United States

                       Securities and Exchange Commission
                             Washington, D.C. 20549

                                    Form 10-K

    (X)     Annual Report Pursuant to Section 13 or 15 (d) of the
            Securities Exchange Act of 1934 For the fiscal year
            ended June 30, 2005

                                       or

    ( )     Transition Report Pursuant to Section 13 or 15 (d) of the Securities
            Exchange Act of 1934
            For the transition period from ________ to ________

     Commission File Number: 0-10832

                             AFP Imaging Corporation
                             -----------------------
             (Exact name of registrant as specified in its charter)

               New York                              13-2956272
               --------                              ----------
   (State or other jurisdiction of      (I.R.S. Employer Identification No.)
    incorporation or organization)


                     250 Clearbrook Road, Elmsford, NY 10523
                     ---------------------------------------
               (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code:  (914) 592-6100

Securities registered pursuant Section 12 (b) of the Act:  None

Securities registered pursuant to Section 12 (g) of the Act:

                      Common Stock, par value .01 per share
                                (Title of Class)

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

              _X_                              ___
              Yes                              No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. YES ( ) NO ( X).

Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). YES ( ) NO ( X ).

The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of December 31, 2004 was approximately
$7,581,857. On such date, the average of the closing bid and asked prices of the
Registrant's Common Stock, as reported by the OTC Bulletin Board, was $1.28.

The registrant had 9,568,217 shares of Common Stock outstanding as of September
15, 2005.

The information required by Part III of Form 10-K is incorporated by reference
to the registrant's Proxy Statement for the 2005 Annual Meeting of Shareholders
tentatively scheduled for December 12, 2005 to be filed with the Securities and
Exchange Commission on or prior to October 28, 2005.


<PAGE>

Introductory Note - Forward - Looking Statements

This Annual Report on Form 10-K contains certain forward-looking statements,
within the meaning of the Private Securities Reform Act of 1995. Forward-looking
statements involve known and unknown risks, uncertainties and other factors that
could cause actual results of AFP Imaging Corporation (collectively with its
subsidiaries, the "Company") or achievements expressed or implied by such
forward-looking statements to not occur, not be realized or differ materially
from that stated in such forward-looking statements. Forward-looking statements
may be identified by terminology such as "may," "will," project," "expect,"
"believe," "would," "could," "estimate," "anticipate," "intend," "continue,"
"potential," "opportunity" or similar terms, variations of such terms, or the
negative of such terms or variations. Potential risks, uncertainties and factors
include, but are not limited to,

o        adverse changes in general economic conditions,

o        the Company's ability to repay its debts when due,

o        changes in the markets for the Company's products and services,

o        the ability of the Company to successfully design, develop, manufacture
         and sell new products,

o        the Company's ability to successfully market its existing and new
         products,

o        adverse business conditions,

o        changing industry and competitive conditions,

o        the effect of technological advancements on the Company's products,

o        the Company's ability to protect its intellectual property rights
         and/or where its intellectual property rights may infringe on the
         intellectual property rights of others,

o        maintaining operating efficiencies,

o        pricing pressures,

o        risk associated with foreign sales,

o        risk associated with the loss of services of the key executive
         officers,

o        the Company's ability to attract, train and retain key personnel,

o        difficulties in maintaining adequate long-term financing to meet the
         Company's obligations, and fund the Company's operations,

o        changes in the nature or enforcement of laws and regulations concerning
         the Company's products, services, suppliers, or the Company's
         customers,

o        determinations in various outstanding legal matters,

o        changes in currency exchange rates and regulations, and

o        other factors set forth in this Form 10-K and from time to time in the
         Company's other filings with the Securities and Exchange Commission.

Readers are urged to carefully review and consider the various disclosures made
by the Company in this Annual Report on Form 10-K for the year ended June 30,
2005, and the Company's other filings with the SEC. These reports attempt to
advise interested parties of the risks and factors that may affect the Company's
business, financial condition and results of operations and prospects. The
forward - looking statements made in this Annual Report on Form 10-K speak only
as of the date hereof and the Company disclaims any obligation to provide
updates, revisions or amendments to any forward-looking statements to reflect
changes in the Company's expectations or future events.


Part I
------

Item 1.  Business
-----------------

a) General Development of Business

AFP Imaging Corporation was organized on September 20, 1978, under the laws of
the State of New York. Since such date, the Company has been engaged in the
business of designing, developing, manufacturing and distributing equipment for
generating, capturing and/or producing medical and dental diagnostic images
through electronic technologies, as well as the chemical processing of
photosensitive materials. Medical, dental, veterinary and industrial
professionals use these products. The Company's products are distributed to
worldwide markets, under various brand names, through a network of independent
and unaffiliated dealers. The Company has been ISO 9001 certified since 1996.

The Company's objective is to be a leading provider of cost effective,
diagnostic radiographic products utilized in the medical, dental, veterinarian
and industrial imaging fields. The Company is concentrating on

                                       2
<PAGE>

o        continually broadening is product offerings,

o        enhancing both its domestic and international distribution channels and

o        expanding its market presence in the diagnostic veterinary and dental
         imaging fields.

In February 2005, the Company settled an outstanding environmental litigation
claim, which had been filed in 2001 as a civil complaint by the current owners
of property, which the Company had owned between August 1984 and June 1985. The
Company paid $325,000, which represented their entire liability under the
settlement offer. See Item 3, Legal proceedings for a further discussion of this
matter.

In September 2003, the Company completely dissolved two of its wholly-owned
subsidiaries: LogEtronics Corporation and Regam Medical Systems AB. The Company
sold selected assets of its graphic arts business in July 2001, which had been
distributed through LogEtronics Corporation. Upon completion of the transfer of
the manufacturing operations to the United States, the Company, in accordance
with Swedish Law, dissolved Regam Medical Systems AB.

b) Financial Information about Industry Segments

The Company is engaged in one industry segment, the manufacture and distribution
of medical/dental x-ray equipment and accessories. Prior to July 2001, when the
Company sold the assets related to its graphic arts subsidiary, the Company had
been engaged in two industry segments, the manufacture and distribution of
medical/dental x-ray equipment and accessories, and graphic arts processing
equipment. The Company has agreed not to compete in this same business line of
graphic arts film and plate processing equipment for ten years, to expire in
July 2011. The Company's business segments until July 2001 were based on
significant differences in the nature of the Company's operations, including
distribution channels and customers. The composition of the current industry
segment is consistent with that used by the Company's management in making
strategic decisions. See Note 10 to the Consolidated Financial Statements for
further discussion of the Company's industry segments.

c) Narrative Description of Business

All of the Company's products are distributed worldwide through an unaffiliated
dealer network to doctors, dentists, veterinarians, hospitals, medical clinics,
the U.S. military and others.

Principal Products and Services

Digital Dental and Large Body DR and CR Imaging Systems
The Company manufactures, distributes and services a filmless, digital dental
radiography system, utilizing x-rays and electronic imaging technology. Such
equipment generates and captures a patient's dental images with an intraoral
sensor and then displays the image on a computer screen that operates in a
Windows-based, software environment. These filmless, digital dental radiographic
systems, referred to as DR Systems, have practical applications in both human
and companion animal dentistry. The Company has developed proprietary
application software for use with the sensor. The Company also distributes a
computed radiology system, referred to as CR Systems, that utilizes a reusable
phosphorus plate and laser scanner in place of x-ray film. The plate can be
erased and then re-exposed to capture another image. The CR System is applicable
to larger body x-ray examinations.

Medical, Dental and Industrial X-Ray Processors & Accessories
The Company manufactures and distributes a line of freestanding and table top
medical, dental and industrial x-ray film processors, commonly referred to as
analog systems. These machines are capable of processing or developing films of
various sizes. The exposed film is inserted into the Company's equipment and
returned to the operator developed, fixed, washed and dried. The equipment can
be located either in a dark room site or adapted to a daylight loading system.
These units are used for diagnostic x-ray imaging and industrial,
non-destructive testing applications.

X-Ray Systems
The Company has the exclusive distribution rights in the North American and
Mexican markets for a well established, European-designed intraoral dental x-ray
machine and a panoramic/cephalometric dental x-ray machine. The Company also has
the North American distribution rights to a Japanese-developed panoramic/
cephalometric dental x-ray machine. The x-ray film exposed by all of these units
can be developed in the Company's film processors. Alternatively, these x-ray
products can be sourced and distributed with a digital, filmless sensor that is
compatible with the Company's other digital x-ray products and software.


                                       3
<PAGE>

Veterinary Imaging and Radiographic Systems

The Company manufactures and distributes a line of x-ray and related
equipment specifically designed for the veterinary marketplace. These include
intraoral x-ray systems, a filmless digital dental radiography system, film
processors, dental veterinary film, and a large body CR filmless scanner used in
conjunction with general radiographic equipment. In July 2005, the Company was
appointed the exclusive worldwide distributor of general-purpose x-ray systems
and components specifically designed for all veterinary applications, known in
the market under trade names "Universal" and "VetTek." These systems are
designed to be either digital or film based and allows the veterinarian to
perform either dental or general radiography on companion animals.

Patents and Trademarks

The Company presently holds or has licensed a number of domestic and foreign
utility patents, which, the Company believes, are material to the technology
used in its products. The Company's intellectual property includes several
patents obtained in connection with acquisitions completed in 1997. The Company
is not aware of any patents or other intellectual property held by others that
conflict with the Company's current product designs. However, there can be no
assurance that infringement claims will not be asserted against the Company in
the future. Patent applications have been filed where appropriate. The Company
owns several domestic and foreign trademarks, which it uses in connection with
the marketing of its products, including AFP Imaging, DENT-X, EVA and DIGIVET,
among others. The Company believes that these utility patents and trademarks are
important to its operations and the loss or infringement by others of or to its
rights to such patents and trademarks could have a material adverse effect on
the Company. Even with the patent rights in the Company's products, the
Company's technology may not preclude or inhibit competitors from producing
products that have identical performance as the Company's products.

The Company has agreed to pay a nominal royalty on the domestic sales of its
digital dental systems to a third party under a license for the use of the third
party's software format for the computer display of such images. The Company
also has agreed to pay a royalty to a third party on the worldwide sales of its
digital dental sensors, under a license to use certain technology developed and
owned by the third party and utilized in the sensor's operations. The Company is
dependant to some degree on these third-party licenses, and the loss or
inability to replace these licenses could result in increased costs as well as
initial delays or reductions in product shipments. The principal technology
applied to the construction of the Company's other products may be considered
proprietary.

Research and Development

The amounts spent by the Company during each of the Company's last three fiscal
years on primary research activities relating to the development of new products
and the improvement of existing products, all of which was Company sponsored,
are as follows:
                                    Year Ended June 30,
                                    -------------------
             2005                          2004                         2003
             ----                          ----                         ----
           $435,812                      $397,444                     $553,991

The Company conducts research and development activities internally, at its
Elmsford, New York facility, as well as contracts out certain projects to
qualified vendors and external consultants. The Company's research and
development efforts and technologies have been enhanced by business acquisitions
completed prior to 2001.

The Company's level of research and development spending is discussed further in
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operation.

Raw Materials

The Company manufactures, assembles, and services its products at its ISO
9001/2000 (International Standards Organization) certified facility in Elmsford,
New York. The Company's products are manufactured from parts, components and
subassemblies obtained from several unaffiliated suppliers and/or fabricated
internally at its manufacturing facility. In most cases, the Company does not
utilize any unique procedures, nor does it traditionally have difficulties in
obtaining raw materials or processes, in the design and manufacture of its
products. The Company does own proprietary designs and tooling to produce the
digital x-ray sensors, which are in the physical possession of a Company vendor.
Although the Company anticipates that an adequate commercial supply of most raw
material parts and components will remain available from multiple sources, the
loss of the Company's relationship with a particular supplier could result in
some productions delays; however, such a loss is not expected to materially
adversely affect the Company's business, as the proprietary design is readily
reproducible.

                                       4
<PAGE>

Warranties

The Company generally warrants each of its products against defects in materials
and workmanship for a period of one to two years from the date of shipment plus
any extended warranty period purchased by the customer, and three years for the
digital sensors. The need to fulfill warranty claims by the Company's dealers
could have an adverse effect on the Company, by requiring additional
expenditures for material and/or labor.

Sales, Marketing and Distribution

The Company's manufactured products are produced domestically and distributed
both domestically and internationally to independent dealers and distributors.
The Company's products are marketed under the Company's own trade names and are
distributed through an extensive network of independent medical, dental, and
veterinary dealers. These dealers install and service such products. Other
products are imported from foreign suppliers and sold in North America.

The Company conducts worldwide marketing and regional sales management efforts
to promote all of its products and brand names. The Company advertises in
domestic and international trade journals, provides sales support and
literature, prepares technical manuals and conducts customer education and
training programs in order to promote its products. In addition, the Company
participates in domestic and international trade and clinical shows. The Company
also maintains two separate web sites, which provide an easy-to-navigate,
on-line information environment, including Company information, product
description and extensive technical specifications and information.

Government Regulation

The Company's medical and dental products are subject to government regulation
in the United States and certain other countries. The United States Food and
Drug Administration ("FDA") regulates the distribution of all equipment used as
medical devices. The Company must comply with the procedures and standards
established by the FDA and comparable foreign regulatory agencies. The Company
believes it has registered all of its applicable medical and dental products
with the FDA, and that all of its products and procedures satisfy all the
criteria necessary to comply with FDA regulations. The FDA has the right to
disapprove the marketing of any medical device that fails to comply with FDA
regulations. The Company's manufacturing facility is ISO 9001/2000 certified.
Where applicable, the Company's products are Conformite' Europeenne ("CE")
certified for sales within the European Union. Any future changes in existing
regulations, or adoption of additional regulations, domestically or
internationally, which govern devices such as the Company's medical and dental
products have the potential to have a material adverse effect on the Company's
ability to market its existing products or to market new products.

The Company is also subject to other federal, state, and local laws, regulations
and recommendations relating to safe working conditions and manufacturing
processes.

International sales of our products are subject to the regulatory agency product
registration requirements of each country in which the Company's products are
sold. The regulatory review process varies from country to country. The Company
typically relies on its distributors in foreign countries to obtain the required
regulatory approvals.

Product Liability Exposure

The Company's business involves the inherent risk of product liability claims.
The Company currently maintains general product liability insurance as well as
an umbrella liability policy, which the Company believes are sufficient to
protect the Company from any potential risks to which it may be subject.
However, there can be no assurances that product liability insurance coverage
will continue to be available or, if available, that it can be obtained in
sufficient amounts or at a reasonable cost. See Item 3. Legal Proceedings, for
further discussion of any outstanding product liability claims.

Seasonal Nature

Historically, the Company's fourth quarter revenues of any fiscal year have been
higher than the subsequent first quarter's revenues. This is due to aggressive
fourth quarter marketing, followed by lower customer demand in the first fiscal
quarter attributed to summer holidays and traditional foreign business closings
during July and August. The Company expects net sales and operating results to
continue to reflect this seasonality.

                                       5
<PAGE>

Working Capital Practices

The Company believes its practices regarding inventories, receivables or other
items of working capital to be typical for the industry involved. On September
21, 2004, the Company renewed its senior secured credit facility (the "Renewed
Revolving Credit Loan"), with its existing senior secured lender, for an
additional three-year period. The maximum borrowing permitted under the Renewed
Revolving Credit Loan is lower than that under the prior credit facility, based
on the Company's current requirements. However, the Renewed Revolving Credit
Loan has more favorable terms, including a lower interest rate and less
stringent reporting requirements, than that under the prior credit facility and
gives the Company the ability to borrow on a specific amount of foreign accounts
receivable. The Renewed Revolving Credit Loan replaced the existing senior
credit facility (the "Original Revolving Credit Loan"). The Renewed Revolving
Credit Loan consists of a $2.5 million revolving line of credit, which is
secured by all of the Company's inventory, accounts receivable, equipment,
officer life insurance policies and proceeds thereof, trademarks, licenses,
patents and general intangibles. It is believed that the Renewed Revolving
Credit Loan is sufficient to finance the Company's ongoing working capital
requirements for the foreseeable future. The Renewed Revolving Credit Loan has
an interest rate of 1.375% over the prime rate, currently at 6-3/4 %, has a
specific formula to calculate available funds based on eligible accounts
receivable and inventory, and has certain reporting requirements to the senior
secured lender. The Renewed Revolving Credit Loan requires that certain
financial ratios and net worth amounts be maintained. The Renewed Revolving
Credit Loan provides for increases in the interest rate charged on monies
outstanding under specific circumstances.

As of June 30, 2005, the Company was in compliance with all the terms and
conditions of its Renewed Revolving Credit Loan, as amended. In connection with
the initial closing of the Original Revolving Credit Loan, the Company issued a
5-year warrant to the lender for the purchase of 100,000 shares of the Company's
common stock at $.32 per share, subject to adjustment for all subsequent
issuances of stock. This warrant expires on September 21, 2006. The
Black-Scholes Method was used to value the warrant, and the stock price was
based on the stock price the day prior to closing, plus 10%, as stipulated in
the Loan and Security Agreement for the Original Revolving Credit Loan.

See Note 4 to the Consolidated Financial Statements and Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operation for
further discussion of the revised terms and conditions.

Customers

In the Company's fiscal year ended June 30th 2005 ("Fiscal Year 2005") there
were no sales to any one customer, which accounted for 10% or more of the
Company's total consolidated sales. In the Company's fiscal year ended June 30th
2004 ("Fiscal Year 2004"), sales of dental imaging equipment to Henry Schein
Inc., accounted for approximately 11% of the Company's total consolidated sales.
In the Company's fiscal year ended June 30th 2003 ("Fiscal Year 2003"), sales of
dental imaging equipment to Henry Schein Inc., and Patterson Dental Supply, each
accounted for approximately 11% of the Company's total consolidated sales.
Management believes that the loss of any one customer would have an adverse
effect on the Company's consolidated business for a short period of time, as the
Company seeks new customers.

Backlog Orders

As of June 30, 2005, the Company's backlog of orders for its products was
approximately $1,089,500 as compared to $1,192,100 as of June 30, 2004. All of
the orders included in the backlog at June 30, 2005 are scheduled for delivery
on or before June 30, 2006. Spare part sales are not included in the Company's
backlog calculations. In the opinion of the Company, fluctuations in the backlog
and its size at any given time are not necessarily indicative of intermediate or
long-term trends in the Company's business. Much of the Company's backlog can be
canceled or the delivery dates of orders can be accelerated or extended without
penalty. Delivery of capital equipment is frequently subject to changing budget
conditions of medical institutions and end user clinical practitioners, which
can vary significantly between fiscal periods.

Government Contracts

The Company did not fulfill any significant contracts in Fiscal Years 2005, 2004
and 2003 with the United States Government that were material to the Company's
consolidated business. The Company's policy is to be responsive to all
governmental Requests for Quotations (RFQ), which can be fulfilled by items
within the scope of the Company's product lines.

                                       6
<PAGE>

Competition

The Company's products utilize mechanical, as well as analog and digital
electronic, technologies. The Company is subject to both foreign and domestic
competition. The competition is characterized by significant investment in
research and development of new technologies, products and services. Some
competitors are well established in the film processor manufacturing and
distribution businesses and may have greater financial, distribution resources
and facilities than the Company. With respect to all of its products, the
Company competes on the basis of price, features, product quality, applications,
engineering, promptness of delivery and customer service. The Company purchases
certain products from others for resale on an exclusive or non-exclusive basis,
which may be subject to competition from other independent distributors.

The Company also competes in the dental imaging market on the basis of its
proprietary and patented technologies. Certain competitors have significant or
greater resources and revenues in electronic digital imaging technologies and
expertise in software development utilized in dental imaging products.

The market for technology professional services is intensely competitive,
rapidly evolving and subject to rapid technological change. The Company expects
competition not only to persist, but also to increase. Competition may result in
price reductions, reduced margins and loss of market share. The market for the
Company's goods and services is rapidly evolving and is subject to continuous
technological change. As a result, the Company's competitors may be better
positioned to address these developments or may react more favorably to these
changes.

While the Company believes its products are competitive in terms of
capabilities, quality and price, increased competition in the marketplace could
have an adverse effect on the Company's business and, recent business mergers
and acquisitions may have potentially adversely affect the Company's business.
Many of the Company's competitors are much larger with significantly greater
financial, sales, marketing and other resources than those of the Company. There
can be no assurance that these competitors are not currently developing or will
attempt to develop new products that are more effective than those of the
Company or that might render the Company's products noncompetitive or obsolete.
No assurances can be given that the Company will be able to compete successfully
with such competitors in the future.

Environmental

The Company believes it is in compliance with the current laws and regulations
governing the protection of the environment and that continued compliance would
not have a material adverse effect on the Company or require any material
capital expenditures. Compliance with local codes for the installation and
operation of the Company's products is the responsibility of the end user, or
the dealer who independently provides installation services. See Item 3. Legal
Proceedings, for further discussion of an environmental claim in which the
Company is involved.

Employees

As of June 30, 2005, the Company employed 84 people on a full-time basis. The
Company has no collective bargaining agreements and considers its relationship
with its employees to be satisfactory.

d) Financial Information about Foreign and Domestic Operations and Export Sales

Financial information related to foreign and domestic operations and
export sales for the last three fiscal years is as follows:
<TABLE>
<CAPTION>

                                           FY 2005                 FY 2004                  FY 2003

<S>                                    <C>          <C>        <C>          <C>         <C>          <C>
Domestic sales                         $18,858,056  82%        $16,733,360  84%         $15,111,108  84%
Export and foreign sales                $4,277,007  18%         $3,099,550  16%          $2,932,560  16%

Domestic operating income               $1,354,617              $1,466,228                   $1,395
Foreign operating loss                           -                ($12,600)                 ($1,940)
</TABLE>


Assets used in the manufacture of export sales are integrated with the other
assets of the Company. The Company liquidated its foreign subsidiary in
September 2003.

                                       7
<PAGE>

Item 2.  Properties
-------------------

The Company's sole executive offices and manufacturing facility are located in
Elmsford, New York. This facility, which comprises approximately 47,735 square
feet, is subject to a lease expiring on December 31, 2009 with a current rental
of $525,085 per year, through the lease term, plus increases for real estate
taxes, utility costs and common area charges. The Company believes its facility
is well maintained, in good operating condition and sufficient to meet the
Company's present and anticipated needs.

Item 3.  Legal Proceedings
--------------------------

The Company is a defendant in an environmental claim relating to property in New
Jersey owned by the Company between August 1984 and June 1985. This claim
relates to the offsite commercial disposition of trash and waste in a landfill
in New Jersey. The Company maintains that its waste materials are of a general
commercial nature. This claim was originally filed in 1998 by the federal
government in United States District Court and the State of New Jersey, citing
several hundred other third-party defendants. The Company (through its former
subsidiary, Kenro Corporation) was added, along with many other defendants, to
the suit. The Company's claimed liability was potentially assessed by the
plaintiff at $150,000. The Company has joined, along with other involved
companies, in an alternative dispute resolution (ADR) process for smaller
claims. No potential cost to the Company has been assessed on this claim;
however, the Company has accrued $75,000 which represents the Company's
potential liability, net of the Company's insurance carrier's agreed upon
contribution towards a potential settlement. The Company does not expect to
receive any further information until a status conference is held in mid-October
2005. The Company cannot, at this time, assess the amount of liability above its
accrued amount, if any, that could result from any adverse final outcome of this
environmental complaint.

On December 6, 2004, the Company reached an agreement as to the parameters of a
settlement, which was finalized on February 8, 2005 and paid on February 18,
2005 relating to a separate environmental claim filed in 2001 as a civil
complaint by the current owners of the same property owned by the Company
between August 1984 and June 1985. This claim was filed in the Superior Court of
New Jersey, Morris County, and alleged that the Company's discontinued graphic
art camera subsidiary had contaminated a portion of the site during its
manufacturing process prior to 1985. The Settlement included a Release and
Indemnification as well as a Stipulation of Dismissal with Prejudice. The
Company paid $325,000, which represented the Company's entire liability under
this settlement offer, net of the Company's insurance carrier's agreed upon
contribution towards the total and final settlement,

The Company's insurance carrier has agreed to equally share with the Company the
defense costs incurred for both of the environmental claims since September
2001.

The Company is a defendant (with several other parties) in a product liability
insurance action, which was filed in May 2005 in the Superior Court in Hartford,
Connecticut. The plaintiff, through their insurance company, claims that the
Company's equipment caused a fire on the plaintiff's premises in May 2003. The
complaint seeks unspecified compensatory damages. The Company maintains that
their equipment was not the cause of the fire or the resultant damage. The
Company's insurance carriers, and their attorneys, are assisting in the
Company's defense in this matter. The Company does not believe that the final
outcome of this matter will have a material adverse effect on the Company.

From time to time, the Company is party to other claims and litigation arising
in the ordinary course of business. The Company does not believe that any
adverse final outcome of any of these matters, whether covered by insurance or
otherwise, would have a material adverse effect on the Company.

Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------

There were no matters submitted to a vote of security holders during the fourth
quarter of Fiscal Year 2005.



                                       8
<PAGE>


Part II
-------


Item 5.  Market for the Registrant's Common Equity and Related Stockholder
         Matters
--------------------------------------------------------------------------

a) Market Information

The Company's Common Stock, par value $.01 per share, is the only class of the
Company's common equity securities outstanding and is traded on the OTC Bulletin
Board (Symbol "AFPC"), maintained by the NASD Inc. The following table, based on
information supplied by Commodity Systems Inc., shows the range of the closing
high and low bid information for the Company's Common Stock for each quarterly
period during the Company's last two fiscal years. These prices reflect
inter-dealer prices and do not include retail mark-ups, markdowns or
commissions, and may not represent actual transactions.
<TABLE>
<CAPTION>
<S>           <C> <C>                              <C>                             <C>
    Quarter ended                               High Bid                        Low Bid
    -------------                               --------                        -------
    September 30, 2003                             .32                             .14
    December 31, 2003                              .74                             .25
    March 31, 2004                                1.19                             .64
    June 30, 2004                                 1.64                            1.02
    September 30, 2004                            1.85                            1.21
    December 31, 2004                             1.51                            1.11
    March 31, 2005                                1.70                            1.12
    June 30, 2005                                 2.25                            1.40
</TABLE>

The market for the Company's Common Stock is highly volatile and the trading
price of the Common Stock could widely fluctuate in response to numerous
factors. In addition, the stock market has from time to time experienced extreme
price and volume fluctuations, which have particularly affected the market price
for the securities of many companies, which often have been unrelated to the
operating performance of these companies. These broad market fluctuations may
adversely affect the market price of the Company's Common Stock.

b) Holders

As of September 15, 2005, the closing bid price for the Company's Common Stock,
as reported on the OTC Bulletin Board, was $2.10, and there were 319
shareholders of record of the Common Stock. The Company estimates, based on
surveys conducted by its transfer agent in connection with the Company's 2004
Annual Meeting of Shareholders, that there are approximately 1,400 beneficial
holders of the Common Stock.

c) Dividends

No cash dividends have been declared on the Company's Common Stock to date and
the Company anticipates that any earnings will be retained for use in the
Company's business for the foreseeable future. The Company currently is
prohibited from paying cash dividends on its Common Stock under the terms and
conditions of its Renewed Revolving Credit Loan. The Company currently does not
have a set policy with respect to payment of dividends. Any future determination
to pay cash dividends will be at the discretion of the Company's Board of
Directors and will be dependent upon the Company's financial condition, results
of operations, capital requirements and other relevant factors.

d) Securities authorized for issuance under equity compensation plans

The following table sets forth as of June 30, 2005:

o        the number of shares of the Company's Common Stock issuable upon
         exercise of outstanding options, warrants and rights, separately
         identified by those granted under equity incentive plans approved by
         the Company's shareholders and those granted under plans, including
         individual compensation contracts, not approved by the Company's
         shareholders (column A),

o        the weighted average exercise price of such options, warrants and
         rights, also as separately identified (column B), and

o        the number of shares remaining available for future issuance under such
         plans, other than those shares issuable upon exercise of outstanding
         options, warrants and rights (column C).


                                       9
<PAGE>
<TABLE>
<CAPTION>
<S>              <C>               <C>                     <C>              <C>
                               (a)                  (b)                  (c)
    Plan Category      Number of securities   Weighted average     Number of securities
                       to be issued upon      exercise price of    remaining available
                       exercise of            outstanding options, for future issuance
                       outstanding options,   warrants and rights  under equity
                       warrants and rights                         compensation plans
                                                                   (excluding securities
                                                                    reflected in column
                                                                    (a))

Equity compensation
plans approved by
security holders (1)               948,400                 $.76             1,114,500

Equity compensation
plan not approved by
security holders                        0                     0                     0

Total                              948,400                 $.76             1,114,500
</TABLE>

(1)      The equity compensation plans approved by the security holders are the
         Company's 2004 Equity Incentive Plan, 1999 Stock Option Plan and the
         1995 Stock Option Plan, as amended, which expires this year.







                                       10
<PAGE>

<TABLE>
<CAPTION>


Item 6.  Selected Financial Data
--------------------------------

                                                                 As of and for the Years Ended June 30,

                                                 2005       2004            2003        2002                2001
                                                 ----        ----           ----        ----                ----
<S>                                          <C>         <C>           <C>           <C>                 <C>
NET SALES                                    23,135,063  $19,832,910   $18,043,668   $20,086,888         $24,051,300
                                             ==========  ===========   ===========   ===========         ===========

OPERATING INCOME (LOSS)                       1,354,617   $1,453,628        $(545)      $391,408     $(1,285,785)(b)
                                              =========   ==========        ======      ========     ===============

INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF     1,899,930   $1,345,467    $(218,338)       $84,002     $(1,738,346)(b)
                                              =========   ==========    ==========       =======     ===============
CHANGE IN ACCOUNTING PRINCIPLE

CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING           $--          $--  $(1,297,069)           $--                 $--
                                                    ===          ===  ============           ===                 ===
PRINCIPLE (a)

NET INCOME (LOSS)                             1,899,930   $1,345,467  $(1,515,407)       $84,002     $(1,738,346)(b)
                                              =========   ==========  ============       =======     ===============
EARNINGS (LOSS) PER SHARE BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
     BASIC                                         $.20         $.15        $(.02)          $.01              $(.19)
                                                   ====         ====        ======          ====              ======
     DILUTED                                       $.19         $.14        $(.02)          $.01              $(.19)
                                                   ====         ====        ======          ====              ======

NET EARNINGS (LOSS) PER SHARE
      BASIC                                        $.20         $.15        $(.16)          $.01              $(.19)
                                                   ====         ====        ======          ====              ======
      DILUTED                                      $.19         $.14        $(.16)          $.01              $(.19)
                                                   ====         ====        ======          ====              ======

TOTAL ASSETS                                 $8,153,396   $6,244,895    $6,043,855    $7,849,510          $8,635,214
                                             ==========   ==========    ==========    ==========          ==========

LONG-TERM DEBT                                      $--     $222,223      $630,556    $1,180,556          $2,359,033
                                                    ===     ========      ========    ==========          ==========

SHAREHOLDERS' EQUITY                         $4,662,631   $2,665,396    $1,319,929    $2,822,717          $2,717,233
                                             ==========   ==========    ==========    ==========          ==========

SHAREHOLDERS' EQUITY PER COMMON SHARE              $.50         $.29          $.14          $.30                $.29
                                                   ====         ====          ====          ====                ====

COMMON SHARES OUTSTANDING, at end
of period                                     9,407,717    9,270,617     9,270,617     9,270,617           9,270,617
                                              =========    =========     =========     =========           =========


CASH DIVIDENDS PER COMMON SHARE                    none         none          none          none                none
</TABLE>


(a)      Upon adoption of SFAS 142 in the first quarter of Fiscal Year 2003, the
         Company recorded a one-time, non-cash charge of approximately
         $1,297,069, to reduce the carrying value of its goodwill. Such charge
         is non-operational in nature and is reflected as a cumulative effect of
         an accounting change. See Note 1 to the Consolidated Financial
         Statements for further discussion and required disclosures.

(b)      The amounts for Fiscal Year 2001 include charges and provisions of
         $846,000, to reduce the goodwill associated with the medical diagnostic
         imager product line to $0, and $110,000, to reflect the sale of the
         graphic arts business, including $50,000 to reduce the graphic arts
         inventory to the fair market value and $60,000, for severance and other
         closing costs.







                                       11
<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operation
--------------------------------------------------------------------------------

The following should be read in conjunction with the Company's Consolidated
Financial Statements and notes thereto included elsewhere in this Annual Report
on Form 10-K.

Capital Resources and Liquidity
-------------------------------

The Company's working capital increased by approximately $1,764,600 between
Fiscal Year 2005 and Fiscal Year 2004. This increase is principally due to
internally generated funds with corresponding reductions in the revolver debt,
an increase in the current deferred tax asset and increases in accounts payable,
offset by scheduled payments on the subordinated debt and increases in inventory
and accounts receivable. The Company used the current availability from the
revolving line of credit to make the required principal payments on the two
subordinated notes and income from operations to reduce the principal amount of
the revolver debt. The Company is current on all of its principal payments.

The Company's higher sales in Fiscal Year 2005 have increased cash collections
and profits. This cash has been used to reduce debt whenever possible. A small
percentage increase in customers using national credit cards has expedited the
collection process. The Company is continuing to increase its finished goods
inventory levels, so as to better satisfy worldwide customer demand. The Company
has not changed its payment policies available to its significant vendors.

On September 21, 2004, the Company renewed its senior secured credit facility
(the "Renewed Revolving Credit Loan") with its existing senior secured lender
for an additional three-year period. The Renewed Revolving Credit Loan replaced
the existing senior credit facility (the "Original Revolving Credit Loan").The
maximum borrowing permitted under the Renewed Revolving Credit Loan is lower
than that under the prior credit facility, based on the Company's current
requirements. However, the Renewed Revolving Credit Loan has more favorable
terms, including a lower interest rate and less stringent reporting
requirements, than that under the Original Revolving Credit Loan and gives the
Company the ability to borrow on a specific amount of foreign accounts
receivable The Renewed Revolving Credit Loan consists of a $2.5 million
revolving line of credit, which is secured by all of the Company's inventory,
accounts receivable, equipment, officer life insurance policies and proceeds
thereof, trademarks, licenses, patents and general intangibles. It is believed
that the Renewed Revolving Credit Loan is sufficient to finance the Company's
ongoing working capital requirements for the foreseeable future. The Renewed
Revolving Credit Loan has an interest rate of 1.375% over the prime rate,
currently at 6-3/4 % (6 1/4 % as of June 30, 2005), has a specific formula to
calculate available funds based on eligible accounts receivable and inventory,
and has certain reporting requirements to the senior secured lender. The Renewed
Revolving Credit Loan also requires that certain financial ratios and net worth
amounts be maintained by the Company. The Renewed Revolving Credit Loan provides
for increases in the interest rate charged on monies outstanding under specific
circumstances. As of June 30, 2005, the principal amount outstanding under the
Renewed Revolving Credit Loan was $452,363.

As of June 30, 2005, the Company was in compliance with all the terms and
conditions of the Renewed Revolving Credit Loan, as amended.

In connection with the Original Revolving Credit Loan, the Company issued a
5-year warrant to the lender for the purchase of 100,000 shares of the Company's
common stock at $.32 per share, subject to adjustment for all subsequent
issuances of stock. This warrant expires on September 21, 2006. The
Black-Scholes option pricing method was used to value the warrant, and the stock
price was based on the stock price the day prior to closing, plus 10%, as
stipulated in the Loan and Security Agreement for the Original Revolving Credit
Loan.

Included in debt is a subordinated promissory note related to a prior dental
company acquisition. As of June 30, 2005, the outstanding principal amount of
this note totals $222,222, and the entire amount has been classified as a
current liability as it is scheduled to be repaid in full within Fiscal Year
2006. The Company is current on all principal and interest payments due the note
holder. A second subordinated promissory note, related to a different prior
acquisition, was repaid in full in Fiscal Year 2005.

The Company's historical operating cash flows have been positive; however, the
Company is dependent upon the Renewed Revolving Credit Loan to finance its
ongoing operations. The Company expects its working capital requirements will
continue to be financed by operations and from borrowings on the Renewed
Revolving Credit Loan. It is believed that the Renewed Revolving Credit Loan is
sufficient to finance the Company's ongoing working capital requirements for the
foreseeable future. The Company currently believes that there are no significant
trends, demands, commitments or contingencies, other than an unexpected material
adverse conclusion to the ongoing environmental litigation case, which are
reasonably likely to result in a significant increase or decrease in its
liquidity or capital resources within the foreseeable future. As of June 30,
2005, the Company had available $1,348,234 of unused credit under the Renewed
Revolving Credit Loan. As of September 16, 2005, the Company had available
$1,141,814 of unused credit under the Renewed Revolving Credit Loan. No
assurances can be given that the Company will have sufficient cash flow in the
long term.

                                       12
<PAGE>

Capital expenditures for Fiscal Year 2005 were approximately $176,981,
consisting mainly of several tooling, foundry and test equipment expenditures
related to the design, development and production of the new imaging products;
costs relating to improvements to the Company's network and email servers, new
computer equipment for the sales personnel, the purchase of a new modular trade
show booth for national dental trade show exhibitions, and other appropriate
replacements in the normal course of operations. The Company expects to continue
to finance any future capital requirements principally from internally generated
funds. The total amount of capital expenditures was limited under the Original
Revolving Credit Loan, and continues to be limited under the Renewed Revolving
Credit Loan. However, such terms can be waived by the senior secured lender when
needed. The Company was in compliance with this requirement as of June 30, 2005.

The Company has made a concerted effort during Fiscal Year 2005 to have
sufficient quantity of finished goods inventory available so as to be able to
quickly fulfill customer demands. That, combined with the anticipated increase
in sales levels in Fiscal Year 2006, has resulted in an increase in inventory
levels, accounts payable and accrued expenses as at June 30, 2005 compared to
the inventory levels, accounts payable, and accrued expenses at June 30, 2004.
The Company also prepared for the extended European summer holiday, when foreign
vendors usually limit their shipments.

Off-Balance Sheet Arrangements
------------------------------

The Company has no off-balance sheet financing arrangements or interests in
so-called special purpose entities.

Results of Operations
---------------------

The Company's quarterly operating results may fluctuate depending on a variety
of factors, many of which are not in the Company's control, including but not
limited to:

o        Demand for products and services,

o        The level of product, price and service competition,

o        Changes in product mix, which could effect profit margins,

o        Federal, state or local government regulation,

o        Consumer trends,

o        Capital spending budgets of customers,

o        General economic conditions specific to the Company's industry.

Fiscal 2005 vs. Fiscal 2004
---------------------------

Sales increased approximately $3,302,200 or 16.6%, between Fiscal Year 2004 and
Fiscal Year 2005. Approximately 57% of this increase is attributable to the
continued sales growth of the Company's digital products in both the domestic
and international marketplaces. X-ray sales increased approximately 28% in the
current fiscal year, due to the introduction of new products or product
enhancements. The balance of the increase in sales is mainly attributable to
x-ray processor sales, chemistry and the introduction into the veterinary market
of a CR filmless scanner used in conjunction with general radiographic
equipment. The Company's international sales increased 38%, mostly in the dental
sector, due to sales of the new products.

Gross profit as a percent of sales stayed relatively constant between Fiscal
Year 2004 and Fiscal Year 2005; however, the detail between material costs and
labor and overhead costs showed differences. Material costs, as a percent of
sales, increased 1.0 percentage points, mainly due to the strength of the Euro
related to the dollar, which was offset by production improvements in other new
products and price increases implemented in the third quarter for some of the
imported products. Labor and overhead costs increased $213,000 due to the
significantly higher sales volumes in the current fiscal year. However, the
relative percentage points for labor and overhead costs decreased 1.1 percentage
points due to the higher sales base.

Selling, general, and administrative costs increased approximately $1,351,800 or
23.3%, between Fiscal Year 2004 and Fiscal Year 2005. This increase is due to
several different factors: (1) as of December 31, 2004, the Company had recorded
a total of $305,000 of G&A costs which included associated legal and settlement
fees related to two separate environmental lawsuits (one of which was settled in
February 2005), (2) marketing and sales costs increased by approximately
$843,000 in the current fiscal year due to the Company aggressively pursuing
various sales opportunities in both the domestic and international markets,
including increased travel costs, attendance at several national and regional
clinical exhibitions, additional advertising, and increased operating costs, (3)
consulting costs related to exploring various acquisition opportunities
increased in the current fiscal year, and (4) increased variable general
operating costs associated with the 16% increase in sales. The Company
anticipates continuing to evaluate acquisition opportunities and therefore may
continue to incur related consulting costs in the future. Such costs relating to
acquisition opportunities may vary significantly between fiscal periods
depending on the extent of acquisition activities.

                                       13
<PAGE>

Research and development costs increased slightly, by approximately $38,400 or
9.7%, between Fiscal Year 2004 and Fiscal Year 2005. The Company continues to
invest in the design, development and refinement of new digital imaging
products, as well as to invest in sustaining engineering and related costs for
existing products. Research and development costs may fluctuate between fiscal
periods, due to changing research and development consulting requirements,
initiation or completion of certain project tasks, and market demands.

Interest expense, net decreased by approximately $31,700 or 20.2% between Fiscal
Year 2004 and Fiscal Year 2005. A subordinated note was repaid as of December
2004, and the other subordinated note had a lower principal amount and slightly
lower interest rate (based on the LIBOR rate of borrowing) in the current fiscal
year. The average revolving credit loan balance in Fiscal Year 2005 was
approximately $26,000 less than the average in Fiscal Year 2004; however, the
prime rate of borrowing, upon which interest rates for the revolving credit loan
is based, was slightly higher.

A deferred income tax benefit of approximately $680,000 resulted from a decrease
in the Company's valuation allowance against its deferred tax asset and was
recorded in the third and fourth quarters of Fiscal Year 2005. The deferred tax
asset primarily relates to losses reported in prior years. The Company believes
it is likely that it will utilize a portion of these prior year net operating
loss carry forwards, based on the Company's recent strong earnings history. As a
result, net income for Fiscal Year 2005 was $680,000 ($.07 per diluted share)
higher than would have been reported if such tax benefit had not been recorded.
The remaining balance of the tax benefit recorded for Fiscal Year 2005, includes
federal and state income and capital taxes, and related refunds and credits
received. The Company's income tax benefit for Fiscal Year 2004 primarily
reflect certain state capital taxes and Federal alternative tax. The Fiscal Year
2004 tax benefit also reflects the realization of net operating losses
previously subject to valuation allowances, which offset federal and state
income tax provisions.


Fiscal 2004 vs. Fiscal 2003
---------------------------

In June 2003, management developed a significant cost reduction program, which
was implemented effective July 2003. This program reduced overhead costs, both
direct and non-direct, and payroll and related costs by over $500,000. These
reductions included elimination of non-productive product lines, a 7% decrease
in the work force, and numerous cost cutbacks throughout the Company. Management
reviewed all significant cost centers and eliminated or reduced many major
expenses, including payroll and related benefit costs, communication, and travel
and entertainment. Management will continue to monitor and control the level of
discretionary spending. In Fiscal Year 2004, the Company reorganized its
marketing/sales department resulting in increased operating efficiencies.
Management was able to significantly increase sales with only a modest increase
in total expenditures. Management continues to search for and develop new
products that satisfy its niche markets in medical, dental and veterinary
diagnostic imaging.

The Company began shipments of its new digital dental sensor, "EVA" (R), in
November 2002 to international dealers and distributors. The Company received
FDA clearance for the EVA sensor in March 2003, which permitted the Company to
begin to market and distribute the product domestically. This digital sensor can
also be used in veterinary dental applications. The Company is continuing to
develop its sensors, accessories and related software, and anticipates both
domestic and international growth in this product line.

Sales increased approximately $1,789,200 or 10% between Fiscal Year 2004 and
Fiscal Year 2003. A significant portion of this increase is attributable to the
introduction of the Company's digital products to the domestic marketplace.
Medical product sales, including veterinary products, showed an increase of
$970,000. Dental product sales, including digital products, increased
approximately $820,000, both domestically and internationally. The Company's
analog products stayed relatively constant throughout the two periods.
International sales increased approximately 6% in Fiscal Year 2004 compared to
Fiscal Year 2003, mainly in dental equipment sales.

Gross profit as a percent of sales increased 4.4 percentage points between the
Fiscal Year 2004 and Fiscal Year 2003. All product lines showed improvements in
their margins, due to increased operating efficiencies. The product mix between
manufactured and distributor goods stayed relatively constant between the two
fiscal years. Labor and overhead costs, which are included in cost of sales,
were approximately $240,000 lower and or 2.7 percentage points lower as a
percent of sales in Fiscal Year 2004 compared to Fiscal Year 2003, due to the
above-mentioned cost reductions.

                                       14
<PAGE>

Selling, general, and administrative costs increased approximately $178,500 or
3.2%, between Fiscal Year 2004 and Fiscal Year 2003. Most of this increase is
attributable to a 7% increase in marketing/selling costs to promote the new
digital sensor and the veterinary imaging products, including advertising and
attendance at several more exhibition shows, offset by the results of the
Company's cost reduction program developed in June 2003. Additionally, the
Company increased its reserve on the environmental litigation related to the
property in New Jersey, based upon the advise of their expert counsel in this
matter.

Research and development costs decreased, approximately $156,500 or 28.3%
between the Fiscal Year 2004 and Fiscal Year 2003. This decrease is mainly
attributable to the timing of expenditures relating to the Company's continued
investment in the design, development and refinement of its new imaging products
as well as the completion of several engineering projects and the introduction
of these products into commercial use. The Company continues to invest in
sustaining engineering and related costs for its existing products. Research and
development costs are expected to continue to fluctuate between reporting
periods.

Interest expense, net, decreased by approximately $49,900 or 24.1%, between
Fiscal Year 2004 and Fiscal Year 2003 primarily due to several factors. There
was approximately $566,000 less in average monthly revolving credit borrowings
for the current year; the prime rate of borrowing, upon which interest rates for
all senior debt is based, was slightly lower in the current period; and the
LIBOR rate of borrowing, upon which a subordinated note is based was
significantly lower in the current period.

The income tax benefit for Fiscal Year 2004 and the income tax provision for
Fiscal Year 2003 primarily reflect certain state capital taxes and Federal
alternative tax. In Fiscal Year 2004, the Company realized net operating losses
previously subject to valuation allowances to offset federal and state income
tax provisions. In Fiscal Year 2003, no tax benefit was recognized for the
losses incurred.

In Fiscal Year 2003, in compliance with the FASB SFAS No. 142, "Goodwill and
Other Intangible Assets," the Company reviewed its remaining goodwill, which
related to the Swedish dental acquisition in April 1997, and determined that,
under the revised accounting valuation rules, such goodwill had significantly
diminished in value. Therefore, in compliance with SFAS No. 142, the Company
took a one-time charge of $1,297,069 to completely write-off the goodwill
associated with this acquisition. As the Company no longer has any goodwill,
management does not expect that future compliance with SFAS No. 142 will have a
material effect on the Company's financial position or results of operation,
except for any potential future acquisitions involving goodwill or other
intangible assets.


Critical Accounting Policies and Estimates
------------------------------------------

The preparation of financial statements in conformity with United States
generally accepted accounting principles requires management to makes estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses. These estimates and assumptions
are evaluated on an ongoing basis based on historical internal operations,
industry trends and conditions, market conditions and other information that
management believes to be reasonable or applicable under the circumstances.
There can be no assurances that actual results of operations will be consistent
with management's estimates and assumptions, and that reported results of
operations will not be adversely affected by the requirement to make accounting
adjustments to reflect changes in these estimates from time to time. The
following policies are those that management believes to be the most sensitive
to estimates and judgments.

Revenue Recognition
-------------------
The Company recognizes revenue for both its domestic and international sales
when products are shipped and title passes to the customer. The Company includes
shipping and handling costs as a component of cost of sales.

Accounts Receivable
-------------------
The Company reports accounts receivable net of reserves for doubtful accounts.
Credit is extended to worldwide distributors on varying terms between 30 and 90
days. The reserve for doubtful accounts is management's best estimate of the
amount of probable credit losses in the Company's existing accounts receivable
and is based upon continual analysis of the accounts receivable aging including
credit risk of specific customers, historical trends and other related
information. The Company writes off accounts receivable when they become
uncollectible. There have been no significant changes in the computation
methodology of the reserve for doubtful accounts in the past three years and the
Company has not had significant bad debt write-offs in the past few years. The
allowance for doubtful accounts is based on the Company's analysis of aged
accounts receivable. Management believes that any potential risk associated with
the estimate of reserve for doubtful accounts is therefore limited.

                                       15
<PAGE>

Inventories
-----------
Inventories, which include material and a small component of work-in-process
labor and overhead, are stated at the lower of cost (first in, first out) or
market (net realizable value). The Company uses a standard cost accounting
system in conjunction with an actual perpetual system to properly account for,
control and maintain the movement of all inventory components. The Company has
established inventory reserves based on inventory estimated to be obsolete, slow
moving, or unmarketable due to changing technological and/or market conditions.
If actual market and technical conditions are less favorable than those
anticipated, additional inventory reserves would be required. There have been no
significant changes in the computation methodology of the reserves for inventory
in the past three years.

Warranties
----------
The Company records a liability for an estimate of costs that it expects to
incur under its limited warranty based on revenues. Various factors affect the
Company's warranty liability, including (1) number of units sold, (2) historical
rates of claims, (3) anticipated rates of claims, as well as (4) costs per
claim. The Company periodically assesses the adequacy of its warranty liability
based on changes in these factors.

In March 2005, the Company began to include an extended warranty with its
digital sensors. The Company will monitor the rate and costs of claims and
review the adequacy of its warranty liability and make any changes as necessary.
If the Company experiences significant increased warranty claims or activity,
the warranty reserve will be increased, resulting in decreased gross profit.

Stock-based Compensation
------------------------
Stock based compensation is accounted for under the recognition and measurement
principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. Effective July 1, 2005, the Company will begin to
account for stock based compensation under Financial Accounting Standards Board
Statement No. 123R, Share Based Payment. Approximately $48,000 of stock-based
employee compensation cost is included in net income for Fiscal Year 2005, as
certain options were granted at an exercise below market value on the date of
grant. The Company determines the fair value of options based on the
Black-Scholes model, which is based on specific assumptions including (1)
expected life of the option, (2) risk free interest rates, (3) expected
volatility and (4) expected dividend yield.

Deferred Tax Asset and Income Taxes
-----------------------------------
Income taxes are accounted for under the asset and liability method. Deferred
income taxes are recorded for temporary differences between financial statement
carrying amounts and the tax basis of assets and liabilities. Deferred tax
assets reflect the tax rates expected to be in effect in the period in which the
differences are expected to reverse. The Company records a valuation allowance
to reduce its tax asset when it is more likely than not that a portion of the
amount may not be realized. The Company estimates its valuation allowance based
on an estimated forecast of its future profitability. Any significant changes in
future profitability resulting from variations in future revenues or expenses
could affect the valuation allowance on its deferred tax asset and operating
results could be effected, accordingly, deferred income tax benefits aggregating
approximately $680,000 resulting from a decrease in the Company's valuation
allowance against its deferred tax asset were recorded in the third and fourth
quarters of Fiscal 2005. The deferred tax asset primarily relates to losses
reported in prior years. The Company believes it is likely that they will
utilize a portion of these prior year net operating loss carry forwards, based
on the Company's current strong earnings history. In reviewing the valuation
allowance, the Company has considered future taxable income and has determined
that it is more likely than not that a portion of the deferred tax asset will be
realized. Changes in these circumstances, such as an increase or decline in
estimated future taxable income would result in a re-valuation of the valuation
allowance.

Litigation and Contingencies
----------------------------
The Company is party to lawsuits arising out of its respective operations. The
Company records a liability when it is probable and can be reasonably estimated.
The Company believes it has properly estimated in the past; however, court
decisions and/or other unforeseen events could cause liabilities to be incurred
in excess of estimates.


Item 7A.   Quantitative and Qualitative Disclosures About Market Risk
---------------------------------------------------------------------

The Company's earnings and cash flows are subject to changes in interest rates
(short-term prime based interest rates and the 12-month LIBOR rate) primarily
from its borrowings under its senior and subordinate debt. The Company does not
believe that it is materially exposed to changes in interest rates; as at June
30, 2005 there was approximately $674,600 in total debt outstanding. The Company
does not currently use interest rate derivative instruments to manage exposure
to interest rate changes.

                                       16
<PAGE>

The Company's earnings and cash flows are subject to foreign currency exchange
rate risk, specifically the Euro/Dollar and the Yen/Dollar. The Company does not
believe that it is materially exposed to foreign currency exchange rate risk due
to the volume of purchases in foreign currency relative to purchases in US
dollars; however, the relative strength of the Dollar to the Euro or to the Yen
does affect the Company's gross profit. The Company continuously monitors all
changes in foreign currency and may adjust its pricing to customers to reflect
these changes.

Item 8. Financial Statements and Supplementary Data
---------------------------------------------------

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES


                                                                        CONTENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------









Reports of Independent Registered Public Accounting Firms              F-1 - F-2


Consolidated Financial Statements:

   Balance Sheet                                                         F-3
   Statement of Operations                                               F-4
   Statement of Shareholders' Equity and Comprehensive Income (Loss)     F-5
   Statement of Cash Flows                                               F-6
   Notes to Consolidated Financial Statements                         F-7 - F-19


Supplemental Schedule:

   Schedule of Valuation and Qualifying Accounts                        F-20



<PAGE>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM




To the Board of Directors
AFP Imaging Corporation


We have audited the accompanying consolidated balance sheets of AFP Imaging
Corporation and Subsidiaries (the "Company") as of June 30, 2005 and 2004, and
the related consolidated statements of operations, shareholders' equity and
comprehensive income (loss), and cash flows for the years then ended. Our audits
also included the financial statement schedule listed in the Index at Item 15.
These consolidated financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of AFP
Imaging Corporation and Subsidiaries as of June 30, 2005 and 2004 and the
results of their operations and their cash flows for the years then ended, in
conformity with United States generally accepted accounting principles. Also, in
our opinion, the related financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.



GOLDSTEIN GOLUB KESSLER LLP
New York, New York


August 16, 2005

                                                                             F-1
<PAGE>



             Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of AFP Imaging Corporation

We have audited the accompanying consolidated statements of operations,
shareholders' equity and comprehensive income (loss), and cash flows of AFP
Imaging Corporation (a New York Corporation) for the year ended June 30, 2003.
Our audit also included the financial statement schedule listed in the Index at
Item 15(a). These financial statements and schedule are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audit.

We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company's internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
AFP Imaging Corporation for the year ended June 30, 2003, in conformity with
U.S. generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

As discussed in Note 1 to the consolidated financial statements, on July 1,
2002, the Company changed its method of accounting for goodwill and other
intangible assets.




                             /s/ Ernst & Young LLP
Stamford, Connecticut
August 25, 2003



                                                                             F-2
<PAGE>
<TABLE>
<CAPTION>






                                                                              AFP IMAGING CORPORATION AND SUBSIDIARIES
                                                                                            CONSOLIDATED BALANCE SHEET
----------------------------------------------------------------------------------------------------------------------


June 30,                                                                                     2005                 2004
----------------------------------------------------------------------------------------------------------------------

ASSETS

Current Assets:
<S>                                                                                    <C>               <C>
  Cash and cash equivalents                                                            $  331,009        $     331,993
  Accounts receivable, less allowance for doubtful accounts
   of $90,000 and $95,000, respectively                                                 2,704,136            2,503,760
  Inventories                                                                           3,921,383            2,704,009
  Prepaid expenses and other current assets                                                89,069              267,380
  Deferred income taxes                                                                   680,000                    -
----------------------------------------------------------------------------------------------------------------------
      Total current assets                                                              7,725,597            5,807,142

Property and Equipment, net of accumulated depreciation
 of $1,234,305 and $1,114,540, respectively                                               388,738              388,271

Other Assets                                                                               39,061               49,482

----------------------------------------------------------------------------------------------------------------------
      Total Assets                                                                     $8,153,396        $   6,244,895
======================================================================================================================

LIABILITIES AND SHAREHOLDERS' EQUITY

Current Liabilities:
  Current portion of long-term debt                                                    $  674,585        $   1,451,094
  Accounts payable                                                                      1,339,251              922,499
  Accrued expenses                                                                      1,361,514              847,923

----------------------------------------------------------------------------------------------------------------------
      Total current liabilities                                                         3,375,350            3,221,516

Long-term Debt                                                                                  -              222,223

Deferred Rent                                                                             115,415              135,760

----------------------------------------------------------------------------------------------------------------------
      Total liabilities                                                                 3,490,765            3,579,499
----------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies

Shareholders' Equity:
  Preferred stock - $.01 par value; authorized 5,000,000 shares, none issued                    -                    -
  Common stock - $.01 par value; authorized 30,000,000 shares, issued and
    outstanding 9,407,717 and 9,270,617 shares at June 30, 2005
    and June 30, 2004, respectively                                                        94,077               92,710
  Common stock warrants                                                                    19,800               19,800
  Paid-in capital                                                                      11,641,821           11,545,883
  Accumulated deficit                                                                  (7,093,067)          (8,992,997)
----------------------------------------------------------------------------------------------------------------------

      Total shareholders' equity                                                        4,662,631            2,665,396

----------------------------------------------------------------------------------------------------------------------
      Total Liabilities and Shareholders' Equity                                       $8,153,396        $   6,244,895
=======================================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements                               F-3

<PAGE>
<TABLE>
<CAPTION>
                                                                              AFP IMAGING CORPORATION AND SUBSIDIARIES


                                                                                  CONSOLIDATED STATEMENT OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------

Year ended June 30,                                                         2005               2004               2003
----------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                 <C>                <C>
Net sales                                                           $ 23,135,063        $19,832,910        $18,043,668

Cost of sales                                                         14,189,096         12,178,072         11,864,995
----------------------------------------------------------------------------------------------------------------------

Gross profit                                                           8,945,967          7,654,838          6,178,673

Selling, general and administrative expenses                           7,155,537          5,803,766          5,625,227

Research and development expenses                                        435,813            397,444            553,991
----------------------------------------------------------------------------------------------------------------------

Operating income (loss)                                                1,354,617          1,453,628               (545)

Interest expense, net of interest income                                 125,358            157,015            206,878
----------------------------------------------------------------------------------------------------------------------

Income (loss) before provision (benefit) for
 income taxes                                                          1,229,259          1,296,613           (207,423)

Provision (benefit) for income taxes                                    (670,671)           (48,854)            10,915
----------------------------------------------------------------------------------------------------------------------

Income (loss) before cumulative effect of change
 in accounting principle                                               1,899,930          1,345,467           (218,338)

Cumulative effect of change in accounting principle                            -          -                 (1,297,069)

----------------------------------------------------------------------------------------------------------------------
Net income (loss)                                                    $ 1,899,930        $ 1,345,467       $ (1,515,407)
======================================================================================================================

Income (loss) per share before cumulative effect of change in accounting
 principle:
  Basic                                                              $       .20        $       .15       $       (.02)
  Diluted                                                            $       .19        $       .14       $       (.02)
======================================================================================================================

Net income (loss) per common share:
  Basic                                                              $       .20        $       .15       $       (.16)
  Diluted                                                            $       .19        $       .14       $       (.16)
======================================================================================================================
</TABLE>



See Notes to Consolidated Financial Statements                               F-4

<PAGE>
<TABLE>
<CAPTION>






                                                                                   AFP IMAGING CORPORATION AND SUBSIDIARIES

                                             CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
---------------------------------------------------------------------------------------------------------------------------

Years ended June 30, 2003, 2004 and 2005
---------------------------------------------------------------------------------------------------------------------------

                                            CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)

Years ended June 30, 2003, 2004 and 2005
                                                                                                   Foreign
                                                            Common                                 Currency
                                 Comprehensive   Common      Stock       Paid-in   Accumulated   Translation
                                 Income (Loss)   Stock     Warrants      Capital       Deficit   Adjustment        Total
---------------------------------------------------------------------------------------------------------------------------

<S>          <C> <C>                           <C>      <C>          <C>          <C>             <C>       <C>
Balance June 30, 2002                       -  $92,710  $    19,800  $11,545,883  $ (8,823,057)   $(12,619) $ 2,822,717
Foreign currency translation
 adjustment                     $       1,470        -            -            -             -       1,470        1,470
Reclassification adjustment            11,149        -            -            -             -      11,149       11,149
Net loss                           (1,515,407)       -            -            -    (1,515,407)          -   (1,515,407)
                                    ----------
Comprehensive loss              $  (1,502,788)
                                    ==========
---------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2003                           92,710       19,800   11,545,883   (10,338,464)          -    1,319,929
Net income                          1,345,467        -            -            -     1,345,467           -    1,345,467

---------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2004                  92,710   19,800   11,545,883   (8,992,997)            -           -    2,665,396
Issuance of 137,100 shares of
common stock in connection with the
exercise of stock options                        1,367            -       47,938             -           -       49,305
Issuance of 100,000 stock
 options below
  market price                                       -            -       48,000             -           -       48,000
Net income                      $   1,899,930        -            -            -     1,899,930           -    1,899,930
---------------------------------------------------------------------------------------------------------------------------
Balance June 30, 2005                          $94,077  $    19,800  $11,641,821  $ (7,093,067)   $  - 0 -  $ 4,662,631
</TABLE>

See Notes to Consolidated Financial Statements                               F-5
<PAGE>



<TABLE>
<CAPTION>



                                                                                   AFP IMAGING CORPORATION AND SUBSIDIARIES

                                                                                       CONSOLIDATED STATEMENT OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------

Years ended June 30,                                                            2005            2004              2003
---------------------------------------------------------------------------------------------------------------------------

Cash flows from operating activities:
<S>                                                                       <C>             <C>              <C>
  Net income (loss)                                                       $1,899,930      $ 1,345,467      $(1,515,407)
  Adjustments to reconcile net income (loss) to
   net cash provided by operating activities:
    Issuance of stock options below market price                              48,000                -                -
    Depreciation and amortization                                            218,682          159,823          202,685
    Loss on disposal of property and equipment                                     -           11,685                -
    Cumulative effect of change in accounting principle                            -                -        1,297,069
    Reclassification of translation adjustments included
     in net loss                                                                   -                -           11,149
    Provision for losses on accounts receivable                               38,454            5,989           49,344
    Deferred income taxes                                                   (680,000)               -                -
    Change in assets and liabilities:
     (Increase) decrease in accounts receivable                             (238,830)        (260,268)         179,368
     (Increase) decrease in inventories                                   (1,217,374)        (222,005)         334,069
     (Increase) decrease in prepaid expenses and other
      current assets                                                         178,311         (168,288)          41,499
     Decrease (increase) in other assets                                     (31,747)          53,391           64,419
     Increase (decrease) in accounts payable                                 416,752            6,171         (359,986)
     (Decrease) increase in accrued expenses                                 513,591          (78,819)         158,058
     (Decrease) Increase in deferred rent                                    (20,345)          27,389                -

---------------------------------------------------------------------------------------------------------------------------
         Net cash provided by operating activities                         1,125,424         880,535           462,267
---------------------------------------------------------------------------------------------------------------------------

Cash flows from investing activities:
  Purchases of property and equipment                                       (176,981)       (107,512)         (221,154)
---------------------------------------------------------------------------------------------------------------------------

Cash flows from financing activities:
  Borrowing of debt                                                                -                -          226,838
  Repayments of debt                                                        (998,732)      (1,099,168)        (327,777)
  Exercise of common stock options                                            49,305                -                -
---------------------------------------------------------------------------------------------------------------------------

           Net cash used in financing activities                            (949,427)     (1,099,168)         (100,939)

---------------------------------------------------------------------------------------------------------------------------


Exchange rate effects on cash and cash equivalents                                 -                -            1,470


Net increase (decrease) in cash and cash equivalents                            (984)        (326,145)         141,644

Cash and cash equivalents at beginning of year                               331,993         658,138           516,494
---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year                                 $   331,009    $    331,993      $    658,138
===========================================================================================================================

Supplemental disclosures of cash flow information:

  Cash paid during the year for:
    Interest                                                             $   132,441     $    161,266     $    213,040
===========================================================================================================================
    Income taxes                                                         $    24,701    $      13,528     $     19,702
===========================================================================================================================
</TABLE>

See Notes to Consolidated Financial Statements                               F-6

<PAGE>






                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

 1.  NATURE OF BUSINESS AND   AFP Imaging Corporation, together with its
     SIGNIFICANT ACCOUNTING   subsidiaries (the "Company"), was organized
     POLICIES:                on September 20, 1978 under the laws of the
                              State of New York. The Company is engaged
                              in the business of designing, developing,
                              manufacturing and distributing equipment for
                              generating, capturing and/or producing medical and
                              dental diagnostic images through electronic
                              technologies as well as the chemical processing of
                              photosensitive materials. These products are used
                              by medical, dental, veterinary and industrial
                              professionals. The Company's products are
                              distributed to worldwide markets, under various
                              brand names, through a network of independent and
                              unaffiliated dealers.

                              In September 2003, the Company completely
                              dissolved two of its wholly owned subsidiaries:
                              LogEtronics Corporation and Regam Medical Systems
                              AB. The Company sold selected assets of its
                              graphic arts business in July 2001, which had been
                              distributed through LogEtronics Corporation. Upon
                              completion of the transfer of the manufacturing
                              operations to the United States, the Company, in
                              accordance with Swedish law, dissolved Regam
                              Medical Systems AB.

                              The consolidated financial statements include AFP
                              Imaging Corporation and its wholly owned
                              subsidiaries. All significant intercompany
                              transactions have been eliminated in
                              consolidation.

                              The preparation of financial statements in
                              conformity with United States generally accepted
                              accounting principles requires management to make
                              estimates and assumptions that affect the reported
                              amounts of assets and liabilities and the reported
                              amounts of revenues and expenses during the
                              reporting period. Actual results could differ from
                              those estimates.

                              Revenue is recognized by the Company when products
                              are shipped and title passes to the customer. The
                              Company includes shipping and handling costs as a
                              component of cost of sales.

                              Cash and cash equivalents include deposits with
                              original maturities of three months or less.

                              The Company maintains cash in bank deposit
                              accounts which, at times, exceed federally insured
                              limits. The Company has not experienced any losses
                              on these accounts.

                              Inventories, which include material, labor and
                              manufacturing overhead, are stated at the lower of
                              cost (first-in, first-out) or market (net
                              realizable value).

                              Machinery and equipment are depreciated using
                              straight-line and accelerated methods over their
                              estimated useful lives, ranging from three to
                              seven years. Leasehold improvements are
                              depreciated on a straight-line basis over the
                              shorter of their estimated useful lives or the
                              term of the lease.

                              Research and development costs are charged to
                              expense as incurred. These costs are incurred in
                              connection with the design and development of the
                              Company's products.

                              Advertising costs, included in selling, general
                              and administrative costs, are charged to expense
                              as incurred and were approximately $185,300,
                              $102,600 and $56,200 for the fiscal years ended
                              June 30, 2005, 2004 and 2003, respectively.

                                                                             F-7
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

                              The Company has elected, in accordance with the
                              provisions of SFAS No. 123, to apply the current
                              accounting rules under APB Opinion No. 25 and
                              related interpretations in accounting for stock
                              options and, accordingly, is presenting the
                              disclosure-only information as required by SFAS
                              No. 123. If the Company had elected to recognize
                              compensation cost based on the fair value of the
                              options granted at the grant date, in accordance
                              with SFAS No. 123, the Company's net income (loss)
                              and net income (loss) per common share would
                              approximate the pro forma amounts shown in the
                              following table:
<TABLE>
<CAPTION>

                              June 30,                                              2005            2004          2003
                             -----------------------------------------------------------------------------------------

<S>                                                                        <C>                <C>          <C>
                              Net income (loss), as reported               $   1,899,930      $1,345,467   $(1,515,407)
                              Deduct:
                                Stock compensation expense
                                 determined under fair-value-based
                                 method for all awards, net of related
                                 tax effect                                     (151,884)       (231,815)       (2,766)
                             -----------------------------------------------------------------------------------------
                              Pro forma net income (loss)                  $    1,748,046     $1,113,652   $(1,518,173)
                             =========================================================================================

                              Basic net income (loss) per share,
                               as reported                                 $         .20      $      .15   $      (.16)
                              Basic net income (loss) per share,
                               pro forma                                   $         .19      $      .13   $      (.16)

                              Diluted net income (loss) per share,
                               as reported                                 $         .19      $      .14   $      (.16)
                              Diluted net income (loss) per share,
                               pro forma                                   $         .18      $      .12   $     (.16)
                             -----------------------------------------------------------------------------------------
</TABLE>


                              The fair value of each option grant was estimated
                              on the date of grant using the Black-Scholes
                              option pricing model and the following assumptions
                              for grants in fiscal 2005, 2004 and 2003: dividend
                              yield of 0%; expected volatility of 80%, 79% and
                              155% respectively; expected life of five to ten
                              years; and risk-free interest rate ranging from
                              3.09% to 4.79%.

                              In December 2004, the FASB issued Statement of
                              Financial Accounting Standards No. 123 (Revised
                              2004) Share-Based Payment ("SFAS No. 123R"), which
                              requires that the compensation cost relating to
                              share-based payment transactions be recognized in
                              financial statements based on alternative fair
                              value models. The share-based compensation cost
                              will be measured based on the fair value of the
                              equity or liability instruments issued. The
                              Company currently discloses pro forma compensation
                              expense quarterly and annually by calculating the
                              stock option grants' fair value using the
                              Black-Scholes option pricing model and disclosing
                              the impact on net income and net income per share
                              in a note to the consolidated financial
                              statements. Upon adoption, pro forma disclosure
                              will no longer be an alternative. The table above

                                                                             F-8
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

                              reflects the estimated impact that the use of fair
                              value accounting would have had on our net income
                              and net income per share if it had been in effect
                              during the year ended June 30, 2005. SFAS No. 123R
                              also requires the benefits of tax deductions in
                              excess of recognized compensation cost to be
                              reported as a financing cash flow rather than as
                              an operating cash flow as required under the
                              current literature. This requirement will reduce
                              net operating cash flows and increase net
                              financing cash flows in periods after adoption.
                              The Company will begin to apply SFAS No. 123R
                              using the most appropriate fair value model as of
                              the interim reporting period ending September 30,
                              2005.

                              Revenue and expenses of the Company's foreign
                              operations were translated at the applicable
                              weighted-average rates of exchange in effect
                              during the period reported. The Company liquidated
                              its foreign operation and reclassified the foreign
                              currency translation adjustment to the net loss in
                              fiscal 2003. Any transaction gains and losses are
                              included in net income.

                              Accounts receivable are recorded at the invoiced
                              amount and do not bear interest. The allowance for
                              doubtful accounts is the Company's best estimate
                              of the amount of probable credit losses in the
                              Company's existing accounts receivable. The
                              Company establishes an allowance for doubtful
                              accounts based upon factors surrounding the credit
                              risk of specific customers, historical trends and
                              other information. Receivable balances are
                              reviewed on an aged basis and account balances are
                              charged off against the allowance after all means
                              of collection have been exhausted and the
                              potential for recovery is doubtful.

                              Income taxes are accounted for under the asset and
                              liability method. Deferred tax assets and
                              liabilities are recognized for the estimated
                              future tax consequences attributable to
                              differences between the financial statement
                              carrying amounts of existing assets and
                              liabilities and their respective tax bases and
                              operating loss carryforwards. Deferred tax assets
                              and liabilities are measured using enacted tax
                              rates in effect for the year in which those
                              temporary differences are expected to be recovered
                              or settled. The effect on deferred tax assets and
                              liabilities of a change in tax rates is recognized
                              in income in the period that includes the
                              enactment date. The Company records a valuation
                              allowance to reduce its deferred tax asset to an
                              amount that is more likely than not to be
                              realized.

                              The computation of net income (loss) and income
                              (loss) per common share before cumulative effect
                              of change in accounting principle is based upon
                              the weighted-average number of common shares
                              outstanding during the period plus, in periods in
                              which they have a dilutive effect, the effect of
                              common shares contingently issuable. Basic and
                              diluted income (loss) per common share before
                              cumulative effect of change in accounting
                              principle for the fiscal years ended 2005, 2004
                              and 2003 is presented below:


                                                                             F-9
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>



                              ----------------------------------------------------------------------------------------
<S>                                                                         <C>               <C>          <C>
                              June 30,                                              2005            2004          2003

                              Income (loss) before cumulative
                               effect of change in accounting
                               principle                                    $  1,899,930      $1,345,467  $   (218,338)

                              ========================================================================================
                              Net income (loss)                             $  1,899,930      $1,345,467  $ (1,515,407)
                              ========================================================================================

                              Weighted-average common stock
                               outstanding - basic                             9,380,855       9,270,617     9,270,617
                              ========================================================================================

                              Basic:
                                Income (loss) per share before
                                 cumulative effect of change in
                                 accounting principle                       $        .20      $     .15    $      (.02)
                                Net income (loss) per share                 $        .20      $     .15    $      (.16)
                              ========================================================================================

                              Weighted-average common stock
                               outstanding - basic                             9,380,855       9,270,617     9,270,617

                              Dilutive effect of stock options                   504,807         361,571             -
                              ----------------------------------------------------------------------------------------

                              Weighted-average common stock
                               outstanding - diluted                           9,885,662       9,632,188     9,270,617
                              ========================================================================================

                              Diluted:
                               Income (loss) per share before
                               cumulative effect of change in
                               accounting principle                         $        .19      $      .14    $     (.02)
                              ========================================================================================
                               Net income (loss) per share                  $        .19      $      .14    $     (.16)
</TABLE>

                              The diluted income (loss) per common share before
                              cumulative effect of change in accounting
                              principle computation reflects the effect of
                              common shares contingently issuable upon the
                              exercise of warrants and options in periods in
                              which conversion would cause dilution. The diluted
                              weighted-average number of shares outstanding for
                              the years ended June 30, 2005, 2004 and 2003 did
                              not include the potential exercise of 18,000,
                              81,000 and 945,000 stock options, respectively, as
                              such amounts was antidilutive.

                              In June 2001, the FASB issued Statements No. 141,
                              Business Combinations ("SFAS No. 141") and No.
                              142, Goodwill and Other Intangible Assets ("SFAS
                              No. 142"). These standards change the accounting
                              for business combinations by, among other things,
                              prohibiting the prospective use of
                              pooling-of-interests accounting and requiring
                              companies to stop amortizing goodwill and certain
                              intangible assets with an indefinite useful life
                              created by business combinations accounted for
                              using the purchase method of accounting. Instead,
                              goodwill and intangible assets deemed to have an
                              indefinite useful life will be subject to an
                              annual review for impairment. SFAS No. 141 was
                              effective for purchase business combinations
                              consummated after June 30, 2001. The Company
                              adopted SFAS No. 142 on July 1, 2002. SFAS No. 142

                                                                            F-10
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

                              requires that goodwill and intangible assets
                              deemed to have an indefinite useful life be
                              reviewed for impairment upon adoption and annually
                              thereafter.

                              Under SFAS No. 142, goodwill impairment is deemed
                              to exist if the net book value of a reporting unit
                              exceeds its estimated fair value. The Company has
                              one reporting unit, which comprises its entire
                              operating segment. This methodology differs from
                              the Company's previous policy, as permitted under
                              accounting standards existing at that time, of
                              using undiscounted cash flows to determine if
                              goodwill is recoverable.

                              Upon adoption of SFAS No. 142, the Company
                              recorded a one-time, noncash charge of $1,297,069
                              ($.14 basic and diluted loss per common share) to
                              reduce the carrying value of its goodwill. Such
                              charge is nonoperational in nature and is
                              reflected as a cumulative effect of an accounting
                              change in the accompanying consolidated statement
                              of operations. In calculating the impairment
                              charge, the fair value of its reporting unit was
                              estimated by comparison to the Company's quoted
                              market capitalization at July 1, 2002, since the
                              reporting unit represents all of the Company's
                              operations.

                              In December 2004, the FASB issued Statement No.
                              151 Inventory Costs ("SFAS No. 151") that amends
                              the guidance in Accounting Research Bulletin No.
                              43, Inventory Pricing, (ARB No. 43) to clarify the
                              accounting for abnormal idle facility expense,
                              freight, handling costs, and wasted material
                              (spoilage). In addition, SFAS No. 151 requires
                              that an allocation of fixed production overhead to
                              the costs of conversion be based on the normal
                              capacity of the production facilities. SFAS No.
                              151 is effective for inventory costs incurred for
                              fiscal years beginning after June 15, 2005 (year
                              ending June 30, 2006 for the Company). The Company
                              is evaluating the impact of SFAS No. 151.

                              Certain prior-year amounts have been reclassified
                              to conform to the current-period presentation.

                              Management does not believe that any other
                              recently issued, but not yet effective, accounting
                              standards if currently adopted would have a
                              material effect on the accompanying consolidated
                              financial statements.


2. INVENTORIES:               Inventories consist of the following:
<TABLE>
<CAPTION>

                              June 30,                                                          2005              2004
                              ----------------------------------------------------------------------------------------

<S>                                                                                      <C>                <C>
                              Raw materials and subcomponent parts                       $ 1,721,165        $1,354,424
                              Work-in-process and finished goods                           2,200,218         1,349,585

                              ----------------------------------------------------------------------------------------
                                                                                         $ 3,921,383        $2,704,009
                              ========================================================================================

</TABLE>

                                                                            F-11
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------




3. PROPERTY AND EQUIPMENT:    Property and equipment, at cost, consists of the
                              following:
<TABLE>
<CAPTION>

                              June 30,                                                          2005              2004
                              ----------------------------------------------------------------------------------------

<S>                                                                                   <C>                 <C>
                              Leasehold improvements                                  $      237,396      $    232,139
                              Machinery and equipment                                      1,385,647         1,270,672
                              ----------------------------------------------------------------------------------------

                                                                                           1,623,043         1,502,811
                              Less accumulated depreciation and amortization              (1,234,305)       (1,114,540)

                              ----------------------------------------------------------------------------------------
                                      Property and equipment, net                     $      388,738      $    388,271
                              ========================================================================================

</TABLE>

                              Depreciation and amortization was $176,514,
                              $159,823 and $202,685 for the years ended June 30,
                              2005, 2004 and 2003, respectively.

                              The Company retired $56,749, $639,665 and $346,239
                              of assets during fiscal years 2005, 2004 and 2003,
                              respectively.


4. DEBT:                      On September 21, 2004, the Company
                              renewed its senior secured credit facility
                              (the "Renewed Revolving Credit Loan") for an
                              additional three-year period. The Renewed
                              Revolving Credit Loan replaced the existing
                              senior credit facility (the "Original
                              Revolving Credit Loan"). The maximum
                              borrowing permitted under the Renewed
                              Revolving Credit Loan is lower than that
                              under the prior credit facility, based on
                              the Company's current requirements. However,
                              the Renewed Revolving Credit Loan has more
                              favorable terms, including a lower interest
                              rate, and less stringent reporting
                              requirements, than that under the Original
                              Revolving Credit Loan, and gives the Company
                              the ability to borrow on specific amounts of
                              foreign accounts receivable. The Renewed
                              Revolving Credit Loan consists of a
                              $2,500,000 revolving line of credit, which
                              is secured by all of the Company's
                              inventory, accounts receivable, equipment,
                              officer life insurance policies and proceeds
                              thereof, trademarks, licenses, patents and
                              general intangibles. The Renewed Revolving
                              Credit Loan has an interest rate of prime
                              plus 1.375%, (6.25% at June 30, 2005), a
                              specific formula to calculate available
                              funds based on eligible accounts receivable
                              and inventory, and certain reporting
                              requirements to the senior secured lender.
                              The Renewed Revolving Credit Loan requires
                              that certain financial ratios and net worth
                              amounts be maintained by the Company, and
                              prohibits the paying of dividends. The
                              Renewed Revolving Credit Loan provides for
                              increases in the interest rate charged on
                              monies outstanding under specific
                              circumstances.

                              As of June 30, 2005, the Company was in compliance
                              with all terms and conditions of the Renewed
                              Revolving Credit Loan.

                              In connection with the original facility, the
                              Company issued a five-year warrant to the lender
                              for the purchase of 100,000 shares of the
                              Company's common stock at $0.32 per share, subject
                              to an adjustment for all subsequent issuances of
                              stock. The Black-Scholes option pricing model was
                              used to value the warrant, and the stock purchase
                              price was based on the stock price the day prior
                              to closing, plus 10%, as stipulated in the Loan
                              and Security Agreement for the Original Revolving
                              Credit Loan.

                                                                            F-12
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>

                              As of June 30, 2005 and 2004, debt consisted of
                              the following:
                                                                                             2005                 2004
                              ----------------------------------------------------------------------------------------

<S>                                                                                 <C>                    <C>
                              Renewed Revolving Credit Loan                         $     452,363          $ 1,042,761
                              Nystrom subordinated note payable (a)                       222,222              488,889
                              Dental product line subordinated note payable (b)                 -              141,667
                              ----------------------------------------------------------------------------------------

                                                                                          674,585            1,673,317
                              Less current portion                                       (674,585)          (1,451,094)

                              ----------------------------------------------------------------------------------------
                                      Total long-term debt                          $           -         $    222,223
                              ========================================================================================
</TABLE>


                              (a)   This note payable consists of an $800,000
                                    promissory note to ACG Nystromgruppen AB
                                    ("Nystrom"), the former parent of a Swedish
                                    dental company. Under the terms of this
                                    note, as amended, interest only was paid
                                    quarterly for the first three years,
                                    followed by 36 equal monthly installments of
                                    $22,222 plus interest on the unpaid balance,
                                    which began in May 2003. The Nystrom
                                    promissory note bears interest at a rate
                                    reset annually based on the LIBOR plus 2%.
                                    The applicable interest rate at June 30,
                                    2005 was 5.6%.

                              (b)   This note represented a promissory note
                                    payable to the former owner of a dental
                                    product line, which the Company acquired in
                                    December 1997. Under the terms of this note,
                                    as amended, $150,000 was due and paid on
                                    August 10, 1999, and the residual balance of
                                    $850,000 was paid in 36 equal installments
                                    commencing in January 2002. The note had a
                                    fixed interest rate of 7.75% and was repaid
                                    in full as of December 31, 2004.


                              At June 30, 2005, the Company had available
                              $1,348,234 of unused lines of credit under the
                              Renewed Revolving Credit Loan.

                              Due to the short-term nature of all of the debt as
                              well as borrowing rates currently available to the
                              Company, the fair market value of all of the
                              Company's debt approximates its carrying value.


5.  ACCRUED EXPENSES:         As of June 30, 2005 and 2004, accrued expenses
                              consisted of the following:
<TABLE>
<CAPTION>
                                                                                             2005                 2004
                              ----------------------------------------------------------------------------------------
<S>                                                                 <C>                <C>                    <C>
                              Accrued environmental claim (see Note 9)                 $   75,000             $200,000
                              Accrued payroll expenses                                    585,094              338,418
                              Accrued amounts due vendors for in-transit
                                  inventory                                               405,951                    -
                              Accrued expenses - other                                    295,469              309,505

                              ----------------------------------------------------------------------------------------
                                                                                       $1,361,514             $847,923
                              ========================================================================================
</TABLE>

                                                                            F-13
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

 6.  COMMON STOCK OPTIONS     The Company has three employee incentive stock
     AND STOCK PURCHASE       option plans under which approximately 2,200,000
     PLAN:                    shares of Company common stock were originally
                              authorized and available for  issuance. Most
                              options that are granted under the plans are
                              fully vested when granted. The Company accounts
                              for these plans pursuant to Accounting Principles
                              Board Opinion No. 25, Accounting for Stock Issued
                              to Employees ("APB No. 25"), under which no
                              compensation costs have been recognized. Under the
                              terms of the plans, options to purchase common
                              stock of the Company may be granted at not less
                              than 100% of the fair market value of the stock on
                              the date of grant, or 110% of the fair market
                              value if granted to persons owning more than 10%
                              of the outstanding stock of the Company.

                              Transactions under the plans for fiscal 2005, 2004
                              and 2003 are as follows:
<TABLE>
<CAPTION>


                              Year ended June 30,                2005               2004                2003
                              ----------------------------------------------------------------------------------------

                                                                  Weighted-            Weighted-             Weighted-
                                                                   average              average               average
                                                         Options    Price     Options    Price     Options     Price

<S>                                                       <C>         <C>       <C>        <C>     <C>            <C>
                              Outstanding, beginning
                               of fiscal year             1,008,500   $.57      945,000    $.42    1,229,500      $.51
                              Exercised                    (137,100)   .36            0       -            0         -
                              Granted                       140,000   1.53      259,500    1.13       24,000       .13
                              Forfeited                      (6,000)   .96     (155,000)    .49       (8,500)      .51
                              Expired                       (57,000)   .31      (41,000)   1.00     (300,000)      .75
                              ----------------------------------------------------------------------------------------

                              Outstanding, end of
                               fiscal year                  948,400  $ .76     1,008,500   $.57      945,000      $.42
                              ========================================================================================
                              Exercisable at June 30        948,400              708,500             645,000
                              ========================================================================================

                              Weighted-average fair value of
                               options granted during years
                               ended June 30                  $1.09                 $.89                $.13
                              ========================================================================================
</TABLE>


                              At June 30, 2005, the range of exercise prices is
                              as follows:
<TABLE>
<CAPTION>

                                                               Options Outstanding               Options Exercisable
                                                               -------------------               -------------------
                                                                    Weighted-
                                                    Number           average      Weighted-     Number     Weighted-
                                                  Exercisable       Remaining      average    Exercisable  average
                                   Range of       at June 30,      Contractual    Exercise    at June 30,  Exercise
                              Exercise Prices        2005         Life (Years)      Price        2005        Price
                              ----------------------------------------------------------------------------------------

<S>                           <C>      <C>          <C>                <C>        <C>            <C>          <C>
                              $  .11 - $  .50       524,500            4.75       $.30           524,500      $ .30
                              $  .53 - $  .81        25,500            4.90        .61            25,500        .61
                              $  1.06 - $1.75       380,400            9.20       1.31           380,400       1.31
                              $  2.00 - $2.26        18,000            2.50       2.16            18,000       2.16
                              ----------------------------------------------------------------------------------------
                                                    948,400            6.40       $.76           948,400        $.76
                             =========================================================================================
</TABLE>

                                                                            F-14
<PAGE>


                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

7.  INCOME TAXES:             The income (loss) before provision for income
                              taxes is comprised of the following:
<TABLE>
<CAPTION>

                              June 30,                                              2005            2004          2003
                              ----------------------------------------------------------------------------------------

<S>                                                                         <C>                <C>           <C>
                              United States                                 $  1,229,259       $1,309,213    $(205,483)
                              Foreign                                                  -          (12,600)      (1,940)

                              ----------------------------------------------------------------------------------------
                              Total                                         $  1,229,259       $1,296,613    $(207,423)
                              ========================================================================================


                              The provision (benefit) for income taxes is
                              comprised of the following:

                              June 30,                                              2005            2004          2003
                              ----------------------------------------------------------------------------------------

                              Current:
                                Federal                                     $     11,775        $ 20,000             -
                                State                                             (2,446)         13,530       $10,915
                                Deferred                                        (680,000)              -             -
                                Adjustment to income tax liability
                                 accounts                                              -         (82,384)            -

                              ----------------------------------------------------------------------------------------
                              Total                                         $   (670,671)       $(48,854)      $10,915
                              ========================================================================================


                              The difference between the provision for income
                              taxes at the effective federal statutory rates and
                              the amounts provided in the consolidated financial
                              statements is summarized as follows:

                              June 30,                                              2005            2004          2003
                              ----------------------------------------------------------------------------------------

                              Tax provision (benefit) at federal
                               statutory rates                               $   417,948       $ 440,848      $(70,524)
                              Increase (decrease) in tax provision
                               resulting from:
                                State income tax provision (benefit)              (2,446)         13,530        10,915
                                Foreign losses not benefited                           -               -           660
                                U.S. losses not benefited                              -               -        69,864
                                Adjustment to income tax liability
                                 accounts                                              -         (82,384)            -
                                Decrease in valuation allowance                 (680,000)              -             -
                                Utilization of federal operating loss
                                  carryforwards                                 (406,173)       (420,848)            -
                              ----------------------------------------------------------------------------------------

                                Provision (benefit) for income taxes         $  (670,671)      $ (48,854)     $ 10,915
                              ========================================================================================
</TABLE>

                                                                            F-15
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------


<TABLE>
<CAPTION>


                              The items that comprise the deferred tax balance
                              are as follows:

                              June 30,                                                       2005                 2004
                              ----------------------------------------------------------------------------------------

<S>                                                                                  <C>                  <C>
                              Depreciation and amortization                          $     41,352         $    945,800
                              Accrued liabilities and reserves not
                               currently deductible                                       187,725              207,700
                              Inventory                                                   128,000               76,600
                              Net operating loss carryforwards and tax credits          3,694,936            3,321,300
                              ----------------------------------------------------------------------------------------

                                                                                        4,052,013            4,551,400
                              Deferred tax asset valuation reserve                     (3,372,013)          (4,551,400)

                              ----------------------------------------------------------------------------------------
                              Tax asset recognized on balance sheet                  $    680,000         $      - 0 -
                              ========================================================================================
</TABLE>


                              During each of the quarters ended March 31, and
                              June 30, 2005, the Company recorded an income tax
                              benefit of approximately $340,000, for a total
                              benefit of $680,000, resulting from a decrease in
                              the Company's valuation allowance against its
                              deferred tax asset. The deferred tax asset
                              primarily relates to losses reported in prior
                              years. As of June 30, 2005, the Company believes
                              it is likely that they will utilize a significant
                              portion of these prior year net operating loss
                              carry forwards. The remaining balance of the tax
                              benefit recorded includes state income and capital
                              taxes, and related refunds and credits received.
                              Should circumstances change and the Company not be
                              able to utilize its net operating loss
                              carryforward, such as a decline in future taxable
                              income, the Company will reevaluate its valuation
                              allowance.

                              Net operating loss carryforwards ("NOLs")
                              amounting to approximately $8,446,000 in federal
                              NOLs and $13,189,000 in state NOLs at June 30,
                              2005, will expire beginning in 2010. The NOLs are
                              subject to review by the Internal Revenue Service.
                              Future changes in ownership of the Company, as
                              defined by Section 382 of the Internal Revenue
                              Code, could limit the amount of NOLs available for
                              use in any one year. The Company recorded the
                              above valuation reserve, based on management's
                              conclusion that it is more likely than not that
                              future operations will not generate sufficient
                              taxable income to realize the entire deferred tax
                              assets during the carryforward period for these
                              tax attributes.

8.    PROFIT-SHARING          The Company maintains a defined contribution
      PLAN:                   profit-sharing plan and trust pursuant to  which
                              participants receive certain benefits upon
                              retirement, death, disability and, to
                              a limited extent, upon termination of employment
                              for other reasons. Allocation among participants'
                              interests, including officers and directors who
                              are employees, is in accordance with IRS
                              regulations.

                              The aggregate amount contributed to the plan by
                              the Company each fiscal year is determined by the
                              board of directors following a review of the
                              profits of such fiscal year. The plan requires no
                              minimum contribution by the Company. The Company
                              has made a contribution of $63,550 and $60,000 for
                              the years ended June 30, 2005 and 2004,
                              respectively. The Company did not make any
                              contributions related to profit sharing for the
                              year ended June 30, 2003.

                                                                            F-16
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

9.  COMMITMENTS               The Company is a defendant in an environmental
    AND CONTINGENCIES:        claim relating to a property in New  Jersey owned
                              by the Company between August 1984 and June 1985.
                              This claim relates to the offsite commercial
                              disposition of trash and waste in a landfill in
                              New Jersey. The Company maintains that its waste
                              materials were of a general commercial nature.
                              This claim was originally filed in 1998 by the
                              federal government in United States District Court
                              and the State of New Jersey, citing several
                              hundred other third-party defendants. The Company
                              (through its former subsidiary, Kenro Corporation)
                              was added, along with many other defendants, to
                              the suit. The Company's claimed liability was
                              potentially assessed by the plaintiff at $150,000.
                              The Company has joined, along with other involved
                              defendants in an alternative dispute resolution
                              (ADR) process for smaller claims. No potential
                              cost to the Company has been assessed on this
                              claim; however, the Company has accrued $75,000 in
                              Fiscal Year 2005, which represents the Company's
                              estimate of its potential liability, net of the
                              Company's insurance carrier's agreed-upon
                              contribution towards a potential settlement. The
                              Company does not expect to receive any further
                              information until a status conference is held in
                              mid-October 2005. The Company cannot, at this
                              time, assess the amount of liability that could
                              result from any adverse final outcome of this
                              environmental complaint. The Company's insurance
                              carrier has agreed to equally share with the
                              Company the defense costs incurred in this
                              environmental claim.

                              On December 6, 2004, the Company reached an
                              agreement as to the parameters of a settlement,
                              which was finalized on February 8, 2005 and paid
                              on February 18, 2005, relating to a separate
                              environmental claim filed in 2001 as a civil
                              complaint brought by the current owners of the
                              same property owned by the Company between August
                              1984 and June 1985 and subject to the
                              above-reference environmental claim. This action
                              was filed in the Superior Court of New Jersey,
                              Morris County, and alleged that the Company's
                              discontinued graphic art camera subsidiary had
                              contaminated a portion of the site during its
                              manufacturing process prior to 1985. The
                              settlement included a release and indemnification
                              as well as a stipulation of dismissal with
                              prejudice. The Company paid $325,000, which
                              represented the Company's entire liability under
                              the settlement agreement, net of the Company's
                              insurance carrier's contribution towards the total
                              and final settlement,

                              The Company is a defendant (with several other
                              parties) in a product liability insurance action,
                              which was filed in May 2005 in the Superior Court
                              in Hartford, Connecticut. The plaintiff, through
                              their insurance company, claims that the Company's
                              equipment caused a fire on the plaintiff's
                              premises in May 2003. The complaint seeks
                              unspecified compensatory damages. The Company
                              maintains that its equipment was not the cause of
                              the fire or the resultant damage. The Company's
                              insurance carriers, and their attorneys, are
                              assisting in the Company's defense in this matter.
                              The Company does not believe that the final
                              outcome of this matter will have a material
                              adverse effect on the Company.

                              From time to time, the Company may be party to
                              other claims and litigation arising in the
                              ordinary course of business. The Company does not
                              believe that any adverse final outcome of any of
                              these matters, whether covered by insurance or
                              otherwise, would have a material adverse effect on
                              the Company.

                              The Company has a noncancelable operating lease,
                              as amended in March 2004, for office and
                              manufacturing facilities expiring in fiscal year
                              2010. Minimum annual rental payments under this
                              lease are as follows:

                                                                            F-17
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>


                              Year ending June 30,

<S>                                       <C>                                                           <C>
                                          2006                                                          $      548,953
                                          2007                                                                 525,085
                                          2008                                                                 525,085
                                          2009                                                                 525,085
                                          2010                                                                 262,543

                             -----------------------------------------------------------------------------------------
                                                                                                       $     2,386,751
                             =========================================================================================
</TABLE>


                              The lease provides for rent abatements and
                              scheduled increases in base rent. Rent expense is
                              charged to operations ratably over the term of the
                              lease resulting in deferred rent payable, which
                              represents cumulative rent expense charged to
                              operations from inception of this lease in excess
                              of required lease payments. Rent expense was
                              approximately $505,000, $505,000 and $496,000 for
                              the years ended June 30, 2005, 2004 and 2003,
                              respectively.


10. SEGMENT INFORMATION:      As of June 30, 2005 and 2004,
                              the Company had only one business segment,
                              medical/dental. Medical/dental segment operations
                              are conducted under the Dent-X and AFP trade names
                              and consists of the design, development,
                              manufacturing and marketing of medical and dental
                              imaging systems and all related accessories. The
                              graphic arts segment operated under the LogE trade
                              name and included products such as paper and film
                              developers.

                              Geographic financial information for the years
                              ended June 30, 2005, 2004 and 2003 is as follows:
<TABLE>
<CAPTION>

                              June 30,                                      2005              2004                2003
                              ----------------------------------------------------------------------------------------

                              Sales:
<S>                                                           <C>                      <C>                 <C>
                                United States                 $       18,858,056       $16,733,360         $15,111,108
                                Domestic export sales                  4,277,007         3,099,550           2,932,560

                              ----------------------------------------------------------------------------------------
                                                              $       23,135,063        $19,832,910        $18,043,668
                              ========================================================================================

                              Net income (loss):
                                United States                 $        1,899,930        $  1,358,067       $(1,513,467)
                                Europe                                         -             (12,600)           (1,940)

                              ----------------------------------------------------------------------------------------
                                                             $         1,899,930        $  1,345,467       $(1,515,407)
                              ========================================================================================

                              Identifiable assets:
                                United States                $         8,153,396      $  6,244,895         $ 6,029,735
                                Europe                                         -         -                      14,120

                              ----------------------------------------------------------------------------------------
                                 Total                       $         8,153,396       $  6,244,895        $ 6,043,855
                              ========================================================================================
</TABLE>

                                                                            F-18
<PAGE>

                                        AFP IMAGING CORPORATION AND SUBSIDIARIES

                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                                                   June 30, 2005
--------------------------------------------------------------------------------

                              During the year ended June 30, 2005, no one
                              customer aggregated over 10% of consolidated net
                              sales. During the year ended June 30, 2004, one
                              customer aggregated approximately 11% of
                              consolidated net sales. During the year ended June
                              30, 2003, net sales to this customer and another
                              customer were approximately 11% each.


 11.   QUARTERLY  FINANCIAL   Summarized,  unaudited  quarterly financial data
       DATA (UNAUDITED):      for fiscal 2005 and 2004 are as follows
                              (in thousands, except per share data):
<TABLE>
<CAPTION>

                              June 30, 2005
                              ----------------------------------------------------------------------------------------

                                                       1st           2nd           3rd           4th          Total
                                                     Quarter       Quarter       Quarter       Quarter        Year
                              ----------------------------------------------------------------------------------------

<S>                                                 <C>          <C>           <C>            <C>          <C>
                              Net sales             $4,655,471   $6,082,235    $6,240,931     $6,156,426   $23,135,063

                              Gross profit           1,747,792    2,469,926     2,475,788      2,252,461     8,945,967

                              Net income (loss)        (71,612)     457,024       998,599        515,919     1,899,930
                              ========================================================================================

                              Net income (loss) per
                              common share:
                                Basic                $    (.01)        $.05          $.11           $.05
                              ========================================================================================
                                Diluted              $    (.01)        $.05          $.10           $.05
                              ========================================================================================
                              June 30, 2004
                              ----------------------------------------------------------------------------------------

                                                       1st           2nd           3rd           4th          Total
                                                     Quarter       Quarter       Quarter       Quarter        Year
                              ----------------------------------------------------------------------------------------

                              Net sales            $ 4,034,879   $4,680,557    $5,476,342     $5,641,132   $19,832,910

                              Gross profit           1,558,542    1,847,534     2,090,697      2,158,065     7,654,838

                              Net income               115,060      398,444       424,507        407,456     1,345,467
                              ========================================================================================

                              Net income per common share:
                                Basic              $       .01   $      .04      $   .05       $     .04
                              ========================================================================================
                                Diluted            $       .01   $      .04      $   .04       $     .04
                              ========================================================================================

</TABLE>


                                                                            F-19
<PAGE>


<TABLE>
<CAPTION>




                                                                                   AFP IMAGING CORPORATION AND SUBSIDIARIES
                                                                                                  SUPPLEMENTARY INFORMATION

                                                                              SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
---------------------------------------------------------------------------------------------------------------------------

Years ended June 30, 2005, 2004 and 2003
---------------------------------------------------------------------------------------------------------------------------

                                                         Balance at        Charged to                           Balance at
                                                          Beginning         Costs and                              End of
        Description                                        of Year          Expenses     Deductions (A)           Year
---------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>                 <C>              <C>                    <C>
June 30, 2005
Allowance for doubtful accounts and sales
 returns                                                 $   95,000          $  38,454     $ (43,454)             $ 90,000

June 30, 2004
Allowance for doubtful accounts and sales
 returns                                                     95,200            5,989          (6,189)               95,000

June 30, 2003
Allowance for doubtful accounts and sales
 returns                                                    104,000           49,344         (58,144)               95,200


(A) Deductions consist of write-offs of uncollectible accounts.
</TABLE>



                                       17
<PAGE>

Item 9.  Changes in and Disagreements with Accountants and Financial Disclosure
-------------------------------------------------------------------------------

None

Item 9A.  Controls and Procedures
---------------------------------

An evaluation was performed as of June 30, 2005, under the supervision and with
the participation of the Company's management, including its co-chief executive
officers and chief financial officer, of the effectiveness of the design and
operation of the Company's disclosure controls and procedures. Based on such
evaluation, the Company's management has concluded that the Company's disclosure
controls and procedures were effective as of June 30, 2005. There have been no
significant changes in our internal controls or in other factors that could
significantly affect our internal control subsequent to June 30, 2005.

Item 9B.  Other Information
---------------------------

Not applicable.




Part III
--------

The information required in items 10, 11,12, 13, and 14 are hereby incorporated
by reference from the Company's definitive Proxy Statement for the 2005 Annual
Meeting of Shareholders, tentatively scheduled for December 12, 2005, to be
filed with the SEC on or prior to October 28, 2005.





                                       18
<PAGE>


Part IV
-------

Item 15.  Exhibits and Financial Statement Schedules
----------------------------------------------------

     (a) Financial Statements.
         The financial statements and schedules listed in Item 8 are filed as a
         part of this Annual Report on Form 10K.
     (b) Exhibits.
         The following exhibits are filed pursuant to Item 601 of Regulation
         S-K. The numbers set forth below opposite the description of each
         exhibit correspond to the Exhibit Table of Item 601 of Regulation S-K.

2.   (a) -- Stock Purchase Agreement between ACG Nystromgruppen AB and AFP
            Imaging Corporation, dated April 17, 1997. (7)
     (b) -- Asset Purchase Agreement between AFP Imaging and ProDen Systems,
            Inc., dated December 24, 1997. (8).
     (c) -- Promissory Note between ProDen Systems, Inc. and AFP Imaging
            Corporation, dated August 10, 1999. (9)
     (d) -- Amended Promissory Note between ACG Nystromgruppen AB and AFP
            Imaging Corporation, dated August 11, 1999. (9)

3.   (a) -- Certificate of Incorporation of Registrant, as amended. (1)
     (b) -- Restated Certificate of Incorporation of Registrant. (16)
     (c) -- Certificate of Amendment to Certificate of Incorporation of
            Registrant. (4)
     (d) -- Certificate of Amendment of the Certificate of Incorporation of
            the Company filed with the Secretary of the State of New York on
            October 12, 1995. (5)
     (e) -- Revised By-Laws of Registrant, issued December 2004. (15)

4.   (a) -- Specimen of Common Stock Certificates. (1)
     (b) -- Common Stock Purchase Warrant issued to Keltic Financial Partners
            LP. (10)

10.  (a) -- Health and Medical Reimbursement Plan. (1)
     (b) -- Lease Agreement dated September 1, 1985, for premises at 250
            Clearbrook Road, Elmsford, NY. (3)
     (c) -- Profit Sharing Plan of the Registrant, as supplemented. (1)
     (d) -- Registrant's 1995 Stock Option Plan. (6)
     (e) -- Registrants' 1999 Incentive Stock Option Plan. (9)
     (f) -- Registrant's 2004 Equity Incentive Plan. (14)
     (g) -- Mediation Resolution Agreement dated August 10, 1999. (9)
     (h) -- Keltic Financial Partners LP Loan and Security Agreement. (10)
     (i) -- Keltic Financial Partners LP Revolving Note. (10)
     (j) -- Keltic Financial Partners LP Fifth Amendment to Loan and Security
            Agreement. (13)
     (k) -- Keltic Financial Partners LP Restated Revolving Note  (13)
     (l) -- Contract for Sale of Business Assets between AFP Imaging and
            Amergraph Corporation, dated July 30, 2001. (10)

11.   --    Statement re computation per share earnings.  (2)

14.   --    Code of Ethics. (12)

16   (a) -- Change in Certifying Accountant (October 3, 2003).  (11)

21.   --    Subsidiaries of the Registrant.

23.1, 23.2 -- Consents of Goldstein Golub Kessler LLP and Ernst & Young LLP

31.1, 31.2, 31.3 - Certifications pursuant to Exchange Act Rule 13a-14 (a).

32.1, 32.2, 32.3 - Certifications pursuant to Section 1350 of the Sarbanes -
                   Oxley Act of 2002.



                                       19
<PAGE>


(1)  Incorporated by reference from the exhibits filed with Registration
     Statement file #2-G8980 of the Company, as amended, on file with the
     Securities and Exchange Commission.

(2)  See Note 1 to "Notes to Financial Statements".

(3)  Incorporated by reference from the Exhibits filed with Registrant's Current
     Report on Form 8-K, dated July 31, 1995.

(4)  Incorporated by reference from the Exhibits filed with Registrant's Annual
     Report on Form 10-K for the fiscal year ended June 30, 1994.

(5)  Incorporated by reference from the Exhibits filed with Registrant's Current
     report on Form 8-K, dated October 12, 1995.

(6)  Incorporated by reference from the Exhibits filed with Registrant's Annual
     Report on Form 10-K for the fiscal year ended June 30, 1996.

(7)  Incorporated by reference from the Exhibits filed with the Registrant's
     Current Report on Form 8-K, dated May 1, 1997.

(8)  Incorporated by reference from the Exhibits filed with Registrant's Current
     Report on Form 8-K, dated January 8, 1998.

(9)  Incorporated by reference from the Exhibits filed with the Registrant's
     Annual Report on Form 10-K for the fiscal year ended June 30, 1999.

(10) Incorporated by reference from the Exhibits filed with the Registrant's
     Annual Report on Form 10K for the fiscal year ended June 30, 2001.

(11) Incorporated by reference from the Exhibits filed with the Registrant's
     Current Report on Form 8-K, dated   October 3, 2003.

(12) Incorporated by reference from the Exhibits filed with the Registrant's
     Quarterly Report on Form 10Q for the six months ended December 31, 2003.

(13) Incorporated by reference from the Exhibits filed with the Registrant's
     Annual Report on Form 10K for the fiscal year ended June 30, 2004.

(14) Incorporated by reference from the Exhibits filed with the Registrant's
     Current Report on Form 8-K, dated October 8, 2004.

(15) Incorporated by reference from the Exhibits filed with the Registrant's
     Current Report on Form 8-K, dated December 10, 2004.

(16) Incorporated by reference from the Exhibits filed with the Registrant's
     Quarterly Report on Form 10Q for the six months ended December 31, 2004.








                                       20
<PAGE>





                                   SIGNATURES
                                   ----------


Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

AFP IMAGING CORPORATION


By:  __________/s/_________________
     Elise Nissen, Chief Financial Officer
Date: September 27, 2005

Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.


By:  _____________/s/___________
     Donald Rabinovitch, President
               & Director
     (Principal Executive Officer)
Date: September 27, 2005


By:  ____________/s/_____________
     David Vozick, Chairman of the Board,
               Secretary and Treasurer
Date: September 27, 2005


By:  __________/s/_______________
     Robert Blatt, Director
Date: September 27, 2005


By:  _________ /s/________________
     Jack Becker, Director
Date: September 27, 2005


By:  _________ /s/________________
     Elise Nissen, Chief Financial Officer
     (Principal Financial and Accounting Officer)
Date: September 27, 2005




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