·
            At
      September 30, 2009, the Company had $235,608 outstanding on its
      capital leases of which $150,237 is due in the next twelve
      months.





In the
event the Company is not able to renew its revolving line of credit or settle
its promissory note and capital lease obligations by the maturity
dates  it would have a material adverse effect on the Company’s
financial statements and liquidity.





From June
17, 2009 through June 26, 2009, the Company temporarily reduced the exercise
price of all outstanding warrants (“Warrants”), to $0.15 (the “Special Warrant
Offer”).  In response to the Special Warrant Offer, the Company
received an aggregate of $690,396 (the “Funds”) from holders (the “Holders”) of
the Warrants seeking to exercise an aggregate of 4,602,639
Warrants.  From July 13, 2009, through July 20, 2009, the Company
entered into a series of identical letter agreements (the “Letter Agreements”)
with the Holders. Pursuant to the Letter Agreements, the parties agreed that the
Funds, in the aggregate amount of $690,395.85 will be deemed loans (the “Loans”)
to the Company, until such time as Shareholder Approval (defined below) is
obtained. Pursuant to the Letter Agreements, the Company agreed to obtain
shareholder approval, and have such shareholder approval become effective in
accordance with applicable law (including, without limitation, Section 14 of the
Securities Exchange Act of 1934, as amended) (the “Shareholder Approval”), by
October 31, 2009, for the Special Warrant Offer, and the issuance of shares of
the Company’s common stock in accordance therewith. The Shareholder Approval was
obtained on August 24, 2009 and therefore the funds were deemed an exercise of
the Special Warrant Offer.  The Company issued shares of its common
stock in accordance therewith, and no interest or other payments were due on the
Loans.  The warrants exercised in connection with the Special Warrant
Offer were at an exercise price below fair market value on the date of exercise
as a result of the one-time temporary price reduction.  The inducement
was revalued under the black-scholes model which resulted in the Company
recording a deemed dividend of approximately $225,000 as the fair market value
of the Company’s Common Stock exceeded the exercise price on the date of
conversion.





Note
3 - Inventories





Inventories
consist primarily of computer hardware held for resale and are stated at the
lower of cost or market (net realizable value).  Cost is determined
using the first-in, first-out method. Supplies are charged to expense as
incurred.  The Company also maintains an inventory pool of component
parts to service systems previously sold, which is classified as non-current in
the accompanying balance sheets.  Such inventory is carried at the
lower of cost or market and is charged to cost of sales based on
usage.  Allowances are made for quantities on hand in excess of
estimated future usage.  At September 30, 2009, the inventory
allowance was $151,989.





Note
4 - Goodwill and Intangible Assets





In
accordance with ASC 350 previously referred to as Statement of Financial
Accounting Standards (“SFAS”) No. 142, goodwill is tested for impairment on
an annual basis or between annual tests if an event occurs or circumstances
change that would indicate the carrying amount may be impaired.  Such
impairment reviews are performed at the entity level with respect to goodwill,
as we have one reporting unit. Under those circumstances, if the fair value were
less than the carrying amount of the entity, further analysis would be required
to determine whether or not a loss would need to be charged against current
period earnings. The determination of fair value and the impairment are based on
a combination of a market and income valuation approach that are based on an
analysis of the market prices of comparable publicly traded companies and a
discounted cash flow analysis, which includes making various judgmental
assumptions, including assumptions about future cash flows, growth rates and
discount rates  The use of different estimates or assumptions could
produce different results. As of September 30, 2009, our net book value
(i.e., shareholders’ equity) was approximately $4.2 million. However, as of the
market close on November 18, 2009 our market capitalization was
approximately $2.1 million. This fact, along with other factors used in the
determination of fair value, such as the year to date net loss and continued
negative cash flow from operations, may lead to potential impairment of goodwill
in the fourth quarter, which we are in the process of analyzing.  In
accordance with ASC 360 previously referred to as SFAS No. 144, Accounting
for Impairment of Long-Lived Assets, management reviews definite life intangible
assets to determine if events or circumstances have occurred which may cause the
carrying values of intangible assets to be impaired. The purpose of these
reviews is to identify any facts and circumstances, either internal or external,
which may indicate that the carrying values of the assets may not be
recoverable.  The Company recorded a
goodwill impairment of $ 576,434 as of December 31, 2008. No
additional events have occurred since the impairment review as of December 31,
2008, that was not already considered in the evaluation.   At
September 30, 2009, the net carrying value of goodwill and intangible
assets were $6,692,000 and $2,556,115, respectively.




8





Note
5 - Earnings per Share





The
Company accounts for its earnings per share in accordance with ASC 260
previously referred to as SFAS No.128, which requires presentation of basic and
diluted earnings per share.  Basic earnings per share is computed by
dividing income or loss available to common shareholders by the weighted average
number of common shares outstanding for the reporting period.  Diluted
earnings per share reflect the potential dilution that could occur if securities
or other contracts, such as stock options, to issue common stock were exercised
or converted into common stock.





Earnings
per share have been computed as follows:





Three Months
              Ended
              September 30, 2009
            
            
            Three Months
              Ended
              September 30, 2008
            
            
            Nine Months
              Ended
              September 30, 2009
            
            
            Nine Months
              Ended
              September 30, 2008NET
      LOSS APPLICABLE TO COMMON SHAREHOLDERS, as reported
            
            $
            (1,720,990
            )
            
            $
            (719,462
            )
            
            $
            (4,789,016
            )
            
            $
            (3,114,145
            )Basic
      weighted average number of common shares outstanding, as
      reported
            
            
            16,204,089
            
            
            
            12,437,150
            
            
            
            13,695,786
            
            
            
            12,437,150Dilutive
      effect of stock options, as reported
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Diluted
      weighted average number of common shares outstanding, as
      reported
            
            
            16,204,089
            
            
            
            12,437,150
            
            
            
            13,695,786
            
            
            
            12,437,150Basic
      and diluted loss per share, as reported
            
            $
            (.11
            )
            
            $
            (.06
            )
            
            $
            (.35
            )
            
            $
            (.25
            )





For the
three and nine months ended September 30, 2009, options and warrants to
purchase 8,662,234 shares of common stock at per share prices ranging from $0.22
to $2.48 were not included in the computation of diluted loss per share because
inclusion would have been anti-dilutive. For the three and nine months ended
September 30, 2008, options and warrants to purchase 7,030,730 shares of
common stock at per share prices ranging from $0.36 to $2.75 were not included
in the computation of diluted loss per share because inclusion would have been
anti-dilutive.





Note
6 - Debt Obligations





On March
26, 2008 the Company entered into a private placement transaction with various
investors in the Company, whereby the investors purchased promissory notes from
the Company in the principal amount of $2,775,000 and mature on August 26, 2010.
In addition to the 2008 private placement transaction, the Company entered into
a note purchase agreement with Great American Investors for the amount of the
transaction fees of $210,000 that matures on August 26, 2010.  On
March 31, 2009, the Company executed agreements to renew its revolving line
of credit in the aggregate amount of $1,300,000.  The revolving line
of credit is secured by the Company’s accounts receivable and inventory and
matures on May 27, 2010.  The revolving line of credit is subject
to certain covenants, including revised financial covenants.  As of
September 30, 2009, the Company was not compliant with some of the
covenants, but had obtained a waiver.  If the Company does not raise
additional capital in the fourth quarter, the Company may not be in compliance
with its covenants at December 31, 2009.  Advances under the revolving
line of credit are on a formula, based on eligible accounts receivable and
inventory balances.  On September 30, 2009, the total amount due
to the bank was $924,965. On February 12, 2009 the Company entered into a
securities purchase agreement with various accredited investors, whereby the
investors purchased secured promissory notes from the Company in the principal
amount of $1,000,000 and mature on August 26, 2010.





9





Note
7 - Stock-Based Compensation





Equity
Incentive and Stock Option Plans: At September 30, 2008, the Company has
two stock-based compensation plans.  Readers should refer to both Note
1 and Note 8 of the Company’s financial statements, which are included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008, for additional information related to these stock-based compensation
plans.  During the quarter ended June 30, 2009, the Company’s
shareholders approved an amendment to the 2005 Equity Incentive Plan increasing
the number of available shares from 1,290,875 to 3,040,875.  There
were 55,000 and 890,000 options granted in the three and nine months ended
September 30, 2009.  There were 135,000 and 935,000 options granted in
the three and nine months ended September 30, 2008.  No stock options
were exercised in the nine months ended September 30, 2009.  The
Company accounts for stock option grants in accordance with ASC 508 and 718
previously referred to as FASB Statement 123(R), Share-Based Payment.
Compensation costs related to share-based payments recognized in the Condensed
Statements of Operations were $61,721 and $185,543 for the three and nine months
ended September 30, 2009 and $109,905 and $355,757 for the three and nine
months ended  September 30, 2008.





On June
25, 2009, the Company issued 161,538 shares of common stock to its chief
executive officer for services valued at approximately $42,000.




Note
8 - Commitments and Contingencies





In
accordance with the bylaws of the Company, officers and directors are
indemnified for certain events or occurrences arising as a result of the officer
or director’s serving in such capacity.  The term of the
indemnification period is for the lifetime of the officer or
director.  The maximum potential amount of future payments the Company
could be required to make under the indemnification provisions of its bylaws is
unlimited.  However, the Company has a director and officer liability
insurance policy that reduces its exposure and enables it to recover a portion
of any future amounts paid.  As a result of its insurance policy
coverage, the Company believes the estimated exposure for the indemnification
provisions of its bylaws is minimal and, therefore, the Company has not recorded
any related liabilities.





The
Company enters into indemnification provisions under agreements with various
parties in the normal course of business, typically with customers and
landlords.  Under these provisions, the Company generally indemnifies
and holds harmless the indemnified party for losses suffered or incurred 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 the
agreement.  These indemnification provisions often include
indemnifications relating to representations made by the Company with regard to
intellectual property rights.  These indemnification provisions
generally survive termination of the underlying agreement.  The
maximum potential amount of future payments the Company could be required to
make under these indemnification provisions cannot be estimated.  The
Company maintains general liability, errors and omissions, and professional
liability insurance in order to mitigate such risks.  The Company has
not incurred material costs to defend lawsuits or settle claims related to these
indemnification agreements.  As a result, the Company believes the
estimated exposure under these agreements is minimal.  Accordingly,
the Company has not recorded any related liabilities.





On April
1, 2009, the Company and its former Chief Technology Officer (“CTO”) entered
into a Separation Agreement and General Release pursuant to which the CTO agreed
that, due to management restructuring which resulted in the elimination of the
position of Chief Technology Officer, his employment with the Company would
terminate effective April 1, 2009.  The following is brief summary of
the material terms of the Separation Agreement: (i) the CTO shall provide
consulting services to the Company for an initial period of ninety business days
(ii) the Company agreed to pay to the CTO severance equal to fifteen months of
his base salary in effect as of April 1, 2009, in equal bi-weekly installments
over twenty-two and one-half months; (ii) the Company shall pay COBRA benefits
to the CTO and his spouse for up to eighteen months; (iii) the Company shall
accelerate the vesting of options exercisable for 10,000 of the Company’s Common
Stock previously granted to the CTO pursuant to the Company’s 2005 Stock
Incentive Plan; and (iv) the Company and the CTO released each other from all
claims arising from the CTO’s employment with the Company, subject to certain
exceptions.





In
April 2009, the Company received a complaint filed in the United States
District Court for the Eastern District of Texas Marshall Division for patent
infringement naming the Company and nine other Picture Archive Communication
System (“PACS”) vendors as defendants. The Company’s exposure to this action, if
any, cannot be determined due to the early stage of the litigation. The Company
believes that it has meritorious defenses to master all of the claims asserted
in the action. No reserves were established on the Company’s potential exposure
as of September 30, 2009.




10





On July
10, 2009, the Company entered into a sub-lease (the “Sub-Lease”) with Standard
Pacific Corp. pursuant to which the Company will sub-lease from the Sub-Lessor
property located at 4360 Park Terrace Drive, Suite 220, Westlake Village,
California 91361, for an eighteen month term commencing on August 1, 2009.
Pursuant to the Sub-Lease, the Company will pay rent of $16,840 per
month.





In
connection with the Sub-Lease, on July 10, 2009, the Company entered into a
lease termination agreement (the “Lease Termination”) with Arden Realty Limited
Partnership. Pursuant to the Lease Termination, the Company’s lease agreement
with Arden, pursuant to which the Company leased property located at 26115-A
Mureau Road, Calabasas, California 91302 was terminated, effective July 31,
2009, and the Company agreed to pay Arden $89,860 for final rental payments and
operating expenses.





Note
9 - Income Taxes





The
Company accounts for income taxes in accordance with ASC 740-10 and 740-30,
previously referred to as SFAS No. 109 “Accounting for Income Taxes,” which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns.  Under this method, deferred tax
liabilities and assets are determined based on the differences between the
financial statements and the tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.  Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized.  Income tax expense represents the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.





Note
10 - Private Placement





On
February 12, 2009 the Company entered into a private placement transaction
with various accredited investors.  Pursuant to the purchase agreement
entered into in connection with the private placement, the investors purchased
secured promissory notes from the Company in the principal amount of $1,000,000.
The notes are convertible into shares of the Company’s Common Stock at a
conversion price of $0.31 per share, subject to adjustment in the event of stock
splits, stock dividends, and similar transactions. The notes are convertible
into up to 3,225,806 shares of the Company’s common stock, and bear interest at
the rate of 12% per annum compounded on each July 15 and January 15.
Upon issuance, the notes had a maturity date of March 26,
2010.  In April 2009, the maturity date of the notes was extended to
August 26, 2010.   In addition, purchase agreement includes an
interest contingency provision in the event of default in which the interest
rate would increase to 24% or the maximum allowable legal rate. Pursuant to the
terms of the purchase agreement, the Company issued to the investors three year
warrants to purchase up to an additional 5,774,194 of shares of Common Stock. In
addition, the Company issued the placement agent warrants to purchase up
to 129,032 shares of Common Stock.  As a result, assuming the
conversion of all promissory notes and exercise of all warrants, up to 9,129,032
shares of the Company’s Common Stock may be issued. Such an issuance if it were
to occur, would be highly dilutive of existing shareholders and may, under
certain conditions effect a change of control of the
Company.  Pursuant to a security agreement entered into between the
Company and the purchasers under the private placement and an intercreditor
agreement between the Company and the collateral agent for the purchasers, the
purchasers were granted a security interest in the Company’s assets that is pari
passu to that of the purchasers who are parties to the Securities Purchase
Agreement, dated March 26, 2008.  During the nine months ended
September 30, 2009, the Company valued the warrants received in the private
placement utilizing the Black-Scholes Model and determined the value of the
warrants is $1,235,518.  The Company allocated the proceeds to the
debt and warrants based on relative fair value.  The relative value of
the warrants was $552,676 and was recorded in additional paid in capital with an
offsetting adjustment to contra discount against the principal amount of the
notes.  The contra discount is being recognized over the term of the
notes.   As of September 30, 2009, $227,496 of the discount was
charged to earnings.  In addition, the Company determined that the
warrant holders are receiving a discount of $.163 per share, which gives rise to
a beneficial conversion feature of $525,806 that is being charged to earnings
over the term of the note or period of return, if shorter. Based on the value of
the warrants and the debt discount the investors received a value of $78,482 in
excess of the proceeds, as such this amount was charged to earnings during the
nine months ended September 30, 2009.  As of September 30, 2009,
$222,367 of the beneficial conversion was charged to earnings.





The
obligations under the notes and the security interest created by the security
agreement are subordinate and junior in right of payment to the senior lien on
the Company’s assets held by Western Commercial Bank in connection with the
Company’s existing line of credit.




11





The
Company issued the placement agent for the private placement, Great American
Investors (GAI), warrants to purchase 129,032 shares of common stock. The
Company valued the warrants utilizing the Black-Scholes Model and determined the
value of the warrants is $27,609.   The broker warrants have the
same terms as the purchaser warrants.  The Company also paid the
placement agent a non-refundable due diligence fee of $5,000 and a cash fee of
$40,000.  The Company also agreed to pay the placement agent’s
expenses up to $12,500.  The placement agent fee of $40,000 is
classified as bond issuance costs and is included in other
assets.  The costs and value of the warrants will be recognized over
the shorter term of debt or date of conversion.   As of September
30, 2009, $27,439 of the placement agent fee was charged to
earnings.





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





On
March 26, 2008 the Company completed a private placement of promissory
notes and warrants pursuant to a Securities Purchase Agreement (the "Purchase
Agreement") with various accredited investors.  Pursuant to the
Purchase Agreement, the investors purchased secured promissory notes from the
Company in the principal amount of $2,775,000. The notes are convertible into
shares of the Company’s Common Stock at a conversion price of $0.55 per share,
subject to adjustment in the event of stock splits, stock dividends, and similar
transactions. The notes are convertible into up to 5,427,273 shares of the
Company’s Common Stock, and bear interest at the rate of 8% per annum compounded
on each July 15 and January 15.  Upon issuance, the notes
had a maturity date of March 26, 2010.  In April 2009, the
maturity date of the notes was extended to August 26, 2010.  Pursuant
to the terms of the Purchase Agreement, the Company issued to the note holders
three year warrants to purchase up to an additional 5,496,646 of shares of
Common Stock. In February 2009, the term of the warrants was extended to March
26, 2012.  Assuming the conversion of all promissory notes and
exercise of all warrants, up to 10,923,919 shares of the Company’s Common Stock
may be issued as a result of the private placement. Such an issuance, if it were
to occur, would be highly dilutive to existing shareholders and may, under
certain conditions, effect a change of control of the Company. The Company’s
obligations under the notes are secured by a security interest in substantially
all of the Company’s tangible and intangible assets, pursuant to the terms of a
Security Agreement dated March 26, 2008. In addition, the Company entered
into a note purchase agreement with Great American Investors (GAI) for the
amount of the transaction fees of $210,000.  Pursuant to the terms of
an agreement between the Company and GAI, the Company issued warrants to
purchase such number of shares of Common Stock equal to the total number of
shares of Common Stock which shall be initially issuable upon conversion of the
related Note plus an additional 69,375 warrants.  The transfer fee of
$210,000 will be recognized over the shorter term of debt or date of conversion
based on the effective interest method. As of September 30, 2009, and December
31, 2008 $142,059 and $78,750, respectively, of the transfer fee was charged to
earnings.  During the year ended December 31, 2008, the Company valued
the warrants issued in the private placement and purchase agreement with GAI
utilizing the Black-Scholes Model and determined that the value of the warrants
is $1,170,000.  The Company allocated the total proceeds to the debt
and warrants based on relative fair value. The relative value of the warrants
was $840,000 and was recorded in additional paid in capital with an offsetting
adjustment to contra discount against the principal amount of the notes. The
contra discount is being recognized over the term of the notes.  As of
September 30, 2009, and December 31, 2008 $568,235 and $315,000, respectively,
of the value of the warrants was charged to earnings.  In addition,
the warrant holders are getting a discount of $.025 per share, which gives rise
to a beneficial conversion feature of $133,000 that is being charged to earnings
over the period from the date of issuance to the date of which the holder can
realize a return.  As of September 30, 2009, and December 31, 2008
$115,679 and $49,875, respectively, of the beneficial conversion was charged to
earnings.





The
obligations under the note and the security interest created by the Security
Agreement are subordinate and junior in right of payment to the senior lien on
the Company’s assets held by Western Commercial Bank in connection with the
Company’s existing line of credit.





Simultaneously
with the execution of the Purchase Agreement, the Company and each of the
investors entered into a Registration Rights Agreement, pursuant to which each
of the investors were granted certain registration rights.




12





Note
11 - New Accounting Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standard Codification (“ASC”) 805, previously referred to as SFAS No.
141(R), Business Combinations. The provisions of this statement are effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15,
2008. Earlier application is not permitted. ASC 805 replaces SFAS 141 and
provides new guidance for valuing assets and liabilities acquired in a business
combination. The Company will adopt ASC 805 for future acquisitions beginning
January 1, 2009.





In
September 2006, the FASB issued ASC 820, previously referred to as SFAS
No. 157, “Fair Value Measurements”.  ASC 820 establishes a
framework for measuring fair value in accordance with generally accepted
accounting principles clarifies the definition of fair value within that
framework and expands disclosures about fair value measurements. ASC 820 applies
whenever other standards require (or permit) assets or liabilities to be
measured at fair value, except for the measurement of share-based payments. ASC
820 was effective for the Company on January 1, 2008. However, since the
issuance of ASC 820, FASB has issued several FASB Staff Position (FSP) to
clarify the application of ASC 820 “Fair Value Measurements”. On February 2008,
the FASB released ASC 820-10-15, previously discussed in FSP SFAS
No. 157-2, “Effective Date of ASC 820”, which delayed the effective date of
ASC 820 for all nonfinancial assets and nonfinancial liabilities, except those
that are recognized or disclosed at fair value in the financial statements on a
recurring basis (at least annually). On October 2008, the FASB issued ASC
820-10-35, previously discussed in FSP SFAS No. 157-3, “Determining the
Fair Value of a Financial Asset When the Market for That Asset Is Not Active”,
which clarifies the application of ASC 820 in a market that is not active and
provides guidance in key considerations in determining the fair value of a
financial asset when the market for that financial asset is not active. FASB
Staff Position applies to financial assets within the scope of accounting
pronouncements that require or permit fair value measurements in accordance with
ASC 820, “Fair Value Measurements”. On April 2009, the FASB issued ASC
820-10-65, previously discussed in FSP SFAS No. 157-4, “Determining the
Fair Value When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly”,
provides additional guidance for estimating fair value in accordance with ASC
820, “Fair Value Measurements”, when the volume and level of activity for the
asset or liability have significantly decreased. ASC 820-10-65 also provides
guidance on identifying circumstances that indicate a transaction is not
orderly. ASC 820-10-65 is effective for interim and periods ending after
June 15, 2009, and shall be applied prospectively. The adoption of ASC 820
for financial assets and liabilities did not have a material impact on our
consolidated financial statements.  The adoption of ASC 820 for
nonfinancial assets and nonfinancial liabilities, effective January 1,
2009, did not have a material impact on our consolidated financial
statements.





In
May 2008, the FASB issued ASC 470 and ASC 825, previously discussed in FSP
No. APB 14-1, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”. Under the new rules for convertible debt instruments that may
be settled entirely or partially in cash upon conversion, an entity should
separately account for the liability and equity components of the instrument in
a manner that reflects the issuer’s economic interest cost.  Previous
guidance provided for accounting of this type of convertible debt instruments
entirely as debt.  For instruments subject to the scope of ASC 470 and
ASC 825, higher interest expense may result through the accretion of the
discounted carrying value of the convertible debt instruments to their face
amount over their term.  ASC 470 and ASC 825 will be effective for
fiscal years beginning after December 15, 2008, and for interim periods
within those fiscal years, with retrospective application
required.  Early adoption is not permitted.  As of the date
of these consolidated financial statements, we do not have any instruments
outstanding that would be subject to ASC 470 and ASC 825, but any instruments
that we may issue in the future will be subject to this
pronouncement.





In
June 2008, the FASB ratified ASC 81, previously discussed in Emerging Issue
Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock”. This issue
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entity’s own stock. ASC 815 applies to
any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative under paragraphs 6-9 of Statement of ASC
815-10-15, “Accounting for Derivative Instruments and Hedging Activities”, for
purposes of determining whether that instrument or embedded feature qualifies
for the first part of the scope exception under paragraph 11(a) of ASC
815-10-15. ASC 81 also applies to any freestanding financial instrument that is
potentially settled in an entity’s own stock, regardless of whether the
instrument has all the characteristics of a derivative under paragraphs 6-9
of ASC 815-10-15, for purposes of determining whether the instrument is within
the scope of ASC 815, previously discussed in EITF Issue 00-19, 
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”, which provides accounting guidance for
instruments that are indexed to, and potentially settled in, the issuer’s own
stock. ASC 815-40 is effective for fiscal years beginning after
December 15, 2008.  We have concluded that application of ASC 815 does
not have a material impact on the Company’s financial statements.





In April
2009, the FASB issued ASC 825, previously discussed in FSP FAS 107-1, “Interim
Disclosures about Fair Value of Financial Instruments”, which requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded Companies as well as in annual financial statements.
ASC 825 also amends ASC 270, previously discussed in APB Opinion No. 28,
“Interim Financial Reporting”, to require those disclosures in summarized
financial information at interim reporting. ASC 825 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We have concluded that application
of ASC 825 does not have a material impact on the Company’s financial
statements.





In
December 2007, the FASB issued ASC 810, previously referred to SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements,”
an amendment of ARB 51, which changes the accounting and reporting for minority
interests. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and,
upon a loss of control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized in earnings. ASC
810 is effective beginning December 15, 2008 and will apply prospectively,
except for the presentation and disclosure requirements. The adoption of ASC 810
did not have a material impact to the Company’s consolidated financial
statements.





In
January 2009, the FASB issued ASC 325, previously discussed in FSP No. EITF
99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”,
which amends the impairment guidance in ASC 325, “Recognition of Interest Income
and Impairment on Purchased Beneficial Interest and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. ASC 3251 retains and emphasizes the other-than-temporary impairment
assessment guidance and required disclosures in ASC 320, previously referred to
as FASB Statement No. 115, “Accounting for certain Investments in Debt and
Equity Securities”. ASC 325 is effective for interim and annual reporting
periods ending after December 15, 2008, and shall be applied prospectively.
Currently, there is no impact of the adoption of ASC 325 on the Company’s
consolidated financial position, results of operations and cash
flows.




13





In April
2009, the FASB issued ASC 320-10-65, previously discussed in FSP No. FAS 115-2
and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”, to determine whether the holder of an investment in a debt or
equity security for which changes in fair value are not regularly recognized in
earnings (such as securities classified as held-to-maturity or
available-for-sale) should recognize a loss in earnings when the investment is
impaired. ASC 320-10-65 improves the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. The effective date for interim and annual reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. Earlier adoption for periods ending before March 15,
2009, is not permitted. The adoption of ASC 320-10-65  did not have a
material impact to the Company’s consolidated financial statements.





In
May 2009, the FASB issued ASC 855, previously referred to as SFAS
No. 165, “Subsequent Events”. ASC 855 is intended to establish general
standards of the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued. ASC 855 is effective for interim or
annual financial periods ending after June 15, 2009 and was adopted by the
Company during the quarter ended June 30, 2009.





In June
2009, the FASB issued ASC 105, previously referred to as SFAS No. 168 “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles”. This statement replaces SFAS No. 162. This new statement
identifies the source of accounting principles and the framework for selecting
principles used in the preparation of financial statements for nongovernmental
entities that are presented in conformity with US GAAP. The pronouncement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company has reviewed the details of the statement
and concluded that changes in codification structure will have no effect on the
financial reporting of the Company. The Company adopted the pronouncement for
the quarter ended September 30, 2009 and the 10Q filing reflects citations as
stated under the codification.




14





Note
12 - Subsequent Event





On
October 27, 2009, the Company and its former Vice President, Strategic Analysis
(“VP”) entered into a Separation Agreement and General Release pursuant to which
the VP agreed that, due to management restructuring which resulted in the
elimination of the position of Vice President, Strategic Analysis, his
employment with the Company was terminated effective November 13,
2009.  The following is brief summary of the material terms of the
Separation Agreement: (i) the Company shall pay to VP severance equal to twelve
months of his base salary in effect as of October 27, 2009, in equal bi-weekly
installments over eighteen months; (ii) the Company shall pay COBRA benefits to
the VP and his spouse for up to eighteen months; (iii) the Company shall
accelerate the vesting of options exercisable for 10,000 of the Company’s Common
Stock previously granted to the VP pursuant to the Company’s 2005 Stock
Incentive Plan; and (iv) the Company and the VP released each other from all
claims arising from the VP’s employment with the Company, subject to certain
exceptions.





On
October 27, 2009, the Company provided notice to NYSE Amex LLC (the “Exchange”)
that the Company has determined to voluntarily delist its common stock, no par
value from the Exchange and deregister its Common Stock under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”).  The Company’s
board of directors has elected to take this action for the following
reasons:  (i) the nature and limited extent of the trading in the
Common Stock as well as the market value that the public markets are currently
applying to the Common Stock; (ii) the direct and indirect costs associated with
the preparation and filing of the Company’s periodic reports with the SEC; (iii)
the fact that many other typical advantages of being a public company, including
enhanced access to capital and the ability to use equity securities to acquire
other businesses, are not currently sufficiently available to the Company to an
extent that would justify such costs.





In
addition to the significant time and cost savings resulting from termination of
the registration of the Company’s Common Stock under the Exchange Act, the board
of directors believes that this action will allow the Company’s management to
focus its attention and resources on building longer-term enterprise
value.




On
September 24, 2009, the Company received notice from the Exchange that the
Company does not meet one of the Exchange’s continued listing standards as set
forth in Part 10 of the NYSE Amex LLC Company Guide (the “Company Guide”). The
notice received from the Exchange stated that the Company is not in compliance
with Section 1003(a)(iv) of the Company Guide. The Company was afforded the
opportunity to submit a plan of compliance to the Exchange by October 26, 2009,
addressing how it intends to regain compliance with Section 1003(a)(iv) of the
Company Guide by March 24, 2010. Because the Company intends to deregister under
the Exchange Act, the Company did not submit such a plan to the
Exchange.





The
Company filed a notification of removal from listing on the Exchange on Form 25
with the Securities and Exchange Commission (the “SEC”) on November 6, 2009. The
withdrawal of the Company’s Common Stock from listing on the Exchange was
effective November 16, 2009, upon which the Company’s common stock commencing
being quoted on the Pink Sheets. The Company intends to terminate the
registration of its Common Stock under the Exchange Act following the completion
of a 101-to-1 reverse stock split in accordance with SEC rules.





The
Company evaluated subsequent events through the time of filing this Quarterly
Report on Form 10-Q on November 20, 2009. The Company is not aware of any
significant events, except as noted above, that occurred subsequent to the
balance sheet date but prior to the filing of this Report that would have a
material impact on its Consolidated Financial Statements.




15





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





Forward Looking
Statements





The SEC
encourages companies to disclose forward-looking information so that investors
can better understand a company’s future prospects and make informed investment
decisions. This Quarterly Report on Form 10-Q 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 the Securities Exchange Act of 1934.





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





·
            projections
      of revenues and other financial
items;





·
            statements
      of strategies and objectives for future
  operations;





·
            statements
      concerning proposed applications or
services;





·
            statements
      regarding future economic conditions, performance or business
      prospects;





·
            statements
      regarding competitors or competitive actions;
  and





·
            statements
      of assumptions underlying any of the
foregoing.





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





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




Overview





The
following discussion relates to the consolidated business of ASPYRA, which
includes the operations of its wholly owned subsidiary, Aspyra Diagnostic
Solutions, Inc. (ADSI), formerly StorCOMM, Inc., and its wholly owned
subsidiary Aspyra Technologies, Ltd. (ATI), formerly StorCOMM Technologies,
Ltd.  On June 30, 2009, Aspyra Diagnostic Solutions, Inc. merged into
Aspyra, Inc.





ASPYRA
operates in one business segment determined in accordance with ASC 280,
previously referred to as SFAS No. 131, and generates revenues primarily
from the sale of its Clinical and Diagnostic Information Systems, which includes
the license of proprietary application software, and may include the sale of
servers and other hardware components to be integrated with its application
software. In connection with its sales of its products, the Company provides
implementation services for the installation, integration, and training of end
users’ personnel. The Company also generates sales of ancillary software and
hardware, to its customers and to third parties. We recognize these revenues
under system sales in our financial statements.  The Company also
generates recurring revenues from the provision of comprehensive
post-implementation services to its customers, pursuant to extended service
agreements. We recognize these revenues under service revenues in our financial
statements.  This service relationship is an important aspect of our
business, as the Company’s products are “mission critical” systems that are used
by healthcare providers, in most cases, 24 hours per day and 7 days per
week.  In order to retain this service relationship we must keep our
products current for competitive, clinical, diagnostic, and regulatory
compliance.  Enhancements to our products in the form of software
upgrades are an integral part of our business model and are included as a
contract obligation in our warranty and extended service
agreements.  In order to generate such revenue opportunities our
investment in software enhancements is significant and is a key component of our
ongoing support obligations.




16





Because
of the nature of our business, ASPYRA makes significant investments in research
and development for new products and enhancements to existing products.
Historically, ASPYRA has funded its research and development programs through
cash flow primarily generated from operations. Management anticipates that
future expenditures in research and development will continue at current
levels.





Aspyra
incurred a net loss applicable to common shareholders of $1,720,990 or basic and
diluted loss per share of $0.11 for the quarter ended September 30, 2009 as
compared to a net loss applicable to common shareholders of $719,462 or basic
and diluted loss per share of $0.06 for the quarter ended September 30,
2008.  For the nine months ended September 30, 2009, the Company
incurred a net loss applicable to common shareholders of $4,789,016 or basic and
diluted loss per share of $0.35 as compared to a net loss applicable to common
shareholders of $3,114,145 or basic and diluted loss per share of $0.25 for the
same period of fiscal 2008.





The
operating losses incurred by the Company during the three and nine months ended
September 30, 2009 were attributable to a decrease in sales compared to the
same periods in 2008, partially offset by lower costs as a result of actions
taken in 2008  to reduce personnel and other expenses. The results are
more fully discussed in the following section “Results of
Operations”.





This
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” section should be read in conjunction with the accompanying
unaudited interim financial statements which have been prepared assuming that we
will continue as a going concern, which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of business. Our
recurring losses from operations and net capital deficiency raise substantial
doubt about our ability to continue as a going concern. Our ability to continue
as a going concern is substantially dependent on the successful execution of our
strategic plan and otherwise discussed in this “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” section and in Note
2, “Liquidity” to our unaudited interim financial statements filed as part of
this Quarterly Report, on the timeline contemplated by our plans and our ability
to obtain additional financing. The uncertainty of successful execution of our
plans, among other factors, raises substantial doubt as to our ability to
continue as a going concern. The accompanying unaudited interim financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.





This
management’s discussion and analysis compares the results of operation for the
three and nine months ended September 30, 2009 with the three and nine
months ended September 30, 2008.




17








Results of
Operations





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




Three Months
              Ended
              September 30, 2009
            
            
            Three Months
              Ended
              September 30, 2008
            
            
            Nine Months
              Ended
              September 30, 2009
            
            
            Nine Months
              Ended
              September 30, 2008Revenues:System
      sales
            
            
            14.2
            %
            
            
            21.6
            %
            
            
            16.0
            %
            
            
            23.3
            %Service
      revenues
            
            
            85.8
            
            
            
            78.4
            
            
            
            84.0
            
            
            
            76.7Total
      revenues
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0
            
            
            
            100.0Cost
      of products and services sold:System
      sales
            
            
            29.2
            
            
            
            21.4
            
            
            
            27.6
            
            
            
            25.2Service
      revenues
            
            
            33.2
            
            
            
            27.3
            
            
            
            29.3
            
            
            
            27.8Total
      cost of products and services
            
            
            62.4
            
            
            
            48.7
            
            
            
            56.9
            
            
            
            53.0Gross
      profit
            
            
            37.6
            
            
            
            51.3
            
            
            
            43.1
            
            
            
            47.0Operating
      expenses:Selling,
      general and administrative
            
            
            78.0
            
            
            
            64.2
            
            
            
            76.4
            
            
            
            68.4Research
      and development
            
            
            15.8
            
            
            
            18.1
            
            
            
            22.6
            
            
            
            20.6Total
      operating expenses
            
            
            93.8
            
            
            
            82.3
            
            
            
            99.0
            
            
            
            89.0Operating
      loss
            
            
            (56.2
            )
            
            
            (31.0
            )
            
            
            (55.9
            )
            
            
            (42.0
            )Loss
      before provision for income taxes
            
            
            (82.7
            )
            
            
            (33.1
            )
            
            
            (77.6
            )
            
            
            (46.8
            )Provision
      for income taxes
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Net
      loss
            
            
            (82.7
            )
            
            
            (33.1
            )
            
            
            (77.6
            )
            
            
            (46.8
            )Deemed
      Dividend
            
            
            (12.5
            )
            
            
            —
            
            
            
            (3.8
            )
            
            
            —Net
      loss applicable to common shareholders
            
            
            (95.2
            )
            
            
            (33.1
            )
            
            
            (81.4
            )
            
            
            (46.8
            )





Revenues





Sales for
the quarter ended September 30, 2009 were $1,807,499, as compared to
$2,175,753 for the quarter ended September 30, 2008, an overall decrease of
$368,254 or 16.9%. For the nine months ended September 30, 2009, sales
decreased to $5,878,409, as compared to $6,657,125 for the comparable nine-month
period ended September 30, 2008, an overall decrease of $778,716 or
11.7%.





When
analyzed by revenue category for the quarter and nine-month period ended
September 30, 2009, sales of Clinical Information Systems (CIS) and Diagnostic
Information Systems (DIS) decreased by $213,172 or 45.4% and $612,438 or 39.5%,
respectively.  For the quarter and nine-month period ended September
30, 2009, service revenues decreased by $155,082 or 9.1% and $166,278 or
3.3%.  The Company continues to show a decrease in sales of DIS
products primarily attributable to the reduction in sales through the Company’s
distributors and channel partners.  Additionally, due to market
conditions, there has been a slowing of sales cycles.  Management
continues to believe that the importance of imaging technologies such as the
Company’s Radiology Information System (“RIS”) / Picture Archive Communication
System (“PACS”) products justifies them as an investment by end users to improve
efficiencies.





The
decrease in service revenues for the quarter and nine-month period is primarily
attributable to decreasing level of post-implementation services
provided.  If and when the Company’s installed base of CIS and DIS
installations increases, then service revenues would be expected to increase as
well.





Sales
cycles for CIS and DIS products are generally lengthy and on average exceed six
months from inception to closure.  Because of the complexity of the
sales process, a number of factors that are beyond the control of the Company
can delay the closing of transactions.  Furthermore, market conditions
have also affected the length of the sales cycle.  Additionally, the
Company has been primarily reliant on distributors and channel partners for the
sales of its diagnostic systems and has been subject to inconsistent flow of
orders.  ASPYRA’s sales force is now focusing on a direct sales model
for the diagnostic system products to supplement the distribution and channel
network so that the Company will be less reliant on third parties for the sale
of its diagnostic systems.  ASPYRA has completed new versions of its
laboratory and radiology information systems products, as well as its AccessRAD
RIS/ PACS, which it has begun marketing.




18





The
Company continues to seek strategic joint marketing partnerships with other
companies, and channel partners.  We expect that the Company’s future
operating results will continue to be subject to annual and quarterly variations
based upon a wide variety of factors, including the volume mix and timing of
orders received during any quarter or annual period.  In addition, the
Company’s revenues associated with CIS and DIS transactions may be delayed due
to customer related issues such as availability of funding, staff availability,
IT infrastructure readiness, and the performance of third party contractors, all
of which are issues outside of the control of ASPYRA.





Costs
of products and services sold





Cost of
products and services sold increased by $68,742 or 6.5% for the quarter ended
September 30, 2009 as compared to the quarter ended September 30,
2008. Cost of products and services sold decreased by $187,297 or 5.3% for the
nine months ended September 30, 2009 as compared to the nine months ended
September 30, 2008.  For the quarter, the overall increase in
cost of sales was primarily attributable to an increase in labor costs of
$10,741 or 1.8%, an increase in material costs of $51,668 or 92.6% and an
increase in other costs of sales of $6,333 or 1.6%.  For the
nine-month period, the overall decrease in cost of sales was primarily
attributable to a decrease in labor costs of $164,396 or 8.6%, a decrease in
material costs of $3,583 or 1.0%, and a decrease in other costs of sales of
$19,318 or 1.5%. The decrease in labor costs and other costs of sales was
primarily attributable to reduction of personnel and overhead.  The
decrease in material costs was attributable to the decrease in system sales
requiring hardware.





For the
quarter and nine months ended September 30, 2009, cost of products and services
sold as a percentage of sales was 62% and 57%, as compared to 49% and 53% for
the quarter and nine months ended September 30, 2008. The overall
percentage increase in cost of sales, as a percentage of sales, was primarily
attributable to reduction in revenues as described above.  Management
believes the gross profit margin will improve in the remainder of fiscal 2009;
however, the Company could experience quarterly variations in gross margin as a
result of the factors discussed above.





Selling,
general and administrative expenses





Selling,
general, and administrative expenses increased by $12,434 or 0.9% for the
quarter ended September 30, 2009 as compared to the quarter ended
September 30, 2008. For the nine months ended September 30, 2009, selling,
general, and administrative expenses decreased by $57,382 or 1.3%, as compared
to the nine months ended September 30, 2008.





For the
quarter ended September 30, 2009, the increase in selling, general, and
administrative expenses was primarily related to the increases in salaries of
approximately $132,000 and legal and accounting expense of $28,000, which was
partially offset by decreases of approximately $58,000 in SFAS 123(R) stock
compensation expense, recruitment expense of $18,000, advertising expense of
$36,000, and rent expense of $34,000 compared to the same period in fiscal
2008.





For
the nine-month period, the reduction of expenses was primarily attributable to
decreases of approximately $220,000 in SFAS 123(R) stock compensation expense,
consulting expense of $128,000, $123,000 in recruitment fees, $48,000 in stock
administration expense, $37,000 in advertising expense and $111,000 in legal and
accounting expenses, which were partially offset by an increase of $587,000
related to salaries and $20,000 in travel expense compared to the same period in
fiscal 2008. Management continues to evaluate cost reductions in some of its
selling, general and administrative expenses while it also continues to plan
further investment in its marketing programs.





Research
and development expenses





For the
quarter and nine months ended September 30, 2009, research and development
expenses decreased $107,391 or 27.3% and $44,197 or 3.2%, respectively, as
compared to the quarter and nine months ended September 30, 2008. The
decrease was primarily attributable to decreases in salaries of personnel in
product development.  Current development expenses were attributable
to the development of AccessRAD, the RIS/PACS solution that integrates the
Company’s CyberRAD radiology information system with its AccessNET PACS system,
and enhancements and new modules for the Company’s CIS and DIS
products.  For the quarter ended September 30, 2009 and 2008, the
Company’s capitalized software costs were $116,424 and $155,767, respectively,
which are generally amortized over the estimated useful life not to exceed five
years.  For the nine months ended September 30, 2009 and 2008,
the Company’s capitalized software costs were $315,488 and $443,854,
respectively, which are generally amortized over the estimated useful life not
to exceed five years.





Interest
and other income





Interest
and other income was $878 and $4,727 for the quarter and nine months ended
September 30, 2009 as compared to $179,104 and $199,011 for the quarter and
nine months ended September 30, 2008 due to the settlement of an
outstanding notes payable, which was recorded in other income during the quarter
ended September 30, 2008.




19





Interest
expense





Interest
expense was $479,905 and $1,282,838 for the quarter and nine months ended
September 30, 2009 as compared to $223,710 and $517,160 for the quarter and
nine months ended September 30, 2008.  The increase was primarily
due to the increased average level of borrowings during the current quarter and
nine month period as compared to the same periods of fiscal 2008.





Net
loss





As a
result of the factors discussed above, the Company incurred a net loss
applicable to common shareholders of $1,720,990 or basic and diluted loss per
share of $0.11 for the quarter ended September 30, 2009 as compared to a
net loss applicable to shareholders of $719,462 or basic and diluted loss per
share of $0.06 for the quarter ended September 30, 2008.  For the
nine months ended September 30, 2009, the Company incurred a net loss applicable
to common shareholders of $4,789,016 or basic and diluted loss per share of
$0.35 as compared to a net loss applicable to common shareholders of $3,114,145
or basic and diluted loss per share of $0.25 for the same period of fiscal
2008.





Liquidity and Capital
Resources





Historically,
the Company’s primary need for capital has been to invest in software
development, and in computers and related equipment for its internal
use.  The Company invested $315,488 and $443,854, respectively, in
software development during the nine months ended September 30, 2009 and
2008.  These expenditures related to investment in the Company’s new
RIS/PACS integrated system, AccessRAD, enhancements to AccessNET, the new
browser version of the Company’s LIS product, CyberLAB, and other product
enhancements. The Company anticipates expending additional sums during fiscal
2009 on product enhancements to all its products and the further development of
AccessRAD.  During the nine months ended September 30, 2009, the
Company invested an aggregate of $34,981 in fixed assets primarily consisting of
computers and software, as compared to an investment of $19,501 in fixed assets
primarily consisting of computers and software in the quarter ended
September 30, 2008.





As of
September 30, 2009, the Company’s working capital amounted to a deficit of
$8,367,049 as compared to a deficit of $3,874,415 as of December 31,
2008.





On March
26, 2008 the Company entered into a private placement transaction with various
investors in the Company, whereby the investors purchased promissory notes from
the Company in the principal amount of $2,775,000 and mature on August 26, 2010.
In addition to the 2008 private placement transaction, the Company entered into
a note purchase agreement with Great American Investors for the amount of the
transaction fees of $210,000 that matures on August 26, 2010.





As
described in more detail below, on February 12, 2009 the Company entered
into a Note Purchase Agreement with various current and new
investors.  Under the terms of the private placement, the investors
purchased secured promissory notes from the Company in the principal amount of
$1,000,000 together with warrants executable for additional shares of Common
Stock. The notes mature on August 26, 2010.





On
March 31, 2009, the Company executed agreements renewing its revolving line
of credit in the aggregate amount of $1,300,000.  The revolving line
of credit is secured by the Company’s accounts receivable and inventory and
matures on May 27, 2010.  The revolving line of credit is subject
to certain covenants including revised financial covenants. At
September 30, 2009, the balance outstanding on the Company’s revolving line
of credit was $924,965.  As of September 30, 2009, the Company
was not compliant with some of the covenants, but had obtained a
waiver.  If the Company does not raise additional capital in the
fourth quarter, the Company may not be in compliance with its covenants at
December 31, 2009.  Advances under the revolving line of credit are on
a formula based on eligible accounts receivable and inventory balances. This
revolving credit line will need to be renewed prior to its
maturity.  In the event the Company is not able to renew its revolving
line of credit it would have a material adverse effect on the Company’s
financial condition and liquidity.





Cash used
in operating activities was $1,611,124 for the nine months ended
September 30, 2009, compared to cash used in operating activities of
$1,358,253 for the nine months ended September 30, 2008.  The
increase in cash used for operating activities was primarily attributable to the
net loss and the net change in receivables, prepaid expenses and other assets
which was partially offset by the change in deferred service contract income,
deferred revenue on system sales, accrued liabilities along with increased
amortization of capitalized software and warrant discount and beneficial
conversion amortization.





Net cash
used in investing activities totaled $350,469 for the nine months ended
September 30, 2009, compared to $463,355 used in investing activities
during the same period of 2008.  The change was primarily the result
of a decrease in investment in fixed assets and software capitalization costs
compared to the same period of 2008.




20





Cash
provided by financing activities amounted to $1,757,718 during the nine months
ended September 30, 2009 compared to cash provided by financing activities
of $2,209,564 in the same period of 2008.  The decrease was primarily
attributable to the Company completing a private placement transaction in the
principal amount of $2,775,000 in March 2008 as compared to the private
placement described below in the principal amount of $1,000,000 on
February 12, 2009, partially offset by the payments on notes payable and
forgiveness of debt in the nine months ended September 30,
2008.





The
Company’s primary source of working capital has been generated from private
placements of securities and from borrowings.  The Company has been
experiencing a history of losses due to the integration of its businesses and
the significant investment in new products since the quarter ended
March 31, 2005 and negative cash flows from operations since the quarter
ended December 31, 2005.  An unanticipated decline in sales,
delays in implementations where payments are tied to delivery and/or performance
of services or cancellations of contracts have had and in the future could have
a negative effect on cash flow from operations and could in turn create
short-term liquidity problems.





On
February 12, 2009 the Company entered into a Securities Purchase Agreement
(the "Purchase Agreement") with various accredited
investors.  Pursuant to the Purchase Agreement, the investors
purchased secured promissory notes from the Company in the principal amount of
$1,000,000. The notes are convertible up to 3,225,806 shares of the Company’s
Common Stock at a conversion price of $0.31 per share, and bear interest at the
rate of 12% per annum compounded on each July 15 and
January 15.  Upon issuance, the notes had a maturity date of
March 26, 2010, In April 2009, the maturity date of the notes was extended
to August 26, 2010. Pursuant to the terms of the Purchase Agreement, the
Company issued three year warrants to purchase up to 5,774,194 of shares of
Common Stock with an exercise price of $0.31 per share. In addition, the Company
issued the placement agent warrants to purchase up to 129,032 shares of
Common Stock with an exercise price of $0.31 per share.  As a result,
assuming the conversion of all promissory notes and exercise of all warrants, up
to 9,129,032 shares of the Company’s Common Stock may be issued.  Such
an issuance if it were to occur, would be highly dilutive of existing
shareholders and may, under certain conditions effect a change of control of the
Company.





From June
17, 2009 through June 26, 2009, the Company temporarily reduced the exercise
price of all outstanding warrants (“Warrants”), to $0.15 (the “Special Warrant
Offer”).  In response to the Special Warrant Offer, the Company
received an aggregate of $690,395.85 (the “Funds”) from holders (the “Holders”)
of the Warrants seeking to exercise an aggregate of 4,602,639
Warrants.  From July 13, 2009, through July 20, 2009, the Company
entered into a series of identical letter agreements (the “Letter Agreements”)
with the Holders. Pursuant to the Letter Agreements, the parties agreed that the
Funds, in the aggregate amount of $690,395.85 will be deemed loans (the “Loans”)
to the Company, until such time as Shareholder Approval (defined below) is
obtained. Pursuant to the Letter Agreements, the Company agreed to obtain
shareholder approval, and have such shareholder approval become effective in
accordance with applicable law (including, without limitation, Section 14 of the
Securities Exchange Act of 1934, as amended) (the “Shareholder Approval”), by
October 31, 2009, for the Special Warrant Offer, and the issuance of shares of
the Company’s common stock in accordance therewith. Shareholder Approval was
obtained prior to October 31, 2009 and therefore the funds were deemed an
exercise of the Special Warrant Offer.  The Company issued shares of
its common stock in accordance therewith, and no interest or other payments were
due on the Loans.





We expect
to incur negative cash flows and net losses for the foreseeable future. Based
upon our current plans, we believe that our existing cash reserves will not be
sufficient to meet our current liabilities and other obligations as they become
due and payable.  As of September 30, 2009, our average monthly cash
usage is approximately $265,000.  Accordingly, we need to seek to
obtain additional debt or equity financing through a public or private placement
of shares of our preferred or common stock, through a public or private
financing, or obtain a credit facility with a lender.  However, the
Company has a detailed contingent strategic plan which outlines short and long
term plans to improve its operations.  If by the end of the year,
revenues are not at the level anticipated, the Company would implement
significant cost cutting measures in the fourth quarter.  Our ability
to meet such obligations will depend on our ability to sell securities, borrow
funds, reduce operating costs, or some combination thereof.  We may
not be successful in obtaining necessary financing on acceptable terms, if at
all.  The sale of additional convertible debt securities or additional
equity securities could result in additional dilution to our
stockholders.  The incurrence of additional indebtedness would result
in increased debt service obligations and could result in additional operating
and financial covenants that would restrict our operations.  In
addition, there can be no assurance that any additional financing will be
available on acceptable terms, if at all.  Although there are no
present understandings, commitments or agreements with respect to the
acquisition of any other businesses, applications or technologies, we may from
time to time, evaluate acquisitions of other businesses, applications or
technologies.  As of September 30, 2009, we had negative working
capital of $8,367,049 and accumulated deficit of $23,345,528.  Cash
used in operations for the nine months ended September 30, 2009 was
$1,611,124.  As a result of these conditions, there is substantial
doubt about our ability to continue as a going concern.  The financial
statements filed as part of this Quarterly Report on Form 10-Q does not include
any adjustments that might result from the outcome of this
uncertainty.




21





Seasonality, Inflation and
Industry Trends





The
Company’s sales are generally higher in the spring and fall but are subject to a
number of factors related to its customers’ budgetary
cycles.  Inflation has not had a material effect on the Company’s
business since the Company has been able to adjust the prices of its products
and services in response to inflationary pressures.  Management
believes that most phases of the healthcare segment of the computer industry
will continue to be highly competitive, and that potential healthcare reforms
including the initiatives to establish a national standard for the electronic
health record may have a long-term positive impact on its
business.  The key issues driving demand for ASPYRA’s products are
industry concerns about patient care and safety issues, development of a
national standard for the electronic health record that will affect all clinical
data, a shift from analog to digital imaging technologies, and regulatory
compliance.  The Company has continued to invest heavily in new
application modules to assist its customers in addressing these
issues.  Management believes that new application modules and features
that concentrate on such issues will be key selling points and will provide a
competitive advantage.  In addition, management believes that the
healthcare information technology industry will be marked with more significant
technological advances, which will improve the quality of service and reduce
costs.





Critical Accounting Policies
and Estimates





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





Inventory





The
Company’s inventory is comprised of a current inventory account that consists of
items that are held for resale and a long-term inventory account that consists
of items that are held for repairs and replacement of hardware components that
are serviced by the Company under long-term Extended Service Agreements with
some of its customers.  Current inventory is valued at the lower of
cost to purchase or the current estimated market value of the inventory
items.  Inventory is evaluated on a continual basis and adjustments to
recorded costs are made based on management’s estimate of future sales value, or
in the case of the long-term component inventory, on management’s estimation of
the usage of specific inventory items and net realizable
value.  Management reviews inventory quantities on hand and makes a
determination of the excess or obsolete items in the inventory, which, are
specifically reserved.  In addition, adjustments are made for the
difference between the cost of the inventory and the estimated market value and
charged to operations in the period in which the facts that give rise to the
adjustments become known.  At September 30, 2009, the inventory
reserve was approximately $151,989.





Accounts
Receivable





Accounts
receivable balances are evaluated on a continual basis and allowances are
provided for potentially uncollectible accounts based on management’s estimate
of the collectability of customer accounts. If the financial condition of a
customer were to deteriorate, resulting in an impairment of their ability to
make payments, an additional allowance may be required. Allowance adjustments
are charged to operations in the period in which the facts that give rise to the
adjustments become known.  The accounts receivable balance at
September 30, 2009 was $1,147,534, net of an allowance for doubtful
accounts of approximately $50,830.




22





Revenue
Recognition





Revenues
are derived primarily from the sale of CIS and DIS products and the provision of
services.  The components of the system sales revenues are the
licensing of computer software, installation, and the sale of computer hardware
and sublicensed software. The components of service revenues are software
support and hardware maintenance, training, and implementation
services.  The Company recognizes revenue in accordance with ASC 605
previously discussed in the provisions of Statement of Position (SOP)
No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4,
SOP 98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue
Recognition in Financial Statements.”  ASC 605 generally requires
revenue earned on software arrangements involving multiple-elements to be
allocated to each element based on the relative fair values of those
elements.  The Company allocates revenue to each element in a
multiple-element arrangement based on the element’s respective fair value, with
the fair value determined by the price charged when that element is sold
separately and specifically defined in a quotation or
contract.  Deferred revenue related to CIS and DIS sales are comprised
of deferrals for license fees, hardware, and other services for which the
implementation has not yet been completed and revenues have not been
recognized.  Revenues are presented net of
discounts.   At September 30, 2009 deferred revenue was
$920,242.





Post-implementation
software and hardware maintenance services are marketed under monthly, quarterly
and annual arrangements and are recognized as revenue ratably over the
contracted maintenance term as services are provided.  The Company
determines the fair value of the maintenance portion of the arrangement based on
the renewal price of the maintenance charged to customers, the professional
services portion of the arrangement (other than installation services) based on
hourly rates which the Company charges for these services when sold apart from a
software license, and the hardware and sublicense of software based on the
prices for these elements when they are sold separately from the
software.  At September 30, 2009, deferred service contract
income was $2,022,222.





Software
Development Costs





Costs
incurred internally in creating computer software products are expensed until
technological feasibility has been established upon completion of a program
design. Thereafter, applicable software development costs are capitalized and
subsequently reported at the lower of amortized cost or net realizable
value.  Capitalized costs are amortized based on current and expected
future revenue for each product with minimum annual amortization equal to the
straight-line amortization over the estimated economic life of the product, not
to exceed five years.  For the nine months ended September 30,
2009 and 2008, the Company capitalized $315,488 and $443,854,
respectively.  At September 30, 2009, the balance of capitalized
software costs was $2,682,570, net of accumulated amortization of
$1,259,529.





Intangible
Assets





Intangible
assets, 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 asset is expected to contribute directly or
indirectly to future cash flows, which range from four to
15 years.





In
accordance with ASC 350, previously referred to as SFAS No. 142, goodwill
is tested for impairment on an annual basis or between annual tests if an event
occurs or circumstances change that would indicate the carrying amount may be
impaired.  Such impairment reviews are performed at the entity level
with respect to goodwill, as we have one reporting unit. Under those
circumstances, if the fair value were less than the carrying amount of the
entity, further analysis would be required to determine whether or not a loss
would need to be charged against current period earnings. The determination
of fair value and the impairment are based on a combination of a market and
income valuation approach that are based on an analysis of the market prices of
comparable publicly traded companies and a discounted cash flow analysis, which
includes making various judgmental assumptions, including assumptions about
future cash flows, growth rates and discount rates  The use of
different estimates or assumptions could produce different results. As of
September 30, 2009, our net book value (i.e., shareholders’ equity) was
approximately $4.2 million. However, as of the market close on November
18, 2009 our market capitalization was approximately $2.1 million.
This fact, along with other factors used in the determination of fair value,
such as the year to date net loss and continued negative cash flow from
operations, may lead to potential impairment of goodwill in the fourth quarter,
which we are in the process of analyzing.  In accordance with ASC 360,
previously referred to as SFAS No. 144, Accounting for Impairment of
Long-Lived Assets, management reviews definite life intangible assets to
determine if events or circumstances have occurred which may cause the carrying
values of intangible assets to be impaired. The purpose of these reviews is to
identify any facts or circumstances, either internal or external, which may
indicate that the carrying value of the assets may not be recoverable.
The Company recorded a goodwill impairment of $ 576,434 as of
December 31, 2008. No additional events have occurred since the impairment
review as of December 31, 2008, that was not already considered in the
evaluation.




23





Stock-based
Compensation





We have
two stock-based compensation plans, the 2005 Equity Incentive Plan and the 1997
Stock Option Plan, under which we may issue shares of our common stock to
employees, officers, directors and consultants. Upon effectiveness of the 2005
Equity Incentive Plan on November 22, 2005, the 1997 Stock Option Plan was
terminated for purposes of new grants.  Both of these plans have been
approved by our shareholders.  On June 11, 2009, the Company’s
shareholders approved an amendment to the Company’s 2005 Equity Incentive Plan
increasing the number of shares available for grant from 1,290,875 to
3,040,875.





Prior to
January 1, 2006, we accounted for these plans under the recognition and
measurement provisions of APB Opinion No. 25, Accounting for Stock Issued
to Employees, and related Interpretations, as permitted by SFAS No. 123,
Accounting for Stock-Based Compensation.  Effective January 1,
2006, we adopted the fair value recognition provisions of ASC 505 and 718
previously referred to as SFAS No. 123(R), Share-Based Payment, using the
modified-prospective-transition method. Under that transition method,
compensation cost recognized in the three months ended March 31, 2009 and
2008 includes: (a) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant date
fair value estimated in accordance with the original provisions of SFAS
No. 123, and (b) compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of ASC 505 and 718. Results for
prior periods have not been restated.





ASC 505
and 718 requires us to make certain assumptions and judgments regarding the
grant date fair value. These judgments include expected volatility, risk free
interest rate, expected option life, dividend yield and vesting percentage.
These estimations and judgments are determined by us using many different
variables that in many cases are outside of our control. The changes in these
variables or trends, including stock price volatility and risk free interest
rate may significantly impact the grant date fair value resulting in a
significant impact to our financial results.





Income
Taxes





The
Company accounts for income taxes in accordance with ASC 740-10 and 740-30
previously referred to as SFAS No. 109 “Accounting for Income Taxes,” which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequences of events that have been included in the financial
statements or tax returns.  Under this method, deferred tax
liabilities and assets are determined based on the differences between the
financial statements and the tax bases of assets and liabilities using enacted
tax rates in effect for the year in which the differences are expected to
reverse.  Valuation allowances are established when necessary to
reduce deferred tax assets to the amount expected to be
realized.  Income tax expense represents the tax payable for the
period and the change during the period in deferred tax assets and
liabilities.  The Company has evaluated the net deferred tax asset
taking into consideration operating results and determined that a full valuation
allowance should be maintained.





New Accounting
Pronouncements





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Accounting Standard Codification (“ASC”) 805, previously referred to as SFAS No.
141(R), Business Combinations. The provisions of this statement are effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after December 15,
2008. Earlier application is not permitted. ASC 805 replaces SFAS 141 and
provides new guidance for valuing assets and liabilities acquired in a business
combination. The Company will adopt ASC 805 for future acquisitions beginning
January 1, 2009.





In
September 2006, the FASB issued ASC 820, previously referred to as SFAS
No. 157, “Fair Value Measurements”,. ASC 820 establishes a framework for
measuring fair value in accordance with generally accepted accounting principles
clarifies the definition of fair value within that framework and expands
disclosures about fair value measurements. ASC 820 applies whenever other
standards require (or permit) assets or liabilities to be measured at fair
value, except for the measurement of share-based payments. ASC 820 was effective
for the Company on January 1, 2008. However, since the issuance of ASC 820,
FASB has issued several FASB Staff Position (FSP) to clarify the application of
ASC 820 “Fair Value Measurements”.  On February 2008, the FASB
released ASC 820-10-15, previously discussed in FSP SFAS No. 157-2,
“Effective Date of ASC 820”, which delayed the effective date of ASC 820 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). On October 2008, the FASB issued ASC 820-10-35,
previously discussed in FSP SFAS No. 157-3, “Determining the Fair Value of
a Financial Asset When the Market for That Asset Is Not Active”, which clarifies
the application of ASC 820 in a market that is not active and provides guidance
in key considerations in determining the fair value of a financial asset when
the market for that financial asset is not active. FASB Staff Position applies
to financial assets within the scope of accounting pronouncements that require
or permit fair value measurements in accordance with ASC 820, “Fair Value
Measurements”. On April 2009, the FASB issued ASC 820-10-65, previously
discussed in FSP SFAS No. 157-4, “Determining the Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly”, provides
additional guidance for estimating fair value in accordance with ASC 820, “Fair
Value Measurements”, when the volume and level of activity for the asset or
liability have significantly decreased. ASC 820-10-65 also provides guidance on
identifying circumstances that indicate a transaction is not orderly. ASC
820-10-65 is effective for interim and periods ending after June 15, 2009,
and shall be applied prospectively. The adoption of ASC 820 for financial assets
and liabilities did not have a material impact on our consolidated financial
statements.  The adoption of ASC 820 for nonfinancial assets and
nonfinancial liabilities, effective January 1, 2009, did not have a
material impact on our consolidated financial statements.




24





In
May 2008, the FASB issued ASC 470 and ASC 825, previously discussed in FSP
No. APB 14-1, “Accounting for Convertible Debt Instruments That
May Be Settled in Cash Upon Conversion (Including Partial Cash
Settlement)”. Under the new rules for convertible debt instruments that may
be settled entirely or partially in cash upon conversion, an entity should
separately account for the liability and equity components of the instrument in
a manner that reflects the issuer’s economic interest cost.  Previous
guidance provided for accounting of this type of convertible debt instruments
entirely as debt.  For instruments subject to the scope of ASC 470 and
ASC 825, higher interest expense may result through the accretion of the
discounted carrying value of the convertible debt instruments to their face
amount over their term.  ASC 470 and ASC 825 will be effective for
fiscal years beginning after December 15, 2008, and for interim periods
within those fiscal years, with retrospective application
required.  Early adoption is not permitted.  As of the date
of these consolidated financial statements, we do not have any instruments
outstanding that would be subject to ASC 470 and ASC 825, but any instruments
that we may issue in the future will be subject to this
pronouncement.





In
June 2008, the FASB ratified ASC 81, previously discussed in Emerging Issue
Task Force (“EITF”) Issue No. 07-5, “Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity’s Own Stock”. This issue
provides guidance for determining whether an equity-linked financial instrument
(or embedded feature) is indexed to an entity’s own stock. ASC 815 applies to
any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative under paragraphs 6-9 of Statement of ASC
815-10-15, “Accounting for Derivative Instruments and Hedging Activities”, for
purposes of determining whether that instrument or embedded feature qualifies
for the first part of the scope exception under paragraph 11(a) of ASC
815-10-15. ASC 81 also applies to any freestanding financial instrument that is
potentially settled in an entity’s own stock, regardless of whether the
instrument has all the characteristics of a derivative under paragraphs 6-9
of ASC 815-10-15, for purposes of determining whether the instrument is within
the scope of ASC 815, previously discussed in EITF Issue 00-19, 
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company’s Own Stock”, which provides accounting guidance for
instruments that are indexed to, and potentially settled in, the issuer’s own
stock. ASC 815-40 is effective for fiscal years beginning after
December 15, 2008.  We have concluded that application of ASC 815 does
not have a material impact on the Company’s financial statements.





In April
2009, the FASB issued ASC 825, previously discussed in FSP FAS 107-1, “Interim
Disclosures about Fair Value of Financial Instruments”, which requires
disclosures about fair value of financial instruments for interim reporting
periods of publicly traded Companies as well as in annual financial statements.
ASC 825 also amends ASC 270, previously discussed in APB Opinion No. 28,
“Interim Financial Reporting”, to require those disclosures in summarized
financial information at interim reporting. ASC 825 is effective for interim
reporting periods ending after June 15, 2009, with early adoption permitted
for periods ending after March 15, 2009. We have concluded that application
of ASC 825 does not have a material impact on the Company’s financial
statements.





In
December 2007, the FASB issued ASC 810, previously referred to SFAS
No. 160, “Noncontrolling Interests in Consolidated Financial Statements,”
an amendment of ARB 51, which changes the accounting and reporting for minority
interests. Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity transactions. In
addition, net income attributable to the noncontrolling interest will be
included in consolidated net income on the face of the income statement and,
upon a loss of control, the interest sold, as well as any interest retained,
will be recorded at fair value with any gain or loss recognized in earnings. ASC
810 is effective beginning December 15, 2008 and will apply prospectively,
except for the presentation and disclosure requirements. The adoption of ASC 810
did not have a material impact to the Company’s consolidated financial
statements.





In
January 2009, the FASB issued ASC 325, previously discussed in FSP No. EITF
99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20”,
which amends the impairment guidance in ASC 325, “Recognition of Interest Income
and Impairment on Purchased Beneficial Interest and Beneficial Interests That
Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve
more consistent determination of whether an other-than-temporary impairment has
occurred. ASC 3251 retains and emphasizes the other-than-temporary impairment
assessment guidance and required disclosures in ASC 320, previously referred to
as FASB Statement No. 115, “Accounting for certain Investments in Debt and
Equity Securities”. ASC 325 is effective for interim and annual reporting
periods ending after December 15, 2008, and shall be applied prospectively.
Currently, there is no impact of the adoption of ASC 325 on the Company’s
consolidated financial position, results of operations and cash
flows.




25





In April
2009, the FASB issued ASC 320-10-65, previously discussed in FSP No. FAS 115-2
and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary
Impairments”, to determine whether the holder of an investment in a debt or
equity security for which changes in fair value are not regularly recognized in
earnings (such as securities classified as held-to-maturity or
available-for-sale) should recognize a loss in earnings when the investment is
impaired. ASC 320-10-65 improves the presentation and disclosure of
other-than-temporary impairments on debt and equity securities in the financial
statements. The effective date for interim and annual reporting periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. Earlier adoption for periods ending before March 15,
2009, is not permitted. The adoption of ASC 320-10-65  did not have a
material impact to the Company’s consolidated financial statements.





In
May 2009, the FASB issued ASC 855, previously referred to as SFAS
No. 165, “Subsequent Events”. ASC 855 is intended to establish general
standards of the accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date, that is, whether that date represents the
date the financial statements were issued. ASC 855 is effective for interim or
annual financial periods ending after June 15, 2009 and was adopted by the
Company during the quarter ended June 30, 2009.





In June
2009, the FASB issued ASC 105, previously referred to as SFAS No. 168 “The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted
Accounting Principles”. This statement replaces SFAS No. 162. This new statement
identifies the source of accounting principles and the framework for selecting
principles used in the preparation of financial statements for nongovernmental
entities that are presented in conformity with US GAAP. The pronouncement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The Company has reviewed the details of the statement
and concluded that changes in codification structure will have no effect on the
financial reporting of the Company. The Company adopted the pronouncement for
the quarter ended September 30, 2009 and the 10Q filing reflects citations as
stated under the codification.





Item
4T. Controls and Procedures.





Disclosure
Controls and Procedures





Our
management, with the participation of our chief executive officer and chief
financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2009. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended, means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to
ensure that information required to be disclosed by a company in the reports
that it files or submits under the Exchange Act is accumulated and communicated
to the company’s management, including its principal executive and principal
financial officers, as appropriate, to allow timely decisions regarding required
disclosure. Based on the evaluation of our disclosure controls and procedures as
of September 30, 2009, our chief executive officer and chief financial
officer concluded that, as of such date, our disclosure controls and procedures
were effective.





Internal
Control Over Financial Reporting





During
the quarter ended September 30, 2009, there have been no changes in our
internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.











Part II
– OTHER INFORMATION





Item
1.                      Legal
Proceedings





None.




26




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





None.





Item
3.                      Defaults
Upon Senior Securities.





None.





Item
4.                      Submission
Of Matters To A Vote Of Security Holders.





On July
20, 2009, the Company obtained written stockholder consent of the holders of
7,186,023 shares of common stock, representing approximately 58% of 12,437,150
outstanding shares, for the temporary reduction in the exercise price of the
Company’s outstanding warrants to purchase shares of the Company’s common stock,
to $0.15 per share, in effect from June 17, 2009 through June 26, 2009, and the
issuance of shares of the Company’s common stock in accordance therewith. The
stockholder consent became effective on August 24, 2009, 20 days after the
mailing of an information statement to the Company’s shareholders.





Item
5.                      Other
Information.





None.




27





Item
6. Exhibits.





Exhibit No.
            
            Description3.1
            (1)
            
            Restated
      Articles of Incorporation, as amended.3.2
            (2)
            
            Amendment
      to the Restated Articles of Incorporation filed with the Secretary of the
      State of California on November 21, 2005.3.3
            (1)
            
            By-Laws,
      as amended.10.1
            (3)
            
            Note
      Purchase Agreement dated as of January 28, 200810.2
            (3)
            
            Security
      Agreement dated as of January 28, 200810.3
            (4)
            
            Agreement
      dated February 25, 2008 by and between Aspyra, Inc. and James
      Zierick10.4
            (5)
            
            Note
      Purchase Agreement dated as of March 13, 200810.5
            (5)
            
            Security
      Agreement dated as of March 13, 200810.6
            (6)
            
            Securities
      Purchase Agreement dated as of March 26, 200810.7
            (6)
            
            Form of
      Note10.8
            (6)
            
            Form of
      Warrant10.9
            (6)
            
            Registration
      Rights Agreement dated as of March 26, 200810.10
            (6)
            
            Security
      Agreement dated as of March 26, 200810.11
            (7)
            
            Securities
      Purchase Agreement dated as of February 12, 200910.12
            (7)
            
            Form of
      Note10.13
            (7)
            
            Form of
      Warrant10.14
            (7)
            
            Intercreditor
      Agreement dated as of February 12, 200910.15
            (7)
            
            Security
      Agreement dated as of February 12, 200910.16
            (8)
            
            Business
      Loan Agreement10.17
            (8)
            
            Separation
      Agreement and General Release, dated as of April 1, 2009 by and between
      Aspyra, Inc. and Bruce M. Miller.10.18
            (9)
            
            Separation
      Agreement and General Release, dated as of October 27, 2009 by and between
      Aspyra, Inc. and James R. Helms.10.19
            (10)
            
            Sublease,
      dated June 25, 2009, between the Company and Standard Pacific
      Corp.10.20
            (10)
            
            Lease
      Termination Agreement, dated July 6, 2009, between the Company and Arden
      Realty Limited Partnership10.21
            (11)
            
            Form
      of Letter Agreement between the Company and warrant
  holder31.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.31.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.32.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.32.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.




28






(1)
            Previously
      filed as an exhibit to the Company’s Registration Statement on
      Form S-18 dated September 22, 1983, SEC File No. 2- 85265,
      and incoporated herein by
reference.





(2)
            Included
      as an Annex to the joint proxy statement/prospectus that is part of the
      Company’s Registration Statement on Form S-4, originally filed on
      October 3, 2005, SEC File No. 333-128795, and incoporated herein
      by reference.





(3)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on February 1, 2008, and
      incoporated herein by reference.





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





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





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





(7)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on February 19, 2009, and
      incoporated herein by reference.





(8)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on April 3, 2009, and
      incoporated herein by reference.





(9)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on November 2, 2009, and
      incoporated herein by reference.





(10)
      Previously filed as an exhibit to the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on July
      16, 2009, and incorporated herein by
reference.





(11)
      Previously filed as an exhibit to the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on July
      17, 2009, and incorporated herein by
reference.





*
            Filed
      herewith.




29





SIGNATURES





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





ASPYRA,
      INC.Date:
      November 20, 2009
            
            /s/
      Rodney W. SchuttChief
      Executive Officer(Principal
      Executive Officer)Date:
      November 20, 2009
            
            /s/
      Anahita VillafaneChief
      Financial Officer(Principal
      Financial and Accounting Officer)





30





EXHIBIT
INDEX





Exhibit No.
            
            Description3.1
            (1)
            
            Restated
      Articles of Incorporation, as amended.3.2
            (2)
            
            Amendment
      to the Restated Articles of Incorporation filed with the Secretary of the
      State of California on November 21, 2005.3.3
            (1)
            
            By-Laws,
      as amended.10.1
            (3)
            
            Note
      Purchase Agreement dated as of January 28, 200810.2
            (3)
            
            Security
      Agreement dated as of January 28, 200810.3
            (4)
            
            Agreement
      dated February 25, 2008 by and between Aspyra, Inc. and James
      Zierick10.4
            (5)
            
            Note
      Purchase Agreement dated as of March 13, 200810.5
            (5)
            
            Security
      Agreement dated as of March 13, 200810.6
            (6)
            
            Securities
      Purchase Agreement dated as of March 26, 200810.7
            (6)
            
            Form of
      Note10.8
            (6)
            
            Form of
      Warrant10.9
            (6)
            
            Registration
      Rights Agreement dated as of March 26, 200810.10
            (6)
            
            Security
      Agreement dated as of March 26, 200810.11
            (7)
            
            Securities
      Purchase Agreement dated as of February 12, 200910.12
            (7)
            
            Form of
      Note10.13
            (7)
            
            Form of
      Warrant10.14
            (7)
            
            Intercreditor
      Agreement dated as of February 12, 200910.15
            (7)
            
            Security
      Agreement dated as of February 12, 200910.16
            (8)
            
            Business
      Loan Agreement10.17
            (8)
            
            Separation
      Agreement and General Release, dated as of April 1, 2009 by and between
      Aspyra, Inc. and Bruce M. Miller.10.18
            (9)
            
            Separation
      Agreement and General Release, dated as of October 27, 2009 by and between
      Aspyra, Inc. and James R. Helms.31.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.31.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.32.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.32.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.





31




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





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





(3)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on February 1,
      2008.





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





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





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





(7)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on February 19,
      2009.





(8)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on April 3,
      2009.





(9)
            Previously
      filed as an exhibit to the Company’s Current Report on Form 8-K filed
      with the Securities and Exchange Commission on November 2,
      2009.





*
            Filed
      herewith.