UNITED
      STATESSECURITIES
      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 December 31, 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 Incorporation or Organization)
            (I.R.S.
                Employer
                Identification No.)






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 February
      11, 2008.


1




AFP
      Imaging Corporation





Table
      of
      Contents




PagePart
                  I.
              Financial
                  InformationItem
                  1.
              Financial
                  Statements
              4Condensed
                  Consolidated Balance Sheets as of December 31, 2007
                  (unaudited) and June 30, 2007
              4Condensed
                  Consolidated
                  Statements of
                  Operations for the three and six months ended December 31, 2007
                  and
                  2006(unaudited)5Condensed
                  Consolidated Statements
                  of Shareholders’
                  Equity for the six months ended December 31, 2007 and 2006(unaudited)
              6Condensed
                  Consolidated
                  Statements
                  of Cash Flows for
                  the sixmonths
                  endedDecember
                  31, 2007and2006(unaudited)
              7Notes
                  toConsolidated
                  Interim Financial
                  Statements
              8-15Item
                  2.
              Management’sDiscussion
                  and Analysis of Financial
                  Condition and Results of Operations
              16-22Item
                  3.
              Quantitative
                  andQualitative
                  Disclosures About
                  Market Risk
              22Item
                  4.
              Controlsand
                  Procedures
              23Part
                  II.
              Other
                  InformationItem
                  1.
              Legal
                  Proceedings
              24Item
                4.
              Submission
                of Matters to a Vote of Security
                Holders
              24Item
                  6.
              Exhibits
              24Signatures
              25






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 sales program,
 ·
              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 December 31, 2007, and its
        results of operations for the six and three-month periods ended December
        31,
        2007 and 2006, and its cash flows for the six-month periods ended December
        31,
        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 – December 31, 2007 and June 30,
          2007
   Assets
                  December31,
                      2007
                  
                  June
                      30,
                      2007
                  
                  Liabilities
                      and
                      Shareholders' Equity
                  December
31,
                      2007
                  
                  June
                      30,
                      2007(Unaudited)
                  
                  
                  
                  
                  (Unaudited)Current
                      Assets:
                  
                  
                  
                  
                  Current
                      Liabilities:Cash
                      and cash
                      equivalents
                  $
                  1,217,635
                  
                  $
                  921,632
                  
                  Current
                      portion of long-term
                      debt
                  $
                  1,837,914
                  
                  $
                  536,727Accounts
                      receivable, less allowance
                      for
                  
                  
                  
                  
                  
                  
                  Accounts
                      payable
                  
                  1,437,101
                  
                  
                  2,834,875doubtful
                      accounts of
                      $168,900
                  
                  
                  
                  
                  
                  
                  Accrued
                      expenses and other current
                      liabilities
                  
                  3,073,444
                  
                  
                  2,887,584and
                      $130,000,
                      respectively
                  
                  4,053,026
                  
                  
                  5,030,579
                  
                  Total
                        current
                        liabilities
                  
                  6,348,459
                  
                  
                  6,259,186Inventories
                  
                  5,341,239
                  
                  
                  6,395,052Prepaid
                      expenses and other current
                      assets
                  
                  240,909
                  
                  
                  179,771
                  
                  Deferred
                        liabilities
                  
                  171,568
                  
                  
                  213,860Deferred
                      income
                      taxes
                  
                  407,465
                  
                  
                  926,603
                  
                  Long-term
                      debt
                  
                  5,777,852
                  
                  
                  5,822,347Total
                      current
                      assets
                  
                  11,260,274
                  
                  
                  13,453,637
                  
                  Deferred
                      income
                      taxes
                  
                  325,101
                  
                  
                  -Total
                        liabilities
                  
                  12,622,980
                  
                  
                  12,295,393Commitments
                      and
                      Contigencies (Note 9)Property
                      and
                      equipment
                  
                  
                  
                  
                  
                  
                  Shareholders’
                        Equity:At
                      cost
                  
                  2,234,875
                  
                  
                  2,141,123
                  
                  Preferred
                        stock -$.01
                        par
                        value;Less
                      accumulated
                      depreciation
                  
                  (1,757,242
                  )
                  
                  (1,602,121
                  )
                  authorized
                      5,000,000 shares, none issued
                  
                  -
                  
                  
                  -477,633
                  
                  
                  539,002
                  
                  Common
                      stock, $.01 par
                      value;  authorized30,000,000
                      shares, issued and
                      outstanding
                    17,928,800  shares
                      at December 31, 2007,and
                      June 30, 2007,
                      respectively
                  
                  179,288
                  
                  
                  179,288Deferred
                      income
                      taxes
                  
                  292,280
                  
                  
                  369,115
                  
                  Common
                      stock
                      warrants
                  
                  91,131
                  
                  
                  91,131Other
                      assets
                  
                  375,023
                  
                  
                  381,905
                  
                  Paid-in
                        capital in excess of
                        par
                  
                  25,404,045
                  
                  
                  25,404,045Goodwill
                  
                  4,129,512
                  
                  
                  3,846,405
                  
                  Accumulated
                      deficit
                  
                  (13,198,762
                  )
                  
                  (10,760,543
                  )Other
                      intangibles
                  
                  8,599,018
                  
                  
                  8,580,762
                  
                  Cumulative
                        translation
                        adjustment
                  
                  35,058
                  
                  
                  (38,488
                  )Total
                        shareholders’ equity
                  
                  12,510,760
                  
                  
                  14,875,433Total
                        Liabilities and Shareholders’Total
                      Assets
                  $
                  25,133,740
                  
                  $
                  27,170,826
                  
                  Equity
                  $
                  25,133,740
                  
                  $
                  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 Ended
                    December
                      31,
                  
                  
                  Six
                      Months Ended
                    December
                      31,2007
                  
                  
                  2006
                  
                  
                  2007
                  
                  
                  2006Net
                      sales
                  
                  $
                  8,659,383
                  
                  
                  $
                  7,884,637
                  
                  
                  $
                  16,107,438
                  
                  
                  $
                  13,376,765Cost
                      of sales
                  
                  
                  5,105,677
                  
                  
                  
                  4,702,387
                  
                  
                  
                  9,461,093
                  
                  
                  
                  8,484,312Gross
                      profit
                  
                  
                  3,553,706
                  
                  
                  
                  3,182,250
                  
                  
                  
                  6,646,345
                  
                  
                  
                  4,892,453Selling,
                      general and administrative expenses
                  
                  
                  3,680,281
                  
                  
                  
                  2,391,425
                  
                  
                  
                  6,791,782
                  
                  
                  
                  4,523,397Amortization
                      of intangibles
                  
                  
                  303,828
                  
                  
                  
                  ---
                  
                  
                  
                  592,282
                  
                  
                  
                  ---Research
                      and development expenses
                  
                  
                  569,007
                  
                  
                  
                  195,056
                  
                  
                  
                  1,003,004
                  
                  
                  
                  373,5364,553,116
                  
                  
                  
                  2,586,481
                  
                  
                  
                  8,387,068
                  
                  
                  
                  4,896,933Operating
                      (loss)/income
                  
                  
                  (999,410
                  )
                  
                  
                  595,769
                  
                  
                  
                  (1,740,723
                  )
                  
                  
                  (4,480
                  )Foreign
                      currency gain on intercompany note
                  
                  
                  518,223
                  
                  
                  
                  --
                  
                  
                  
                  1,095,346
                  
                  
                  
                  ---Interest
                      expense, net of (interest income)
                  
                  
                  239,805
                  
                  
                  
                  (24,523
                  )
                  
                  
                  493,464
                  
                  
                  
                  (56,912
                  )(Loss)/income
                      before provision for income taxes
                  
                  
                  (720,992
                  )
                  
                  
                  620,292
                  
                  
                  
                  (1,138,841
                  )
                  
                  
                  52,432Provision
                      for income taxes
                  
                  
                  1,003,716
                  
                  
                  
                  14,644
                  
                  
                  
                  1,299,378
                  
                  
                  
                  14,644Net
                      (loss)/income
                  
                  $
                  (1,724,708
                  )
                  
                  $
                  605,648
                  
                  
                  $
                  (2,438,219
                  )
                  
                  $
                  37,788Net
                      (loss)/income per common share:Basic
                  
                  $
                  (.10
                  )
                  
                  $
                  .05
                  
                  
                  $
                  (.14
                  )
                  
                  $
                  ---Diluted
                  
                  $
                  (.10
                  )
                  
                  $
                  .05
                  
                  
                  $
                  (.14
                  )
                  
                  $
                  ---Weighted
                      average outstanding common stock:Basic
                  
                  
                  17,928,800
                  
                  
                  
                  12,428,800
                  
                  
                  
                  17,928,800
                  
                  
                  
                  12,401,703Diluted
                  
                  
                  17,928,800
                  
                  
                  
                  12,728,692
                  
                  
                  
                  17,928,800
                  
                  
                  
                  12,753,476
  5
  AFP
                    Imaging Corporation and Subsidiaries
                  Condensed
                    Consolidated Statements of Shareholders’ Equity
                  For
                    the Six Months Ended December 31, 2007 and 2006
                  (Unaudited)Comprehensive
                  Loss
                
                
                Common
                    Stock
                
                
                Common
                    Stock
                  Warrants
                
                
                Paid-in-Capital
                
                
                Accumulated
                  Deficit
                
                
                Foreign
                    Currency
                  Translation
                  Adjustment
                
                
                TotalBalance
                    June 30, 2006
                
                $
                --
                
                
                $
                95,682
                
                
                $
                110,931
                
                
                $
                11,805,852
                
                
                $
                (6,087,719
                )
                
                $
                --
                
                
                $
                5,924,746Issuance
                    of 82,806 shares of common  stock in connection with the
                    exercise of common stock warrants
                
                
                --
                
                
                
                828
                
                
                
                (19,800
                )
                
                
                18,972
                
                
                
                --
                
                
                
                --
                
                
                
                --Stock
                    based compensation expense
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                42,329
                
                
                
                --
                
                
                
                --
                
                
                
                42,329Additional
                    fees associated with issuance of common stock in May 2006
                
                
                
                
                
                
                --
                
                
                
                --
                
                
                
                (12,569
                )
                
                
                --
                
                
                
                --
                
                
                
                (12,569
                )Net
                    income for six months ended December 31, 2006
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                37,788
                
                
                
                --
                
                
                
                37,788Balance
                    December 31, 2006
                
                
                --
                
                
                $
                96,510
                
                
                $
                91,131
                
                
                $
                11,854,584
                
                
                $
                (6,049,631
                )
                
                
                --
                
                
                $
                5,992,294Balance
                    June 30, 2007
                
                $
                --
                
                
                $
                179,288
                
                
                $
                91,131
                
                
                $
                25,404,045
                
                
                $
                (10,760,543
                )
                
                $
                (38,488
                )
                
                $
                14,875,433Foreign
                    currency translation gain
                
                
                73,546
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                73,546
                
                
                
                73,546Net
                    loss for six months ended December 31, 2007
                
                
                (2,438,219
                )
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                (2,438,219
                )
                
                
                --
                
                
                
                (2,438,219
                )Comprehensive
                    loss
                
                
                (2,346,673
                )
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --
                
                
                
                --Balance
                    December 31, 2007
                
                $
                --
                
                
                $
                179,288
                
                
                $
                91,131
                
                
                $
                25,404,045
                
                
                $
                (13,198,762
                )
                
                $
                35,058
                
                
                $
                12,510,760
  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)
 Six
                    Months Ended
                  December
                    31,2007
                
                
                2006Cash
                    flows from operating activities:Net
                    (loss)/income
                
                $
                (2,438,219
                )
                
                $
                37,788Adjustments
                    to reconcile net (loss)/income to net cash used by operating
                    activities-Depreciation
                    and amortization
                
                
                769,562
                
                
                
                117,540Amortization
                    of discount on term loan
                
                
                101,275
                
                
                
                ---Non-cash
                    compensation expense
                
                
                ---
                
                
                
                42,329Write-off
                    of deferred financing costs
                
                
                ---
                
                
                
                50,000Deferred
                    income taxes
                
                
                921,074
                
                
                
                ---Change
                    in assets and liabilities:Decrease/(increase)in
                    accounts receivable
                
                
                977,553
                
                
                
                (574,463
                )Decrease
                    in inventories
                
                
                1,053,813
                
                
                
                272,508Increase
                    in prepaid expenses and other assets
                
                
                (76,415
                )
                
                
                (16,559
                )Decrease
                    in accounts payable
                
                
                (1,397,774
                )
                
                
                (479,222
                )Increase
                    in accrued expenses
                
                
                185,860
                
                
                
                95,510(Decrease)/increase
                    in deferred liabilities
                
                
                (42,292
                )
                
                
                152,830Exchange
                    rate effect on intangibles
                
                
                (893,645
                )
                
                
                ---Total
                    adjustments
                
                
                1,599,011
                
                
                
                (339,527
                )Net
                    cash used by operating activities
                
                
                (839,208
                )
                
                
                (301,739
                )Cash
                    flows from investing activities:Purchases
                    of property and equipment
                
                
                (57,880
                )
                
                
                (62,964
                )Costs
                    related to acquisition of QR
                
                
                --
                
                
                
                (223,973
                )Net
                    cash used in investing activities
                
                
                (57,880
                )
                
                
                (286,937
                )Cash
                    flows from financing activities:Borrowing
                    of debt
                
                
                1,304,730
                
                
                
                1,451,310Repayment
                    of debt
                
                
                (185,185
                )Payment
                    of fees associated with issuance of common stock in May
                    2006
                
                
                --
                
                
                
                (12,569
                )Net
                    cash provided by financing activities
                
                
                1,119,545
                
                
                
                1,438,741Exchange
                    rate effect on cash and cash equivalents
                
                
                73,546
                
                
                
                --Net
                    increase in cash and cash equivalents
                
                
                296,003
                
                
                
                850,065Cash
                    and cash equivalents, at beginning of period
                
                
                921,632
                
                
                
                5,213,289Cash
                    and cash equivalents, at end of period
                
                $
                1,217,635
                
                
                $
                6,063,354Supplemental
                    cash flow disclosures:
                  Cash
                    paid during the periods for-Interest
                
                $
                409,684
                
                
                $
                55,375Income
                    taxes, net of refunds
                
                $
                836,331
                
                
                $
                16,371Supplemental
                    schedule of non cash activity:Cashless
                    exercise of common stock warrants
                
                $
                --
                
                
                $
                19,800Equipment
                    under capital lease
                
                $
                35,872
                
                
                $
                -
 
 
 The
          accompanying notes to condensed consolidated financial statements are an
          integral part of these statements.
 7
  AFP
        Imaging Corporation and Subsidiaries
 Notes
        to Consolidated Financial Statements
 December
        31,
        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 and medical imaging fields.
 
 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 three-dimensional 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.  There was no non cash stock based compensation
        expense related to stock option awards for the three and six months ended
        December 31, 2007. For the three and six months ended December 31, 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 and six months ended December 31, 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.  There were no options
        granted during the three and six months ended December 31, 2007.  The
        weighted-average of the fair value of the options granted during the three
        and
        six months ended December 31, 2006 was $0 and $2.15 per option,
        respectively.
 
 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 and
        Significant Capital Transactions:
 
 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 registered the shares
        for
        resale.  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.  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 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.  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 has registered these
        shares of common stock for resale.
 
 9
 The
        following is a reconciliation from basic to diluted shares for the three
        and six
        months ended December 31, 2007 and 2006:
 
 Three
                  months ended December 31,
              
              
              Six
                  months ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Basic
                  Shares
              
              
              17,928,800
              
              
              
              12,428,800
              
              
              
              17,928,800
              
              
              
              12,401,703Dilutive:Options
              
              
              ---
              
              
              
              299,892
              
              
              
              ---
              
              
              
              324,997Warrants
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              26,776Diluted
                  Shares
              
              
              17,928,800
              
              
              
              12,728,692
              
              
              
              17,928,800
              
              
              
              12,753,476
 
 The
        diluted weighted average number of shares outstanding for the three and six
        months ended December 31, 2007 and 2006 does not include the potential exercise
        of the following stock options and warrants as such amounts were
        anti-dilutive.
 
 Three
                  and six months ended
                December
                  31,2007
              
              
              2006Options
              
              
              891,900
              
              
              
              191,000Warrants
              
              
              850,000
              
              
              
              50,000Diluted
                  Shares
              
              
              1,741,900
              
              
              
              241,000
 
 (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 registered the shares of common stock
        issuable upon exercise of the warrants and conversion of the term note and
        must
        use its best efforts to keep the registration statement effective during
        the
        applicable registration period.
 
 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
 December
                  31, 2007
              
              
              June
                  30, 2007Term
                  Loan
              
              $
              5,000,000
              
              
              $
              5,000,000Fair
                  value of warrants (recorded as capital in excess of par)
              
              
              (1,114,784
              )
              
              
              (1,114,784
              )Principal
                  payments
              
              
              (185,185
              )
              
              
              ---Accretion
                  of debt discount (recorded as interest expense)
              
              
              150,419
              
              
              
              49,144Recorded
                  value of Term Loan
              
              $
              3,850,450
              
              
              $
              3,934,360
 
 As
        of
        December 31, 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 December 31, 2007 there was outstanding 635,990
        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 a function of Euribor plus .75% to
        1.5%.
 
 In
        November 2007 the Company purchased a new telephone system to integrate its
        US
        locations.  This equipment was leased with a bargain purchase option,
        and accounted as a capital lease.  The value of this equipment has
        been recorded as capital equipment and the resulting liability
        recorded.
 
 As
        of
        December 31 and June 30, 2007, debt consisted of the following:
  December
                  31, 2007
              
              
              June
                  30, 2007ComVest
                  Term Loan, net of debt discount
              
              $
              3,850,450
              
              
              $
              3,934,360$3.0
                  Million Revolving Senior Credit Facility
              
              
              2,802,192
              
              
              
              2,424,714Capitalized
                  lease
              
              
              34,515
              
              
              
              ---Foreign
                  line of credit borrowings
              
              
              928,609
              
              
              
              ---7,615,766
              
              
              
              6,359,074Less
                  current portion
              
              
              1,837,914
              
              
              
              536,727Total
                  long-term debt
              
              $
              5,777,852
              
              
              $
              5,822,347
 
 At
        December 31, 2007, the Company had available $197,807 of unused lines of
        credit
        under the Revolving Senior Credit Facility, as well as the unused lines of
        credit available to 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 December 31, and June 30,
        2007, inventories, net of reserves, consisted of the following:
 
 December
                  31, 2007
              
              
              June
                  30, 2007(Unaudited)Raw
                  materials and sub-component parts
              
              $
              3,133,574
              
              
              $
              2,856,813Work-in-process
                  and finished goods
              
              
              2,207,665
              
              
              
              3,538,239$
              5,341,239
              
              
              $
              6,395,052
 
 
 11
  (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 December 31, 2007, the Company has recorded a
        deferred tax asset of approximately $700,000, all of which relates to its
        foreign operations. The Company increased its valuation allowance on the
        US
        portion of its deferred tax asset by approximately $680,000 as it does not
        believe that it is more likely than not that it will be able to utilize these
        prior year operating loss carry forwards based on the recent losses and
        anticipated market conditions.  However, should circumstance change
        and the Company determine that it will be able to utilize its net operating
        loss
        carry forward, such as the generation of consolidated future taxable income,
        the
        Company will reevaluate its valuation allowance.  The Company
        decreased its foreign deferred tax asset by approximately $100,000 to reflect
        the newly enacted Italian Finance Bill of 2008 which reduced the overall
        tax
        rate from 37.25% to 31.4%.  This decrease in the deferred tax asset as
        well as the increase in the valuation allowance has been reflected as part
        of
        the tax provision in the accompanying financial statements. The Company’s
        foreign operations recorded a deferred tax liability of approximately $325,000
        related to the unrealized exchange gain on the intercompany note denominated
        in
        US dollars, as it will only be taxed when realized and when repayment is
        made.
        The net tax expense recorded for the three and six months ended December
        31,
        2007 includes foreign taxes at the statutory rates on the Company’s foreign
        operations, state income and capital taxes required in the United States
        and the
        changes to the deferred tax accounts.
 
 As
        of December 31, 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 at 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
              
              
              NetDeveloped
                  technologies
              
              $
              5,320,000
              
              
              $
              149,918
              
              
              $
              5,170,898Customer
                  relationships
              
              
              3,149,000
              
              
              
              62,117
              
              
              
              3,086,883Non-compete
                  contracts and other
              
              
              336,000
              
              
              
              13,019
              
              
              
              322,9818,805,000
              
              
              
              225,054
              
              
              
              8,580,762Goodwill
              
              
              3,846,405
              
              
              
              ---
              
              
              
              3,846,405Total
                  intangible assets
              
              $
              12,651,405
              
              
              $
              225,054
              
              
              $
              12,427,167
 
 December
                  31, 2007
              
              Gross
                  carrying amount
              
              
              Accumulated
                  amortization
              
              
              NetDeveloped
                  technologies
              
              $
              5,711,568
              
              
              $
              568,921
              
              
              $
              5,142,647Customer
                  relationships
              
              
              3,380,775
              
              
              
              235,728
              
              
              
              3,145,047Non-compete
                  contracts and other
              
              
              360,731
              
              
              
              49,407
              
              
              
              311,3249,453,074
              
              
              
              854,056
              
              
              
              8,599,018Goodwill
              
              
              4,129,512
              
              
              
              ---
              
              
              
              4,129,512Total
                  intangible assets
              
              $
              13,582,586
              
              
              $
              854,056
              
              
              $
              12,728,530
 The
        change
        in the value of goodwill and other intangibles from the date of acquisition
        to
        December 31, 2007, and the change in accumulated amortization 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.
 
 12
  (8)
        Segment
        Information
 
 As
        of
        December 31, 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.  Geographical financial information is as
        follows:
 
 Three
                  months ended December 31,
              
              
              Six
                  months ended December 31,2007
              
              
              2006
              
              
              2007
              
              
              2006Sales:United
                  States
              
              $
              4,631,847
              
              
              $
              5,909,220
              
              
              $
              8,306,631
              
              
              $
              9,525,970Europe
              
              
              1,444,026
              
              
              
              ---
              
              
              
              3,265,140
              
              
              
              ---US
                  Export Sales
              
              
              2,583,510
              
              
              
              1,975,417
              
              
              
              4,535,667
              
              
              
              3,850,795$
              8,659,383
              
              
              $
              7,884,637
              
              
              $
              16,107,438
              
              
              $
              13,376,765Net
                  Income (loss)United
                  States
              
              $
              (1,723,930
              )
              
              $
              605,648
              
              
              $
              (3,035,132
              )
              
              $
              37,788Europe
              
              
              (778
              )
              
              
              ---
              
              
              
              596,913
              
              
              
              ---$
              (1,724,708
              )
              
              $
              605,648
              
              
              $
              (2,438,219
              )
              
              $
              37,788December
                  31, 2007
              
              
              June
                  30, 2007Identifiable
                  assets:United
                  States
              
              $
              7,220,178
              
              
              $
              9,942,023Europe
              
              
              17,913,562
              
              
              
              17,228,803Total
              
              $
              25,133,740
              
              
              $
              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 many 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 Company’s insurance
        carrier has agreed to equally share in the proposed settlement.  The
        Company had accrued $11,550 as of December 31, 2007 and Fiscal Year 2007,
        based
        on previous settlement offers.  The Company does not expect to receive
        any further information until after a mediation session is held in mid February
        2008.  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.
 
 13
 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.
 
 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.  In February 2008, the FASB decided
        to defer the effective date of SFAS157 for all nonfinancial assets and
        nonfinancial liabilities, except those that are recognized or disclosed at
        fair
        value on a recurring basis.  Therefore, the Company is required to
        adopt SFAS No. 157, as applicable, beginning in July 2009.  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
        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.
 
 In
        December 2007, the FASB issued SFAS No. 141R, Business Combinations(“SFAS
        No 141R”) to replace FASB No. 141 Business Combinations.  The
        objective of this statement is to improve the relevance, representation and
        comparability of financial information provided about a business combination
        and
        its effects and establishes principles and requirements for (1) recognizing
        and
        measuring the assets and liabilities assumed, (2) recognizing and measuring
        the
        goodwill or bargain purchase, and (3) determining the information required
        to be
        disclosed in the financial reports. This statement applies to business
        combinations where the acquisition date is on or after December 15,
        2008.  The Company will adopt SFAS 141R for any business combinations
        completed on or after December 15, 2008.
  In
        December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
        in
        Consolidated Statements-an Amendment of ARB No. 51 (“SFAS No.
        160”).  The objective of SFAS No. 160 is to improve financial
        information related to entities that have an outstanding non-controlling
        interest in one or more subsidiaries.  The non-controlling interest in
        the subsidiary is an ownership interest in the consolidated entity that should
        be reported as equity in the consolidated financial statements and consolidated
        net income should include (and separately disclose) the amounts of the parent
        and the non-controlling interest on the income statement.  This
        statement requires additional financial statement disclosures related to
        the
        parent and the non-controlling owners of the subsidiary.  Earnings per
        share amounts will be based on the amounts attributable to the
        parent.  The Company is required to adopt SFAS No. 160 beginning in
        July 2009.  The Company is evaluating the effect of SFAS No. 160, 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.
 
 15
 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 December 31, 2007 decreased by approximately $2.3
        million 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 and increased borrowings on foreign credit lines, a decrease
        in inventory, and a decrease in accounts receivable, as the customer accounts
        were significantly more current at December 31, 2007 when compared to June
        30,
        2007.
 
 Operating
        cash flows were negatively impacted by the loss from operations in the current
        six month period, however, cash receipts were above average which reduced
        the
        Company’s accounts receivable balance and enabled the Company to significantly
        reduce its account payable balance.  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 Company’s various credit facilities.  The Company is continuing to
        require advance deposits from its customers on the new, high dollar valued
        equipment.  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.  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.  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
        December 31, 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 fixed 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.
 
 16
 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 registered the shares of common stock issuable
        upon exercise of the warrants and conversion of the term note and must use
        its
        best efforts to keep the registration statement effective during the applicable
        registration period.
 
 The
        Company’s foreign subsidiary maintains various lines of credit with two separate
        financial institutions, for a total of 1.35 million Euros.  The
        borrowings under most of these lines of credit are guaranteed by specific
        foreign accounts receivable and inventory.  These lines of credit were
        granted in August 2007 and there are no restrictive covenants or subordination
        clauses.  As of December 31, 2007 there was outstanding 635,990 Euros
        and no funds were outstanding as of June 30, 2007.
 
 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 registered the shares
        for
        resale.  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.  In accordance with the
        provisions of FSP EITF 00-19-2, the Company has recorded this private placement
        as shareholders’ equity on the accompanying balance sheets.  The
        Company 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 six months of Fiscal Year 2008 were approximately
        $57,900, 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 and its foreign lines of credit to continue 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 and foreign lines of credit  are 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 December 31, 2007, the Company had available $197,807
        of unused credit under the Revolving Credit and Term Loan
        Agreement.  As of February 1, 2008, the Company had available $593,235
        of unused credit under the Revolving Credit and Term Loan
        Agreement.  The Company also had the ability to borrow on its foreign
        lines of credit from the generation of any new sales.  No assurances
        can be given that the Company will have sufficient cash flow in the long
        term.
 
 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, product lines, or product line
        distributors.  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.
  17
 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 goodwill and intangibles is based on the Euro cost of
        the acquisition at April 19, 2007 and is maintained in Euros and is therefore
        subject to fluctuations in currency between the US dollar and the Euro. 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 fluctuate
        in the future.  Due to historic changes 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,
 §
              changes
                  in the federal and foreign tax laws, and
 §
              the
                  timing of new product introductions by the Company as well as by
                  its
                  competitors.
 
 Six
        Months  Fiscal
        2008 Versus Six Months Fiscal 2007
 
 Sales
        increased approximately $2.73 million or 20.4%, between the Fiscal 2007 and
        Fiscal 2008 six-month periods, principally due to increases in
        volume.  Approximately $3.6 million of this increase can be attributed
        to the worldwide sales of the three-dimensional dental x-ray imaging systems
        manufactured by QR 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 36%, mainly due to lower than anticipated demand
        for the
        very specialized digital equine systems and general purpose analog x-ray
        systems
        designed for general veterinary applications.  There is a continuing
        strong demand for the Company’s two-dimensional filmless digital dental
        radiography system which showed a 9% increase in human and veterinary sales
        in
        the current six-month period.  The Company’s other dental x-ray
        systems showed a decrease of 9% in the current six-month period as intra-oral
        x-rays have become a commodity product.  The Company’s analog film
        processor business showed a slight decrease of approximately 2% in the current
        six-month period, due to the transition from analog to digital imaging
        processing.  US health-care professionals continue to migrate to
        digital imaging equipment that 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 an
        18% increase in international sales between the periods.
 
 Gross
        profit as a percent of sales increased 4.7 percentage points between the
        Fiscal
        2007 and Fiscal 2008 six-month comparable periods.  This increase can
        mainly be attributed to the profit margins realized from QR, offset by increases
        in freight charges due to the increase in fuel costs.
 
 Selling,
        general, and administrative costs increased approximately $2.27 million or
        50.2%, between the Fiscal 2007 and Fiscal 2008 six-month comparable
        periods.  Approximately $1.34 million 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 $239,000 increase in general and administrative costs, which
        includes costs associated with the Company’s initial compliance with Section 404
        of the Sarbanes-Oxley Act of 2002; (2) approximately a $168,000 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 $519,000 in the current
        six-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 marketing 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  (4) costs associated
        with the development and growth of a new distinct distribution channel to
        implement various methods to increase sales levels.  Included in the
        Fiscal Year 2007 six-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.
 
 18
 Amortization
        of intangibles increased $592,300 or 100% and resulted from the amortization
        of
        the other intangibles created from the acquisition of QR. Prior to April
        2007, the Company did not have any such intangibles.
 
 Research
        and development costs increased approximately $629,500, or 168.5%, between
        the
        Fiscal 2007 and Fiscal 2008 six-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
        six-month period ended December 31, 2007, the gain on foreign currency
        transactions amounted to approximately $1.1 million.  This gain is an
        unrealized non-cash foreign currency gain on the US dollar denominated
        intercompany note and recorded by QR.  A deferred tax liability has
        been recorded for this unrealized gain, in accordance with local
        laws.  There was no foreign currency gain or loss recorded in the six-
        month period ended December 31, 2006.
 
 For
        the
        six-month period ended December 31, 2007 (FY 2008), net interest expense
        was
        approximately  $493,400.  For the six-month period ended
        December 31, 2007 (FY 2007), net interest income was approximately
        $56,900.  There was approximately $1,200 of interest income in Fiscal
        Year 2008 compared to approximately $123,820 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 $495,000 of interest expense
        in the current six-month period, compared to approximately $66,900 in the
        comparable period in the prior year.  The current six-month period had
        approximately $6.5 million more in average borrowings on the senior secured
        debt
        and foreign lines of credit 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 and to provide continued working capital
        for
        the growth of the new digital imaging product lines.
 
 The
        Company made several small state tax payments in the US in the six-months
        ended
        December 31, 2007, based on the consolidated loss from operations and made
        the
        required national and local tax payments in Italy for calendar years 2006,
        2007
        and 2008, based on the foreign operations, as required by local
        law.  The Company recorded a provision for taxes on QR’s operations at
        the combined required statutory tax rate.  The Company has a deferred
        tax asset of approximately $700,000, all of which relates to its foreign
        operations.  The Company increased its valuation allowance on the US
        portion of its deferred tax asset by approximately $680,000 as it does not
        believe that it is more likely than not that it will be able to utilize these
        prior year operating loss carry forwards based on the recent losses and
        anticipated market conditions.  The Company decreased its foreign
        deferred tax asset by approximately $100,000 to reflect the newly enacted
        Italian Finance Bill of 2008 which reduced the overall tax rate from 37.25%
        to
        31.4%.  The decrease in the deferred tax asset as well as the increase
        in the valuation allowance has been reflected as part of the tax provision
        in
        the accompanying financial statements.  The Company’s foreign
        operations recorded a deferred tax liability of approximately $325,000 related
        to the unrealized exchange gain on the intercompany note denominated in US
        dollars, as it will only be taxed when realized and when repayment is
        made.  The Company had approximately $7.24 million in federal net
        operating loss carryforwards, and approximately $12.0 million in state net
        operating loss carry forwards, as of December 31, 2007.
 
 Second
        Quarter  Fiscal 2008 Versus Second Quarter Fiscal
        2007
 
 Sales
        for
        the second quarter fiscal year 2008 were $8.66 million, an increase of
        approximately $775,000, or 9.8% compared to the second quarter fiscal 2007
        principally due to increases in volume.  Approximately $1.9 million of
        this increase can be attributed to the worldwide sales of the three-dimensional
        dental x-ray imaging systems manufactured by QR 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 36%, mainly due to lower than anticipated
        demand for the very specialized digital equine systems and general purpose
        analog x-ray systems designed for general veterinary
        applications.  There was a slight decrease for the Company’s
        two-dimensional filmless digital dental radiography system as the Company
        transitions to a direct sell sales force, from a dealer specific sales
        force.  The Company’s other dental x-ray systems showed a decrease of
        15% in the current quarter as intra-oral x-rays have become a commodity
        product.  The Company’s analog film processor business showed a
        decrease of approximately 12% in the current quarter, due to the transition
        from
        analog to digital imaging processing.  US health-care professionals
        continue to migrate to digital imaging equipment that 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 22.5% increase in international sales between the
        periods.
 
 19
 Gross
        profit as a percent of sales stayed relatively constant between the second
        quarter Fiscal 2007 and the second quarter Fiscal 2008 comparable
        periods.
 
 Selling,
        general, and administrative costs increased approximately $1.3 million or
        54%,
        between the second quarter Fiscal 2007 and the second quarter Fiscal
        2008.  Approximately $750,000 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 $210,000 increase in general and administrative costs, which
        includes costs associated with the Company’s initial compliance with Section 404
        of the Sarbanes-Oxley Act of 2002; (2) approximately a $90,000 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 $241,000 in the current
        quarter 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 marketing 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  (4) costs associated
        with the development and growth of a new distinct distribution channel to
        implement various methods to increase sales levels.
 
 Amortization
        of intangibles in the second quarter Fiscal 2008 compared to the prior year
        increased $303,828 or 100% and resulted from the amortization of the other
        intangibles created from the acquisition of QR.  Prior to April 2007,
        the Company did not have any such intangibles.
 
 Research
        and development costs increased approximately $374,000, or 192%, between
        the
        second quarter Fiscal 2007 and second quarter Fiscal 2008.  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.
 
 For
        the
        second quarter Fiscal 2008, the gain on foreign currency transactions amounted
        to $518,223.  This gain is an unrealized non-cash foreign currency
        gain on the US dollar denominated intercompany note and recorded by
        QR.  A deferred tax liability 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 December 31,
        2006.
 
 For
        the
        second quarter Fiscal 2008, net interest expense was approximately
        $240,000.  For the second quarter Fiscal 2007, net interest income was
        $24,500.  There was approximately $7,900 of interest income in the
        second quarter Fiscal  2008 compared to approximately $64,400 in the
        second quarter Fiscal 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 $247,700 of interest expense in the current second quarter,
        compared to approximately $39,900 in the comparable period in the prior
        year.  The current quarter had approximately $6.5 million more in
        average borrowings on the senior secured debt and lines of
        credit.  The significant increase in borrowings was used to fund a
        portion of the purchase price of QR and to provide continued working capital
        for
        the growth of the new digital imaging product lines.
 
 The
        Company made a small state tax payment in the US in the second quarter Fiscal
        2008, based on the consolidated loss from operations and made the required
        national and local tax payments in Italy for calendar years 2007 and 2008,
        based
        on the foreign operations, as required by local law.  The Company
        recorded a provision for taxes on QR’s operations at the combined required
        statutory tax rate.  The Company has a deferred tax asset of
        approximately $700,000, all of which relates to its foreign
        operations.  The Company increased its valuation allowance on the US
        portion of its deferred tax assets by approximately $680,000 in the second
        quarter Fiscal 2008 as it does not believe that it is more likely than not
        that
        it will be able to utilize these prior year operating loss carry forwards
        based
        on the recent losses and anticipated market
        conditions.    The Company also decreased its foreign
        deferred tax asset by approximately $100,000 in the second quarter
        Fiscal 2008 to reflect the newly enacted Italian Finance Bill of 2008 which
        reduced the overall tax rate from 37.25% to 31.4%.  The decrease in
        the deferred tax asset as well as the increase in the valuation allowance
        has
        been reflected as part of the tax provision in the accompanying financial
        statements.  The Company’s foreign operations recorded a deferred tax
        liability of approximately $325,000 related to the unrealized exchange gain
        on
        the intercompany note denominated in US dollars, as it will only be taxed
        when
        realized and when repayment is made.  The Company had approximately
        $7.24 million in federal net operating loss carry forwards, and approximately
        $12.0 million in state net operating loss carry forwards, as of December
        31,
        2007.
 
 20
 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.
 
 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 continued 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, finished goods, 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 current warranty information available
        to
        the Company.
 
 The
        Company offers extended warranties in connection with sales of its digital
        sensors.  The Company continues to specifically monitor the rate and
        costs of these claims and reviews the adequacy of its warranty liability
        and
        makes any changes as, and if, deemed 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.
 
 21
 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 and liabilities reflect the tax
        rates expected to be in effect in the period in which the differences are
        expected to reverse.  Any changes in tax laws which affect the
        effective tax rates will affect the deferred tax asset and will be reflected
        in
        the accompanying current tax provision.  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 recorded deferred tax assets and
        liabilities associated with its foreign operations.  Certain tax
        assets 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 Euros in accordance with
        generally accepted accounting principles as applied in the United States,
        and
        therefore, their historical carrying values are subject to fluctuations in
        the
        US dollar/Euro exchange rates.
 
 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 six-months ended December 31, 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 and the rates did not fluctuate
        significantly between the acquisition date and June 30, 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.  The Company has
        established an intercompany note related to the acquisition of QR denominated
        in
        US dollars, and therefore there is an unrealized gain or loss recorded on
        this
        note as the US dollar/Euro exchange rates fluctuate.
 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 and foreign lines of credit.  The interest rate on the
        term loan is fixed, however the interest rate on the revolver varies with
        the
        prime rate of interest.  The Company’s foreign borrowings vary with
        Euribor.  A hypothetical, instantaneous increase or decrease of one
        percentage point in the prime rate of borrowing would change 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.
 
 22
 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.  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 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 had purchased and settled in Fiscal Year
        2007, a Euro hedge contract relative to the acquisition of QR to limit the
        Company’s exposure to the Euro/dollar exchange.  As of December 31,
        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
        December 31, 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  second quarter ended December 31, 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.
 
 23
 Part
        II Other
        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.
 
 A
        status
        conference was held in November 2007 relating to the environmental claim
        involving a property in New Jersey owned by the Company between August 1984
        and
        June 1985.  The Company has authorized their attorneys for this matter
        to proceed with a possible settlement of which the Company’s insurance carrier
        has agreed to equally share in this proposed settlement.  The next
        mediation session is  scheduled for mid-February 2008.
 
 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
        4:  Submission of Matters to a Vote of Security
        Holders
 
 On
        December 12, 2007, the Company held an Annual Meeting of Shareholders to
        elect
        four directors for a term of one year or until their successors are duly
        elected.
 
 The
        nominees were each elected to the Board of Directors by the following
        votes:
 
 For
                  Election
              
              
              Against
                  ElectionDavid
                  Vozick
              
              
              10,440,866
              
              
              
              450,927Donald
                  Rabinovitch
              
              
              10,440,866
              
              
              
              450,927Jack
                  Becker
              
              
              10,426,176
              
              
              
              465,617Robert
                  Blatt
              
              
              10,440,866
              
              
              
              450,927
 
 
 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.
  24
 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)David
                    VozickDavid
                  VozickChairman
                  of the Board,(Co-Chief
                  Executive Officer)Secretary,
                  TreasurerDate:  February
                  14, 2008Donald
                    RabinovitchDonald
                  RabinovitchPresident(Co-Chief
                  Executive Officer)Date:  February
                  14, 2008Elise
                    NissenElise
                  NissenChief
                  Financial Officer(Principal
                  Financial and Accounting Officer)Date:  February
                  14, 2008




25