National Dentex (NADX) 10-Q 2008 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, 2008

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.)
2 Vision Drive, Natick, MA	01760
(Address of Principal Executive Offices)	(Zip Code)

(508) 907-7800
(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, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one).

Large accelerated filer o	Accelerated filer þ	Non-accelerated filer o	Smaller reporting company o
	(Do not check if a smaller reporting company)

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

     As of August 8, 2008, 5,654,546 shares of the registrant’s Common Stock, par value $.01 per share, were outstanding.

NATIONAL DENTEX CORPORATION
FORM 10-Q
QUARTER ENDED JUNE 30, 2008
TABLE OF CONTENTS

	Page
PART I. Financial Information
Item 1. Financial Statements:
Unaudited Condensed Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008		3
Unaudited Condensed Consolidated Statements of Income for the three and six month periods ended June 30, 2007 and 2008		4
Unaudited Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and 2008		5
Notes to Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		14
Item 3. Quantitative and Qualitative Disclosures About Market Risk		24
Item 4. Controls and Procedures		24
PART II. Other Information
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
Exhibit Index		28
Ex-10.2 Written Summary of Compensation Arrangements
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO

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NATIONAL DENTEX CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)

	December 31,		June 30,
	2007		2008
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	1,689,391	$	2,027,806
Accounts receivable:
Trade, less allowance of $359,000 in 2007 and $396,000 in 2008		16,073,716		17,549,476
Other		2,484,821		1,793,438
Inventories		7,354,062		7,847,213
Prepaid expenses		4,298,891		3,514,562
Deferred tax asset		964,892		1,115,178
Property held for sale		259,000		—
Total current assets		33,124,773		33,847,673
PROPERTY, PLANT AND EQUIPMENT:
Land and buildings		7,835,015		7,835,015
Leasehold and building improvements		16,202,649		18,950,238
Laboratory equipment		21,327,055		22,863,744
Furniture and fixtures		7,789,754		8,689,175
		53,154,473		58,338,172
Less — Accumulated depreciation and amortization		22,279,229		23,830,871
Net property, plant and equipment		30,875,244		34,507,301
OTHER ASSETS, net:
Goodwill		68,987,397		69,218,627
Trade names		8,998,123		8,986,306
Customer relationships		5,575,194		5,181,173
Non-competition agreements		1,743,867		1,588,081
Other assets		6,334,545		8,150,820
Total other assets		91,639,126		93,125,007
Total assets	$	155,639,143	$	161,479,981
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Revolving line of credit	$	4,547,101	$	3,293,991
Current portion of long-term debt		5,064,174		5,128,706
Accounts payable		5,810,303		6,342,606
Accrued liabilities:
Payroll and employee benefits		6,545,770		5,091,682
Current portion of deferred acquisition costs		1,278,861		300,000
Other accrued expenses		3,878,207		6,315,947
Total current liabilities		27,124,416		26,472,932
LONG-TERM LIABILITIES:
Long-term obligations		24,630,801		26,712,993
Deferred compensation		5,593,067		5,940,709
Other accrued expenses		961,453		961,453
Deferred tax liability		6,137,143		5,943,937
Total long-term liabilities		37,322,464		39,559,092
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 — 5,582,119 shares at December 31, 2007 and 5,637,351 shares at June 30, 2008		55,821		56,374
Paid-in capital		18,501,175		19,265,159
Retained earnings		72,189,938		75,807,759
Other comprehensive income		445,329		318,665
Total stockholders’ equity		91,192,263		95,447,957
Total liabilities and stockholders’ equity	$	155,639,143	$	161,479,981

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

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NATIONAL DENTEX CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2007		2008		2007		2008
Net sales	$	44,434,070	$	44,579,581	$	87,777,307	$	88,108,245
Cost of goods sold		24,873,866		25,914,775		49,156,649		51,233,091
Gross profit		19,560,204		18,664,806		38,620,658		36,875,154
Selling, general and administrative expenses		14,685,632		14,803,532		29,226,092		29,624,478
Operating income		4,874,572		3,861,274		9,394,566		7,250,676
Other expense		223,147		210,234		397,648		368,417
Interest expense		754,257		513,238		1,481,407		1,021,087
Income before provision for income taxes		3,897,168		3,137,802		7,515,511		5,861,172
Provision for income taxes		1,480,145		1,200,610		2,854,392		2,243,350
Net income	$	2,417,023	$	1,937,192	$	4,661,119	$	3,617,822
Net income per share — basic	$	.44	$	.34	$	.84	$	.65
Net income per share — diluted	$	.43	$	.34	$	.82	$	.64
Weighted average shares outstanding — basic		5,535,794		5,630,056		5,523,050		5,607,518
Weighted average shares outstanding — diluted		5,666,158		5,652,193		5,653,842		5,637,212

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

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NATIONAL DENTEX CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six months Ended
	June 30,			June 30,
	2007			2008
Cash flows from operating activities:
Net income	$	4,661,119		$	3,617,822
Adjustments to reconcile net income to net cash provided by operating activities, net of effects of acquisitions:
Depreciation and amortization		2,499,886			2,739,633
Loss (Gain) on disposal of property, plant and equipment		3,787			(38,930	)
Benefit for deferred income taxes		(87,357	)		(151,453	)
Provision for bad debts		20,921			88,094
Losses on write-down of inventories		61,003			80,121
Stock-based compensation expense		113,764			204,227
Other non-cash items		251,703			(23,804	)
Changes in operating assets and liabilities, net of effects of acquisitions:
Increase in accounts receivable		(657,281	)		(886,128	)
Increase in inventories		(230,135	)		(578,361	)
(Increase) decrease in prepaid expenses		(855,497	)		773,122
(Increase) decrease in other assets		(149,423	)		336,209
(Decrease) increase in accounts payable and accrued liabilities		(496,047	)		1,121,005
Net cash provided by operating activities		5,136,443			7,281,557
Cash flows from investing activities:
Payment of deferred purchase price		(1,521,576	)		(1,277,720	)
Increase in notes receivable		—			(2,000,000	)
Premiums paid for life insurance policies		(171,999	)		(152,484	)
Additions to property, plant and equipment		(2,627,401	)		(4,384,905	)
Dispositions of property, plant, and equipment		182,400			313,830
Net cash used in investing activities		(4,138,576	)		(7,501,279	)
Cash flows from financing activities:
Borrowings of revolving line of credit		29,167,423			26,816,381
Repayments of revolving line of credit		(27,347,761	)		(28,069,491	)
Borrowings of long-term debt		—			3,800,000
Repayments of long-term debt		(3,234,355	)		(2,533,548	)
Net proceeds from issuance of common stock		306,090			560,309
Net cash (used in) provided by financing activities		(1,108,603	)		573,651
Effect of Exchange rate changes on cash		32,779			(15,514	)
Net (decrease) increase in cash and cash equivalents		(77,957	)		338,415
Cash and cash equivalents at beginning of period		648,265			1,689,391
Cash and cash equivalents at end of period	$	570,308		$	2,027,806
Supplemental schedule of non-cash investing and financing activities:
Capital lease obligations		—		$	(881,000	)

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

5

NATIONAL DENTEX CORPORATION

Notes to Condensed Consolidated Financial Statements
June 30, 2008
(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, 2007 as filed with the SEC on March 12, 2008 in its Annual Report 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 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 specified events, which generally are based on 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 condensed 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”).

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(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 and tests for impairment annually, on June 30th.

     The changes in the carrying amount of goodwill for the six months ended June 30, 2008 are as follows:

	As of
	June 30, 2008
Beginning of year	$	68,987,000
Adjustments related to contingent consideration		300,000
Effects of exchange rate changes		(69,000	)
Goodwill— End of period	$	69,218,000

     Adjustments related to contingent consideration arise from payments related to laboratory purchase obligations subject to earnings performance, as detailed in the purchase agreements. As of June 30, 2008, all contingencies have been resolved.

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 on an annual basis 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 result from a decline in forecasted revenue at specific laboratories in comparison to revenue forecasts used in previous valuation calculations. There were no trade name impairment charges recorded for the six month periods ended June 30, 2008 or 2007.

     The changes in the carrying amount of trade names for the six months ended June 30, 2008 are as follows:

	As of June 30, 2008
Beginning of year	$	8,998,000
Effects of exchange rate changes		(12,000	)
Trade Names — End of period	$	8,986,000

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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, 2008
Beginning of year, Gross	$	7,993,000
Effects of exchange rate changes		(9,000	)
Customer Relationships, Gross		7,984,000
Less: Accumulated amortization		(2,803,000	)
Customer Relationships, Net	$	5,181,000

     Amortization expense associated with customer relationships totaled approximately $385,000 for the six months ended June 30, 2008 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 2008	$	385,000
2009		770,000
2010		770,000
2011		770,000
2012		701,000
2013		489,000
Thereafter		1,296,000
	$	5,181,000

Non-competition Agreements

     In connection with acquisitions, the Company has executed 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 economic useful life of the agreement, and are recorded as operating expenses.

	As of June 30, 2008
Beginning of year, Gross	$	10,553,000
Effects of exchange rate changes		(1,000	)
Non-competition Agreements, Gross		10,552,000
Less: Accumulated amortization		(8,964,000	)
Non-competition Agreements, Net	$	1,588,000

     Amortization expense associated with non-competition agreements totaled approximately $155,000 for the six months ended June 30, 2008.

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

For the remainder of fiscal 2008	$	142,000
2009		274,000
2010		265,000
2011		225,000
2012		170,000
2013		152,000
Thereafter		360,000
	$	1,588,000

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(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 potential common shares. 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, 2008 and 2007 are as follows:

	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2007		2008		2007		2008
Weighted average number of shares used in basic earnings per share calculation		5,535,794		5,630,056		5,523,050		5,607,518
Incremental shares under option plans		130,364		22,137		130,792		29,694
Weighed average number of shares used in diluted earnings per share calculation		5,666,158		5,652,193		5,653,842		5,637,212
Shares under option plans excluded in computation of diluted earnings per share due to anti-dilutive effects		120,415		394,375		122,101		430,508

(5) Inventories

     Inventories consist of the following:

	December 31, 2007		June 30, 2008
Raw Materials	$	5,941,931	$	6,172,442
Work in Process		1,160,686		1,494,324
Finished Goods		251,445		180,447
	$	7,354,062	$	7,847,213

     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 derived 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, 2008		June 30, 2008
Net income	$	1,937,192	$	3,617,822
Foreign currency translation adjustments		26,679		(126,664	)
Total comprehensive income	$	1,963,871	$	3,491,158

     Accumulated other comprehensive income at June 30, 2008 of $318,665 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

9

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, income and other financial ratios.

     In October 2006, the Company borrowed against its acquisition line of credit to finance the acquisition of Keller Group, Incorporated (“Keller”). In order to refinance the borrowings incurred for the Keller acquisition, the Company and the Bank executed a Second Amended and Restated Loan Agreement as of November 7, 2006 (the “Second Agreement”) comprised of 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, minimum consolidated total “EBITDA”, debt to income ratio and other financial ratios.

     The Second Agreement was amended on May 9, 2008, effective March 31, 2008, to revise certain financial targets within these covenants. Additionally, the Bank and the Company agreed to consolidate the revolving line of credit with the acquisition line of credit into a single line of credit of $25,000,000 to be used by the Company for general corporate purposes, including potential acquisitions. The amendment did not change the total availability under the Second Agreement.

     As of June 30, 2008, $17,906,000 was available under the consolidated revolving line of credit. Prior to the consolidation of the credit lines, $3,800,000 was borrowed under the acquisition line of credit. This amount represents cumulative payments of deferred laboratory purchase price obligations drawn from the revolving line of credit since November 2006, when the loan agreement was amended, and has been classified as long-term debt.

Long-Term Obligations:

	December 31,		June 30,
	2007		2008
Term note	$	29,583,000	$	27,083,000
Borrowings under the former acquisition line of credit		—		3,800,000
Other long-term debt		112,000		959,000
Total long-term debt		29,695,000		31,842,000
Less: Current maturities		5,064,000		5,129,000
Long-term debt, less current portion	$	24,631,000	$	26,713,000

     The table below reflects the expected repayment terms associated with the long-term debt at June 30, 2008. The interest rate associated with the Company’s borrowings as of June 30, 2008 was 5.3%.

	June 30, 2008
	Principal Due
For the remainder of fiscal 2008	$	2,582,000
Fiscal 2009		8,917,000
Fiscal 2010		5,083,000
Fiscal 2011		14,667,000
Fiscal 2012		84,000
Thereafter		509,000
Total	$	31,842,000

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(8) Fair Value Measurements

     Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157) and SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). SFAS 157 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. SFAS 157 establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value which are provided in the table below. SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The adoption of both SFAS 157 and SFAS 159 had no impact on the Company’s financial statements.

     In February 2008, the FASB issued a FSP 157-2 that (1) partially deferred the effective date of SFAS 157 for one year for certain nonfinancial assets and nonfinancial liabilities and (2) removed certain leasing transactions from the scope of SFAS 157. SFAS 157 as amended by this FSP is effective for nonfinancial assets and liabilities in fiscal years beginning after November 15, 2008 and will be applied prospectively. The provisions of SFAS 157 are not expected to have a material impact on our consolidated financial statements.

     The Company uses the market approach technique to value its financial instruments and there were no changes in valuation techniques during the six months ended June 30, 2008. The Company’s financial assets and liabilities are primarily comprised of investments in insurance contracts held as assets to satisfy outstanding retirement liabilities.

SFAS No. 157 requires that assets and liabilities carried at fair value be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities that the Company has the ability to access.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data such as quoted prices, interest rates, and yield curves.

Level 3: Inputs are unobservable data points that are not corroborated by market data.

The following table presents information about the Company’s financial assets measured at fair value on a recurring basis as of June 30, 2008. There were no liabilities that require disclosure:

			Quoted Prices in		Significant Other
	As of		Active Markets		Observable Inputs		Significant Unobservable
Description	June 30, 2008		(Level 1)		(Level 2)		Inputs ( Level 3)
Financial Assets
Cash Surrender Value of Life Insurance		$5,875,000		—		$5,875,000		—
Total Financial Assets		$5,875,000		—		$5,875,000		—

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(9) Recent Accounting Pronouncements

          In December 2007, the FASB issued FAS No. 141 (Revised 2007), “Business Combinations” (“FAS 141 (R)”). FAS 141 (R) establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements, the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of business combinations. FAS 141 (R) is effective on a prospective basis for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combination we enter into after December 31, 2008 will be subject to this new standard.

(10) 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 these segments are consistent with those described for the consolidated financial statements in the summary of significant accounting policies.

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     The following table sets forth information about the Company’s operating segments for the three and six months ended June 30, 2007 and 2008.

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2007		June 30, 2008		June 30, 2007		June 30, 2008
Revenue:
NDX Laboratories	$	33,400,304	$	32,681,178	$	65,980,661	$	64,690,514
Green Dental Laboratory		5,089,939		5,479,961		10,218,427		10,779,170
Keller Group		6,120,446		6,756,211		11,836,206		13,196,932
Subtotal		44,610,689		44,917,350		88,035,294		88,666,616
Inter-segment Revenues:
NDX Laboratories		65,541		100,114		109,020		194,450
Green Dental Laboratory		70,984		118,042		107,146		175,686
Keller Group		40,094		119,613		41,821		188,235
Net Sales	$	44,434,070	$	44,579,581	$	87,777,307	$	88,108,245
Laboratory Operating Income:
NDX Laboratories	$	5,339,030	$	4,210,940	$	10,401,059	$	8,808,165
Green Dental Laboratory		1,147,490		1,466,819		2,578,324		2,604,664
Keller Group		931,524		983,526		1,869,765		1,830,246
	$	7,418,044	$	6,661,285	$	14,849,148	$	13,243,075
Total Assets:
NDX Laboratories	$	88,100,894	$	92,965,853	$	88,100,894	$	92,965,853
Green Dental Laboratory		26,828,504		26,655,551		26,828,504		26,655,551
Keller Group		25,976,785		25,986,928		25,976,785		25,986,928
Corporate		9,589,585		15,871,649		9,589,585		15,871,649
	$	150,495,768	$	161,479,981	$	150,495,768	$	161,479,981
Capital Expenditures:
NDX Laboratories	$	852,133	$	1,736,418	$	1,167,445	$	4,958,851
Green Dental Laboratory		306,869		27,454		329,695		96,480
Keller Group		360,465		60,943		592,231		174,264
Corporate		125,636		451,910		200,959		613,320
	$	1,645,103	$	2,276,725	$	2,290,330	$	5,842,915
Depreciation & Amortization on Property, Plant & Equipment:
NDX Laboratories	$	538,182	$	707,845	$	1,131,892	$	1,395,258
Green Dental Laboratory		81,098		79,294		151,633		166,976
Keller Group		94,740		129,345		168,174		256,598
Corporate		167,693		195,004		330,266		380,969
	$	881,713	$	1,111,488	$	1,781,965	$	2,199,801

     Reconciliation of Laboratory Operating Income with reported Consolidated Operating Income:

	Three Months Ended		Three Months Ended		Six Months Ended		Six Months Ended
	June 30, 2007		June 30, 2008		June 30, 2007		June 30, 2008
Laboratory Operating Income	$	7,418,044	$	6,661,285	$	14,849,148	$	13,243,075
Less:
Corporate Selling, General and Administrative Expenses		2,453,506		2,739,331		5,134,390		5,809,980
Amortization Expense — Intangible Assets		313,113		270,914		717,840		550,836
Add:
Other Expense		223,147		210,234		397,648		368,417
Consolidated Operating Income	$	4,874,572	$	3,861,274	$	9,394,566	$	7,250,676

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

The following discussion should be read in conjunction with the Unaudited Condensed 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 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 “Factors that may Affect Future Results” as well as under Part II Item 1A “Risk Factors” of this Quarterly Report and our other quarterly reports filed with the SEC for 2008 and under Item 1A of our most recently filed Annual Report onForm 10-K. We assume no obligation to update these forward-looking statements contained in this report, whether as a result of new information, future events, or otherwise.

Overview

     We own and operate 47 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 North America.

     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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Recent Trends

     We believe that recent unfavorable economic conditions in the United States are negatively impacting the entire dental laboratory industry, as price-sensitive consumers postpone elective dental work. Additionally, we believe that the low cost segment for United States manufactured dental prosthetics has declined as competition from offshore laboratories, primarily those located in China, has become more intensive. While our business has not focused on this low cost segment of the market, we have experienced pricing pressures from other laboratories in our marketplaces that have restrained our ability to increase prices. Since 2007, these increasing competitive pressures in the form of low price competition have been partially responsible for decreasing 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. These trends appear to be restraining industry growth, and have impacted our results of operations.

     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 costs, as well as volatility in the prices of many precious metals that we use, such as gold and palladium, have driven these costs higher. In 2007, we evaluated and adjusted staffing levels, as appropriate, at each of our locations, while continuing to recognize the need to maintain an available and properly trained workforce. Additionally, technology-based dental laboratory CAD-CAM manufacturing solutions have required us to make additional investments in capital equipment. We believe that these investments are critical to our long-term business strategy.

Acquisitions

     We continue to pursue strategic acquisitions, which have played an important role in helping us increase sales from $99,274,000 in 2003 to $170,361,000 in 2007. In March 2005, we completed the acquisition of Green Dental Laboratories, Inc. (“Green”). Green is treated as a separate reportable segment for financial reporting purposes. 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.

     The acquisition of Keller has broadened our marketing strategies and product offerings. In recent years Keller has changed 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 and direct mail, on products that can generate strong revenue growth. One of these products is the NTI-tss plus^tm device (NTI), an alternative to full-coverage bite guards that is also approved by the FDA for use in the prevention of medically diagnosed migraine pain and jaw disorders. Sales growth for NTI, for which Keller holds a 15 year exclusive product license, was approximately $595,000, or 18%, in the first six months of 2008 as compared to the first six months of 2007.

     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 2007 was $2,803,000 compared to $1,523,000 in 2006 and $665,000 in 2005. However, due primarily to lower interest rates in the first half of 2008 compared to the first half of 2007, interest expense declined from $1,481,000 for the six months ended June 30, 2007 to $1,021,000 for the six months ended June 30, 2008.

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Overview of Results of Operations

     For the year ended December 31, 2007, sales increased $20,253,000 to $170,361,000, and net income increased $863,000 as compared to the prior fiscal year. The acquisitions completed in the fourth quarter of 2006, Keller and Impact Dental of Ottawa, Ontario, were primarily responsible for this sales growth. During fiscal 2007, internal sales growth was essentially flat with a sales decline of $503,000 overall. In the NDX Laboratories operating segment, consisting of our laboratories other than Keller and Green, the consolidation of certain laboratories and departments, with the goal of improving segment profitability, led to the loss of certain customers and contributed to the decline in same laboratory sales. During the first six months of 2008, revenues in the NDX Laboratories operating segment declined $1,376,000, or 2.1% as compared to the first six months of 2007, while Keller increased by $1,214,000, or 10.3% and Green increased by $492,000 or 4.9%.

     For the year ended December 31, 2007, gross profit increased by $555,000 within the NDX Laboratories operating segment over the prior year, Green’s gross profit increased by $380,000 over the prior year and Keller contributed $9,061,000 of acquired gross profit. Overall results benefited from staffing adjustments which lowered labor costs and related health insurance expense, as well as from increasing returns in laboratory technology investments. Same laboratory labor and benefits expenses declined $2,213,000 for the year ended December 31, 2007 compared to the prior year.

     For the six months ended June 30, 2008, gross profit decreased by $1,746,000 compared to the six months ended June 30, 2007. Health insurance costs increased approximately $550,000 as a result of higher claims experience and labor costs increased by approximately $802,000 over the prior period as a result of base pay increases, including raises related to a modification of the Laboratory Incentive Compensation plan (the “Laboratory Plan”). The former plan was designed to reward operating efficiency. The modified plan is now designed to provide incentives for growth in profits. As a result of these and other design changes, the reported amounts of laboratory incentive compensation are significantly less this year than in the past. Conversely, labor expenses are somewhat higher within both cost of goods sold and operating expenses. As a result, in combination with declines related to decreases in operating performance, laboratory incentive compensation decreased by $2,036,000 for the six months ended June 30, 2008.

     Within operating expenses, increases in deferred compensation and market declines in the investment values of related insurance policies combined to increase expenses by $500,000. Primarily as a result of rising fuel costs, delivery costs increased $486,000. As a result of the factors discussed above, net income decreased by $1,043,000 to $3,618,000 for the six months ended June 30, 2008 compared to $4,661,000 for the six months ended June 30, 2007.

Liquidity and Capital Resources

     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, income and other financial ratios.

     In October 2006, we borrowed against our acquisition line of credit to finance our acquisition of Keller. In order to refinance the borrowings incurred for the Keller acquisition, we and the Bank executed a Second Amended and Restated Loan Agreement as of November 7, 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, minimum consolidated total EBITDA, debt to income ratio and other financial ratios.

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     The Second Agreement was amended on May 9, 2008, effective March 31, 2008, to revise certain financial targets within these covenants. Additionally, the Bank and our management agreed to consolidate the revolving line of credit with the acquisition line of credit into a single line of credit of $25,000,000 to be used for general corporate purposes, including potential acquisitions. The amendment to the Second Agreement did not change the total availability under the Second Agreement.

     As of June 30, 2008, $17,906,000 was available under the consolidated revolving line of credit. Prior to the consolidation of the credit lines, $3,800,000 was borrowed under the acquisition line of credit. This amount represents cumulative payments of deferred laboratory purchase price obligations drawn from the revolving line of credit since November 2006, when the loan agreement was amended, and has been classified as long-term debt.

Long-Term Obligations:

	December 31, 2007		June 30, 2008
Term note	$	29,583,000	$	27,083,000
Borrowings under the former acquisition line of credit		—		3,800,000
Other long-term debt		112,000		959,000
Total long-term debt		29,695,000		31,842,000
Less: Current maturities		5,064,000		5,129,000
Long-term debt, less current portion	$	24,631,000	$	26,713,000

     The table below reflects the expected repayment terms associated with the long-term debt at June 30, 2008. The interest rate associated with our borrowings was 5.3% as of June 30, 2008.

	June 30, 2008
	Principal Due
For the remainder of fiscal 2008	$	2,582,000
Fiscal 2009		8,917,000
Fiscal 2010		5,083,000
Fiscal 2011		14,667,000
Fiscal 2012		84,000
Thereafter		509,000
Total	$	31,842,000

     Operating activities provided $7,282,000 in cash flow for the six months ended June 30, 2008 compared to $5,136,000 during the six months ended June 30, 2007, an increase of $2,146,000. Our working capital increased from $6,000,000 at December 31, 2007 to $7,375,000 at June 30, 2008. The increase was primarily attributable to decreases in current bank debt of $1,189,000; increases in accounts payable and accrued liabilities of $537,000, increases in accounts receivable of $784,000, primarily related to increased sales volume; increases in inventory of $493,000, primarily related to increases in work in process inventories, offset by: decreases in prepaid expenses of $784,000, primarily related to decreases in prepaid income taxes due to timing differences in our payments.

     Investing activities consumed $7,501,000 in cash flow for the six months ended June 30, 2008 compared to $4,139,000 during the six months ended June 30 2007, an increase of $3,362,000. Capital expenditures increased from $2,627,000 at June 30, 2007 to $4,385,000 at June 30, 2008 primarily due to leasehold improvements for new facilities. Long-term notes receivable increased $2,000,000 pursuant to the execution of an extension of the NTI agreement for Keller.

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     Within financing activities, net borrowings on credit lines increased by $727,000 from $1,820,000 for the six months ended June 30, 2007 to $2,547,000 for the six months ended June 30, 2008 while amounts due under the term facility declined $2,500,000 to $27,083,000 at June 30, 2008 from $29,583,000 at December 31, 2007 as a result of scheduled term loan repayments. We believe that cash flow from operations and available financing will be sufficient to meet contemplated operating and capital requirements such as those discussed below, for the foreseeable future.

Commitments and Contingencies

     The following table represents a list of our contractual obligations and commitments as of June 30, 2008:

	Payments Due By Period
			Less Than						Greater Than
	Total		1 Year		1 - 3 Years		4 - 5 Years		5 Years
Term Loan Facility	$	27,083,000	$	5,000,000	$	10,000,000	$	12,083,000		—
Line of credit		7,094,000		—		7,094,000		—		—
Interest expense		3,610,000		1,374,000		1,899,000		266,000		71,000
Capital Leases		958,000		145,000		186,000		160,000		467,000
Operating Leases:
Real Estate		19,372,000		3,506,000		6,105,000		4,781,000		4,980,000
Vehicles		786,000		542,000		241,000		3,000		—
Equipment		190,000		99,000		76,000		15,000		—
Laboratory Purchase Obligations		600,000		300,000		300,000		—		—
TOTAL	$	59,693,000	$	10,966,000	$	25,901,000	$	17,308,000	$	5,518,000

     Bank borrowings on the term loan facility, with repayment terms greater than one year, are classified as long-term debt on the balance sheet. Amounts borrowed on the acquisition line of credit, which expires on November 7, 2009, have been classified as long-term debt. 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 which is 5.3%.

     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 $600,000, 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.

Results of Operations

     The following table sets forth for the periods indicated the percentage of net sales represented by certain items in our Unaudited Consolidated Financial Statements for the periods indicated:

	Three Months Ended						Six Months Ended
	June 30						June 30
	2007			2008			2007			2008
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Cost of goods sold		56.0			58.1			56.0			58.1
Gross profit		44.0			41.9			44.0			41.9
Selling, general and administrative expenses		33.0			33.2			33.3			33.6
Operating income		11.0			8.7			10.7			8.3
Other expense		0.5			0.5			0.5			0.4
Interest expense		1.7			1.2			1.6			1.2
Income before provision for income taxes		8.8			7.0			8.6			6.7
Provision for income taxes		3.4			2.7			3.3			2.6
Net income		5.4	%		4.3	%		5.3	%		4.1	%

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Six Months Ended June 30, 2008 compared with Six Months Ended June 30, 2007

     Net Sales

     For the six months ended June 30, 2008, net sales increased $331,000 or 0.4% over the six months ended June 30, 2007. However, approximately $994,000 of such sales was attributable to the effect of increased prices due to underlying increases in the prices of precious metals passed through to customers without which net sales would have decreased slightly. Net sales increased by approximately $1,214,000, or 10.3% in the Keller operating segment and increased $492,000 or 4.9%, in the Green operating segment. Net sales decreased approximately $1,376,000 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. We also believe that recent unfavorable economic conditions in the United States are impacting our revenues and the revenues of the entire dental laboratory industry, as price-sensitive consumers postpone elective dental work.

     Cost of Goods Sold

     Our cost of goods sold increased by $2,076,000 or 4.2% in the six months ended June 30, 2008 over the six months ended June 30, 2007. As a percentage of sales, cost of goods sold increased from 56.0% to 58.1%, primarily resulting from increases in labor and related benefits and laboratory overhead.

     Production labor and related benefits increased by approximately $974,000 for the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Included in this increase is a reclassification of approximately $524,000 in base pay increases related to modifications of the Laboratory Plan, which is discussed above, while health insurance expense increased by approximately $419,000. Overall, manufacturing labor and benefits expense as a percentage of sales for the six months ended June 30, 2008 increased from 32.1% in the first six months of 2007 to 33.1% in the first six months of 2008. Green’s labor costs of 27.8% of sales and Keller’s labor costs of 22.5% of sales lowered the overall percentage while the portion attributable to NDX Laboratories increased to 36.1% of sales for the six months ended June 30, 2008 from 34.4% for the six months ended June 30, 2007.

     The cost of raw materials as a percentage of sales increased from 15.9% for the six months ended June 30, 2007 to 16.2% for the six months ended June 30, 2008. During the first six months of 2008 the average cost of gold and palladium, precious metals used as components of many dental alloys, increased by approximately 38.3% for gold and 24.8% for palladium over average costs for these materials in the first six months of 2007. Although we were 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.

     Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $398,000 or 1.4% in the six months ended June 30, 2008 compared to the six months ended June 30, 2007. Operating expenses as a percentage of net sales increased from 33.3% in 2007 to 33.6% in 2008. Delivery expenses as a percentage of sales increased from 8.8% in the six months ended June 30, 2007 to 9.3% in 2008. Selling expenses increased from 6.0% of sales for the six months ended June 30, 2007 to 6.7% in 2008, primarily due to increases at Keller. Selling expenses in 2008 for the Keller segment were 16.3% of sales, or $2,150,000, compared to 14.4%, or $1,704,000 in 2007. Laboratory incentive compensation decreased from 2.8% of sales in 2007 to 0.4% in 2008, while the amount decreased by $2,036,000 from $2,425,000 for the six months ended June 30, 2007 to $389,000 in 2008. Executive incentive compensation decreased by $308,000 due to declines in profit performance.

     The increase of $389,000 in our operating expenses in the first six months of 2008 compared to the same period in 2007 was primarily attributable to the following items:

• Increases in delivery costs, resulting primarily from cost increases in fuel and delivery services — $486,000;

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• Increases in selling expenses, including $298,000 in increased marketing expense at Keller and $258,000 in increased compensation — $652,000;

• Increases in administrative expenses at the laboratory level, including $443,000 in increased compensation primarily resulting from increases to base pay related to the change in the Laboratory Plan— $788,000;

• Increases in salaries and benefits at the corporate level— $664,000; and

• Increases in deferred compensation and decreases in related cash surrender value of underlying life insurance policies as a result of market value declines — $500,000;

     Partially offset by:

• Decreases in laboratory incentive compensation as a result of the Laboratory Plan restructuring — $2,036,000.

• Decreases in executive incentive compensation accruals due to our financial results — $308,000; and

• Decreases in training expense — $148,000.

     Operating Income

     As a result of the above factors, our operating income decreased by $2,144,000 to $7,251,000 for the six months ended June 30, 2008 from $9,395,000 for the first six months of 2007. As a percentage of net sales, operating income decreased from 10.7% for the first six months of 2007 to 8.2% for the first six months of 2008.

     Interest Expense

     Interest expense decreased $460,000 from $1,481,000 for the six months ended June 30, 2007 to $1,021,000 for the corresponding period of 2008, primarily as a result of declining interest rates.

     Provision for Income Taxes

     The provision for income taxes decreased by $611,000 to $2,243,000 for the six months ended June 30, 2008 from $2,854,000 in 2007. The 38.0% effective tax rate estimated for the first six months ended June 30, 2007 increased to 38.3% for 2008 due to changes in the amounts of certain non-deductible expenses.

     Net Income

     As a result of all the factors discussed above, net income decreased $1,043,000 to $3,618,000 or $0.64 per share on a diluted basis for the six months ended June 30, 2008 from $4,661,000 or $0.82 per share on a diluted basis for the six months ended June 30, 2007.

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Three Months Ended June 30, 2008 compared with Three Months Ended June 30, 2007

     Net Sales

     For the three months ended June 30, 2008, net sales increased $146,000 or 0.3% over the three months ended June 30, 2007. However, approximately $454,000 of such sales was attributable to the effect of increased prices due to underlying increases in the prices of precious metals without which net sales would have decreased slightly. Net sales increased by approximately $556,000, or 9.1% in the Keller operating segment and increased $343,000 or 6.8%, in the Green operating segment. Net sales decreased approximately $754,000 in the NDX Laboratories operating segment for reasons previously discussed in the six month comparison above.

     Cost of Goods Sold

     Our cost of goods sold increased by $1,041,000 or 4.2% in the three months ended June 30, 2008 over the three months ended June 30, 2007. As a percentage of sales, cost of goods sold increased from 56.0% to 58.1%, primarily resulting from increases in labor and related benefits and laboratory overhead.

     Production labor and related benefits increased by approximately $383,000 for the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Included in this increase is a reclassification of approximately $262,000 in base pay increases related to modifications of the Laboratory Plan offset by decreases in overtime of $59,000. Overall, labor expense as a percentage of sales for the three months ended June 30, 2008 increased over the three months ended June 30, 2007 from 32.0% to 32.7%. Green’s labor costs of 26.4% of sales and Keller’s labor costs of 22.2% of sales lowered the overall percentage while the portion attributable to NDX Laboratories increased to 36.0% of sales for the three months ended June 30, 2008 from 34.1% for the three months ended June 30, 2007.

     The cost of raw materials as a percentage of sales increased from 16.1% for the three months ended June 30, 2007 to 16.4% for the three months ended June 30, 2008. During the second quarter of 2008 the average cost of gold and palladium, precious metals used as components of many dental alloys, increased by approximately 34.3% for gold and 20.5% for palladium over average costs in the second quarter of 2007.

     Selling, General and Administrative Expenses

     Operating expenses, which consist of selling, delivery and administrative expenses both at the laboratory and corporate level, increased by $118,000 or 0.8% in the three months ended June 30, 2008 compared to the three months ended June 30, 2007. Operating expenses as a percentage of net sales increased from 33.1% in the second quarter of 2007 to 33.2% in the second quarter of 2008. Delivery expenses as a percentage of sales increased from 9.0% in the three months ended June 30, 2007 to 9.5% in the same period of 2008. Selling expenses increased from 5.9% of sales for the three months ended June 30, 2007 to 6.6% in 2008. Selling expenses in the second quarter of 2008 for the Keller segment were 15.2% of sales, or $1,026,000. Laboratory incentive compensation decreased from 2.9% of sales in the second quarter of 2007 to 0.9% in the second quarter of 2008, while the amount decreased by $1,054,000 from $1,273,000 for the three months ended June 30, 2007 to $219,000 for the three months indeed June 30, 2008. Executive incentive compensation decreased by $250,000 due to declines in profit performance.

     The increase of $118,000 in our operating expenses in the second quarter of 2008 compared to the second quarter of 2007 was primarily attributable to the following items:

• Increases in delivery costs, resulting primarily from cost increases in fuel and delivery services — $194,000;

• Increases in selling expenses, including $166,000 in advertising expense increases at Keller and $121,000 in increased compensation — $297,000;

• Increases in administrative expenses at the laboratory level, including $294,000 in increased compensation primarily resulting from increases to base pay related to the change in the Laboratory Plan— $437,000;

• Increases in salaries and benefits at the corporate level — $413,000; and

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• Increases in deferred compensation and decreases in related cash surrender value of underlying life insurance policies as a result of market value declines — $150,000;

     Partially offset by:

• Decreases in laboratory incentive compensation as a result of the Laboratory Plan restructuring — $1,054,000; and

• Decreases in executive incentive compensation accruals due to our financial results — $250,000.

     Operating Income

     As a result of the above factors, our operating income decreased by $1,014,000 to $3,861,000 for the quarter ended June 30, 2008 from $4,875,000 for the corresponding quarter of 2007. As a percentage of net sales, operating income decreased to 8.7% for the second quarter of 2008 from 11.0% for the corresponding quarter of 2007.

     Interest Expense

     Interest expense decreased $241,000 to $513,000 for the quarter ended June 30, 2008 from $754,000 for the corresponding quarter of 2007 primarily as a result of declining interest rates on our line of credit.

     Provision for Income Taxes

     The provision for income taxes decreased by $279,000 to $1,201,000 for the quarter ended June 30, 2008 from $1,480,000 for the corresponding quarter of 2007. The 38.0% effective tax rate for the quarter ended June 30, 2007 increased to 38.3% for 2008 due to changes in the amounts of certain non-deductible expenses.

     Net Income

     As a result of all the factors discussed above, net income decreased $480,000 to $1,937,000 or $0.34 per share on a diluted basis for the quarter ended June 30, 2008 from $2,417,000 or $0.43 per share on a diluted basis for the corresponding quarter of 2007.

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 known as 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.

	Three Months Ended June 30
	2007		2008		$ Change			% Change
Revenue:
NDX Laboratories	$	33,400,304	$	32,681,178	$	(719,126	)		(2.2	)
Green Dental		5,089,939		5,479,961		390,022			7.7
Keller		6,120,446		6,756,211		635,765			10.4
Subtotal		44,610,689		44,917,350		306,661			.7
Less: Inter-segment Revenues:		176,619		337,769		161,150			91.2
Net Sales	$	44,434,070	$	44,579,581	$	145,511			.3
Laboratory Operating Income:
NDX Laboratories	$	5,339,030	$	4,210,940	$	(1,128,090	)		(21.1	)
Green Dental		1,147,490		1,466,819		319,329			27.8
Keller		931,524		983,526		52,002			5.6
Laboratory Operating Income	$	7,418,044	$	6,661,285	$	(756,759	)		(10.2	)

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	Six Months Ended June 30
	2007		2008		$ Change			% Change
Revenue:
NDX Laboratories	$	65,980,661	$	64,690,514	$	(1,290,147	)		(2.0	)
Green Dental		10,218,427		10,779,170		560,743			5.5
Keller		11,836,206		13,196,932		1,360,726			11.5
Subtotal		88,035,294		88,666,616		631,322			.7
Less: Inter-segment Revenues:		257,987		558,371		300,384			—
Net Sales	$	87,777,307	$	88,108,245	$	330,938			.4
Laboratory Operating Income:
NDX Laboratories	$	10,401,059	$	8,808,165	$	(1,592,894	)		(15.3	)
Green Dental		2,578,324		2,604,664		26,340			1.0
Keller		1,869,765		1,830,246		(39,519	)		(2.1	)
Laboratory Operating Income	$	14,849,148	$	13,243,075	$	(1,606,073	)		(10.8	)

NDX Laboratories

     For the six months ended June 30, 2008, before elimination of inter-segment revenues, sales in this segment decreased by 2.0%. The reduction in sales resulted in part 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.

     Gross profit as a percentage of sales decreased from 41.9% for the six months ended June 30, 2007 to 38.7% for the six months ended June 30, 2008. Cost of goods sold increased by $1,147,000 in the first six months of 2008 as compared to the first six months of 2007. The increase was attributable to increases in manufacturing labor and benefits of approximately $580,000, resulting from increases to base pay of $524,000 related to changes in the Laboratory Plan and increases in health insurance and other benefit costs of $313,000, which were partially offset by lower labor costs resulting from labor force reductions. Materials costs decreased approximately $31,000 on lower sales volume and laboratory overhead increased by approximately $598,000 resulting from depreciation and increased rent for new facilities.

     Laboratory operating income as a percentage of sales for NDX Laboratories decreased from 15.8% for the six months ended June 30, 2007 to 13.7% for the six months ended June 30, 2008 and declined by $1,593,000 or 15.3% as a result of the factors discussed above.

Green Dental Laboratory

     Sales growth before elimination of inter-segment revenues for the six months ended June 30, 2008 in this segment was 5.5%. As a percentage of sales, gross profit decreased from 48.3% for the six months ended June 30, 2007 to 48.0% for the six months ended June 30, 2008, primarily as a result of increases in materials cost, including precious metals. In addition to temporary increases in overtime of $64,000 resulting primarily from training and implementation of new production methods, benefit costs increased $56,000, primarily resulting from increases in the cost of providing health insurance. Materials costs increased $137,000 in the six months of 2008 as compared to the six months ended June 30, 2007, and although the dollar amount of precious metals used was consistent in both periods, it was higher as a percentage of sales. Precious metal-based unit volume was down in favor of zirconia-based, CAD-CAM produced units. Increased expenses for implant parts, porcelain and zirconia materials resulted from this changing product mix.

     As a result of the factors discussed above, laboratory operating income as a percentage of sales for Green declined from 25.8% for the six months ended June 30, 2007 to 24.6% for the six months ended June 30, 2008 and increased by $26,000.

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Keller Group

     For the six months ended June 30, 2008, sales growth before elimination of inter-segment revenues in this segment was 11.5%. As a percentage of sales, gross profit increased from 51.9% for the six months ended June 30, 2007 to 52.2% for the six months ended June 30, 2008, primarily as a result of improved labor efficiency, partially offset by increased materials cost, including precious metals. Delivery costs increased by $322,000 which primarily is the result of increased delivery service charges due to higher volume and increased fuel costs. As a result, delivery costs as a percentage of sales rose to 11.6% during the first six months of 2008 from 10.2% during the first six months of 2007. Advertising expense increased by $166,000 in the six months ended June 30, 2008 compared to 2007 due to increased marketing activities.

     As a result of the factors discussed above, laboratory operating income as a percentage of sales for Keller declined from 15.9% for the six months ended June 30, 2007 to 14.1% for the six months ended June 30, 2008, a decrease of $40,000.

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; however we may not be able to pass on some or all of the increased cost to our customer or find suitable less expensive substitution materials to cover the effect of rising metal prices.

     At June 30, 2008, we had variable rate debt of $34,177,000. 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 $211,000, 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, 2008. 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, 2008, 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 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, 2008 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

     On May 6, 2008, the U.S. Court of Appeals for the Federal Circuit issued a favorable ruling in a patent infringement case, PSN Illinois, LLC vs. Ivoclar Vivadent, Inc., et al., in which we are a defendant. In its ruling, the Court of Appeals affirmed a federal district court’s previous grant of summary judgment in favor of the defendants on the grounds of non-infringement. The plaintiff subsequently petitioned for a rehearing and that request was denied on July 16, 2008.

     We are involved from time to time in other litigation incidental to our business. Our management believes that the outcome of such litigation, individually or in the aggregate, will not have a material adverse effect upon our operations or financial condition and will not disrupt our normal operations. Refer to our Annual Report on Form 10-K for the year ended December 31, 2007, and our quarterly report on Form 10-Q for the period ended March 31, 2008 for a discussion of certain litigation matters.

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, 2007, as filed with the SEC on March 12, 2008.

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

     In November 2002, we announced that our Board of Directors approved the repurchase by us of up to 300,000 shares of our common stock pursuant to a stock repurchase program. During the six months ended June 30, 2008, we did not repurchase any shares of our common stock. We continue to consider repurchases on the open market or in privately-negotiated transactions, at management’s discretion.

Issuer Purchases of Equity Securities

							Maximum Number
					Total Number of		of Shares that
					Shares Purchased		May Yet Be
	Total Number		Average		as Part of Publicly		Purchased Under
	of Shares		Price Paid		Announced Plans		the Plans or
Fiscal Period	Purchased		per Share		or Programs		Programs
January 1, 2008 — June 30, 2008		—	$	—		—		206,700

We did not repurchase any of our equity securities during the six months ended June 30, 2008 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 13, 2008. At the meeting, the following matters were voted upon and approved:

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

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	Number of Votes		Number of Votes Witheld
Name	Cast for Nominee		from Nominee
David L. Brown		4,908,883		64,904
Thomas E. Callahan		4,938,856		34,931
Jack R. Crosby		4,895,723		78,064
David V. Harkins		4,909,222		64,565
Norman F. Strate		4,897,143		76,644
James E. Mulvihill, D.M.D		4,926,527		47,260

(b) 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, 2008.

Number of Votes Cast	Number of Votes Cast		Number of Votes
for Proposal	Against Proposal		Abstained
4,959,317		13,101		1,369

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 on 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, 2008	By:	/s/ DAVID L. BROWN
		David L. Brown
		President, CEO and Director (Principal Executive Officer)
August 8, 2008	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
10.1	Amendment No. 2 to Second Amended and Restated Loan Agreement by and among Bank of America, N.A., National Dentex Corporation and the subsidiaries of National Dentex Corporation therein named, incorporated by reference from the Quarterly Report on Form 10-Q as filed with the Securities and Exchange Commission on May 12, 2008.
10.2*	Written Summary of Compensation Arrangements.
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).

* Management contract or compensatory plan or arrangement.

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