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. The increasing severity of the current credit crisis, coupled with higher unemployment, problems in the housing market and higher commodity prices, has further eroded consumer confidence. 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. As we enter 2009, we will continue to proactively work to reduce labor, production and operating expenses to manage through this slowdown in economic activity. Additionally, technology-based dental laboratory CAD-CAM manufacturing solutions have required us to make additional investments in capital equipment. Our ability to afford and utilize these CAD-CAM systems provides us the opportunity to centrally produce product for many of our laboratories at more efficient and profitable levels. Therefore, 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. Most recently, in September 2008, we completed the acquisition of Dental Art Laboratories, Inc ("Dental Art") of Lansing Michigan. Our Consolidated Statement of Income reflects the financial results of Dental Art for the month of September, 2008.
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 plustm 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 $775,000, or 15.6%, in the first nine months of 2008 as compared to the first nine months of 2007.
We have used long-term debt to finance the purchase of Green, Keller and Dental Art. Future acquisitions may also be funded using available debt financing. As a result of these acquisitions, 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, interest expense declined from $2,172,000 for the nine months ended September 30, 2007 to $1,541,000 for the nine months ended September 30, 2008. However, the period ended September 30, 2008 contained only one month of interest expense related to the debt that funded the acquisition of Dental Art.

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 nine months of 2008, revenues in the NDX Laboratories operating segment declined $1,164,000, or 1.2% as compared to the first nine months of 2007, while Keller increased by $2,061,000, or 11.7% and Green increased by $954,000 or 6.3%.
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 overall for the year ended December 31, 2007 compared to the prior year.
For the nine months ended September 30, 2008, gross profit decreased by $2,685,000 compared to the nine months ended September 30, 2007. Health insurance costs increased approximately $850,000 as a result of higher claims experience, and labor costs increased by approximately $1,252,000 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 $2,825,000 for the nine months ended September 30, 2008.
Within operating expenses, increases in deferred compensation accruals and market declines in the investment values of related insurance policies combined to increase expenses by $660,000. Primarily as a result of rising fuel costs, delivery costs increased $802,000. As a result of the factors discussed above, net income decreased by $1,561,000, or 26.1% to $4,409,000 for the nine months ended September 30, 2008 compared to $5,970,000 for the nine months ended September 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.
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. We are currently in the process of extending the maturity of the line of credit beyond its current maturity of November, 2009. The Second Agreement was also amended on September 2, 2008 due to the acquisition of Dental Art which increased our outstanding debt and therefore required an adjustment to an affected financial covenant. These amendments did not change the total availability under the Second Agreement.
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. Additionally, $10,000,000 was borrowed under the consolidated revolving line of credit to fund the purchase of Dental Art, and has been classified as long-term debt. As of September 30, 2008, $6,999,000 was available under the consolidated revolving line of credit.

Long-Term Obligations:

                                                                   December 31, 2007          September 30, 2008

Term note                                                         $        29,583,000        $         25,833,000
Borrowings classified as long term under the revolving line
of credit                                                                           -                  13,800,000
Other long-term debt                                                          112,000                     909,000

Total long-term debt                                                       29,695,000                  40,542,000
Less: Current maturities                                                    5,064,000                   5,121,000

Long-term debt, less current portion                              $        24,631,000        $         35,421,000

The table below reflects the expected repayment terms associated with the long-term debt at September 30, 2008. The interest rate associated with the Company's borrowings as of September 30, 2008 was 5.2%.

                                                 September 30, 2008
                                                   Principal Due

             For the remainder of fiscal 2008   $          1,282,000
             Fiscal 2009                                  18,917,000
             Fiscal 2010                                   5,083,000
             Fiscal 2011                                  14,667,000
             Fiscal 2012                                      84,000
             Thereafter                                      509,000

             Total                              $         40,542,000

Liquidity
Operating activities provided $10,174,000 in cash flow for the nine months ended September 30, 2008 compared to $10,348,000 during the nine months ended September 30, 2007, a decrease of $174,000. Our working capital increased from $6,000,000 at December 31, 2007 to $7,877,000 at September 30, 2008. The increase was primarily attributable to the acquisition of Dental Art of $571,000, increases in cash on hand and decreases in current bank debt of $767,000; decreases in accounts payable and accrued liabilities of $742,000, offset by decreases in

prepaid expenses of $210,000, primarily related to decreases in prepaid income taxes due to timing differences in our payments.
Investing activities consumed $19,742,000 in cash flow for the nine months ended September 30, 2008 compared to $6,385,000 during the nine months ended September 30, 2007, an increase of $13,357,000. Cash outflows related to dental laboratory acquisitions, including deferred purchase price payments associated with prior period acquisitions, totaled approximately $11,277,000 for the nine months ended September 30, 2008 primarily as a result of the acquisition of Dental Art, compared to approximately $1,900,000 for the nine months ended September 30, 2007. Capital expenditures increased from $4,341,000 at September 30, 2007 to $6,466,000 at September 30, 2008 primarily due to leasehold improvements and laboratory equipment for new facilities. Long-term notes receivable increased $2,000,000 pursuant to the execution of an extension of the NTI agreement for Keller.
Within financing activities, net borrowings on credit lines decreased by $1,565,000 from $1,219,000 borrowed for the nine months ended September 30, 2007 to $346,000 repaid for the nine months ended September 30, 2008, while amounts due under the term facility declined $3,750,000 to $25,833,000 at September 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 September 30, 2008: