National Dentex (NADX) 10-Q 2007 Q2 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2007

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    .

Commission file number 000-23092

NATIONAL DENTEX CORPORATION

(Exact name of registrant as specified in its charter)

MASSACHUSETTS	04-2762050
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
526 Boston Post Road, Wayland, MA	01778
(Address of Principal Executive Offices)	(Zip Code)

(508) 358-4422
(Registrant’s Telephone No., including Area Code)

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

Yes   þ       No   o

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

Large accelerated filer   o       Accelerated filer   þ       Non-accelerated filer   o

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

Yes   o       No   þ

     As of August 2, 2007, 5,543,370 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION

FORM 10-Q

QUARTER ENDED JUNE 30, 2007

TABLE OF CONTENTS

	Page(s)
PART I. Financial Information
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2006 and June 30, 2007		3
Unaudited Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2006 and 2007		4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2007		5
Notes to Condensed Consolidated Financial Statements		6-12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13-22
Item 3. Quantitative and Qualitative Disclosures About Market Risk		22
Item 4. Controls and Procedures		22
PART II. Other Information
Item 1. Legal Proceedings		23
Item 1A. Risk Factors		23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		23
Item 3. Defaults Upon Senior Securities		23
Item 4. Submission of Matters to a Vote of Security Holders		23
Item 5. Other Information		24
Item 6. Exhibits		24
Signatures		25
Exhibit Index		26
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

2

NATIONAL DENTEX CORPORATION

CONSOLIDATED BALANCE SHEETS
(Unaudited)

	December 31,			June 30,
	2006			2007
CURRENT ASSETS:
Cash and cash equivalents	$	648,265		$	570,308
Accounts receivable:
Trade, less allowance of $290,000 in 2006 and $277,000 in 2007		17,022,130			17,667,406
Other		915,938			945,576
Inventories		7,212,975			7,394,962
Prepaid expenses		1,905,570			2,775,202
Property held for sale		—			259,000
Deferred tax asset		1,347,387			1,221,629
Total current assets		29,052,265			30,834,083
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings		8,530,593			7,835,015
Leasehold and building improvements		13,428,314			14,161,513
Laboratory equipment		18,956,508			19,600,014
Furniture and fixtures		6,943,244			7,590,906
		47,858,659			49,187,448
Less — Accumulated depreciation and amortization		19,976,182			21,247,750
Net property, plant and equipment		27,882,477			27,939,698
OTHER ASSETS, net:
Goodwill		68,000,747			68,501,522
Trade names		9,032,102			9,064,199
Customer relationships		6,298,927			5,938,522
Non-competition agreements		2,225,431			1,910,287
Other assets		5,998,335			6,307,457
Total other assets		91,555,542			91,721,987
Total assets	$	148,490,284		$	150,495,768
CURRENT LIABILITIES:
Revolving line of credit	$	1,343,228		$	3,162,890
Current portion of long-term debt		5,768,670			5,069,657
Accounts payable		4,344,704			3,459,960
Accrued liabilities:
Payroll and employee benefits		6,778,395			6,522,137
Current portion of deferred acquisition costs		1,517,694			1,277,612
Other accrued expenses		3,067,581			3,411,375
Total current liabilities		22,820,272			22,903,631
LONG-TERM LIABILITIES:
Long-term obligations		29,688,696			27,162,352
Deferred compensation		4,863,163			5,103,975
Deferred acquisition costs		1,581,494			600,000
Deferred tax liability		6,743,027			6,552,221
Total long-term liabilities		42,876,380			39,418,548
COMMITMENTS AND CONTINGENCIES (Note 8)
STOCKHOLDERS’ EQUITY:
Preferred stock, $.01 par value Authorized — 500,000 shares None issued and outstanding		—			—
Common stock, $.01 par value Authorized — 8,000,000 shares Issued and Outstanding — 5,509,412 shares at December 31, 2006 and 5,536,320 shares at June 30, 2007		55,094			55,379
Paid-in capital		17,296,170			17,715,739
Retained earnings		65,564,279			70,225,398
Other comprehensive income		(121,911	)		177,073
Total stockholders’ equity		82,793,632			88,173,589
Total liabilities and stockholders’ equity	$	148,490,284		$	150,495,768

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

3

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2006		2007		2006		2007
Net sales	$	38,116,202	$	44,434,070	$	74,905,049	$	87,777,307
Cost of goods sold		21,824,312		24,873,866		42,685,505		49,156,649
Gross profit		16,291,890		19,560,204		32,219,544		38,620,658
Selling, general and administrative expenses		11,947,123		14,685,632		23,914,132		29,226,092
Operating income		4,344,767		4,874,572		8,305,412		9,394,566
Other expense		227,185		223,147		437,815		397,648
Interest expense		281,003		754,257		569,642		1,481,407
Income before provision for income taxes		3,836,579		3,897,168		7,297,955		7,515,511
Provision for income taxes		1,516,681		1,480,145		2,828,542		2,854,392
Net income	$	2,319,898	$	2,417,023	$	4,469,413	$	4,661,119
Net income per share — basic	$	.42	$	.44	$	.82	$	.84
Net income per share — diluted	$	.40	$	.43	$	.78	$	.82
Weighted average shares outstanding — basic		5,492,537		5,535,794		5,461,393		5,523,050
Weighted average shares outstanding — diluted		5,774,191		5,666,158		5,750,131		5,653,842

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

4

NATIONAL DENTEX CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	June 30,			June 30,
	2006			2007
Cash flows from operating activities:
Net income	$	4,469,413		$	4,661,119
Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation and amortization		2,270,662			2,499,886
Gain (Loss) on disposal of property, plant and equipment		(403,722	)		3,787
Benefit for deferred income taxes		(133,640	)		(87,357	)
(Benefit) Provision for bad debts		(30,484	)		20,921
Losses on write-down of inventories		113,585			61,003
Stock based compensation expense		81,434			113,764
Other non-cash items		—			251,703
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(1,631,438	)		(657,281	)
Increase in inventories		(395,641	)		(230,135	)
Decrease (increase) in prepaid expenses		871,900			(855,497	)
Decrease (increase) in other assets		33,638			(149,423	)
Decrease in accounts payable and accrued liabilities		(581,619	)		(496,047	)
Net cash provided by operating activities		4,664,088			5,136,443
Cash flows from investing activities:
Payment of deferred purchase price		(1,184,341	)		(1,521,576	)
Premiums paid for life insurance policies		(329,505	)		(171,999	)
Additions to property, plant and equipment		(1,480,746	)		(2,627,401	)
Sales of property, plant, and equipment		932,899			182,400
Net cash used in investing activities		(2,061,693	)		(4,138,576	)
Cash flows from financing activities:
Borrowings of revolving line of credit		—			29,167,423
Repayments of revolving line of credit		—			(27,347,761	)
Repayments of long-term debt		(1,420,311	)		(3,234,355	)
Proceeds from issuance of common stock		1,344,075			306,090
Net cash used in financing activities		(76,236	)		(1,108,603	)
Effect of exchange rate changes on cash		—			32,779
Net increase in cash and cash equivalents		2,526,159			(77,957	)
Cash and cash equivalents at beginning of period		401,251			648,265
Cash and cash equivalents at end of period	$	2,927,410		$	570,308

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

5

NATIONAL DENTEX CORPORATION

Notes to Condensed Consolidated Financial Statements
June 30, 2007
(Unaudited)

(1) Interim Financial Statements

     The accompanying unaudited financial statements include all adjustments (consisting only of normal recurring adjustments) that are, in the opinion of management, necessary for a fair statement of the results of operations for the periods presented. Interim results are not necessarily indicative of the results to be expected for a full year. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America.

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

     Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the Company’s condensed consolidated financial statements for the year ended December 31, 2006 as filed on March 16, 2007 with the SEC on Form 10-K.

(2) Acquisitions

     The Company has participated in the acquisition of dental laboratories that have been recorded as business combinations. Certain factors, such as the laboratory’s assembled workforce, technical skills, and value as a going concern result in the recognition of goodwill.

     In connection with certain acquisition agreements, the Company has incurred certain contractual obligations associated with deferred purchase price payments, which are not contingent on any future actions or performance measures. These deferred payments are recorded as a liability upon consummation of the acquisition and are included in the acquisition purchase price. Also, certain acquisition agreements contain provisions which require additional purchase price payments, contingent upon certain specified events, generally earnings targets. These contingent payments are recorded as an increase to goodwill upon the resolution of the contingency.

     In addition, in certain transactions, the Company executes non-compete agreements with the former owners and other key employees. The fair value of these agreements is recognized in purchase accounting as an identifiable intangible asset and is amortized over the estimated economic life of the agreement. All acquisitions have been reflected in the accompanying consolidated financial statements from the date of acquisition and have been accounted for as purchase business combinations in accordance with SFAS No. 141,“Business Combinations”(“FAS 141”).

     During 2006, the Company acquired the following dental laboratory operations:

Acquisition	Form of Acquisition	Location	Period Acquired
Impact Dental Laboratory Limited	All Outstanding Capital Stock	Ottawa, ON Canada	October, 2006
Keller Group, Incorporated	All Outstanding Capital Stock	St Louis, MO	October, 2006

     There have been no acquisitions of dental operations in 2007.

     The following pro forma operating results of the Company assume these acquisitions had been made as of January 1, 2006. Such information includes adjustments to reflect additional depreciation, amortization and interest expense and is not necessarily indicative of what the results of operations would actually have been, or the results of operations to be expected in future periods.

6

Notes to Condensed Consolidated Financial Statements (Continued)

	Six Months Ended
	June 30,		June 30,
	2006		2007
	(unaudited)
Net sales	$	86,845,000	$	87,777,000
Net income	4,823,000			4,661,000
Net income per share:
Basic	$	.88	$	.84
Diluted	$	.84	$	.82

(3) Goodwill and Other Intangible Assets

     In July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141,“Business Combinations”and SFAS No. 142,“Goodwill and Other Intangible Assets.”SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination, whether acquired individually or with a group of other assets, and the accounting and reporting for goodwill and other intangibles subsequent to their acquisition. These standards require that the purchase method of accounting be used for business combinations and eliminates the use of the pooling-of-interest method. Additionally, these standards require that goodwill and intangible assets with indefinite lives no longer be amortized. The Company was required to adopt SFAS No. 141 and SFAS No. 142 on a prospective basis as of July 1, 2001 and January 1, 2002, respectively. In accordance with the provisions of SFAS No. 142, the Company no longer amortizes goodwill.

     The changes in the carrying amount of goodwill for the six months ended June 30, 2007 are as follows:

	Six Months Ended
	June 30, 2007
Balance as of January 1	$	68,001,000
Adjustments related to contingent consideration		300,000
Adjustments related to the finalization of preliminary purchase estimates		13,000
Effects of exchange rate changes		188,000
Balance as of June 30	$	68,502,000

     The Company’s contingent laboratory purchase price liabilities as defined in the purchase agreements are tied to earnings performance, generally over a three year period, and are approximately $667,000 at June 30, 2007. As the contingencies are resolved, any contingent laboratory purchase price payments will be recorded as goodwill.

     In connection with dental laboratory acquisitions, the Company has identified certain other intangible assets including trade names, customer relationships and non-competition agreements. The Company has applied the provisions of SFAS No. 141 and SFAS No. 142 as well as EITF No. 02-17“Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination”(“EITF 02-17”) in its purchase price allocations.

Trade Names

     Trade names as acquired are valued using a quantification of the income generated based on the recognition afforded by the trade name in the marketplace, using the relief-from-royalty valuation approach. Company practice is to use existing and acquired trade names in perpetuity, and consequently they have been treated as indefinite-lived intangibles. While these assets are not subject to amortization, they are tested for impairment at least annually in accordance with SFAS No. 142. The Company uses the relief-from-royalty valuation approach at each fiscal year end to determine the value of the asset. Trade name impairment charges generally result from a decline in forecasted revenue at specific laboratories in comparison to revenue forecasts used, if any, in previous valuation calculations. There were no trade name impairment charges recorded for the six months periods ended June 30, 2007 or 2006.

7

Notes to Condensed Consolidated Financial Statements (Continued)

Customer Relationships

     Acquired dental laboratories have customer relationships in place with dentists within their market areas. Based on the criteria of EITF 02-17, the Company recognizes customer relationship assets when established relationships exist with customers through contracts or other contractual relationships such as purchase orders or sales orders. Customer relationships are valued based on an analysis of revenue and customer attrition data and amortized over their useful lives. The amounts assigned to customer relationships are amortized on a straight-line basis over their useful lives, ranging over periods of 9 to 12 years. The Company has determined that the straight-line method is appropriate based on an analysis of customer attrition statistics.

	As of June 30, 2007
Beginning of year, Gross	$	7,945,000
Effects of exchange rate changes		26,000
Customer Relationships, Gross		7,971,000
Less: Accumulated amortization		(2,032,000	)
Customer Relationships, Net — End of period	$	5,939,000

     Amortization expense associated with customer relationships totaled approximately $386,000 for the six months ended June 30, 2007 and is recorded in selling, general and administrative expenses. Future amortization expense of the current customer relationship balance will be approximately:

For the remainder of fiscal 2007	$	411,000
2008		768,000
2009		768,000
2010		768,000
2011		768,000
2012		698,000
Thereafter		1,758,000
	$	5,939,000

Non-competition Agreements

     The Company has incurred certain deferred purchase costs relating to non-compete agreements with certain individuals, ranging over periods of 2 to 15 years. The amounts assigned to non-competition agreements are amortized on a straight-line basis over the estimated economic lives of the agreements.

	As of
	June 30, 2007
Beginning of year, Gross	$	10,546,000
Effects of exchange rate changes		4,000
Non-competition agreements, Gross		10,550,000
Less: Accumulated amortization		(8,640,000	)
Non-competition agreements, net	$	1,910,000

     Amortization expense associated with non-competition agreements totaled approximately $319,000 for the six months ended June 30, 2007 and is recorded in selling, general and administrative expenses.

     Future amortization expense of non-competition agreements will be approximately:

For the remainder of fiscal 2007	$	173,000
2008		295,000
2009		273,000
2010		264,000
2011		224,000
2012		168,000
Thereafter		513,000
	$	1,910,000

8

Notes to Condensed Consolidated Financial Statements (Continued)

(4) Earnings per Share

     In accordance with the disclosure requirements of SFAS No. 128,“Earnings per Share,” basic earnings per share is computed by dividing net income by the weighted average number of shares outstanding and diluted earnings per share reflects the dilutive effect of stock options and the Company’s Employee Stock Purchase Plan. The weighted average number of shares outstanding, the dilutive effects of outstanding stock options, and the shares under option plans that were anti-dilutive for the three and six months ended June 30, 2007 and 2006 are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2006		2007		2006		2007
Weighted average number of shares used in basic earnings per share calculation		5,492,537		5,535,794		5,461,393		5,523,050
Incremental shares under option plans		281,654		130,364		288,738		130,792
Weighed average number of shares used in diluted earnings per share calculation		5,774,191		5,666,158		5,750,131		5,653,842
Shares under option plans excluded in computation of diluted earnings per share due to anti-dilutive effects	None			120,415	None			122,101

(5) Inventories

     Inventories consist of the following:

	December 31, 2006		June 30, 2007
Raw Materials	$	5,853,793	$	5,798,401
Work in Process		1,112,467		1,399,867
Finished Goods		246,715		196,694
	$	7,212,975	$	7,394,962

     Inventories are stated at the lower of cost (first-in, first-out) or market. Work in process represents an estimate of the value of specific orders in production yet incomplete at period end. Finished goods consist of completed orders that were shipped to customers immediately subsequent to period end.

(6) Comprehensive Income

     SFAS No. 130, “Reporting Comprehensive Income,” requires disclosure of all components of comprehensive income on an annual and interim basis. Comprehensive income is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. The Company’s total comprehensive income was as follows for the periods presented:

	Three Months Ended		Six Months Ended
	June 30, 2007		June 30, 2007
Net income	$	2,417,023	$	4,661,119
Foreign currency translation adjustments		263,465		298,984
Total comprehensive income	$	2,680,488	$	4,960,103

     Accumulated other comprehensive income at June 30, 2007 of $177,073 as presented in the equity section of the consolidated balance sheet is entirely attributable to accumulated foreign currency translation adjustments.

(7) Lines of Credit and Term Loan Facility

     On August 9, 2005, the Company entered into an amended and restated financing agreement (the “Amended Agreement”) with Bank of America, N.A. (the “Bank”). The Amended Agreement included a revolving line of credit of $5,000,000, a revolving acquisition line of credit of $20,000,000 and a term loan facility of $20,000,000. The interest rate on both revolving lines of credit and the term loan was the prime rate or, at the Company’s option, LIBOR, a cost of funds rate or the Bank’s fixed rate plus a range of 1.25% to 2.25%, depending on the ratio of consolidated funded debt to consolidated “EBITDA”, as defined in the Amended Agreement. The Amended Agreement required monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Amended Agreement. The Amended Agreement required compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

9

Notes to Condensed Consolidated Financial Statements (Continued)

     In October 2006 the Company borrowed against its acquisition line of credit to finance the acquisition of Keller Group, Incorporated (“Keller”). In connection with the acquisition, the Company and the Bank executed a Second Amended and Restated Loan Agreement as of November 6, 2006 (the “Second Agreement”) comprising uncollateralized senior credit facilities totaling $60,000,000. The Second Agreement amended and restated the Amended Agreement (a) to increase the term loan facility to an aggregate principal amount of $35,000,000 and used the proceeds of the increase in the term loan to repay the outstanding principal balance under the acquisition line of credit and (b) to adjust the allocation of availability under the lines of credit by increasing the revolving line of credit to $10,000,000 ($5,000,000 of which may be used for future acquisitions) and decreasing the acquisition line of credit from $20,000,000 to $15,000,000. The interest rate on both lines of credit and the term loan is now the prime rate or, at the Company’s option, LIBOR, a cost of funds rate or the Bank’s fixed rate, plus, in each case, a range of 1.25% to 3.00%, depending on the ratio of consolidated total funded debt to consolidated “EBITDA”, as each is defined in the Second Agreement. The term loan facility portion of the Second Agreement requires monthly interest payments and monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Second Agreement. The acquisition line of credit and the first line of credit mature on the third anniversary of the Second Agreement. The Second Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

     As of June 30, 2007, $6,837,000 was available under the revolving line of credit and $15,000,000 was available under the acquisition line of credit.

	December 31,		June 30,
	2006		2007
Total long-term debt	$	35,458,000	$	32,232,000
Less: Current maturities		5,769,000		5,070,000
Long-term debt, less current portion	$	29,689,000	$	27,162,000

     The table below reflects the contractual repayment terms associated with the existing Second Agreement at June 30, 2007. The interest rate associated with the Company’s borrowings as of June 30, 2007 was 8.1%.

	Principal Due
For the remainder of fiscal 2007	$	2,542,000
Fiscal 2008		5,063,000
Fiscal 2009		5,040,000
Fiscal 2010		5,004,000
Fiscal 2011		14,583,000
Total	$	32,232,000

(8) Segment Information

     The Company follows Statement of Financial Accounting Standards No. 131 (“SFAS 131”),“Disclosures about Segments of an Enterprise and Related Information”.SFAS 131 establishes standards for disclosing information about reportable segments in financial statements. Laboratory operating income includes the direct profits generated by laboratories owned by the Company and excludes general and administrative expenses of the Company’s corporate location including amortization expenses associated with the Company’s intangible assets as well as interest expense.

     In March 2005, the Company acquired Green Dental Laboratories, Inc. of Heber Springs, Arkansas. The Company identified Green as a separate operating segment since it met the quantitative thresholds of SFAS 131. In October 2006, the Company acquired Keller Group, Incorporated, a privately-held dental laboratory business with production facilities in both St. Louis, Missouri and Louisville, Kentucky. The Company has also identified Keller as a separate operating segment as it meets the quantitative thresholds of SFAS 131. As a result, the Company has three reportable segments. The accounting policies of this segment are consistent with those described for the consolidated financial statements in the summary of significant accounting policies.

10

Notes to Condensed Consolidated Financial Statements (Continued)

     The following table sets forth information about the Company’s operating segments for the three and six months ended June 30, 2007 and 2006:

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2006		June 30, 2007		June 30, 2006		June 30, 2007
Revenue:
NDX Laboratories	$	33,239,321	$	33,334,763	$	65,330,384	$	65,871,641
Green Dental Laboratory		4,913,316		5,089,939		9,635,520		10,218,427
Keller Group		—		6,120,446		—		11,836,206
Subtotal		38,152,637		44,545,148		74,965,904		87,926,274
Inter-segment Revenues:
Green Dental Laboratory		36,435		70,984		60,855		107,146
Keller Group		—		40,094		—		41,821
Net Sales	$	38,116,202	$	44,434,070	$	74,905,049	$	87,777,307
Laboratory Operating Income:
NDX Laboratories	$	5,388,293	$	5,339,030	$	10,692,348	$	10,401,059
Green Dental Laboratory		1,208,410		1,147,490		2,433,498		2,578,324
Keller Group		—		931,524		—		1,869,765
	$	6,596,703	$	7,418,044	$	13,125,846	$	14,849,148
Total Assets:
NDX Laboratories	$	83,575,833	$	88,100,894	$	83,575,833	$	88,100,894
Green Dental Laboratory		26,826,052		26,828,504		26,826,052		26,828,504
Keller Group		—		25,976,785		—		25,976,785
Corporate		9,718,662		9,589,585		9,718,662		9,589,585
	$	120,120,547	$	150,495,768	$	120,120,547	$	150,495,768
Capital Expenditures:
NDX Laboratories	$	388,144	$	852,133	$	1,223,319	$	1,167,445
Green Dental Laboratory		31,909		306,869		45,439		329,695
Keller Group		—		360,465		—		592,231
Corporate		138,983		125,636		211,988		200,959
	$	559,036	$	1,645,103	$	1,480,746	$	2,290,330
Depreciation & Amortization on Property, Plant & Equipment:
NDX Laboratories	$	567,207	$	538,182	$	1,054,607	$	1,131,892
Green Dental Laboratory		63,925		81,098		129,435		151,633
Keller Group		—		94,740		—		168,174
Corporate		150,822		167,693		291,245		330,266
	$	781,954	$	881,713	$	1,475,287	$	1,781,965

Reconciliation of Laboratory Operating Income with reported Consolidated Operating Income:

	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	June 30, 2006		June 30, 2007		June 30, 2006		June 30, 2007
Laboratory Operating Income	$	6,596,703	$	7,418,044	$	13,125,846	$	14,849,148
Less:
Corporate Selling, General and Administrative Expenses		2,096,496		2,453,506		4,462,874		5,134,390
Amortization Expense — Intangible Assets		382,625		313,113		795,375		717,840
Add:
Other Expense		227,185		223,147		437,815		397,648
Consolidated Operating Income	$	4,344,767	$	4,874,572	$	8,305,412	$	9,394,566

11

Notes to Condensed Consolidated Financial Statements (Continued)

(9) Recent Accounting Pronouncements

     In June 2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109”, (“FIN 48”). FIN 48 clarifies the uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Additionally, FIN 48 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation was adopted by the Company effective January 1, 2007.

     At December 31, 2006 the Company had recorded $347,000 of contingent taxes payable, which included interest and penalties of $51,000. This liability was recorded as a component of other accrued expenses in the Consolidated Balance Sheet. This liability related to ongoing tax filing positions taken by the Company in its previously filed US Federal and State tax returns. As of June 30, 2007, the tax years that remain subject to examination by the Internal Revenue Service and other state tax jurisdictions are 2002 to 2005. In connection with the adoption of FIN 48, the Company determined this $347,000 liability met the FIN 48 recognition provisions and no material adjustments were required upon adoption. Interest and penalties, as appropriate, continue to be recorded as a component of the Company’s tax liability and tax provision. As of June 30, 2007 the Company does not believe there is a reasonably possible material adjustment to this liability within the next twelve months.

(10) Legal Proceedings

     As sponsor of the National Dentex Corporation Dollars Plus Plan, (the “Plan”), a qualified plan under Section 401(a) of the Internal Revenue Code, the Company filed a retroactive plan amendment under the Internal Revenue Service’s Voluntary Correction Program to clarify the definition of compensation in the Plan. Effective June 7, 2007, the Internal Revenue Service accepted the retroactive plan amendment and issued a favorable determination letter.

     The Company is involved from time to time in litigation incidental to its business. Management believes that the outcome of current litigation will not have a material adverse effect upon the operations or financial condition of the Company and will not disrupt the normal operations of the Company.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements

The following discussion should be read in conjunction with the Consolidated Financial Statements
and the related notes that appear elsewhere in this document.

     Certain statements in this Quarterly Report, particularly statements contained in this Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The words “anticipate”, “believe”, “estimate”, “expect”, “plan”, “intend” and other similar expressions are intended to identify these forward-looking statements, but are not the exclusive means of identifying them. Forward-looking statements included in this Quarterly Report or hereafter included in other publicly available documents filed with the Securities and Exchange Commission (“SEC”), reports to our stockholders and other publicly available statements issued or released by us involve known and unknown risks, uncertainties, and other factors which could cause our actual results, performance (financial or operating) or achievements to differ from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. Such statements regarding future results are based upon our best estimates based upon current conditions and the most recent results of operations. Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, the forward-looking statements contained in this Quarterly Report. These include, but are not limited to, those described under the heading “Factors That May Affect Future Results”, as well as under Part II, Item 1A, “Risk Factors” of this Quarterly Report onForm 10-Q and under Item 1A of our most recently filed Annual Report onForm 10-K. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Overview

     We own and operate 48 dental laboratories located in 31 states and one Canadian province, serving an active customer base of over 24,000 dentists. Our business consists of the design, fabrication, marketing and sale of custom dental prosthetic appliances for dentists located primarily in the domestic marketplace.

     Our products are grouped into the following three main categories:

     Restorative Products.Restorative products that our dental laboratories sell consist primarily of crowns and bridges. A crown replaces the part of a tooth that is visible, and is usually made of gold, porcelain or zirconia. A bridge is a restoration of one or more missing teeth that is permanently attached to the natural teeth or roots. In addition to the traditional crown, we also make porcelain jackets, which are crowns constructed entirely of porcelain; onlays, which are partial crowns which do not cover all of the visible tooth; and precision crowns, which are restorations designed to receive and connect a removable partial denture. We also make inlays, which are restorations made to fit a prepared tooth cavity and then cemented into place.

     Reconstructive Products.Reconstructive products sold by our dental laboratories consist primarily of partial dentures and full dentures. Partial dentures are removable dental prostheses that replace missing teeth and associated structures. Full dentures are dental prostheses that substitute for the total loss of teeth and associated structures. We also sell precision attachments, which connect a crown and an artificial prosthesis, and implants, which are fixtures anchored securely in the bone of the mouth to which a crown, partial or full denture is secured by means of screws or clips.

     Cosmetic Products.Cosmetic products sold by our dental laboratories consist primarily of porcelain veneers and ceramic crowns. Porcelain veneers are thin coverings of porcelain cemented to the front of a tooth to enhance personal appearance. Ceramic crowns are crowns made from ceramic materials that most closely replicate natural teeth. We also sell composite inlays and onlays, which replace silver fillings for a more natural appearance, and orthodontic appliances, which are products fabricated to move existing teeth to enhance function and appearance.

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     During 2006, our internal sales growth was 2.8%, including the effect of increased prices due to underlying increases in the prices of precious metals. We believe that the low cost segment for United States-based dental laboratories has begun to shrink as competition from offshore laboratories, primarily those located in China, makes inroads into the domestic marketplace. While our business has not focused on this low cost segment of the market, we have experienced price pressure from laboratories in our marketplaces that has restrained our ability to increase prices. During the first six months of 2007, these increasing competitive pressures in the form of low price competition were partially responsible for declines in revenues or revenue growth in several marketplaces. In addition, we face growing competition from technology-based solutions that allow dentists to fabricate their own restorations without the use of a dental laboratory. Both of these trends have impacted industry growth, and have been inhibiting our results of operations. Technology based dental laboratory CAD-CAM manufacturing solutions have required additional investments in capital equipment. While we expect these capital expenditures will benefit future periods, they have not yet positively impacted net income.

     The main components of our costs are labor and related employee benefits as well as raw materials, including precious metals. Over the past several years, competition for labor resources and increases in medical insurance premiums, as well as volatility in the prices of many precious metals that we use, such as gold and palladium, have driven these costs higher. We have been evaluating and adjusting staffing levels as appropriate at each of our locations while recognizing the need to maintain an available and properly trained workforce.

     Since 2004 we have experienced cost pressures resulting from the implementation expenditures necessary to comply with Section 404 of the Sarbanes-Oxley Act. The impact of these various Section 404 implementation costs on earnings for fiscal 2004 was approximately $1,027,000, or approximately $0.11 per diluted share, net of taxes. For fiscal 2005, these costs were approximately $720,000,or approximately $0.08 per diluted share, net of taxes while in 2006, these costs were approximately $530,000,or approximately $0.06 per diluted share, net of taxes. We believe that these external costs will decrease in 2007 as a result of revisions to standards governing the audit of internal control over financial reporting, but that significant ongoing expenditures will still be required to maintain our compliance with the internal controls framework required by the Sarbanes-Oxley Act.

     We have also continued to pursue our acquisition strategy, which has played an important role in helping us increase sales over the past five years from $95,185,000 in 2002 to $150,107,000 in 2006. We recognize acquired customer relationships and trade names as intangible assets which require the recognition of amortization expense (for the customer relationships) and impairment testing (for the customer relationships, trade names and goodwill). On a prospective basis, our future amortization expense will increase based upon our recent and any future acquisition activity. The amount recognized for customer relationships and subsequent amortization expense will depend on the expected profitability and customer retention characteristics of our recently acquired businesses together with those, if any, that we may subsequently acquire.

     In March 2005 we completed what was then our largest acquisition to date, Green Dental Laboratories, Inc. (“Green”). Green is treated as a separate reportable segment for financial reporting purposes and retains a separate company identity as a wholly owned subsidiary.

     In October 2006, we completed our largest acquisition to date, that of Keller Group, Incorporated (“Keller”) of St. Louis, Missouri. Keller is also treated as a separate reportable segment for financial reporting purposes. Keller differs from National Dentex in its approach to marketing and to the marketplace. In recent years Keller has broadened its focus from local markets in the Midwest to the national marketplace. In order to sustain this strategy, Keller invests significantly in product advertising, primarily in dental print publications. As a result, we expect Keller to return lower net margins initially than our other operating segments but conversely expect it to obtain stronger sales growth prospectively. In January 2007, we announced a realignment of our corporate organization that reflects our recent acquisitions and is designed to help us better execute our operational strategy.

     In order to finance the purchase of Green and Keller, we borrowed approximately $39,200,000 in long-term debt. Future acquisitions may also be financed using available debt financing. As a result of our acquisitions of Green and Keller we are more highly leveraged than we were previously. Our interest expense has therefore become a more significant component of our pre-tax earnings. Interest expense in the first six months of 2007 was $1,481,000 compared to $570,000 in the first six months of 2006. Interest expense for 2006 was $1,523,000 compared to $665,000 in 2005 and $42,000 in 2004.

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     For the six month period ended June 30, 2007, sales increased $12,872,000 to $87,777,000, and net income increased $192,000. The acquisitions completed in the fourth quarter of 2006, Keller and Impact, were primarily responsible for this sales growth. While our gross profit declined by $71,000 within the NDX Laboratories operating segment, Green’s contribution increased by $332,000 over the prior year and Keller contributed $6,140,000 of acquired gross profit. Overall results benefited from lower health and life insurance expense as well as increasing returns in laboratory technology investments. Same laboratory sales declined $927,000 in the quarter ended June 30, 2007 and $988,000 in the six months ended June 30, 2007. Laboratory labor and benefits also declined $698,000 for the quarter and $989,000 for the six month period, as we adjusted our staffing levels at certain laboratories in the NDX Laboratories operating segment. However, the consolidation of certain laboratories and departments with the goal of improving profitability led to the loss of certain customers and contributed to the decline in same laboratory sales.

Liquidity and Capital Resources

     Our working capital increased $1,698,000 from $6,232,000 at December 31, 2006 to $7,930,000 at June 30, 2007. Cash and cash equivalents decreased $78,000 from $648,000 at December 31, 2006 to $570,000 at June 30, 2007. Operating activities provided $5,150,000 in cash flow for the six months ended June 30, 2007 compared to $4,664,000 during the six months ended June 30, 2006, an increase of $486,000. The increase was attributable to decreases in accounts receivable of $974,000 due to the timing of sales, decreases in gains on property disposals of $408,000 and increased net income and depreciation expense of $421,000 and various other increases, offset by increases in prepaid expenses of $1,727,000, primarily resulting from timing differences related to the payment of health and general insurance premiums and income taxes.

     Cash outflows related to dental laboratory acquisitions, including deferred purchase price payments associated with prior period acquisitions, totaled $1,522,000 for the six months ended June 30, 2007 compared to $1,184,000 for the six months ended June 30, 2006.

     On August 9, 2005 we entered into an amended and restated financing agreement (the “Amended Agreement”) with Bank of America, N.A. (the “Bank”). The Amended Agreement included a revolving line of credit of $5,000,000, a revolving acquisition line of credit of $20,000,000 and a term loan facility of $20,000,000. The interest rate on both revolving lines of credit and the term loan was the prime rate or, at our option, LIBOR, a cost of funds rate, or the Bank’s fixed rate plus a range of 1.25% to 2.25% depending on the ratio of consolidated funded debt to consolidated “EBITDA”, as defined in the Amended Agreement. The Amended Agreement required monthly payments of principal on the term loan, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Amended Agreement. The Amended Agreement required compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

     In October 2006 we borrowed against our acquisition line of credit to finance our acquisition of Keller. As a result of this acquisition, we and the Bank executed a Second Amended and Restated Loan Agreement as of November 6, 2006 (the “Second Agreement”) comprising uncollateralized senior credit facilities totaling $60,000,000. The Second Agreement amended and restated the Amended Agreement (a) to increase the term loan facility to an aggregate principal amount of $35,000,000 and used the proceeds of the increase in the term loan to repay the portion of the outstanding principal balance under the acquisition line of credit and (b) to adjust the allocation of availability under the lines of credit by increasing the revolving line of credit to $10,000,000 ($5,000,000 of which may be used for future acquisitions) and decreasing the acquisition line of credit from $20,000,000 to $15,000,000. The interest rate on both lines of credit and the term loan is now the prime rate or, at our option, LIBOR, a cost of funds rate or the Bank’s fixed rate, plus, in each case, a range of 1.25% to 3.00%, depending on the ratio of consolidated total funded debt to consolidated “EBITDA”, as each is defined in the Second Agreement. The term loan facility portion of the Second Agreement requires monthly interest payments and monthly payments of principal, based on a seven year amortization schedule, with a final payment due on the fifth anniversary of the Second Agreement. The acquisition line of credit and the first line of credit mature on the third anniversary of the Second Agreement. The Second Agreement requires compliance with certain covenants, including the maintenance of specified net worth and other financial ratios.

15

     As of June 30, 2007, $6,837,000 was available under the revolving line of credit and $15,000,000 was available under the acquisition line of credit.

	December 31,		June 30,
	2006		2007
Total long-term debt	$	35,458,000	$	32,232,000
Less: Current maturities		5,769,000		5,070,000
Long-term debt, less current portion	$	29,689,000	$	27,162,000

     The table below reflects the contractual repayment terms associated with the Second Agreement at June 30, 2007. The interest rate associated with our borrowings as of June 30, 2007 was 8.1%.

	Principal Due
For the remainder of fiscal 2007	$	2,542,000
Fiscal 2008		5,063,000
Fiscal 2009		5,040,000
Fiscal 2010		5,004,000
Fiscal 2011		14,583,000
Total	$	32,232,000

     We believe that cash flow from operations and available financing will be sufficient to meet contemplated operating and capital requirements and deferred payments associated with prior acquisitions for the foreseeable future.

Commitments and Contingencies

     The following table represents a list of our contractual obligations and commitments as of June 30, 2007:

	Payments Due By Period
			Less Than						Greater Than
	Total		1 Year		1 - 3 Years		4 - 5 Years		5 Years
Term Loan Facility	$	32,083,000	$	5,000,000	$	10,000,000	$	17,083,000	$	—
Interest Expense		7,467,000		2,404,000		3,581,000		1,482,000		—
Capital Leases		149,000		70,000		79,000		—		—
Operating Leases:
Real Estate		19,250,000		3,511,000		5,681,000		4,625,000		5,433,000
Vehicles		1,008,000		731,000		276,000		1,000		—
Equipment		231,000		110,000		100,000		21,000
Construction Contracts		616,000		616,000		—		—		—
Laboratory Purchase Obligations		1,878,000		1,278,000		600,000		—		—
Contingent Laboratory Purchase Price		667,000		667,000		—		—		—
TOTAL	$	63,349,000	$	14,387,000	$	20,317,000	$	23,212,000	$	5,433,000

     Bank borrowings on the term loan facility, with repayment terms greater than one year, are classified as long-term debt on the balance sheet. Interest expense payments, included in the above table, related to the term loan facility have been projected using the interest rate associated with current borrowings.

     We are committed under various non-cancelable operating lease agreements covering office space and dental laboratory facilities, vehicles and certain equipment. Certain of these leases also require us to pay maintenance, repairs, insurance and related taxes.

     Laboratory purchase obligations totaling $1,878,000, classified as deferred acquisition costs, are presented in the liability section of the balance sheet. These obligations, including deferred obligations associated with non-competition agreements, represent purchase price commitments arising from dental laboratory acquisitions, irrespective of the acquired laboratory’s earnings performance. Contingent laboratory purchase price includes amounts subject to acquisition agreements that are tied to laboratory earnings performance, as defined within the acquisition agreements, generally over a three year period. As payments become determinable, they are recorded in our purchase price allocation. The amount included in the table represents the maximum contractual amount that could be paid under the agreements.

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     As sponsor of the National Dentex Corporation Dollars Plus Plan, (the “Plan”), a qualified plan under Section 401(a) of the Internal Revenue Code, we filed a retroactive plan amendment under the Internal Revenue Service’s Voluntary Correction Program to clarify the definition of compensation in the Plan. Effective June 7, 2007, the Internal Revenue Service accepted the retroactive plan amendment and issued a favorable determination letter.

Results of Operations

     We report results within three operating segments, NDX Laboratories, Green Dental and Keller. The following table sets forth for the periods indicated the percentage of net sales represented by certain items in our condensed consolidated financial statements:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2006			2007			2006			2007
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		57.3			56.0			57.0			56.0
Gross profit		42.7			44.0			43.0			44.0
Selling, general and administrative expenses		31.3			33.0			31.9			33.3
Operating income		11.4			11.0			11.1			10.7
Other expense		0.6			0.5			0.6			0.5
Interest expense		0.7			1.7			0.8			1.6
Income before provision for income taxes		10.1			8.8			9.7			8.6
Provision for income taxes		4.0			3.4			3.7			3.3
Net income		6.1	%		5.4	%		6.0	%		5.3	%

  Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006

  Net Sales

     For the six months ended June 30, 2007, net sales increased $12,872,000 or 17.2% over the prior year. Net sales increased by approximately $13,861,000 as a result of acquisitions, measured by business at dental laboratories owned less than one year. Net sales decreased approximately $988,000 at dental laboratories owned for both the six months ended June 30, 2007 and the six months ended June 30, 2006, primarily as a result of sales declines in the NDX Laboratories operating segment. Competitive pressures from offshore laboratories that can produce crowns at fees lower than crowns manufactured in the United States continue to limit our ability to raise our prices during a time when we have experienced relatively higher costs for precious metals used in manufacturing. In addition, these competitive pressures are partially responsible for declines in revenues or revenue growth in several marketplaces.

Cost of Goods Sold

     Our cost of goods sold increased by $6,471,000 or 15.2% in the six months ended June 30, 2007 over the six months ended June 30, 2006. As a percentage of sales, cost of goods sold decreased from 57.0% to 56.0%, primarily resulting from decreases in labor and related benefits, partially offset by increases in materials expense. Manufacturing labor and related benefits decreased by approximately $700,000 for the six months ended June 30, 2007 compared to the six months ended June 30, 2006 primarily due to reductions in our staffing levels at certain laboratories. The cost of raw materials as a percentage of sales increased from 15.1% for the six months ended June 30, 2006 to 15.6% for the six months ended June 30, 2007. The average cost of precious metals used as components of many dental alloys, including gold and palladium, increased approximately 11.5% over average costs in the prior year. Although we are able to pass a portion of precious metal cost increases on to our customers, prolonged higher metal costs have had and likely will continue to have a negative impact on gross profit percentages.

     Overall, labor expense as a percentage of sales for the six months ended June 30, 2007 improved over the six months ended June 30, 2006. As a percentage of sales, production labor and related benefits declined from 34.1% in 2006 to 32.1% in 2007. Green’s labor costs of 28.2% of sales and Keller’s labor costs of 22.8% of sales in the first

17

quarter of 2007 lowered the overall percentage while the portion attributable to NDX Laboratories declined slightly to 34.4% of sales for the six months ended June 30, 2007 from 34.9% for the six months ended June 30, 2006.

Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $5,312,000 or 22.2% in the six months ended June 30, 2007 compared to 2006. Operating expenses increased as a percentage of net sales from 31.9% in 2006 to 33.3% in 2007. As a percentage of sales, delivery expenses increased from 8.5% in the six months ended June 30, 2006 to 8.8% in 2007. Selling expenses increased from 4.5% of sales for the six months ended June 30, 2006 to 6.0% in 2007. Selling expenses in the first quarter of 2007 for the Keller segment were 14.4% of sales, or $1,704,000 while spending on promotional materials and customer loyalty programs increased by approximately $103,000 for the six months ended June 30, 2007. Laboratory incentive compensation decreased from 3.1% of sales in 2006 to 2.8% in 2007, while the amount increased by $70,000, primarily attributable to Keller, from $2,355,000 for the six months ended June 30, 2006 to $2,425,000 in 2007.

     The increase of $5,312,000 in our operating expenses in 2007 was primarily attributable to the following increases:

• Additional operating costs associated with recent acquisitions — $4,731,000;

• Increases in salaries and benefits at the corporate level due to additional management staff — $554,000;

• Increases in selling expenses, including promotional materials and customer loyalty programs — $103,000; and

• Absence of gains on the sale of fixed assets in 2007, compared with the gain recorded in 2006 resulting from the sale of our former laboratory facility in Houston, Texas — $407,000; partially offset by:

• Increases in the cash surrender value of life insurance policies — $325,000; and

• Decreases in health insurance expense — $130,000;

     Operating Income

     As a result of the above factors, our operating income increased by $1,090,000 to $9,395,000 for the six months ended June 30, 2007 from $8,305,000 in 2006. As a percentage of net sales, operating income declined from 11.1% in 2006 to 10.7% in 2007, primarily as a result of the decline in same laboratory sales.

  Interest Expense

     Interest expense increased $912,000 from $570,000 for the six months ended June 30, 2006 to $1,481,000 in 2007, primarily as a result of our increased bank borrowings to fund our acquisition of Keller and rising interest rates.

  Provision for Income Taxes

     The provision for income taxes increased by $26,000 to $2,854,000 for the six months ended June 30, 2007 from $2,828,000 in 2006. The 38.0% effective tax rate estimated for fiscal year 2007 declined from the 38.8% effective tax rate for 2006. The decrease in the effective tax rate for 2007 was due in part to recognition of lower federal tax expense resulting from increases to the domestic manufacturing tax credit provisions of the American Jobs Creation Act of 2004.

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Net Income

     As a result of all the factors discussed above, net income increased $192,000 to $4,661,000 or $.82 per share on a diluted basis for the six months ended June 30, 2007 from $4,469,000 or $.78 per share on a diluted basis in 2006.

Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006

Net Sales

     For the three months ended June 30, 2007, net sales increased $6,318,000 or 16.6% over the prior year. Net sales increased by approximately $7,245,000 as a result of acquisitions, measured by business at dental laboratories owned less than one year. Net sales decreased approximately $927,000 at dental laboratories owned for both the three months ended June 30, 2007 and the three months ended June 30, 2006, primarily as a result of sales declines in the NDX Laboratories operating segment, for the same reasons as discussed above in connection with the six month comparisons for 2007 and 2006.

Cost of Goods Sold

     Our cost of goods sold increased by $3,050,000 or 14.0% in the three months ended June 30, 2007 over the three months ended June 30, 2006. As a percentage of sales, cost of goods sold decreased from 57.3% to 56.0%, primarily resulting from decreases in labor and related benefits, partially offset by increases in materials expense. Manufacturing labor and related benefits decreased by approximately $550,000 for the three months ended June 30, 2007 compared to the three months ended June 30, 2006 primarily due to reductions in our staffing levels at certain laboratories. The cost of raw materials as a percentage of sales increased from 15.4% for the three months ended June 30, 2006 to 16.1% for the three months ended June 30, 2007. The average cost of precious metals used as components of many dental alloys, including gold and palladium, increased approximately 6.3% for gold and 6.0% for palladium, over average costs in the prior year. Although we are able to pass a portion of precious metal cost increases on to our customers, prolonged higher metal costs have had and likely will continue to have a negative impact on gross profit percentages.

     Overall, labor expense as a percentage of sales for the three months ended June 30, 2007 improved over the three months ended June 30, 2006. As a percentage of sales, production labor and related benefits declined from 34.1% in 2006 to 32.0% in 2007. Green’s labor costs of 28.7% of sales and Keller’s labor costs of 23.3% of sales in the second quarter of 2007 lowered the overall percentage while the portion attributable to NDX Laboratories declined slightly to 34.1% of sales for the three months ended June 30, 2007 from 34.9% for the three months ended June 30, 2006.

Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $2,739,000 or 22.9% in the three months ended June 30, 2007 compared to 2006. Operating expenses increased as a percentage of net sales from 31.3% in 2006 to 33.1% in 2007. As a percentage of sales, delivery expenses increased from 8.4% in the three months ended June 30, 2006 to 9.0% in 2007. Selling expenses increased from 4.5% of sales for the three months ended June 30, 2006 to 5.9% in 2007. Selling expenses in the second quarter of 2007 for the Keller segment were 13.2% of sales, or $810,000. Laboratory incentive compensation decreased from 3.3% of sales in the three months ended June 30, 2006 to 2.9% in the three months ended June 30, 2007.

     The increase of $2,739,000 in our operating expenses in the quarter ended June 30, 2007 was primarily attributable to the following increases:

• Additional operating costs associated with recent acquisitions — $2,439,000;

• Increases in salaries and benefits at the corporate level due to additional management staff — $341,000;

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     Operating Income

     As a result of the above factors, our operating income increased by $530,000 to $4,875,000 for the three months ended June 30, 2007 from $4,345,000 in 2006. As a percentage of net sales, operating income declined from 11.4% in 2006 to 11.0% in 2007, primarily as a result of the decline in same laboratory sales.

  Interest Expense

     Interest expense increased $473,000 from $281,000 for the three months ended June 30, 2006 to $754,000 in 2007, primarily as a result of our increased bank borrowings to fund our acquisition of Keller and rising interest rates.

  Provision for Income Taxes

     The provision for income taxes decreased by $37,000 to $1,480,000 for the three months ended June 30, 2007 from $1,517,000 in 2006. The 39.5% effective tax rate for fiscal year 2006 decreased to 38.0% for fiscal year 2007, for the same reasons as previously discussed.

  Net Income

     As a result of all the factors discussed above, net income increased $97,000 to $2,417,000 or $.43 per share on a diluted basis for the three months ended June 30, 2007 from $2,320,000 or $.40 per share on a diluted basis in 2006.

Operating Segment Results

     Our business consists of a single industry segment, which is the design, fabrication, marketing and sale of custom dental prosthetic appliances for and to dentists in North America. We report on three operating segments within this single industry segment. These three segments are Green Dental, representing the operations of Green Dental Laboratories, Inc. of Heber Springs, Arkansas which we acquired in March 2005; Keller, representing the operations of Keller Group, Incorporated with laboratories in St. Louis, Missouri and Louisville, Kentucky which we acquired in October, 2006; and NDX Laboratories, which represents our remaining laboratories, including Impact Dental Laboratory Limited, which we acquired in October, 2006.

	Three Months Ended June 30
	2006		2007		$ Change			% Change
Revenue:
NDX Laboratories	$	33,239,321	$	33,334,763	$	95,442			0.3
Green Dental		4,913,316		5,089,939		176,623			3.6
Keller		—		6,120,446		6,120,446			—
Subtotal		38,152,637		44,545,148		6,392,511			16.8
Less: Inter-segment Revenues:		36,435		111,078		74,643			—
Net Sales	$	38,116,202	$	44,434,070	$	6,317,868			16.6
Laboratory Operating Income:
NDX Laboratories	$	5,388,293	$	5,339,030	$	(49,263	)		(0.9	)
Green Dental		1,208,410		1,147,490		(60,920	)		(5.0	)
Keller		—		931,524		931,524			—
Laboratory Operating Income	$	6,596,703	$	7,418,044	$	821,341			12.5

	Six Months Ended June 30
	2006		2007		$ Change		% Change
Revenue:
NDX Laboratories	$	65,330,384	$	65,871,641	$	541,257		0.8
Green Dental		9,635,520		10,218,427		582,907		6.1
Keller		—		11,836,206		11,836,206		—
Subtotal		74,965,904		87,926,274		12,960,370		17.3

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	Six Months Ended June 30
	2006		2007		$ Change			% Change
Less: Inter-segment Revenues:		60,855		148,967		88,112			—
Net Sales	$	74,905,049	$	87,777,307	$	12,872,258			17.2
Laboratory Operating Income:
NDX Laboratories	$	10,692,348	$	10,401,059	$	(291,289	)		(2.7	)
Green Dental		2,433,498		2,578,324		144,826			6.0
Keller		—		1,869,765		1,869,765			—
Laboratory Operating Income	$	13,125,846	$	14,849,148	$	1,723,302			13.1

NDX Laboratories

     For the six months ended June 30, 2007, sales growth in this segment of 0.7% consisted of a 2.4% reduction in internal growth and growth of 3.1% related to the October 2006 acquisition of Impact. The reduction in internal sales resulted primarily from the loss of certain customers as we consolidated certain laboratories and departments, with the goal of improving long-term profitability. Several laboratories in this segment also experienced lower unit volumes as they were impacted by increased competitive pressures in the form of low price competition. Additionally, this segment experienced generally flat unit growth at other locations.

     Gross profit as a percentage of sales decreased from 42.3% for the six months ended June 30, 2006 to 41.9% for the six months ended June 30, 2007. Cost of goods sold increased by $524,000. The increase was attributable to additional costs from acquisitions of $1,180,000, increases in the cost of materials of approximately $64,000, laboratory overhead increases of approximately $109,000 resulting from new facilities and higher energy costs, offset by decreases in manufacturing labor and benefits of approximately $829,000, primarily resulting from reductions in staffing levels and decreases in health insurance costs.

     Laboratory operating income as a percentage of sales for NDX Laboratories decreased from 16.4% for the six months ended June 30, 2006 to 15.8% for the six months ended June 30, 2007 primarily as a result of the above factors.

Green Dental

     For the six months ended June 30, 2007, sales growth in this segment was 3.6%, all of which was internal sales growth. As a percentage of sales, gross profit increased from 47.8% for the six months ended June 30, 2006 to 48.3% for the six months ended June 30, 2007, primarily the result of manufacturing labor and benefit decreases. Laboratory operating income as a percentage of sales for Green was consistent at 25.2% for the six months ended June 30, 2006 and June 30, 2007.

Keller

     This segment resulted from our acquisition of Keller Group, Inc. effective October 2, 2006, and therefore the sales are entirely attributable to acquisition growth. Keller operates with manufacturing efficiencies but also is pursuing growth with significant spending in product advertising, primarily in dental print publications and direct mail. As a result, we expect Keller to return lower net margins initially than our other operating segments but conversely expect it to obtain stronger sales growth prospectively.

     Gross profit as a percentage of sales for Keller was 51.2% in the second quarter of 2007 compared to 52.6% in the first quarter of 2007. Laboratory operating income as a percentage of sales was 15.2% in the second quarter of 2007 compared to 16.4% in the first quarter of 2007.

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Factors That May Affect Future Results

     Various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, statements contained in this Quarterly Report on Form 10-Q, including, but not limited to those described in Part II, Item 1A, “Risk Factors” of this Quarterly Report and in Item 1A, “Risk Factors” in our most recently filed Annual Report on Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     Our market risk exposure includes potential price volatility of commodities we use in our manufacturing processes. We purchase dental alloys that contain gold, palladium and other precious metals. We have not participated in hedging transactions. We have relied on pricing practices that attempt to pass increased costs on to the customer, in conjunction with materials substitution strategies.

     At June 30, 2007, we had variable rate debt of $32,232,000. Based on this amount, the earnings and cash flows impact for the next year resulting from a one percentage point increase in interest rates would be approximately $200,000, net of tax, holding other variables constant.

Item 4. Controls and Procedures

(a)Evaluation of Disclosure Controls and Procedures.

     We carried out an evaluation, with the participation of our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures as of June 30, 2007. In designing and evaluating our disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and our management necessarily applied its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that, as of June 30, 2007, our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e), were effective to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission’s rules and forms and such information is accumulated and communicated to management, including the CEO and CFO, to allow timely decisions regarding required disclosure.

(b)Changes in Internal Controls.

     No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended June 30, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings:

We are involved from time to time in litigation incidental to our business. Our management believes that the outcome of current litigation will not have a material adverse effect upon our operations or financial condition and will not disrupt our normal operations.

Item 1A. Risk Factors:

     There have been no material changes to the risk factors previously disclosed in Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006, as filed with the SEC on March 16, 2007.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds:

We did not repurchase any of our equity securities during the fiscal quarter ended June 30, 2007 or engage in any transactions during such period reportable pursuant to Item 703 of Regulation S-K.

Item 3. Defaults upon Senior Securities:

     Not Applicable

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

Our Special Meeting in Lieu of an Annual Meeting of Stockholders was held on May 15, 2007. At the meeting, the following matters were voted upon and approved:

(a) Proposal to elect the following persons as directors.

	Number of Votes		Number of Votes Witheld
Name	Cast for Nominee		from Nominee
David L. Brown		4,555,385		110,756
Thomas E. Callahan		4,650,182		15,959
Jack R. Crosby		4,558,505		107,636
David V. Harkins		1,619,245		3,046,896
Norman F. Strate		4,649,207		16,934
James E. Mulvihill, D.M.D		4,651,074		15,067

(b) Proposal to approve an amendment to our 1992 Employees’ Stock Purchase Plan.

Number of Votes Cast	Number of Votes Cast		Number of Votes
for Proposal	Against Proposal		Abstained
3,872,255		69,084		724,802

(c) Proposal to ratify the selection of the independent registered public accounting firm of PricewaterhouseCoopers LLP as our auditors for the fiscal year ending December 31, 2007.

Number of Votes Cast	Number of Votes Cast		Number of Votes
for Proposal	Against Proposal		Abstained
4,654,803		9,405		1,933

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Item 5. Other Information:

     Not Applicable

Item 6. Exhibits:

     The exhibits listed in the Exhibit Index immediately preceding the exhibits are filed as part of this Quarterly Report of Form 10-Q.

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SIGNATURES

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

NATIONAL DENTEX CORPORATION
Registrant

August 8, 2007	By:	/s/ DAVID L. BROWN
		David L. Brown
		President, CEO and Director (Principal Executive Officer)
August 8, 2007	By:	/s/WAYNE M. COLL
		Wayne M. Coll
		Vice President and Chief Financial Officer (Principal Financial Officer)

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Exhibit Index

Exhibit
No.	Description
31.1	Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act (Chief Executive Officer).
31.2	Certification Pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act (Chief Financial Officer).
32.1	Certification pursuant to 18 U.S.C. Section 1350 (Chief Executive Officer).
32.2	Certification pursuant to 18 U.S.C. Section 1350 (Chief Financial Officer).

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