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 March 31, 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 0-13268





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)





26115-A
Mureau Road, Calabasas, California 91302


(Address
of principal executive offices)





(818)
880-6700


Registrant’s
telephone number, including area code





Indicate
by check 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
May 14, 2009, there were 12,437,150 shares of the registrant’s only class
of common stock outstanding.








ASPYRA,
INC.





QUARTERLY
REPORT ON FORM 10-Q





March 31,
2009





TABLE
OF CONTENTS





PagePART I
      – FINANCIAL INFORMATIONItem
      1.
              Condensed
      Consolidated Financial Statements (Unaudited)
              1Condensed
      consolidated balance sheets at March 31, 2009 and December 31,
      2008
              1Condensed
      consolidated statements of operations for the three months ended
      March 31, 2009 and 2008
              2Condensed
      consolidated statements of cash flows for the three months ended
      March 31, 2009 and 2008
              3Notes
      to Condensed Consolidated Financial Statements
              4Item
      2.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              10Item
      4T.
              Controls
      and Procedures
              19PART II
      – OTHER INFORMATIONItem
      1.
              Legal
      Proceedings
              20Item
      2.
              Unregistered
      Sales of Equity Securities and Use of Proceeds
              20Item
      3.
              Defaults
      Upon Senior Securities
              20Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              20Item
      5.
              Other
      Information
              20Item
      6.
              Exhibits
              21Signatures
              22Exhibit Index
              23












ASPYRA,
INC.





PART I
- FINANCIAL INFORMATION





Item
      1.  Financial Statements





CONDENSED
CONSOLIDATED BALANCE SHEETS





March 31,
                
                
                December 31,2009
                
                
                2008(Unaudited)ASSETSCURRENT
      ASSETS:Cash
                
                $
                584,295
                
                
                $
                779,630Receivables,
      net
                
                
                691,844
                
                
                
                806,996Inventory
                
                
                39,292
                
                
                
                27,358Prepaid
      expenses and other assets
                
                
                137,617
                
                
                
                225,971TOTAL
      CURRENT ASSETS
                
                
                1,453,048
                
                
                
                1,839,955PROPERTY
      AND EQUIPMENT, net
                
                
                413,105
                
                
                
                498,395OTHER
      ASSETS
                
                
                699,379
                
                
                
                182,698INVENTORY
      OF COMPONENT PARTS, net
                
                
                20,193
                
                
                
                27,693CAPITALIZED
      SOFTWARE COSTS, net of accumulated amortization of $917,973 and
      $798,919
                
                
                2,813,310
                
                
                
                2,851,327INTANGIBLES,
      net
                
                
                2,900,365
                
                
                
                3,072,490GOODWILL
                
                
                6,692,000
                
                
                
                6,692,000$
                14,991,400
                
                
                $
                15,164,558LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Notes
      payable
                
                $
                794,965
                
                
                $
                794,965Accounts
      payable
                
                
                592,695
                
                
                
                710,157Accrued
      liabilities:Vacation
      pay
                
                
                392,265
                
                
                
                357,798Accrued
      compensation
                
                
                264,763
                
                
                
                333,712Accrued
      interest
                
                
                305,415
                
                
                
                226,635Deferred
      rent
                
                
                75,214
                
                
                
                75,511Customer
      deposits
                
                
                435,000
                
                
                
                373,928Other
                
                
                187,808
                
                
                
                254,928Deferred
      service contract income
                
                
                1,707,452
                
                
                
                1,914,979Deferred
      revenue on system sales
                
                
                413,263
                
                
                
                521,520Capital
      lease — current portion
                
                
                150,237
                
                
                
                150,237TOTAL
      CURRENT LIABILITIES
                
                
                5,319,077
                
                
                
                5,714,370CAPITAL
      LEASE, LESS CURRENT PORTION
                
                
                160,489
                
                
                
                198,048NOTES
      PAYABLE
                
                
                3,060,574
                
                
                
                2,460,000TOTAL
      LIABILITIES
                
                
                8,540,140
                
                
                
                8,372,418SHAREHOLDERS’
      EQUITY:Common
      shares, no par value; 20,000,000 shares authorized; 12,437,150 shares
      issued and outstanding
                
                
                22,761,951
                
                
                
                22,761,951Additional
      paid-in-capital
                
                
                3,728,646
                
                
                
                2,587,065Accumulated
      deficit
                
                
                (20,041,145
                )
                
                
                (18,556,512
                )Accumulated
      other comprehensive loss
                
                
                1,808
                
                
                
                (364
                )TOTAL
      SHAREHOLDERS’ EQUITY
                
                
                6,451,260
                
                
                
                6,792,140$
                14,991,400
                
                
                $
                15,164,558





See
Notes to Condensed Consolidated Financial Statements.






1





ASPYRA,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS





(unaudited)





Three Months Ended March 31,2009
                
                
                2008NET
      SYSTEM SALES AND SERVICE REVENUE:System
      sales
                
                $
                243,109
                
                
                $
                448,768Service
      revenue
                
                
                1,679,548
                
                
                
                1,715,7971,922,657
                
                
                
                2,164,565COSTS
      OF PRODUCTS AND SERVICES SOLD:System
      sales
                
                
                502,476
                
                
                
                560,255Service
      revenue
                
                
                566,759
                
                
                
                657,5591,069,235
                
                
                
                1,217,814Gross
      profit
                
                
                853,422
                
                
                
                946,751OPERATING
      EXPENSESSelling,
      general and administrative
                
                
                1,485,247
                
                
                
                1,480,847Research
      and development
                
                
                438,872
                
                
                
                596,451Total
      operating expenses
                
                
                1,924,119
                
                
                
                2,077,298Operating
      loss
                
                
                (1,070,697
                )
                
                
                (1,130,547
                )INTEREST
      AND OTHER INCOME
                
                
                2,886
                
                
                
                4,646INTEREST
      EXPENSE
                
                
                (416,822
                )
                
                
                (68,498
                )Loss
      before provision for income taxes
                
                
                (1,484,633
                )
                
                
                (1,194,399
                )PROVISION
      FOR INCOME TAXES
                
                
                —
                
                
                
                —NET
      LOSS
                
                $
                (1,484,633
                )
                
                $
                (1,194,399
                )LOSS
      PER SHARE:Basic
                
                $
                (.12
                )
                
                $
                (.10
                )Diluted
                
                
                (.12
                )
                
                
                (.10
                )WEIGHTED
      AVERAGE NUMBER OF SHARES OUTSTANDING:Basic
                
                
                12,437,150
                
                
                
                12,437,150Diluted
                
                
                12,437,150
                
                
                
                12,437,150





See
Notes to Condensed Consolidated Financial Statements.






2





ASPYRA,
INC.





CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


Increase
(Decrease) in Cash





(unaudited)





Three Months Ended March 31,2009
                  
                  
                  2008OPERATING
      ACTIVITIESNet
      loss
                  
                  $
                  (1,484,633
                  )
                  
                  $
                  (1,194,399
                  )Adjustments
      to reconcile net loss to net cash provided by (used in) operating
      activities:Depreciation
      and amortization
                  
                  
                  87,848
                  
                  
                  
                  113,492Amortization
      of capitalized software costs
                  
                  
                  142,688
                  
                  
                  
                  125,121Warrant
      discount and beneficial conversion amortization
                  
                  
                  313,038
                  
                  
                  
                  —Amortization
      of acquired intangibles
                  
                  
                  172,125
                  
                  
                  
                  172,125Provision
      for doubtful accounts
                  
                  
                  12,970
                  
                  
                  
                  767Stock
      based compensation
                  
                  
                  35,490
                  
                  
                  
                  117,514Increase
      (decrease) from changes in:Receivables
                  
                  
                  102,182
                  
                  
                  
                  248,887Inventories
                  
                  
                  (4,434
                  )
                  
                  
                  (1,643
                  )Prepaid
      expenses and other assets
                  
                  
                  (34,700
                  )
                  
                  
                  (12,342
                  )Accounts
      payable
                  
                  
                  (117,462
                  )
                  
                  
                  14,194Accrued
      liabilities
                  
                  
                  37,954
                  
                  
                  
                  (275,233
                  )Deferred
      service contract income
                  
                  
                  (207,527
                  )
                  
                  
                  419,076Deferred
      revenue on system sales
                  
                  
                  (108,257
                  )
                  
                  
                  (30,349
                  )Net
      cash used in operating activities
                  
                  
                  (1,052,718
                  )
                  
                  
                  (302,790
                  )INVESTING
      ACTIVITIESAdditions
      to property and equipment
                  
                  
                  (2,652
                  )
                  
                  
                  (11,849
                  )Additions
      to capitalized software costs
                  
                  
                  (104,672
                  )
                  
                  
                  (156,396
                  )Net
      cash used in investing activities
                  
                  
                  (107,324
                  )
                  
                  
                  (168,245
                  )FINANCING
      ACTIVITIESBorrowings
      on line of credit and notes payable
                  
                  
                  1,000,000
                  
                  
                  
                  2,775,000Payments
      on line of credit and notes payable
                  
                  
                  —
                  
                  
                  
                  (250,050
                  )Payments
      on capital lease obligations
                  
                  
                  (37,559
                  )
                  
                  
                  (37,559
                  )Net
      cash provided by financing activities
                  
                  
                  962,441
                  
                  
                  
                  2,487,391Foreign
      currency translation adjustment
                  
                  
                  2,266
                  
                  
                  
                  170NET
      INCREASE (DECREASE) IN CASH
                  
                  
                  (195,335
                  )
                  
                  
                  2,016,526CASH, beginning
      of period
                  
                  
                  779,630
                  
                  
                  
                  803,392CASH,
      end of period
                  
                  $
                  584,295
                  
                  
                  $
                  2,819,918





See
notes to Condensed Consolidated Financial Statements.






3








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 March 31, 2009, the results
of its operations for the three months ended March 31, 2009 and 2008, and
cash flows for the three months ended March 31, 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 months ended March 31, 2009 are not
necessarily indicative of the results expected for any other period or for the
entire year.




Note
2-Liquidity




As of
March 31, 2009, the Company’s working deficit was $3,866,029 compared to a
working deficit of $3,874,415, as of December 31, 2008. At March 31,
2009, the Company’s credit facilities with its bank consisted of a revolving
line of credit of $1,300,000, of which $744,965 was outstanding. 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.  As of
March 31, 2009, the Company was in compliance with all
covenants.  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 statements and liquidity. At March 31, 2009, the
Company had $310,726 outstanding on its capital leases of which $150,237 is due
in the next twelve months.





The
Company’s primary source of working capital has 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, have a maturity date of
March 26, 2010 and bear interest at the rate of 12% per annum compounded on
each July 15 and January 15.  In April 2009, the note
holders signed a waiver extending the maturity date of the convertible notes 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.





We
believe that our current cash and cash equivalents, and cash flow from
operations, will be sufficient to meet our current anticipated cash needs,
including for working capital purposes, capital expenditures and various
contractual obligations, for at least the next 12 months.  If the
Company is unable to generate cash from operations or meet revenue targets or
obtain new cash inflows from financing or equity offerings, the Company would
need to take action and reduce costs in order to operate for the next 12
months.  This requires the Company to plan for potential courses of
action to reduce costs and look for new sources of financings and capital
infusion.  The Company has a detailed strategic plan which outlines
short and long term plans to improve its operations.  If sales are not
as expected, the Company will make significant cost cutting measures beginning
June 30, 2009.  We may, also, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If these sources
are insufficient to satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit facility with a
lender.  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.






4





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 March 31, 2009, the inventory
allowance was $144,489.





Note
4-Goodwill and Intangible Assets





In
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 142, goodwill is tested for impairment on an annual basis or between
annual tests if an event occurs or circumstances change that would indicate the
carrying amount may be impaired.  In accordance with 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.  As of December 31, 2008,
there was a goodwill impairment of $576,434 which was reflected in the financial
statements. No additional events have occurred since that time that would
trigger a reevaluation.  At March 31, 2009, the net carrying
value of goodwill and intangible assets were $6,692,000 and $2,900,365,
respectively.




Note
5-Earnings per Share




The
Company accounts for its earnings per share in accordance with 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
                    March 31, 2009
                  
                  
                  Three Months
                    Ended
                    March 31, 2008NET
      LOSS, as reported
                  
                  $
                  (1,484,633
                  )
                  
                  $
                  (1,194,399
                  )Basic
      weighted average number of common shares outstanding, as reported
                  
                  
                  12,437,150
                  
                  
                  
                  12,437,150Dilutive
      effect of stock options, as reported
                  
                  
                  —
                  
                  
                  
                  —Diluted
      weighted average number of common shares outstanding, as
      reported
                  
                  
                  12,437,150
                  
                  
                  
                  12,437,150Basic
      and diluted loss per share, as reported
                  
                  $
                  (.12
                  )
                  
                  $
                  (.10
                  )





For the
three months ended March 31, 2009, options and warrants to purchase
12,399,872 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 months ended
March 31, 2008, options and warrants to purchase 6,365,272 shares of common
stock at per share prices ranging from $0.55 to $2.75 were not included in the
computation of diluted loss per share because inclusion would have been
anti-dilutive.







5




Note
6-Debt Obligations




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
March 31, 2009, the Company was in compliance with all
covenants.  Advances under the revolving line of credit are on a
formula, based on eligible accounts receivable and inventory
balances.  On March 31, 2009, the total amount due to the bank
was $744,965.




Note
7-Stock-Based Compensation




Equity
Incentive and Stock Option Plans: At March 31, 2009, 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. There
were 15,000 options granted in the three months ended March 31,
2009.  There were 162,500 options granted in the three months ended
March 31, 2008.  No stock options were exercised in the period
ending March 31, 2008.  There were no options exercised in the
period ending March 31, 2009.  The Company accounts for stock
option grants in accordance with FASB Statement 123(R), Share-Based Payment.
Compensation costs related to share-based payments recognized in the Condensed
Statements of Operations were $35,490 and $117,514 for the periods ended
March 31, 2008 and 2007, respectively.




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.




Note
9-Income Taxes




The
Company accounts for income taxes in accordance with 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.






6






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, have a maturity date
of March 26, 2010 and bear interest at the rate of 12% per annum compounded
on each July 15 and January 15.  In addition, purchase agreement
includes an interest contingency provision in the event of default in which the
interest rate would increase to 24%.   In April 2009, the
purchasers signed a waiver extending the maturity date of the convertible notes
to August 26, 2010.  Pursuant to the terms of the purchase agreement,
the Company issued 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 quarter ended March
31, 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 March 31, 2009, $48,250 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
three months ended March 31, 2009.  As of March 31, 2009, $28,373 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.





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 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 March 31,
2009, $5,512 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, have a maturity date of March 26, 2010 and bear
interest at the rate of 8% per annum compounded on each July 15 and
January 15.  In April 2009, the note holders signed a waiver
extending the maturity date of the convertible notes 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 Company and
purchasers signed waivers extending the term of the warrants 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 March 31, 2009, and December 31, 2008
$105,000 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
March 31, 2009, and December 31, 2008 $420,000 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 March 31, 2009, and December 31, 2008 $71,046 and
$49,875, respectively, of the beneficial conversion was charged to
earnings.






7





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.




Note
11-New Accounting Pronouncements




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 141 (Revised) (“SFAS
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. SFAS 141(R) replaces SFAS 141
and provides new guidance for valuing assets and liabilities acquired in a
business combination. The Company will adopt SFAS 141 (R) for future
acquisitions beginning January 1, 2009.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, or
“SFAS 157”. SFAS 157 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. SFAS 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value, except for the
measurement of share-based payments. SFAS 157 was effective for the Company on
January 1, 2008. However, since the issuance of SFAS No. 157, FASB has
issued several FASB Staff Position (FSP) to clarify the application of FAS
No. 157 “Fair Value Measurements”. On February 2008, the FASB released FASB
Staff Position (“FSP”) SFAS No. 157-2, “Effective Date of FASB Statement
No. 157”, which delayed the effective date of SFAS 157 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 FASB Staff Position (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 Statement 157
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 FASB statement No. 157, “Fair Value
Measurements”. On April 2009, the FASB issued FASB Staff Position (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 FASB Statement No. 157, “Fair Value
Measurements”, when the volume and level of activity for the asset or liability
have significantly decreased. SFAS No. 157-4 also provides guidance on
identifying circumstances that indicate a transaction is not orderly. FSP SFAS
No. 157-4 is effective for interim and periods ending after June 15,
2009, and shall be applied prospectively. The adoption of SFAS 157 for financial
assets and liabilities did not have a material impact on our consolidated
financial statements.  The adoption of SFAS 157 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 FASB Staff Position No. APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash
Upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1).
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 FSP APB 14-1,
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.  FSP APB 14-1 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
FSP APB 14-1, but any instruments that we may issue in the future will be
subject to this pronouncement.





In
June 2008, the FASB ratified 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” (EITF 07-5). This issue provides
guidance for determining whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock. EITF 07-5 applies to
any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative under paragraphs 6-9 of Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, (SFAS 133) for purposes of determining
whether that instrument or embedded feature qualifies for the first part of the
scope exception under paragraph 11(a) of SFAS 133. EITF 07-5
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 SFAS 133,
for purposes of determining whether the instrument is within the scope of EITF
Issue 00-19,  “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock”, (Issue 00-19) which provides
accounting guidance for instruments that are indexed to, and potentially settled
in, the issuer’s own stock. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008.  We have concluded that application
of EITF 07-5 does not have a material impact on the Company’s financial
statements.





In April
2009, the FASB issued FASB Staff Position (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. FSP FAS 107-1 also
amends APB Opinion No. 28, “Interim Financial Reporting”, to require those
disclosures in summarized financial information at interim reporting. FSP FAS
107-1 is effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. The Company will evaluate the potential impact of FSP FAS107-1 on these
disclosures on a prospective basis.





In
December 2007, the FASB issued 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. SFAS No. 160 is effective beginning
December 15, 2008 and will apply prospectively, except for the presentation
and disclosure requirements. The adoption of SFAS No. 160 did not have a
material impact to the Company’s consolidated financial statements.






8





In
January 2009, the FASB issued FASB Staff Position (FSP) No. EITF 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20”, which
amends the impairment guidance in EITF issue No. 99-20, “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. FSP EITF 99-20-1 retains and
emphasizes the other-than-temporary impairment assessment guidance and required
disclosures in FASB Statement No. 115, “Accounting for certain Investments
in Debt and Equity Securities”. FSP EITF 99-20-1 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 FSP EITF
99-20-1 on the Company’s consolidated financial position, results of operations
and cash flows.





In April
2009, the FASB issued FASB Staff Position (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. FSP No. FAS 115-2
and FAS 124-2 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 Company does not believe the adoption of FSP No. FAS
115-2 and FAS 124-2 will have a material impact to the Company’s consolidated
financial statements.




Note
12-Subsequent Event




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 March 31, 2009.







9





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.






10





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.





ASPYRA
operates in one business segment determined in accordance with Statement of
Financial Accounting Standards (“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.





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 of $1,484,633 or basic and diluted loss per share of $0.12
for the quarter ended March 31, 2009 as compared to a net loss of
$1,194,399 or basic and diluted loss per share of $0.10 for the quarter ended
March 31, 2008.





The
operating losses incurred by the Company during the quarter ended March 31,
2009 were attributable to a decrease in sales compared to the same period 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 compares the results of operation for the
quarter ended March 31, 2009 with the quarter ended March 31,
2008.







11





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
                      March 31, 2009
                    
                    
                    Three Months
                      Ended
                      March 31, 2008Revenues:System
      sales
                    
                    
                    12.6
                    %
                    
                    
                    20.7
                    %Service
      revenues
                    
                    
                    87.4
                    
                    
                    
                    79.3Total
      revenues
                    
                    
                    100.0
                    
                    
                    
                    100.0Cost
      of products and services sold:System
      sales
                    
                    
                    26.1
                    
                    
                    
                    25.9Service
      revenues
                    
                    
                    29.5
                    
                    
                    
                    30.4Total
      cost of products and services
                    
                    
                    55.6
                    
                    
                    
                    56.3Gross
      profit
                    
                    
                    44.4
                    
                    
                    
                    43.7Operating
      expenses:Selling,
      general and administrative
                    
                    
                    77.3
                    
                    
                    
                    68.4Research
      and development
                    
                    
                    22.8
                    
                    
                    
                    27.6Total
      operating expenses
                    
                    
                    100.1
                    
                    
                    
                    96.0Operating
      loss
                    
                    
                    (55.7
                    )
                    
                    
                    (52.2
                    )Loss
      before provision for income taxes
                    
                    
                    (77.2
                    )
                    
                    
                    (55.2
                    )Provision
      for income taxes
                    
                    
                    —
                    
                    
                    
                    —Net
      loss
                    
                    
                    (77.2
                    )
                    
                    
                    (55.2
                    )





Revenues





Sales for
the quarter ended March 31, 2009 were $1,922,657, as compared to $2,164,565
for the quarter ended March 31, 2008, an overall decrease of $241,908 or
11.2%. When analyzed by revenue category, sales of Clinical Information Systems
(“CIS”) and Diagnostic Information Systems (“DIS”) decreased by $205,659 or
45.8% and service revenues decreased by $36,249 or 2.1%.  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 is primarily attributable to a reduced number 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.





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.







12


Costs
of products and services sold





Cost of
products and services sold decreased by $148,580 or 12.2% for the quarter ended
March 31, 2009 as compared to the quarter ended March 31, 2008. The
overall decrease in cost of sales was primarily attributable to a decrease in
labor costs of $98,365 or 14.6%, a decrease in other costs of sales of $16,991
or 4.0%, and a decrease in material costs of $33,223 or 28.9%. 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.





Cost of
products and services sold as a percentage of sales remained the same at 56% for
the quarters ended March 31, 2009 and 2008.  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 $4,400 or 0.3% for the quarter
ended March 31, 2009 as compared to the quarter ended March 31,
2008.  The increase in expenses was primarily attributable to an
increase of $186,000 related to salaries, which were partially offset by
decreases of approximately $169,000 in legal and accounting expenses and $10,000
in travel and lodging expenses 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





Research
and development expenses decreased $157,579 or 26.4% during the quarter ended
March 31, 2009, as compared to the quarter ended March 31,
2008.  The decrease was primarily attributable to decreases in
salaries and expenses of personnel in product development.  Current
development expenses were attributable to the development of AccessRAD, the
RIS/PACS platform that integrates the Company’s radiology information system
CyberRAD with its AccessNET PACS system, and enhancements and new modules for
the Company’s CIS and DIS products.  For the quarter ended
March 31, 2009 and the quarter ended March 31, 2008, the Company’s
capitalized software costs were $104,672 and $156,396, respectively, which are
generally amortized over the estimated useful life not to exceed five
years.





Interest
and other income





Interest
and other income was $2,886 for the quarter ended March 31, 2009 as
compared to $4,646 for the quarter ended March 31, 2008 due to the
collection activity and therefore finance charges levied on customers who were
late in their payments on accounts receivable.





Interest
expense





Interest
expense was $416,822 for the quarter ended March 31, 2009 as compared to
$68,498 for the quarter ended March 31, 2008.  The increase was
primarily due to the increased level of borrowings during the current quarter as
compared to the same period of fiscal 2008.





Net
loss





As a
result of the factors discussed above, the Company incurred a net loss of
$1,484,633 or basic and diluted loss per share of $0.12 for the quarter ended
March 31, 2009 as compared to a net loss of $1,194,399 or basic and diluted
loss per share of $0.10 for the quarter ended March 31, 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 $104,672 and $156,396, respectively, during
quarter ended March 31, 2009 and 2008 in software
development.  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 quarter ended March 31,
2009, the Company invested an aggregate of $2,652 in fixed assets primarily
consisting of computers and software, as compared to an investment of $11,849 in
fixed assets primarily consisting of computers and software in the quarter ended
March 31, 2008.







13




As of
March 31, 2009, the Company’s working capital amounted to a deficit of
$3,866,029 as compared to a deficit of $3,874,415 as of December 31,
2008.  The reduction in deficit was primarily attributable to the
private placement transaction completed on February 12, 2009.  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.





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 March 31,
2009, the balance outstanding on the Company’s revolving line of credit was
$744,965.  As of March 31, 2009, the Company was in compliance
with all covenants.  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 statements and liquidity.





Cash used
in operating activities was $1,052,718 for the quarter ended March 31,
2009, compared to cash used in operating activities of $302,790 for the quarter
ended March 31, 2008.  The increase in cash used for operating
activities was primarily attributable to the net change in deferred service
contract income.





Net cash
used in investing activities totaled $107,324 for the quarter ended
March 31, 2009, compared to $168,245 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.





Cash
provided by financing activities amounted to $962,441 during the quarter ended
March 31, 2009 compared to cash provided by financing activities of
$2,487,391 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 in the
first quarter ended March 31, 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, have a maturity date of
March 26, 2010 and bear interest at the rate of 12% per annum compounded on
each July 15 and January 15.  In addition, purchase
agreement includes an interest contingency provision in the event of default in
which the interest rate would increase to 24%.  In April 2009, the
note holders signed a waiver extending the maturity date of the convertible
notes 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.





We
believe that our current cash and cash equivalents, and cash flow from
operations, will be sufficient to meet our current anticipated cash needs,
including for working capital purposes, capital expenditures and various
contractual obligations, for at least the next 12 months.  If the
Company is unable to generate cash from operations or meet revenue targets or
obtain new cash inflows from financing or equity offerings, the Company would
need to take action and reduce costs in order to operate for the next 12
months.  This requires the Company to plan for potential courses of
action to reduce costs and look for new sources of financings and capital
infusion.  The Company has a detailed strategic plan which outlines
short and long term plans to improve its operations.  If sales are not
as expected, the Company will make certain cost cutting measures beginning June
30, 2009.  We may, also, require additional cash resources due to
changed business conditions or other future developments, including any
investments or acquisitions we may decide to pursue.  If these sources
are insufficient to satisfy our cash requirements, we may seek to sell debt
securities or additional equity securities or to obtain a credit facility with a
lender.  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.






14





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 March 31, 2009, the inventory
reserve was approximately $144,489.





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
March 31, 2009 was $691,844, net of an allowance for doubtful accounts of
approximately $50,583.







15




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 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.”  SOP No 97-2, as amended, 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 March 31, 2009 deferred revenue was
$413,263.





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 March 31, 2009, deferred service contract income
was $1,707,452.





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 three months ended March 31, 2009
and 2008, the Company capitalized $104,672 and $156,396,
respectively.  At March 31, 2009, the balance of capitalized
software costs was $2,813,310, net of accumulated amortization of
$917,973.





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 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.  In accordance with 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.





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.





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 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 SFAS
No. 123(R). Results for prior periods have not been restated.






16





SFAS
No. 123(R) 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 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
Statement of Financial Accounting Standard No. 141 (Revised) (“SFAS
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. SFAS 141(R) replaces SFAS 141
and provides new guidance for valuing assets and liabilities acquired in a
business combination. The Company adopted SFAS 141(R) for all acquisitions after
January 1, 2009.





In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, or
“SFAS 157”. SFAS 157 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. SFAS 157 applies whenever other standards require (or
permit) assets or liabilities to be measured at fair value, except for the
measurement of share-based payments. SFAS 157 was effective for the Company on
January 1, 2008. However, since the issuance of SFAS No. 157, FASB has
issued several FASB Staff Position (“FSP”) to clarify the application of FAS
No. 157 “Fair Value Measurements”. On February 2008, the FASB released FASB
Staff Position (FSP) SFAS No. 157-2, “Effective Date of FASB Statement
No. 157”, which delayed the effective date of SFAS 157 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 FASB Staff Position (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 Statement 157
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 FASB statement No. 157, “Fair Value
Measurements”. On April 2009, the FASB issued FASB Staff Position (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 FASB Statement No. 157, “Fair Value
Measurements”, when the volume and level of activity for the asset or liability
have significantly decreased. SFAS No. 157-4 also provides guidance on
identifying circumstances that indicate a transaction is not orderly. FSP SFAS
No. 157-4 is effective for interim and periods ending after June 15,
2009, and shall be applied prospectively. The adoption of SFAS 157 for financial
assets and liabilities did not have a material impact on our consolidated
financial statements.  The adoption of SFAS 157 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 FASB Staff Position No. APB 14-1,
“Accounting for Convertible Debt Instruments That May Be Settled in Cash
Upon Conversion (Including Partial Cash Settlement)” (FSP APB 14-1).
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 FSP APB 14-1,
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.  FSP APB 14-1 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
FSP APB 14-1, but any instruments that we may issue in the future will be
subject to this pronouncement.






17





In
June 2008, the FASB ratified 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” (EITF 07-5). This issue provides
guidance for determining whether an equity-linked financial instrument (or
embedded feature) is indexed to an entity’s own stock. EITF 07-5 applies to
any freestanding financial instrument or embedded feature that has all the
characteristics of a derivative under paragraphs 6-9 of Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities”, (SFAS 133) for purposes of determining
whether that instrument or embedded feature qualifies for the first part of the
scope exception under paragraph 11(a) of SFAS 133. EITF 07-5
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 SFAS 133,
for purposes of determining whether the instrument is within the scope of EITF
Issue 00-19,  “Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company’s Own Stock”, (Issue 00-19) which provides
accounting guidance for instruments that are indexed to, and potentially settled
in, the issuer’s own stock. EITF 07-5 is effective for fiscal years
beginning after December 15, 2008.  We have concluded that application
of EITF 07-5 does not have a material impact on the Company’s financial
statements.





In April
2009, the FASB issued FASB Staff Position (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. FSP FAS 107-1 also
amends APB Opinion No. 28, “Interim Financial Reporting”, to require those
disclosures in summarized financial information at interim reporting. FSP FAS
107-1 is effective for interim reporting periods ending after June 15,
2009, with early adoption permitted for periods ending after March 15,
2009. The Company will evaluate the potential impact of FSP FAS107-1 on these
disclosures on a prospective basis.





In
December 2007, the FASB issued 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. SFAS No. 160 is effective beginning
December 15, 2008 and will apply prospectively, except for the presentation
and disclosure requirements. The adoption of SFAS No. 160 did not have a
material impact to the Company’s consolidated financial statements.





In
January 2009, the FASB issued FASB Staff Position (FSP) No. EITF 99-20-1,
“Amendments to the Impairment Guidance of EITF Issue No. 99-20”, which
amends the impairment guidance in EITF issue No. 99-20, “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. FSP EITF 99-20-1 retains and
emphasizes the other-than-temporary impairment assessment guidance and required
disclosures in FASB Statement No. 115, “Accounting for certain Investments
in Debt and Equity Securities”. FSP EITF 99-20-1 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 FSP EITF
99-20-1 on the Company’s consolidated financial position, results of operations
and cash flows.





In April
2009, the FASB issued FASB Staff Position (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. FSP No. FAS 115-2
and FAS 124-2 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 Company does not believe the adoption of FSP No. FAS
115-2 and FAS 124-2 will have a material impact to the Company’s consolidated
financial statements.






18





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 March 31, 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 March 31, 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 March 31, 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.





This
quarterly report does not include an attestation report of the company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the company’s
registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the company to provide only
management’s report in this quarterly report.






19




Part II
– OTHER INFORMATION





Item
1.               Legal
Proceedings





None.





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





As
described above in Note 10 to our condensed consolidated financial statements
and in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations — Liquidity and Capital Resources,” the Company entered into the
following transactions in the fiscal quarter ended March 31, 2009. Other
than the warrant issued in the private placement described below to Great
American Investors as placement agent for that transaction, all proceeds from
the sale of these securities were used for the Company’s general working capital
purposes:





·
            The
      sale on February 12, 2009 of secured promissory notes in the
      aggregate principal amount of $1,000,000 to certain current and new
      Company investors, convertible at $0.31 per share into an aggregate of
      3,225,806 shares of our common stock, together with accompanying 3-year
      warrants exercisable for an additional 5,774,194 shares of our common
      stock at an exercise price of $0.31 per share. The notes are secured by a
      lien on substantially all of the Company’s assets.  The material
      terms of this transaction are described in the Company’s Current Report on
      Form 8-K filed with the Securities and Exchange Commission on
      February 19, 2009 which is hereby incorporated by reference
      herein.





Item
3.               Defaults
Upon Senior Securities.





None.




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





None.





Item
5.                Other
Information.





None.






20





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.31.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.31.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.32.1
            *
            
            Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.32.2
            *
            
            Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.







(1)
            Previously
      filed as an exhibit to the Company’s Registration 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.





*
            Filed
      herewith.






21





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:
      May 15, 2009
            
            /s/
      Rodney W. SchuttChief
      Executive Officer(Principal
      Executive Officer)Date:
      May 15, 2009
            
            /s/
      Anahita VillafaneChief
      Financial Officer(Principal
      Financial and Accounting Officer)






22





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.31.1
              *
              
              Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.31.2
              *
              
              Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of
      1934.32.1
              *
              
              Certification
      of Chief Executive Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C. Section 1350.32.2
              *
              
              Certification
      of Chief Financial Officer Pursuant to
      Rule 13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934
      and 18 U.S.C.
Section 1350.







(1)
            Previously
      filed as an exhibit to the Company’s Registration 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.





*
            Filed
      herewith.








23