** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

(Mark One)

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly periodended June 30, 2006.

OR

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

For the transition periodfrom                    to                    

Commission file number:333-124080

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**INTERDENT SERVICE**

**CORPORATION**

(Exact name of registrantas specified in its charter)

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| **Washington**                            |   | **91-1577891**                        |
|-------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)           |   |                                  |
|                                      |   |                                  |
| **222 No.  Sepulveda Blvd., Suite 740,**  |   |                                  |
| **El  Segundo, CA**                       |   | **90245**                             |
| (Address of  principal executive offices) |   | (Zip Code)                            |

 

Registrant’s telephonenumber, including area code: **(310) 765-2400**

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 forsuch 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  x    No o

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

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

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x

Number of shares of common stock outstanding as ofAugust 14, 2006: 105,521

**TABLEOF ADDITIONAL REGISTRANT**

| Exact Name of Registrant | ** ** | **State of Incorporation** | ** ** | **I.R.S. Employer  Identification Number** |
|--------------------------|------------|----------------------------|------------|--------------------------------------------|
| InterDent, Inc.          |       | Delaware                   |       | 95-4710504                                 |

 

 

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INTERDENT SERVICE CORPORATION

TABLE OF CONTENTS
|           | **** **** | ** **                                                                                                    | ** ** | ** ** |
|-----------|----------------|---------------------------------------------------------------------------------------------------------------|------------|------------|
| PART I    |           | FINANCIAL INFORMATION                                                                                         |       |       |
|      |           |                                                                                                          |       |       |
| Item 1.   |           | Financial Statements                                                                                          |       |       |
|      |           | Consolidated Balance  Sheets at June 30, 2006 (unaudited) and December 31, 2005                               |       |       |
|      |           | Consolidated  Statements of Operations for the three and six months ended June 30, 2006 and  2005 (unaudited) |       |       |
|      |           | Consolidated  Statements of Cash Flows for the six months ended June 30, 2006 and 2005  (unaudited)           |       |       |
|      |           | Condensed Notes to Consolidated  Financial Statements (unaudited)                                             |       |       |
| Item 2.   |           | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                   |       |       |
| Item 3.   |           | Quantitative  and Qualitative Disclosure About Market Risk                                                    |       |       |
| Item 4.   |           | Controls and  Procedures                                                                                      |       |       |
|      |           |                                                                                                          |       |       |
| PART  II  |           | OTHER  INFORMATION                                                                                            |       |       |
|      |           |                                                                                                          |       |       |
| Item 1.   |           | Legal Proceedings                                                                                             |       |       |
| Item  1A. |           | Risk Factors                                                                                                  |       |       |
| Item  6.  |           | Exhibits and Reports on Form 8-K                                                                              |       |       |
|      |           | Signatures                                                                                                    |       |       |

 

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PART I — FINANCIAL INFORMATION

**Item 1. Financial Statements.**

**INTERDENT, INC. AND SUBSIDIARIES**

Consolidated Balance Sheets

(dollars inthousands)
| ** **                                                                                                         | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                         | ** ** | **(unaudited)**         | ** ** | ** **                  | ** ** |
| **Assets**                                                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Current assets:                                                                                                    |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                         |       | $                       | 3,021      |                        | $          | 1,519 |   |
| Marketable  securities                                                                                             |       | 529                     |       | —                      |       |
| Accounts  receivable, net of allowances of $1,981 and $1,909 at June 30, 2006 and  December 31, 2005, respectively |       | 12,501                  |       | 12,645                      |       |
| Supplies  inventory                                                                                                |       | 6,316                   |       | 6,454                       |       |
| Prepaid expenses  and other current assets                                                                         |       | 2,476                   |       | 3,291                       |       |
| Total current  assets                                                                                              |       | 24,843                  |       | 23,909                      |       |
|                                                                                                               |       |                    |       |                        |       |
| Property and equipment,  net                                                                                       |       | 24,038                  |       | 23,883                      |       |
| Goodwill                                                                                                           |       | 74,434                  |       | 74,774                      |       |
| Intangible assets, net                                                                                             |       | 15,203                  |       | 16,006                      |       |
| Other assets                                                                                                       |       | 5,993                   |       | 6,247                       |       |
| Total assets                                                                                                       |       | $                       | 144,511    |                        | $          | 144,819 |   |
|                                                                                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| **Liabilities**                                                                                                    |       |                    |       |                        |       |
| Current liabilities:                                                                                               |       |                    |       |                        |       |
| Accounts payable                                                                                                   |       | $                       | 7,233      |                        | $          | 8,060 |   |
| Accrued payroll  and related costs                                                                                 |       | 10,116                  |       | 9,461                       |       |
| Accrued interest                                                                                                   |       | 372                     |       | 393                         |       |
| Other current  liabilities                                                                                         |       | 8,621                   |       | 10,336                      |       |
| Current portion  of capital lease obligations                                                                      |       | 93                      |       | 90                          |       |
| Total current  liabilities                                                                                         |       | 26,435                  |       | 28,340                      |       |
|                                                                                                               |       |                    |       |                        |       |
| Long-term liabilities:                                                                                             |       |                    |       |                        |       |
| Capital lease  obligations, net of current portion                                                                 |       | 192                     |       | 239                         |       |
| Senior secured  revolving credit facility                                                                          |       | 1,239                   |       | 1,308                       |       |
| Senior secured  notes                                                                                              |       | 80,000                  |       | 80,000                      |       |
| Mandatorily  redeemable preferred stock                                                                            |       | 4,404                   |       | 4,088                       |       |
| Deferred  compensation liability                                                                                   |       | 646                     |       | —                      |       |
| Other long-term  liabilities                                                                                       |       | 1,563                   |       | 1,052                       |       |
| Accumulated  dividends                                                                                             |       | 1,219                   |       | 998                         |       |
| Total long-term  liabilities                                                                                       |       | 89,263                  |       | 87,685                      |       |
| Total  liabilities                                                                                                 |       | 115,698                 |       | 116,025                     |       |
| ** **                                                                                                         |       |                    |       |                        |       |
| **Shareholders’ equity**                                                                                      |       |                    |       |                        |       |
| Convertible  preferred stock, $0.001 par value, 281,679 shares authorized:                                         |       |                    |       |                        |       |
| Class A 229,007  shares authorized, 1,000 shares issued and outstanding at June 30, 2006 and  December 31, 2005    |       | —                  |       | —                      |       |
| Class B 52,672  shares authorized, issued and outstanding at June 30, 2006 and December 31,  2005                  |       | 8,650                   |       | 8,650                       |       |
| Common stock,  $0.001 par value, 981,679 shares authorized:                                                        |       |                    |       |                        |       |
| Class A 229,007  shares authorized, zero shares issued and outstanding at June 30, 2006 and  December 31, 2005     |       |                    |       | —                      |       |
| Class B 52,672  shares authorized, zero shares issued and outstanding at June 30, 2006 and  December 31, 2005      |       | —                  |       | —                      |       |
| Class C 700,000  shares authorized; 105,521 shares issued and outstanding at June 30, 2006 and  December 31, 2005  |       | —                  |       | —                      |       |
| Additional paid-in  capital                                                                                        |       | 21,612                  |       | 21,592                      |       |
| Accumulated  deficit                                                                                               |       | (1,456                  | )          | (1,448                      | )          |
| Accumulated  other comprehensive income                                                                            |       | 7                       |       | —                      |       |
| Total  shareholders’ equity                                                                                   |       | 28,813                  |       | 28,794                      |       |
| Total liabilities and  shareholders’ equity                                                                   |       | $                       | 144,511    |                        | $          | 144,819 |   |

 

See accompanying condensed notes to consolidatedfinancial statements.

** **

1

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**INTERDENT, INC.AND SUBSIDIARIES**

Consolidated Statementsof Operations

(unaudited, dollars in thousands)
| ** **                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|---------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                              | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                    |       |                                            |       |                                          |       |   |   |   |   |
| **Revenues:**                                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Dental practice net patient service revenue             |       | $                                               | 54,617     |                                          | $          | 53,905 |   | $ | 109,994 |   | $ | 107,391 |   |
| Other fees                                              |       | 264                                             |       | 328                                           |       | 563 |   | 581 |   |
| Total revenues                                          |       | 54,881                                          |       | 54,233                                        |       | 110,557 |   | 107,972 |   |
| **Costs  and expenses:**                                | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cost of revenues:**                                   | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Clinical salaries, benefits, and provider costs         |       | 26,568                                          |       | 25,908                                        |       | 53,830 |   | 52,128 |   |
| Practice non-clinical salaries and benefits             |       | 7,140                                           |       | 7,432                                         |       | 14,735 |   | 15,004 |   |
| Dental supplies and lab expenses                        |       | 5,612                                           |       | 5,446                                         |       | 11,093 |   | 10,899 |   |
| Practice occupancy expenses                             |       | 3,664                                           |       | 3,335                                         |       | 7,164 |   | 6,627 |   |
| Practice selling, general and administrative  expenses  |       | 4,051                                           |       | 4,307                                         |       | 8,102 |   | 8,820 |   |
| Provision for doubtful accounts                         |       | 372                                             |       | 455                                           |       | 744 |   | 688 |   |
| Total cost of revenues                                  |       | 47,407                                          |       | 46,883                                        |       | 95,668 |   | 94,166 |   |
| Corporate selling, general and administrative  expenses |       | 3,103                                           |       | 2,993                                         |       | 6,048 |   | 5,128 |   |
| Stock-based compensation expense                        |       | 7                                               |       | 7                                             |       | 14 |   | 13 |   |
| Depreciation and amortization                           |       | 1,431                                           |       | 1,348                                         |       | 2,825 |   | 2,657 |   |
| Total operating expenses                                |       | 51,948                                          |       | 51,231                                        |       | 104,555 |   | 101,964 |   |
| Operating income                                        |       | 2,933                                           |       | 3,002                                         |       | 6,002 |   | 6,008 |   |
| **Non-operating  (income) expense:**                    | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Interest income                                         |       | (32                                             | )          | (8                                            | )          | (57 | ) | (10 | ) |
| Interest expense                                        |       | 2,584                                           |       | 2,511                                         |       | 5,168 |   | 5,054 |   |
| Other income                                            |       | —                                          |       | (164                                          | )          | — |   | (164 | ) |
| Other expense                                           |       | 265                                             |       | 21                                            |       | 321 |   | 31 |   |
| Non-operating expense, net                              |       | 2,817                                           |       | 2,360                                         |       | 5,432 |   | 4,911 |   |
| Income before provision for income taxes                |       | 116                                             |       | 642                                           |       | 570 |   | 1,097 |   |
| Provision for  income taxes                             |       | 112                                             |       | 253                                           |       | 357 |   | 430 |   |
| Net income                                              |       | 4                                               |       | 389                                           |       | 213 |   | 667 |   |
| Accumulated  dividends on preferred stock               |       | 101                                             |       | 114                                           |       | 221 |   | 205 |   |
| Net (loss)  income attributed to common stock           |       | $                                               | (97        | )                                             | $          | 275 |   | $ | (8 | ) | $ | 462 |   |

 

See accompanying condensed notes to consolidatedfinancial statements.

2

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**INTERDENT, INC.AND SUBSIDIARIES**

Consolidated Statementsof Cash Flows

(unaudited, dollars in thousands)
| ** **                                                                             | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| ** **                                                                             | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| **Operating  activities**                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income                                                                             |       | $                                                 | 213        |   | $ | 667 |   |
| **Adjustments  to reconcile net income to net cash provided by operating activities:** | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Depreciation and amortization                                                          |       | 2,825                                             |       | 2,657 |   |
| Provision for revenue adjustments and doubtful  accounts                               |       | 744                                               |       | 969 |   |
| Loss on dental location dispositions and disposal of  assets                           |       | 343                                               |       | 30 |   |
| Change in deferred taxes                                                               |       | 340                                               |       | 413 |   |
| Interest paid in kind                                                                  |       | 316                                               |       | 295 |   |
| Interest amortization on deferred financing costs  and discounted debt                 |       | 426                                               |       | 415 |   |
| Deferred compensation expense                                                          |       | 646                                               |       | — |   |
| Stock-based compensation expense                                                       |       | 20                                                |       | 13 |   |
| Recognition of deferred revenues                                                       |       | 812                                               |       | (138 | ) |
| Other                                                                                  |       | (6                                                | )          | — |   |
| **Changes  in assets and liabilities:**                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Accounts receivable                                                                    |       | (600                                              | )          | 137 |   |
| Supplies inventory                                                                     |       | 138                                               |       | (220 | ) |
| Prepaid expenses and other current assets                                              |       | 815                                               |       | 1,134 |   |
| Other assets                                                                           |       | (166                                              | )          | (132 | ) |
| Accounts payable                                                                       |       | (827                                              | )          | 251 |   |
| Accrued payroll and related costs                                                      |       | 655                                               |       | (73 | ) |
| Accrued interest                                                                       |       | (21                                               | )          | (90 | ) |
| Other current liabilities                                                              |       | 596                                               |       | (1,471 | ) |
| Net cash provided by operating activities                                              |       | 7,269                                             |       | 4,857 |   |
| **Investing  activities**                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Marketable securities                                                                  |       | (522                                              | )          | — |   |
| Purchase of property and equipment                                                     |       | (2,520                                            | )          | (5,373 | ) |
| Cash received for trailing acquisition costs and  earn-outs                            |       | —                                            |       | 7 |   |
| Net cash used in investing activities                                                  |       | (3,042                                            | )          | (5,366 | ) |
| **Financing  activities**                                                              | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net payments on revolving credit facility                                              |       | (69                                               | )          | — |   |
| Payments on long-term debt and obligations under  capital leases                       |       | (44                                               | )          | (364 | ) |
| Changes in bank overdraft balances                                                     |       | (2,612                                            | )          | 2,575 |   |
| Net cash (used in) provided by financing activities                                    |       | (2,725                                            | )          | 2,211 |   |
| Increase in cash and cash equivalents                                                  |       | 1,502                                             |       | 1,702 |   |
| Cash and cash  equivalents, beginning of period                                        |       | 1,519                                             |       | — |   |
| Cash and cash  equivalents, end of period                                              |       | $                                                 | 3,021      |   | $ | 1,702 |   |

See accompanying condensed notes to consolidated financial statements.

3

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** **

**1.        Our Company**

InterDent ServiceCorporation, the principal operating subsidiary of InterDent, Inc.(collectively, We, InterDent or the Company) provides dental practicemanagement services to multi specialty group dental practices in the UnitedStates. Our network of affiliated dental practices seeks to providecomprehensive, convenient and high quality general dentistry as well as dentalspecialty services such as orthodontics, periodontics, endodontics, pediatricdentistry, prosthodontics and oral surgery. We do not engage in the practice of dentistry, but rather work withaffiliated dental practices or professional corporations (PC) to enhance thebusiness operations of their practices. We enter into management service agreementswith these affiliated dental practices pursuant to which we provide them, on anexclusive basis, with management and administrative services.

As of June 30, 2006, we provided management servicesto 128 affiliated dental practices in Arizona, California, Hawaii, Kansas,Nevada, Oklahoma, Oregon and Washington and own and operate one dentallaboratory in Oklahoma.

**2.        Basis ofPresentation**

Following the rules and regulations of the Securitiesand Exchange Commission, or SEC, we have omitted footnote disclosures that would substantiallyduplicate the disclosures in our annual audited financial statements. Theaccompanying consolidated financial statementsshould be read in conjunction with the financial statement disclosures from our2005 Consolidated Financial Statements contained in our 10-K filed April 11,2006 with the SEC.  The same accounting policies are followed in preparingquarterly financial data as are followed in preparing annual data. In theopinion of management, all adjustments necessary for a fair presentation ofquarterly operating results are reflected herein and are of a normal, recurringnature.

A reclassificationhas been made to the 2005 consolidated financial statements to conform to thecurrent period presentation.  Accruedinterest which was included in other current liabilities is statedseparately.  The consolidated statementof cash flows reflects a reclassification for the provision for revenueadjustments and doubtful accounts from accounts receivable as well as areclassification of interest paid in kind from other current liabilities.  As a result, the consolidated statement ofcash flows for the period ended June 30, 2005 reflects a reclassification of$1,264,000 in adjustments to reconcile net income to net cash provided by operatingactivities with the corresponding offset in changes in assets andliabilities.  There was no change in thenet cash provided by operating activities.

We operatein one principal business segment as a provider of dental practice managementservices to multi specialty group dental practices in the United States.

**3.        Summary ofSignificant Accounting Policies**

*Net revenues*

Dental practice netpatient service revenue (Net Patient Revenue) represents the consolidatedrevenue of the affiliated PCs and is recorded when the related work iscompleted. Revenue related to prepayments, typically for multi-visitprocedures, is deferred until the multi-visit procedure is completed. Revenueis recorded at the estimated net realizable amount to be received from patients,third party payors and others, net of a provision for fee schedule adjustments.

Net Patient Revenue includes amounts received under capitated managed carecontracts.  A portion of these capitatedrevenue premiums are received at certain wholly-owned subsidiaries thatare subject to regulatory review and oversight by various state agencies. Thesubsidiaries are required to, among other things, file statutory financialstatements with the state agencies and maintain minimum tangible net equitybalances and restricted deposits. The Company is in compliance with suchrequirements as of June 30, 2006. Total revenues subject to regulatory reviewand oversight by various state agencies were $10.9 million and $10.3 millionand $22.0 million and $20.2 million for the three and six months ended June 30,2006 and 2005, respectively.

4

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* *

*Stock-based compensation*

On January 1, 2006,we adopted Statement of Financial Accounting Standard (SFAS) No. 123R, “Share-BasedPayment,” or SFAS 123R.  In accordancewith SFAS 123R, the Company measures the cost of employee services received inexchange for an award of equityinstruments based on the grant-date fair value of the award.  That cost is recognized over the periodduring which an employee is required to provide service in exchange for theaward — the requisite service period.  Nocompensation cost is recognized for equity instruments for which employees donot render the requisite service.  TheCompany determines the grant-date fair value of employee share options grantedafter the adoption of SFAS 123R using the Black-Scholes option-pricing modeladjusted for the unique characteristics of these options.

Prior to adoption ofSFAS 123R, we accounted for grants under the stock option plan using either theminimum value method as permitted for non-public entities in SFAS No. 123 “Accountingfor Stock-Based Compensation,” or SFAS 123, for grants at the market price atthe date of the grant or the intrinsic value method for grants issued below themarket price at the date of the grant in accordance with Accounting PrinciplesBoard Opinion No. 25, “Accounting for Stock Issued to Employees”, or APB 25 adoptingthe disclosure only provisions of SFAS 123. Entities that used the minimum value method of measuring equity shareoptions prior to adoption of SFAS 123R are to apply SFAS 123R prospectively toawards issued, modified, repurchased, or canceled after adoption and continueto account for any portion of awards outstanding at the date of the initialapplication using the accounting principles originally applied to thoseawards.  Accordingly, periods prior tothe adoption of SFAS 123R will not be restated. Options accounted for under the intrinsic value method will continue tobe expensed over the vesting period.

The pro-formacompensation costs for outstanding awards granted prior to adoption of SFAS123R are presented below:
| ** **                                                                                                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                                                                                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **(in thousands)**                                                                                                                         | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income, as  reported                                                                                                                        |       | $                                               | 4          |                                          | $          | 389 |   | $ | 213 |   | $ | 667 |   |
|                                                                                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Add: Stock-based  employee compensation expense included in reported net income, net of related  tax effect                                     |       | 7                                               |       | 4                                             |       | 14 |   | 8 |   |
| Deduct: Total  stock-based employee compensation expense determined under minimum value  based method for all awards, net of related tax effect |       | (12                                             | )          | (31                                           | )          | (36 | ) | (56 | ) |
|                                                                                                                                            |       |                                            |       |                                          |       |   |   |   |   |
| Net (loss) income, pro  forma                                                                                                                   |       | $                                               | (1         | )                                             | $          | 362 |   | $ | 191 |   | $ | 619 |   |

See note 5 for furtherdiscussion on stock-based compensation.

5

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* *

*Available for sale securities*

The Company considers its marketablesecurities as available-for-sale as defined in SFAS No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” or SFAS 115. Theseinvestments are recorded at fair value and are classified as marketablesecurities in the accompanying consolidated balance sheets as of June 30, 2006.The changes in fair values, net of applicable taxes, are recorded as unrealizedgains (losses) as a component of accumulated other comprehensive income in shareholders’equity. Increases in the fair values for the six months ended June 30, 2006were $7,000.

*Goodwill*

The change ingoodwill in the six months ended June 30, 2006 is related to the utilization ofpre-emergence deferred tax assets.

*Deferred compensation*

On January1, 2006, we adopted an elective non-qualified Deferred Incentive CompensationRetirement Plan (the 2006 Plan) to provide certain employees and affiliatedprofessionals an opportunity to voluntarily defer compensation on a pre-taxbasis. Additionally, the Company will make bonus contributions to the 2006 Planon behalf of our affiliated dentists based on predetermined performance goals.These bonus contributions vest and will be recorded as compensation expense bythe Company starting with the period earned through the end of the serviceperiod, typically 3 to 4 years. The Company intends to make its first bonuscontribution in December 2007.

A rabbitrust is the funding vehicle that is used to hold the deferred compensationamounts that are invested in mutual funds within the trust. Accounting for the2006 Plan is in accordance with Emerging Issues Task Force (EITF) 97-14 “Accountingfor Deferred Compensation Arrangements Where Amounts Earned are Held in a RabbiTrust and Invested”.  The rabbi trustassets held in mutual fund securities are deemed to be “available for sale”with unrealized gains and losses excluded from earnings and reported in aseparate component of shareholders’ equity according to SFAS 115.

*Self-insurance*

The Company utilizes highdeductible insurance programs for workers’ compensation, professionalliability, and substantially all of the employee medical benefit plans.  The Company has utilized the medical benefitplan since 2003 and the workers’ compensation and professional liability beganin January 2005 and November 2005, respectively. Under these plans, the Companyassumed first dollar coverage responsibility and limits its exposure throughthe use of individual and aggregate stop-loss agreements.

The Company records an estimatedliability for self-insured deductibles and claims incurred but not paid basedon management’s estimates of the aggregate liability for uninsured claims usingactuarial assumptions and historical loss patterns.  The reserve for the workers’ compensation andprofessional liability of $0.8 million and $0.4 million atJune 30, 2006 and December 31, 2005, respectively, is recorded inother current liabilities on the balance sheet. The reserve for the employeemedical plans of $0.6 million is recorded in accrued payroll and relatedcosts.  Although management believes ithas the ability to adequately estimate losses related to claims, it is possiblethat actual results could differ from recorded self-insurance liabilities.

*Use of estimates*

The preparationof financial statements in conformity with generally accepted accountingprinciples requires management to makeestimates and assumptions that affect reported amounts of assets andliabilities, revenues and expenses and related disclosures of contingent assetsand liabilities in the consolidated financial statements and accompanyingnotes. There is a possibility that actual results may vary significantly fromthose estimates.

6

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* *

*Accounting pronouncements*

In May 2005, the FASB issued SFAS No. 154, “AccountingChanges and Error Corrections—A Replacement of APB Opinion No. 20 and FASBStatement No. 3” or SFAS 154. SFAS 154 requires that a voluntary change inaccounting principle be applied retrospectively with all prior period financialstatements presented on the new accounting principle, unless it isimpracticable to do so. SFAS 154 also provides that (1) a change in method ofdepreciating or amortizing a long-lived nonfinancial asset be accounted for asa change in estimate (prospectively) that was affected by a change inaccounting principle, and (2) correction of errors in previously issuedfinancial statements shall be termed a “restatement.” SFAS 154 is effective foraccounting changes and corrections of errors made in fiscal years beginningafter December 15, 2005. The implementation of SFAS 154, effective January 1,2006 did not have a material impact on the Company’s consolidated financialstatements.

In June 2006, the FASB issued FASB Interpretation No.48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109,” to clarify the accounting for uncertainty in incometaxes recognized in the financial statements in accordance with FASB StatementNo. 109. This Interpretation prescribes a recognition threshold and measurementcriteria for the recognition and measurement of a tax position taken orexpected to be taken in a tax return. FIN 48 also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure and transition. FIN 48 is effective for years beginningafter December 15, 2006. We are currently evaluating the effect that theadoption of FIN 48 will have on our consolidated results of operations andfinancial condition but do not expect this Interpretation to have a materialimpact.

On November 10, 2005, the Financial AccountingStandards Board (FASB) issued FASB Staff Position (FSP) No. FAS 123 (R)-3,“Transition Election Related to Accounting for the Tax Effects of Share-BasedPayment Awards”.  This FSP allowscompanies using either the modified retrospective or modified prospectiveapplication to make a one-time election to adopt the transition methoddescribed in the FSP and also allowed companies to take up to one year from thelater of its initial adoption of Statement 123 (R) or the effective date ofthis FSP to evaluate its available transition alternatives and make itsone-time election.  We are currentlyevaluating the available transition alternatives and have not yet made adetermination of which method we will be using.

In March 2006, the FASB issued EITF No. 06-03, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)”which requires a reevaluation of existing policies as to gross versus netreporting of taxes and the subsequent disclosure of taxes reported on a grossbasis, of significant taxes.  We are inthe process of reevaluating existing policies and have not made a decisionregarding presentation and disclosure of these taxes in the financialstatements in accordance with SFAS 154.

**4.        Related party transactions**

In April2005, our board of directors authorized the payment of an annual management feein the amount of $0.25 million to our majority shareholder for certain servicesto be provided to us for the year and $0.25 million in annual directorfees.  This agreement is in effect untileither party terminates the agreement.

**5.        Stock-BasedCompensation**

On April 28,2005, the Company adopted the InterDent, Inc. Amended and Restated 2003Stock Option Plan (2003 Stock Option Plan) under which the Company’s Board ofDirectors (Board) may issue incentive and non-qualified stock options topurchase up to 33,726 shares of the Company’s Class C Common Stock. Stockoptions issued under the 2003 Stock Option Plan are generally granted with an exercise price equal to the market priceof our stock at the date of grant and shall be exercisable up to ten years fromthe grant date as determined by the Board. Options granted under the 2003 StockOption Plan typically vest over a 4 year period. The following table summarizesstock option activity as of December 31, 2005 and changes during the six monthsended June 30, 2006.

|                                        | ** ** | **Number of  Shares** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Weighted  Average  Remaining  Contractual  Term (in years)** | ** ** | **Aggregate  Intrinsic  Value (in  thousands)** | ** ** |
|----------------------------------------|------------|----------------------------|------------|----------------------------------------|------------|--------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| Outstanding at  December 31, 2005 |       | 33,387                     |       | $                                      | 157.76     |                                                                     | —     |                                                 | —     |   |
| Granted                                |       | 811                        |       | 175.52                                 |       | —                                                                   |       | —                                               |       |
| Exercised                              |       | —                     |       | —                                 |       | —                                                                   |       | —                                               |       |
| Forfeited                              |       | (472                       | )          | 153.69                                 |       | —                                                                   |       | —                                               |       |
| Cancelled                              |       | —                     |       | —                                 |       | —                                                                   |       | —                                               |       |
| Outstanding at  June 30, 2006          |       | 33,726                     | ** ** | **$**                                  | **157.63** | ** **                                                               | **3.4**    | ** **                                           | **$**      | **589** | ** ** |
| Exercisable at June 30,  2006          |       | 22,952                     | ** ** | **$**                                  | **155.56** | ** **                                                               | **2.9**    | ** **                                           | **$**      | **458** | ** ** |

 

7

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Under the modified prospective transition methodprescribed by SFAS 123R, the Company is required to record compensation expense for all awardsgranted after the date of adoption. The Company measured stock basedcompensation using the Black-Scholes option pricing model. The following rangesof assumptions were used to compute employee stock based compensation underSFAS 123R:

| Risk free interest rate                       |   | 4.9  | %      |
|-----------------------------------------------|--------|------|--------|
| Expected  volatility                          |   | 49.0 | %      |
| Expected  dividend yield                      |   | 0    | %      |
| Expected life  (in years)                     |   | 3    |   |
| Forfeiture rate                               |   | 10   | %      |
| Weighted average fair  value at date of grant |   | $    | 66.39  |   |
|                                               |        |      |        |  |

 

Expectedvolatility is based upon an appropriate peer group within the Company’sindustry sector. The expected life of the awards represents the period of timethat management estimates that options granted will be outstanding. 

TheCompany used historical information to estimate forfeitures within thevaluation model. The risk-free interest rate for periods within the expectedlife of the option is based on implied yields on U.S. Government Issues ineffect at the time of grant. Compensation cost is recognized over the vestingperiod using a graded vesting schedule and net of estimated forfeitures.

The Company recognized in the statement of operations$6,000 of stock based compensation under the fair value method in the three and six months ended June 30,2006 and $7,000 and $14,000 of stock based compensation under the intrinsicvalue method in the three and six months ended June 30, 2006, respectively. Asof June 30, 2006, there was approximately $42,000 of total employee unrecognizedcompensation costs related to non-vested stock-based compensation awardsgranted under the Plan That cost is expected to be recognized over a weightedaverage period of approximately 4 years.

**6.        Contingencies**

*Senior secured revolving credit facility*

As of June30, 2006, our borrowing base was $10.0 million; the amount available has beenreduced by $1.5 million for a letter of credit issued to satisfy therequirements of our workers compensation policy. At June 30, 2006, $1.2 millionin borrowings were outstanding and $7.3 million remained available under theSenior Secured Revolving Credit Facility. This facility expires December 2009 and is secured by substantially allof our assets.  The negative covenantsinclude, among other items, limits on additional indebtedness, liens,distributions, certain investments and transactions and certain financialcovenants to limit capital expenditures and require minimum earnings beforeinterest, taxes, depreciation, and amortization (EBITDA).  We were in compliance with these covenants asof June 30, 2006.

*Legal*

We have been named as a defendant in various lawsuitsin the normal course of business, primarily for malpractice claims. We, our affiliated dental practices and associated dentists’ are insuredwith respect to dentistry malpractice risks on a claims-made basis. Managementbelieves all of these pending lawsuits, claims, and proceedings against us arewithout merit or will not have a material adverse effect on our consolidatedoperating results, liquidity or financial position, or cash flows.

In March 2006 the California Attorney General’s Bureauof Medical Fraud and Elderly Abuse initiated an investigation following our self reporting toDenti-Cal of billing errors we had discovered at one of our affiliated dentalpractices.  We continue to cooperate inthe investigation; no material developments occurred during the past quarter.

 

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

**FORWARD LOOKING STATEMENTS**

*This document includes forward looking statements.Forward looking statements are those that do not relate solely to historicalfact. They include, but are not limited to, any statements that may predict,forecast, indicate or imply future results, performance, achievements orevents. They may contain words such as “believe,” “anticipate,” “expect,” “estimate,”“intend,” “project,” “plan,” “will,” or words or phrases of similar meaning.They may relate to, among other things, our strengths, strategy, growth plans,operations, revenue, earnings, expenses, financing, sources of liquidity andcapital requirements.*

*Forward looking statements involve risks anduncertainties, including, but not limited to, economic, competitive andgovernmental factors outside of our control, that may cause actual results todiffer materially from trends, plans or expectations set forth in the forwardlooking statements.  Certain factors thatmight cause such a difference include, among other things, dependence upon ouraffiliated dental practices and the dental professionals who generate ourrevenue; access to and cost of capital due to our high leverage ratio; costcontainment efforts by third party payors and capitation arrangements; ourgrowth strategy and the terms of our service agreements with affiliated dentalpractices may reduce the cash we have available for operations and fundsavailable to meet our obligations; the geographic concentration of ouroperations increases the risk that our operating results will suffer fromadverse developments in our principal markets; government regulation of thedental industry and regulatory challenges to our business model; professionalliability and other claims that may be made against our affiliated dentalpractices; our operations and growth plans may be adversely affected by ahighly competitive environment; and the interest of the entities affiliatedwith our majority shareholder may conflict or differ from your interests. Forfurther information about risks which may effect our future operating results,please see the Risk Factors set forth in Item 1A of Part II below.  New risks and uncertainties may emerge in thefuture. It is not possible for us to predict all of these risks oruncertainties, nor can we assess the extent to which any factor, or combinationof factors, may cause actual results to differ from those contained in forwardlooking statements. Given these risks and uncertainties, we urge you to readthis document completely with the understanding that actual future results maybe materially different from what is expressly stated or implicit in anyforward looking statement.*

**OVERVIEW**

We provide practice management services to 128 affiliated multi-specialtygroup dental practices in the United States. Our network of affiliated dentalpractices is comprised of approximately 1,250 operatories throughout eightstates.

We believe longterm growth of the dental care industry in the United States is fueled by,among other things, increased availability of dental insurance, a growingpopulation of older patients who have retained their teeth, and increasedinterest in cosmetic dentistry. However, certain dental procedures areconsidered elective or can be deferred and our revenue growth in the short termis subject to fluctuation based on trends in consumer confidence and theeffects that will have on patients’ disposable income.

Our strategy togrow our business consists of two initiatives. We seek to drive revenue in ourexisting affiliated offices through the delivery of consistently good patientservice, marketing to attract new patients, improving the physical appearanceand infrastructure of offices, and moving our affiliated practices to higherreimbursement plans where appropriate. Additionally, our new office growthstrategy seeks to enhance market penetration in existing markets as a primarydriver of overall revenue growth.

Our results from2006 reflect an improvement in our revenue and cost of revenue attributed tothe stability and productivity of our affiliated dentists, the impact of ourgrowth initiatives and significant efforts to reduce the costs of operations. Thisimprovement is offset by increases in corporate selling, general andadministrative expenses related to initiatives in information technology anddepreciation expense generated from our increase in capital expenditures inrecent years.

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** **

**RESULTS OF OPERATIONS FOR THEQUARTERS**

**ENDED JUNE 30, 2006 AND 2005**

** **

The followingtable sets forth the consolidated Statement of Operations for the three and sixmonths ended June 30, 2006 and 2005 and should be used in connection with thenarrative of our operations that follows the tables (in thousands):
| ** **                                              | ** ** | **Three Months ended  June 30, 2006** | ** ** | **Three Months ended  June 30, 2005** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|-----------------------------------------------------------|------------|-----------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Amount**                                                | ** ** | **% of Total  Revenue**                         | ** ** | **Amount** | ** ** | **% of Total  Revenue** | ** ** | **%  Change** | ** ** |
| Total revenues                                          |       | $                                                         | 54,881     |                                                      | 100.0      | %          | $          | 54,233 |   | 100.0 | % | 1.2 | % |
|                                                    |       |                                                      |       |                                                      |       |       |       |   |   |   |   |
| Cost of revenues                                        |       | 47,404                                                    |       | 86.4                                                      |       | 46,883     |       | 86.5 |   | 1.1 |   |
| Corporate  selling, general and administrative expenses |       | 3,113                                                     |       | 5.7                                                       |       | 3,000      |       | 5.5 |   | 3.8 |   |
| Depreciation and  amortization                          |       | 1,431                                                     |       | 2.6                                                       |       | 1,348      |       | 2.5 |   | 6.2 |   |
| Total operating expenses                                |       | 51,948                                                    |       | 94.7                                                      |       | 51,231     |       | 94.5 |   | 1.4 |   |
| Operating income                                        |       | 2,933                                                     |       | 5.3                                                       |       | 3,002      |       | 5.5 |   | (2.3 | ) |
| Other  non-operating (income) expense, net              |       | 265                                                       |       | 0.5                                                       |       | (143       | )          | (0.3 | ) | (285.3 | ) |
| Interest  expense, net                                  |       | 2,552                                                     |       | 4.7                                                       |       | 2,503      |       | 4.6 |   | 2.0 |   |
| Net income before provision for income taxes            |       | 116                                                       |       | 0.2                                                       |       | 642        |       | 1.2 |   | (81.9 | ) |
| Provision for  income taxes                             |       | 112                                                       |       | 0.2                                                       |       | 253        |       | 0.5 |   | (55.7 | ) |
| Net income                                              |       | $                                                         | 4          |                                                      | 0.0        | %          | $          | 389 |   | 0.7 | % | (99.0 | )% |

 
| ** **                                              | ** ** | **Six Months ended  June 30, 2006** | ** ** | **Six Months ended  June 30, 2005** | ** ** | ** ** | ** ** |
|---------------------------------------------------------|------------|---------------------------------------------------------|------------|---------------------------------------------------------|------------|------------|------------|
| ** **                                              | ** ** | **Amount**                                              | ** ** | **% of Total  Revenue**                       | ** ** | **Amount** | ** ** | **% of Total  Revenue** | ** ** | **%  Change** | ** ** |
| Total revenues                                          |       | $                                                       | 110,557    |                                                    | 100.0      | %          | $          | 107,972 |   | 100.0 | % | 2.4 | % |
|                                                    |       |                                                    |       |                                                    |       |       |       |   |   |   |   |
| Cost of revenues                                        |       | 95,665                                                  |       | 86.5                                                    |       | 94,166     |       | 87.2 |   | 1.6 |   |
| Corporate  selling, general and administrative expenses |       | 6,065                                                   |       | 5.5                                                     |       | 5,141      |       | 4.8 |   | 18.0 |   |
| Depreciation and  amortization                          |       | 2,825                                                   |       | 2.6                                                     |       | 2,657      |       | 2.5 |   | 6.3 |   |
| Total operating expenses                                |       | 104,555                                                 |       | 94.6                                                    |       | 101,964    |       | 94.4 |   | 2.5 |   |
| Operating income                                        |       | 6,002                                                   |       | 5.4                                                     |       | 6,008      |       | 5.6 |   | (0.1 | ) |
| Other  non-operating (income) expense, net              |       | 321                                                     |       | 0.3                                                     |       | (133       | )          | (0.1 | ) | (341.4 | ) |
| Interest  expense, net                                  |       | 5,111                                                   |       | 4.6                                                     |       | 5,044      |       | 4.7 |   | 1.3 |   |
| Net income before provision for income taxes            |       | 570                                                     |       | 0.5                                                     |       | 1,097      |       | 1.0 |   | (48.0 | ) |
| Provision for  income taxes                             |       | 357                                                     |       | 0.3                                                     |       | 430        |       | 0.4 |   | (17.0 | ) |
| Net income                                              |       | $                                                       | 213        |                                                    | 0.2        | %          | $          | 667 |   | 0.6 | % | (68.1 | )% |

 

**Revenues**

Forthe three and six month periods ended June 30, 2006, we posted net revenuegains of $0.6 million and $2.6 million, respectively from the same periods lastyear.  The increase in our overallrevenue is driven primarily by improved productivity and stability of ouraffiliated providers and new office growth. We opened 4 new offices and closed2 existing offices in the twelve months ending June 30, 2006.

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Ournet revenue from offices open for at least one year, or same-office revenue,increased by 1.8% to $105.8 million over the same period last year.   The increase in same office revenue is theresult of improved productivity and stability of our affiliated providers.

#### **Costsand expenses**

*Cost of revenues. *Cost of revenues consists of costs directlyassociated with activities of operating and managing the practice facilitylocations, including regional support departments. The components of cost ofrevenues are largely variable or semi-variable costs and include clinical andnon-clinical salaries and benefits, dental supplies and lab expenses,occupancy, practice selling, general and administrative expenses and provisionfor doubtful accounts.

Although our overall cost of revenues increased,cost of revenues decreased as a percentage of net revenues for the same threeand six month periods last year. The overall cost increases are attributed tonet gains in offices open for the same period last year while the primarydrivers of the percentage decreases for the three and six months are asfollows:

·                  Decrease as a percentage of revenue in nonclinical salaries and related benefits of 0.7% and 0.6% for the three and six months, respectively, as we focusedon properly staffing offices for the level of business.  This decrease was primarily due to areduction in back office head count. Additional gains were noted through the process of rotating officemanagers and front office staff between offices to ensure optimum effectivenessof existing personnel.

·                  Practice selling, general and administrativeexpenses as a percentage of revenue decreased 0.6% and 0.9% for the three andsix months, respectively resulting from lower marketing expenditures in 2006 ascompared to a planned incremental increase in 2005 designed to build brandequity in our newly rebranded practices and to generate new patientgrowth.  We expect to continue thisincrementally lower expenditure for marketing for the remainder of 2006.

·                  The decreases are offset by a 0.6% and 0.4%increase as a percentage of revenue in clinical salaries and benefits and a0.6% and 0.3% increase as a percentage of revenue in occupancy costs for thethree and six months, respectively.  Theincrease in clinical salaries and benefits as a percentage of revenue is dueprimarily to increase in temporary salary guarantees to new affiliated doctorsduring their initial ramp up period, combined with the typically lower productivityof these new doctors. We customarily provide new affiliated dentists withguaranteed minimum compensation for a period of three to six months while theyestablish their practice. At the end of this period, the affiliated dentistsshift to a variable commission model. The guarantees are a residual effect ofthe increase in doctor turnover that we experienced in late 2005.  We are also incurring additional clinicalcosts when we use contract doctors in areas where we are encounteringdifficulty in recruiting permanent affiliated doctors.

The increases in occupancycosts are related to opening new offices and the overall increases in rent,common area maintenance costs, and utilities for existing offices.

*Corporate selling, general and administrative expenses. *Corporate selling, general and administrative expenses include:corporate salaries, general office costs, investor relations expense, legal andaudit fees, general insurance, director and officer liability insurance andother miscellaneous costs at our corporate facilities.

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For the three and six months ended June 30, 2006 ourcorporate selling, general and administrative costs increased $0.1 million and$0.9 million, respectively from the same periods last year. This increase isattributed to:

·                  Additional compensation costs related to anincrease in our vacation and bonus liability. We also shifted certain support related activities and related headcountfrom operations to corporate.  Suchresponsibilities primarily include information technology (IT) and chiefclinical roles.

·                  Higher professional services related tocontinuing IT initiatives and audit costs resulting from a stub period audit inthe prior year and a full year audit for 2005; and

·                  Non-employee director and management feespayable to our majority shareholder for the quarter. Amounts paid for servicesprovided in the prior year began in the second quarter.

*Depreciation and amortization.* Depreciation expense is attributed to depreciation of dental equipment,furniture, fixtures and computer equipment and amortization of leaseholdimprovements and identifiable intangibles. Depreciation and amortizationexpense was slightly up for the three and six months ended June 30, 2006compared to the same periods last year due to the incremental depreciation andamortization for new equipment and new office expansion.

We expect to continue to incur capital expenditures,primarily as part of our new office expansion program and the on-going remodelor relocation of offices. Because of this, depreciation and amortizationexpense may increase as a percentage of revenue in future periods depending onthe timing and amount of the capital expenditure.

**Non-operatingexpenses**

*Interestexpense.* Net interestexpense in both periods is a result of $80.0 million in principal of our SeniorSecured Notes due 2011, or the Notes, and amortization of deferred financingcosts associated with the Notes.  Ourobligations under the Notes will result in substantial interest expense infuture periods.  The Notes bear interestat 10 3⁄4% per year, payable semiannually on June 15 and December 15 of eachyear.  Interest expense also consists ofinterest on our revolving credit facility, the letter of credit and unusedcredit line facility.

*Othernon-operating (income) expense. *The increase in othernon-operating (income) expense is due to the following transactions:  In 2006, we incurred charges for disposal ofcertain assets relating to prior year office relocation and in 2005 werecovered monies from our insurance carrier relating to a prior year loss.

**Income taxes**

*Provisionfor income taxes.* Oureffective tax rate was approximately 96.6% and 39.4% for the three months endedJune 30, 2006 and 2005, respectively, and 62.6% and 39.2% for the sixmonths ended June 30, 2006 and 2005, respectively. The 2006 income taxprovision consists of state minimum taxes and benefits realized from utilizingpre-reorganization deferred taxes.  The increase in the effective tax rate is dueto the payment of certain non-deductible expenses and accrued interest on themandatorily redeemable preferred stock, which result in permanent differences.

**LIQUIDITY AND CAPITAL RESOURCES**

Historically, we have financed our operating and capitalneeds through cash generated by operations and borrowings. Our primary sourcesof liquidity for the near future will be cash flow from our operations andavailability under our $10 million senior secured revolving credit facility.Advances under this facility are limited to the lesser of (i) $10 million or(ii) a borrowing base formula calculated at 0.75 times our trailing 12 monthearnings before interest, taxes, depreciation and amortization, or EBITDA, as definedin the agreement. In addition, we are required to maintain a monthly minimumEBITDA, as measured on a trailing 12 month basis, of at least $12 million. Wehad trailing 12 month EBITDA of $14.8 and $15.1 million as of June 30, 2006 andDecember 31, 2005, respectively.

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As of June 30, 2006, our borrowing base was $10.0million and the amount available under our revolving credit facility was $7.3 million fromwhich we have borrowed $1.2 million. The $1.5 million reduction on the amountavailable under our revolving credit facility resulted from the issuance on ourbehalf of a letter of credit in conjunction with our self insured workers’compensation programs.

Our primary cash requirements include general operatingexpenses, debt service requirements and capital expenditures. Our SeniorSecured Notes are interest only, payable semi-annually in the amount ofapproximately $4.3 million, or approximately $8.6 million over a 12 monthperiod. We currently anticipate funding interest payments from cash generatedby our operations, supplemented as necessary with borrowings under ourrevolving credit facility.  Dividends onthe mandatorily redeemable preferred stock accrue annually, and are payablemonthly. We are permitted to pay required dividends either in cash (ifpermitted by other applicable debt covenants) or “in kind” through the issuanceof additional shares of the preferred stock. We currently intend to settle thedividends on the preferred stock through additional shares of Class C PreferredStock.

Under our new office growth strategy we currently plan toinitiate approximately seven new dental offices in leased facilities this yearand complete 10-15 per year thereafter, depending upon our liquidity and ourability to identify opportunities that meet our expectations. We expect to fundmost of these offices using our cash flow from operations. We may also fromtime to time consider acquisitions of dental practices, although we have nocurrent plans for any acquisitions.

We believe that our currentsources of liquidity will be sufficient to meet our requirements in 2006.However, an unexpected decline in cash flow from operations or in our EBITDAcould materially impair our liquidity. In such event, we may not be able toaccess our revolving credit facility and we may be unable to generatesufficient free cash flow to meet all of our operating requirements. Moreover,the indenture governing our notes and the terms of our senior secured revolvingcredit facility limit our ability to incur additional indebtedness. As aresult, in the event of a material decline in our operating performance, we mayencounter substantial difficulty in securing additional sources of liquidity.

Ourcash flow sources and uses by operating, investing and financing activities areshown below (in thousands):

|                                                      | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| Net cash  provided by operations                     |       | $                                                 | 7,269      |   | $ | 4,857 |   |
| Net cash used in  investing activities               |       | $                                                 | (3,042     | ) | $ | (5,366 | ) |
| Net cash (used in) provided  by financing activities |       | $                                                 | (2,725     | ) | $ | 2,211 |   |

 

*Cash flow from operations*.  The increase in cash flow fromoperations from the same period last year is due primarily to cash retainedthrough:

·                  $0.6 million related to the adoption of ourdeferred compensation program in January 2006;

·                  $0.8 million related to the building ofreserves for claims incurred but not reported for third party providers and ourhigh deductible insurance programs implemented in late 2005 and early 2006; and

·                  $0.8 million reduction in our prepaid rent asrent checks generated prior to the end of the quarter were not released at June30, 2006 due to the timing of the quarter end.

*Cash flow used in investing activities*.  Ourspending on property and equipment during the first six months of 2006decreased $2.9 million from the same period in the prior year. We opened onenew office in the six months ended June 30, 2006 versus opening 3 new officesin the same period prior year. We expect to continue to incur significantcapital expenditures, primarily as part of our new office growth strategy andthe on-going remodel or relocation of offices. We also invested $0.5 million in marketable securities in conjunctionwith our deferred compensation program which began in January 2006.

*Cash flow from financing activities*.  Thesignificant decrease in financing activities is due to reducing our book cashoverdraft position. Additionally,cash was used to pay down outstanding balances on our revolving line of creditand capital leases. Our subordinated seller debt was paid off in 2005.  We will pay the remaining balance on thecapital lease obligation of $0.3 million as scheduled through March 2009.

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** **

**CRITICAL ACCOUNTING POLICIES ANDESTIMATES**

Our discussion and analysis of our financial conditionand results of operations are based upon our consolidated financial statements,which have been prepared in accordance with accounting principles generallyaccepted in the United States. The preparation of these financial statementsrequires us to make estimates and judgments that affect the reported amounts ofassets, liabilities, revenues and expenses, and related disclosure ofcontingent assets and liabilities.

We believe that the estimates, assumptions andjudgments involved in the accounting policies described in the “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section of our most recent Annual Report on Form 10-K have the greatestpotential impact on our financial statements, so we consider these to be ourcritical accounting policies. Because of the uncertainty inherent in thesematters, actual results could differ from the estimates we use in applying thecritical accounting policies. Certain of these critical accounting policiesaffect working capital account balances, including the policies for revenuerecognition, the reserve for uncollectible accounts receivable and inventorybalances. These policies require that we make estimates in the preparation ofour financial statements as of a given date.

Within the context of these critical accounting policies,we are not currently aware of any reasonably likely events or circumstancesthat would result in materially different amounts being reported.

#### **RecentlyAdopted Accounting Pronouncements**

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections—A Replacement ofAPB Opinion No. 20 and FASB Statement No. 3” or SFAS 154. SFAS 154 requiresthat a voluntary change in accounting principle be applied retrospectively withall prior period financial statements presented on the new accountingprinciple, unless it is impracticable to do so. SFAS 154 also provides that (1)a change in method of depreciating or amortizing a long-lived nonfinancialasset be accounted for as a change in estimate (prospectively) that wasaffected by a change in accounting principle, and (2) correction of errors inpreviously issued financial statements shall be termed a “restatement.” SFAS154 is effective for accounting changes and corrections of errors made infiscal years beginning after December 15, 2005. The implementation of SFAS 154,effective January 1, 2006 did not have a material impact on the Company’sconsolidated financial statements.

#### **AccountingStandards Not Yet Adopted by the Company**

In June 2006, the FASBissued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty inIncome Taxes—an interpretation of FASB Statement No. 109,” to clarify theaccounting for uncertainty in income taxes recognized in the financialstatements in accordance with FASB Statement No. 109. This Interpretationprescribes a recognition threshold and measurement criteria for the recognitionand measurement of a tax position taken or expected to be taken in a taxreturn. FIN 48 also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure andtransition. FIN 48 is effective for years beginning after December 15, 2006. Weare currently evaluating the effect that the adoption of FIN 48 will have onour consolidated results of operations and financial condition but do notexpect this Interpretation to have a material impact.

On November 10, 2005, the Financial AccountingStandards Board (FASB) issued FASB Staff Position (FSP) No. FAS 123(R)-3, “TransitionElection Related to Accounting for the Tax Effects of Share-Based PaymentAwards”.  This FSP allows companies usingeither the modified retrospective or modified prospective application to make aone-time election to adopt the transition method described in the FSP and alsoallowed companies to take up to one year from the later of its initial adoptionof Statement 123(R) or the effective date of this FSP to evaluate its availabletransition alternatives and make its one-time election.  We are currently evaluating the availabletransition alternatives and have not yet made a determination of which methodwe will be using.

In March 2006, the FASB issued EITF No. 06-03, “HowTaxes Collected from Customers and Remitted to Governmental Authorities ShouldBe Presented in the Income Statement (That Is, Gross versus Net Presentation)” whichrequires a reevaluation of existing policies as to gross versus net reportingof taxes and the subsequent disclosure of taxes reported on a gross basis, ofsignificant taxes.  We are in the processof reevaluating existing policies and have not made a decision regardingpresentation and disclosure of these taxes in the financial statements inaccordance with SFAS 154.

**Item 3.Quantitative and Qualitative Disclosures About Market Risk.**

In theordinary course of business, we are exposed to interest rate risk. For fixedrate debt, interest rate changes affect the fair value but do not impactearnings or cash flow. Conversely, for floating rate debt, interest ratechanges generally do not affect the fair market value but do impact futureearnings and cash flow. We do not believe a one percentage point change ininterest rates would have a material impact on the fair market value of ourfixed rate debt.

Ourinterest expense is sensitive to changes in the general level of interest ratesas our senior secured revolving credit facility has interest rates based uponLIBOR or the prime rate plus for the banks’ applicable margins ranging from1.0% to 3.25%. At June 30, 2006, there were $1.2 million in borrowingsoutstanding under this facility. The annual pre-tax earnings and cash flowimpact for a one percentage point change in interest rates would not besignificant to our operations.  Thehypothetical change used in this analysis may be different from what actuallyoccurs in the future.  We do notpresently undertake any specific actions to cover our exposure to interest raterisk and we are not party to any interest rate risk management transactions.

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** **

**Item 4.Controls and Procedures**

Our management,with the participation of our Chief Executive Officer and Chief FinancialOfficer, evaluated the effectiveness of our disclosure controls and procedures(as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as ofthe end of the period covered by this report. Our management, with theparticipation of our Chief Executive Officer and Chief Financial Officer, alsoconducted an evaluation of our internal control over financial reporting todetermine whether any changes occurred during the first six months of fiscal2006 that have materially affected, or are reasonably likely to materiallyaffect, our internal control over financial reporting. Based upon theseevaluations, and solely because of the material weakness in internal control overfinancial reporting discussed below, the Chief Executive Officer and ChiefFinancial Officer have concluded that our disclosure controls and procedureswere not effective in providing reasonable assurance that information requiredto be disclosed in the reports we file or submit under the Exchange Act isrecorded, processed, summarized and reported as and when required and that suchinformation is accumulated and communicated to management, including the ChiefExecutive Officer and Chief Financial Officer, in a manner that allows timelydecisions regarding required disclosure. However, we believe that theaccompanying consolidated financial statements fairly present in all materialrespects our financial position and results of operations presented in thisForm 10-Q.

A material weakness is a control deficiency, orcombination of control deficiencies, that results in more than a remotelikelihood that a material misstatement of the annual or interim financialstatements will not be prevented or detected. While no material misstatement oradjustment was noted, management concluded that we did not maintain effectivecontrols to mitigate the likelihood to less than remote that a materialmisstatement in our patient service revenue and related accounts receivableprocess would be prevented or detected, including the estimation andestablishment of allowances for bad debts and fee rate change adjustments.Management’s conclusion was based on the effect of limitations of our industrystandard dental practice management software on the estimation of ourallowances and our need to strengthen the preventative controls surrounding ourbilling process.

In order to proactively address the material weaknessnoted above, in mid 2005, we began preparations to implement a new dentalpractice management system and are in the process of implementing this systemand designing new controls and processes in conjunction with our preparationsto be compliant with Section 404 of the Sarbanes Oxley Act by December 31,2007.

There were no changes in the internal control overfinancial reporting that occurred during the period covered by this report thatmaterially affected, or that are reasonably likely to materially affect,internal control over financial reporting.

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PART II — OTHER INFORMATION

**Item 1.Legal Proceedings**

Wehave been named as a defendant in various lawsuits in the normal course ofbusiness, primarily for malpractice claims. We, our affiliated dental practicesand associated dentists’ are insured with respect to dentistry malpracticerisks on a claims-made basis. Management believes all of these pendinglawsuits, claims, and proceedings against us are without merit or will not havea material adverse effect on our consolidated operating results, liquidity orfinancial position, or cash flows.

Aspreviously reported, the California Attorney General’s Bureau of Medical Fraudand Elderly Abuse initiated an investigation following our self reporting toDenti-Cal of billing errors we had discovered at one of our affiliated dentalpractices.  We continue to cooperate inthe investigation; no material developments occurred during the past quarter.

**Item 1A.Risk Factors**

**Our ability to manage ourbusiness is limited by our lack of control over the dental professionals whogenerate our revenues.**

We provide a number ofservices designed to enhance the productivity of affiliated dental practices.Our revenues depend upon the success of those dental practices. The success ofany dental practice will, to a large extent, depend upon the efforts of thedentists and their professional skills and reputation. We do not employ thedentists nor do we control their clinical practices. While we seek to affiliatewith dedicated, well-qualified dentists, we cannot control their delivery ofpatient care. Our lack of control over all clinical aspects of the delivery ofdental services by our affiliated dental practices makes it more difficult forus to improve our performance. As a result, a key determinant of our success isbeyond our control to effectively manage.

**Our revenue may be adverselyaffected by third party payor cost containment efforts and capitationarrangements.**

A portion of the paymentsfor dental care that is received by our affiliated dental practices is paid orreimbursed under insurance programs, or by third party payors. We areresponsible for negotiating the terms of these third party payor arrangements.Third party payors are continually negotiating the fees charged for dentalcare, with a goal of containing reimbursement and utilization rates. In recentyears, we have been able to increase some reimbursement rates. However, webelieve that pressure by third party payors to reduce fees and reimbursementrates will continue and will increasingly affect the provision of dentalservices. This may result in a reduction in per-patient and per-procedurerevenue from current levels. Loss of revenue by our affiliated dental practicescaused by third party payor cost containment efforts could have a materialadverse effect on our business, financial condition and results of operations.

Additionally, somethird-party payor contracts are capitated arrangements. Approximately 23% ofour revenue was derived from capitated arrangements for the six months endedJune 30, 2006. Under those contracts, the affiliated dental practice receives acapitated payment, calculated on a monthly per-member basis, to provide care tothe covered enrollees and generally receives a co-payment from the patient atthe time care is provided. These payment methods shift a portion of the risk ofproviding care from the third party payors to the affiliated dental practices.To the extent that patients covered by these contracts require more frequent orextensive care than is anticipated, there may be a shortfall between the capitatedpayments received by the affiliated dental practices and the costs to providethe contracted services. These shortfalls may result in our affiliated dentalpractices being unable to reimburse us for expenses and contribute to ourservice fees.

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** **

**The terms of our serviceagreements with affiliated dental practices may result in losses which cannotbe recovered, thereby reducing our cash flow from operations and the funds wehave available to meet our obligations.**

Substantially all of ouroperating revenue is derived from our service agreements with affiliated dentalpractices. Under these agreements, we assume responsibility for operatingexpenses of the dental practice, such as salaries and benefits for non-dentistpersonnel, dental supplies, lab fees, office occupancy costs and marketingexpenses. The dental practice is contractually obligated to reimburse us forsuch expenses and pay us a fee equal to a percentage of their revenue plus abonus. However, a newly opened dental practice or an under-performing practicemay not generate sufficient revenues to fully reimburse us for expensesadvanced on behalf of the practice and may not have net revenues to contributeto our service fees. Therefore, we may incur expenses that will not bereimbursed equivalent to the amount of losses incurred by these practices.

The losses we incur as aresult of an affiliated practice’s failure to pay our service fees and fullyreimburse expenses advanced on its behalf may never be recovered. We have noeffective recourse to obtain reimbursement for these losses. We also do nothave any guaranties from our affiliated dental practices or affiliated dentiststo cover such losses. To the extent that we are unable to collect the amountsdue us under our service agreements, our revenues and cash flow may suffer,thereby reducing the funds we have available to pay interest and principal onthe notes.

**Our operating results may beadversely affected by professional liability or other claims against us or ouraffiliated dental practices.**

Our affiliated dentalpractices could be exposed to the risk of professional liability and otherclaims. These claims, if successful, could result in substantial damages thatcould exceed the limits of any applicable insurance coverage. Our standard professionalliability insurance coverage is $1 million per occurrence and $15 million inannual aggregate. Per the terms of the management agreement, we arrange for andpay the cost of the professional liability insurance for our affiliatedpractices. We also arrange for and pay the cost of the professional liabilityinsurance for the dentists employed by our affiliated dental practices. It ispossible that professional liability claims could be asserted against us aswell as the affiliated dental practices. If such a claim is brought against anaffiliated dental practice or dentist, the professional liability insurancepremiums of that affiliated dental practice could materially increase. Also,fees payable to us from an affiliated dental practice could be adverselyaffected if damages payable by that practice exceed insurance coverage limits.While we attempt to cover both the affiliated practices as well as ourselvesfrom all types of risks and liabilities, we may still be subject to claims thateither exceed our coverage limitations or are not covered at all by insurance.In the future, insurance coverage may not be available upon terms satisfactoryto us or the coverage may not be adequate to cover losses. In addition, we maybe subject to other claims such as claims in which it is alleged that we havebeen negligent in performing our duties under management services agreements. Asuccessful professional liability claim or any other claim against us or anaffiliated dental practice could have a material adverse effect on ouravailable cash.

**Our growth strategy may reducethe cash we have available for operations.**

Our growth strategyincludes expansion through opening new affiliated dental offices as well as theexpansion of existing affiliated dental practices. We opened one new affiliatedoffice in February 2006 in Arizona under our new office growth strategy. Whilethe cost per new office will vary based on size and region, we estimate thatthe average office buildout will cost between $0.4 million and $0.6 million.The strategy is to fund these offices with cash flow from operations. Typicallyeach buildout takes between 6 to 9 months. While we will seek to support thesesnew offices with staffing from existing offices, we still expect to incurlosses of approximately $0.1 million during the first year of operations. Webelieve that the addition of these new offices will provide synergies such asgiving us greater purchasing power as well as allowing us to spread fixedoverhead across a larger revenue base. The emphasis on growing through openingnew offices, however, is a new strategy; previously, our growth strategyemphasized the acquisition of existing practices. We do not have sufficientexperience with our new growth strategy to evaluate its effectiveness.

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Opening new affiliateddental offices involves numerous risks, including potentially higher thanexpected buildout and construction costs, delays in completing the buildoutsrelated to office site selection, permitting and construction difficulties, andthe failure to recruit affiliated providers and other key personnel on a timelybasis to staff these new offices. Identifying locations in suitable geographicmarkets and negotiating leases can be a lengthy and costly process.Furthermore, we will need to provide each new office with appropriatenon-clinical staff, equipment, furnishings, materials and supplies.Additionally, new offices must be staffed with one or more dentists. Because anew office may be staffed with a dentist with no established patient base,significant advertising and marketing expenditures may be required to attractpatients. Revenue for new offices may be less than expected or take longer thanexpected to reach acceptable levels, and operating costs may be higher thanexpected, resulting in our inability to operate these new offices profitablywithin expected timeframes.

The expenses involved inopening new offices and in supporting such offices until they become profitablewill consume a significant portion of our cash flow. We believe that most newoffices should become profitable within 9 to 15 months of opening. However, asthis is a new competency we lack the experience to validate this.

**We are highly leveraged, whichmay impair our ability to obtain additional financing to pursue growthopportunities.**

We are highly leveragedwhich may constrain our ability to obtain additional financing to pursue growthopportunities. Prospective lenders and other providers of capital will considerthe extent of our leverage in determining whether to make any funds availableto us. Our current leverage ratios effectively limit our ability to obtainadditional funding from third parties. We are therefore unlikely to be able topursue in the near future business opportunities that we cannot finance out ofour cash flow. Our current financial leverage effectively precludes us frompursuing significant acquisition opportunities or other opportunities thatrequire a substantial cash payment. Our near term growth may suffer as aresult, particularly in comparison with certain competitors who may be betterpositioned to obtain additional financing.

**The geographic concentration ofour operations increases the risk that our operating results will suffer fromadverse developments in our principal markets.**

We provide managementservices to 128 affiliated dental practices, and own and operate one dentallaboratory. The following table illustrates the number of these dental officeswe serve in each state on June 30, 2006.

|            | ** ** | **Dental**        |
|------------|------------|-------------------|
| **State**  | ** ** | ** **        | ** ** | ** ** | **Offices** | ** ** |
| California |       | ** **56      |
| Oregon     |       | ** **27      |
| Washington |       | ** **13      |
| Nevada     |       | ** **10      |
| Arizona    |       | ** **10      |
| Hawaii     |       | **  **6 |
| Oklahoma   |       | **  **5 |
| Kansas     |       |              | **  **1 |   |
|       |       |              | 128 |   |
|            |            |                   |  |  |  |  |  |  |

 

The current geographicconcentration of our operations in the western United States, and especially inCalifornia and Oregon, increases the risk to us of adverse economic orregulatory developments within these markets.

In addition, our growthstrategy includes focusing our growth within our existing markets. Our currentconcentration in these markets, as well as our strategy of focused expansionwithin our existing markets, increases the risk to us that adverse economic orregulatory developments in one or more of these markets may have a materialadverse effect on our business, financial condition and operating results.

 

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**Our management arrangement withaffiliated dental practices could be challenged by a state or dentist underlaws regulating the practice of dentistry.**

The laws of each state inwhich we operate contain restrictions on the practice of dentistry and controlover the provision of dental services. In the states in which we operate, thestatutes regarding the practice of dentistry include broad and vaguely statedrestrictions on owning, managing, maintaining and/or operating an office wheredental services are performed.

Our management agreementswith each affiliated dental practice provide that the affiliated dentalpractice, and not us, retains responsibility for all activities that are withinthe scope of a dentist’s license and cannot be performed by a person who is notlicensed to practice dentistry in that state. We do not have an ownershipinterest in any entity that provides dental services. The affiliated dentalpractices each retain full authority and control with respect to all dental,professional and ethical determinations over the practice.

We do not, and do notintend to, control the practice of dentistry by our affiliated dental practicesor their compliance with the regulatory requirements directly applicable todentists or the practice of dentistry. However, any challenge to ourcontractual relationships with our affiliated dental practices by dentists orregulatory authorities could result in a finding that could have a materialadverse effect on our operations, such as voiding one or more long-termmanagement agreements. Moreover, the laws and regulatory environment may changeto restrict or limit the enforceability of our management service agreements.We could be prevented from affiliating with dental practices or providingcomprehensive business services to dental practices in one or more states.

**We are subject to health care andinsurance regulations. Keeping abreast of and in compliance with these laws iscostly; failure to comply could result in fines, penalties or exclusion fromthe Medicare or Medicaid Programs.**

Our dental practiceaffiliates are subject to the Health Insurance Portability and AccountabilityAct of 1996, or HIPAA. HIPAA regulations include various requirements onprivacy and security of patient records. Federal and state regulations, such asMedicare and Medicaid, also contain anti-kickback provisions and restrictionson referrals. Our dental practice affiliates also must comply with federalOccupation Safety and Health Administration Bloodborne Pathogens Standard,which requires them to institute training programs and procedures designed toeliminate or minimize occupational exposure to Hepatitis B Virus (HBV), HumanImmunodeficiency Virus (HIV) and other bloodborne pathogens. Our subsidiary,Dedicated Dental, is also subject to the Knox-Keene Healthcare Service Plan Actof the State of California in connection with its managed dental care plan,which requires our subsidiary, among other things, to file periodic financialdata and other information with the California Department of Managed HealthCare, maintain substantial net equity on its balance sheet and maintainadequate medical, financial and operating personnel. These regulations requireconsistent monitoring to maintain compliance. Failure to comply with theseregulations could result in penalties and fines being imposed.

**Entities affiliated with LevineLeichtman Capital Partners, or LLCP hold substantially all of the outstandingvoting power of the capital stock of our parent, InterDent, Inc., and theirinterests may conflict with or be different from your interests.**

Entities affiliated withLLCP hold substantially all of the voting power of InterDent, Inc. As a result,these entities affiliated with LLCP hold, and will for the foreseeable futurecontinue to hold, sufficient voting power to direct our actions and affairs,including the election of all of our directors and, except as otherwiseprovided by law, approving or disapproving all other matters submitted to avote of stockholders of InterDent, Inc., including a merger, consolidation orsale of assets. These stockholders are permitted to act in their own interests,which may conflict with or be different from your interests. Furthermore, ifthese stockholders were to sell their shares to a single or limited group ofinvestors, thereby resulting in those investors’ beneficial ownership of 50% ormore of InterDent, Inc.’s voting stock, a change of control could be deemed tohave occurred under the terms of the indenture governing the notes, whichcould, among other things, give rise to an option in favor of each holder ofthe notes to require us to repurchase all or any part of that holder’s notes.

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**Item 6.Exhibits**

Set forth below is a listof the exhibits included as part of this quarterly report.

**INDEX TO EXHIBITS**
| Exhibit  Number | ** ** | **Description**                                                                                                                                                                                                                                                                                                                                                                                            |
|-----------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1             |       | Restated Articles of Incorporation of InterDent  Service Corporation†                                                                                                                                                                                                                                                                                                                                 |
| 3.2             |       | By-Laws of InterDent Service Corporation†                                                                                                                                                                                                                                                                                                                                                             |
| 3.3             |       | Second Amended and Restated Certificate of Incorporation  of InterDent, Inc.†                                                                                                                                                                                                                                                                                                                    |
| 3.4             |       | Amended and Restated By-Laws of  InterDent, Inc.†                                                                                                                                                                                                                                                                                                                                                |
| 4.1             |       | Indenture, dated as of December 15, 2004, by  and among IDI Acquisition Corp., InterDent Service Corporation,  InterDent, Inc., and Wells Fargo Bank as trustee and collateral agent†                                                                                                                                                                                                       |
| 4.2             |       | Registration Rights Agreement by and among IDI  Acquisition Corp., InterDent Service Corporation, InterDent, Inc. and  Jeffries & Company, Inc. dated December 15, 2004†                                                                                                                                                                                                      |
| 4.3             |       | Amended and Restated Loan and Security Agreement by  and among InterDent, Inc. as Parent, InterDent Service Corporation as  Borrower, the Lenders that are Signatories thereto as the Lenders, and Wells  Fargo Foothill, Inc. as the Arranger and Administrative Agent dated as  of December 15, 2004.†                                                                               |
| 4.4             |       | InterDent, Inc. Class D Common Stock  Purchase Warrant, dated October 8, 2003, issued by InterDent, Inc.  to Levine Leichtman Capital Partners II, L.P.††                                                                                                                                                                                                                    |
| 4.5             |       | InterDent, Inc. Class G Common Stock  Purchase Warrant, dated December 15, 2004, issued by  InterDent, Inc. to Levine Leichtman Capital Partners II, L.P.††                                                                                                                                                                                                                  |
| 5.1             |       | Opinion of Morrison & Foerster LLP,  regarding the validity of the securities being issued†††                                                                                                                                                                                                                                                                                      |
| 5.2             |       | Opinion of Stoel Rives LLP, regarding the validity  of the securities being issued†††                                                                                                                                                                                                                                                                                                       |
| 10.1            |       | InterDent, Inc. 2003 Stock Option Plan†                                                                                                                                                                                                                                                                                                                                                          |
| 10.2            |       | Employment Agreement, effective January 1,  2004, by and between the Company and Ivar S. Chhina†                                                                                                                                                                                                                                                                                            |
| 10.3            |       | Amendment 1 to Employment Agreement, effective  December 15, 2004, by and between the Company and Ivar S. Chhina†                                                                                                                                                                                                                                                                      |
| 10.4            |       | Employment Agreement, effective August 3, 2004,  by and between the Company and Robert W. Hill†                                                                                                                                                                                                                                                                                             |
| 10.5            |       | Purchase Agreement, dated December 10, 2004, by  and among IDI Acquisition Corp., InterDent Service Corporation,  InterDent, Inc. and Jefferies & Company, Inc.†                                                                                                                                                                                                              |
| 10.6            |       | Amended and Restated Shareholders Agreement, dated  as of December 15, 2004, by and among InterDent, Inc., a Delaware  Corporation, Levine Leichtman Capital Partners II, L.P., Pleasant Street  Investors, LLC, and each other holder of an equity security of the Company†                                                                                                           |
| 10.7            |       | Intercreditor Agreement, dated as of  December 15, 2004 among InterDent Service Corporation, the Guarantors  from time to time party hereto, Wells Fargo Foothill, Inc. as Credit  Agreement Agent under the Credit Agreement and Priority Lien Collateral Agent  hereunder, and Wells Fargo Bank, National Association, as Trustee under the  Indenture and as Collateral Agent hereunder† |

 

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| 10.8  |   | Security Agreement, dated as of December 15,  2004, by and between InterDent, Inc. and Wells Fargo Bank, National  Association†                                                                                                                                                                                                                                                                           |
|-------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9  |   | Security Agreement, dated as of December 15,  2004, by and between InterDent Service Corporation (as survivor from IDI  Acquisition Corp) and Wells Fargo Bank, National Association†                                                                                                                                                                                                                          |
| 10.10 |   | Stock Pledge agreement, dated as of  December 15, 2004, by and between InterDent, Inc. and Wells Fargo  Bank, National Association†                                                                                                                                                                                                                                                                       |
| 10.11 |   | Stock Pledge agreement, dated as of  December 15, 2004, by and between InterDent Service Corporation and  Wells Fargo Bank, National Association†                                                                                                                                                                                                                                                              |
| 10.12 |   | Deed of Trust, Assignment of Rents and Leases and  Security Agreement, dated as of June 23, 2004, by and from InterDent  Service Corporation, “Grantor” to First American Title Insurance Company,  “Trustee or “Grantee” for the benefit of Wells Fargo Foothill, Inc., in  its capacity as administrative agent, “Beneficiary” or “Grantee”††         |
| 10.13 |   | Mortgage, Assignment of Rents and Leases, and  Security Agreement, dated as of June 23, 2004, by and from InterDent  Service Corporation, “Mortgagor” to Wells Fargo Foothill, Inc., in its  capacity as administrative agent, “Mortgagee”††                                                                                                                                     |
| 10.14 |   | Deed of Trust, Assignment of Rents and Leases and  Security Agreement, dated as of December 15, 2004, by and from InterDent  Service Corporation, “Grantor” to First American Title Insurance Company,  “Trustee or “Grantee” for the benefit of Wells Fargo Bank, National  Association, in its capacity as collateral agent, “Beneficiary” or  “Grantee”†† |
| 10.15 |   | Mortgage, Assignment of Rents and Leases, and  Security Agreement, dated as of December 15, 2004, by and from InterDent  Service Corporation, “Mortgagor” to Wells Fargo Bank, National Association,  in its capacity as collateral agent, “Mortgagee”††                                                                                                                              |
| 10.16 |   | Management Services Agreement, dated as of  April 1, 2005, by and between InterDent Service Corporation and Levine  Leichtman Capital Partners Inc.†††                                                                                                                                                                                                                                          |
| 10.17 |   | InterDent Deferred Incentive Compensation Retirement  Plan. ††††                                                                                                                                                                                                                                                                                                                                     |
| 12.1  |   | Computation of Ratio of Earnings to Fixed Charges†††                                                                                                                                                                                                                                                                                                                                                      |
| 16    |   | Letter, dated June 13, 2005, from Ernst & Young  LLP to the SEC††                                                                                                                                                                                                                                                                                                                                          |
| 21.1  |   | List of subsidiaries†                                                                                                                                                                                                                                                                                                                                                                                               |
| 23.3  |   | Consent of Morrison & Foerster LLP  (incorporated by reference to Exhibit 5.1)†††                                                                                                                                                                                                                                                                                                           |
| 23.4  |   | Consent of Stoel Rives LLP (incorporated by  reference to Exhibit 5.2)†††                                                                                                                                                                                                                                                                                                                            |
| 24.1  |   | Power of Attorney†                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.1  |   | Certification of Chief Executive Officer under  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                            |
| 31.2  |   | Certification of Chief Financial Officer under  Section 302 of the Sarbanes-Oxley Act of 2002                                                                                                                                                                                                                                                                                                                            |

 

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| 32.1 |   | Certification of Chief Executive Officer under  Section 906 of the Sarbanes-Oxley Act of 2002           |
|------|--------|---------------------------------------------------------------------------------------------------------|
| 32.2 |   | Certification of Chief Financial Officer under  Section 906 of the Sarbanes-Oxley Act of 2002           |
| 99.1 |   | Form of Letter of Transmittal††                                                               |
| 99.2 |   | Form of Notice of Guaranteed Delivery††                                                       |
| 99.3 |   | Guidelines for Certification of Taxpayer  identification Number on Substitute Form W-9†† |

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†                                         Previouslyfiled on April 14, 2005 with the SEC on the Registration Statement onForm S-4

††                                   Previouslyfiled on June 13, 2005 with the SEC on Amendment No. 1 to the RegistrationStatement on Form S-4

†††                             Previouslyfiled on August 19, 2005 with the SEC on Amendment No. 2 to theRegistration Statement on Form S-4.

††††                       Previouslyfiled on May 12, 2006 with the SEC on Form 10-Q.

 

 

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** **

**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|        |   |            | ** ** | **INTERDENT SERVICE CORPORATION** |
|--------|--------|-----------------|------------|-----------------------------------|
|   |   |            | ** ** | ** **                        |   | (Registrant) |
|   |   |            |       |                              |   |   |
|   |   |            |       |                              |   |   |
| Date:  |   | August 14, 2006 |       |                              | By: |   | /s/ IVAR S. CHHINA |
|   |   |            |       |                              |   |   | Ivar S. Chhina |
|   |   |            |       |                              |   | President, Chief  Executive Officer and  Chairman |
|   |   |            |       |                              |   |   |
|   |   |            |       |                              |   |   |
|   |   |            |       | By:                               |   | /s/ ROBERT W. HILL |
|   |   |            |       |                              |   | Robert W. Hill |
|   |   |            |       |                              |   | Chief Financial  Officer, Treasurer  and Secretary |

 

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** **

**SIGNATURES**

In accordance with therequirements of the Exchange Act, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.
|        |   |            | ** ** | **INTERDENT, INC.** |
|--------|--------|-----------------|------------|---------------------|
|   |   |            | ** ** | ** **          |   | (Registrant) |
|   |   |            |       |                |   |   |
|   |   |            |       |                |   |   |
| Date:  |   | August 14, 2006 |       |                | By: |   | /s/ IVAR S. CHHINA |
|   |   |            |       |                |   |   | Ivar S. Chhina |
|   |   |            |       |                |   | President, Chief  Executive Officer and  Chairman |
|   |   |            |       |                |   |   |
|   |   |            |       |                |   |   |
|   |   |            |       | By:                 |   | /s/ ROBERT W. HILL |
|   |   |            |       |                |   | Robert W. Hill |
|   |   |            |       |                |   | Chief Financial  Officer, Treasurer  and Secretary |

 

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