** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

** **

** **

**FORM 10-QSB**

 
| **(Mark One)** |
|----------------|
| **x**          | ** ** | **QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF  THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **     | ** ** | ** ** |
| ** **     |   | **For the quarterly period ended September 30,  2006.** |
| ** **     |   | ** ** |
| **o**          | ** ** | **TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF  THE EXCHANGE ACT** |
| ** **     | ** ** | ** ** |
| ** **     |   | **For the transition period from                      to                         ** |

 

 

Commission file number **0-12551**

 

 

**ASPYRA, INC.(formerly known as CREATIVE COMPUTER APPLICATIONS, INC.)**

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

 

 

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

** **

** **

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

(Address of principal executive offices)

 

 

**(818) 880-6700**

(Issuer’s telephone number, including area code)

 

 

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

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

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

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

State the number of shares outstanding of each ofthe issuer’s classes of common equity, as of the latest practicable date:  10,783,150 common shares as of November 10,2006.

Transitional Small Business Disclosure Format (check one):

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

 

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** **

**ASPYRA, INC.**

**FORM10-QSB**

**I N D E X**
| **PART  I - Financial Information:** |       |                                                                                                                  |
|--------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------|
| ** **                           | ** ** | ** **                                                                                                            |   |   |
| **Item  1.**                         | ** ** | **Financial  Statements (unaudited)**                                                                                 |   |   |
| ** **                           | ** ** | ** **                                                                                                            |   |   |
|                                 |       | Condensed Consolidated Balance Sheets, at September  30, 2006 and December 31, 2005                                   |   |   |
|                                 |       |                                                                                                                  |   |   |
|                                 |       | Condensed Consolidated Statements of Operations for  the three months ended September 30, 2006 and September 30, 2005 |   |   |
|                                 |       |                                                                                                                  |   |   |
|                                 |       | Condensed Consolidated Statements of Operations for  the nine months ended September 30, 2006 and September 30, 2005  |   |   |
|                                 |       |                                                                                                                  |   |   |
|                                 |       | Condensed Consolidated Statements of Cash Flows for  the nine months ended September 30, 2006 and September 30, 2005  |   |   |
|                                 |       |                                                                                                                  |   |   |
|                                 |       | Notes to Condensed Consolidated Financial Statements                                                                  |   |   |
|                                 |       |                                                                                                                  |   |   |
| **Item 2.**                          | ** ** | **Management’s Discussion and Analysis or Plan of  Operation**                                                   |   |   |
| ** **                           | ** ** | ** **                                                                                                            |   |   |
| **Item 3.**                          | ** ** | **Controls and Procedures**                                                                                           |   |   |
| ** **                           | ** ** | ** **                                                                                                            |   |   |
| **PART  II - Other Information:**    |       |                                                                                                                  |
|                                 |       |                                                                                                                  |   |   |
| **Item 6.**                          | ** ** | **Exhibits**                                                                                                          |   |   |
| ** **                           | ** ** | ** **                                                                                                            |   |   |
| **Signatures**                       |       |                                                                                                                  |
| ** **                           |       |                                                                                                                  |   |   |
| **Exhibit Index**                    |       |                                                                                                                  |

 

2

 

 

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**ASPYRA, INC.**

**PART I - FINANCIAL INFORMATION**

**Item 1.  Financial Statements**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 
| ** **                                                                                                          | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                          | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                          | ** ** | **(Unaudited)**        | ** ** | ** **            | ** ** |
| **ASSETS**                                                                                                          |       |                   |       |                  |       |
| CURRENT ASSETS:                                                                                                     |       |                   |       |                  |       |
| Cash                                                                                                                |       | $                      | 1,964,545  |                  | $          | 1,329,753 |   |
| Restricted cash  (Note 6)                                                                                           |       | 1,000,000              |       | —                |       |
| Receivables, net                                                                                                    |       | 2,391,021              |       | 1,547,699             |       |
| Inventory                                                                                                           |       | 204,268                |       | 207,345               |       |
| Prepaid expenses  and other assets                                                                                  |       | 434,532                |       | 589,510               |       |
| TOTAL CURRENT ASSETS                                                                                                |       | 5,994,366              |       | 3,674,307             |       |
|                                                                                                                |       |                   |       |                  |       |
| PROPERTY AND EQUIPMENT,  net                                                                                        |       | 1,130,031              |       | 511,919               |       |
| INVENTORY OF COMPONENT  PARTS                                                                                       |       | 112,733                |       | 158,302               |       |
| CAPITALIZED SOFTWARE  COSTS, net of accumulated amortization of $1,001,179 and $1,211,445                      |       | 2,383,258              |       | 1,885,887             |       |
| INTANGIBLES, net                                                                                                    |       | 4,245,359              |       | 4,697,240             |       |
| GOODWILL                                                                                                            |       | 7,698,434              |       | 7,698,434             |       |
|                                                                                                                |       | $                      | 21,564,181 |                  | $          | 18,626,089 |   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                      | ** ** | ** **             | ** ** | ** **            | ** ** |
| CURRENT LIABILITIES:                                                                                                |       |                   |       |                  |       |
| Notes payable  (Note 6)                                                                                             |       | $                      | 1,474,078  |                  | $          | 995,403 |   |
| Accounts payable                                                                                                    |       | 819,903                |       | 1,218,698             |       |
| Accrued  liabilities:                                                                                               |       |                   |       |                  |       |
| Vacation pay                                                                                                        |       | 348,902                |       | 384,887               |       |
| Accrued payroll                                                                                                     |       | 215,371                |       | 355,277               |       |
| Accrued  settlement                                                                                                 |       | —                 |       | 154,300               |       |
| Accrued interest  and penalty                                                                                       |       | 281,596                |       | —                |       |
| Other                                                                                                               |       | 430,288                |       | 338,098               |       |
| Deferred service  contract income                                                                                   |       | 2,060,468              |       | 1,611,644             |       |
| Deferred revenue  on system sales                                                                                   |       | 1,930,958              |       | 1,165,521             |       |
| Capital lease —  current portion                                                                               |       | 127,297                |       | —                |       |
| TOTAL CURRENT  LIABILITIES                                                                                          |       | 7,688,861              |       | 6,223,828             |       |
|                                                                                                                |       |                   |       |                  |       |
| CAPITAL LEASE                                                                                                       |       | 438,589                |       | —                |       |
| NOTES PAYABLE                                                                                                       |       | 19,055                 |       | 220,871               |       |
| TOTAL LIABILITIES                                                                                                   |       | 8,146,505              |       | 6,444,699             |       |
|                                                                                                                |       |                   |       |                  |       |
| SHAREHOLDERS’ EQUITY:                                                                                          |       |                   |       |                  |       |
| Common shares,  no par value; 20,000,000 shares authorized; 10,783,150 and 8,489,400 shares  issued and outstanding |       | 21,044,071             |       | 16,974,222            |       |
| Additional  paid-in-capital                                                                                         |       | 276,871                |       | —                |       |
| Accumulated  deficit                                                                                                |       | (7,878,103             | )          | (4,790,142            | )          |
| Accumulated  other comprehensive loss                                                                               |       | (25,163                | )          | (2,690                | )          |
| TOTAL SHAREHOLDERS’  EQUITY                                                                                    |       | 13,417,676             |       | 12,181,390            |       |
|                                                                                                                |       |                   |       |                  |       |
|                                                                                                                |       | $                      | 21,564,181 |                  | $          | 18,626,089 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

3

 

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Three Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                 | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                          | ** ** |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                                                     |       |   |   |
| System sales                                    |       | $                                                        | 1,508,056  |   | $ | 545,886 |   |
| Service revenue                                 |       | 1,773,985                                                |       | 1,181,786 |   |
|                                            |       | 3,282,041                                                |       | 1,727,672 |   |
|                                            |       |                                                     |       |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                                     |       |   |   |
| System sales                                    |       | 964,343                                                  |       | 393,686 |   |
| Service revenue                                 |       | 779,871                                                  |       | 414,985 |   |
|                                            |       | 1,744,214                                                |       | 808,671 |   |
|                                            |       |                                                     |       |   |   |
| Gross profit                                    |       | 1,537,827                                                |       | 919,001 |   |
|                                            |       |                                                     |       |   |   |
| OPERATING  EXPENSES                             |       |                                                     |       |   |   |
| Selling, general and administrative             |       | 1,664,784                                                |       | 883,704 |   |
|                                            |       |                                                     |       |   |   |
| Research and development                        |       | 499,084                                                  |       | 314,456 |   |
|                                            |       |                                                     |       |   |   |
| Total operating expenses                        |       | 2,163,868                                                |       | 1,198,160 |   |
|                                            |       |                                                     |       |   |   |
| Operating loss                                  |       | (626,041                                                 | )          | (279,159 | ) |
|                                            |       |                                                     |       |   |   |
| INTEREST AND  OTHER INCOME                      |       | 43,938                                                   |       | 3,873 |   |
|                                            |       |                                                     |       |   |   |
| INTEREST EXPENSE                                |       | (125,921                                                 | )          | (3,989 | ) |
|                                            |       |                                                     |       |   |   |
| Loss before provision for income taxes          |       | (708,024                                                 | )          | (279,275 | ) |
|                                            |       |                                                     |       |   |   |
| PROVISION FOR  INCOME TAXES                     |       | 2,039                                                    |       | 793,877 |   |
|                                            |       |                                                     |       |   |   |
| NET LOSS                                        |       | $                                                        | (710,063   | ) | $ | (1,073,152 | ) |
|                                            |       |                                                     |       |   |   |
| LOSS PER SHARE  (Note 5):                       |       |                                                     |       |   |   |
|                                            |       |                                                     |       |   |   |
| Basic                                           |       | $                                                        | (.07       | ) | $ | (.31 | ) |
| Diluted                                         |       | (.07                                                     | )          | (.31 | ) |
|                                            |       |                                                     |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                                     |       |   |   |
| Basic                                           |       | 10,772,914                                               |       | 3,465,900 |   |
| Diluted                                         |       | 10,772,914                                               |       | 3,465,900 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

4

 

 

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** **

**ASPYRA, INC.**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

 
| ** **                                      | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                      | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                      | ** ** | **(Unaudited)**                                         | ** ** |
| NET SYSTEM SALES  AND SERVICE REVENUE:          |       |                                                    |       |   |   |
| System sales                                    |       | $                                                       | 3,881,308  |   | $ | 1,429,593 |   |
| Service revenue                                 |       | 5,320,629                                               |       | 3,679,374 |   |
|                                            |       | 9,201,937                                               |       | 5,108,967 |   |
|                                            |       |                                                    |       |   |   |
| COSTS OF  PRODUCTS AND SERVICES SOLD:           |       |                                                    |       |   |   |
| System sales                                    |       | 2,874,810                                               |       | 1,218,254 |   |
| Service revenue                                 |       | 2,176,019                                               |       | 1,239,678 |   |
|                                            |       | 5,050,829                                               |       | 2,457,932 |   |
|                                            |       |                                                    |       |   |   |
| Gross profit                                    |       | 4,151,108                                               |       | 2,651,035 |   |
|                                            |       |                                                    |       |   |   |
| OPERATING  EXPENSES                             |       |                                                    |       |   |   |
| Selling, general and administrative             |       | 5,548,953                                               |       | 2,483,681 |   |
|                                            |       |                                                    |       |   |   |
| Research and development                        |       | 1,460,776                                               |       | 873,396 |   |
|                                            |       |                                                    |       |   |   |
| Total operating expenses                        |       | 7,009,729                                               |       | 3,357,077 |   |
|                                            |       |                                                    |       |   |   |
| Operating loss                                  |       | (2,858,621                                              | )          | (706,042 | ) |
|                                            |       |                                                    |       |   |   |
| INTEREST AND  OTHER INCOME                      |       | 64,862                                                  |       | 13,015 |   |
|                                            |       |                                                    |       |   |   |
| INTEREST EXPENSE                                |       | (292,163                                                | )          | (11,750 | ) |
|                                            |       |                                                    |       |   |   |
| Loss before provision for income taxes          |       | (3,085,922                                              | )          | (704,777 | ) |
|                                            |       |                                                    |       |   |   |
| PROVISION FOR INCOME  TAXES                     |       | 2,039                                                   |       | 793,877 |   |
|                                            |       |                                                    |       |   |   |
| NET LOSS                                        |       | $                                                       | (3,087,961 | ) | $ | (1,498,654 | ) |
|                                            |       |                                                    |       |   |   |
| LOSS PER SHARE  (Note 5):                       |       |                                                    |       |   |   |
|                                            |       |                                                    |       |   |   |
| Basic                                           |       | $                                                       | (.32       | ) | $ | (.44 | ) |
| Diluted                                         |       | (.32                                                    | )          | (.44 | ) |
|                                            |       |                                                    |       |   |   |
| WEIGHTED AVERAGE  NUMBER OF SHARES OUTSTANDING: |       |                                                    |       |   |   |
| Basic                                           |       | 9,625,505                                               |       | 3,401,011 |   |
| Diluted                                         |       | 9,625,505                                               |       | 3,401,011 |   |

 

**SeeNotes to Condensed Consolidated Financial Statements.**

5

 

 

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**ASPYRA, INC.**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWSIncrease (Decrease) in Cash**

 
| ** **                                                                                 | ** ** | **Nine Months Ended September 30,** | ** ** |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                                                                                 | ** ** | **2006**                                                | ** ** | **2005** | ** ** |
| ** **                                                                                 | ** ** | **(Unaudited)**                                         | ** ** |
| OPERATING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Net loss                                                                                   |       | $                                                       | (3,087,961 | ) | $ | (1,498,654 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used in) operating activities: |       |                                                    |       |   |   |
| Depreciation and amortization                                                              |       | 724,085                                                 |       | 122,864 |   |
| Provision for doubtful accounts                                                            |       | 18,371                                                  |       | 30,880 |   |
| Amortization of capitalized software costs                                                 |       | 218,574                                                 |       | 259,950 |   |
| Deferred tax provision                                                                     |       | —                                                  |       | 793,877 |   |
| Stock based compensation                                                                   |       | 276,871                                                 |       | — |   |
| Increase (decrease) from changes in:                                                       |       |                                                    |       |   |   |
| Receivables                                                                                |       | (861,693                                                | )          | 853,411 |   |
| Inventories                                                                                |       | 48,646                                                  |       | (59,348 | ) |
| Prepaid expenses and other assets                                                          |       | 154,978                                                 |       | (76,758 | ) |
| Accounts payable                                                                           |       | (398,795                                                | )          | 53,657 |   |
| Accrued liabilities                                                                        |       | 43,596                                                  |       | (152,018 | ) |
| Deferred service contract income                                                           |       | 448,824                                                 |       | (149,691 | ) |
| Deferred revenue on system sales                                                           |       | 765,437                                                 |       | 64,817 |   |
| Net cash provided by (used in) operating activities                                        |       | (1,649,067                                              | )          | 242,987 |   |
|                                                                                       |       |                                                    |       |   |   |
| INVESTING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Additions to property and equipment                                                        |       | (253,831                                                | )          | (256,925 | ) |
| Additions to deferred merger costs                                                         |       | —                                                  |       | (340,077 | ) |
| Additions to capitalized software costs                                                    |       | (715,946                                                | )          | (511,421 | ) |
| Net cash used in investing activities                                                      |       | (969,777                                                | )          | (1,108,423 | ) |
|                                                                                       |       |                                                    |       |   |   |
| FINANCING  ACTIVITIES                                                                      |       |                                                    |       |   |   |
| Borrowings on line of credit                                                               |       | 500,000                                                 |       | — |   |
| Payments on notes payable                                                                  |       | (223,141                                                | )          | (100,000 | ) |
| Payments on capital leases                                                                 |       | (70,599                                                 | )          | — |   |
| Increase in restricted cash                                                                |       | (1,000,000                                              | )          |   |   |
| Net proceeds from sales of stock in private  placement                                     |       | 4,033,883                                               |       | — |   |
| Buyback of fractional shares related to merger                                             |       | (234                                                    | )          | — |   |
| Exercise of stock options                                                                  |       | 36,200                                                  |       | 171,400 |   |
| Net cash provided by financing activities                                                  |       | 3,276,109                                               |       | 71,400 |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| Foreign currency  translation adjustment                                                   |       | (22,473                                                 | )          | — |   |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| NET INCREASE  (DECREASE) IN CASH                                                           |       | 634,792                                                 |       | (794,036 | ) |
| ** **                                                                                 | ** ** | ** **                                              | ** ** | ** ** | ** ** |
| CASH, beginning  of period                                                            |       | 1,329,753                                               |       | 1,655,063 |   |
|                                                                                       |       |                                                    |       |   |   |
| CASH, end of period                                                                        |       | $                                                       | 1,964,545  |   | $ | 861,027 |   |

 

**Seenotes to Condensed Consolidated Financial Statements.**

 

6

 

 

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** **

**ASPYRA, INC.**

**NOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTS(unaudited)**

**Note1-Presentation of Financial Statements**

In the opinion of management of Aspyra, Inc. (the “Company”or “ASPYRA”), the accompanying unaudited condensed consolidated financial statementsreflect all adjustments (which include only normal recurring accruals)necessary to present fairly the Company’s financial position as of September30, 2006, the results of its operations for the three and nine-month periodsended September 30, 2006 and 2005, and cash flows for the nine months endedSeptember 30, 2006 and 2005.  Theseresults have been determined on the basis of accounting principles generallyaccepted in the United States and practices applied consistently with thoseused in preparation of the Company’s Annual Report on Form 10-KSB for thefiscal year ended December 31, 2005.

The results of operations for the three and nine months endedSeptember 30, 2006 are not necessarily indicative of the results expected forany other period or for the entire year.

**Note 2-Liquidity**

As of September 30, 2006, the Company’s workingcapital amounted to a deficit of $1,694,495 compared to a deficit of$2,549,521, as of December 31, 2005.  Thedeficit working capital position on a consolidated basis is the result ofASPYRA merging with Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM,Inc.), which had a substantial negative working capital position at the time ofthe merger and the increase in deferred revenues, which in the aggregateamounted to approximately $3,991,000 at September 30, 2006 because of increasedorders and delays in implementation of these orders.  On May 17, 2006, the Company sold in aprivate placement transaction 2,250,000 shares of its common stock and warrantsto purchase up to 1,350,000 shares of its common stock pursuant to the terms ofthe Common Stock and Warrant Purchase Agreement, dated May 4, 2006.  The private placement generated $4,500,000,less costs, and improved the Company’s working capital position.

The Company’s primary source of working capital hasbeen generated from private placements, which were completed in November 2005and May 2006, and from borrowings.  Theprivate placement that was completed in November 2005 generated $3,000,000,less costs.  The Company’s results ofoperations for the nine months ended September 30, 2006 produced negativeoperating cash flow of $1,649,067.  Anunanticipated decline in sales, delays in implementations where payments aretied to delivery and/or performance of services or cancellations of contractscould have a negative effect on cash flow from operations and could in turncreate short-term liquidity problems.  Ifsales are not as expected, the Company will consider certain cost cuttingmeasures.  We believe that our currentcash and cash equivalents, and cash flow from operations, will be sufficient tomeet our current anticipated cash needs, including for working capitalpurposes, capital expenditures and various contractual obligations, for atleast the next 12 months.  We may,however, require additional cash resources due to changed business conditionsor other future developments, including any investments or acquisitions we maydecide to pursue.  The sale of convertible debt securitiesor additional equity securities could result in additional dilution to ourshareholders. The incurrence of indebtedness would result in incurring debtservice obligations and could result in operating and financial covenants thatwould restrict our operations. In addition, there can be no assurance that anyadditional financing will be available on acceptable terms, if at all. Althoughthere are no present understandings, commitments or agreements with respect tothe acquisition of any other businesses, applications or technologies, we may,from time to time, evaluate acquisitions of other businesses, applications ortechnologies.

**Note3-Inventories**

Inventories consist primarily of computer hardwareheld for resale and are stated at the lower of cost or market (net realizablevalue).  Cost is determined using thefirst-in, first-out method. Supplies are charged to expense as incurred.

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

7

 

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** **

estimated future usage.  At September 30, 2006 and December 31,2005 the inventory allowance was $161,781 and $116,781, respectively.

**Note4-Goodwill and Intangible Assets**

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired.  In accordance with SFAS No.144, Accounting for Impairment of Long-Lived Assets, management reviewsdefinite life intangible assets to determine if events or circumstances haveoccurred which may cause the carrying values of intangible assets to beimpaired. The purpose of these reviews is to identify any facts andcircumstances, either internal or external, which may indicate that thecarrying values of the assets may not be recoverable.  At September 30, 2006, the net carrying valueof goodwill and intangible assets were $7,698,434 and $4,245,359, respectively.

**Note5-Earnings per Share**

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

Earnings per share havebeen computed as follows:

 
| ** **                                                    | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Three Months  Ended  September 30, 2005** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                                          |       |                                                      |       |                                                      |       |                                                       |       |                                                       |       |
| NET LOSS                                                      |       | $                                                         | (3,087,961 | )                                                         | $          | (1,498,654                                                 | )          | $                                                          | (710,063   | ) | $ | (1,073,152 | ) |
| Basic weighted  average number of common shares outstanding   |       | 9,625,505                                                 |       | 3,401,011                                                 |       | 10,772,914                                                 |       | 3,465,900                                                  |       |
| Dilutive effect  of stock options                             |       | —                                                    |       | —                                                    |       | —                                                     |       | —                                                     |       |
| Diluted weighted  average number of common shares outstanding |       | 9,625,505                                                 |       | 3,401,011                                                 |       | 10,772,914                                                 |       | 3,465,900                                                  |       |
| Basic loss per  share                                         |       | $                                                         | (.32       | )                                                         | $          | (.44                                                       | )          | $                                                          | (.07       | ) | $ | (.31 | ) |
| Diluted loss per  share                                       |       | $                                                         | (.32       | )                                                         | $          | (.44                                                       | )          | $                                                          | (.07       | ) | $ | (.31 | ) |

 

For the three and ninemonths ended September 30, 2006, options to purchase 636,898 shares of commonstock at per share prices ranging from $.72 to $2.75 were not included in thecomputation of diluted loss per share because inclusion would have beenanti-dilutive. For the three and nine months ended September 30, 2005, optionsto purchase 210,000 shares of common stock at per share prices ranging from $.72to $1.76 were not included in the computation of diluted loss per share becauseinclusion would have been anti-dilutive.

**Note6-Debt Obligations**

The Company’s line ofcredit with its bank provides for $1,000,000 on a revolving basis through May19, 2007.  The line of credit is securedby a $1,000,000 time deposit account.  OnSeptember 30, 2006, the total amount due to the bank was $1,000,000.  The Company acquired a note in conjunctionwith the merger with Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM,Inc.), with an interest rate of 7% with payments in the amount of $25,000 duemonthly.  As of September 30, 2006, thetotal amount due on this note was $319,055. The Company also acquired unsecured notes in conjunction with the mergerwith interest rates ranging from 7% to 8%. These notes are due upon demand and the balance outstanding at September30, 2006 was $174,078.

8

 

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** **

**Note7-Stock-Based Compensation**

As of September 30, 2006, the Company has twostock-based compensation plans, the 2005 Equity Incentive Plan and the 1997Stock Option Plan, under which we may issue shares of our common stock toemployees, officers, directors and consultants. Upon effectiveness of the 2005Equity Incentive Plan on November 22, 2005, the 1997 Stock Option Plan wasterminated for purposes of new grants. Both of these plans have been approved by our shareholders.

Prior to January 1, 2006, we accounted for thoseplans under the recognition and measurement provisions of Accounting PrinciplesBoard (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees*”*, and related Interpretations, aspermitted by SFAS No. 123, “Accounting for Stock-Based Compensation.” Nostock-based employee compensation cost was recognized in our Statement ofOperations for the three and nine months ended September 30, 2005 as alloptions granted under our plans had an exercise price equal to the market valueof the underlying common stock on the date of grant. Effective January 1,2006, we adopted the fair value recognition provisions of SFAS No. 123(R),“Share-Based Payment*”*, using themodified-prospective-transition method. Under that transition method,compensation cost recognized in the three and nine months ended September 30,2006 includes; (a) compensation cost for all share-based payments grantedprior to, but not yet vested as of January 1, 2006, based on the grant datefair value estimated in accordance with the original provisions of SFASNo. 123, and (b) compensation cost for all share-based paymentsgranted subsequent to January 1, 2006, based on the grant-date fair valueestimated in accordance with the provisions of SFAS No. 123(R).  As SFAS No. 123(R) requires that stock-basedcompensation expense be based on awards that are ultimately expected to vest,stock-based compensation for the three and nine months ended September 30, 2006has been reduced by estimated forfeitures based on historical trends of optionforfeitures.  The Company has recorded $69,456and $276,871 of stock-based compensation expense during the three and ninemonths ended September 30, 2006 as a result of the adoption of SFAS No.123(R).  The Company did not record anyexcess tax benefits as a result of adopting SFAS No. 123(R) in the three andnine months ended September 30, 2006 because the Company is currently providinga valuation on future tax benefits realized until it can sustain a level ofprofitability that demonstrates its ability to utilize the assets.  Results for prior periods have not been restated.

A summary of option activities under the stock optionplans during the nine months ended September 30, 2006 is presented asfollows:

| Stock Options                      | ** ** | **Shares** | ** ** | **Weighted-  Average  Exercise Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term** | ** **     | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------|------------|------------|------------|---------------------------------------------|------------|-----------------------------------------------------|----------------|-------------------------------------|------------|
| Outstanding at  January 1, 2006    |       | 521,670    |       | $                                           | 2.17       |                                                | 34.7 mos. |                                | $          | 251,600 |   |
| Granted                                 |       | 170,000    |       | $                                           | 1.97       |                                                |           |                                |       |   |
| Exercised                               |       | (43,750    | )          | $                                           | 0.83       |                                                |           |                                |       |   |
| Canceled or  Expired                    |       | (11,022    | )          | $                                           | 2.75       |                                                |           |                                |       |   |
|                                    |       |       |       |                                        |       |                                                |           |                                |       |
| Outstanding at  September 30, 2006 |       | 636,898    |       | $                                           | 2.19       |                                                | 35.7 mos.      |                                | $          | 86,175 |   |
|                                    |       |       |       |                                        |       |                                                |           |                                |       |
| Exercisable at  September 30, 2006 |       | 216,412    |       | $                                           | 2.04       |                                                | 26.2mos.       |                                | $          | 51,275 |   |

 

The aggregate intrinsic value is calculated as thedifference between the exercise price of the underlying awards and the quotedprice of our common stock for the 286,250 options that were in-the-moneyat September 30, 2006.  As of September30, 2006, there was $388,214 of total unrecognized compensation cost related tounvested share-based compensation arrangements granted under our stock awardsplans. That cost is expected to be recognized over a weighted-average period oftwo years.  The share-based compensationwill be amortized based on the accelerated method over the vesting period.  During the three and nine-months ended 

9

 

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** **

September 30, 2006, the Company granted 120,000 and170,000 options at a weighted average fair value price of $1.75 and $1.97 pershare.

 A summary ofthe status of the Company’s non-vested stock options during the nine monthsended September 30, 2006 is presented below:

| Non-vested Options                | ** ** | **Shares** | ** ** | **Weighted-  Average  Grant-Date  Fair Value** | ** ** |
|----------------------------------------|------------|------------|------------|-----------------------------------------------------|------------|
| Non-vested at  January 1, 2006    |       | 361,670    |       | $                                                   | 2.36       |   |
| Granted                                |       | 170,000    |       | 1.97                                                |       |
| Exercised                              |       | —     |       | —                                              |       |
| Vested                                 |       | (100,162   | )          | 1.80                                                |       |
| Forfeited or  expired                  |       | (11,022    | )          | 2.75                                                |       |
|                                   |       |       |       |                                                |       |
| Non-vested at September 30,  2006 |       | 420,486    |       | $                                                   | 2.27       |   |

 

The following table illustrates the proforma effect onnet loss and net loss per share if we had applied the fair value recognitionprovisions of SFAS No. 123(R) to all periods presented.

|                                                                                                                      | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|----------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
|  Net loss before stock-based compensation  expense                                                              | ** ** | $                                                          | (1,073,152 | )                                                         | $          | (1,498,654 | ) |
|  Less: total stock based employee  compensation expense determined under fair value based method for all awards | ** ** | (11,011                                                    | )          | (33,032                                                   | )          |
|  Net loss                                                                                                       | ** ** | $                                                          | (1,084,163 | )                                                         | $          | (1,531,686 | ) |
|                                                                                                                 |       |                                                       |       |                                                      |       |
| Basic net loss  per share:                                                                                           |       |                                                       |       |                                                      |       |
| Net loss before stock-based compensation                                                                             | ** ** | $                                                          | (.31       | )                                                         | $          | (.44 | ) |
| Stock-based compensation                                                                                             | ** ** | (.00                                                       | )          | (.01                                                      | )          |
| Basic net loss per share                                                                                             | ** ** | $                                                          | (.31       | )                                                         | $          | (.45 | ) |
| Diluted net loss  per share:                                                                                         |       |                                                       |       |                                                      |       |
| Net loss before stock-based compensation                                                                             | ** ** | $                                                          | (.31       | )                                                         | $          | (.44 | ) |
| Stock-based compensation                                                                                             | ** ** | (.00                                                       | )          | (.01                                                      | )          |
| Diluted net loss per share                                                                                           | ** ** | $                                                          | (.31       | )                                                         | $          | (.45 | ) |

 

The Company issues all ofits options at fair market value at the time of grant.  The fair value of each option was estimatedon the date of grant using a Black-Scholes option-pricing model with thefollowing weighted average assumptions: risk free interest rates ranging from3.4% to 4.9%, expected life of options ranging from 3 to 5 years; volatilityranging from 70% to 106% and no assumed dividends.  The weighted-average grant-date fair value ofoptions granted during 2005 was estimated to be $1.80.  There were 170,000 options granted in thenine months ended September 30, 2006 at a weighted average fair value of $1.97per share.  For the nine months ended 

10

 

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September 30, 2006, theCompany used a forfeiture rate of 0% and 12% for non-qualified stock optionsand incentive stock options, respectively.

SFAS No. 123(R) requiresus to make certain assumptions and judgments regarding the grant date fairvalue. These judgments include expected volatility, risk free interest rate,expected option life, dividend yield, vesting percentage and forfeitures. Theseestimations and judgments are determined by us using many different variablesthat in many cases are outside of our control. The changes in these variablesor trends, including stock price volatility and risk free interest rate maysignificantly impact the grant date fair value resulting in a significantimpact to our financial results.

**Note8-Commitments and Contingencies**

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

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

**Note 9-Income Taxes**

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

**Note 10-Acquisition of StorCOMM, Inc.**

On November 22,2005, the Company acquired StorCOMM, Inc. pursuant to an Agreement andPlan of Reorganization dated August 16, 2005 (the “Merger Agreement”).Simultaneously with the closing of the merger, ASPYRA sold in a privateplacement 1,500,000 shares of its common stock and warrants to purchase up to300,000 shares of its common stock for $3,000,000, less costs, pursuant to theterms of the Common Stock and Warrant Purchase Agreement dated August 18,2005. The private placement closed and became effective on November 22,2005.

Pursuant to the MergerAgreement, the Company issued 3,498,000 shares of common stock in exchange forthe business and assets of StorCOMM. Based upon the average closing price ofthe common stock for August 11, 2005 

11

 

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** **

through August 19,2005, the value of the common stock was $7,765,560. In addition, the Companypaid approximately $1,157,000 in transaction costs and had advanced StorCOMM$595,387.

The acquisition ofStorCOMM is accounted for as a purchase business combination in accordance withSFAS No. 141, “Business Combinations.” The total purchase price related tothe acquisition of StorCOMM was $9,517,590.

StorCOMM operates as awholly owned subsidiary of ASPYRA and the Company’s financial statementsinclude the results of StorCOMM from the closing date of the acquisition(November 22, 2005).

The following tablesummarizes the estimated fair values of the assets acquired and liabilitiesassumed at the date of acquisition. The allocation of the purchase price wasbased on an independent third-party valuation of certain intangible assets. Theexcess purchase price over the estimated fair value of the assets acquired andliabilities assumed is recorded as goodwill.

**AtNovember 22, 2005**

|                            | ** ** | ** ** | ** ** |
|----------------------------|------------|------------|------------|
| Current assets        |       | $1,286,767 |       |
| Purchased  technology      |       | 1,976,836  |       |
| Other intangible  assets   |       | 2,110,000  |       |
| Goodwill                   |       | 7,698,434  |       |
|                       |       |       |       |
| Total assets  acquired     |       | 13,072,037 |       |
|                       |       |       |       |
| Current  liabilities       |       | 3,554,447  |       |
|                       |       |       |       |
| Total  liabilities assumed |       | 3,554,447  |       |
|                       |       |       |       |
| Net assets acquired        |       | $          | 9,517,590  |   |
|                            |            |            |            |  |

 

The purchased technologyis comprised of internally created software, which was valued by theindependent third-party who assigned an expected useful life of six years.

The other intangibleassets are primarily comprised of customer relationships valued by theindependent third-party. The expected useful life assigned is fifteen years.

The excess of thepurchase price over the estimated fair value of the assets acquired and theliabilities assumed was recorded as goodwill, which is expected to be deductiblefor income tax purposes.

Since there is no step upin basis of the acquired intangible assets for tax purposes, amortization ofpurchased technology and other intangible assets is not deductible for taxpurposes. A $1,634,734 deferred tax liability is calculated at the blended taxrate of 40% applied to the $1,976,836 purchased technology and $2,110,000 otherintangible assets. At December 31, 2005, in accordance with SFAS No. 141,$1,634,734 of the deferred tax liability is expected to be realized over theterm as the deferred tax asset, therefore $1,634,734 of the deferred taxliability was offset against the deferred tax asset of ASPYRA as part ofthe consolidated income tax provision. As a result of the transaction, ASPYRA’Sdeferred tax asset valuation was reduced. In accordance with SFAS No. 109, thechange in valuation allowance was offset against goodwill.

12

 

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The following summarizedunaudited pro forma consolidated results of operations are presented as if theacquisition of StorCOMM occurred on January 1, 2005. The unaudited proforma results are not necessarily indicative of future earnings or earningsthat would have been reported had the acquisition been completed and presented.

 

|                                   | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended**  | ** ** |
|-----------------------------------|------------|----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **September 30, 2005** | ** ** | **September 30, 2005** | ** ** |
| ** **                        | ** ** | **(unaudited)**                  | ** ** | **(unaudited)**                  | ** ** |
|                              |       |                             |       |                             |       |
| Revenues                          |       | $                                | 2,455,781  |                             | $          | 9,284,663 |   |
| Net Loss                          |       | (2,278,819                       | )          | (2,651,248                       | )          |
| Loss per share-basic  and diluted |       | (.27                             | )          | (.32                             | )          |
|                                   |            |                                  |            |                                  |            |  |  |

 

In January 2006, StorCOMM, Inc. changed its name toAspyra Diagnostic Solutions, Inc.

**Note 11-Private Placement**

On May 17, 2006, ASPYRA sold in a private placement 2,250,000 shares ofits common stock and warrants to purchase up to 1,350,000 shares of its commonstock pursuant to the terms of the Common Stock and Warrant Purchase Agreement,dated May 4, 2006 (the “Purchase Agreement”), by and among ASPYRA and each ofthe Purchasers named therein. The shares of common stock and warrants were soldin units, with each unit consisting of a single share of ASPYRA common stockand three-fifths of a warrant to purchase one share of ASPYRA common stock. Theprice per unit was $2.00 for an aggregate purchase price of $4,500,000, lesscosts.  The exercise price of the warrants is $3.00 per share.  Theseshares were issued and sold pursuant to the exemption from registration underthe Securities Act of 1933, as amended (the “Securities Act”) that is availablefor offers and sales to accredited investors pursuant to Rule 506 ofRegulation D under the Securities Act and Section 4(2) of theSecurities Act.  Simultaneously with theexecution of the Purchase Agreement, ASPYRA and each of the Purchasers enteredinto a Registration Rights Agreement, dated May 4, 2006, pursuant to which eachof the Purchasers shall be entitled to certain registration rights.

During the three and nine months ended September 30, 2006 the Companyaccrued approximately $93,000 and $192,000 which is attributable to a penaltyrelated to the private placement transactions that were completed in November2005 and May 2006, whereby the investors were entitled to receive an amount of1% per month of the private placement of $3,000,000 and $4,500,000 if theCompany’s registration statement had not been declared effective within 120days of the closing dates of the respective private placements.

**Note 12-Supplemental Cash Flow**

During the nine months ended September 30, 2006, the Company enteredinto capital leases for the purchase of equipment totaling $636,485 of which$70,599 was paid during the period.

 

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**Note 13-New Accounting Pronouncements**

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicingof Financial Assets - an amendment of FASB Statement No. 140.” SFAS No.156 requires an entity to recognize a servicing asset or servicing liabilityeach time it undertakes a contractual obligation to service a financial assetin certain circumstances. All separately recognized servicing assets andservicing liabilities are required to be initially measured at fair value.Subsequent measurement methods include the **amortization****method, whereby servicing assets orservicing liabilities are amortized in proportion to and over the period ofestimated net servicing income or net servicing loss, or the **fair value**method, whereby servicing assets or servicing liabilities are measured at fairvalue at each reporting date and changes in fair value are reported in earningsin the period in which they occur. If the amortization method is used, anentity must assess servicing assets or servicing liabilities for impairment orincreased obligation based on the fair value at each reporting date.SFAS No. 156 is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact of SFAS No. 156 on ourconsolidated financial statements.

In June 2006, theFASB issued FASB Interpretation No. 48, Accounting for Uncertainty inIncome Taxes, (FIN 48) an interpretation of FASB Statement No. 109,Accounting for Income Taxes. FIN 48 requires that a position taken or expectedto be taken in a tax return be recognized in the financial statements when itis more likely than not (i.e. a likelihood of more than fifty percent) that theposition would be sustained upon examination by tax authorities. A recognizedtax position is then measured at the largest amount of benefit that is greaterthan fifty percent likely of being realized upon ultimate settlement. Uponadoption, the cumulative effect of applying the recognition and measurementprovisions of FIN 48, if any, shall be reflected as an adjustment to theopening balance of retained earnings.

FIN 48 requires that subsequent to initial adoption a change injudgment that results in subsequent recognition, derecognition or change in ameasurement of a tax position taken in a prior annual period (including anyrelated interest and penalties) be recognized as a discrete item in the periodin which the change occurs. Currently, we record such changes in judgment,including audit settlements, as a component of our income tax provision. Thus,our reported quarterly income tax rate may become more volatile upon adoptionof FIN 48. This change will not impact the manner in which we record income taxexpense on an annual basis.

FIN 48 also requires expanded disclosures including identification oftax positions for which it is reasonably possible that total amounts ofunrecognized tax benefits will significantly change in the next twelve months,a description of tax years that remain subject to examination by major taxjurisdiction, a tabular reconciliation of the total amount of unrecognized taxbenefits at the beginning and end of each annual reporting period, the totalamount of unrecognized tax benefits that, if recognized, would affect theeffective tax rate and the total amounts of interest and penalties recognizedin the statements of operations and financial position. FIN 48 is effective forfiscal years beginning after December 15, 2006. We are currentlyevaluating the impact of this standard on our consolidated financialstatements.

On September 15, 2006, the FASB issued SFAS No. 157, Fair ValueMeasurements. SFAS No. 157 defines fair value, establishes a framework formeasuring fair value in accordance with generally accepted accountingprinciples, and expands disclosures about fair value measurements. SFAS No. 157does not expand the use of fair value in any new circumstances. SFASNo. 157 is effective for fiscal years beginning after November 15,2007, and interim periods within those fiscal years. The Company does notexpect SFAS No. 157 will have a significant impact on the Company’sconsolidated financial statements.

In September 2006, the Securities and Exchange Commission (“SEC”)issued Staff Accounting Bulletin No. 108, “Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements” (“SAB 108”). SAB 108 provides interpretive guidance on how theeffects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement.  The SEC staffbelieves that registrants should quantify errors using both the balance sheetand income statement approach when quantifying a misstatement. SAB 108 iseffective for the Company’s fiscal year ending December 31, 2006.  TheCompany is currently evaluating the impact of SAB 108 on the Company’sconsolidated financial statements.

**Item 2.            Management’s Discussion and Analysis or Plan ofOperation**

TheSEC encourages companies to disclose forward-looking information so thatinvestors can better understand a company’s future prospects and make informedinvestment decisions. This Quarterly Report on Form 10-QSB contains 

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such “forward-lookingstatements” within the meaning of the Private Securities Litigation Reform Actof 1995, Section 27A of the Securities Act of 1933 and Section 21E ofthe 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 discussionof future events, operating or financial performance, financing sources,product development, capital requirements, market growth and the like, identifyforward-looking statements. Forward-looking statements are merely predictionsand therefore inherently subject to uncertainties and other factors which couldcause the actual results to differ materially from the forward-lookingstatement.  These forward-lookingstatements include, among others:

·      projectionsof revenues and other financial items;

·      statementsof strategies and objectives for future operations;

·      statementsconcerning proposed applications or services;

·      statementsregarding future economic conditions, performance or business prospects;

·      statementsregarding competitors or competitive actions; and

·      statementsof assumptions underlying any of the foregoing.

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

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

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

**Overview**

The followingdiscussion relates to the newly merged business of ASPYRA, which includes theoperations of its wholly owned subsidiaries Aspyra Diagnostic Solutions, Inc.(formerly StorCOMM, Inc.) and Aspyra Technologies, Ltd. (formerly StorCOMMTechnologies, Ltd.).  The merger, whichresulted in the acquisition of StorCOMM, was consummated on November 22, 2005and this third fiscal quarter and nine-month period of 2006 is the third fullquarterly report since the merger was consummated.

ASPYRA operates inone business segment and generates revenues primarily from the sale of itsClinical Information Systems (“CIS”) and Diagnostic Information Systems (“DIS”),which includes the license of proprietary application software, and may includethe sale of servers and other hardware components to be integrated with itsapplication software. In connection with its sales of its products, the Companyprovides implementation services for the installation, integration, andtraining of end users’ personnel. The Company also generates sales of ancillarysoftware and hardware, including its data acquisition products, to itscustomers and to third parties. We recognize these revenues under system salesin our financial statements.  The Companyalso generates recurring revenues from the provision of comprehensive postimplementation services to its customers, pursuant to extended serviceagreements. We recognize these revenues under service revenues in our financialstatements.  This is an important aspectof its business as the Company’s products are “mission critical” systems thatare used by healthcare providers in most cases 24 hours per day and 7 days perweek. The ability to provide comprehensive services is crucial to obtaining newcustomers and maintaining existing customers.

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Because of thenature of its business, ASPYRA makes significant investments in research anddevelopment for new products and enhancements to existing products. Historically,ASPYRA has funded its research and development programs through cash flowprimarily generated from operations. Management anticipates that future expenditures in research anddevelopment will either continue at current levels or may increase for theforeseeable future, and will be funded primarily out of the Company’s cashflow.

ASPYRA’sresults of operations for the third fiscal quarter and nine-month period endedSeptember 30, 2006 were marked by an increase in sales and an increase inoperating loss over the comparable periods of 2005 that are more fullydiscussed in the following section “Results of Operations.”  The Company’s increase in revenues was due tothe addition of the revenues from ASPYRA’s wholly owned subsidiaries, AspyraDiagnostic Solutions, Inc. (formerly StorCOMM, Inc.) and Aspyra Technologies,Ltd. (formerly StorCOMM Technologies, Ltd.). The Company concluded sales late in the quarter, which due to timingissues, were not fully implemented and recognized in the quarter resulting indeferred revenue on system sales of approximately $1.9 million at September 30,2006.  Generally, sales cycles for CISand DIS products are lengthy and on average exceed six months from inception toclosure.  Because of the complexity ofthe sales process, a number of factors that are beyond the control of theCompany can delay the closing of transactions.

Theoperating losses incurred by the Company during the current quarter andnine-month period ended September 30, 2006 were attributable to variousfactors.  The Company continued toexperience delays related to closing sales, which delayed implementation ofsystems and recognition of revenue on many of its DIS and CIS sales.  In the third quarter ended September 30,2006, the Company completed the sale of its Laboratory Information Systems (“LIS”)and Anatomic Pathology (“AP”) applications to a large community-based hospitalin Chicago, which will be implemented in the fourth quarter of 2006 and severalother CIS and DIS transactions.  Only afraction of the sales completed in the quarter ended September 30, 2006, wereactually recognized as revenue in that quarter. The backlog of deferred revenue associated with such sales increased to$1,930,958 as of September 30, 2006, which will be recognized in futureperiods.  Additionally, the Company isstill completing the integration and restructuring of the merged business andincurred certain costs associated with such activities which were onlypartially offset by reductions in redundant personnel and other expenses duringthe quarter ended September 30, 2006. The Company expects to achieve synergies and cost reductions in itsbusiness as it completes further integration and restructuring by year-end.  Furthermore, the Company has been primarilyreliant on distributors and channel partners for the sales of its diagnosticsystems and has been subject to inconsistencies in the performance of suchthird parties and the timely consummation of orders.  Aspyra is in the process of transitioning toa direct sales model for some of the diagnostic system products to supplementthe distribution and channel network so that it is less reliant on thirdparties in the sale of its diagnostic systems. Aspyra also has completed new versions of its laboratory and radiologyinformation systems products, as well as its new AccessRAD RadiologyInformation System (“RIS”) / Picture Archive Communication Systems (“PACS”)which it has begun marketing and anticipates increased sales related to suchnew product releases in the future.

Overallas compared to the second and first fiscal quarters of 2006, the Company’soperating losses in the third fiscal quarter ended September 30, 2006 declinedby approximately $320,000 and $660,000, respectively.  Management believes that the operating losseswill continue to decline as the integration plan is concluded and the Companyreaches it sales objectives with its new improved products.

**Resultsof Operations**

Thefollowing table sets forth certain line items in our condensed consolidated statementof operations as a percentage of total revenues for the periods indicated:
| ** **                              | ** ** | **Three Months  Ended  September 30, 2006** | ** ** | **Three Months  Ended  September 30, 2005** | ** ** | **Nine Months  Ended  September 30, 2006** | ** ** | **Nine Months  Ended  September 30, 2005** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Revenues:                               |       |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                            |       | 45.9                                                       | %          | 31.6                                                       | %          | 42.2                                                      | %          | 28.0                                                      | %          |
| Service revenues                        |       | 54.1                                                       |       | 68.4                                                       |       | 57.8                                                      |       | 72.0                                                      |       |
| Total revenues                          |       | 100.0                                                      |       | 100.0                                                      |       | 100.0                                                     |       | 100.0                                                     |       |
| Cost of products  and services sold:    | ** ** |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| System sales                            | ** ** | 29.4                                                       |       | 22.8                                                       |       | 31.2                                                      |       | 23.8                                                      |       |
| Service revenues                        | ** ** | 23.7                                                       |       | 24.0                                                       |       | 23.7                                                      |       | 24.3                                                      |       |
| Total cost of  products and services    | ** ** | 53.1                                                       |       | 46.8                                                       |       | 54.9                                                      |       | 48.1                                                      |       |
| Gross profit                            | ** ** | 46.9                                                       |       | 53.2                                                       |       | 45.1                                                      |       | 51.9                                                      |       |
| Operating  expenses:                    | ** ** |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Selling, general and administrative     | ** ** | 50.7                                                       |       | 51.2                                                       |       | 60.3                                                      |       | 48.6                                                      |       |
| Research and development                | ** ** | 15.2                                                       |       | 18.2                                                       |       | 15.9                                                      |       | 17.1                                                      |       |
| Total operating  expenses               | ** ** | 65.9                                                       |       | 69.4                                                       |       | 76.2                                                      |       | 65.7                                                      |       |
| Operating loss                          | ** ** | (19.0                                                      | )          | (16.2                                                      | )          | (31.1                                                     | )          | (13.8                                                     | )          |
|                                    | ** ** |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Loss before  provision for income taxes | ** ** | (21.6                                                      | )          | (16.2                                                      | )          | (33.5                                                     | )          | (13.8                                                     | )          |
| Provision for  income taxes             | ** ** | —                                                     |       | 45.9                                                       |       | —                                                    |       | 15.5                                                      |       |
|                                    | ** ** |                                                       |       |                                                       |       |                                                      |       |                                                      |       |
| Net loss                                | ** ** | (21.6                                                      | )          | (62.1                                                      | )          | (33.5                                                     | )          | (29.3                                                     | )          |

 

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*Revenues*

Salesfor the fiscal quarter ended September 30, 2006 increased to $3,282,041, ascompared to $1,727,672 for the comparable quarter ended September 30, 2005, anoverall increase of approximately $1,554,369 or 89.97%. For the nine-monthperiod ended September 30, 2006 sales increased to $9,201,937, as compared to$5,108,967 for the same period in fiscal 2005, an overall increase of$4,092,970 or 80.1%.   When analyzed byrevenue category for the quarter and nine-month period, sales of CIS and DISproducts increased by $962,170, or 176.26%, and $2,451,715 or 171.5%respectively.  For the quarter andnine-month period, service revenues increased by $592,199 or 50.11% and$1,641,255 or 44.6% respectively. The increase in sales of CIS and DIS productswas primarily attributable to the addition of the revenues from ASPYRA’s whollyowned subsidiaries, described above under “Overview”.  The increase in service revenues isattributable to the consolidation of service revenues from the subsidiaries anda greater number of client accounts under contract.  Service revenues are expected to continue toincrease as and when the Company’s installed base of CIS and DIS installationsincreases.

TheCompany continues to invest heavily in sales and marketing activities focusedon increasing its transaction pipeline and transitioning to more of a directsales model so that it is less reliant on third parties in the sale of its CISand DIS products while new improved product versions are being introduced.  While this transition is being completedmanagement is cautiously optimistic about the near-term outlook for its salesof CIS and DIS products.  The Company hasinvested additional funds into marketing activities to further build its salespipeline as well as to launch the newly merged company into new marketopportunities.  The Company’s futureoperating results will continue to be subject to quarterly variations basedupon a wide variety of factors, including the volume mix and timing of ordersreceived during any quarter, and the temporary delays in the closing of new CISand DIS sales.  In addition, the Company’srevenues associated with CIS and DIS sales may be delayed due to client relatedissues such as client staff availability for training, information technologyinfrastructure readiness, and the performance of third party contractors, allof which are issues outside of the control of ASPYRA.

*Costsof products and services sold*

Costof sales for the quarter ended September 30, 2006 increased by $935,543 or115.7% to $1,744,214, as compared to $808,671 for the same quarter of fiscal2005.  Cost of sales for the nine-monthperiod increased by $2,592,897 or 105.5% to $5,050,829 as compared to $2,457,932for the same period of fiscal 2005.  Forthe quarter and nine-month period, the increases in cost of sales wereprimarily attributable to an increase in labor costs of $309,511 or 69.0%, and$978,058 or 71.8% respectively, increases in material costs of $330,178 or633.2%, and $868,628 or 416.6% respectively; and increases in other costs of$295,854 or 96.2% and $746,211 or 84.2% respectively, as compared to the sameperiods in fiscal 2005.  The increase inmaterial costs was attributable to the increase in sales of CIS and DISproducts discussed above.  The increasein labor costs was attributable to the addition of personnel of AspyraDiagnostic Solutions, Inc. The increase to other costs was also a result of theaddition of the operations of the subsidiaries. For the current quarter and nine-month period, cost of sales as apercentage of sales was 53% and 55% respectively, as compared to 47% and 48%respectively for the comparable periods of 2005.  The overall percentage increase in cost ofsales, as a percentage of sales, was attributable to the volume and mix ofsales during the periods discussed and the cost of sales related thereto.  The Company could potentially experiencequarterly variations in gross margin as a result of the factors discussed above.

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*Selling,general and administrative expenses*

Selling,general and administrative expenses increased by $781,080 or 88.4% for thecurrent fiscal quarter ended September 30, 2006 as compared to the same quarterin fiscal 2005.  For the nine-monthperiod, selling, general and administrative expenses increased by $3,065,272 or123.4% as compared to the same period in fiscal 2005. For the quarter theincreases in selling, general and administrative expenses were primarilyattributable to the addition of expenses from the consolidation of the subsidiariesof approximately $678,000 as well as additional expenses incurred during thequarter ended September 30, 2006, as follows: corporate governance expenses of approximately $40,000, depreciationexpense of approximately $22,000, and compensation expense of approximately $52,000associated with the adoption of SFAS No. 123(R).  Also included in the current quarter, areadditional expense consolidated from our subsidiaries was approximately$150,000 attributable to amortization of intangible assets.

Forthe nine-month period the increases in selling, general and administrativeexpenses were primarily attributable to the addition of expenses from theconsolidation of the subsidiaries of approximately $2,212,000 as well asadditional expenses incurred during the period as follows:  legal and accounting fees of approximately$146,000, corporate governance expenses of $120,000, tradeshow expenses ofapproximately $62,000, additional personnel, including commissions paid, insales, regulatory affairs, and accounting of approximately $139,000,depreciation expense of $66,000, increase in utilities of approximately$42,000, compensation expense of approximately $213,000 associated with theadoption of SFAS No. 123(R),  andexpenses related to the Company’s user symposium of approximately $72,000.  Also included in the current nine-monthperiod as additional expense consolidated from our subsidiaries wasapproximately $452,000 attributable to amortization of intangible assets

TheCompany’s plans include increased further investment in its marketing and salesprograms during the balance of its 2006 fiscal year.

*Researchand development expenses*

Researchand development expenses increased by $184,628, or 58.7% for the current fiscalquarter ended September 30, 2006 as compared to the same period in fiscal2005.  For the nine-month period researchand development expense increased $587,380 or 67.3%, as compared to the sameperiod in fiscal 2005.  The increase isattributable to the addition of expenses from the consolidation of thesubsidiaries, which amounted to approximately $169,000 during the currentquarter and $471,000 for the nine-month period. In addition there were other personnel additions, which amounted to$12,000 and $81,000 for the current quarter and nine-month period.  For the comparable third quarters of 2006 and2005, the Company capitalized software costs of $216,360 and $171,000,respectively, which are generally amortized over the estimated useful life, notto exceed five years.  For the comparablenine-month periods of 2006 and 2005, the Company capitalized software costs of$715,946 and $511,421 respectively.  Suchcosts were attributable to the development of AccessRAD the new RIS/PACSplatform that integrates the Company’s radiology information system CyberRADwith its AccessNET PACS system, and enhancements and new modules for theCompany’s CIS and DIS products.  TheCompany plans to continue significant product development activities at currentexpense levels throughout the 2006 fiscal year.

*InterestExpense*

Interest expensefor the current quarter ended September 30, 2006 increased by $121,932 or3,057% as compared to the same quarter of fiscal 2005.  Interest expense for the current nine-monthperiod increased $280,413 or 2,386% over the comparable nine-month period offiscal 2005. Of this amount approximately $93,000 and $192,000 for the quarterand nine-month period, respectively, was attributable to a penalty related tothe private placement transactions that were completed in November 2005 and May2006 whereby the investors were entitled to receive an amount of 1% per monthif the Company’s registration had not been declared effective within 120 daysof the closing dates of the respective private placements.  The Company’s registration statement wasdeclared effective on September 22, 2006 therefore, the Company is nolonger in penalty on these private placement transactions.  The balance of the increase is a result ofthe increased borrowings during the current quarter and nine-month periods ascompared to the third quarter and nine-month period of fiscal 2005.

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*Netincome (loss)*

As aresult of the factors discussed above, the Company incurred a net loss of $710,063or basic and diluted loss per share of $.07 in the third fiscal quarter of 2006as compared to net loss of $1,073,152 or basic and diluted loss per share of$.31 for the third fiscal quarter of 2005. For the nine-month period ended September 30, 2006, the Company incurreda net loss of $3,087,961 or basic and diluted loss per share of $.32 ascompared to net loss of $1,498,654 or basic and diluted loss per share of $.44for the same period of 2005.

**Liquidity and Capital Resources**

Historically,the Company’s primary need for capital has been to invest in softwaredevelopment, and in computers and related equipment for its internal use.  The Company invested $715,946 and $511,421respectively during the nine months ended September 30, 2006 and 2005 insoftware development.  These expendituresrelated to investment in the Company’s new RIS/PACS integrated systemAccessRAD, enhancements to AccessNET, and the new browser version of theCompany’s LIS product, CyberLAB, and other product enhancements.  The Company anticipates expending additionalsums during the remainder of fiscal 2006 on product enhancements to all itsproducts and the further development of AccessRAD, and the new browser versionof the Company’s LIS product, CyberLAB. During the nine months ended September 30, 2006 and 2005, the Companyinvested an aggregate of $890,316, of which $636,485 was under capital leases,and $256,925, respectively, in fixed assets primarily consisting of computers,network infrastructure, telephone and data communications systems, andsoftware.

Asof September 30, 2006, the Company’s working capital amounted to a deficit of$1,694,495 compared to a deficit of $2,549,521, as of December 31, 2005.  The deficit working capital position on aconsolidated basis is the result of ASPYRA merging with Aspyra DiagnosticSolutions, Inc. (formerly StorCOMM, Inc.), which had a substantial negativeworking capital position at the time of the merger and the increase in deferredrevenues, which in the aggregate amounted to approximately $3,991,000 atSeptember 30, 2006.  On May 17, 2006, theCompany sold in a private placement transaction 2,250,000 shares of its commonstock and warrants to purchase up to 1,350,000 shares of its common stockpursuant to the terms of the Common Stock and Warrant Purchase Agreement, datedMay 4, 2006.  The private placementgenerated $4,500,000, less costs of approximately $470,000, and improved  the Company’s working capital position.

Cashused in operating activities was $1,649,067 for the nine-month period endedSeptember 30, 2006 compared to cash provided by operations of $242,987 for thecomparable period of fiscal 2005.  Thedecrease in cash flow from operating activities was primarily attributable tothe net loss incurred and the net change in accrued receivables and payablescompared to the same period of fiscal 2005.

Netcash used in investing activities totaled $969,777 for the nine-month periodended September 30, 2006, compared to $1,108,423 used in investing activitiesduring the comparable period of 2005. The decrease in cash used in investing activities was due to the reductionin capitalized acquisition costs partially offset by additional investment incapitalized software.

Cashflows from financing activities amounted to $3,276,109 during the nine-monthperiod ended September 30, 2006 compared to $71,400 provided during thecomparable period of fiscal 2005.  Theincrease was primarily attributable to proceeds from the private placementcompleted in May 2006, discussed above and from borrowings on its revolvingline of credit with the bank offset by payments on notes payable and anincrease in restricted cash.

The Company’s primary source of working capital hasbeen generated from the private placement, which was completed in May 2006, andfrom borrowings.  The Company’s resultsof operations for the current period ended September 30, 2006 produced negativeoperating cash flow of approximately $1,649,067.  An unanticipated decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices or cancellations of contracts could have a negative effect on cashflow from operations and could in turn create short-term liquidityproblems.  If sales are not as expected,the Company will consider certain cost cutting measures.  We believe that our current cash and cashequivalents, and cash flow from operations, will be sufficient to meet ourcurrent anticipated cash needs, including for working capital purposes, capitalexpenditures and various contractual obligations, for at least the next 12months.  We may, however, requireadditional cash resources due to changed business conditions or other futuredevelopments, including any investments or acquisitions we may decide topursue.  The sale of convertible debt securitiesor additional equity securities could result in additional dilution to ourshareholders. 

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The incurrence ofindebtedness would result in incurring debt service obligations and couldresult in operating and financial covenants that would restrict our operations.In addition, there can be no assurance that any additional financing will beavailable on acceptable terms, if at all. Although there are no presentunderstandings, commitments or agreements with respect to the acquisition ofany other businesses, applications or technologies, we may, from time to time,evaluate acquisitions of other businesses, applications or technologies.

**Seasonality, Inflation and Industry Trends**

The Company’ssales are generally higher in the winter and spring.  Inflation has not had a material effect onthe Company’s business since the Company has been able to adjust the prices ofits products and services in response to inflationary pressures.  Management believes that most phases of thehealthcare segment of the computer industry will continue to be highlycompetitive, and that potential healthcare reforms including those promulgatedby Health Insurance Portability and Accountability Act may have a long-termpositive impact on its business.  The keyissues driving demand for ASPYRA’s products are industry concerns about patientcare and safety issues, development of a national standard for the electronichealth record that will affect all clinical data, a paradigm shift from analogto digital imaging technologies, and regulatory compliance.  The Company has continued to invest heavilyin new application modules to assist its customers in addressing theseissues.  Management believes that newapplication modules and features that concentrate on such issues will be keyselling points and will provide a competitive advantage.  In addition, management believes that thehealthcare information technology industry will be marked with more significanttechnological advances, which will improve the quality of service and reducecosts.  The Company anticipates it will beable to meet these challenges.

**Critical Accounting Policies and Estimates**

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

*Inventory*

TheCompany’s inventory is comprised of a current inventory account that consistsof items that are held for resale and a long-term inventory account thatconsists of items that are held for repairs and replacement of hardwarecomponents that are serviced by the Company under long-term Extended ServiceAgreements with its clients.  Currentinventory is valued at the lower of cost to purchase or the current estimatedmarket value of the inventory items. Inventory is evaluated on a continual basis and adjustments to recordedcosts are made based on management’s estimate of future sales value, or in thecase of the long-term component inventory, on management’s estimation of theusage of specific inventory items and net realizable value.  Management reviews inventory quantities onhand and makes determination of the excess or obsolete items in the inventory,which, are specifically reserved.  Inaddition, adjustments are made for the difference between the cost of the inventoryand the estimated market value and charged to operations in the period in whichthe facts that give rise to the adjustments become known.  At September 30, 2006, the inventory reservewas approximately $161,800.

*Accounts Receivable*

Accountsreceivable balances are evaluated on a continual basis and allowances areprovided for potentially uncollectible accounts based on management’s estimateof the collectability of customer accounts. If the financial condition of acustomer were to deteriorate, resulting in an impairment of their ability tomake payments, an additional allowance may be required. Allowance adjustmentsare charged to operations in the period in which the facts that give 

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rise to theadjustments become known.  The accountsreceivable balance at September 30, 2006 was $2,391,021, net of an allowancefor doubtful accounts of approximately $82,840.

*RevenueRecognition*

Revenues arederived primarily from the sale of CIS and DIS products and the provision ofservices.  The components of the systemsales revenues are the licensing of computer software, installation, and thesale of computer hardware and sublicensed software. The components of servicerevenues are software support and hardware maintenance, training, andimplementation services.  The Companyrecognizes revenue in accordance with the provisions of Statement of Position(SOP) No. 97-2, “Software Revenue Recognition,” as amended by SOP No. 98-4, SOP98-9 and clarified by Staff Accounting Bulletin (SAB) 104 “Revenue Recognitionin Financial Statements.”  SOP No 97-2,as amended, generally requires revenue earned on software arrangementsinvolving multiple-elements to be allocated to each element based on therelative fair values of those elements. The Company allocates revenue to each element in a multiple-elementarrangement based on the element’s respective fair value, with the fair valuedetermined by the price charged when that element is sold and specificallydefined in a quotation or contract.  TheCompany determines the fair value of the maintenance portion of the arrangementbased on the renewal price of the maintenance charged to customers,professional services portion of the arrangement, other than installationservices, based on hourly rates which the Company charges for these serviceswhen sold apart from a software license, and the hardware and sublicense ofsoftware based on the prices for these elements when they are sold separatelyfrom the software.  At September 30, 2006deferred revenue was $1,930,958.

PostImplementation software and hardware maintenance services are marketed undermonthly, quarterly and annual arrangements and are recognized as revenueratably over the contracted maintenance term as services are provided.  Deferred revenue related to CIS and DIS salesare comprised of deferrals for license fees, hardware, and other services forwhich the implementation has not yet been completed and revenues have not beenrecognized.  At September 30, 2006deferred service contract income was $2,060,468.

*SoftwareDevelopment Costs*

Costsincurred internally in creating computer software products are expensed untiltechnological feasibility has been established upon completion of a programdesign. Thereafter, applicable software development costs are capitalized andsubsequently reported at the lower of amortized cost or net realizablevalue.  Capitalized costs are amortizedbased on current and expected future revenue for each product with minimumannual amortization equal to the straight-line amortization over the estimatedeconomic life of the product, not to exceed five years.  For the nine-month periods ended September30, 2006 and 2005, the Company capitalized $715,946 and $511,421,respectively.  At September 30, 2006, thebalance of capitalized software costs was $2,383,258, net of accumulatedamortization of $1,001,179.

*Intangible Assets*

Intangible assets, withdefinite and indefinite lives, consist of acquired technology, customerrelationships, channel partners, and goodwill. They are recorded at cost and are amortized, except goodwill, on a straight-linebasis based on the period of time the asset is expected to contribute directlyor indirectly to future cash flows, which range from four to 15 years.

In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 142, goodwill istested for impairment on an annual basis or between annual tests if an eventoccurs or circumstances change that would indicate the carrying amount may beimpaired.  In accordance with SFAS No.144, Accounting for Impairment of Long-Lived Assets, management reviewsdefinite life intangible assets to determine if events or circumstances haveoccurred which may cause the carrying values of intangible assets to beimpaired. The purpose of these reviews is to identify any facts orcircumstances, either internal or external, which may indicate that thecarrying value of the assets may not be recoverable.

*Stock-basedCompensation*

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

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Priorto January 1, 2006, we accounted for those plans under the recognition andmeasurement provisions of APB Opinion No. 25, Accounting for Stock Issuedto Employees, and related Interpretations, as permitted by SFAS No. 123,Accounting for Stock-Based Compensation. No stock-based employee compensationcost was recognized in our Statement of Operations for the three and ninemonths ended September 30, 2005 as all options granted under our plans had anexercise price equal to the market value of the underlying common stock on thedate of grant. Effective January 1, 2006, we adopted the fair valuerecognition provisions of SFAS No. 123(R), Share-Based Payment, using themodified-prospective-transition method. Under that transition method, compensationcost recognized in the three and nine months ended September 30, 2006 includes;(a) compensation cost for all share-based payments granted prior to, butnot yet vested as of January 1, 2006, based on the grant date fair valueestimated in accordance with the original provisions of SFAS No. 123, and(b) compensation cost for all share-based payments granted subsequent toJanuary 1, 2006, based on the grant-date fair value estimated inaccordance with the provisions of SFAS No. 123(R). Results for priorperiods have not been restated.

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

*IncomeTaxes*

TheCompany accounts for income taxes in accordance with SFAS No. 109 “Accountingfor Income Taxes,” which requires recognition of deferred tax liabilities andassets for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Under this method, deferred tax liabilitiesand assets are determined based on the differences between the financialstatements and the tax bases of assets and liabilities using enacted tax ratesin effect for the year in which the differences are expected to reverse.  Valuation allowances are established whennecessary to reduce deferred tax assets to the amount expected to berealized.  Income tax expense representsthe tax payable for the period and the change during the period in deferred taxassets and liabilities.

### **Risk Factors**

Inevaluating the Company, various risk factors and other information should becarefully considered.  The risks anduncertainties described below are not the only ones that impact theCompany.  Additional risks anduncertainties not presently known to us or that we currently deem immaterialmay also have an adverse impact on us. Among other things, this discussion contains forward-looking statementsthat are based on certain assumptions about future risks anduncertainties.  We believe that ourassumptions are reasonable.  Nonetheless,it is likely that at least some of these assumptions will not come true.

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

We haveexperienced operating losses and cash outflows. For the nine months ended September 30, 2006, our net loss was $3,087,961.  At September 30, 2006, our cash and cashequivalents, including restricted cash, totaled $2,964,545 and our workingcapital deficit was $1,694,495.  Wecannot be certain that Aspyra will become profitable and sustainprofitability.  If Aspyra does not becomeprofitable and sustain profitability, the market price of our common stock willdecline.  The Company’s primary source ofworking capital has been generated from the private placements andborrowings.  The Company’s results ofoperations for the nine months ended September 30, 2006 produced negativeoperating cash flow of approximately $1,649,067.  Any decline in sales, delays inimplementations where payments are tied to delivery and/or performance ofservices or cancellations of contracts could have a negative effect on cashflow from operations and could in turn increase our liquidity problem.  If sales are not as expected, the Companywill consider certain cost cutting measures. We may require additional cash resources to sustain our business.  The sale of convertible debt securities oradditional equity securities could result in additional dilution to ourshareholders.  The incurrence ofadditional indebtedness would result in incurring debt service obligations andcould result in operating and financial covenants that would restrict ouroperations.  There can be no assurancethat any additional financing will be available on acceptable terms, if at all.

 

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***If ASPYRA and Aspyra Diagnostic Solutions, Inc. (formerlyStorCOMM) fail to effectively integrate their operations, the combined companymay not realize the potential benefits of the merger.***

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

·      failure to successfully managerelationships with customers and other important relationships;

·      failure of customers to accept newservices or to continue using the products and services of the combinedcompany;

·      difficulties in successfully integratingthe management teams and employees of ASPYRA and Aspyra Diagnostic Solutions,Inc. (formerly StorCOMM);

·      challenges encountered in managing larger,more geographically dispersed operations;

·      the loss of key employees;

·      diversion of the attention of managementfrom other ongoing business concerns;

·      potential incompatibilities oftechnologies and systems;

·      potential difficulties integrating andharmonizing financial reporting systems; and

·      potential incompatibility of businesscultures.

If the combinedcompany’s operations do not meet the expectations of customers of ASPYRA orAspyra Diagnostic Solutions, Inc. (formerly StorCOMM) then these customers maycease doing business with the combined company altogether, which would harm theresults of operations and financial condition of ASPYRA.

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

·      the integration of ASPYRA and AspyraDiagnostic Solutions, Inc. (formerly StorCOMM) is unsuccessful;

·      the combined company does not achieve theexpected benefits of the merger as quickly as anticipated or the costs of oroperational difficulties arising from the merger are greater than anticipated;

·      the combined company’s financial resultsafter the merger are not consistent with the expectations of financial orindustry analysts;

·      the anticipated operating and productsynergies of the merger are not realized; or

·      the combined company experiences the lossof significant customers or employees as a result of the merger.

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

Our markets arecompetitive. There are many companies with active research and developmentprograms both in and outside of the healthcare information technologyindustry.  Many of these companies haveconsiderable experience in 

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areas of competinginterest to us.  Additionally, we cannotdetermine if other firms are conducting potentially competitive research, whichcould result in the development and introduction of products that are eithercomparable or superior to the products we sell. Further, new product introductions, product enhancements and the use ofother technologies by our competitors could lead to a loss of market acceptanceand cause a decline in sales or gross margins.

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

·      our ability to adapt effectively to thecontinued development, acquisition or licensing of technology or product rightsby our competitors;

·      our ability to enhance our products ordevelop new products;

·      our ability to adapt to changingtechnological demands; and

·      our strategic decisions regarding the bestallocation of our limited resources.

Several of ourcurrent and potential competitors have greater financial, technical, sales,marketing and other resources than we do and consequentially may have anability to influence customers to purchase their products that compete withours. Our future and existing competitors could introduce products withsuperior features, scalability and functionality at lower prices than ourproducts, and could also bundle existing or new products with other moreestablished products in order to compete with us. Our competitors could alsogain market share by acquiring or forming strategic alliances with our othercompetitors. If we do not adapt our business in the face of this competition,our business and operating results may be harmed.

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

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

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

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

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

Our future successand growth depend on the continued services of our key management andemployees, including Steven M. Besbeck, Bruce M. Miller, James R. Helms, andSamuel G. Elliott.  The loss of theservices of any of these individuals or any other key employee could materiallyaffect our business. Our future success also depends on our ability toidentify, attract and retain additional qualified personnel. Competition foremployees in our industry is intense and we may not be successful in attractingor retaining them.  There are a limitednumber of people with knowledge of, and experience in, our industry.  We do not have employment agreements withmost of our key employees.  However, wegenerally enter into agreements with our employees regarding patents, confidentialityand related matters.  We do not maintainlife insurance polices on our employees. Our loss of key personnel, especially without advance notice, or ourinability to hire or retain qualified personnel, could have a material adverseeffect on sales and our ability to maintain our 

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technological edge.  We cannot guarantee that we will continue toretain our key management and skilled personnel, or that we will be able toattract, assimilate and retain other highly qualified personnel in the future.

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

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

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

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

·      be time consuming to defend;

·      result in costly litigation;

·      divert management’s time and attentionfrom our business;

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

·      require us to pay monetary amounts asdamages to our customers.

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

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

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

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

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

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

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

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

***We are subject to the Health InsurancePortability and Accountability Act (HIPAA) and the cost of complying with HIPAAmay negatively impact our net income.***

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

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

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

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

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

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

While we believe that we currently have adequate internal controlprocedures in place, we are still exposed to potential risks from recentlegislation requiring companies to evaluate controls under Section 404 of theSarbanes-Oxley Act of 2002. We are evaluating our internal controls system inorder to allow management to report on our internal controls over financialreporting, as required by Section 404 of the Sarbanes-Oxley Act of 2002beginning in our fiscal year 2007.  Theimplementation process of Section 404 of the Sarbanes-Oxley Act of 2002 will beexpensive, time-consuming and will require significant attention of theCompany’s management. The Company cannot assure that it will not discovermaterial weaknesses in its internal controls. The Company also cannot assurethat it will complete the process of its evaluation and the auditors'attestation on time. If the Company discovers a material weakness, correctiveaction may be time-consuming, costly and further divert the attention ofmanagement. The disclosure of a material weakness, even if quickly remedied,could reduce the market's confidence in the Company’s financial statements,cause the delisting of its Common Stock from American Stock Exchange and harmits stock price, especially if a restatement of financial statements for pastperiods were to be necessary.

 

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

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

·      deterioration in economic conditions inany of the healthcare information technology industry, which could reducecustomer demand and ability to pay for our products and services;

·      political and military instability, whichcould slow spending within our target markets, delay sales cycles and otherwiseadversely affect our ability to generate revenues and operate effectively;

·      budgetary constraints of customers, whichare influenced by corporate earnings and spending objectives;

·      earthquakes, floods or other naturaldisasters affecting our headquarters located in Calabasas, California, an areaknown for seismic activity, or our other locations worldwide;

·      acts of war or terrorism; and

·      inadvertent errors.

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

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

We expect togenerate approximately 10% of our revenues from customers located outside ofthe United States in the fiscal year ending December 31, 2006.  We expect to expand our internationaloperations and such expansion is contingent upon the successful growth of ourinternational revenues. Our international operations are subject to risks inaddition to those faced by our domestic operations, including:

·      potential loss of proprietary informationdue to piracy, misappropriation or laws that may be less protective of ourintellectual property rights;

·      imposition of foreign laws and othergovernmental controls, including trade and employment restrictions;

·      enactment of additional regulations orrestrictions on imports and exports;

·      fluctuations in currency exchange ratesand economic instability such as higher interest rates and inflation, whichcould make our products more expensive in those countries;

·      limitations on future growth or inabilityto maintain current levels of revenues from international sales if we do notinvest sufficiently in our international operations;

·      longer payment cycles for sales in foreigncountries and difficulties in collecting accounts receivable;

·      difficulties in staffing, managing andoperating our international operations;

·      difficulties in coordinating theactivities of our geographically dispersed and culturally diverse operations;and

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

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

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

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

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

***Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM)currently relies on third party distribution arrangements to distribute itsproducts.  The loss of any of theserelationships, or a material change in any of them, could materially harm ourbusiness.***

For the three andnine months ended September 30, 2006 and September 30, 2005, Aspyra DiagnosticSolutions, Inc. (formerly StorCOMM) received approximately 90% and 80% of itsrevenues, respectively, through third party distribution arrangements. Weexpect that we will continue to generate a significant portion of our revenuesthrough a limited number of distribution arrangements for the foreseeablefuture. A significant portion of the Company’s outstanding accounts receivableis with such third party distributors, which will result in a concentration ofour credit risk. If any of these third party distributors decides not to marketor distribute our products or decides to terminate or not renew its agreementwith us, we may be unable to replace the affected agreements with acceptablealternatives, which could materially harm our business, operating results andfinancial condition.

***We depend on channel partners and distributors for asignificant portion of our revenues.***

In each of fiscal2005 and 2004, Aspyra Diagnostic Solutions, Inc. (formerly StorCOMM) generatedapproximately 90%, respectively, of its revenues from medical imaging relatedproducts. We expect to continue to derive a substantial portion of our revenuesfrom this single product category. If this product category is not successfulin the future or we are unable to develop new applications that are assuccessful, our future revenues could be limited and our business may suffer.

**RisksRelated to Our Common Stock**

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

Future sales ofsubstantial amounts of shares of our common stock in the public market, or theperception that these sales could occur, may cause the market price of ourcommon stock to decline.  In addition, wemay be required to issue additional shares upon exercise of previously grantedoptions or warrants such as the warrants to purchase up to 300,000 shares ofAspyra common stock that Aspyra issued in a private placement pursuant to theCommon Stock and Warrant Purchase Agreement dated August 18, 2005 by and amongAspyra and each of the purchasers named therein, the Aspyra options andwarrants to be issued in exchange for StorCOMM’s options and warrants pursuantto the merger, and the warrants to purchase up to 1,350,000 shares of Aspyracommon stock that Aspyra issued in a private placement pursuant to the CommonStock and Warrant Purchase Agreement dated May 4, 2006 by and among Aspyra andeach of the purchasers named therein. Increased sales of our common stock in the market after exercise ofstock options or warrants could exert significant downward pressure on ourstock price.  These sales also might makeit more difficult for us to sell equity or equity-related securities in thefuture at a time and price we deem appropriate.

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

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

·      announcements of quarterly operatingresults and revenue and earnings forecasts by us, our competitors or ourcustomers;

·      failure to achieve financial forecasts,either because expected sales do not occur or because they occur at lowerprices or on terms that are less favorable to us;

·      rumors, announcements or press articlesregarding changes in our management, organization, operations or priorfinancial statements;

·      changes in revenue and earnings estimatesby securities analysts;

·      announcements of planned acquisitions byus or by our competitors;

·      announcements of new or planned productsby us, our competitors or our customers;

·      gain or loss of a significant customer;

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

·      acts of terrorism, the threat of war andeconomic slowdowns in general.

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

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

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

·      effectively align sales resources to meetcustomer needs and address market opportunities;

·      effectively respond to competitivepressures; and

·      effectively manage our operating expenselevels.

A number offactors associated with our industry and the markets for our products, many ofwhich are outside our control, may cause our quarterly financial results tofluctuate, including:

·      reduced demand for any of our products;

·      timing and amount of orders by customersand seasonality in the buying patterns of customers;

·      cancellation, deferral or limitation oforders by customers;

·      fluctuations in foreign currency exchangerates; and

·      weakness or uncertainty in generaleconomic or industry conditions.

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

### **New Accounting Pronouncements**

In March 2006, theFASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - anamendment of FASB Statement No. 140.” SFAS No. 156 requires an entity torecognize a servicing asset or servicing liability each time it undertakes acontractual obligation to service a financial asset in certain circumstances.All separately recognized servicing assets and servicing liabilities arerequired to be initially measured at fair value. Subsequent measurement methodsinclude the **amortization****method, whereby servicing assets orservicing liabilities are amortized in proportion to and over the period ofestimated net servicing income or net servicing loss, or the **fair value**method, whereby servicing assets or servicing liabilities are measured at fairvalue at each reporting date and changes in fair value are reported in earningsin the period in which they occur. If the amortization method is used, anentity must assess servicing assets or servicing liabilities for impairment orincreased obligation based on the fair value at each reporting date.SFAS No. 156 is effective for fiscal years beginning after December 15,2006. We are currently evaluating the impact of SFAS No. 156 on ourconsolidated financial statements.

In June 2006, the FASB issued FASB InterpretationNo. 48, Accounting for Uncertainty in Income Taxes, (FIN 48) aninterpretation of FASB Statement No. 109, Accounting for Income Taxes. FIN48 requires that a position taken or expected to be taken in a tax return berecognized in the financial statements when it is more likely than not (i.e. alikelihood of more than fifty percent) that the position would be sustainedupon examination by tax authorities. A recognized tax position is then measuredat the largest amount of benefit that is greater than fifty percent likely ofbeing realized upon ultimate settlement. Upon adoption, the cumulative effectof applying the recognition and measurement provisions of FIN 48, if any, shallbe reflected as an adjustment to the opening balance of retained earnings.

FIN 48 requiresthat subsequent to initial adoption a change in judgment that results insubsequent recognition, derecognition or change in a measurement of a taxposition taken in a prior annual period (including any related interest andpenalties) be recognized as a discrete item in the period in which the changeoccurs. Currently, we record such changes in judgment, including auditsettlements, as a component of our income tax provision. Thus, our reportedquarterly income tax rate may become more volatile upon adoption of FIN 48.This change will not impact the manner in which we record income tax expense onan annual basis.

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FIN 48 alsorequires expanded disclosures including identification of tax positions forwhich it is reasonably possible that total amounts of unrecognized tax benefitswill significantly change in the next twelve months, a description of tax yearsthat remain subject to examination by major tax jurisdiction, a tabularreconciliation of the total amount of unrecognized tax benefits at thebeginning and end of each annual reporting period, the total amount ofunrecognized tax benefits that, if recognized, would affect the effective taxrate and the total amounts of interest and penalties recognized in thestatements of operations and financial position. FIN 48 is effective for fiscalyears beginning after December 15, 2006. We are currently evaluating theimpact of this standard on our consolidated financial statements.

**Item 3.            Controlsand Procedures**

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

**Evaluationof Disclosure Controls and Procedures**

The Company’smanagement, with the participation of the Chief Executive Officer and ChiefFinancial Officer, conducted an evaluation of the effectiveness of the Company’sdisclosure controls and procedures, as defined in Exchange Act Rule 13a-15(e),as of the end of the period covered by this Form 10-QSB.  Based on that evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that, as of September 30, 2006,our disclosure controls and procedures are effective to provide reasonableassurance that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act (i) is recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission rules and forms, and (ii) is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow timely decisions regarding required disclosure.

**Changesin Internal Control over Financial Reporting**

Therewere no changes in our internal control over financial reporting that occurredduring the quarter ended September 30, 2006 that have materially affected, orare reasonably likely to materially affect, our internal control over financialreporting.

**PART II — OTHER INFORMATION**

**Item6.            Exhibits**

Exhibit 3.1      Restated Articles of Incorporation, asAmended (previously filed as an exhibit to the Company’s Registration Statementon Form S-18 dated September 22, 1983, SEC File No. 2-85265 and incorporatedherein by reference).

Exhibit 3.2      Amendment to the Restated Articles ofIncorporation (incorporated by reference to Annex E to the joint proxystatement/prospectus that is part of the Company’s Registration Statement onForm S-4, originally filed on October 3, 2005, SEC file No. 333-128795).

Exhibit 3.3      By-Laws, as amended (previously filed asan exhibit to the Company’s Registration Statement on Form S-18 dated September22, 1983, SEC File No. 2-85265 and incorporated herein by reference).

Exhibit 11       Statement re: computation of per shareearnings.

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Exhibit 31.1    Certification of Chief Executive Officerpursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934.

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

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

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

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**SIGNATURES**

In accordance withthe requirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
| ASPYRA, INC.             |   |                                                   |
|--------------------------|--------|--------------------------------------------------------|
| (Registrant)             |   |                                                   |
|                     |   |                                                   |
|                     |   |                                                   |
| Date: November  14, 2006 |   | /S/ Steven M. Besbeck                                  |
|                     |   | Steven M.  Besbeck, President and                      |
|                     |   | Chief Executive  Officer (Principal Executive Officer) |
|                     |   |                                                   |
|                     |   |                                                   |
| Date: November  14, 2006 |   | /S/ Anahita Villafane                                  |
|                     |   | Anahita  Villafane,                                    |
|                     |   | Chief Financial  Officer (Principal Financial and      |
|                     |   | Accounting  Officer)                                   |

 

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**EXHIBIT INDEX**

3.1                                 RestatedArticles of Incorporation, as Amended (previously filed as an exhibit to theCompany’s Registration Statement on Form S-18 dated September 22, 1983, SECFile No. 2-85265).

3.2                                 Amendmentto the Restated Articles of Incorporation (incorporated by reference to Annex Eto the joint proxy statement/prospectus that is part of the Company’sRegistration Statement on Form S-4, originally filed on October 3, 2005, SECfile No. 333-128795).

3.3.1                        By-Laws,as amended (previously filed as an exhibit to the Company’s RegistrationStatement on Form S-18 dated September 22, 1983, SEC File No. 2-85265).

11                                    Statementre: computation of per share earnings.

31.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities ExchangeAct of 1934.

31.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(a) of the SecuritiesExchange Act of 1934.

32.1                           Certificationof Chief Executive Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

32.2                           Certificationof Chief Financial Officer pursuant to Rule 13a-14(b) of the SecuritiesExchange Act of 1934.

 

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