**UNITED
      STATES**





**SECURITIES
      AND EXCHANGE COMMISSION**


WASHINGTON,
      D.C.  20549





**FORM
      10-Q**





**Quarterly
      Report Pursuant to Section 13 or 15 (d)**


**of
      the Securities Exchange Act of 1934**





For
      Quarterly Period Ended September 30, 2007





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, New York
            10523(Address
                of Principal Executive Offices)
            (Zip
                Code)





914-592-6100


(Registrant's
      Telephone Number, Including Area Code)





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








Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer.





Large
      accelerated
      filer_____                Accelerated
      filer______              Non-accelerated
      filer X







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


The
      registrant had 17,928,800 shares of its common stock outstanding as of November
      12, 2007.





1








**AFP
      Imaging Corporation**





Table
      of Contents





Page**Part
                I.**
            **Financial
                Information**Item
                1.
            Financial
                StatementsCondensed
                Consolidated Balance Sheets as of
                September 30, 2007 (unaudited) and June 30, 2007
            4Condensed
                Consolidated Statements of Operations for the
                three months ended September 30, 2007 and 2006
                (unaudited)
            5Condensed
                Consolidated Statements of Shareholders’ Equity
                for the three months ended September 30, 2007 and 2006
                (unaudited)
            6Condensed
                Consolidated Statements of Cash Flows for the
                three months ended September 30, 2007 and 2006
                (unaudited)
            7Notes
                to Consolidated Interim Financial
                Statements
            8-14Item
                2.
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            15-20Item
                3.
            Quantitative
                and Qualitative Disclosures About Market
                Risk
            20Item
                4.
            Controls
                and Procedures
            20**Part
                II.**
            **Other
                Information**Item
                1
            Legal
                Proceedings
            21Item
                6.
            Exhibits
            21Signatures
            22-28




2






This
      Quarterly Report on Form 10-Q contains certain forward-looking statements within
      the meaning of the Private Securities Litigation Reform Act of
      1995.  Forward-looking statements involve known and unknown risks and
      uncertainties and other factors that could cause the 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,” “could,” “would,” “project,”
“expect,” “believe,” “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:


·
            adverse
                changes in general economic conditions, ·
            the
                Company’s ability to repay its debts when
                due,


·
            changes
                in the markets for the Company’s products and
                services,


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


·
            the
                Company’s ability to successfully market its existing and new
                products,


·
            adverse
                business conditions,


·
            changing
                industry and competitive
                conditions,


·
            the
                effect of technological advancements on the marketability of the
                Company’s
                products,


·
            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,


·
            maintaining
                operating efficiencies,


·
            pricing
                pressures,


·
            risks
                associated with foreign sales,


·
            risks
                associated with the implementation of the new direct
                salesprogram,


·
            risks
                associated  with the loss of services of the key executive
                officers,


·
            the
                Company’s ability to attract and retain key
                personnel,


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


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


·
            determinations
                in various outstanding legal
                matters,


·
            the
                success of the Company’s strategy to increase its market share in the
                industries in which it competes,


·
            the
                Company’s ability to successfully integrate the operations of any entity
                acquired by the Company with the Company’s
                operations,


·
            changes
                in currency exchange rates and regulations,
                and


·
            other
                factors set forth in this Quarterly Report on Form 10-Q, and the
                Company’s
                Annual Report on Form 10-K for the year ended June 30, 2007, 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 Quarterly Report on Form 10-Q, the Company’s Annual Report on
      Form 10-K for the year ended June 30, 2007, 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 Form 10-Q 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.  Financial
      Information**





The
      consolidated financial statements included herein have been prepared by the
      Company without audit, pursuant to the rules and regulations of the Securities
      and Exchange Commission.  While certain information and footnote
      disclosures normally included in financial statements prepared in accordance
      with generally accepted accounting principles in the United States have been
      condensed or omitted pursuant to such rules and regulations, the Company
      believes that the disclosures made herein are adequate to make the information
      presented not misleading.  It is recommended that these consolidated
      financial statements be read in conjunction with the Company’s consolidated
      financial statements and notes thereto included in the Company's Annual Report
      on Form 10-K for the fiscal year ended June 30, 2007.





In
      the
      opinion of the Company, all adjustments necessary to present fairly the
      Company’s consolidated financial position as of September 30, 2007, and its
      results of operations for the three-month periods ended September 30, 2007
      and
      2006, and its cash flows for the three-month periods ended September 30, 2007
      and 2006, consisting of normal recurring adjustments, have been
      included.  The accompanying unaudited interim consolidated financial
      statements include all adjustments (consisting only of those of a normal
      recurring nature) necessary for a fair statement of the results of the interim
      periods.




3




**Item
        1:  FINANCIAL
        STATEMENTS**
 **AFP
        Imaging Corporation and
        Subsidiaries**
 **Condensed
        Consolidated Balance Sheets – September 30, 2007 and June 30,
        2007**
  **Assets**
                    
                    **September
                        30,**
                      **2007**
                    
                    
                    **June
                        30,**
                      **2007**
                    
                    **Liabilities
                        and Shareholders' Equity**
                    
                    **September
                          30,**
                        **2007**
                    
                    
                    **June
                        30,**
                      **2007**(Unaudited)
                    
                    
                    
                    
                    
                    
                    (Unaudited)Current
                        Assets:
                    
                    
                    
                    
                    
                    
                    Current
                        Liabilities:Cash
                        and cash equivalents
                    
                    $
                    742,472
                    
                    
                    $
                    921,632
                    
                    Current
                        portion of long-term debt
                    
                    $
                    971,123
                    
                    
                    $
                    536,727Accounts
                        receivable,less
                        allowance
                    
                    
                    
                    
                    
                    
                    
                    Accounts
                        payable
                    
                    
                    3,084,177
                    
                    
                    
                    2,834,875for
                        doubtful accounts
                        of $135,000
                    
                    
                    
                    
                    
                    
                    
                    Accrued
                        expenses
                    
                    
                    2,562,415
                    
                    
                    
                    2,887,584and
                        $130,000, respectively
                    
                    
                    4,154,192
                    
                    
                    
                    5,030,579
                    
                    **Total
                        current liabilities**
                    
                    
                    6,617,715
                    
                    
                    
                    6,259,186Inventories
                    
                    
                    7,010,557
                    
                    
                    
                    6,395,052Prepaid
                        expenses and other current assets182,038
                    
                    
                    
                    179,771
                    
                    Deferred
                        Liabilities
                    
                    
                    202,027
                    
                    
                    
                    213,860Deferred
                        income taxes
                    
                    
                    937,940
                    
                    
                    
                    926,603
                    
                    Long-term
                        debt
                    
                    
                    5,793,612
                    
                    
                    
                    5,822,347**Total
                        current assets**
                    
                    
                    13,027,199
                    
                    
                    
                    13,453,637
                    
                    **Total
                        liabilities**
                    
                    
                    12,613,354
                    
                    
                    
                    12,295,393Property
                        and Equipment
                    
                    
                    
                    
                    
                    
                    
                    
                    Shareholders’
                        Equity:At
                        cost
                    
                    
                    2,178,200
                    
                    
                    
                    2,141,123
                    
                    Preferred
                        stock -$.01 par
                        value;
                      authorized5,000,000shares,
                        none issued
                    -
                    
                    
                    
                    -Less
                        accumulated depreciation
                    
                    
                    (1,674,283
                    )
                    
                    
                    (1,602,121
                    )
                    Common
                        stock,$.01 par
                        value;503,917
                    
                    
                    
                    539,002
                    
                    authorized
                        30,000,000 shares, issued andoutstanding
                        17,928,800  shares at September 30,2007,
                        and June 30, 2007, respectively
                    179,288
                    
                    
                    
                    179,288Deferred
                        income taxes
                    
                    
                    374,434
                    
                    
                    
                    369,115
                    
                    Common
                        stock warrants
                    
                    
                    91,131
                    
                    
                    
                    91,131Other
                        assets
                    
                    
                    364,765
                    
                    
                    
                    381,905
                    
                    Paid-in
                        capital in excess of par
                    
                    
                    25,404,045
                    
                    
                    
                    25,404,045Goodwill
                    
                    
                    4,021,190
                    
                    
                    
                    3,846,405
                    
                    Accumulated
                        deficit
                    
                    
                    (11,474,054
                    )
                    
                    
                    (10,760,543
                    )Other
                        intangibles
                    
                    
                    8,671,643
                    
                    
                    
                    8,580,762
                    
                    Cumulative
                        translation adjustment
                    
                    
                    149,384
                    
                    
                    
                    (38,488
                    )**Total
                        shareholders’ equity**
                    
                    
                    14,349,794
                    
                    
                    
                    14,875,433**Total
                        Liabilities and Shareholders’****Total
                        Assets**
                    
                    **$**
                    **26,963,148**
                    
                    
                    **$**
                    **27,170,826**
                    
                    **Equity**
                    
                    **$**
                    **26,963,148**
                    
                    
                    **$**
                    **27,170,826**
  The
                        accompanying notes to condensed consolidated financial statements
                        are an
                        integral part of these
                        statements.
 4
  **AFP
          Imaging Corporation and
          Subsidiaries**
 **Condensed
          Consolidated Statements of Operations**
 (Unaudited)
  Three
                  Months EndedSeptember
                  30,**2007**
              
              
              **2006****Net
                  sales**
              
              **$**
              **7,448,055**
              
              
              **$**
              **5,492,128**Cost
                  of sales
              
              
              4,355,416
              
              
              
              3,781,925Gross
                  profit
              
              
              3,092,639
              
              
              
              1,710,203Selling,
                  general and administrative expenses
              
              
              3,111,501
              
              
              
              2,131,972Amortization
                  of intangibles
              
              
              288,454
              
              
              
              --Research
                  and development expenses
              
              
              433,997
              
              
              
              178,4803,833,952
              
              
              
              2,310,452Operating
                  loss
              
              
              (741,313
              )
              
              
              (600,249
              )Foreign
                  currency gain on intercompany note
              
              
              577,123
              
              
              
              --Interest
                  expense, net of (interest income)
              
              
              253,659
              
              
              
              (32,389
              )Loss
                  before provision for income taxes
              
              
              (417,849
              )
              
              
              (567,860
              )Provision
                  for income taxes
              
              
              295,662
              
              
              
              ---**Net
                  loss**
              
              **$**
              **(713,511**
              **)**
              
              **$**
              **(567,860**
              **)**Net
                  loss per common share:Basic
              
              $
              (.04
              )
              
              $
              (.05
              )Diluted
              
              $
              (.04
              )
              
              $
              (.05
              )Weighted
                  average outstanding common stock:Basic
              
              
              17,928,800
              
              
              
              12,374,607Diluted
              
              
              17,928,800
              
              
              
              12,374,607




The
        accompanying notes to condensed consolidated financial statements are an
        integral part of these statements.




5






**AFP
                  Imaging Corporation and
                  Subsidiaries**
                **Condensed
                  Consolidated Statements of Shareholders’ Equity**
                **For
                  the Three Months Ended September 30, 2007 and 2006**
                **(**Unaudited)Comprehensive
                Loss
              
              
              Common
                  Stock
              
              
              Common
                  Stock
                Warrants
              
              
              Paid-in-Capital
              
              
              Accumulated
                Deficit
              
              
              Foreign
                Currency
                Translation
                Adjustment
              
              
              Total**Balance
                  June 30, 2006**
              
              **$**
              **--**
              
              
              **$**
              **95,682**
              
              
              **$**
              **110,931**
              
              
              **$**
              **11,805,852**
              
              
              **$**
              **(6,087,719**
              **)**
              
              **$**
              **--**
              
              
              **$**
              **5,924,746******Issuance
                  of 82,800 shares of common  stock in connection with the
                  exercise of common stock warrants
              
              ****
              **--**
              
              
              
              828
              
              
              
              (19,800
              )
              
              
              18,972
              
              
              
              --
              
              
              
              --
              
              
              
              --Stock
                  based compensation
                expense
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              42,329
              
              
              
              --
              
              
              
              --
              
              
              
              42,329****Additional
                  fees associated with issuance of common stock in May 2006
              
              
              
              
              
              
              --
              
              
              
              --
              
              
              
              (12,569
              )
              
              
              --
              
              
              
              --
              
              
              
              (12,569
              )****Net
                  loss for three months ended September 30, 2006
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (567,860
              )
              
              
              --
              
              
              
              (567,860
              )**Balance
                  September 30, 2006**
              
              ****
              **--**
              
              
              **$**
              **96,510**
              
              
              **$**
              **91,131**
              
              
              **$**
              **11,854,584**
              
              
              **$**
              **(6,655,579**
              **)**
              
              ****
              **--**
              
              
              **$**
              **5,386,646****Balance
                  June 30, 2007**
              
              **$**
              **--**
              
              
              **$**
              **179,288**
              
              
              **$**
              **91,131**
              
              
              **$**
              **25,404,045**
              
              
              **$**
              **(10,760,543**
              **)**
              
              **$**
              **(38,488**
              **)**
              
              **$**
              **14,875,433******Foreign
                  currency translation
                gain
              
              
              187,872
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              187,872
              
              
              
              187,872****Net
                  loss for three months ended September 30, 2007
              
              
              (713,511
              )
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              (713,511
              )
              
              ****
              **--**
              
              
              
              (713,511
              )****Comprehensive
                  loss
              
              ****
              **(525,639**
              **)**
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --
              
              
              
              --**Balance
                  September 30, 2007**
              
              **$**
              **--**
              
              
              **$**
              **179,288**
              
              
              **$**
              **91,131**
              
              
              **$**
              **25,404,045**
              
              
              **$**
              **(11,474,054**
              **)**
              
              **$**
              **149,384**
              
              
              **$**
              **14,349,794**


The
        accompanying notes to condensed consolidated financial statements are an
        integral part of these statements.


6
   **AFP
          Imaging Corporation and Subsidiaries**
 **Condensed
          Consolidated Statements of Cash Flows**
 (Unaudited)
 **Three
                    Months Ended**
                  **September**2007
                
                
                2006Cash
                    flows from operating activities:Net
                    loss
                
                $
                (713,511
                )
                
                $
                (567,860
                )Adjustments
                    to reconcile net income/(loss) to net cash provided by operating
                    activities-Depreciation
                    and amortization
                
                
                372,133
                
                
                
                58,133Amortization
                    of discount on term loan
                
                
                50,316
                
                
                
                --Non-cash
                    compensation expense
                
                
                --
                
                
                
                42,329Write-off
                    of deferred financing costs
                
                
                --
                
                
                
                50,000Change
                    in assets and liabilities:Decrease
                    in accounts receivable
                
                
                876,387
                
                
                
                358,552(Increase)
                    in inventories
                
                
                (615,505
                )
                
                
                (131,774
                )(Increase)
                    in prepaid expenses and other assets
                
                
                (13,300
                )
                
                
                (125,603
                )Increase/(decrease)
                    in accounts payable
                
                
                249,302
                
                
                
                (587,703
                )Increase/(decrease)
                    in accrued expenses
                
                
                (325,169
                )
                
                
                32,741(Decrease)
                    in deferred liabilities
                
                
                (11,833
                )
                
                
                (5,085
                )Exchange
                    rate effect on intangibles
                
                
                (554,120
                )
                
                
                --Total
                    adjustments
                
                
                28,211
                
                
                
                (308,410
                )**Net
                    cash used by operating activities**
                
                
                (685,300
                )
                
                
                (872,270
                )Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                (37,077
                )
                
                
                (38,468
                )Costs
                    related to acquisition of QR
                
                
                --
                
                
                
                (115,047
                )**Net
                    cash used in investing activities**
                
                
                (37,077
                )
                
                
                (153,515
                )Cash
                    flows from financing activities:Borrowing
                    of debt
                
                
                355,345
                
                
                
                1,062,545Payment
                    of fees associated with issuance of common stock in May
                    2006
                
                
                --
                
                
                
                (12,569
                )**Net
                    cash provided by financing activities**
                
                
                355,345
                
                
                
                1,049,976**Exchange
                    rate effect on cash and cash equivalents**
                
                
                187,872
                
                
                
                --Net
                    (decrease)/increase in cash and cash equivalents
                
                
                (179,160
                )
                
                
                20,191Cash
                    and cash equivalents, at beginning of period
                
                
                921,632
                
                
                
                5,213,289Cash
                    and cash equivalents, at end of period
                
                $
                742,472
                
                
                $
                5,233,480**Supplemental
                    cash flow disclosures:**
                  Cash
                    paid during the periods for-Interest
                
                $
                247,038
                
                
                $
                17,153Income
                    taxes, net of refunds
                
                $
                466,762
                
                
                $
                1,727**Supplemental
                    Schedule of Non Cash Activity:**Cashless
                    exercise of common stock warrants
                
                $
                --
                
                
                $
                19,800
 
 
 The
          accompanying notes to condensed consolidated financial statements are an
          integral part of these statements.
  7
   **A****FP
        Imaging Corporation and
        Subsidiaries**


**Notes
      to Consolidated Financial Statements**


**September
      30, 2007**


(Unaudited)





**(1)
      General:**


AFP
      Imaging Corporation (together with its subsidiaries, the “Company”) 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 and/or capturing medical and dental diagnostic images.  The
      products utilize electronic and radiographic technologies, as well as the
      chemical processing of photosensitive materials.  The Company is ISO
      9001 certified.  Medical, dental, veterinary and industrial
      professionals use these products.  The Company’s products are
      distributed to worldwide markets under various brand names and trademarks
      through a network of independent and unaffiliated dealers.  Certain
      digital imaging products are also sold and distributed by the Company directly
      to dental professional end users through a new distribution channel acquired
      in
      fiscal year 2007.  The Company has only one business segment -
      medical/dental.





The
      Company’s primary objective is to be a leading provider of cost effective,
      diagnostic radiographic products for applications in the medical, dental,
      veterinary and industrial imaging fields.  The Company is
      concentrating on:


·
            continually
                broadening is product offerings in the transition from x-ray film
                to
                electronic imaging,


·
            enhancing
                both its domestic and international distribution channels,
                and


·
            expanding
                its world-wide market
                presence in the diagnostic, dental imaging field.





On
      April
      19, 2007, the Company completed the acquisition of Quantitative Radiology srl,
      an Italian corporation (“QR”), by acquiring all of the outstanding share capital
      of QR from the shareholders.  QR is a global supplier of
      state-of-the-art, in-office 3D dental computed tomography (CT).  QR
      uses an imaging technology that features a cone shaped beam of x-rays (a CBCT
      scanner).  The Company, prior to April 19, 2007, had acted as QR’s
      exclusive distributor in North and South America, excluding Brazil.





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





The
      accounting policies followed during the interim periods reported on herein
      are
      in conformity with accounting principles generally accepted in the United States
      and are consistent with those applied for annual periods, as described in the
      Company's consolidated financial statements included in the Company's Annual
      Report on Form 10-K for the year ended June 30, 2007.  The Condensed
      Consolidated Balance Sheet at June 30, 2007 has been derived from the audited
      financial statements.





**(2)
      Stock Option Plans:**


The
      Company currently has in effect two employee incentive stock plans, under which
      approximately 1,100,000 shares of Company common stock were originally
      authorized and available for issuance.  Options that are granted under
      the plans generally are either fully vested when granted or vest upon completion
      of specific length of employment.  Under the terms of these plans,
      options to purchase common stock of the Company may be granted at not less
      than
      85% of the fair market value of the stock on the date of grant (100% in the
      case
      of incentive stock options qualifying under Section 422A of the Internal Revenue
      Code (“ISOs”) or 110% in the case of ISOs granted to persons owning more than
      10% of the outstanding stock of the Company).





Effective
      July 1, 2005, the Company adopted the fair value based method of accounting
      for
      stock-based employee compensation under the provisions of Statement of Financial
      Accounting Standards No. 123 (Revised 2004), *Share Based Payment* (“SFAS
      No. 123R”), using the modified prospective method without restatement of the
      interim periods prior to the adoption date, as described in SFAS
      123R.  As a result, the Company has begun recognizing expense in an
      amount equal to the fair value of share-based payments (including stock option
      awards) on their date of grant over the vesting period of the
      awards.  Under SFAS 123R, the Company must recognize compensation
      expense for (1) all share-based payments granted on or after July 1, 2005 and
      (2) any partially vested options as of July 1, 2005.  Prior to the
      adoption of SFAS 123R, the Company accounted for these plans pursuant to
      Accounting Principles Board Opinion No. 25 *Accounting for Stock Issued to
      Employees*.   Therefore, compensation expense related to
      stock option awards was not reflected in operating expenses in any period prior
      to July 2005 (first quarter of Fiscal Year 2006), and prior period results
      have
      not been restated.  For the three months ended September 30, 2007 and
      2006, non-cash stock based compensation expense related to stock option awards
      was $0 and $42,329 respectively.  These charges have all been included
      in operating expenses.





8






The
      fair
      value of each option granted under the Company’s incentive stock plans during
      the three months ended September 30, 2007 and 2006 was estimated on the date
      of
      grant using the Black-Scholes option pricing method.  Using this
      model, fair value is calculated based on assumptions with respect to (a)
      expected volatility of the market price of Company common stock, (b) the periods
      of time over which employees, directors and other option holders are expected
      to
      hold their options prior to exercise (expected lives), (c) expected dividend
      yield on Company common stock and (d) risk-free interest rates which are based
      on quoted US Treasury rates for securities with maturities approximating the
      options’ expected lives.  Expected volatility has been estimated based
      on actual movements in the Company’s stock price over the most recent historical
      periods equivalent to the options’ expected lives.  Expected lives are
      principally based on the Company’s limited historical exercise experience with
      option grants with similar prices.  The expected dividend yield is
      zero as the Company has never paid dividends and does not currently anticipate
      paying any dividends in the foreseeable future.  The weighted-average
      of the fair value of the options granted during the three months ended September
      30, 2007 and 2006 was $0 and $2.15 per option, respectively.





No
      stock
      options were granted during the three-month period ended September 30, 2007,
      and
      stock options to purchase an aggregate of 20,000 shares of Company common stock
      were granted to the Company’s non-employee Board of Director members in the
      three-month period ended September 30, 2006 in accordance with the Company’s
      policy for non-employee director compensation.  All of these stock
      options were issued with a ten-year useful life.





In
      April
      2007, the Company granted an aggregate of 50,000 shares of Company common stock
      to an employee, half of which vested immediately and the remainder will vest
      in
      April 2008.  Compensation expense amounting to $40,131 will be
      recognized in Fiscal Year 2008, upon the vesting of these
      options.  These options were issued with a ten-year useful
      life.





**(3)
      Per Share Data:**


The
      Company’s basic net income per share amounts are calculated by dividing net
      income by the weighted average number of common shares outstanding during the
      period.  Diluted net income per share is based upon the weighted
      average number of common shares and common share equivalents outstanding, when
      dilutive.  Common stock equivalents include (1) outstanding stock
      options and (2) outstanding warrants.





On
      March
      28, 2006, the Company issued an aggregate of 50,000 warrants to designees of
      an
      investment banking firm.  Each warrant entitles the holder to purchase
      one share of Company common stock at a purchase price of $1.98, the closing
      stock price on March 28, 2006.  The warrants are for five years and
      the Black-Scholes method was used to value these warrants.





On
      May 2,
      2006, the Company issued 2,777,777 shares of its common stock in a private
      placement to selected institutional and other accredited
      investors.  The offering price was at $1.80 per share.  In
      conjunction with the private placement, the Company granted the investors
      certain registration rights with respect to the resale of the shares
      acquired.  No warrants were issued to the investors in this private
      placement.  The Company incurred fees of approximately $256,000
      including all placement fees and related legal and accounting
      expenses.  The Company used the entire net proceeds for the
      acquisition of QR.





With
      respect to the above described financing, the Company filed a registration
      statement which was declared effective on July 14, 2006.  If this
      registration statement is subsequently suspended for a specified period of
      time,
      the Company could be required to pay a penalty of 1% of the financing per month
      to the investors.  Additionally, the Company is required to file
      amendments to the registration statement as necessary to keep the registration
      effective for 24 months from the closing date.  In accordance with the
      provisions of FSP EITF 00-19-2, the Company has classified this private
      placement as shareholders’ equity on the accompanying balance
      sheet.  The Company has maintained this registration statement since
      it was declared effective and believes that any future payments related to
      this
      registration statement are remote.  Therefore, in accordance with SFAS
      5, *Accounting for Contingencies,*no corresponding contingent liability
      has been recorded.





In
      August
      and September 2006, the Company’s previous senior secured lender chose to
      exercise its warrant to purchase 100,000 shares of the Company’s common stock
      into 82,806 shares of common stock in a cashless exercise in a manner as
      specified in the warrant.





On
      April
      12, 2007, the Company completed the sale of an aggregate of 5,500,000 shares
      of
      its common stock to certain accredited investors for an aggregate consideration
      of $8,140,000 pursuant to previously executed subscription
      agreements.  The common stock was issued and sold pursuant to the
      exemption from registration afforded by Regulation D of the Securities Act
      of
      1933, as amended.  In connection with the transaction, the Company
      paid the placement agent for the offering $407,000, or five percent of the
      gross
      proceeds of the offering.  The proceeds were used for the purchase of
      QR.  The Company granted the investors certain registration rights
      with respect to the resale of the shares acquired and agreed to register these
      shares of common stock.  With regard to such shares, the Company filed
      a registration statement on October 15, 2007, which was amended on November
      2,
      2007 and declared effective on November 8, 2007.





9






The
      following is a reconciliation from basic to diluted shares for the three months
      ended September 30, 2007 and 2006:





Three
                months ended September 30,2007
            
            
            2006Basic
                Shares
            
            
            17,928,800
            
            
            
            12,374,607Dilutive:Options
            
            
            ---
            
            
            
            ---Warrants
            
            
            ---
            
            
            
            ---Diluted
                Shares
            
            
            17,928,800
            
            
            
            12,374,607





Common
      stock equivalents which have been excluded from the September 30, 2007 and
      2006
      diluted per share amounts because their effect would have been antidilutive,
      include the following:


Three
                months ended September 30,2007
            
            
            2006Options
            
            
            868,900
            
            
            
            846,900Warrants
            
            
            850,000
            
            
            
            50,000Diluted
                Shares
            
            
            1,718,900
            
            
            
            896,900





**(4)
      Long and Short Term Debt:**


On
      April
      13, 2007, the Company entered into a new senior secured facility (the Revolving
      Credit and Term Loan) with ComVest Capital, LLC (“ComVest”) that replaced the
      Company’s existing $2.5 million revolving line of credit  that was due
      to expire on September 21, 2007.  The Revolving Credit and Term Loan
      consists of a $5 million convertible term note and a $3 million revolving loan
      facility.  The convertible term note bears interest at a rate of ten
      percent (10%) per annum and provides for repayment over five years commencing
      in
      November 2007 with a final balloon payment of all remaining amounts due
      there-under on April 30, 2012.  The revolving loan bears interest at a
      rate of two percent plus prime rate per annum, has a specific formula to
      calculate available funds based on eligible accounts receivable and inventory,
      is subject to maximum “borrowing base” limitations, and hascertain
      reporting requirements to the lender.  The convertible term note, in
      addition to being convertible by the Company upon the satisfaction of certain
      conditions, including a trading price equal to 175% of the conversion price
      of
      the Company’s common stock being traded on Nasdaq, is convertible by the lender
      at any time into shares of common stock at a conversion price of $2.37 per
      share
      or 2,109,705 shares based on the initial principal amount of the convertible
      term note.





The
      Company and each of its wholly-owned subsidiaries executed a Collateral
      Agreement pursuant to which each such party agreed to grant a security interest
      in all of its respective assets to ComVest as collateral security for repayment
      of the loans.  The Revolving Credit and Term Loan is secured by all of
      the Company’s and its wholly-owned subsidiaries’ inventory, accounts receivable,
      equipment, officer life insurance policies and proceeds thereof, trademarks,
      licenses, patents and general intangibles.  It is believed that the
      Revolving Credit and Term Loan is sufficient to finance the Company’s ongoing
      working capital requirements for the foreseeable future, based on existing
      sales
      levels.





As
      part of
      the transaction, the Company granted to ComVest an aggregate of 800,000
      five-year warrants to purchase shares of the Company’s common stock at exercise
      prices per share equal to $1.85 with respect to 266,666 warrants, $2.02 with
      respect to an additional 266,666 warrants, and $2.19 with respect to the
      remaining 266,668 warrants. The Company entered into a Registration Rights
      Agreement pursuant to which it agreed to register the shares of common stock
      issuable upon exercise of the warrants and conversion of the term
      note.  The Company is subject to specific penalties if the
      registration statement is not filed within a certain time and then declared
      effective within a certain time.  The Company must also use its best
      efforts to keep the registration statement effective during the applicable
      registration period.  With regard to such shares, the Company filed a
      registration statement on October 15, 2007, which was amended on November 2,
      2007 and declared effective on November 8, 2007.





The
      Company has assessed whether the warrants granted to ComVest should be
      classified as either a liability or equity in accordance with EITF 00-19,
“*Accounting for Derivative Financial Instruments Indexed to, and Potentially
      Settled in a Company’s Own Stock*” and concluded that these warrants should
      be classified as equity.  The Black-Scholes Method was used to value
      these detachable warrants, and have been recorded in the accompanying
      Consolidated Balance Sheets at $1,114,784.  In accordance with
      Accounting principles Board Opinion No. 14, “*Accounting for Convertible Debt
      and Debt Issued with Stock Purchase warrants*”, proceeds received from the
      sale of debt with detachable stock purchase warrants are allocated to both
      the
      debt and the warrants.  The portion allocable to warrants is accounted
      for as additional paid in capital, and the remaining portion is classified
      as
      debt.  The fair value of the warrants issued to ComVest is being
      treated as debt discount, which will be accreted as interest expense utilizing
      the interest method over the 60-month term of the Term Loan.  The
      assumptions used for the Black-Scholes option pricing model were as
      follows:  risk-free interest rate of 4.66%, expected volatility of
      123%, an expected life of five years, and no expected dividends.  A
      summary of such follows:




10





**September
                30, 2007**
            
            
            **June
                30, 2007**Term
                Loan
            
            $
            5,000,000
            
            
            $
            5,000,000Fair
                value of warrants (recorded as capital in excess of par)
            
            
            (1,114,784
            )
            
            
            (1,114,784
            )Accretion
                of debt discount (recorded as interest expense)
            
            
            99,460
            
            
            
            49,144Recorded
                value of Term Loan
            
            $
            3,984,676
            
            
            $
            3,934,360





As
      of
      September 30, 2007, the Company was in compliance with all terms and conditions
      of the Revolving Credit and Term Loan Agreement.




QR
      has the
      ability to borrow up to 350,000 Euros under two separate lines of credit and
      up
      to an additional one million Euros from three different lines, all guaranteed
      by
      its accounts receivables and inventory.  All the lines are with two
      different financial institutions.  These lines of credit were granted
      in August 2007.  As of September 30, 2007 there was outstanding
      111,992 Euros and no funds were outstanding as of June 30, 2007.  The
      funds borrowed in Italy are guaranteed by specific outstanding account
      receivable and the current rate of borrowing is 5.09%.





As
      of
      September 30 and June 30, 2007, debt consisted of the following:




**September
                30, 2007**
            
            
            **June
                30, 2007**ComVest
                Term Loan, net of debt discount
            
            $
            3,984,676
            
            
            $
            3,934,360$3.0
                Million Revolving Senior Credit Facility
            
            
            2,620,832
            
            
            
            2,424,714Foreign
                line of credit borrowings
            
            
            159,2276,764,735
            
            
            
            6,359,074Less
                current portion
            
            
            971,123
            
            
            
            536,727**Total
                long-term debt**
            
            $
            5,793,612
            
            
            $
            5,822,347





At
      September 30, 2007, the Company had available $379,168 of unused lines of credit
      under the Revolving Senior Credit Facility, as well as the unused lines for
      QR.





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
      approximated its carrying value.





**(5)
      Inventory:**


Inventories,
      which include material and a small component of labor and manufacturing
      overhead, are stated at the lower of cost (first-in, first-out) or market (net
      realizable value). The Company’s US operations uses a standard cost accounting
      system in conjunction with an actual perpetual inventory system to properly
      account for, control, and maintain the movement of all inventory
      components.  All standard costs are reviewed periodically and updated
      accordingly to verify that the standard costs approximate the actual costs.
      The
      Company’s foreign operations implemented an inventory control system in early
      fiscal year 2008.  Provision has been made for any potential losses on
      obsolete or slow-moving inventory items.  At September 30, and June
      30, 2007, inventories, net of reserves, consisted of the following:





September
                30, 2007
            
            
            June
                30, 2007(Unaudited)Raw
                materials and sub-component parts
            
            $
            3,592,656
            
            
            $
            2,856,813Work-in-process
                and finished goods
            
            
            3,417,901
            
            
            
            3,538,239$
            7,010,557
            
            
            $
            6,395,052





**(6)
      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
      deferred tax asset to an amount that is more likely than not to be
      realized.  As of September 30, 2007, the Company has recorded a
      deferred tax asset of approximately $1,312,400, which primarily relates to
      US
      losses recorded in prior years and foreign deferred tax assets acquired related
      to the acquisition of QR.  The Company believes it is likely that the
      Company will utilize these prior year net operating loss carry
      forwards.  However, should circumstance change and the Company
      determine that it will not be able to utilize its net operating loss
      carryforward, such as a continuous decline in future taxable income, the Company
      will reevaluate its valuation allowance.  The net tax expense recorded
      as of September 30, 2007 includes foreign taxes at the statutory rates on the
      Company’s foreign operations and state income and capital taxes required in the
      United States.





11






As
      of
      September 30, 2007, the Company had approximately $7.24 million in federal
      net
      operating loss carryforwards, and approximately $12.0 million in state net
      operating loss carryforwards.  These NOL’s will begin to expire in
      2010 and are subject to review by the Internal Revenue
      Service.  Changes in ownership of the Company as defined in Section
      382 of the Internal Revenue Code, will limit the amount of NOL’s available in
      any one year.





Effective
      July 1, 2007, the Company adopted the provisions of the Financial Accounting
      Standards Board (“FASB”) Interpretation no. 48 (“FIN 48”), *Accounting for
      Uncertainties in Income Taxes – an interpretation of FASB Statement No.
      109.*The implementation of FIN 48 had no impact on the Company’s
      financial statements.





**(7)
      Intangible Assets and Goodwill**


On
      April
      19, 2007 the Company acquired QR, an Italian corporation located in Verona,
      Italy.  The purchase price was 13 million Euros and was funded through
      the issuance of stock and assumption of new debt.  The results of QR’s
      operations have been combined with those of the Company since the date of
      acquisition.  The acquisition was accounted for under the purchase
      method of accounting in accordance with FASB Statement No. 141, Business
      Combinations (“SFAS 141”).  The carrying values of QR’s assets and
      liabilities were adjusted to their fair values on April 19, 2007 and the
      difference between the purchase price and the fair value of the net assets
      and
      liabilities was recorded as goodwill.  The goodwill and intangible
      amounts are maintained in Euros on the subsidiary’s books and converted into US
      dollars on the respective exchange rate.





The
      following is a summary of the amortization of the intangible assets subject
      to
      amortization:





**June
                30, 2007**
            
            **Gross
                carrying**
              **amount**
            
            
            **Accumulated**
              **amortization**
            
            
            **Net**Developed
                technologies
            
            $
            5,320,000
            
            
            
            149,918
            
            
            $
            5,170,082Customer
                relationships
            
            
            3,149,000
            
            
            
            62,117
            
            
            
            3,086,883Non-compete
                contracts and other
            
            
            336,000
            
            
            
            13,019
            
            
            
            322,9818,805,000
            
            
            
            225,054
            
            
            
            8,579,946Goodwill
            
            
            3,846,405
            
            
            
            ---
            
            
            
            3,846,405Total
                intangible assets
            
            $
            12,651,405
            
            
            $
            225,054
            
            
            $
            12,426,351





**September
                30, 2007**
            
            **Gross
                carrying**
              **amount**
            
            
            **Accumulated**
              **amortization**
            
            
            **Net**Developed
                technologies
            
            
            5,548,453
            
            
            
            342,070
            
            
            
            5,206,383Customer
                relationships
            
            
            3,286,585
            
            
            
            141,733
            
            
            
            3,144,852Non-compete
                contracts and other
            
            
            350,113
            
            
            
            29,705
            
            
            
            320,4089,185,151
            
            
            
            513,508
            
            
            
            8,671,643Goodwill
            
            
            4,021,190
            
            
            
            --
            
            
            
            4,021,190Total
                intangible assets
            
            
            13,206,341
            
            
            
            513,508
            
            
            
            12,692,833





The
      change
      in the value of goodwill and other intangibles from September 30, 2007 to the
      date of acquisition is due to changes in exchange rates, as there was a
      significant change in value between the US dollar and the Euro during this
      time
      period.





**(8)
      Segment Information**


As
      of
      September 30, 2007 and June 30, 2007, the Company had only one business segment,
      medical/dental imaging. The
      medical/dental segment operations are conducted under the Dent-X, EVA, NewTom
      and AFP trade names and consist of the design, development, manufacturing,
      marketing and distribution of medical and dental imaging systems and all related
      accessories.  The amortization of the intangibles associated with the
      acquisition of QR has been attributed to the Italian operations.





12








Geographical
                financial information for the three months ended September 30, 2007
                and
                2006 is as follows:2007
            
            
            2006Sales:United
                States
            
            $
            3,674,784
            
            
            $
            3,619,424Europe
            
            
            1,821,114
            
            
            
            -US
                Export Sales
            
            
            1,952,167
            
            
            
            1,872,704$
            7,448,055
            
            
            $
            5,492,128Net
                Income (loss)United
                States
            
            $
            (1,311,202
            )
            
            $
            (567,860
            )Europe
            
            
            597,691
            
            
            
            -$
            (713,511
            )
            
            $
            (567,860
            )September
                30, 2007
            
            
            June
                30, 2007Identifiable
                assets:United
                States
            
            $
            8,677,496
            
            
            $
            9,942,023Europe
            
            
            18,285,652
            
            
            
            17,228,803Total
            
            $
            26,963,148
            
            
            $
            27,170,826





**(9)****Commitments
      and Contingencies:**


The
      Company is a defendant in an environmental 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 for 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.  A recent settlement amount was offered by this group,
      however, to date, no settlement has been reached.  The potential cost
      to the Company based on this settlement offer has been assessed at
      $18,080.  The Company had accrued $11,550 as of September 30, 2007 and
      Fiscal Year 2007, 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 after a status conference is held in
      late
      November 2007.  The Company cannot currently 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 connection with this
      environmental claim.





The
      Company is involved in two other product liability insurance actions, however,
      to date, no lawsuits have been filed.  The Company maintains that its
      equipment was not the cause of the respective incidents or the resultant
      damage.  The Company’s insurance carriers, and their attorneys, are
      assisting in the Company’s defense in these matters.  The Company does
      not believe that the final outcome of either of these matters will have a
      material adverse effect on the Company.





In
      October
      2007, the Company settled the lawsuit filed in May 2007 in the Supreme Court
      of
      Orange County, New York, whereby it was named as a third party defendant in
      a
      lawsuit which alleged that the Company’s negligence in manufacturing, designing,
      assembling and distributing its digital radiographic sensors caused damages
      to
      the plaintiff.  The Company’s responsibility for the settlement was
      approximately $8,300.  The Company received a Stipulation
      Discontinuing Action in this matter.





On
      August
      8, 2007, the Company received a letter from counsel to Lightyear Technology,
      Inc. (“Lightyear”) that alleges that certain actions the Company may have taken
      subsequent to the acquisition of Lightyear, a small distribution channel, in
      December 2006, may give rise to causes of action and claims of fraud and breach
      of contract.  To date, no legal action has been filed.  The
      Company believes it is currently in full compliance with the terms of the
      contract and maintains that there was neither fraud nor breach of
      contract.  The Company believes it acted in good faith at all times
      with the management and direction of Lightyear.  At this time, the
      Company cannot assess if the final outcome of this situation will have a
      material adverse effect on the Company.





13






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.





As
      part of
      the acquisition of QR, the Company granted employment agreements to each of
      the
      four former owners, for a total yearly commitment of 500,000
      Euros.  Each agreement is for a period of five years and contains a
      non-compete clause.  The Company can terminate each agreement after
      the first year of employment, in which event, any employee so terminated is
      entitled to one-half of the salary for the remaining term.





In
      October
      2007, QR signed a non-cancelable operating lease for additional office space
      in
      Verona, Italy.  The leasing agent is owned by three of the four former
      owners of QR.  The annual rental is 39,000 Euro per year.





**(10)
      New Accounting Standards:**


In
      September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
      No. 157, *Fair Value Measurements*(“SFAS No. 157”).  SFAS No.
      157 establishes a framework for measuring fair value in generally accepted
      accounting principles and expands disclosures about fair value
      measurements.  SFAS No. 157 emphasizes that fair value is a
      market-based measurement, not an entity-specific measurement.  SFAS
      No. 157 also expands disclosures about the use of fair value to measure assets
      and liabilities in interim and annual periods subsequent to initial
      recognition.  The Company is required to adopt SFAS No. 157, as
      applicable, beginning in July 2008.  The Company is evaluating the
      effect of SFAS No. 157, but does not believe that there will be any material
      effect on the Company’s financial statements.





In
      September 2006, the FASB also issued SFAS No. 158, *Employers’ Accounting for
      Defined Benefit Pension and Other Postretirement Plans-an Amendment of FASB
      Statements No. 87, 88, 106 and 132R*(“SFAS No. 158”).  SFAS No.
      158 improves financial reporting by requiring an employer to recognize the
      over
      funded or under funded status of a defined benefit postretirement plan as an
      asset or liability in its statement of financial position and to recognize
      changes in that funded status in the year in which the changes occur through
      comprehensive income of a business entity or changes in unrestricted net assets
      of a not-for-profit organization.  SFAS No. 158 also improves
      financial reporting by requiring an employer to measure the funded status of
      a
      plan as of the date of its year-end financial position.  The Company
      is required to adopt SFAS No. 158, as applicable, as follows.  The
      Company must recognize the funded status of its defined benefit postretirement
      plans and provide the required disclosures as of June 30, 2007, and the Company
      must measure the plan assets and benefit obligations for the fiscal year ended
      June 30, 2009.  The Company does not believe that there will be any
      material effect on the Company’s financial statements.





In
      February 2007, the FASB issued SFAS No. 159, *The Fair Value Option for
      Financial Assets and Financial Liabilities – Including an Amendment of FASB
      Statement No. 115*(“SFAS No. 159”)*.*SFAS 159 permits
      entities to choose to measure many financial instruments and certain other
      items
      at fair value, so as to improve financial reporting by providing entities with
      the opportunity to alleviate volatility in reported earnings.  This
      Statement should expand the use of fair value measurement and permits all
      entities to choose to measure eligible items at fair value at specified election
      dates.  The resulting unrealized gains or losses on items which the
      fair value option has been elected are to be reported in
      earnings.  The Company is required to adopt SFAS No. 159, as
      applicable, beginning in July 2008.  The Company is evaluating the
      effect of SFAS No. 159, but does not believe that there will be any material
      effect on the Company’s financial statements.





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.





14






**Item
      2:  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 Quarterly
      Report on Form 10-Q.  This discussion may contain certain
      forward-looking statements based on current expectations that involve risks
      and
      uncertainties.  Actual results and timing of certain events may differ
      significantly from those projected in such forward-looking statements due to
      a
      number of factors, including those set forth in elsewhere in this
      report.  Except as otherwise disclosed, all amounts are reported in US
      dollars ($).





**Capital
      Resources and Liquidity**





The
      Company’s working capital at September 30, 2007 decreased by approximately
      $785,000 from June 30, 2007.  This decrease is principally due to an
      increase in the current portion of the outstanding debt, based on scheduled
      principal payments, a decrease in accounts receivable, as sales were lower
      in
      the first quarter of Fiscal Year 2008 compared to the fourth quarter of Fiscal
      Year 2007, offset by an increase in inventory on hand.





Operating
      cash flows were slightly better in the three months ended June 2007 compared
      to
      June 2006.  The loss from operations was higher, however this was
      offset by good cash receipts in the current quarter.  This loss is
      mainly attributable to lower gross margins in the US based on the product mix
      towards more distributor goods, the strong Euro in relation to the US dollar,
      increased competition in the marketplace, as well as significantly higher
      marketing, sales distribution and administrative expenses.  These
      expenses related to new and existing products and the development and growth
      of
      various new distribution channels to advance sales growth.  These
      factors caused the Company to utilize its cash resources, resulting in increased
      borrowings on the new credit facility.  The Company is continuing to
      require advance deposits from its customers on the new-high dollar valued
      equipment, which is consistent with the vendor’s terms of
      sale.  Otherwise, the Company has neither changed its payment policies
      to its vendors nor revised its payment terms with its customers.





On
      April
      12, 2007, the Company completed the sale of an aggregate of 5,500,000 shares
      of
      its common stock to certain accredited investors for an aggregate consideration
      of $8,140,000 pursuant to previously executed subscription
      agreements.  The Company has registered these shares for
      resale.  The common stock was issued and sold pursuant to the
      exemption from registration afforded by Regulation D of the Securities Act
      of
      1933, as amended.  In connection with the transaction, the Company
      paid the placement agent for the offering $407,000, or five percent of the
      gross
      proceeds of the offering.  The net proceeds were used to fund a
      portion of the purchase price of QR, which was completed on April 19,
      2007.





On
      April
      13, 2007, the Company entered into a Revolving Credit and Term Loan Agreement
      with ComVest whereby ComVest agreed to lend the Company an aggregate of up
      to $8
      million in the form of a $5 million Convertible Term Note and a $3 million
      Revolving Loan Facility.  The term loan bears interest at a rate of
      ten percent (10%) per annum and provides for repayment over five years
      commencing in November 2007 in 53 equal monthly installments of $92,592.60
      with
      a final balloon payment of all remaining amounts due there-under on April 30,
      2012.  The term loan is further subject to mandatory prepayment to the
      extent of 50% of proceeds received by the Company in connection with the sale
      of
      its capital stock unless such proceeds are utilized to acquire another
      business.  The revolving loans bear interest a rate per annum of two
      percent (2%) plus the prime rate and is payable in full on April 30, 2012,
      has a
      specific formula to calculate available funds based on eligible accounts
      receivable and inventory, is subject to maximum “borrowing base” limitations,
      and hascertain
      reporting requirements.  This new senior secured Revolving Credit and
      Term Loan Agreement replaced the Company’s previous $2.5 million senior secured
      credit facility, which was due to expire on September 21, 2007.  The
      proceeds were used to fund a portion of the purchase price of QR and for ongoing
      working capital requirements.





As
      of
      September 30, 2007, the Company was in compliance with all the terms and
      conditions of the Revolving Credit and Term Loan Agreement.





Both
      loans
      are subject to mandatory prepayment in full in the event of certain “sale”
events, including merger, sale of assets or change in control.  The
      term loan is convertible by ComVest at any time into shares of the Company’s
      common stock at a conversion price of $2.37 per share.  The term loan
      is convertible at the Company’s option upon the satisfaction of certain
      conditions, including a reported trading price equal to 175% of the conversion
      price, the common stock being traded on NASDAQ, and a certain minimum trading
      volume, among others.  In addition, the Company and each of its
      wholly-owned subsidiaries executed a Collateral Agreement pursuant to which
      each
      such party agreed to grant a security interest in all of its respective assets
      to ComVest as collateral security for repayment of the
      loans.  Further, each subsidiary agreed to guaranty performance of all
      of the Company’s obligations to ComVest.





15






As
      part of
      the transaction, the Company granted to ComVest an aggregate of 800,000 warrants
      to purchase shares of the Company’s common stock at exercise prices per share
      equal to $1.85 with respect to 266,666 warrants, $2.02 with respect to an
      additional 266,666 warrants, and $2.19 with respect to the remaining 266,668
      warrants.  The Company entered into a Registration Rights Agreement
      pursuant to which it agreed to register the shares of common stock issuable
      upon
      exercise of the warrants and conversion of the term note.  These
      shares have been registered for resale.  The Company must use its best
      efforts to keep the registration statement effective during the applicable
      registration period.





On
      May 2,
      2006, the Company completed a private placement of its common stock to a group
      of institutional and other accredited investors.  The Company sold a
      total of 2,777,777 shares of its common stock at $1.80 per share.  The
      Company granted the investors certain registration rights with respect to the
      resale of the shares acquired.  The Company used the net proceeds to
      fund a portion of the purchase price of QR.





With
      respect to the above described financing, the Company filed a registration
      statement which was declared effective on July 14, 2006.  If this
      registration statement is subsequently suspended for a specified period of
      time,
      the Company could be required to pay a penalty of 1% of the financing per month
      to the investors.  Additionally, the Company is required to file
      amendments to the registration statement as necessary to keep the registration
      effective for 24 months from the closing date.  In accordance with the
      provisions of FSP EITF 00-19-2, the Company has recorded this private as
      shareholders’ equity on the accompanying balance sheets.  The Company
      has maintained this registration statement since it was declared effective
      and
      believes that any future payments related to this registration statement are
      remote.  Therefore, in accordance with SFAS 5, *Accounting for
      Contingencies,*no corresponding contingent liability has been
      recorded.





In
      August
      and September 2006, the Company’s former senior secured lender chose to exercise
      its warrant to purchase 100,000 shares of the Company’s common stock by
      converting the warrant into 82,806 shares of common stock in a cashless exercise
      in a manner as specified in the warrant.  This warrant was due to
      expire in September 2006.





Capital
      expenditures for  the first three months of Fiscal Year 2008 were
      approximately $37,000, consisting mainly of  tooling expenditures
      related to the redesign, development and production of new imaging
      products.  The Company expects to continue to finance any future
      capital requirements principally from internally generated funds.  The
      total amount of capital expenditures is not limited under the Company’s new
      Revolving Credit and Term Loan Agreement





The
      Company’s historical operating cash flows generally have been positive; however,
      the Company is dependent upon its Revolving Credit and Term Loan Agreement
      with
      ComVest to finance its ongoing operations.  The Company expects its
      worldwide working capital requirements will continue to be financed by
      operations, both in the United States and Italy, and from borrowings on the
      Revolving Credit and Term Loan Agreement.  It is believed that the
      Revolving Credit and Term Loan Agreement is sufficient to finance the Company’s
      ongoing worldwide working capital requirements for the foreseeable future,
      based
      upon existing sales levels.  The Company currently believes that there
      are no significant trends, demands, commitments or contingencies, other than
      an
      unexpected material adverse conclusion to an ongoing environmental litigation
      case, or any other pending litigation, which are reasonably likely to result
      in
      a significant increase or decrease in its liquidity or capital resources within
      the foreseeable near-term future.  As of September 30, 2007, the
      Company had available approximately $379,168 of unused credit under the
      Revolving Credit and Term Loan Agreement.  As of November 1, 2007, the
      Company had available approximately $312,945 of unused credit under the
      Revolving Credit and Term Loan Agreement.  No assurances can be given
      that the Company will have sufficient cash flow in the long term.





QR
      has the
      ability to borrow up to 350,000 Euros under two separate lines of credit and
      up
      to an additional one million Euros from three different lines, all guaranteed
      by
      its accounts receivables and inventory.  All the lines are with two
      different financial institutions.  These lines of credit were granted
      in August 2007.  As of September 30, 2007 there was outstanding
      111,992 Euros and no funds were outstanding as of June 30, 2007.





The
      Company is continuing to investigate various strategies to increase its market
      share.  Some of these strategies could involve the acquisition of one
      or more businesses or product line distributions.  There are no
      assurances that the Company will be able to identify any suitable acquisition
      candidate(s), or, if so identified, be able to enter into a definitive agreement
      with such candidates on terms favorable to the Company.


**Off-Balance
        Sheet Arrangements**


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





16








**Results
      of Operations**





**Fluctuations
      in Operating Results**





The
      results of operations for the Company have changed significantly as a result
      of
      the acquisition of QR on April 19, 2007.  The carrying values of QR’s
      assets and liabilities were adjusted to their fair values and the difference
      between the purchase price and the fair value of the net assets was recorded
      as
      goodwill and other intangibles, and is subject to periodic impairment
      testing.  The Company’s results of operations have been and will
      continue to be materially effected by the amortization costs associated with
      these other intangibles.





The
      Company’s operating results have varied in the past and are likely to vary in
      the future.  Due to variations that the Company has experienced in
      operating results, management does not believe that period-to-period comparisons
      of results of operations are necessarily meaningful or reliable as indicators
      of
      future performance.  These variations result from several factors,
      many of which are out of the Company’s control, and include the
      following:


§
            changes
                in technology, specifically imaging
                modalities,


§
            demand
                for products and services,


§
            the
                level of product, price  and service
                competition,


§
            changes
                in product mix, which could effect profit
                margins,


§
            Federal,
                state, local or international
                regulations,


§
            the
                timing of industry trade shows,


§
            currency
                fluctuations,


§
            capital
                spending budgets of customers,


§
            general
                economic trends and conditions specific to the Company’s
                industry,


§
            changes
                in the prime rate of borrowing in the United States,
                and


§
            the
                timing of new product introductions by the Company as well as by
                its
                competitors.





**Three
      Months  Fiscal 2008 Versus Three Months Fiscal
      2007**





Sales
      increased approximately $1,955,900, or 35.6%, between the Fiscal 2007 and Fiscal
      2008 three-month periods.  Approximately $1.7 million of this increase
      can be attributed to the worldwide sales of the three-dimensional dental x-ray
      imaging systems manufactured in Italy.  Prior to the purchase of QR,
      the Company was the exclusive distributor in the United States, Canada and
      Latin
      America (excluding Brazil) for QR’s three-dimensional dental x-ray imaging
      system.  The Company sells this product into both the dental and
      medical ENT market.  The Company’s veterinary products business
      decreased approximately 16%, mainly due to lower than anticipated demand for
      the
      very specialized digital equine systems and general purpose x-ray systems
      (analog and digital) specifically designed for all veterinary
      applications.  There is a continuing strong demand for the Company’s
      two-dimensional filmless digital dental radiography system which showed a 46%
      increase in human and veterinary sales in the current three-month
      period.  The Company’s analog film processor business showed an
      increase of approximately 5.5% in the current three-month period, mainly due
      to
      international sales.  US health-care professionals continue to migrate
      to digital imaging equipment, much of which the Company also
      supplies.  The Company has continued its efforts to increase worldwide
      distribution and expand and develop new international markets for its digital
      products, resulting in a 12.8% increase in international sales between the
      periods.





Gross
      profit as a percent of sales increased 10.4 percentage points between the Fiscal
      2007 and Fiscal 2008 three-month comparable periods.  This increase
      can mainly be attributed to the profit margins realized from QR, as there were
      insignificant changes on the Company’s US operations.





Selling,
      general, and administrative costs increased approximately $979,500 or 45.9%,
      between the Fiscal 2007 and Fiscal 2008 three-month comparable
      periods.  Approximately $595,000 of this increase is due to operating
      costs in Italy, associated with the acquisition of QR.  The balance of
      this increase is due to several factors, including:  (1) an
      approximate 3% increase in general and administrative costs;  (2)
      approximately a $80,000 increase in technical support costs related to the
      new
      digital equipment the Company is selling, that require a devoted infrastructure
      support system;  (3) an increase in marketing and sales costs of
      approximately $280,000 in the current three-month period due to (a) the
      Company’s continued aggressive launch into the dental and medical marketplaces
      for the new three dimensional x-ray imaging equipment, including attendance
      at
      several large international trade shows, development of new brochures and
      advertising materials, and the related travel and entertainment expenses, (b)
      the worldwide introduction of the Company’s new vertical three-dimensional CBCT
      scanner, (c) pursuing various sales opportunities in both the domestic and
      international markets, with specific emphasis in the growing veterinary markets,
      (d) an increase in general operating expenses, based on increased sales levels;
      and  (5) approximately $150,000 related to the acquisition in
      mid-December 2006 of a new distinct distribution channel to implement various
      methods to increase sales levels.  Included in the Fiscal Year 2007
      three-month period is the write-off of certain deferred financing costs incurred
      in the previous fiscal year as the Company chose not to utilize that
      lender.





17






Amortization
      of intangibles increased approximately $288,500 or 100% and resulted from the
      amortization of the other intangibles created from the acquisition of QR and
      the
      purchase price relative to the fair-value of the assets
      acquired.  Prior to April 2007, the Company did not have any such
      intangibles.





Research
      and development costs increased approximately $255,500, or 143.2%, between
      the
      Fiscal 2007 and Fiscal 2008 three-month comparable periods.  The
      Company’s research and development efforts and technologies were significantly
      enhanced by the acquisition of QR.  Most of this increase is due to
      research and development efforts in Italy.  The Company continues to
      invest in the design, development and refinement of its existing digital imaging
      products, as well as the design and development of new digital imaging products
      for the human dental and broad veterinary applications, including both hardware
      and software enhancements.  Research and development costs may
      fluctuate between reporting periods, due to changing research and development
      consulting agreements, initiation or completion of certain project tasks, and
      market demands.  Research and development costs may increase over the
      next several years as the Company evaluates its strategy to develop and market
      additional high tech digital products.  The Company has integrated its
      research and development between both locations.





For
      the
      three-month period ended September 30, 2007, the gain on foreign currency
      transactions amounted to approximately $577,000.  This gain is an
      unrealized non-cash foreign currency gain on the US dollar denominated
      intercompany note and recorded by QR.  No tax benefit has been
      recorded for this unrealized gain, in accordance with local
      laws.  There was no foreign currency gain or loss recorded in the
      three month period ended September 30, 2007.





For
      the
      three-month period ended September 30, 2007 (FY 2008), net interest expense
      was
      $253,659.  For the three-month period ended September 30, 2007 (FY
      2007), net interest income was $32,389.  There was approximately $768
      of interest income in Fiscal Year 2008 compared to approximately $59,435 in
      Fiscal year 2007.  The decrease in interest income is due to the
      utilization of all cash raised from the private placements in Fiscal Years
      2007
      and 2006 for the acquisition of QR in April 2007.  There was
      approximately $254,400 of interest expense in the current three-month period,
      compared to approximately $27,000 in the comparable period in the prior
      year.  The current three-month period had approximately $6.9 million
      more in average borrowings on the senior secured debt and had a slightly higher
      average interest rate.  The significant increase in borrowings was
      used to fund a portion of the purchase price of QR.





The
      Company made several small state tax payments in the US in the three-months
      ended September 30, 2007, based on the consolidated loss from operations and
      made the required national and local tax payments in Italy for 2007 and 2008,
      based on the foreign operations, as required by local law.  The
      Company recorded a provisions for taxes on QR’s operations at the combined
      required statutory tax rate.  The Company has recorded a deferred tax
      asset of $1.3 million, of which approximately $632,000 relates to its foreign
      operations acquired in April 2007 and approximately $680,000 which primarily
      relates to US losses recorded in prior years; the Company believes it is likely
      that it will utilize these prior year net operating loss carry
      forwards.  As of September 30, 2007, the Company had approximately
      $7.24 million in federal net operating loss carryforwards, and approximately
      $12.0 million in state net operating loss carryforwards.





**Critical
      Accounting Policies and Estimates**





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.  These estimates and
      assumptions are evaluated on an ongoing basis focusing 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 assurance 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.  The Company has begun to sell extended service contracts on
      its three-dimensional dental x-ray imaging machines.  Such revenue has
      been deferred and will be recorded on a straight-line basis over the period
      of
      the extended service contract.




18





Accounts
      Receivable


The
      Company reports accounts receivable net of reserves for doubtful
      accounts.  Credit is extended to worldwide distributors on varying
      terms from letters of credit to 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 are
      determined by management to be 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.





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 the Company’s limited warranties issued to its
      customers.  Various factors affect the Company’s warranty liability,
      including (1) number of units sold, (2) historical rates of claims, (3)
      anticipated rates of claims, and (4) costs per claim.  The Company
      periodically assesses the adequacy of its warranty liability based on changes
      in
      these factors.  Management believes that the current warranty
      provisions are sufficient based on the warranty information available to the
      Company.





The
      Company offers extended warranties in connection with sales of its digital
      sensors.  The Company is continuing to monitor the rate and costs of
      claims and review the adequacy of its warranty liability and make any changes
      as, and if, necessary.  If the Company experiences significant
      increased warranty claims or activity, or the warranty claims exceed the
      currently reserved amount, the warranty reserve will be increased, resulting
      in
      decreased gross profit during the period(s) in which the warranty reserve is
      increased.





Stock-based
      Compensation


Stock
      based compensation is accounted for in accordance with SFAS No.
      123R.  The Company determines the fair value of options based on the
      Black-Scholes model, which is based on specific assumptions including (1) the
      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 affected.  In reviewing the valuation
      allowance, the Company considers future taxable income and determines whether
      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-determination
      of the valuation allowance.  The company has also recorded deferred
      tax assets associated with its foreign operations.  These tax benefits
      were acquired upon the acquisition of QR in April 2007 and primarily relate
      to
      the financial statement carrying amount of existing assets and liabilities
      and
      their respective tax bases.





Goodwill
      and other intangibles


Prior
      to
      April 2007, the Company did not have any long-lived assets or
      goodwill.  Long-lived assets held for use by the Company will be
      reviewed for impairment whenever circumstances provide evidence that suggests
      the carrying amount of the asset may not be recoverable.  The Company
      will also perform ongoing impairment analysis on intangible assets related
      to
      technology.  Determination of whether impairment exists will be based
      upon comparison of the identifiable cash flows of the assets to the carrying
      values of the respective assets, and if impaired the value of the asset will
      be
      reduced.  Goodwill is not amortized, but will be tested for impairment
      on an annual basis each June 30th, or whenever circumstances or events indicate
      that the carrying amount may not be recoverable.  The impairment tests
      will be based on a comparison of the fair value of the reporting entity to
      the
      respective goodwill amount.  Any identified impairment will result in
      a charge to reduce the carrying value of the associated goodwill.Goodwill
      and intangibles have been recorded on QR’s books in accordance with generally
      accepted accounting principles as applied in the United States, and therefore,
      their historical carrying values are subject to changes in exchange
      rates.





19






Litigation
      and Contingencies


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





Exchange
      Rates and Currency Conversion


The
      US
      dollar is the Company’s reporting currency; its functional currency depends on
      the country of operation.  For the three-months ended September 30,
      2007, a significant amount of revenues and expenses were denominated in
      Euros.  During this period the US dollar/Euro exchange rate has
      fluctuated considerably.  The amounts for Fiscal Year 2007 were not
      significant as QR was acquired in April 2007.  The Company has
      recorded the intangibles related to the acquisition of QR in Euros, and
      therefore, the gross carrying amount of these intangibles will fluctuate with
      changes in the US dollar/Euro exchange rate.





**Item
        3:  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) primarily from its borrowings under
      its
      senior debt.  The interest rate on the term loan is fixed, however the
      interest rate on the revolver varies with the prime rate of
      interest.  A hypothetical, instantaneous increase of one percentage
      point in the prime rate of borrowing would increase interest expense by $30,000
      for twelve months, assuming that the entire revolver line was
      utilized.  Therefore, the Company does not believe that it is
      materially exposed to changes in interest rates.  The Company does not
      currently use interest rate derivative instruments to manage exposure to
      interest rate changes.





Prior
      to
      April 2007, the Company’s earnings and cash flows were subject to changes in
      interest rates associated with U.S. Treasury Notes and U.S. Treasury
      Bills.  As the Company used its excess cash for the purchase of QR in
      April 2007 and no longer maintains any significant cash balances, the Company
      does not believe that they are materially exposed to market rate
      volatility.





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
      the functional currency; 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.  The Company did
      purchase a Euro hedge contract relative to the acquisition of QR to limit the
      Company’s exposure to the Euro/dollar exchange.  As of September 30,
      2007, the Company did not have any outstanding hedge contracts.








**Item
      4:  Controls and
      Procedures.**





a)
      Evaluation of disclosure controls and procedures





The
      Company’s Co-Chief Executive Officers and Chief Financial Officer have reviewed
      and evaluated the effectiveness of the Company’s disclosure controls and
      procedures (as defined in Rule 13a – 15 (e) of the Securities Exchange Act of
      1934 (the “Act”)).  Based on their review and evaluation, the Co-Chief
      Executive Officers and Chief Financial Officer have concluded that, as of
      September 30, 2007, the Company’s disclosure controls and procedures were
      adequate and effective to ensure that information required to be disclosed
      by
      the Company in the reports that it files or submits under the Act is recorded,
      processed, summarized and reported, within the time periods specified in the
      rules and forms of the Securities and Exchange Commission.





(b)
      Changes in internal controls





During
      the
      quarter ended September 30, 2007, there were no significant changes in the
      Company’s internal controls over financial reporting or in other factors that
      could materially affect, or would be reasonably likely to materially affect,
      these internal controls, nor were there any significant deficiencies or material
      weaknesses in these internal controls requiring corrective
      actions.  As a result, no corrective actions were
      necessary.





20






**Part
      IIOther Information**





**Item
      1:   Legal
      Proceedings.**





Reference
      is made to Item 3 in the Company’s Annual Report on Form 10-K for the fiscal
      year ended June 30, 2007, and to the references therein, for a discussion of
      all
      material pending legal proceedings to which the Company and its subsidiaries
      are
      parties.





In
      October
      2007, the Company settled the lawsuit filed in May 2007 in the Supreme Court
      of
      Orange County, New York, whereby it was named as a third party defendant in
      a
      lawsuit which alleged that the Company’s negligence in manufacturing, designing,
      assembling and distributing its digital radiographic sensors caused damages
      to
      the plaintiff.  The Company’s responsibility for the settlement was
      approximately $8,300.  The Company received a Stipulation
      Discontinuing Action in this matter.





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.




**Item
                6:       **Exhibits****.****31.1
                - Certification of Co-Chief Executive Officer pursuant to Exchange
                Act
                Rule 13a – 14 (a).31.2
                - Certification of Co-Chief Executive Officer pursuant to Exchange
                Act
                Rule 13a – 14 (a).31.3
                - Certification of Chief Financial Officer pursuant to Exchange Act
                Rule
                13a – 14 (a).32.1
                - Certification of Co-Chief Executive Officer pursuant to 18 U.S.C.
                Section 1350 of the Sarbanes – Oxley Act of 2002.32.2
                - Certification of Co-Chief Executive Officer pursuant to 18 U.S.C.
                Section 1350 of the Sarbanes – Oxley Act of 2002.32.3
                - Certification of Chief Financial Officer pursuant to 18 U.S.C.
                Section
                1350 of the Sarbanes – Oxley Act of
                2002.







21
 
   Signatures
  Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
   **AFP
                  IMAGING CORPORATION**
                **(Registrant)**/s/
                David Vozick**David
                Vozick**Chairman
                of the Board,(Co-Chief
                Executive Officer)Secretary,
                TreasurerDate:
                November 14, 2007/s/
                Donald Rabinovitch**Donald
                Rabinovitch**President(Co-Chief
                Executive Officer)Date:
                November 14, 2007/s/
                Elise Nissen**Elise
                Nissen**Chief
                Financial Officer(Principal
                Financial and Accounting Officer)Date:
                November 14, 2007
  
   22