**UNITED STATES SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

**FORM 10-Q**

**(Mark One)**

**x     Quarterly Report Pursuant to Section 13or 15(d) of the Securities ExchangeAct of 1934**

**Forthe quarterly period ended March 31, 2007**

**or**

**o      Transition Report pursuant to Section 13or 15(d) of the Securities ExchangeAct of 1934**

**Forthe transition period from            to             **

**Commissionfile number 000-22673**

**Sirona Dental Systems, Inc.**

(Exact name of registrantas specified in charter)

| **Delaware**                                                    | **11-3374812**                        |
|-----------------------------------------------------------------|---------------------------------------|
| (State or other jurisdiction of incorporation or  organization) | (I.R.S. Employer  Identification No.) |
| **30-00 47****th Avenue, Long Island City, New York**      | **11101**                             |
| (Address of principal executive offices)                        | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code: **(718) 937-5765**

**Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.**

**Yes**x No o

**Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one):**

| **Large accelerated filer ****o** | **Accelerated  filer****x** | **Non-accelerated  filer ****o** |
|----------------------------------------|-----------------------------|---------------------------------------|

 

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

**Yes **o No x

Asof May 4, 2007, the number of shares outstanding of the Registrant’sCommon Stock, par value $.01 per share, was 54,733,488.

 

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**SIRONA DENTAL SYSTEMS, INC.FORM 10-QFOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2007**

**Index**

|                   | ** ** | ** **                                                                                                       | ** ** | ** ** | **Page** | ** ** |
|-------------------|------------|------------------------------------------------------------------------------------------------------------------|------------|------------|----------|------------|
| **Part I.**  | ** ** | **Financial Information  (Unaudited)**                                                                           |       | 1          |     |
| Item 1.           |       | Financial Statements                                                                                             |       | 1          |     |
|              |       | Condensed Consolidated Balance  Sheets as of March 31, 2007 and September 30, 2006                |       | 1          |     |
|              |       | Condensed Consolidated Statements of Operations  for the three and six months ended March 31, 2007 and 2006 |       | 2          |     |
|              |       | Condensed Consolidated Statements of Cash Flows for  the six months ended March 31, 2007 and 2006           |       | 3          |     |
|              |       | Notes  to the Condensed Consolidated Financial Statements                                                        |       | 4          |     |
| Item 2.           |       | Management’s Discussion and  Analysis of Financial Condition and Results of Operations                      |       | 13         |     |
| Item 3.           |       | Quantitative and Qualitative  Disclosures About Market Risk                                                      |       | 24         |     |
| Item 4.           |       | Controls and Procedures                                                                                          |       | 24         |     |
| **Part II.** | ** ** | **Other  Information**                                                                                           |       | 25         |     |
| Item 1.           |       | Legal Proceedings                                                                                                |       | 25         |     |
| Item 1A.          |       | Risk Factors                                                                                                     |       | 25         |     |
| Item 2.           |       | Unregistered Sales of Equity  Securities and Use of Proceeds                                                     |       | 25         |     |
| Item 3.           |       | Defaults upon Senior  Securities                                                                                 |       | 25         |     |
| Item 4.           |       | Submission of Matters to a  Vote of Security Holders                                                             |       | 25         |     |
| Item 5.           |       | Other Information                                                                                                |       | 26         |     |
| Item 6.           |       | Exhibits                                                                                                         |       | 26         |     |
| Signatures        |       | 27                                                                                                               |       |
| Certifications    |       |                                                                                                             |       |
|                   |            |                                                                                                                  |            |            |          |            |  |

 

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**PART I  FINANCIAL INFORMATION (UNAUDITED)**

**ITEM 1.**             FINANCIALSTATEMENTS

**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS**

|                                                                                                                                  | ** ** | **March 31,**                                | ** **    | **September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|---------------|------------------------|------------|
| ** **                                                                                                                       | ** ** | **2007**                                          | ** **    | **2006 **         | ** ** |
| ** **                                                                                                                       | ** ** | **(unaudited)**                                   | ** **    | ** **             | ** ** |
| ** **                                                                                                                       | ** ** | **$’000s (except  share amounts)** | ** **    |
| **ASSETS**                                                                                                                       | ** ** |                                              | ** **    | ** **             |       |   |   |   |   |
| **Current  assets**                                                                                                              | ** ** |                                              | ** **    | ** **             |       |   |   |   |   |
| Cash and cash equivalents                                                                                                        |       |                                              | $             | 43,266                 |       |   |   | $ | 80,560 |   |   |
| Restricted cash                                                                                                                  |       |                                              | 791           |                   |       |   | 953 |   |   |
| Accounts receivable, net of allowance  for doubtful accounts of $1,146 and $837, respectively                                    |       |                                              | 87,866        |                   |       |   | 66,090 |   |   |
| Inventories, net                                                                                                                 |       |                                              | 72,677        |                   |       |   | 57,303 |   |   |
| Deferred tax assets                                                                                                              |       |                                              | 6,433         |                   |       |   | 4,671 |   |   |
| Prepaid expenses  and other current assets                                                                                       |       |                                              | 15,856        |                   |       |   | 16,074 |   |   |
| Income tax receivable                                                                                                            |       |                                              | 3,124         |                   |       |   | — |   |   |
| **Total  current assets**                                                                                                        | ** ** |                                              | **230,013**   | ** **             |       | ** ** | **225,651** |   |   |
| Property, plant and equipment, net of  accumulated depreciation and amortization of $22,330 and $18,139,  respectively |       |                                              | 67,328        |                   |       |   | 61,042 |   |   |
| Goodwill                                                                                                                         |       |                                              | 634,625       |                   |       |   | 613,549 |   |   |
| Investments                                                                                                                      |       |                                              | 1,152         |                   |       |   | 750 |   |   |
| Intangible assets,  net of accumulated amortization of $109,308 and $66,242, respectively                                        |       |                                              | 602,582       |                   |       |   | 618,993 |   |   |
| Other non-current assets                                                                                                         |       |                                              | 5,064         |                   |       |   | 17,370 |   |   |
| Deferred tax  assets                                                                                                             |       |                                              | 6,118         |                   |       |   | 3,649 |   |   |
| **Total assets**                                                                                                                 | ** ** |                                              | **$**         | **1,546,882**          | ** ** |   | ** ** | **$** | **1,541,004** |   |   |
| **LIABILITIES,  MINORITY INTEREST AND SHAREHOLDERS’ EQUITY**                                                                | ** ** |                                              | ** **    | ** **             |       |   |   |   |   |
| **Current liabilities**                                                                                                          | ** ** |                                              | ** **    | ** **             |       |   |   |   |   |
| Trade accounts  payable                                                                                                          |       |                                              | $             | 29,815                 |       |   |   | $ | 30,303 |   |   |
| Short-term debt and current portion of  long-term debt                                                                           |       |                                              | 12,864        |                   |       |   | 14,738 |   |   |
| Income taxes  payable                                                                                                            |       |                                              | 7,502         |                   |       |   | 10,434 |   |   |
| Deferred tax liabilities                                                                                                         |       |                                              | 1,530         |                   |       |   | 3,208 |   |   |
| Accrued  liabilities and deferred income                                                                                         |       |                                              | 74,083        |                   |       |   | 65,203 |   |   |
| **Total current liabilities**                                                                                                    | ** ** |                                              | **125,794**   | ** **             |       | ** ** | **123,886** |   |   |
| Long-term debt                                                                                                                   |       |                                              | 515,833       |                   |       |   | 518,634 |   |   |
| Deferred tax liabilities                                                                                                         |       |                                              | 230,771       |                   |       |   | 243,491 |   |   |
| Other non-current  liabilities                                                                                                   |       |                                              | 11,783        |                   |       |   | 18,128 |   |   |
| Pension related provisions                                                                                                       |       |                                              | 51,513        |                   |       |   | 48,167 |   |   |
| Deferred income                                                                                                                  |       |                                              | 95,000        |                   |       |   | 100,589 |   |   |
| **Total liabilities**                                                                                                            | ** ** |                                              | **1,030,694** | ** **             |       | ** ** | **1,052,895** |   |   |
| **Minority  interest**                                                                                                           | ** ** |                                              | **160**       | ** **             |       | ** ** | **263** |   |   |
| **Shareholders’ equity**                                                                                                    | ** ** |                                              | ** **    | ** **             |       |   |   |   |   |
| Preferred stock  ($0.01 par value; 5,000,000 shares authorized; none issued and outstanding)                                     |       |                                              | —        |                   |       |   | — |   |   |
| Common stock ($0.01 par value;  95,000,000 shares authorized:                                                                    |       |                                              |          |                   |       |   |   |   |   |
| 54,733,488 and 54,608,134 shares issued  and outstanding, respectively)                                                          |       |                                              | 547           |                   |       |   | 546 |   |   |
| Additional paid-in  capital                                                                                                      |       |                                              | 594,011       |                   |       |   | 582,447 |   |   |
| Excess of purchase price over  predecessor basis                                                                                 |       |                                              | (49,103       | )                      |       |   | (49,103 | ) |   |
| Accumulated  deficit                                                                                                             |       |                                              | (44,738       | )                      |       |   | (47,406 | ) |   |
| Other comprehensive income                                                                                                       |       |                                              | 15,311        |                   |       |   | 1,362 |   |   |
| **Total  shareholders’ equity**                                                                                             | ** ** |                                              | **516,028**   | ** **             |       | ** ** | **487,846** |   |   |
| **Total liabilities, minority  interest and shareholders’ equity**                                                          | ** ** |                                              | **$**         | **1,546,882**          | ** ** |   | ** ** | **$** | **1,541,004** |   |   |

 

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

1

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**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENT OF OPERATIONS(UNAUDITED)**

| ** **                                                           | ** ** | **Three months  ended  March 31,**                   | ** **  | **Six months  ended  March 31,** | ** ** |
|----------------------------------------------------------------------|------------|----------------------------------------------------------------|-------------|--------------------------------------------|------------|
| ** **                                                           | ** ** | **2007**                                                       | ** **  | **2006**                                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                           | ** ** | **$’000s (except per share amounts)** | ** **  |
| **Revenue**                                                          | ** ** | **$**                                                          | **150,168** | ** **                                 | **$**      | **131,843** | ** ** | **$** | **324,967** | ** ** | **$** | **267,725** | ** ** |
| Cost of sales                                                        |       | 79,622                                                         |        | 66,816                                     |       | 170,349 |   | 136,480 |   |
| **Gross profit**                                                     | ** ** | **70,546**                                                     | ** **  | **65,027**                                 | ** ** | **154,618** | ** ** | **131,245** | ** ** |
| Selling, general and administrative expense                          |       | 52,877                                                         |        | 35,339                                     |       | 100,378 |   | 67,642 |   |
| Research and  development                                            |       | 12,054                                                         |        | 8,026                                      |       | 22,334 |   | 14,973 |   |
| (Benefit)/provision  for doubtful accounts and notes receivable |       | (68                                                            | )           | 322                                        |       | 233 |   | 182 |   |
| Net other  operating expense/(income)                                |       | 122                                                            |        | 1,376                                      |       | (28 | ) | 1,684 |   |
| **Operating income**                                                 | ** ** | **5,561**                                                      | ** **  | **19,964**                                 | ** ** | **31,701** | ** ** | **46,764** | ** ** |
| Foreign currency transactions (gain)/loss, net                       |       | (1,889                                                         | )           | (3,377                                     | )          | (8,955 | ) | 1,880 |   |
| Loss/(gain) on  derivative instruments                               |       | 911                                                            |        | (1,647                                     | )          | 420 |   | (1,372 | ) |
| Interest expense,  net                                               |       | 6,207                                                          |        | 13,545                                     |       | 15,166 |   | 29,000 |   |
| Loss on debt  extinguishment                                         |       | —                                                         |        | —                                     |       | 21,145 |   | — |   |
| **Income  before taxes and minority interest**                       | ** ** | **332**                                                        | ** **  | **11,443**                                 | ** ** | **3,925** | ** ** | **17,256** | ** ** |
| Income tax provision                                                 |       | 125                                                            |        | 6,976                                      |       | 1,374 |   | 9,480 |   |
| Minority interest                                                    |       | (143                                                           | )           | 23                                         |       | (117 | ) | 22 |   |
| **Net income**                                                       | ** ** | **$**                                                          | **350**     | ** **                                 | **$**      | **4,444** | ** ** | **$** | **2,668** | ** ** | **$** | **7,754** | ** ** |
| Income per share                                                     |       |                                                           |        |                                       |       |   |   |   |   |
| —Basic                                                          |       | $                                                              | 0.01        |                                       | $          | 0.12 |   | $ | 0.05 |   | $ | 0.21 |   |
| —Diluted                                                        |       | $                                                              | 0.01        |                                       | $          | 0.12 |   | $ | 0.05 |   | $ | 0.21 |   |
| Weighted average  shares—basic                                  |       | 54,683,295                                                     |        | 36,972,480                                 |       | 54,652,557 |   | 36,972,480 |   |
| Weighted average shares—diluted                                 |       | 54,890,447                                                     |        | 36,972,480                                 |       | 54,869,481 |   | 36,972,480 |   |

 

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

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**SIRONA DENTAL SYSTEMS, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)**

| ** **                                                                        | ** ** | **Six months  ended  March 31,** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                        | ** ** | **2007**                                   | ** ** | **2006** | ** ** |
| ** **                                                                        | ** ** | **$’000s**                            | ** ** |
| **Cash  flows from operating activities**                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| **Net  income**                                                                   | ** ** | **$**                                      | **2,668**  | ** ** | **$** | **7,754** | ** ** |
| **Adjustments  to reconcile net income to net cash used in operating activities** | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Minority interest                                                                 |       | (116                                       | )          | — |   |
| Depreciation and  amortization                                                    |       | 44,992                                     |       | 30,035 |   |
| Loss on disposal  of property, plant and equipment                                |       | 31                                         |       | — |   |
| Losses/(gains) on  derivate instruments                                           |       | 420                                        |       | (1,372 | ) |
| Foreign currency  transactions (gain)/loss                                        |       | (8,955                                     | )          | 1,880 |   |
| Accreted interest  on long term debt                                              |       | 4,449                                      |       | 11,318 |   |
| Deferred income  taxes                                                            |       | (22,691                                    | )          | (3,975 | ) |
| Amortization of  debt issuance cost                                               |       | 2,374                                      |       | 4,078 |   |
| Loss on debt  extinguishment                                                      |       | 19,964                                     |       | — |   |
| Compensation  expense from stock options                                          |       | 6,711                                      |       | — |   |
| **Changes  in assets and liabilities**                                            | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Accounts  receivable                                                              |       | (19,067                                    | )          | (19,825 | ) |
| Inventories                                                                       |       | (13,166                                    | )          | (3,684 | ) |
| Prepaid expenses  and other current assets                                        |       | 5,999                                      |       | 20,714 |   |
| Restricted cash                                                                   |       | 204                                        |       | 47 |   |
| Other non-current  assets                                                         |       | (4,924                                     | )          | (2,953 | ) |
| Trade accounts  payable                                                           |       | (509                                       | )          | (1,383 | ) |
| Accrued  liabilities and deferred income                                          |       | (4,358                                     | )          | (10,665 | ) |
| Other non-current  liabilities                                                    |       | (6,212                                     | )          | 3,228 |   |
| Income taxes  receivable                                                          |       | (3,106                                     | )          | — |   |
| Income taxes  payable                                                             |       | (2,102                                     | )          | 9,457 |   |
| **Net cash  provided by operating activities**                                    | ** ** | **2,606**                                  | ** ** | **44,654** | ** ** |
| **Cash  flows from investing activities**                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Investment in  property, plant and equipment                                      |       | (9,326                                     | )          | (6,011 | ) |
| Proceeds from sale  of property, plant and equipment                              |       | 215                                        |       | 6 |   |
| Restricted short  term investments/securities                                     |       | —                                     |       | 741 |   |
| Purchase of  intangible assets                                                    |       | (57                                        | )          | (372 | ) |
| Purchase of  long-term investments                                                |       | (402                                       | )          | — |   |
| **Net cash  used in investing activities**                                        | ** ** | **(9,570**                                 | **)**      | **(5,636** | **)** |
| **Cash  flows from financing activities**                                         | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Repayments of  long-term debt                                                     |       | (559,294                                   | )          | (36,153 | ) |
| Proceeds from  borrowings                                                         |       | 529,747                                    |       | — |   |
| Debt issuance cost                                                                |       | (5,381                                     | )          | — |   |
| Common shares  issued under share based compensation plans                        |       | 1,092                                      |       | — |   |
| Tax effect of  common shares exercised under share based compensation plans       |       | 1,173                                      |       | — |   |
| **Net cash  used in financing activities**                                        | ** ** | **(32,663**                                | **)**      | **(36,153** | **)** |
| Change in cash and  cash equivalents                                              |       | (39,627                                    | )          | 2,865 |   |
| Effect of exchange  rate change on cash and cash equivalents                      |       | 2,333                                      |       | (555 | ) |
| Cash and cash equivalents  at beginning of period                                 |       | 80,560                                     |       | 65,941 |   |
| **Cash and  cash equivalents at end of period**                                   | ** ** | **$**                                      | **43,266** | ** ** | **$** | **68,251** | ** ** |
| **Supplemental  information**                                                     | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Interest paid                                                                     |       | $                                          | 25,584     |   | $ | 14,939 |   |
| —thereof accreted  interest paid on repayment of long-term debt              |       | 8,594                                      |       | — |   |
| Interest  capitalized                                                             |       | 205                                        |       | 69 |   |
| Income taxes paid                                                                 |       | 26,249                                     |       | 3,268 |   |

 

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

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**SIRONA DENTAL SYSTEMS. INC, AND SUBSIDIARIESNOTES TO THE CONDENSED CONSOLIDATED FINANCIALSTATEMENTS (UNAUDITED)**

**1.**                 General

**The Company and its Operations**

Sirona Dental Systems, Inc.and its subsidiaries manufacture high quality, technologically advanced dentalequipment and systems solutions for the global dental equipment market. Weoffer a broad range of products across all major segments of the dentalequipment market including CEREC CAD/CAM systems, digital and film basedintra-oral and panoramic imaging systems, treatment centers and instruments. Werecently acquired Schick Technologies Inc. (“Schick”), which further expandedour global presence and product offerings and strengthened our research anddevelopment capabilities. Sirona has served equipment dealers and dentistsworldwide for more than 128 years. Sirona’s headquarters are located in LongIsland City, New York with a significant facility located in Bensheim, Germany.We maintain manufacturing and assembling facilities in the U.S. and Germany aswell as sales and service facilities throughout the world. 

**Basis of Presentation**

These unaudited interimcondensed consolidated financial statements have been prepared in accordancewith U.S. generally accepted accounting principles (“U.S. GAAP”). Preparationof the interim financial statements in conformity with U.S. GAAP requiresmanagement to make estimates and assumptions related to the reported amounts ofassets and liabilities and the disclosure of contingent assets and liabilitiesas at the reporting date and the reported amounts of revenues and expenses forthe interim period. Actual results could differ from those estimates. Certaininformation and footnote disclosures normally included in financial statementsprepared in accordance with U.S. GAAP have been condensed or omitted pursuantto such rules and regulations. However, the Company believes that thedisclosures are adequate to make the information not misleading. The year-endcondensed consolidated balance sheet data was derived from the auditedconsolidated financial statements, but does not include all disclosuresrequired by U.S. GAAP. These consolidated financial statements should be readin conjunction with the Consolidated Financial Statements and the Notes theretoincluded in the Company’s Annual Report on Form 10-K for the fiscal yearended September 30, 2006.

In the opinion ofmanagement, all adjustments (consisting of those of a normal recurring nature)considered necessary to present fairly the Company’s financial position as of March 31,2007 and September 30, 2006 and the results of operations and cash flowsfor the three months and six months ended March 31, 2007 and March 31,2006, as applicable, have been made. The results of operations for the threemonths and six months ended March 31, 2007 are not necessarily indicativeof the operating results for the full fiscal year or future periods.

All amounts are reportedin thousands of U.S. dollars ($), except per share amounts or as otherwisedisclosed.

***Fiscal year***

The Company’s fiscal yearis October 1 to September 30.

***Principles ofconsolidation***

The consolidated financialstatements include, after eliminating inter-company transactions and balances,the accounts of Sirona Dental Systems, Inc. and its subsidiaries. 

Certain prior periodamounts have been reclassified to conform to current period presentation.

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**2.**                 Recently IssuedAccounting Pronouncements

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” Amongother requirements, SFAS 157 defines fair value and establishes a framework formeasuring fair value and also expands disclosure about the use of fair value tomeasure assets and liabilities. SFAS 157 prescribes a single definition of fairvalue as the price that would be received to sell an asset or paid to transfera liability in an orderly transaction between market participants at themeasurement date. SFAS 157 is effective beginning the first fiscal year thatbegins after November 15, 2007. The Company is still determining theeffect SFAS 157 will have on its consolidated financial statements, but itcurrently does not expect the effect to be material.

In September 2006,the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans, an amendment of FASB Statements No. 87,88, 106, and 132(R)”. SFAS 158 requires an employer to: (a) recognizein its statement of financial position an asset for a plan’s overfunded statusor a liability for a plan’s under-funded status; (b) measure a plan’sassets and its obligations that determine its funded status as of the end ofthe employer’s fiscal year (with limited exceptions); and (c) recognizechanges in the funded status of a defined benefit postretirement plan in theyear in which the changes occur. Those changes will be reported incomprehensive income of a for-profit business entity. The requirement torecognize the funded status of a benefit plan and the disclosure requirementsare effective for the Company for the fiscal year ending on September 30,2007. The Company already measures plan assets and benefit obligations asof the date of its fiscal year-end. The Company will initially recognize thefunded status of its defined benefit plans and provide the required disclosuresas of the end of the fiscal year 2007. The Company is still determining theeffect SFAS 158 will have on its consolidated financial statements.

In February 2007, the FASBissued SFAS 159, “The Fair Value Option for Financial Assets and FinancialLiabilities.” SFAS 159 permits measurement of recognized financial assets andliabilities at fair value with some certain exceptions such as investments insubsidiaries, obligations for pension or other postretirement benefits, andfinancial assets and financial liabilities recognized under leases. Changes inthe fair value of items for which the fair value option is elected should berecognized in income or loss. The election to measure eligible items at fairvalue is irrevocable and can only be made at defined election dates or events,generally on an instrument by instrument basis. Items for which the fair valueoption is elected should be separately presented or parenthetically bedisclosed in the statement of financial position. SFAS 159 also requiressignificantly new disclosures that apply for interim and annual financialstatements. SFAS 159 shall be effective for fiscal years beginning afterNovember 15, 2007 with earlier adoption permitted, if certain conditionsare met. The effect of the first remeasurement to fair value of eligible itemsexisting will be reported as an adjustment to the opening balance of retainedearnings as of the date of adoption. The Company is currently evaluating SFAS 159and determining whether to elect the fair value option for certain financialassets and liabilities.

In July 2006, theFASB issued FASB Interpretation No. 48 (“FIN 48”), *“Accounting for Uncertainty in Income Taxes”*which is an interpretation of FASB Statement 109, *“Accounting for Income Taxes.”* FIN 48 requires management toperform a two-step evaluation of all tax positions, ensuring that these taxreturn positions meet the “more-likely than not” recognition threshold and canbe measured with sufficient precision to determine the benefit recognized inthe financial statements. These evaluations provide management with acomprehensive model for how a company should recognize, measure, present, anddisclose in its financial statements certain tax positions that the Company hastaken or expects to take on income tax returns. FIN 48 is effective for theCompany’s fiscal year ending September 30, 2008. The Company is stilldetermining the effect FIN 48 will have on its consolidated financial statements.

In September 2006,the Securities and Exchange Commission issued Staff Accounting Bulletin (“SAB”)No. 108, “Considering the Effects of Prior Year Misstatements WhenQuantifying 

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Misstatementsin Current Year Financial Statements”, which provides interpretive guidance onhow the effects of the carryover or reversal of prior year misstatements shouldbe considered in quantifying a current year misstatement. The guidance in SAB 108 must be applied toannual financial statements for fiscal years ending after November 15,2006. The Company is still determining the effect SAB 108 will have on itsconsolidated financial statements. 

**3.**                 EmployeeShare-Based Compensation 

The total stockcompensation expense for the Company’s stock option plans amounted to $3,635for the three months and $6,711 for the six months ended March 31, 2007.These expenses include the impact of the new stock option plan discussed below.

On December 13, 2006 the Company granted 525,000stock options under a new Equity Incentive Plan (the “New Plan”). The stockoptions vest over a period of four years and expire ten years after the date ofthe grant. The exercise price of such options may not be less than 100% of thefair market value of a share of common stock as determined by the closing priceas of the date of the grant. The New Plan provides for granting in total up to2,275,000 stock options to employees. The New Plan received stockholderapproval at the Company’s Annual Meeting of Stockholders on February 27,2007.

Thefair values of the stock options granted under the New Plan were estimatedusing the Black-Scholes option pricing model using the assumptions in thefollowing table. The exercise price is equal to the fair market value of ourstock at the grant date. The expected volatility is determined based on ourhistorical stock volatility. The risk-free rate is based on the U.S. Treasuryyield curve in effect at the time of the grant and has a term equal to theexpected life of the options. The expected life represents the period of timethe options are expected to be outstanding based on anticipated employeebehavior. The expected dividend yield is based on the Company’s history of notpaying regular dividends in the past and the Company’s current intention not topay dividends in the foreseeable future.

| Exercise price        |   | $39.46     |   |
|-----------------------|--------|------------|--------|
| Expected volatility   |   | 44%        |   |
| Risk-free rate        |   | 4.47%      |   |
| Expected life         |   | 6.25 years |   |
| Expected dividends    |   | —     |   |
| Grant date fair value |   | $19.70     |   |

 

**4.**                 ComprehensiveIncome

| ** **                  | ** ** | **Three months ended**                         | ** ** | **Six months ended**                           | ** ** |
|-----------------------------|------------|----------------------------------------------------------|------------|----------------------------------------------------------|------------|
| ** **                  | ** ** | **March 31,**                                       | ** ** | **March 31,**                                       | ** ** |
| ** **                  | ** ** | **    2007    ** | ** ** | **    2006    ** | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **$’000s**                                          | ** ** | **$’000s**                                          | ** ** |
| Net Income                  |       |                                                     | $          | 350                                                      |       |   |   | $ | 4,444 |   |   | $ | 2,668 |   | $ | 7,754 |   |
| Other Comprehensive  Income |       |                                                     | 3,541      |                                                     |       |   | 11 |   |   | 13,949 |   | (540 | ) |
| Total Comprehensive Income  |       |                                                     | $          | 3,891                                                    |       |   |   | $ | 4,455 |   |   | $ | 16,617 |   | $ | 7,214 |   |

 

Other comprehensive incomerelates to the cumulative translation adjustment. The adjustment includes gainson intercompany foreign currency transactions of a long-term investment naturebetween entities consolidated in these financial statements in the amount of$2,594 for the three months and $10,670 for the six months ended March 31,2007.

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**5.**                 Inventories, Net

| ** **        | ** ** | **March 31,** | ** ** | **September 30,** | ** ** |
|-------------------|------------|--------------------|------------|------------------------|------------|
| ** **        | ** ** | **2007**           | ** ** | **2006**               | ** ** |
| ** **        | ** ** | **$’000s**    | ** ** |
| Finished goods    |       | $                  | 35,494     |                   |       | $ | 28,382 |   |   |
| Work in progress  |       | 14,458             |       |                   | 11,688     |   |   |
| Raw materials     |       | 32,858             |       |                   | 25,630     |   |   |
|              | ** ** | **82,810**         | ** ** | ** **             | **65,700** |   |   |
| Inventory reserve |       | (10,133            | )          |                   | (8,397     | ) |   |
|              | ** ** | **$**              | **72,677** | ** **             | ** ** | **$** | **57,303** |   |   |

 

**6**.                 IntangibleAssets and Goodwill

| ** **                             | ** ** | ** **      | ** **    | **Accumulated**  | ** ** | ** ** | ** **  |
|----------------------------------------|------------|-----------------|---------------|------------------|------------|------------|-------------|
| ** **                             | ** ** | **Gross**       | ** **    | **amortization** | ** ** | **Net**    | ** **  |
| ** **                             | ** ** | **$’000s** | ** **    |
| **As of March 31, 2007**          | ** ** | ** **      | ** **    |             | ** ** | ** ** |        | ** ** | ** ** |
| Patents & licenses            |       | $               | 138,974       |             |       | $          | 24,516      | ** ** |   | $ | 114,458 |   |
| Trademarks                             |       | 129,201         |          |             | 78         | ** ** |        | 129,123 |   |
| Technologies and dealer  relationships |       | 443,468         |          |             | 84,714     | ** ** |        | 358,754 |   |
| Prepayments for  intangible assets     |       | 247             |          |             | —     | ** ** |        | 247 |   |
|                                   |       | 711,890         |          |             | 109,308    | ** ** |        | 602,582 |   |
| Goodwill                               |       | 634,625         |          |             | —     | ** ** |        | 634,625 |   |
| **Total intangible assets**            | ** ** | **$**           | **1,346,515** | ** **       |       | **$**      | **109,308** | ** ** |   | **$** | **1,237,207** | ** ** |

 

| ** **                             | ** ** | ** **      | ** **    | **Accumulated**  | ** ** | ** ** | ** ** |
|----------------------------------------|------------|-----------------|---------------|------------------|------------|------------|------------|
| ** **                             | ** ** | **Gross**       | ** **    | **amortization** | ** ** | **Net**    | ** ** |
| ** **                             | ** ** | **$’000s** | ** **    |
| **As of September 30, 2006**      | ** ** | ** **      | ** **    |             | ** ** | ** ** |       | ** ** | ** ** |
| Patents & licenses            |       | $               | 132,736       |             |       | $          | 17,168     | ** ** |   | $ | 115,568 |   |
| Trademarks                             |       | 124,282         |          |             | 28         | ** ** |       | 124,254 |   |
| Technologies and dealer  relationships |       | 428,217         |          |             | 49,046     | ** ** |       | 379,171 |   |
|                                   |       | 685,235         |          |             | 66,242     | ** ** |       | 618,993 |   |
| Goodwill                               |       | 613,549         |          |             | —     | ** ** |       | 613,549 |   |
| **Total intangible assets**            | ** ** | **$**           | **1,298,784** | ** **       |       | **$**      | **66,242** | ** ** |   | **$** | **1,232,542** | ** ** |

 

Thechange in the value of goodwill from September 30, 2006 to March 31,2007 includes changes in exchange rates totaling $24,368, changes made on thefinalization of the Schick purchase price allocation of ($2,446), and ($846)relating to the accounting for income tax benefits from the exercise ofemployee stock options.

**7.**                 Short-TermDebt and Current Portion of Long-Term Debt

Short-term debt relates tothe Company’s revolving credit facility utilized in the amount of Euro 7million ($9.3 million) as of March 31, 2007 as well as the currentportion of other long-term debt and accrued interest on long-term debt totaling$3.6 million and $14.7 million, as of March 31, 2007 and September30, 2006, respectively.

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**8.**                 Long-Term debt

| ** **                                                                                                                            | ** ** | **March 31,** | ** **  | **September 30,** | ** **  |
|---------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|-------------|------------------------|-------------|
| ** **                                                                                                                            | ** ** | **2007**           | ** **  | **2006**               | ** **  |
| ** **                                                                                                                            | ** ** | **$’000s**    | ** **  |
| Senior syndicated  loan, Tranche A                                                                                                    |       | $                  | —      |                   |        | $ | 118,013 |   |   |
| Senior syndicated  loan, Tranche B                                                                                                    |       |               |        |                   | 158,587     |   |   |
| Senior syndicated  loan, Tranche C                                                                                                    |       | —             |        |                   | 139,574     |   |   |
| Mezzanine loan                                                                                                                        |       | —             |        |                   | 115,344     |   |   |
| Senior term loan,  Tranche A1, variable rate repayable in annual installments starting November 2009  through November 2011 |       | 150,789            |        |                   |        |   |   |
| Senior term loan,  Tranche A2, variable rate repayable in annual installments starting November 2009  through November 2011 |       | 366,725            |        |                   |        |   |   |
| Other debt                                                                                                                            |       | 1,870              |        |                   | 1,854       |   |   |
|                                                                                                                                  | ** ** | **519,384**        | ** **  | ** **             | **533,372** |   |   |
| Less current  portion                                                                                                                 |       | 3,551              |        |                   | 14,738      |   |   |
|                                                                                                                                  | ** ** | **$**              | **515,833** | ** **             | ** **  | **$** | **518,634** |   |   |

 

**Senior Term Loans**

On November 22, 2006, Sirona Dental Systems, Inc.entered into a new senior credit facility (the “Senior Facilities Agreement”)as original guarantor, with Schick Technologies, Inc., a New York companyand wholly owned subsidiary of Sirona (“Schick NY”), as original borrower andoriginal guarantor, with Sirona Dental Systems GmbH, as original borrower andoriginal guarantor, with Sirona Dental Services GmbH, as original borrower andoriginal guarantor and with Sirona Dental Systems LLC, Sirona Holding GmbH andwith Sirona Immobilien GmbH as original guarantors. Initial borrowings underthe Senior Facilities Agreement plus excess cash were used to retire theoutstanding borrowings under the Company’s previous credit facilities.

The Senior Facilities Agreement includes: (1) aterm loan A1 in an aggregate principal amount of $150 million (the “tranche A1term loan”) available to Sirona’s subsidiary, Schick NY, as borrower; (2) aterm loan A2 in an aggregate principal amount of Euro 275 million (the “trancheA2 term loan”) available to Sirona’s subsidiary, Sirona Dental Services GmbH,as borrower; and (3) a $150 million revolving credit facility available toSirona Dental Systems GmbH, Schick NY and Sirona Dental Services GmbH, asinitial borrowers. The revolving credit facility is available forborrowing in Euro, U.S.$, Yen or any other freely available currency agreed toby the facility agent. The facilities are made available on an unsecuredbasis. Subject to certain limitations, each European guarantor guarantees theperformance of each European borrower, except itself, and each U.S. guarantorguarantees the performance of each U.S. borrower, except itself. There are nocross-border guarantees since all guarantees are by entities that have the samefunctional currency as the currency in which the respective guaranteedborrowing is denominated.

Each of the senior term loans has a five year maturityand is to be repaid in three installments beginning on November 24, 2009and ending on November 24, 2011. Of the amounts borrowed under the termloan facilities, 15% is due on November 24, 2009, 15% is due onNovember 24, 2010 and 70% is due on November 24, 2011. At the Company’scurrent leverage multiples, the new facilities bear interest at a margin of 75basis points plus, in the case of Euro-denominated loans, EURIBOR and, in thecase of other loans, LIBOR.

The Senior Facilities Agreement contains a marginratchet. Pursuant to this provision, which applies from November 24, 2007onwards, the applicable margin will vary between 90 basis points and 45 basispoints per annum according to our leverage multiple (i.e. the ratio ofconsolidated total net debt to consolidated adjusted EBITDA as defined in theSenior Facilities Agreement).

8

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The Senior Facilities Agreement contains restrictivecovenants that limit Sirona’s ability to make loans, make investments (includingin joint ventures), incur additional indebtedness, make acquisitions or paydividends, subject to agreed exceptions. The Company has agreed to certainfinancial debt covenants in relation to the financing. The covenants stipulatethat the Company must maintain certain ratios in respect of interest paymentsand defined earnings measures. If the Company breaches any of the covenants,the loans will be become repayable on demand.

Debt issuance costs of$5.4 million were incurred in relation to the new financing and werecapitalized as deferred charges.

**Debt Extinguishment**

The retirement of theborrowings under the Company’s previous credit facilities, the seniorsyndicated loan tranches A, B and C and the mezzanine loan facility, was accountedfor as a debt extinguishment in accordance with SFAS 140 “Accounting forTransfers and Servicing of Financial Assets and Extinguishment of Liabilities”.The unscheduled repayment of the mezzanine facility by the Company resulted ina prepayment fee of Euro 0.9 million ($1.2 million). In addition, $19.9million of unamortized debt issuance costs relating to the previous creditfacilities were written off in the period. As a result, a loss on debtextinguishment totaling $21.1 million was recognized in the six months ended March 31,2007.

**9.**                 IncomeTaxes

For fiscal year 2007 anestimated effective tax rate of 35% has been applied, which is positivelyimpacted by structural changes as a result of the refinancing. This compares toan effective tax rate of 88.3 % for fiscal year 2006, which was adverselyimpacted by foreign income for which no foreign tax credit was available andthe non-tax deductible charge related to the write-off of IPR&D inconnection with the Exchange.

**10.**          IncomePer Share

Thecomputation of basic and diluted income per share is as follows:

| ** **                                        | ** ** | **Three months  ended  March 31,**                        | ** ** | **Six months  ended  March 31,**                          | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2007**                                                            | ** ** | **2006**                                                            | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                        | ** ** | **$’000s (except for  per share amounts)** | ** ** | **$’000s (except for  per share amounts)** | ** ** |
| Net income                                        |       | $                                                                   | 350        |                                                                | $          | 4,444 |   | $ | 2,668 |   | $ | 7,754 |   |
| Weighted average shares  outstanding—basic   |       | 54,683,295                                                          |       | 36,972,480                                                          |       | 54,652,557 |   | 36,972,480 |   |
| Dilutive effect of stock  options                 |       | 207,152                                                             |       | —                                                              |       | 216,924 |   | — |   |
| Weighted average shares  outstanding—diluted |       | 54,890,447                                                          |       | 36,972,480                                                          |       | 54,869,481 |   | 36,972,480 |   |
| Income per share                                  |       |                                                                |       |                                                                |       |   |   |   |   |
| Basic                                             |       | $                                                                   | 0.01       |                                                                | $          | 0.12 |   | $ | 0.05 |   | $ | 0.21 |   |
| Diluted                                           |       | $                                                                   | 0.01       |                                                                | $          | 0.12 |   | $ | 0.05 |   | $ | 0.21 |   |

 

Income per shareinformation for the three-month and six-month periods ended March 31, 2006is based on the number of shares which were issued in connection with theExchange. Because the Company did not grant stock options prior to theExchange, basic and diluted income per share for periods prior to the Exchangeis the same. Options to acquire 585,000 shares of common stock have beenexcluded from the computation of diluted income per share because the optionprice exceeds the average share price during the period.

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**11.**          ProductWarranty

Thefollowing table provides the changes in the product warranty accrual for thethree months and six months ended March 31, 2007 and March 31,2006:

| ** **                                       | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|--------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                       | ** ** | **March 31,**           | ** ** | **March 31,**         | ** ** |
| ** **                                       | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                       | ** ** | **$’000s**              | ** ** | **$’000s**            | ** ** |
| Balance at  beginning of the period              |       | $                            | 11,934     |                       | $          | 10,075 |   | $ | 10,879 |   | $ | 9,276 |   |
| Accruals for warranties issued during the period |       | 5,242                        |       | 4,490                      |       | 9,251 |   | 8,019 |   |
| Warranty  settlements made during the period     |       | (4,682                       | )          | (3,522                     | )          | (8,087 | ) | (6,052 | ) |
| Translation  adjustment                          |       | 107                          |       | 244                        |       | 558 |   | 44 |   |
| Balance at the  end of the period                | ** ** | **$**                        | **12,601** | ** **                 | **$**      | **11,287** | ** ** | **$** | **12,601** | ** ** | **$** | **11,287** | ** ** |

 

**12.**          PensionPlans

Componentsof net periodic benefit costs are as follows:

| ** **                 | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|----------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                 | ** ** | **March 31,**           | ** ** | **March 31,**         | ** ** |
| ** **                 | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                 | ** ** | **$’000s**              | ** ** | **$’000s**            | ** ** |
| Service cost               |       | $                            | 97         |                       | $          | 66 |   | $ | 192 |   | $ | 147 |   |
| Interest cost              |       | 545                          |       | 484                        |       | 1,081 |   | 944 |   |
| Net periodic benefit  cost | ** ** | **$**                        | **642**    |                       | **$**      | **550** |   | **$** | **1,273** | ** ** | **$** | **1,091** | ** ** |

 

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**13.**          SegmentReporting

Thefollowing tables show the results of the Company’s reportable segments underthe Company’s management reporting system. The segment performance measure usedto monitor segment performance is gross profit excluding the impact of the MDPTransaction and the Exchange. This measure is considered by management tobetter reflect the performance of each segment as it eliminates the need toallocate centrally incurred costs and significant purchase accounting impactsthat the Company does not believe are representative of the performance of thesegments. Furthermore, the Company monitors performance geographically byregion. As the Company manages its business on both a product and ageographical basis, U.S. GAAP requires segmental disclosure based on productinformation.

| ** **                                | ** ** | **Three months  ended** | ** **  | **Six months  ended** | ** ** |
|-------------------------------------------|------------|------------------------------|-------------|----------------------------|------------|
| ** **                                | ** ** | **March 31,**           | ** **  | **March 31,**         | ** ** |
| ** **                                | ** ** | **2007**                     | ** **  | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                | ** ** | **$’000s**              | ** **  | **$’000s**            | ** ** |
| **Revenue External**                      |       |                         |        |                       |       |   |   |   |   |
| Dental CAD/CAM Systems                    |       | $                            | 47,196      |                       | $          | 52,804 |   | $ | 99,671 |   | $ | 111,476 |   |
| Imaging Systems                           |       | 52,857                       |        | 27,500                     |       | 111,736 |   | 57,119 |   |
| Treatment Centers                         |       | 29,415                       |        | 33,615                     |       | 69,987 |   | 63,008 |   |
| Instruments                               |       | 20,684                       |        | 19,594                     |       | 43,552 |   | 36,146 |   |
| **Total**                                 | ** ** | **$**                        | **150,152** | ** **                 | **$**      | **133,513** | ** ** | **$** | **324,946** | ** ** | **$** | **267,749** | ** ** |
| **Revenue Internal**                      |       |                         |        |                       |       |   |   |   |   |
| Dental CAD/CAM Systems                    |       | $                            | —      |                       | $          | — |   | $ | — |   | $ | — |   |
| Imaging Systems                           |       | 22                           |        | 20                         |       | 74 |   | 38 |   |
| Treatment Centers                         |       | 4                            |        | 24                         |       | 6 |   | 36 |   |
| Instruments                               |       | 2,487                        |        | 3,110                      |       | 5,977 |   | 5,847 |   |
| Intercompany elimination                  |       | (2,513                       | )           | (3,154                     | )          | (6,057 | ) | (5,921 | ) |
| **Total**                                 | ** ** | **$**                        | **—**  | ** **                 | **$**      | **—** | ** ** | **$** | **—** | ** ** | **$** | **—** | ** ** |
| **Revenue Total**                         |       |                         |        |                       |       |   |   |   |   |
| Dental CAD/CAM Systems                    |       | $                            | 47,196      |                       | $          | 52,804 |   | $ | 99,671 |   | $ | 111,476 |   |
| Imaging Systems                           |       | 52,879                       |        | 27,520                     |       | 111,810 |   | 57,157 |   |
| Treatment Centers                         |       | 29,419                       |        | 33,639                     |       | 69,993 |   | 63,044 |   |
| Instruments                               |       | 23,171                       |        | 22,704                     |       | 49,529 |   | 41,993 |   |
| **Total**                                 | ** ** | **$**                        | **152,665** | ** **                 | **$**      | **136,667** | ** ** | **$** | **331,003** | ** ** | **$** | **273,670** | ** ** |
| **Segment Performance Measure**           |       |                         |        |                       |       |   |   |   |   |
| Dental CAD/CAM Systems                    |       | $                            | 32,836      |                       | $          | 40,016 |   | $ | 71,357 |   | $ | 84,019 |   |
| Imaging Systems                           |       | 31,563                       |        | 13,376                     |       | 66,403 |   | 27,028 |   |
| Treatment Centers                         |       | 11,320                       |        | 12,691                     |       | 28,199 |   | 23,355 |   |
| Instruments                               |       | 9,580                        |        | 10,271                     |       | 20,627 |   | 18,777 |   |
| **Total**                                 | ** ** | **$**                        | **85,299**  | ** **                 | **$**      | **76,354** | ** ** | **$** | **186,586** | ** ** | **$** | **153,179** | ** ** |
| **Depreciation and Amortization Expense** |       |                         |        |                       |       |   |   |   |   |
| Dental CAD/CAM Systems                    |       | $                            | 264         |                       | $          | 470 |   | $ | 843 |   | $ | 944 |   |
| Imaging Systems                           |       | 885                          |        | 604                        |       | 1,921 |   | 1,245 |   |
| Treatment Centers                         |       | 497                          |        | 634                        |       | 1,142 |   | 1,203 |   |
| Instruments                               |       | 461                          |        | 572                        |       | 1,160 |   | 1,179 |   |
| **Total**                                 | ** ** | **$**                        | **2,107**   | ** **                 | **$**      | **2,280** | ** ** | **$** | **5,066** | ** ** | **$** | **4,571** | ** ** |

 

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***Reconciliation of the results of the segmentperformance measure to the consolidated statements of operations***

The following table and discussion provide areconciliation of the total results of operations of the Company’s businesssegments under management reporting to the consolidated financial statements.As of October 1, 2006 the Company changed the basis of accounting for itsmanagement reporting from statutory German accounting standards to U.S. GAAP,the basis used to prepare the consolidated financial statements. As a result,the differences shown between management reporting and U.S. GAAP for the threeand six month periods ended March 31, 2007, are mainly due to the impactof purchase accounting. Purchase accounting effects are not included in grossprofit as the Company does not believe these to be representative of theperformance of each segment.

Inter-segmenttransactions are based on amounts which management believes are approximate tothe amounts of transactions with unrelated third parties. 

| ** **                                                      | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                      | ** ** | **March 31,**           | ** ** | **March 31,**         | ** ** |
| ** **                                                      | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **$’000s**              | ** ** | **$’000s**            | ** ** |
| **Revenue**                                                     |       |                         |       |                       |       |   |   |   |   |
| Total segments                                                  |       | $                            | 150,152    |                       | $          | 133,513 |   | $ | 324,946 |   | $ | 267,749 |   |
| Electronic center and corporate                                 |       | 16                           |       | 11                         |       | 21 |   | 30 |   |
| Differences management reporting vs U.S. GAAP                   |       | —                       |       | (1,681                     | )          | — |   | (54 | ) |
| Consolidated revenue                                            | ** ** | **150,168**                  | ** ** | **131,843**                | ** ** | **324,967** | ** ** | **267,725** | ** ** |
| **Depreciation  and Amortization**                              |       |                         |       |                       |       |   |   |   |   |
| Total segments                                                  |       | 2,107                        |       | 2,280                      |       | 5,066 |   | 4,571 |   |
| Electronic center and corporate                                 |       | 535                          |       | 475                        |       | 896 |   | 901 |   |
| Differences management reporting vs. U.S. GAAP                  |       | 18,608                       |       | 13,698                     |       | 38,859 |   | 25,111 |   |
| Consolidated depreciation and amortization                      | ** ** | **21,250**                   | ** ** | **16,453**                 | ** ** | **44,821** | ** ** | **30,583** | ** ** |
| **Segment  Performance Measure**                                |       |                         | ** ** | ** **                 |       |   | ** ** | ** ** | ** ** |
| Total segments                                                  |       | 85,299                       |       | 76,354                     |       | 186,586 |   | 153,179 |   |
| Electronic center and corporate                                 |       | 1,048                        |       | 913                        |       | 1,892 |   | 776 |   |
| Differences management reporting vs. U.S. GAAP                  |       | (15,801                      | )          | (12,240                    | )          | (33,860 | ) | (22,710 | ) |
| Consolidated gross profit                                       | ** ** | **70,546**                   | ** ** | **65,027**                 | ** ** | **154,618** | ** ** | **131,245** | ** ** |
| Selling, general and administrative expense                     |       | 52,877                       |       | 35,339                     |       | 100,378 |   | 67,642 |   |
| Research and  development                                       |       | 12,054                       |       | 8,026                      |       | 22,334 |   | 14,973 |   |
| (Benefit)/provision  for doubtful accounts and notes receivable |       | (68                          | )          | 322                        |       | 233 |   | 182 |   |
| Net other  operating loss/(income)                              |       | 122                          |       | 1,376                      |       | (28 | ) | 1,684 |   |
| Foreign currency  transaction (gain)/loss                       |       | (1,889                       | )          | (3,377                     | )          | (8,955 | ) | 1,880 |   |
| Loss/(gain) on  derivative instruments                          |       | 911                          |       | (1,647                     | )          | 420 |   | (1,372 | ) |
| Interest expense,  net                                          |       | 6,207                        |       | 13,545                     |       | 15,166 |   | 29,000 |   |
| Loss on debt  extinguishment                                    |       | —                       |       | —                     |       | 21,145 |   | — |   |
| **Income Before Income Taxes and  Minority Interest**           | ** ** | **$**                        | **332**    | ** **                 | **$**      | **11,443** | ** ** | **$** | **3,925** | ** ** | **$** | **17,256** | ** ** |

 

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**ITEM2.**                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) should be read in conjunctionwith the Condensed Consolidated Financial Statements included elsewhere in thisReport and the MD&A included in our Annual Report on Form 10-Kfor the fiscal year ended September 30, 2006.

All amounts are reported in thousands of U.S. dollars,except as otherwise disclosed.

This report containsforward-looking statements that involve risk and uncertainties. All statements,other than statements of historical facts, included in this report regardingthe Company, its financial position, products, business strategy and plans andobjectives of management of the Company for future operations, areforward-looking statements. When used in this report, words such as “anticipate,”“believe,” “estimate,” “expect,” “intend,” “objectives,” “plans” and similarexpressions, or the negatives thereof or variations thereon or comparableterminology as they relate to the Company, its products or its management,identify forward-looking statements. Such forward-looking statements are basedon the beliefs of the Company’s management, as well as assumptions made by andinformation currently available to the Company’s management. Actual resultscould differ materially from those contemplated by the forward-lookingstatements as a result of various factors, including, but not limited to, thosecontained in the “Risk Factors” set forth in Part I, Item 1A of our AnnualReport on Form 10-K for the fiscal year ended September 30,2006. All forward looking statements speak only as of the date of this reportand are expressly qualified in their entirety by the cautionary statementsincluded in this report. We undertake no obligation to update or reviseforward-looking statements which maybe made to reflect events or circumstancesthat arise after the date made or to reflect the occurrence of unanticipatedevents other than required by law.

**Overview**

Sirona is a leadingmanufacturer of high-tech dental equipment. Sirona focuses on developinginnovative systems and solutions for dentists globally. Sirona has servedequipment dealers and dentists worldwide for more than 128 years. The Companyhas its headquarters in Long Island City, New York and in addition the Companyhas a significant facility in Bensheim, Germany. Sirona manages its business onboth a product and geographic basis and has four reporting segments: DentalCAD/CAM Systems, Imaging Systems, Treatment Centers and Instruments. Productsfrom each category are marketed in all geographical sales regions.

**Significant Factorsthat Affect Sirona’s Results of Operations**

***Increased Focus on Sirona’s Position in the U.S.Market and Further Global Expansion***

The U.S. market is the largest individual market forSirona. Over the last three fiscal years, from October 1, 2003 to September 30,2006, Sirona experienced strong revenue growth, with U.S. dollar revenueincreasing on average by 31% annually. Bolstered by the Schick acquisition,which closed on June 20, 2006, this trend has continued in the fiscal year2007. Several products have generated significant interest in the U.S. market,including, but not limited to, CEREC, Schick imaging products, the ORTHOPHOS XG line,inLab, inEos, C8 + and electrical handpieces and SIROlaser.

Sirona works together with large distributors,including Patterson Dental and Henry Schein, who accounted for 31% and 16%,respectively, of Sirona’s global revenue for the six month period ended March 31,2007.

In addition to increasedU.S. market penetration, Sirona has pursued expansion in the rest of the world.Over the last three fiscal years, sales in the rest of the world grew onaverage by 15% annually. To 

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supportthis growth, Sirona expanded its local presence and distribution channels byestablishing new sales and service locations in Spain, France and the UnitedKingdom in 2004; in Japan and Australia in 2005; and in China in 2006. Thisexpansion has resulted in increased sales, gross profit and selling, generaland administrative (SG&A) expense.

***Transactions Accounted for as Business Combinations***

The change in control of the Sirona business to Luxco,a Luxembourg-based holding entity owned by funds managed by Madison DearbornPartners, Beecken Petty O’Keefe and management of Sirona, through a leveragedbuy-out transaction on June 30, 2005 (“MDP Transaction”) and theacquisition of Schick Technologies Inc. (the “Exchange”), completed on June 20,2006, were accounted for as business combinations and are described in detailin the Company’s annual report on Form 10-K for the fiscal year 2006.

As a result of these transactions, Sirona’s cost ofgoods sold, research and development, SG&A expense and operating resultshave been and will continue to be materially affected by (i) higherdepreciation and amortization costs arising from the step-up of Sirona’s assetsand liabilities to fair value; and (ii) accounting for the Company’s stockoption plans. Taxes, interest and net income have also been and will continueto be substantially impacted by the structural changes resulting from thesebusiness combinations.

IPR&D projects acquired in connection with theExchange and the MDP Transaction, with fair values of $6.0 million and$33.8 million, respectively, were appraised and charged to the incomestatement at the respective dates of acquisition. The projects primarilyrelated to (i) 3D-Imaging, (ii) enhancements to the CAD/CAM system’shardware and software, (iii) the new treatment center platform and (iv) intra-oraldigital imaging. The fair value of $6.0 million in connection with theExchange related primarily to the intra-oral digital imaging projects. As of March 31,2007, the 3D-Imaging and the majority of the CAD/CAM system’s enhancements havebeen completed.

The remaining estimated costs to complete thesignificant projects at March 31, 2007 were (i) $0.8 million foran outstanding enhancement to the CAD/CAM system, (ii) $11.2 millionfor the new treatment center platform, and (iii) $1.1 million for theintra-oral digital imaging projects. The estimated percentages of completion ofthe significant projects as of March 31, 2007 were (i) 60%, (ii) 40%and (iii) 40%.

As of March 31, 2007, (i) the project forenhancements to the CAD/CAM system’s hardware and software was more than halfway through the product development phase, with the remaining steps prior tothe project release phase being the finalization of project developmentincluding working models, beta testing and regulatory approvals, (ii) thenew treatment center platform was in the product development phase with theremaining steps prior to the product release phase being the development ofworking models, beta testing and regulatory approvals, and (iii) theintra-oral digital imaging projects were in the product development phases withthe remaining steps prior to the project release phase being the finalizationof project development including working models, beta testing and regulatoryapprovals.

It is anticipated that theprojects will be completed in fiscal year 2008 and begin to generate cash inthe fiscal year following their completion. There are no specific risks anduncertainties associated with these projects; however the general risksrelating to the Company as discussed under “Risk Factors” as set forth in our Form 10-Kfor the fiscal year ended September 30, 2006 may apply.

***Fluctuations in U.S. Dollar/Euro Exchange Rate***

Although the U.S. dollar is Sirona’s reportingcurrency, its functional currency varies depending on the country of operation.For the six months ended March 31, 2007, approximately 50% of Sirona’s 

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revenue and approximately78% of its expenses were denominated in Euros. During the periods under review,the U.S. dollar/Euro exchange rate has fluctuated significantly, therebyimpacting Sirona’s financial results. Between October 1, 2005 and March 31,2007, the U.S. dollar/Euro exchange rate used to calculate items included inSirona’s financial statements varied from a low of 1.177 to a high of 1.3363and as of March 31, 2007 and September 30, 2006 were 1.3303 and1.2669, respectively. Although Sirona does not apply hedge accounting, Sironahas entered into foreign exchange forward contracts to manage foreign currencyexposure. As of March 31, 2007, these contracts had notional amountstotalling $16.4 million. As these agreements are relatively short-term(generally six months) continued fluctuation in the U.S. dollar couldmaterially affect Sirona’s results of operations.

Certain revenue information under “Results ofOperations” below is presented on a constant currency basis. This informationis a non-GAAP financial measure. Sirona supplementally presents revenue on aconstant currency basis because it believes this information facilitates acomparison of Sirona’s operating results from period to period without regardto changes resulting solely from fluctuations in currency rates. Sironacalculates constant currency revenue growth by comparing current periodrevenues to prior period revenues with both periods converted at the Euro/U.S.$ average foreign exchange rate for the current period. The exchange rates usedin converting Euro denominated revenues into U.S. $ in the Company’s financialstatements prepared in accordance with U.S. GAAP were: $1.310 and $1.203 forthe three months ended March 31, 2007 and 2006, respectively, and $1.299and $1.196 for the six months ended March 31, 2007 and 2006, respectively.

Loans made to Sirona underthe new senior credit facility entered into November 22, 2006 aredenominated in the functional currency of the respective borrowers. See “—Liquidityand Capital Resources” for a discussion of our new senior credit facility.However, intercompany loans are denominated in the functional currency of onlyone of the parties to the loan agreements. Where intercompany loans are of along-term investment nature, the potential non-cash fluctuations in currencyexchange rates are reflected within other comprehensive income. Thesefluctuations may be significant in any period due to changes in the exchangerates between the Euro and the U.S. dollar.

***Fluctuations in Quarterly Operating Results***

Sirona’s quarterlyoperating results have varied in the past and are likely to vary in the future.These variations result from a number of factors, many of which aresubstantially outside its control, including:

·       the timing of new productintroductions by Sirona or its competitors;

·       the timing of industry tradeshows;

·       developments in governmentreimbursement policies;

·       changes in product mix;

·       Sirona’s ability to supplyproducts to meet customer demand;

·       fluctuations inmanufacturing costs;

·       income tax incentives; and

·       currency fluctuation.

Due to the variationswhich Sirona has experienced in its quarterly operating results, it does notbelieve that period-to-period comparisons of results of operations of Sironaare necessarily meaningful or reliable as indicators of future performance.

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**Taxes**

The German tax authorityis currently examining the Company’s tax returns for the years 2001 to 2004.The Company does not believe the results of the examination will have anadverse material effect on the Company’s financial position, results ofoperations or liquidity.

**Results ofOperations**

***Three Months Ended March 31, 2007 Compared toThree Months Ended March 31, 2006***

Revenue for the threemonths ended March 31, 2007 was $150.2 million, an increase of $18.3million, or 13.9%, as compared with the three months ended March 31, 2006.On a constant currency basis, adjusting for the fluctuations in the $/Eurorate, total revenue increased by 7.1%. Growth rates were 92% (up 80% on aconstant currency basis) for the Imaging Systems segment, and 6% (down 2% on aconstant currency basis) for the Instruments segment. Revenue for the DentalCAD/CAM systems and the Treatment Center segments decreased by 11% (down14% on a constant currency basis) and 12% (down 19% on a constant currencybasis), respectively. The positive Imaging Systems segment development in thethree month period that ended March 31, 2007 was attributable to theinclusion of the Schick operations, the continued adoption of digitalradiography, and the recently launched 3D digital panoramic imaging unitGALILEOS. The Dental CAD/CAM Systems segment faced a challenging year-over-yearcomparison as revenues in the second quarter of fiscal year 2006 were verystrong. CAD/CAM revenues were also impacted by investment caution by ourcustomers as many of them appeared to be awaiting the launch and delivery ofour new products. Treatment Center revenues slowed down from the strongrevenues recorded in the first quarter of fiscal year 2007, which was marked byincreased customer purchases in Germany in anticipation of the January 1,2007 increase in VAT(Value Added Tax). Treatment Center revenue continued to bestrong in China. Revenue changes were mainly volume driven, while prices ingeneral remained stable.

Revenue in the UnitedStates for the three months ended March 31, 2007 increased by 33.7%compared to the same period last year. This development was particularly attributableto the inclusion of the Schick operations and the first deliveries of our new3D imaging unit GALILEOS. Revenue growth in the rest of the world was 5.6%. Ona constant currency basis, revenue in the rest of the world decreased by 3.1%.The revenue development in the rest of the world was impacted by strong revenuerecorded in Germany in the first quarter of fiscal year 2007 in anticipation ofthe January 1, 2007 increase in VAT.

***Cost of Sales***

Cost of sales for thethree months ended March 31, 2007 was $79.6 million, an increase of $12.8million, or 19.2%, as compared with the three months ended March 31, 2006.Cost of sales included amortization and depreciation expense resulting from thestep-up to fair values of tangible and intangible assets, which was $18.0million for the three months ended March 31, 2007, compared with $12.0million for the three months ended March 31, 2006. Thequarter-over-quarter increase in amortization and depreciation expense mainlyresulted from the fair value adjustments related to the Exchange. Excluding theseamounts, costs of sales as a percentage of revenue decreased to 41.0% for thethree months ended March 31, 2007 compared with 41.6% for the three monthsended March 31, 2006 and gross profit as a percentage of revenue increasedby 0.6 percentage points to 59.0% from 58.4%. This development was mainlydriven by the Schick product lines and the first deliveries of the 3D Unit GALILEOSin the imaging systems segment.

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***Selling, Generaland Administrative***

For the three months endedMarch 31, 2007, SG&A expense was $52.9 million, an increase of $17.5million, or 49.6%, as compared with the three months ended March 31, 2006.SG&A expense included amortization and depreciation resulting from thestep-up to fair values of tangible and intangible assets as well as non-cashstock option expense in the amount of $4.0 million for the three months endedMarch 31, 2007, compared with $0.1 million for the three months ended March 31,2006. The year-over-year increase in amortization and depreciation expensereflects the step-up to the fair values of certain assets resulting from theExchange. Excluding these amounts, as a percentage of revenue, SG&A expenseincreased to 32.6% for the three months ended March 31, 2007 as comparedwith 26.7% for the three months ended March 31, 2006. The increase wasprimarily due to the inclusion of Schick, expenses associated with majorproduct launches, the bi-annual International Trade Show IDS held in Cologne,Germany at the end of March, the general growth in revenue and Sirona’sexpanded presence in various markets, including the United States, China andJapan. Furthermore, administration expenses for the three months endedMarch 31, 2007, include costs for the preparation and review of U.S. GAAPaccounts as well as compliance with Sarbanes Oxley, which were not applicablein the three months ended March 31, 2006.

***Research andDevelopment***

R&D expense for thethree months ended March 31, 2007 was $12.1 million, an increase of $4.0million, or 50.2%, as compared with the three months ended March 31, 2006.As a percentage of revenue, R&D expense increased to 8.0% for the threemonths ended March 31, 2007, compared with 6.1% for the three months endedMarch 31, 2006. The quarter-over-quarter increase was primarily driven bythe inclusion of the Schick operations, and expenses relating to the developmentof the new treatment center platform and the new 3D imaging unit, GALILEOS.

***Gain/Loss onForeign Currency Transactions***

Gain on foreign currencytransactions for the three months ended March 31, 2007 amounted to $1.9million compared to a gain of $3.4 million for the three months endedMarch 31, 2006. For the three months ended March 31, 2007 the gainincluded an unrealized non-cash foreign currency gain of $0.9 million on theU.S. dollar denominated deferred income, resulting from the translation adjustmentof Patterson’s exclusivity payment, as well as a non-cash foreign currency gainon U.S. dollar denominated short term intra-group loans to German entities of$0.8 million. The gain for the three months ended March 31, 2006included an unrealized non-cash foreign currency loss resulting fromtranslation adjustments to the carrying value of the U.S. dollar denominatedbank debt of $3.4 million and a foreign currency gain of $0.2 million on theU.S. dollar denominated deferred income, resulting from the translationadjustment of Patterson’s exclusivity payment.

***Interest Expense***

Net interest expense forthe three months ended March 31, 2007 was $6.2 million, compared to $13.5million for the three months ended March 31, 2006. This decrease wasprimarily due to the Company’s refinancing of its previous credit facilities onNovember 24, 2006, on more favorable terms. In addition, interest expensefor the three months ended March 31, 2006 included interest of$3.4 million on a shareholder loan which was subsequently transferred to agroup entity as consideration for the Exchange and has been eliminated onconsolidation since June 20, 2006.

***Income TaxProvision***

The income tax provisionfor the three months ended March 31, 2007 was $0.1 million, compared to$7.0 million for the three months ended March 31, 2006. For fiscal year2007 an estimated effective tax rate of 35% has been applied, which ispositively impacted by structural changes as a result of the refinancing. 

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Thiscompares to an effective tax rate of 61.0% for the second quarter of fiscalyear 2006, which was adversely impacted by foreign income for which no foreigntax credit was available.

***Net Income***

Sirona’s net income forthe three months ended March 31, 2007 was $0.4 million, a decrease of $4.1million, as compared with the three months ended March 31, 2006. Asdescribed above, Sirona’s net income was significantly impacted by the MDPTransaction and the Exchange. For the three months ended March 31, 2007,amortization and depreciation expense resulting from the step-up of fair valuesof intangible and tangible assets related to the Exchange and the MDPTransaction amounted to $18.8 million ($12.2 million net of tax impact). Inaddition, the gain on the deferred income from the Patterson exclusivitypayment was $0.9 million ($0.6 million net of tax impact) and option expenseswere $3.6 million ($2.3 million net of tax impact). Excluding these items, netincome increased due to higher revenue and improved gross margins, partiallyoffset by higher SG&A and R&D expenses.

***Six Months Ended March 31,2007 Compared to Six Months Ended March 31, 2006***

Revenue for the six monthsended March 31, 2007 was $325.0 million, an increase of $57.2 million, or21.4%, as compared with the six months ended March 31, 2006. On a constantcurrency basis, adjusting for the fluctuations in the $/Euro rate, totalrevenue increased by 14.7%. Growth rates were 96% (up 84% on a constantcurrency basis) for the Imaging Systems Segment, 21% (up 12% on a constantcurrency basis) for the Instruments segment, and 11% (up 3% on a constantcurrency basis) for the Treatment Center segment. Dental CAD/CAM Systemssegment revenue decreased by 11% (down 14% on a constant currency basis). Thepositive Imaging Systems segment result in the six month period that ended March 31,2007 was attributable to the inclusion of the Schick operations, the continuedadoption of digital radiography, and the recently launched 3D digital panoramicimaging unit GALILEOS. The Instruments segment revenue increase wasparticularly driven by new products, such as the SIROlaser and endodonticproducts. Treatment Center revenue particularly benefited from strong revenuein Germany, China and the Middle East. The Dental CAD/CAM Systems segment faceda challenging year-over-year comparison as revenues in the first six months offiscal year 2006 were very strong. CAD/CAM revenues were also impacted byinvestment caution by our customers as many of them appeared to be awaiting thelaunch and delivery of our new products. Revenue changes were mainly volumedriven while prices in general remained stable.

Revenue in the UnitedStates for the six months ended March 31, 2007 increased by 32.5% comparedto the same period last year. This development was particularly attributable tothe inclusion of the Schick operations and the continuing strong performance ofthe imaging systems segment, which includes the first deliveries of our new 3Dimaging unit GALILEOS. Revenue growth in the rest of the world was 16.1%. On aconstant currency basis, revenue in the rest of the world increased by 6.9%.The revenue growth in the rest of the world was primarily due to strong salesin Germany, China as well as project business in the Middle East.

***Cost of Sales***

Cost of sales for the sixmonths ended March 31, 2007 was $170.3 million, an increase of $33.9million, or 24.8%, as compared with the six months ended March 31, 2006.Cost of sales included amortization and depreciation expense resulting from thestep-up to fair values of tangible and intangible assets, which was $37.3million for the six months ended March 31, 2007, compared with $24.0million for the six months ended March 31, 2006. The year-over-yearincrease in amortization and depreciation expense for the six months mainlyresulted from the fair value adjustments related to the Exchange. Excludingthese amounts, costs of sales as a percentage of revenue decreased to 40.9% forthe six months ended March 31, 2007 compared with 42.0% for the six monthsended March 31, 2006 and gross profit as a percentage of revenue increasedby 1.1 percentage points to 59.1% from 58.0%. The improvement was driven bystrong German 

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salesand a favorable product mix in the Treatment Center segment as well as theSchick product lines, which were the main drivers of the positive gross profitmargin development in the Imaging Systems segment.

***Selling, Generaland Administrative***

For the six months ended March 31,2007, SG&A expense was $100.4 million, an increase of $32.7 million, or48.4%, as compared with the six months ended March 31, 2006. SG&Aexpense included amortization and depreciation resulting from the step-up tofair values of tangible and intangible assets as well as non-cash optionexpense in the amount of $7.8 million for the six months ended March 31,2007, compared with $0.2 million for the six months ended March 31, 2006.The year-over-year increase in amortization and depreciation expense reflectsthe step-up to the fair values of certain assets resulting from the Exchange.Excluding these amounts, as a percentage of revenue, SG&A expense increasedto 28.5% for the six months ended March 31, 2007 as compared with 25.2%for the six months ended March 31, 2006. The increase was primarily due tothe inclusion of Schick, expenses associated with the bi-annualInternational Trade Show IDS held in Cologne, Germany at the end of March, andincreased costs associated with the growth in revenue and with Sirona’sexpanded presence in various markets, including the United States, China andJapan. Furthermore, administration expenses for the six months ended March 31,2007, include costs for the preparation and audit and review of U.S. GAAPaccounts as well as compliance with Sarbanes Oxley, which were not applicablein the six months ended March 31, 2006.

***Research andDevelopment***

R&D expense for thesix months ended March 31, 2007 was $22.3 million, an increase of $7.4million, or 49.2%, as compared with the six months ended March 31, 2006.As a percentage of revenue, R&D expense increased to 6.9% for the sixmonths ended March 31, 2007, compared with 5.6% for the six monthsended March 31, 2006. The increase was primarily driven by the inclusionof the Schick operations and expenses relating to the development of the newtreatment center platform and the new 3D imaging unit, GALILEOS.

***Gain / Loss onForeign Currency Transactions***

Gain on foreign currencytransactions for the six months ended March 31, 2007 amounted to $9.0million compared to a loss of $1.9 million for the six months ended March 31,2006. For the six months ended March 31, 2007 the gain included foreigncurrency gains upon the repayment of the U.S. dollar denominated bank debt of$3.9 million, an unrealized non-cash foreign currency gain of $4.9 million onthe U.S. dollar denominated deferred income, resulting from the translationadjustment of Patterson’s exclusivity payment, as well as a non-cash foreign currencygain on the U.S. dollar denominated bank loans and short term intra-group loansto German entities of $1.4 million. The loss for the six months ended March 31,2006 included an unrealized non-cash foreign currency gain of $0.2 million onthe U.S. dollar denominated deferred income, resulting from thetranslation adjustment of Patterson’s exclusivity payment and a non-cashforeign currency gain of $0.4 million on the U.S. dollar denominated bankdebt.

***Interest Expense***

Net interest expense forthe six months ended March 31, 2007 was $15.2 million, compared to $29.0million for the six months ended March 31, 2006. This decrease wasprimarily due to the Company’s refinancing of its previous credit facilities onNovember 24, 2006, on more favorable terms. In addition, interest expensefor the six months ended March 31, 2006, included interest of$6.9 million on a shareholder loan which was subsequently transferred to agroup entity as consideration for the Exchange and has been eliminated onconsolidation since June 20, 2006.

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***Debt Extinguishment***

The retirement of theborrowings under the Company’s previous credit facilities, the senior syndicatedloan tranches A, B and C and the mezzanine loan facility, was accounted for asa debt extinguishment in accordance with SFAS 140 “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities”. Theunscheduled repayment of the mezzanine facility by the Company resulted in aprepayment fee of Euro 0.9 million ($1.2 million). In addition, $19.9million of unamortized debt issue costs relating to the previous creditfacilities were written off in the period. As a result, a loss on debtextinguishment totaling $21.1 million was recognized in the period.

***Income TaxProvision***

The income tax provisionfor the six months ended March 31, 2007 was $1.4 million, compared to $9.5million for the six months ended March 31, 2006. For fiscal year 2007 anestimated effective tax rate of 35% has been applied, which is positivelyimpacted by structural changes as a result of the refinancing. This compares toan effective tax rate of 54.9% for the first six months of fiscal year 2006,which was adversely impacted by foreign income for which no foreign tax creditwas available.

***Net Income***

Sirona’s net income forthe six months ended March 31, 2007 was $2.7 million, a decrease of $5.1million, as compared with the six months ended March 31, 2006. Asdescribed above, Sirona’s net income was significantly impacted by the MDPTransaction and the Exchange. For the six months ended March 31, 2007,amortization and depreciation expense resulting from the step-up of fair valuesof intangible and tangible assets related to the Exchange and the MDPTransaction totaled $38.9 million ($25.3 million, net of tax impact).In addition to this effect, losses of $21.1 were recorded on debtextinguishment ($13.3 million, net of tax impact). Furthermore foreign currencygains made on the repayment of the Tranche A U.S. dollar denominated bank debtas well as gains on the deferred income from the Patterson exclusivity paymentamounted to $8.8 million ($5.7 million, net of tax impact) and stock optionexpenses were $6.7 million ($4.4 million net of tax impact). Excluding theseitems in both periods, net income increased due to higher revenue and improvedgross margins, partially offset by higher SG&A and R&D expenses.

**Liquidity and Capital Resources**

Historically,Sirona’s principal uses of cash, apart from operating requirements, includingresearch and development expenses, have been for interest payments, debtrepayment and acquisitions. Operating capital expenditures are approximately equalto operating depreciation (excluding any effects from the increasedamortization and depreciation expense resulting from the step-up to fair valuesof Sirona’s and Schick’s assets and liabilities required under purchaseaccounting). Sirona’s management believes that Sirona’s working capital issufficient for its present requirements.

| ** **                                     | ** ** | **Six months** | ** ** | **Six months** | ** ** |
|------------------------------------------------|------------|---------------------|------------|---------------------|------------|
| ** **                                     | ** ** | **ended**           | ** ** | **ended**           | ** ** |
| ** **                                     | ** ** | **March 31,**  | ** ** | **March 31,**  | ** ** |
| ** **                                     | ** ** | **2007**            | ** ** | **2006**            | ** ** |
| Net cash provided  by operating activities     |       |                | $          | 2,606               |       |   |   | $ | 44,654 |   |   |
| Net cash (used  in) investing activities       |       |                | (9,570     | )                   |       |   | (5,636 | ) |   |
| Net cash (used  in) financing activities       |       |                | (32,663    | )                   |       |   | (36,153 | ) |   |
| (Decrease)/Increase in  cash during the period |       |                | $          | (39,627             | )          |   |   | $ | 2,865 |   |   |

 

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***Net Cash Provided by Operating Activities***

Net cash provided by operating activities representsnet cash from operations, returns on investments, and payments for interest andtaxation.

Net cash provided byoperating activities was $2.6 million for the six months ended March 31,2007 compared to $44.7 million for the six months ended March 31, 2006.The primary contributors were (i) the changes in assets and liabilities inboth periods and (ii) income tax payments. The changes in assets are aresult of short term working capital requirements resulting from strongrevenues in March, which in turn led to increased account receivables. Inaddition, inventory levels increased due to the ramp up for new productlaunches. Income tax payments totaling $26.2 million were made in relation totaxes for prior year periods, which had been accrued at the end of fiscal year2006, and for prepayments concerning the current fiscal year.

***Net Cash Used in Investing Activities***

Net cash used in investing activities represents cashused for capital expenditures, financial investments and long-lived assetdisposals. The primary contributors to the investing cash outflow in theperiods presented are capital expenditures in the course of normal operatingactivities.

Net cash used in investingactivities was $9.6 million for the six months ended March 31, 2007,compared to $5.6 million for the six months ended March 31, 2006. Theincrease is mainly due to increased investments in special tools and softwarerelated to new product launches.

***Net Cash Used in Financing Activities***

Net cash used in financing activities was $32.7million for the six months ended March 31, 2007 compared to $36.2 millionfor the six months ended March 31, 2006. Net cash used in financingactivities in the six months ended March 31, 2007 reflected therefinancing of the Company’s prior credit facilities as of November 24,2006 and the utilization of the Company’s revolving credit facility in theperiod. Cash used in financing activities in the six month period ended March 31,2006 comprised unscheduled prepayments of the Mezzanine loan (€15.0million or $18.1 million) as well as Tranche C (€15.0 million or $18.1million).

Sirona’s managementbelieves that its operating cash flows and available cash (including restrictedcash), together with its long-term borrowings, will be sufficient to fund itsworking capital needs, research and development expenses (including but notlimited to the acquired in-process research and development), anticipatedcapital expenditure and debt service requirements for the foreseeable future.

***Capital Resources***

***Senior Term Loans***

On November 22, 2006, Sirona DentalSystems, Inc. entered into a new senior credit facility (the “SeniorFacilities Agreement”) as original guarantor, with SchickTechnologies, Inc., a New York company and wholly owned subsidiary ofSirona (“Schick NY”), as original borrower and original guarantor, with SironaDental Systems GmbH, as original borrower and original guarantor, with SironaDental Services GmbH, as original borrower and original guarantor and withSirona Dental Systems LLC, Sirona Holding GmbH and with Sirona Immobilien GmbHas original guarantors. Initial borrowings under the Senior FacilitiesAgreement plus excess cash were used to retire the outstanding borrowings underthe Company’s previous credit facilities.

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The Senior Facilities Agreement includes: (1) aterm loan A1 in an aggregate principal amount of $150 million (the “tranche A1term loan”) available to Sirona’s subsidiary, Schick NY, as borrower; (2) aterm loan A2 in an aggregate principal amount of Euro 275 million (the “trancheA2 term loan”) available to Sirona’s subsidiary, Sirona Dental Services GmbH,as borrower; and (3) a $150 million revolving credit facility available toSirona Dental Systems GmbH, Schick NY and Sirona Dental Services GmbH, as initialborrowers. The revolving credit facility is available for borrowing inEuro, U.S.$, Yen or any other freely available currency agreed to by thefacility agent. The facilities are made available on an unsecured basis. Subjectto certain limitations, each European guarantor guarantees the performance ofeach European borrower, except itself, and each U.S. guarantor guarantees theperformance of each U.S. borrower, except itself. There are no cross-borderguarantees since all guarantees are by entities that have the same functionalcurrency as the currency in which the respective guaranteed borrowing isdenominated.

Each of the senior term loans has a five year maturityand is to be repaid in three installments beginning on November 24, 2009and ending on November 24, 2011. Of the amounts borrowed under the termloan facilities, 15% is due on November 24, 2009, 15% is due onNovember 24, 2010 and 70% is due on November 24, 2011. At the Company’scurrent leverage multiples, the new facilities bear interest at a margin of 75basis points plus, in the case of Euro-denominated loans, EURIBOR and, in thecase of other loans, LIBOR.

The Senior Facilities Agreement contains a marginratchet. Pursuant to this provision, which applies from November 24, 2007onwards, the applicable margin will vary between 90 basis points and 45 basispoints per annum according to our leverage multiple (i.e. the ratio ofconsolidated total net debt to consolidated adjusted EBITDA as defined in theSenior Facilities Agreement).

The Senior FacilitiesAgreement contains restrictive covenants that limit Sirona’s ability to makeloans, make investments (including in joint ventures), incur additionalindebtedness, make acquisitions or pay dividends, subject to agreed exceptions.The Company has agreed to certain financial debt covenants in relation to thefinancing. The covenants stipulate that the Company must maintain certainratios in respect of interest payments and defined earnings measures. If theCompany breaches any of the covenants, the loans will be become repayable ondemand.

**Other Financial Data (unaudited)**

| ** **                  | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|-----------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                  | ** ** | **March 31,**           | ** ** | **March 31,**         | ** ** |
| ** **                  | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                  | ** ** | **$’000s**              | ** ** | **$’000s**            | ** ** |
| Net income                  |       | $                            | 350        |                       | $          | 4,444 |   | $ | 2,668 |   | $ | 7,754 |   |
| Net interest  expense       |       | 6,207                        |       | 13,545                     |       | 15,166 |   | 29,000 |   |
| Provision for  income taxes |       | 125                          |       | 6,976                      |       | 1,374 |   | 9,480 |   |
| Depreciation                |       | 2,109                        |       | 3,973                      |       | 5,732 |   | 6,919 |   |
| Amortization                |       | 19,141                       |       | 11,932                     |       | 39,089 |   | 23,116 |   |
| EBITDA                      |       | $                            | 27,932     |                       | $          | 40,870 |   | $ | 64,029 |   | $ | 76,269 |   |

 

EBITDA is anon-GAAP financial measure that is reconciled to net income, its most directlycomparable U.S. GAAP measure, in the accompanying financial tables. EBITDA isdefined as net earnings before interest, taxes, depreciation, and amortization.Sirona’s management utilizes EBITDA as an operating performance measure inconjunction with U.S. GAAP measures, such as net income and gross margincalculated in conformity with U.S. GAAP. EBITDA should not be considered inisolation or as a substitute for net income prepared in accordance with U.S.GAAP. There are material limitations 

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associatedwith making the adjustments to Sirona’s earnings to calculate EBITDA and usingthis non-GAAP financial measure. For instance, EBITDA does not include:

·       interestexpense, and because Sirona has borrowed money in order to finance itsoperations, interest expense is a necessary element of its costs and ability togenerate revenue;

·       depreciationand amortization expense, and because Sirona uses capital and intangible assets,depreciation and amortization expense is a necessary element of its costs andability to generate revenue; and

·       taxexpense, and because the payment of taxes is part of Sirona’s operations, taxexpense is a necessary element of costs and impacts Sirona’s ability tooperate.

In addition, other companies may define EBITDAdifferently. EBITDA, as well as the other information in this filing, should beread in conjunction with Sirona’s financial statements and footnotes containedin the documents that Sirona files with the U.S. Securities and ExchangeCommission.

In addition to EBITDA, the accompanying financialtables also set forth certain supplementary information that Sirona believes isuseful for investors in evaluating Sirona’s underlying operations. Thissupplemental information includes gains/losses recorded in the periodspresented relating to early extinguishment of debt, stock option grants,revaluation of dollar-denominated exclusivity payment and borrowings where thefunctional currency is Euro, and the Schick acquisition. Sirona’s managementbelieves that these items are either nonrecurring or noncash in nature, andshould be considered by investors in assessing Sirona’s financial condition,operating performance and underlying strength.

Sirona’s managementuses EBITDA together with this supplemental information as an integral part ofits reporting and planning processes and as one of the primary measures to,among other things:

(i)             monitor and evaluatethe performance of Sirona’s business operations;

(ii)         facilitate management’sinternal comparisons of the historical operating performance of Sirona’s businessoperations;

(iii)     facilitate management’sexternal comparisons of the results of its overall business to the historicaloperating performance of other companies that may have different capitalstructures and debt levels;

(iv)       analyze and evaluatefinancial and strategic planning decisions regarding future operatinginvestments; and

(v)           plan for and preparefuture annual operating budgets and determine appropriate levels of operatinginvestments.

Sirona’s managementbelieves that EBITDA and the supplemental information provided is useful toinvestors as it provides them with disclosures of Sirona’s operating results onthe same basis as that used by Sirona’s management.

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**Supplemental Information**

| ** **                                                                                                                      | ** ** | **Three months  ended** | ** ** | **Six months  ended** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|----------------------------|------------|
| ** **                                                                                                                      | ** ** | **March 31,**           | ** ** | **March 31,**         | ** ** |
| ** **                                                                                                                      | ** ** | **2007**                     | ** ** | **2006**                   | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                                                                                      | ** ** | **$’000s**              | ** ** | **$’000s**            | ** ** |
| Transaction  related costs                                                                                                      |       | $                            | —     |                       | $          | (220 | ) | $ | — |   | $ | — |   |
| Fair value  increase in inventory                                                                                               |       | —                       |       | (922                       | )          | — |   | — |   |
| Loss on debt  extinguishment                                                                                                    |       | —                       |       | —                     |       | 21,145 |   | — |   |
| Share-based  compensation                                                                                                       |       | 3,635                        |       | —                     |       | 6,711 |   | — |   |
| Unrealized,  non-cash (gain) on revaluation of the carrying value of the $-denominated exclusivity  fee                         |       | (912                         | )          | (174                       | )          | (4,866 | ) | (174 | ) |
| Foreign currency  exchange (gain) on the early extinguishment of $-denominated bank debt                                        |       | —                       |       | —                     |       | (3,885 | ) | — |   |
| Unrealized,  non-cash (gain) on revaluation of the carrying value of $-denominated bank  loans and short-term shareholder loans |       | (762                         | )          | (3,359                     | )          | (1,353 | ) | (443 | ) |
|                                                                                                                            |       | $                            | 1,961      |                       | $          | (4,675 | ) | $ | 17,752 |   | $ | (617 | ) |

 

**Recent AccountingPronouncements Issued**

See note 2 to theunaudited condensed consolidated financial statements for discussion ofrecently issued accounting pronouncements.

**ITEM3.**                QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been nomaterial changes to the Company’s market risk since September 30, 2006.

**ITEM4.**                CONTROLS ANDPROCEDURES

**Evaluation ofDisclosure Controls and Procedures**

Our management, with theparticipation of our chief executive officer and chief financial officer,evaluated the effectiveness of our disclosure controls and procedures (asdefined in Rules 13a-15(e) and 15d-15(e) under theSecurities Exchange Act of 1934), as of March 31, 2007. Based upon thisevaluation, our chief executive officer and chief financial officer concludedthat, as of March 31, 2007, the Company’s disclosure controls andprocedures were effective. Our disclosure controls and procedures are designedto ensure that information relating to the Company, including our consolidatedsubsidiaries, that is required to be disclosed in the reports we file or submitunder the Securities Exchange Act of 1934 are recorded, processed, summarizedand reported within the time periods specified in Commission’s rules andforms.

**Changes in Internal Control over Financial Reporting**

No change in our internalcontrol over financial reporting (as defined in rules 13a-15(f) and15d-15(f) under the Securities Exchange Act of 1934) occurred duringthe quarter ended March 31, 2007 that has materially affected, or isreasonably likely to materially affect, our internal control over financial reporting.

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**PART II.**

**ITEM 1.**                LEGALPROCEEDINGS

There are currently nomaterial legal proceedings pending.

**ITEM 1A.**        RISKFACTORS

There are no materialchanges from risk factors as previously disclosed by the Company in its 2006Annual Report on Form 10-K.

**ITEM 2.**                UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

**ITEM 3.**                DEFAULTSUPON SENIOR SECURITIES

None.

**ITEM 4.**                SUBMISSIONOF MATTERS TO VOTE OF SECURITY HOLDERS

(a)          The Company held its2006 Annual Meeting of Stockholders (the “Annual Meeting”) on February 27,2007.

(b)         Thefollowing matter concerning the election of Directors was voted upon at theAnnual Meeting with the accompanying results:

**Electionof Directors:**

| ** **                                       | ** ** | **Number of Votes  For** | ** ** | **Number of Votes  Withheld** | ** ** |
|--------------------------------------------------|------------|------------------------------------|------------|-----------------------------------------|------------|
| Simone Blank  (New term expires in 2009)         |       |                               | 51,159,168 |                                    |       |   | 1,947,279 |   |   |
| Timothy D. Sheehan  (New term expires in 2009)   |       |                               | 50,874,111 |                                    |       |   | 2,232,336 |   |   |
| Timothy P.  Sullivan  (New term expires in 2009) |       |                               | 50,760,924 |                                    |       |   | 2,345,523 |   |   |

 

The terms of theother Directors of the Company continued after the meeting, as follows: WilliamK. Hood, Harry M. Jansen Kraemer, Jr. and Jeffrey T. Slovin serve in theclass whose term expires in 2007 and Nicolas W. Alexos, David K. Beecken, JostFischer and Arthur D. Kowaloff serve in the class whose term expires in 2008.Upon the expiration of the term of a class of Directors, the members of suchclass will be elected for three-year terms at the annual meeting ofstockholders held in the year in which such term expires.

(c)          The following additionalmatters were voted upon at the Annual Meeting held on February 27, 2007with the following results:

1.                 Toapprove the Sirona Dental Systems, Inc. Equity Incentive Plan:

| Number of votes  for:     |   | 41,467,999 |   |
|---------------------------|--------|------------|--------|
| Number of votes  against: |   | 8,442,801  |   |
| Number of abstentions:    |   | 9,601      |   |

 

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2.                 Ratificationof the selection of KPMG Deutsche Treuhand-Gesellschaft, Aktiengesellschaft,Wirtschaftspruefungsgesellschaft, Germany as the Company’s independent auditorfor the fiscal year ending September 30, 2007:

| Number of votes  for:     |   | 53,017,788 |   |
|---------------------------|--------|------------|--------|
| Number of votes  against: |   | 80,416     |   |
| Number of abstentions:    |   | 8,242      |   |

 

(d)         NotApplicable.

**ITEM 5.**                OTHERINFORMATION

None.

**ITEM 6.**                EXHIBITS

Thefollowing Exhibits are included in this report:
| Exhibit No. | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                              | ** ** | **Item Title** |
|------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|
| 10.1             |       | Senior Facilities  Agreement (incorporating amendments made on 5 December 2006 and 19 January 2007)  among Sirona Dental Systems, Inc., Schick Technologies, Inc.,  Sirona Dental Systems GmbH, Sirona Dental Services GmbH, Sirona Dental  Systems LLC, Sirona Holding GmbH, Sirona Immobilien GmbH, J.P. Morgan PLC,  UBS Limited, JPMorgan Chase Bank, N.A., and J.P. Morgan Europe Limited, dated  November 22, 2006. |
| 10.2             |       | Sirona Dental  Systems, Inc. Equity Incentive Plan (incorporated by reference to  Appendix A of the Company’s definitive proxy statement on Schedule 14A, filed  on January 26, 2007)                                                                                                                                                                                                                                                    |
| 10.3             |       | Form of  Incentive Stock Option Notice (incorporated by reference to Exhibit 10.1  of the Company’s Current Report on Form 8-K, filed on  February 28, 2007).                                                                                                                                                                                                                                                                  |
| 10.4             |       | Form of  Letter to be Used to Exercise Nonqualified Stock Option (incorporated by  reference to Exhibit 10.2 of the Company’s Current Report on Form 8-K,  filed on February 28, 2007).                                                                                                                                                                                                                                        |
| 31.1             |       | Certification of  Principal Executive Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                         |
| 31.2             |       | Certification of  Principal Financial Officer, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                                                                                                                                         |
| 32.1             |       | Section 1350  Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                                                                                                                                            |
| 32.2             |       | Section 1350  Certification of Chief Financial Officer.                                                                                                                                                                                                                                                                                                                                                                                            |

 

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**SIGNATURE**

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

Date: May 10,2007
|        | SIRONA DENTAL  SYSTEMS, INC. |
|--------|-----------------------------------|
|   | By:                               | /s/ SIMONE BLANK |
|   |                              | Simone Blank,*Executive Vice President and Chief Financial  Officer (Principal Financial and Accounting Officer)*  (Duly authorized signatory) |

 

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