UNITED
STATES





SECURITIES
AND EXCHANGE COMMISSION





WASHINGTON,
D.C. 20549





FORM
10-Q


(Mark
One)





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





For
      the quarterly period ended
                  June
      30, 2010





OR




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





For the transition period
from  ________________________ to
________________________





Commission
file number 0-23367





BIRNER
      DENTAL MANAGEMENT SERVICES, INC.(Exact
      name of registrant as specified in its
charter)




COLORADO
              
              84-1307044(State
      or other jurisdiction of incorporationor organization)
              
              (IRS
      Employer
                Identification
      No.)




3801
      EAST FLORIDA AVENUE, SUITE 508
              DENVER,
      COLORADO
            80210(Address
      of principal executive offices)
            (Zip
      Code)





(303)
      691-0680(Registrant’s
      telephone number, including area
code)




Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.   Yes x  No o





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files).  Yes  o  No o





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




Large
      accelerated filer  ̈
                          
                          Accelerated
      filer  ̈
                          
                          Non-accelerated
      filer  ̈
                          
                          Smaller
      reporting company x(Do
      not check if a smallerreporting
      company)






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


Yes  o  No x





Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.




Class
              
              Shares
      Outstanding as of August 9, 2010Common
      Stock, no par value
              
              1,851,380










BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


INDEX
TO FORM 10-Q





PART I - FINANCIAL
INFORMATION





PageItem
      1.
                          Financial
      StatementsCondensed
      Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010
      (Unaudited)
                          
                          3Unaudited
      Condensed Consolidated Statements of Income for the Quarters and Six
      Months Ended June 30, 2009 and 2010
                          
                          4Unaudited
      Condensed Consolidated Statements of Shareholders’ Equity and
      Comprehensive Income as of June 30, 2010
                          
                          5Unaudited
      Condensed Consolidated Statements of Cash Flows for the Six Months Ended
      June 30, 2009 and 2010
                          
                          6Unaudited
      Notes to Condensed Consolidated Financial Statements
                          
                          8Item
      2.
                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                          
                          15Item
      4.
                          Controls
      and Procedures
                          
                          26PART II - OTHER INFORMATIONItem
      2.
                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                          
                          27Item
      6.
                          Exhibits
                          
                          28Signatures
                          
                          
                          29




2




PART I - FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS





BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





December 31,
                                                        
                                                        
                                                        June 30,2009
                                                        
                                                        
                                                        2010**
                                                        
                                                        
                                                        (Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                                        
                                                        $
                                                        779,622
                                                        
                                                        
                                                        $
                                                        923,711Accounts
      receivable, net of allowance for doubtfulaccounts
      of $371,762 and $358,600, respectively
                                                        
                                                        
                                                        3,124,160
                                                        
                                                        
                                                        
                                                        3,472,142Deferred
      tax asset
                                                        
                                                        
                                                        195,170
                                                        
                                                        
                                                        
                                                        195,170Prepaid
      expenses and other assets
                                                        
                                                        
                                                        433,222
                                                        
                                                        
                                                        
                                                        782,612Total
      current assets
                                                        
                                                        
                                                        4,532,174
                                                        
                                                        
                                                        
                                                        5,373,635PROPERTY
      AND EQUIPMENT, net
                                                        
                                                        
                                                        3,532,011
                                                        
                                                        
                                                        
                                                        4,140,967OTHER
      NONCURRENT ASSETS:Intangible
      assets, net
                                                        
                                                        
                                                        12,842,285
                                                        
                                                        
                                                        
                                                        12,392,108Deferred
      charges and other assets
                                                        
                                                        
                                                        153,734
                                                        
                                                        
                                                        
                                                        153,784Notes
      receivable
                                                        
                                                        
                                                        191,557
                                                        
                                                        
                                                        
                                                        185,654Total
      assets
                                                        
                                                        $
                                                        21,251,761
                                                        
                                                        
                                                        $
                                                        22,246,148LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                                        
                                                        $
                                                        1,934,468
                                                        
                                                        
                                                        $
                                                        2,362,964Accrued
      expenses
                                                        
                                                        
                                                        1,716,395
                                                        
                                                        
                                                        
                                                        1,798,058Accrued
      payroll and related expenses
                                                        
                                                        
                                                        1,795,968
                                                        
                                                        
                                                        
                                                        2,257,660Income
      taxes payable
                                                        
                                                        
                                                        267,160
                                                        
                                                        
                                                        
                                                        -Current
      maturities of long-term debt
                                                        
                                                        
                                                        920,000
                                                        
                                                        
                                                        
                                                        920,000Liabilities
      related to discontinued operations
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        158,447Total
      current liabilities
                                                        
                                                        
                                                        6,633,991
                                                        
                                                        
                                                        
                                                        7,497,129LONG-TERM
      LIABILITIES:Deferred
      tax liability, net
                                                        
                                                        
                                                        526,036
                                                        
                                                        
                                                        
                                                        505,403Long-term
      debt, net of current maturities
                                                        
                                                        
                                                        4,362,024
                                                        
                                                        
                                                        
                                                        4,426,097Other
      long-term obligations
                                                        
                                                        
                                                        2,112,395
                                                        
                                                        
                                                        
                                                        2,168,406Liabilities
      related to discontinued operations
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        14,126Total
      liabilities
                                                        
                                                        
                                                        13,634,446
                                                        
                                                        
                                                        
                                                        14,611,161SHAREHOLDERS'
      EQUITY:Preferred
      Stock, no par value, 10,000,000 sharesauthorized;
      none outstanding
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Common
      Stock, no par value, 20,000,000 shares authorized;1,858,135
      and 1,854,281 shares issued and outstanding, respectively
                                                        
                                                        
                                                        164,255
                                                        
                                                        
                                                        
                                                        165,897Retained
      earnings
                                                        
                                                        
                                                        7,475,212
                                                        
                                                        
                                                        
                                                        7,481,208Accumulated
      other comprehensive loss
                                                        
                                                        
                                                        (22,152
                                                        )
                                                        
                                                        
                                                        (12,118
                                                        )Total
      shareholders' equity
                                                        
                                                        
                                                        7,617,315
                                                        
                                                        
                                                        
                                                        7,634,987Total
      liabilities and shareholders' equity
                                                        
                                                        $
                                                        21,251,761
                                                        
                                                        
                                                        $
                                                        22,246,148





**  Derived
from the Company’s audited consolidated balance sheet at December 31,
2009.




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




3




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)


Quarters Ended
                                                                                
                                                                                
                                                                                Six Months EndedJune 30,
                                                                                
                                                                                
                                                                                June 30,2009
                                                                                
                                                                                
                                                                                2010
                                                                                
                                                                                
                                                                                2009
                                                                                
                                                                                
                                                                                2010REVENUE:
                                                                                
                                                                                $
                                                                                15,116,412
                                                                                
                                                                                
                                                                                $
                                                                                15,746,655
                                                                                
                                                                                
                                                                                $
                                                                                30,375,031
                                                                                
                                                                                
                                                                                $
                                                                                32,193,537DIRECT
      EXPENSES:Clinical
      salaries and benefits
                                                                                
                                                                                
                                                                                8,643,614
                                                                                
                                                                                
                                                                                
                                                                                9,054,028
                                                                                
                                                                                
                                                                                
                                                                                17,438,710
                                                                                
                                                                                
                                                                                
                                                                                18,475,360Dental
      supplies
                                                                                
                                                                                
                                                                                577,078
                                                                                
                                                                                
                                                                                
                                                                                662,489
                                                                                
                                                                                
                                                                                
                                                                                1,110,434
                                                                                
                                                                                
                                                                                
                                                                                1,244,855Laboratory
      fees
                                                                                
                                                                                
                                                                                678,148
                                                                                
                                                                                
                                                                                
                                                                                699,383
                                                                                
                                                                                
                                                                                
                                                                                1,312,164
                                                                                
                                                                                
                                                                                
                                                                                1,415,933Occupancy
                                                                                
                                                                                
                                                                                1,169,208
                                                                                
                                                                                
                                                                                
                                                                                1,289,934
                                                                                
                                                                                
                                                                                
                                                                                2,334,927
                                                                                
                                                                                
                                                                                
                                                                                2,587,601Advertising
      and marketing
                                                                                
                                                                                
                                                                                96,313
                                                                                
                                                                                
                                                                                
                                                                                289,932
                                                                                
                                                                                
                                                                                
                                                                                178,121
                                                                                
                                                                                
                                                                                
                                                                                481,339Depreciation
      and amortization
                                                                                
                                                                                
                                                                                563,080
                                                                                
                                                                                
                                                                                
                                                                                592,864
                                                                                
                                                                                
                                                                                
                                                                                1,131,455
                                                                                
                                                                                
                                                                                
                                                                                1,158,130General
      and administrative
                                                                                
                                                                                
                                                                                1,114,998
                                                                                
                                                                                
                                                                                
                                                                                1,286,005
                                                                                
                                                                                
                                                                                
                                                                                2,259,920
                                                                                
                                                                                
                                                                                
                                                                                2,597,50012,842,439
                                                                                
                                                                                
                                                                                
                                                                                13,874,635
                                                                                
                                                                                
                                                                                
                                                                                25,765,731
                                                                                
                                                                                
                                                                                
                                                                                27,960,718Contribution
      from dental offices
                                                                                
                                                                                
                                                                                2,273,973
                                                                                
                                                                                
                                                                                
                                                                                1,872,020
                                                                                
                                                                                
                                                                                
                                                                                4,609,300
                                                                                
                                                                                
                                                                                
                                                                                4,232,819CORPORATE
      EXPENSES:General
      and administrative
                                                                                
                                                                                
                                                                                1,187,732
                                                                                (1)
                                                                                
                                                                                
                                                                                1,071,158
                                                                                (1)
                                                                                
                                                                                
                                                                                2,162,920
                                                                                (2)
                                                                                
                                                                                
                                                                                2,255,326
                                                                                (2)Depreciation
      and amortization
                                                                                
                                                                                
                                                                                22,161
                                                                                
                                                                                
                                                                                
                                                                                22,323
                                                                                
                                                                                
                                                                                
                                                                                44,551
                                                                                
                                                                                
                                                                                
                                                                                43,947OPERATING
      INCOME
                                                                                
                                                                                
                                                                                1,064,080
                                                                                
                                                                                
                                                                                
                                                                                778,539
                                                                                
                                                                                
                                                                                
                                                                                2,401,829
                                                                                
                                                                                
                                                                                
                                                                                1,933,546Interest
      expense, net
                                                                                
                                                                                
                                                                                27,350
                                                                                
                                                                                
                                                                                
                                                                                44,183
                                                                                
                                                                                
                                                                                
                                                                                69,958
                                                                                
                                                                                
                                                                                
                                                                                97,019INCOME
      FROM CONTINUING OPERATIONSBEFORE
      INCOME TAXES
                                                                                
                                                                                
                                                                                1,036,730
                                                                                
                                                                                
                                                                                
                                                                                734,356
                                                                                
                                                                                
                                                                                
                                                                                2,331,871
                                                                                
                                                                                
                                                                                
                                                                                1,836,527Income
      tax expense
                                                                                
                                                                                
                                                                                434,762
                                                                                
                                                                                
                                                                                
                                                                                315,771
                                                                                
                                                                                
                                                                                
                                                                                979,386
                                                                                
                                                                                
                                                                                
                                                                                789,707INCOME
      FROM CONTINUING OPERATIONS
                                                                                
                                                                                
                                                                                601,968
                                                                                
                                                                                
                                                                                
                                                                                418,585
                                                                                
                                                                                
                                                                                
                                                                                1,352,485
                                                                                
                                                                                
                                                                                
                                                                                1,046,820DISCONTINUED
      OPERATIONS (Note 9):Operating
      (loss) attributable to assets disposed of
                                                                                
                                                                                
                                                                                (142,026
                                                                                )
                                                                                
                                                                                
                                                                                (85,418
                                                                                )
                                                                                
                                                                                
                                                                                (268,734
                                                                                )
                                                                                
                                                                                
                                                                                (250,125
                                                                                )(Loss)
      recognized on dispositions
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (268,598
                                                                                )
                                                                                
                                                                                
                                                                                -
                                                                                
                                                                                
                                                                                
                                                                                (268,598
                                                                                )Income
      tax benefit
                                                                                
                                                                                
                                                                                59,651
                                                                                
                                                                                
                                                                                
                                                                                152,227
                                                                                
                                                                                
                                                                                
                                                                                112,868
                                                                                
                                                                                
                                                                                
                                                                                223,051LOSS
      ON DISCONTINUED OPERATIONS
                                                                                
                                                                                
                                                                                (82,375
                                                                                )
                                                                                
                                                                                
                                                                                (201,789
                                                                                )
                                                                                
                                                                                
                                                                                (155,866
                                                                                )
                                                                                
                                                                                
                                                                                (295,672
                                                                                )NET
      INCOME
                                                                                
                                                                                $
                                                                                519,593
                                                                                
                                                                                
                                                                                $
                                                                                216,796
                                                                                
                                                                                
                                                                                $
                                                                                1,196,619
                                                                                
                                                                                
                                                                                $
                                                                                751,148Net
      income per share of Common Stock - BasicContinuing
      Operations
                                                                                
                                                                                $
                                                                                0.32
                                                                                
                                                                                
                                                                                $
                                                                                0.23
                                                                                
                                                                                
                                                                                $
                                                                                0.73
                                                                                
                                                                                
                                                                                $
                                                                                0.56Discontinued
      Operations
                                                                                
                                                                                
                                                                                (0.04
                                                                                )
                                                                                
                                                                                
                                                                                (0.11
                                                                                )
                                                                                
                                                                                
                                                                                (0.09
                                                                                )
                                                                                
                                                                                
                                                                                (0.16
                                                                                )Net
      income per share of Common Stock - Basic
                                                                                
                                                                                $
                                                                                0.28
                                                                                
                                                                                
                                                                                $
                                                                                0.12
                                                                                
                                                                                
                                                                                $
                                                                                0.64
                                                                                
                                                                                
                                                                                $
                                                                                0.40Net
      income per share of Common Stock – DilutedContinuing
      Operations
                                                                                
                                                                                $
                                                                                0.32
                                                                                
                                                                                
                                                                                $
                                                                                0.22
                                                                                
                                                                                
                                                                                $
                                                                                0.72
                                                                                
                                                                                
                                                                                $
                                                                                0.55Discontinued
      Operations
                                                                                
                                                                                
                                                                                (0.05
                                                                                )
                                                                                
                                                                                
                                                                                (0.11
                                                                                )
                                                                                
                                                                                
                                                                                (0.09
                                                                                )
                                                                                
                                                                                
                                                                                (0.16
                                                                                )Net
      income per share of Common Stock - Diluted
                                                                                
                                                                                $
                                                                                0.27
                                                                                
                                                                                
                                                                                $
                                                                                0.11
                                                                                
                                                                                
                                                                                $
                                                                                0.63
                                                                                
                                                                                
                                                                                $
                                                                                0.39Cash
      dividends per share of Common Stock
                                                                                
                                                                                $
                                                                                0.17
                                                                                
                                                                                
                                                                                $
                                                                                0.20
                                                                                
                                                                                
                                                                                $
                                                                                0.34
                                                                                
                                                                                
                                                                                $
                                                                                0.40Weighted
      average number of shares ofCommon
      Stock and dilutive securities:Basic
                                                                                
                                                                                
                                                                                1,855,778
                                                                                
                                                                                
                                                                                
                                                                                1,858,850
                                                                                
                                                                                
                                                                                
                                                                                1,858,036
                                                                                
                                                                                
                                                                                
                                                                                1,863,354Diluted
                                                                                
                                                                                
                                                                                1,890,929
                                                                                
                                                                                
                                                                                
                                                                                1,900,272
                                                                                
                                                                                
                                                                                
                                                                                1,887,250
                                                                                
                                                                                
                                                                                
                                                                                1,902,241





(1)
            Corporate
      expense - general and administrative includes $170,915 of stock-based
      compensation expense pursuant to ASC Topic 718 and $81,792 related to a
      long-term incentive program for the quarter ended June 30, 2009 and
      $151,432 of stock-based compensation expense pursuant to ASC Topic 718 and
      $84,348 related to a long-term incentive program for the quarter ended
      June 30, 2010.


(2)
            Corporate
      expense - general and administrative includes $335,092 of stock-based
      compensation expense pursuant to ASC Topic 718 and $81,792 related to a
      long-term incentive program for the six months ended June 30, 2009 and
      $301,761 of stock-based compensation expense pursuant to ASC Topic 718 and
      $168,696 related to a long-term incentive program for the six months ended
      June 30, 2010.




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




4




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY


(UNAUDITED)





Common Stock
                                
                                
                                OtherComprehensiveIncome
                                
                                
                                RetainedEarnings
                                
                                
                                Shareholders'EquityShares
                                
                                
                                AmountBALANCES,
      December 31, 2009
                                
                                
                                1,858,135
                                
                                
                                $
                                164,255
                                
                                
                                $
                                (22,152
                                )
                                
                                $
                                7,475,212
                                
                                
                                $
                                7,617,315Common
      Stock options exercised
                                
                                
                                25,145
                                
                                
                                
                                19,310
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                19,310Purchase
      and retirement of Common Stock
                                
                                
                                (28,999
                                )
                                
                                
                                (488,125
                                )
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (488,125
                                )Dividends
      declared on Common Stock
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (745,152
                                )
                                
                                
                                (745,152
                                )Stock-based
      compensation expense
                                
                                
                                -
                                
                                
                                
                                470,457
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                470,457Other
      comprehensive income
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                10,034
                                
                                
                                
                                -
                                
                                
                                
                                10,034Net
      income, six months ended June 30, 2010
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                751,148
                                
                                
                                
                                751,148BALANCES,
      June 30, 2010
                                
                                
                                1,854,281
                                
                                
                                $
                                165,897
                                
                                
                                $
                                (12,118
                                )
                                
                                $
                                7,481,208
                                
                                
                                $
                                7,634,987




STATEMENT
OF COMPREHENSIVE INCOME FOR SIX MONTHS ENDED JUNE 30, 2010


(UNAUDITED)





Net
      income
                      
                      $
                      751,148Other
      comprehensive income
                      
                      
                      10,034Comprehensive
      income
                      
                      $
                      761,182





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




5




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six Months EndedJune 30,2009
                                                      
                                                      
                                                      2010CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                                      
                                                      $
                                                      1,196,619
                                                      
                                                      
                                                      $
                                                      751,148Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
                                                      
                                                      
                                                      1,274,545
                                                      
                                                      
                                                      
                                                      1,202,076Stock-based
      compensation expense
                                                      
                                                      
                                                      416,884
                                                      
                                                      
                                                      
                                                      470,457Provision
      for doubtful accounts
                                                      
                                                      
                                                      303,409
                                                      
                                                      
                                                      
                                                      118,502Provision
      for deferred income taxes
                                                      
                                                      
                                                      (82,477
                                                      )
                                                      
                                                      
                                                      (20,632
                                                      )Discontinued
      operations costs
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      376,903Changes
      in assets and liabilities net of effectsfrom
      acquisitions:Accounts
      receivable
                                                      
                                                      
                                                      (838,965
                                                      )
                                                      
                                                      
                                                      (466,484
                                                      )Prepaid
      expenses and other assets
                                                      
                                                      
                                                      (146,542
                                                      )
                                                      
                                                      
                                                      (328,870
                                                      )Deferred
      charges and other assets
                                                      
                                                      
                                                      8,333
                                                      
                                                      
                                                      
                                                      (50
                                                      )Accounts
      payable
                                                      
                                                      
                                                      180,466
                                                      
                                                      
                                                      
                                                      428,496Accrued
      expenses
                                                      
                                                      
                                                      199,230
                                                      
                                                      
                                                      
                                                      35,993Accrued
      payroll and related expenses
                                                      
                                                      
                                                      481,030
                                                      
                                                      
                                                      
                                                      461,692Income
      taxes payable
                                                      
                                                      
                                                      75,900
                                                      
                                                      
                                                      
                                                      (267,161
                                                      )Other
      long-term obligations
                                                      
                                                      
                                                      (66,093
                                                      )
                                                      
                                                      
                                                      56,011Net
      cash provided by operating activities
                                                      
                                                      
                                                      3,002,339
                                                      
                                                      
                                                      
                                                      2,818,081CASH
      FLOWS USED IN INVESTING ACTIVITIES:Notes
      receivable - related parties, net
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      5,903Capital
      expenditures
                                                      
                                                      
                                                      (192,619
                                                      )
                                                      
                                                      
                                                      (290,771
                                                      )Development
      or acquisition of new dental centers
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,294,932
                                                      )Net
      cash used in investing activities
                                                      
                                                      
                                                      (192,619
                                                      )
                                                      
                                                      
                                                      (1,579,800
                                                      )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      – line of credit
                                                      
                                                      
                                                      6,736,883
                                                      
                                                      
                                                      
                                                      12,462,774Repayments
      – line of credit
                                                      
                                                      
                                                      (8,415,085
                                                      )
                                                      
                                                      
                                                      (11,938,700
                                                      )Repayments
      – Term Loan
                                                      
                                                      
                                                      (460,000
                                                      )
                                                      
                                                      
                                                      (460,000
                                                      )Proceeds
      from exercise of Common Stock options
                                                      
                                                      
                                                      97,500
                                                      
                                                      
                                                      
                                                      19,310Purchase
      and retirement of Common Stock
                                                      
                                                      
                                                      (170,045
                                                      )
                                                      
                                                      
                                                      (488,126
                                                      )Tax
      benefit of Common Stock options exercised
                                                      
                                                      
                                                      896
                                                      
                                                      
                                                      
                                                      -Common
      Stock cash dividends
                                                      
                                                      
                                                      (632,871
                                                      )
                                                      
                                                      
                                                      (689,450
                                                      )Net
      cash used in financing activities
                                                      
                                                      
                                                      (2,842,722
                                                      )
                                                      
                                                      
                                                      (1,094,192
                                                      )NET
      INCREASE (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
                                                      
                                                      
                                                      (33,002
                                                      )
                                                      
                                                      
                                                      144,089CASH
      AND CASH EQUIVALENTS, beginning of period
                                                      
                                                      
                                                      1,234,991
                                                      
                                                      
                                                      
                                                      779,622CASH
      AND CASH EQUIVALENTS, end of period
                                                      
                                                      $
                                                      1,201,989
                                                      
                                                      
                                                      $
                                                      923,711




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




6




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
      Months EndedJune
      30,2009
                                  
                                  
                                  2010SUPPLEMENTAL
      DISCLOSURE OF CASHFLOW
      INFORMATION:Cash
      paid during the year for interest
                                  
                                  $
                                  95,225
                                  
                                  
                                  $
                                  135,032Cash
      paid during the year for income taxes
                                  
                                  $
                                  709,900
                                  
                                  
                                  $
                                  854,449NON-CASH
      ITEM:Gain
      recognized on interest rate swap (net of taxes)
                                  
                                  $
                                  10,810
                                  
                                  
                                  $
                                  10,034




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




7




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


June
30, 2010





(1)         UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS





The
condensed consolidated financial statements included herein are unaudited and
have been prepared by Birner Dental Management Services, Inc. (the “Company”)
pursuant to the rules and regulations of the Securities and Exchange Commission
(the “SEC”).  Certain information and footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States (“GAAP”) have been condensed
or omitted pursuant to such rules and regulations, although the Company believes
that the disclosures included herein are adequate to make the information
presented not misleading. A description of the Company’s accounting policies and
other financial information is included in the audited consolidated financial
statements as filed with the SEC in the Company’s Annual Report on Form 10-K for
the year ended December 31, 2009.





In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments necessary to present fairly the
financial position of the Company as of June 30, 2010 and the results of
operations and cash flows for the periods presented.  All such
adjustments are of a normal recurring nature.  The results of
operations for the quarter and six months ended June 30, 2010 are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire
year.  The Company has evaluated all subsequent events through August
11, 2010, the date the financial statements were issued.




(2)         SIGNIFICANT ACCOUNTING
POLICIES





Basis of Presentation/Basis
of Consolidation





The
accompanying consolidated financial statements have been prepared on the accrual
basis of accounting. These financial statements present the financial position
and results of operations of the Company and the dental offices (“Offices”)
which are under the control of the Company.  The Offices are organized
as professional corporations (“P.C.s”) and the Company provides its business
services to the Offices under long-term management agreements (the “Management
Agreements”).  All intercompany accounts and transactions have been
eliminated in the consolidation.  Certain prior year amounts have been
reclassified to conform to the presentation used in 2010. Such reclassifications
had no effect on net income.  As discussed in the Company’s Annual
Report on Form 10-K for the year ended December 31, 2009, the Company, among
other things, restated its consolidated income statements for the quarter and
six months ended June 30, 2009 to record revenue and clinical salaries on a
gross basis.  The restatement had no effect on contribution from
dental offices, operating income, net income, earnings per share, the
consolidated balance sheets, the consolidated statements of shareholders’ equity
and comprehensive income, or the consolidated statement of cash
flows.





The
Company treats Offices as consolidated subsidiaries where it has a long-term and
unilateral controlling financial interest over the assets and operations of the
Offices. The Company has obtained control of substantially all of its Offices
via the Management Agreements. The Company is a business service organization
and does not engage in the practice of dentistry or the provision of dental
hygiene services. These services are provided by licensed professionals. Certain
key features of these arrangements either enable the Company at any time and in
its sole discretion to cause a change in the shareholder of the P.C. (i.e.,
''nominee shareholder'') or allow the Company to vote the shares of stock held
by the owner of the P.C. and to elect a majority of the board of directors of
the P.C.  The accompanying statements of income reflect revenue, which
is the amount billed to patients less contractual adjustments. Direct expenses
consist of all the expenses incurred in operating the Offices and paid by the
Company.  Under the Management Agreements, the Company assumes
responsibility for the management of most aspects of the Offices' business (the
Company does not engage in the practice of dentistry or the provision of dental
hygiene services), including personnel recruitment and training; comprehensive
administrative, business and marketing support and advice; and facilities,
equipment, and support personnel as required to operate the
practice.





The
Company prepares its consolidated financial statements in accordance with
Financial Accounting Standards Board (“FASB”) Accounting Standards Codification
(“ASC”) 810, which provides for consolidation of variable interest entities
(“VIEs”) of which the Company is the primary beneficiary. The Company has
concluded that the P.C.s meet the definition of VIEs as defined by this standard
and that the Company is the primary beneficiary of these VIEs.  This
conclusion was reached because the Company has the power to direct significant
activities of the VIEs and the Company is obligated to absorb losses of and/or
provide rights to receive benefits from the VIEs.




8




Revenue





Revenue
is generally recognized when services are provided and are reported at estimated
net realizable amounts due from insurance companies, preferred provider and
health maintenance organizations (i.e., third-party payors) and patients for
services rendered, net of contractual and other adjustments.  Dental
services are billed and collected by the Company in the name of the
Offices.





Revenue
under certain third-party payor agreements is subject to audit and retroactive
adjustments. To management's knowledge, there are no material claims, disputes
or other unsettled matters that exist concerning third-party reimbursements as
of June 30, 2010.





Most of
the Company’s patients are insured under third-party payor agreements. The
Company’s billing system generates contractual adjustments for each patient
encounter based on fee schedules for the patient’s insurance
plan.  The services provided are attached to the patient’s fee
schedule based on the insurance the patient has at the time the service is
provided.  Therefore, the revenue that is recorded by the billing
system is based on insurance contractual amounts. Additionally, each patient at
the time of service signs a form agreeing that the patient is ultimately
responsible for the contracted fee if the insurance company does not pay the fee
for any reason.





Intangible
Assets





The Company's dental
practice acquisitions involve the purchase of tangible and intangible assets and
the assumption of certain liabilities of the acquired dental Offices. As part of
the purchase price allocation, the Company allocates the purchase price to
the tangible and identifiable intangible assets acquired and liabilities
assumed, based on estimated fair market values. Costs of acquisition in excess
of the net estimated fair value of tangible assets acquired and liabilities
assumed are allocated to the Management Agreement related to the Office. The
Management Agreement represents the Company's right to manage the Offices during
the 40-year term of the Management Agreement. The assigned value of the
Management Agreement is amortized using the straight-line method over a period
of 25 years.  Amortization was $225,089 and $195,071 for the quarters
ended June 30, 2010 and 2009, respectively.  Amortization was $450,177
and $390,086 for the six months ended June 30, 2010 and 2009,
respectively.





The
Management Agreements cannot be terminated by the related P.C without cause,
consisting primarily of bankruptcy or material default by the
Company.





If facts
and circumstances indicate that the carrying value of long-lived and intangible
assets may be impaired, an evaluation of recoverability would be performed. If
an evaluation is required, the estimated future undiscounted cash flows
associated with the asset would be compared to the asset’s carrying amount to
determine if a write-down to market value or discounted cash flow value would be
required.





Stock
Options





The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. Total stock-based compensation expense
included in the Company’s statement of income for the quarters ended June 30,
2010 and 2009 was approximately $236,000 and $253,000,
respectively.  For the quarter ended June 30, 2010, the stock-based
compensation expense consisted of approximately $151,000 related to ASC Topic
718 expense (stock option expense) and approximately $84,000 related to
restricted stock units granted under a long-term incentive program
(“LTIP”).  The LTIP was adopted by the Board of Directors on June 3,
2009 and provides for long-term performance-based cash and stock opportunities
for the executive officers of the Company.  For the quarter ended June
30, 2009, the stock-based compensation expense consisted of approximately
$171,000 related to stock option expense and approximately $82,000 related to
restricted stock units granted under the LTIP.  Total stock-based
compensation expense included in the Company’s statement of income for the six
months ended June 30, 2010 and 2009 was approximately $470,000 and $417,000,
respectively.  For the six months ended June 30, 2010, the stock-based
compensation expense consisted of approximately $302,000 related to stock option
expense and approximately $169,000 related to restricted stock units granted
under the LTIP.  For the six months ended June 30, 2009, the
stock-based compensation expense consisted of approximately $335,000 related to
stock option expense and approximately $82,000 related to restricted stock units
granted under the LTIP.  Total stock-based compensation expense was
recorded as a component of corporate general and administrative
expense.




The
Black-Scholes option-pricing model was used to estimate the option fair values.
The option-pricing model requires a number of assumptions, of which the most
significant are expected stock price volatility, the expected pre-vesting
forfeiture rate, expected dividend rate and the expected option term (the amount
of time from the grant date until the options are exercised or expire). Expected
volatility was calculated based upon actual historical stock price movements
over the most recent periods ended June 30, 2010 equal to the expected option
term. Expected pre-vesting forfeitures were estimated based on actual historical
pre-vesting forfeitures over the most recent periods ended June 30, 2010 for the
expected option term. From January 1, 2006 through December 31, 2007, the
expected option term was calculated using the “simplified” method permitted by
Staff Accounting Bulletin 107.   Starting January 1, 2008, the
expected option term was calculated based on historical experience of the terms
of previous options.




9




Recent Accounting
Pronouncements




In
January 2010, the FASB issued new accounting guidance relating to improving
disclosures about fair value measurement. The new accounting guidance requires
new disclosures and clarifies certain existing disclosure requirements about
fair value measurements. A reporting entity is required to disclose significant
transfers in and out of Level 1 and Level 2 fair value measurements, to describe
the reasons for the transfers and to present separately information about
purchases, sales, issuances and settlements for fair value measurements using
significant unobservable inputs. This new accounting guidance is effective on
January 1, 2010, except for the disclosures about purchases, sales, issuances
and settlements in the roll forward of activity in Level 3 fair value
measurements, which is effective on January 1, 2011 and early adoption is
permitted. The Company adopted this guidance on January 1, 2010, but it did not
have a material impact on the Company’s consolidated financial
statements.




(3)         EARNINGS PER
SHARE





The
Company calculates earnings per share in accordance with ASC Topic
260.





Quarters Ended June 30,2009
                            
                            
                            2010Net Income
                            
                            
                            Shares
                            
                            
                            Per ShareAmount
                            
                            
                            Net Income
                            
                            
                            Shares
                            
                            
                            Per ShareAmountBasic
      EPS
                            
                            $
                            519,593
                            
                            
                            
                            1,855,778
                            
                            
                            $
                            0.28
                            
                            
                            $
                            216,796
                            
                            
                            
                            1,858,850
                            
                            
                            $
                            0.12Effect
      of Dilutive Stock Options
                            
                            
                            -
                            
                            
                            
                            35,151
                            
                            
                            
                            (0.01
                            )
                            
                            
                            -
                            
                            
                            
                            41,422
                            
                            
                            
                            (0.01
                            )Diluted
      EPS
                            
                            $
                            519,593
                            
                            
                            
                            1,890,929
                            
                            
                            $
                            0.27
                            
                            
                            $
                            216,796
                            
                            
                            
                            1,900,272
                            
                            
                            $
                            0.11





The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended June 30, 2010 and
2009 relates to the effect of 41,422 and 35,151 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation.  For the quarters ended June 30,
2010 and 2009, options to purchase 305,350 and 309,938 shares, respectively, of
the Company’s Common Stock were not included in the computation of dilutive
earnings per share because their effect was anti-dilutive.





Six Months Ended June 30,2009
                          
                          
                          2010Net Income
                          
                          
                          Shares
                          
                          
                          Per ShareAmount
                          
                          
                          Net Income
                          
                          
                          Shares
                          
                          
                          Per ShareAmountBasic
      EPS
                          
                          $
                          1,196,619
                          
                          
                          
                          1,858,036
                          
                          
                          $
                          0.64
                          
                          
                          $
                          751,148
                          
                          
                          
                          1,863,354
                          
                          
                          $
                          0.40Effect
      of Dilutive Stock Options
                          
                          
                          -
                          
                          
                          
                          29,214
                          
                          
                          
                          (0.01
                          )
                          
                          
                          -
                          
                          
                          
                          38,887
                          
                          
                          
                          (0.01
                          )Diluted
      EPS
                          
                          $
                          1,196,619
                          
                          
                          
                          1,887,250
                          
                          
                          $
                          0.63
                          
                          
                          $
                          751,148
                          
                          
                          
                          1,902,241
                          
                          
                          $
                          0.39





The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 2010 and
2009 relates to the effect of 38,887 and 29,214 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation.  For the six months ended June 30,
2010 and 2009, options to purchase 309,350 and 330,013 shares, respectively, of
the Company’s Common Stock were not included in the computation of dilutive
earnings per share because their effect was anti-dilutive.




10




(4)         STOCK-BASED COMPENSATION
PLANS





At the
Company’s June 2005 annual meeting of shareholders, the shareholders approved
the 2005 Equity Incentive Plan (“2005 Plan”). An amendment to the 2005 Plan was
approved at the June 2009 annual meeting of shareholders to increase the number
of authorized shares of Common Stock issuable under the 2005 Plan from 425,000
shares to 625,000 shares. The 2005 Plan provides for the grant of incentive
stock options, restricted stock, restricted stock units and stock grants to
employees (including officers and employee-directors) and non-statutory stock
options to employees, directors and consultants. The objectives of this plan
include attracting and retaining the best personnel and providing for additional
performance incentives by providing employees with the opportunity to acquire
equity in the Company. As of June 30, 2010, there were 99,818 shares available
for issuance under the 2005 Plan. The exercise price of the stock options issued
under the 2005 Plan is equal to the market price, or market price plus 10% for
shareholders who own greater than 10% of the Company, at the date of grant.
These stock options expire seven years, or five years for shareholders who own
greater than 10% of the Company, from the date of the grant and vest annually
over a service period ranging from three to five years. The 2005 Plan is
administered by a committee of two or more independent directors from the
Company’s Board of Directors (the “Committee”). The Committee determines the
eligible individuals to whom awards under the 2005 Plan may be granted, as well
as the time or times at which awards will be granted, the number of shares
subject to awards to be granted to any eligible individual, the life of any
award, and any other terms and conditions of the awards in addition to those
contained in the 2005 Plan.As of June 30, 2010, there were 213,793
vested options and 151,812 unvested options under the 2005 Plan.





The
Employee Stock Option Plan (the “Employee Plan”) was adopted by the Board of
Directors effective as of October 30, 1995, as amended on September 4, 1997,
February 28, 2002, and June 8, 2004.  The Board of Directors reserved
479,250 shares of Common Stock for issuance under the Employee Plan. The
Employee Plan provided for the grant of incentive stock options to employees
(including officers and employee-directors) and non-statutory stock options to
employees, directors and consultants. The Employee Plan expired by its terms on
October 30, 2005. As of June 30, 2010, there were 31,000 vested options
outstanding and zero unvested options outstanding under the Employee
Plan.





The
Company uses the Black-Scholes pricing model to estimate the fair value of each
option granted with the following weighted average assumptions:





Quarters Ended
                                      
                                      
                                      Six Months EndedJune 30,
                                      
                                      
                                      June 30,Valuation Assumptions
                                      
                                      2009 (5)
                                      
                                      
                                      2010 (5)
                                      
                                      
                                      2009
                                      
                                      
                                      2010Expected
      life (1)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      3.2
                                      
                                      
                                      
                                      3.4Risk-free
      interest rate (2)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      1.30
                                      %
                                      
                                      
                                      1.62
                                      %Expected
      volatility (3)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      69
                                      %
                                      
                                      
                                      59
                                      %Expected
      dividend yield
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      6.33
                                      %
                                      
                                      
                                      4.50
                                      %Expected
      Forteiture (4)
                                      
                                      
                                      -
                                      
                                      
                                      
                                      -
                                      
                                      
                                      
                                      4.97
                                      %
                                      
                                      
                                      8.49
                                      %





(1)
            The
      expected life, in years, of stock options is estimated based on historical
      experience.


(2)
              The
      risk-free interest rate is based on U.S. Treasury bills whose term is
      consistent with the expected life of the stock
  options.


(3)
            The
      expected volatility is estimated based on historical and current stock
      price data for the Company.


(4)
              Forfeitures
      are estimated based on historical
experience.


(5)
              The
      Company did not issue any options during the quarters ended June 30, 2010
      or June 30, 2009.




11




A summary
of option activity as of June 30, 2010, and changes during the six months then
ended, is presented below:




Number ofOptions
                                                      
                                                      
                                                      Weighted-AverageExercisePrice
                                                      
                                                      
                                                      Range ofExercise Prices
                                                      
                                                      
                                                      Weighted-AverageRemainingContractualTerm (years)
                                                      
                                                      
                                                      AggregateIntrinsicValue(thousands)Outstanding
      at December 31, 2009
                                                      
                                                      
                                                      393,251
                                                      
                                                      
                                                      $
                                                      16.28
                                                      
                                                      
                                                      $9.66
      - $21.85
                                                      
                                                      
                                                      
                                                      3.2
                                                      
                                                      
                                                      $
                                                      879Granted
                                                      
                                                      
                                                      65,000
                                                      
                                                      
                                                      $
                                                      15.62
                                                      
                                                      
                                                      $15.22
      - $17.13Exercised
                                                      
                                                      
                                                      61,646
                                                      
                                                      
                                                      $
                                                      10.25
                                                      
                                                      
                                                      $9.66
      - $14.81Outstanding
      at June 30, 2010
                                                      
                                                      
                                                      396,605
                                                      
                                                      
                                                      $
                                                      17.11
                                                      
                                                      
                                                      $9.66
      - $21.85
                                                      
                                                      
                                                      
                                                      3.6
                                                      
                                                      
                                                      $
                                                      631Exercisable
      at June 30, 2010
                                                      
                                                      
                                                      244,793
                                                      
                                                      
                                                      $
                                                      18.03
                                                      
                                                      
                                                      $9.66
      - $21.85
                                                      
                                                      
                                                      
                                                      2.7
                                                      
                                                      
                                                      $
                                                      273





The
weighted average grant date fair values of options granted were $5.16 per option
and $3.69 per option during the six months ended June 30, 2010 and 2009,
respectively.  Net cash proceeds from the exercise of stock options
during the six months ended June 30, 2010 and 2009 were $19,310 and $97,500,
respectively. The associated income tax benefit from stock options exercised
during the six months ended June 30, 2010 and 2009 was $0 and $896,
respectively.  As of the date of exercise, the total intrinsic values
of options exercised during the six months ended June 30, 2010 and 2009 were
$403,335 and $67,150, respectively. As of June 30, 2010, there was $555,000 of
total unrecognized compensation expense related to non-vested stock options,
which is expected to be recognized over a weighted average period of 1.78
years.





(5)        
LONG TERM INCENTIVE
PROGRAM





On June
3, 2009, the Compensation Committee of the Board of Directors adopted the
LTIP.  The LTIP, which operates under the 2005 Plan, provides for
long-term performance-based cash and stock opportunities for the executive
officers of the Company.  Details of the LTIP are as
follows:





The
Company’s executive officers may earn an aggregate of up to $1,050,000 in cash
and up to 80,000 shares of Common Stock of the Company.  The Company
issued restricted stock units with respect to the 80,000
shares.  Frederic W. Birner, the Company’s Chairman and Chief
Executive Officer, Dennis N. Genty, the Company’s Chief Financial Officer, and
Mark A. Birner, D.D.S., the Company’s President, may earn up to 50%, 25% and 25%
of the foregoing amounts, respectively.  Of the foregoing amounts,
24%, 33% and 43% can be earned in each of 2009, 2010 and 2011,
respectively.





The
executive officers may earn the foregoing amounts through achievement by the
Company of performance targets related to patient revenue growth, practice
additions, adjusted EBITDA margin and earnings per share growth.  The
executive officers will earn 100% of the amounts allocated to a particular year
if the Company exceeds all four of the annual performance targets, 90% if the
Company exceeds three of the four annual performance targets, 66.7% if the
Company exceeds two of the four annual performance targets, and 0% if the
Company achieves fewer than two of the four annual performance
targets.  The Compensation Committee will review each of the
performance targets annually and will administer the LTIP.





All
amounts vest only if the executive officer is employed by the Company on
December 31, 2011 and will be payable during the first quarter of
2012.





For the
quarter ended June 30, 2010, the Company accrued approximately $78,000 related
to the cash portion and recorded approximately $84,000 of stock-based
compensation for the equity portion, respectively, of the LTIP.  For
the six months ended June 30, 2010, the Company accrued approximately $156,000
related to the cash portion and recorded approximately $169,000 of stock-based
compensation for the equity portion, respectively, of the LTIP.




12




(6)         DIVIDENDS





The
Company has declared and paid the following quarterly cash
dividends.





Date Dividend Paid
                  
                  Quarterly Dividend Paidper ShareApril
      11, 2008; July 11, 2008; October 10, 2008; January 9, 2009
                  
                  0.17April
      10, 2009; July 10, 2009; October 9, 2009; January 8, 2010
                  
                  0.17April
      9, 2010; July 9, 2010
                  
                  0.20




The
payment of dividends in the future is subject to the discretion of the Company’s
Board of Directors, and various factors may prevent the Company from paying
dividends or require the Company to reduce the dividends. Such factors include
the Company’s financial position, capital requirements and liquidity, the
existence of a stock repurchase program, any loan agreement restrictions, state
corporate law restrictions, results of operations and such other factors that
the Company’s Board of Directors may consider relevant.




(7)   
     LINE OF
CREDIT





On May
31, 2010, the Company amended its Second Amended and Restated Credit Agreement
(the “Credit Facility”).  The amended Credit Facility decreases the
interest rate margins and extends the expiration of the Credit Facility from May
31, 2011 to May 31, 2012.  The Credit Facility allows the Company to
borrow, on a revolving basis, an aggregate principal amount not to exceed $7.0
million at either, or a combination of, the lender’s Base Rate or at LIBOR plus
a LIBOR rate margin, at the Company’s option.  The Base Rate computes
interest at the higher of the lender’s “prime rate” or the Federal Funds Rate
plus a margin of 0.25%.  The amendment adjusts the Base Rate margin
from 2.5% to 0.25%.  The LIBOR option computes interest at the LIBOR
rate as of the date such LIBOR rate loan was made plus a LIBOR rate margin of
2.5%, which is a decrease from the previous 3.875%
margin.  Additionally, the amendment eliminated the LIBOR “floor” of
1.5%.  As of June 30, 2010, the Company’s LIBOR borrowing rate was
2.85% and the Base Rate borrowing rate was 3.5%.  A commitment fee on
the average daily unused amount of the revolving loan commitment during the
preceding quarter is also assessed and decreased from 0.40% to 0.25% as of June
1, 2010 as a result of the amendment.  The Company may prepay any Base
Rate loan at any time and any LIBOR rate loan upon not less than three business
days prior written notice given to the lender, but the Company is responsible
for any loss or cost incurred by the lender in liquidating or employing deposits
required to fund or maintain the LIBOR rate loan.  At June 30, 2010,
the Company had approximately $4.2 million outstanding and $2.8 million
available for borrowing under the Credit Facility.  The outstanding
amounts consisted of $3.0 million outstanding under the LIBOR rate option and
$1.2 million outstanding under the Base Rate option.  The Credit
Facility requires the Company to comply with certain covenants and financial
ratios. At June 30, 2010, the Company was in full compliance with all of its
covenants under the Credit Facility.




(8)        
TERM
LOAN





In
October 2006, the Company entered into a $4.6 million term loan (“Term Loan”).
Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05%
and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR
plus 1.5%. As of June 30, 2010, the floating rate was 1.85%.  The
principal amount borrowed is repaid quarterly in 20 equal payments of $230,000
plus interest beginning December 31, 2006. The Term Loan matures on September
30, 2011.  As of June 30, 2010, $575,000 was outstanding at the fixed
rate of 7.05% and $575,000 was outstanding at the LIBOR plus 1.5% floating
rate.  The
Term Loan requires the Company to comply with certain covenants and financial
ratios. At June 30, 2010, the Company was in full compliance with all of
its covenants under the Term Loan.





Historically,
the Company has not used derivative instruments or engaged in hedging
activities. On October 12, 2006, the Company entered into a fixed-for-floating
interest rate swap transaction on $2.3 million of the Term Loan.  The
Company elected to designate the swap as a cash flow hedge under ASC Topic
815.  In June 2010, the Company recognized, on its balance sheet,
approximately $5,000 of other comprehensive income to mark up the value of the
cash flow hedge net of taxes.  As required by ASC Topic 820, the
Company calculated the value of the cash flow hedge using Level II
inputs.




13




(9)   
    DISCONTINUED
OPERATIONS





Discontinued
operations include the results attributable to two Offices in the Phoenix,
Arizona market that were closed in May 2010.  The loss from
discontinued operations includes both the current and historical results from
operations, the fair value of all future lease obligations and an impairment
charge to write down the fixed assets to fair value.  Current and
long-term liabilities related to discontinued operations relate to the estimated
lease obligations and estimated property taxes payable.





The
following is a summary of the costs from discontinued operations for the
quarters and six months ended June 30, 2010 and 2009:





Quarters Ended
                                      
                                      
                                      Six Months EndedJune 30,
                                      
                                      
                                      June 30,2009
                                      
                                      
                                      2010
                                      
                                      
                                      2009
                                      
                                      
                                      2010Results
      of operations
                                      
                                      $
                                      (142,026
                                      )
                                      
                                      $
                                      (85,418
                                      )
                                      
                                      $
                                      (268,734
                                      )
                                      
                                      $
                                      (250,125
                                      )Future
      lease obligations, fair value
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (144,978
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (144,978
                                      )Asset
      impairment charge
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (123,620
                                      )
                                      
                                      
                                      -
                                      
                                      
                                      
                                      (123,620
                                      )Income
      tax benefit
                                      
                                      
                                      59,651
                                      
                                      
                                      
                                      152,227
                                      
                                      
                                      
                                      112,868
                                      
                                      
                                      
                                      223,051Loss
      from discontinued operations
                                      
                                      $
                                      (82,375
                                      )
                                      
                                      $
                                      (201,789
                                      )
                                      
                                      $
                                      (155,866
                                      )
                                      
                                      $
                                      (295,672
                                      )




(10)  
     OTHER





The
Company’s retained earnings as of June 30, 2010 were approximately $7.5 million,
and the Company had a working capital deficit on that date of approximately $2.1
million. During the six months ended June 30, 2010, the Company had capital
expenditures of approximately $1.6 million, paid dividends of approximately
$689,000 and repurchased outstanding Common Stock for approximately $488,000
pursuant to the Company’s stock repurchase program, while increasing total bank
debt by approximately $64,000.





14




ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS




Forward-Looking
Statements




The
statements contained in this report that are not historical in nature are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. All statements, other than statements of
historical facts, included in this report that address activities, events or
developments that we expect, believe, intend or anticipate will or may occur in
the future, are forward-looking statements. When used in this document, the
words “estimate,” “believe,” anticipate,” “project” and similar expressions are
intended to identify forward-looking statements. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be predicted
with accuracy and some of which might not even be anticipated. These
forward-looking statements include statements in this Item 2, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,”
regarding intent, belief or current expectations of the Company or its officers
with respect to the development of de novo offices or
acquisition of additional dental practices (“Offices”) and the successful
integration of such Offices into the Company’s network, recruitment of
additional dentists, funding of the Company’s expansion, capital expenditures,
payment or nonpayment of dividends and cash outlays for income taxes and other
purposes.





Such
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from anticipated results. These risks
and uncertainties include regulatory constraints, changes in laws or regulations
concerning the practice of dentistry or dental practice management companies,
the availability of suitable new markets and suitable locations within such
markets, changes in the Company’s operating or expansion strategy, the general
economy of the United States and the specific markets in which the Company’s
Offices are located or are proposed to be located, trends in the health care,
dental care and managed care industries, as well as the risk factors set forth
in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2009, and other factors as may be identified from
time to time in the Company’s filings with the Securities and Exchange
Commission or in the Company’s press releases.




General




The
following discussion relates to factors that have affected the results of
operations and financial condition of the Company for the quarters and six
months ended June 30, 2009 and 2010. This information should be read in
conjunction with the Company’s condensed consolidated financial statements and
related notes thereto included elsewhere in this report.




Overview




The
Company was formed in May 1995 and currently manages 63 Offices in Colorado, New
Mexico and Arizona staffed by 82 general dentists and 38 specialists. The
Company derives all of its revenue from its Management Agreements with
professional corporations (“P.C.s”), which conduct the practice at each Office.
In addition, the Company assumes a number of responsibilities when it develops a
de novo Office or
acquires an existing dental practice.  These responsibilities are set
forth in a Management Agreement, as described below.





The
Company was formed with the intention of becoming the leading provider of
business services to dental practices in Colorado. The Company’s growth and
success in the Colorado market led to its expansion into the New Mexico and
Arizona markets. The Company’s growth strategy is to focus on greater
utilization of existing physical capacity through recruiting more dentists and
support staff and through development of de novo Offices and selective
acquisitions.




Critical
Accounting Policies




The
Company’s critical accounting policies are set forth in its Annual Report on
Form 10-K for the year ended December 31, 2009.  There have been no
changes to these policies since the filing of that report.




Restatement
of Certain Financial Information





On
March 10, 2010, management and the Audit Committee of the Board of
Directors of the Company concluded that the Company’s previously issued audited
statements of income for each of the years ended December 31, 2007 and 2008
and its unaudited consolidated statements of income for each of the quarters of
the years ended December 31, 2008 and 2009 should be restated.  The
restatements are a result of a change in accounting relating to the
consolidation of the Company’s managed P.Cs.




15




In prior
periods, the Company had been consolidating its managed P.C.s under the
consolidation by contract method as originally set forth in EITF 97-02 and the
related Staff interpretation of EITF 97-02 since its initial public offering in
1998.  The consolidation by contract method as described in EITF 97-02
has a very narrow scope, and the Company believed that it fit within that scope
precisely. In 2009, the Staff of the SEC reviewed and issued comments pertaining
to the Company’s Form 10-K for the year ended December 31, 2008.  In
the course of reviewing the SEC’s accounting comments, management of the Company
examined the application of the consolidation methodology of ASC Topic 810-10 to
the consolidation of its affiliated P.C.s.  ASC Topic 810-10 provides
that variable interest entity, or VIE, accounting should be considered before
consideration of consolidation by contract. Based on its review of ASC Topic
810-10, management began the process of analyzing whether its managed P.C.s
should be consolidated under the VIE model and made submissions to the SEC to
determine whether VIE accounting under ASC Topic 810-10 was
appropriate.  After thorough consideration of the questions and
comments raised by the SEC in the SEC review process and discussions with the
SEC staff regarding the issue, on March 10, 2010, the Audit Committee of the
Board of Directors of the Company, in consultation with management and the
Company’s independent registered public accounting firm, concluded
that  treatment of the Company’s managed P.C.s as variable interest
entities is the appropriate treatment under ASC Topic 810-10.





The
restatements affect the Company’s previously reported revenue and expenses for
clinical salaries and benefits paid to dentists, dental hygienists and dental
assistants.  As a result, for the periods that were restated, the
Company’s reported revenue increased by the amounts paid to dentists, dental
hygienists and dental assistants.  Clinical salaries and benefits
increased by the same dollar amounts as the increase in revenue.  The
restatements have no impact on the following items:





•
            Contribution
      from dental offices


•
            Operating
      income


•
            Net
      income


•
            Earnings
      per share


•
            Consolidated
      balance sheets


•
            Consolidated
      statements of shareholders equity and comprehensive
  income


•
            Consolidated
      statements of cash flows


•
            Adjusted
      EBITDA




Components
of Revenue and Expenses




Revenue
represents the revenue of the Offices, reported at estimated realizable amounts,
received from third-party payors and patients for dental services rendered at
the Offices, net of contractual and other adjustments.  Substantially
all of the Company’s patients are insured under third-party payor
agreements.  The Company’s billing system generates contractual
adjustments for each patient encounter based on fee schedules for the patient’s
insurance plan.  The services provided are attached to the patient’s
fee schedule based on the insurance the patient has at the time the service is
provided.  Therefore, the revenue that is recorded by the billing
system is based on insurance contractual amounts.  Additionally, each
patient at the time of service signs a form agreeing that the patient is
ultimately responsible for the contracted fee if the insurance company does not
pay the fee for any reason.





Direct
expenses consist of clinical salaries and benefits paid to dentists, dental
hygienist and dental assistants and the expenses incurred by the Company in
connection with managing the Offices, including salaries and benefits of other
employees at the Offices, supplies, laboratory fees, occupancy costs,
advertising and marketing, depreciation and amortization and general and
administrative expenses (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.





Under
each of the Management Agreements, the Company provides business and marketing
services at the Offices, including (i) providing capital, (ii) designing and
implementing advertising and marketing programs, (iii) negotiating for the
purchase of supplies, (iv) staffing, (v) recruiting, (vi) training of non-dental
personnel, (vii) billing and collecting patient fees, (viii) arranging for
certain legal and accounting services, and (ix) negotiating with managed care
organizations. The P.C. is responsible for, among other things, (i) supervision
of all dentists, dental hygienists and dental assistants, (ii) complying with
all laws, rules and regulations relating to dentists, dental hygienists and
dental assistants, and (iii) maintaining proper patient records. The Company has
made, and intends to make in the future, loans to P.C.s to fund their
acquisition of dental assets from third parties in order to comply with state
dental practice laws.  Because the Company’s financial statements are
consolidated with the financial statements of the P.C.s, these loans are
eliminated in consolidation.




16




Under the
typical Management Agreement, the P.C. pays the Company a management fee equal
to the Adjusted Gross Center Revenue of the P.C. less compensation paid to the
dentists, dental hygienists and dental assistants employed at the Office of the
P.C.  Adjusted Gross Center Revenue is comprised of all fees and
charges booked each month by or on behalf of the P.C. as a result of dental
services provided to patients at the Office, less any adjustments for
uncollectible accounts, professional courtesies and other activities that do not
generate a collectible fee. The Company’s costs include all direct and indirect
costs, overhead and expenses relating to the Company’s provision of management
services to the Office under the Management Agreement, including (i) salaries,
benefits and other direct costs of Company employees who work at the Office,
(ii) direct costs of all Company employees or consultants who provide services
to or in connection with the Office, (iii) utilities, janitorial, laboratory,
supplies, advertising and other expenses incurred by the Company in carrying out
its obligations under the Management Agreement, (iv) depreciation expense
associated with the P.C.’s assets and the assets of the Company used at the
Office, and the amortization of intangible asset value relating to the Office,
(v) interest expense on indebtedness incurred by the Company to finance any of
its obligations under the Management Agreement, (vi) general and malpractice
insurance expenses, lease expenses and dentist recruitment expenses, (vii)
personal property and other taxes assessed against the Company’s or the P.C.’s
assets used in connection with the operation of the Office, (viii) out-of-pocket
expenses of the Company’s personnel related to mergers or acquisitions involving
the P.C., (ix) corporate overhead charges or any other expenses of the Company
including the P.C.’s pro rata share of the expenses of the accounting and
computer services provided by the Company, and (x) a collection reserve in the
amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially all
costs associated with the provision of dental services at the Office are borne
by the Company, except for the compensation of the dentists, dental hygienists
and dental assistants who work at the Office.  This enables the
Company to manage the profitability of the Offices.  Each Management
Agreement is for a term of 40 years.  Each Management Agreement
generally may be terminated by the P.C. only for cause, which includes a
material default by or bankruptcy of the Company. Upon expiration or termination
of a Management Agreement by either party, the P.C. must satisfy all obligations
it has to the Company.





Revenue
is derived principally from fee-for-service revenue and revenue from capitated
managed dental care plans. Fee-for-service revenue consists of P.C. revenue
received from indemnity dental plans, preferred provider plans and direct
payments by patients not covered by any third-party payment arrangement. Managed
dental care revenue consists of P.C. revenue received from capitated managed
dental care plans, including capitation payments and patient co-payments.
Capitated managed dental care contracts are between dental benefits
organizations and the P.C.s. Under the Management Agreements, the Company
negotiates and administers these contracts on behalf of the P.C.s. Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them. This arrangement
shifts the risk of utilization of these services to the dental group practice
providing the dental services. Because the Company assumes responsibility under
the Management Agreements for all aspects of the operation of the dental
practices (other than the practice of dentistry) and thus bears all costs of the
P.C.s associated with the provision of dental services at the Office (other than
compensation of dentists, dental hygienists and dental assistants), the risk of
over-utilization of dental services at the Office under capitated managed dental
care plans is effectively shifted to the Company. In addition, dental group
practices participating in a capitated managed dental care plan often receive
supplemental payments for more complicated or elective procedures. In contrast,
under traditional indemnity insurance arrangements, the insurance company pays
whatever reasonable charges are billed by the dental group practice for the
dental services provided.





The
Company seeks to increase its revenue by increasing the patient volume at
existing Offices through effective advertising and marketing programs, adding
additional specialty services, by opening de novo Offices and by making
select acquisitions of dental practices.  The Company seeks to
supplement fee-for-service revenue with revenue from contracts with capitated
managed dental care plans. Although the Company’s fee-for-service business
generally provides a greater margin than its capitated managed dental care
business, capitated managed dental care business increases facility utilization
and dentist productivity. The relative percentage of the Company’s revenue
derived from fee-for-service business and capitated managed dental care
contracts varies from market to market depending on the availability of
capitated managed dental care contracts in any particular market and the
Company’s ability to negotiate favorable contractual terms. In addition, the
profitability of capitated managed dental care revenue varies from market to
market depending on the level of capitation payments and co-payments in
proportion to the level of benefits required to be provided.




17




The
Company’s policy is to collect any patient co-payments at the time the service
is provided.  If the patient owes additional amounts that are not covered
by insurance, Offices collect by sending monthly invoices, placing phone calls
and sending collection letters.  Interest at 18% per annum is charged on
all account balances greater than 60 days old.  Patient accounts receivable
in excess of $50 that are over 120 days past due and that appear are not
collectible are written off as bad debt and sent to an outside collections
agency.





Results
of Operations




For the
quarter ended June 30, 2010, revenue increased $630,000, or 4.2%, to $15.7
million compared to $15.1 million for the quarter ended June 30,
2009.  This increase is primarily attributable to revenue from three
Offices that were acquired during the fourth quarter of 2009 and one de novo Office that was
opened during February 2010.  These four new Offices accounted for an
additional $1.2 million in revenue during the quarter ended June 30,
2010.  Same store revenue (based on 59 Offices open during each full
quarter) decreased $527,000.





For the
quarter ended June 30, 2010, net income decreased 58.3% to $217,000, or $0.11
per share, compared to $520,000, or $0.27 per share, for the quarter ended June
30, 2009.  Net income for the quarter ended June 30, 2010 includes a
loss on discontinued operations of $202,000, net of income tax
benefit.  This includes a loss on disposition of two Offices of
$269,000.  Net income for the quarter ended June 30, 2009 includes an
operating loss on discontinued operations of $82,000, net of income tax
benefit.





In May
2010, the Company closed two Offices in the Phoenix, Arizona market due to poor
operating performance.  The Company’s second quarter 2010 results also
were negatively effected by $123,000 of television advertising costs in the
Denver market, $86,000 of training costs related to improving productivity of
dentists and hygienists, and $40,000 of marketing expense for a marketing plan
for a new specialty dental implant center the Company plans to open in the third
quarter of 2010.





For the
six months ended June 30, 2010, revenue increased $1.8 million, or 6.0%, to
$32.2 million compared to $30.4 million for the six months ended June 30,
2009.  This increase is primarily attributable to revenue from three
Offices that were acquired during the fourth quarter of 2009 and one de novo Office that was
opened during February 2010.  These four new Offices accounted for an
additional $2.2 million in revenue during the six months ended June 30, 2010.
Same store revenue (based on 59 Offices open during each full six-month period)
decreased $409,000.





For the
six months ended June 30, 2010, net income decreased 37.2% to $751,000, or $0.39
per share, compared to $1.2 million, or $0.63 per share, for the six months
ended June 30, 2009.  Net income for the six months ended June 30,
2010 includes a loss on discontinued operations of $296,000, net of income tax
benefit.  This includes a loss on disposition of two Offices of
$269,000.  Net income for the six months ended June 30, 2009 includes
an operating loss on discontinued operations of $156,000.  The
expenses discussed above that were incurred in the second quarter of 2010 also
affected net income for the six months ended June 30, 2010.





During
the first six months of 2010, the Company generated $2.8 million of cash from
operations.  During this period, the Company repurchased outstanding
Common Stock for $488,000, invested $1.6 million in capital expenditures, and
paid approximately $689,000 in dividends while increasing total bank debt by
approximately $64,000.





18





The
Company’s earnings before discontinued operations, interest, taxes,
depreciation, amortization and non-cash expense associated with stock-based
compensation (“Adjusted EBITDA”) decreased $389,000, or 9.7%, to $3.6 million
for the six months ended June 30, 2010 compared to $4.0 million for the six
months ended June 30, 2009. Although Adjusted EBITDA is not a GAAP measure of
performance or liquidity, the Company believes that it may be useful to an
investor in evaluating the Company’s ability to meet future debt service,
capital expenditures and working capital requirements. However, investors should
not consider these measures in isolation or as a substitute for operating
income, cash flows from operating activities or any other measure for
determining the Company’s operating performance or liquidity that is calculated
in accordance with GAAP. In addition, because Adjusted EBITDA is not calculated
in accordance with GAAP, it may not necessarily be comparable to similarly
titled measures employed by other companies. A reconciliation of Adjusted EBITDA
to net income is made by adding discontinued operations, depreciation and
amortization expense - Offices, depreciation and amortization expense –
corporate, stock-based compensation expense, interest expense, net and income
tax expense to net income as in the following table:





Quarters
                    
                    
                    Six MonthsEnded June 30,
                    
                    
                    Ended June 30,2009
                    
                    
                    2010
                    
                    
                    2009
                    
                    
                    2010RECONCILIATION
      OF EBITDA:Net
      income
                    
                    $
                    519,593
                    
                    
                    $
                    216,796
                    
                    
                    $
                    1,196,619
                    
                    
                    $
                    751,148Add
      back:Discontinued
      operations-(before
      income tax expense)
                    
                    
                    142,026
                    
                    
                    
                    354,016
                    
                    
                    
                    268,734
                    
                    
                    
                    518,723Depreciation
      and amortization - Offices
                    
                    
                    563,080
                    
                    
                    
                    592,864
                    
                    
                    
                    1,131,455
                    
                    
                    
                    1,158,130Depreciation
      and amortization - Corporate
                    
                    
                    22,161
                    
                    
                    
                    22,323
                    
                    
                    
                    44,551
                    
                    
                    
                    43,947Stock-based
      compensation expense
                    
                    
                    252,707
                    
                    
                    
                    235,780
                    
                    
                    
                    416,884
                    
                    
                    
                    470,457Interest
      expense, net
                    
                    
                    27,350
                    
                    
                    
                    44,183
                    
                    
                    
                    69,958
                    
                    
                    
                    97,019Income
      tax expense
                    
                    
                    375,111
                    
                    
                    
                    163,544
                    
                    
                    
                    866,518
                    
                    
                    
                    566,656Adjusted
      EBITDA
                    
                    $
                    1,902,028
                    
                    
                    $
                    1,629,506
                    
                    
                    $
                    3,994,719
                    
                    
                    $
                    3,606,080


19


The
following table sets forth the percentages of revenue represented by certain
items reflected in the Company’s condensed consolidated statements of income.
The information contained in the following table represents the historical
results of the Company. The information that follows should be read in
conjunction with the Company’s condensed consolidated financial statements and
related notes thereto contained elsewhere in this report.




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Quarters Ended
                      
                      
                      Six Months EndedJune 30,
                      
                      
                      June 30,2009
                      
                      
                      2010
                      
                      
                      2009
                      
                      
                      2010Revenue
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %
                      
                      
                      100.0
                      %Direct
      Expenses:Clinical
      salaries and benefits
                      
                      
                      57.2
                      %
                      
                      
                      57.5
                      %
                      
                      
                      57.4
                      %
                      
                      
                      57.4
                      %Dental
      supplies
                      
                      
                      3.8
                      %
                      
                      
                      4.2
                      %
                      
                      
                      3.7
                      %
                      
                      
                      3.9
                      %Laboratory
      fees
                      
                      
                      4.5
                      %
                      
                      
                      4.4
                      %
                      
                      
                      4.3
                      %
                      
                      
                      4.4
                      %Occupancy
                      
                      
                      7.7
                      %
                      
                      
                      8.2
                      %
                      
                      
                      7.7
                      %
                      
                      
                      8.0
                      %Advertising
      and marketing
                      
                      
                      0.6
                      %
                      
                      
                      1.8
                      %
                      
                      
                      0.6
                      %
                      
                      
                      1.5
                      %Depreciation
      and amortization
                      
                      
                      3.7
                      %
                      
                      
                      3.8
                      %
                      
                      
                      3.7
                      %
                      
                      
                      3.6
                      %General
      and administrative
                      
                      
                      7.4
                      %
                      
                      
                      8.2
                      %
                      
                      
                      7.4
                      %
                      
                      
                      8.1
                      %85.0
                      %
                      
                      
                      88.1
                      %
                      
                      
                      84.8
                      %
                      
                      
                      86.9
                      %Contribution
      from dental offices
                      
                      
                      15.0
                      %
                      
                      
                      11.9
                      %
                      
                      
                      15.2
                      %
                      
                      
                      13.1
                      %Corporate
      Expenses:General
      and administrative
                      
                      
                      7.9
                      %(1)
                      
                      
                      6.8
                      %(1)
                      
                      
                      7.1
                      %(2)
                      
                      
                      7.0
                      %(2)Depreciation
      and amortization
                      
                      
                      0.1
                      %
                      
                      
                      0.1
                      %
                      
                      
                      0.1
                      %
                      
                      
                      0.1
                      %Operating
      income
                      
                      
                      7.0
                      %
                      
                      
                      4.9
                      %
                      
                      
                      7.9
                      %
                      
                      
                      6.0
                      %Interest
      expense
                      
                      
                      0.2
                      %
                      
                      
                      0.3
                      %
                      
                      
                      0.2
                      %
                      
                      
                      0.3
                      %Income
      from continuing operations before income taxes
                      
                      
                      6.9
                      %
                      
                      
                      4.7
                      %
                      
                      
                      7.7
                      %
                      
                      
                      5.7
                      %Income
      tax expense
                      
                      
                      2.9
                      %
                      
                      
                      2.0
                      %
                      
                      
                      3.2
                      %
                      
                      
                      2.5
                      %Income
      from continuing operations
                      
                      
                      4.0
                      %
                      
                      
                      2.7
                      %
                      
                      
                      4.5
                      %
                      
                      
                      3.3
                      %Loss
      attributable to discontinued opeations, net of income
taxes
                      
                      
                      ( 0.5
                      )%
                      
                      
                      ( 1.3
                      )%
                      
                      
                      ( 0.5
                      )%
                      
                      
                      ( 0.9
                      )%Net
      income
                      
                      
                      3.4
                      %
                      
                      
                      1.4
                      %
                      
                      
                      3.9
                      %
                      
                      
                      2.3
                      %





(1)
              Corporate
      expense - general and administrative includes $170,915 of stock-based
      compensation expense pursuant to ASC Topic 718 and $81,792 related to a
      long-term incentive program for the quarter ended June 30, 2009 and
      $151,432 of stock-based compensation expense pursuant to ASC Topic 718 and
      $84,348 related to a long-term incentive program for the quarter ended
      June 30, 2010.


(1)
              Corporate
      expense - general and administrative includes $335,092 of stock-based
      compensation expense pursuant to ASC Topic 718 and $81,792 related to a
      long-term incentive program for the six months ended June 30, 2009 and
      $301,761 of stock-based compensation expense pursuant to ASC Topic 718 and
      $168,696 related to a long-term incentive program for the six months ended
      June 30, 2010.


20




Quarter
Ended June 30, 2010 Compared to Quarter Ended June 30, 2009:




Revenue





For the quarter ended June
30, 2010, revenue increased $630,000, or 4.2%, to $15.7 million compared to
$15.1 million for the quarter ended June 30, 2009.This increase is
primarily attributable to revenue from three Offices that were acquired during
the fourth quarter of 2009 and one de novo Office that was
opened during February 2010.  These four new Offices accounted for an
additional $1.2 million in revenue during the quarter ended June 30, 2010. 
Same store revenue (based on 59 Offices open during each full quarter) decreased
$527,000.





Direct
expenses




Clinical salaries and
benefits. For the quarter ended June 30, 2010, clinical salaries and
benefits increased $410,000, or 4.7%, to $9.1 million compared to $8.6
million for the quarter ended June 30, 2009. This increase is attributable to
the four new Offices, which accounted for an additional $693,000 of clinical
salaries and benefits during the quarter ended June 30, 2010 while salaries and
benefits at the 59 Offices open during each full quarter declined
$282,000.  As a percentage of revenue, clinical salaries and benefits
increased to 57.5% for the quarter ended June 30, 2010 compared to 57.2% for the
quarter ended June 30, 2009.




Dental supplies. For the
quarter ended June 30, 2010, dental supplies increased to $662,000 compared to
$577,000 for the quarter ended June 30, 2009, an increase of $85,000 or
14.8%.  This increase is primarily attributable to the four new Offices,
which accounted for an additional $69,000 of dental supplies during the quarter
ended June 30, 2010.  As a percentage of revenue, dental supplies increased
to 4.2% for the quarter ended June 30, 2010 compared to 3.8% for the quarter
ended June 30, 2009.




Laboratory fees. For the
quarter ended June 30, 2010, laboratory fees increased to $699,000 compared to
$678,000 for the quarter ended June 30, 2009, an increase of $21,000 or
3.1%.  This increase is attributable to the four new Offices, which
accounted for an additional $53,000 of laboratory fees during the quarter ended
June 30, 2010 while laboratory fees at the 59 Offices open during each full
quarter declined $31,000.  As a percentage of revenue, laboratory fees
decreased to 4.4% for the quarter ended June 30, 2010 compared to 4.5% for the
quarter ended June 30, 2009.




Occupancy. For the quarter
ended June 30, 2010, occupancy expense increased to $1.3 million compared to
$1.2 million for the quarter ended June 30, 2009, an increase of $121,000 or
10.3%.  This increase is primarily attributable to the four new Offices,
which accounted for an additional $103,000 of occupancy expense during the
quarter ended June 30, 2010.  As a percentage of revenue, occupancy expense
increased to 8.2% for the quarter ended June 30, 2010 compared to 7.7% for the
quarter ended June 30, 2009.




Advertising and marketing.
For the quarter ended June 30, 2010, advertising and marketing expense increased
to $290,000 compared to $96,000 for the quarter ended June 30, 2009, an increase
of $194,000 or 201.0%.  This increase is primarily attributable to $123,000
related to a television advertising campaign the Company initiated in February
2010 in its Denver, Colorado market, $24,000 related to an internet advertising
campaign initiated in August 2009 and an increase of $9,000 in yellow page
advertising.  Advertising costs of $40,000 were recognized for a marketing
plan for a new specialty dental implant center the Company plans to open in the
third quarter of 2010.  As a percentage of revenue, advertising and
marketing expense increased to 1.8% for the quarter ended June 30, 2010 compared
to 0.6% for the quarter ended June 30, 2009.




Depreciation and
amortization-Offices.For the quarter ended June 30, 2010, depreciation
and amortization expenses attributable to the Offices increased to $593,000
compared to $563,000 for the quarter ended June 30, 2009, an increase of $30,000
or 5.3%.  The increase in deprecation and amortization is related to
approximately $64,000 of additional depreciation and amortization related to the
four new Offices offset by a $34,000 decrease in depreciation and amortization
expense as a result of assets becoming fully depreciated during the first six
months of 2010 at many of the Company’s other Offices.  As a percentage of
revenue, depreciation and amortization expenses attributable to the Offices
increased to 3.8% for the quarter ended June 30, 2010 compared to 3.7% for the
quarter ended June 30, 2009.





General and
administrative-Offices:For the quarter ended June 30, 2010,
general and administrative expenses attributable to the Offices increased to
$1.3 million compared to $1.1 million for the quarter ended June 30, 2009, an
increase of $171,000 or 15.3%.  This increase is primarily attributable to
the four new Offices, which accounted for an additional $102,000 of general and
administrative expenses during the quarter ended June 30, 2010.  In
addition, malpractice insurance premiums increased $54,000 and computer supplies
and maintenance expense increased $15,000 at the remaining 59 Offices.  As
a percentage of revenue, general and administrative expenses increased to 8.2%
for the quarter ended June 30, 2010 compared to 7.4% for the quarter ended June
30, 2009.


21




Contribution
from dental Offices




As a
result of revenue increasing $630,000 and direct expenses increasing $1.0
million, contribution from dental Offices decreased to $1.9 million for the
quarter ended June 30, 2010 compared to $2.3 million for the quarter ended June
30, 2009, a decrease of $402,000 or 17.7%. As a percentage of revenue,
contribution from dental Offices decreased to 11.9% for the quarter ended June
30, 2010 compared to 15.0% for the quarter ended June 30, 2009.




Corporate
expenses




Corporate expenses - general and
administrative. For the quarter ended June 30, 2010, corporate expenses –
general and administrative decreased to $1.1 million compared to $1.2 million
for the quarter ended June 30, 2009, a decrease of $117,000 or 9.8%.  This
decrease is primarily related to a decrease in executive bonuses of $143,000 and
a decrease in legal fees of $27,000 offset by an increase of $54,000 in training
costs related to improving productivity of dentists and hygienists.  As a
percentage of revenue, corporate expenses - general and administrative decreased
to 6.8% for the quarter ended June 30, 2010 compared to 7.9% for the quarter
ended June 30, 2009.




Corporate expenses - depreciation
and amortization. For the quarters ended June 30, 2010 and 2009,
corporate expenses - depreciation and amortization remained constant at
$22,000.  As a percentage of revenue, corporate expenses – depreciation and
amortization remained constant at 0.1% for the quarters ended June 30, 2010 and
2009.




Operating
income




As a
result of the matters discussed above, the Company’s operating income decreased
by $286,000, or 26.8%, to $779,000 for the quarter ended June 30, 2010 compared
to $1.1 million for the quarter ended June 30, 2009.  As a percentage of
revenue, operating income decreased to 4.9% for the quarter ended June 30, 2010
compared to 7.0% for the quarter ended June 30, 2009.




Interest
expense/(income), net




For the
quarter ended June 30, 2010, interest expense increased to $44,000 compared to
$27,000 for the quarter ended June 30, 2009, an increase of $17,000 or 61.5%.
This increase in interest expense is attributable to higher average balances and
higher interest rates on the Credit Facility. As a percentage of revenue,
interest expense increased to 0.3% for the quarter ended June 30, 2010 compared
to 0.2% for the quarter ended June 30, 2009.




Discontinued
operations




In May
2010, the Company closed two Offices in the Phoenix, Arizona market that
resulted in a loss from discontinued operations of $202,000 and $82,000 for the
quarters ended June 30, 2010 and 2009, respectively.  For the quarter ended
June 30, 2010, the loss attributable to the discontinued operations was
comprised of an operating loss of $85,000 and a loss on disposition of dental
Offices of $269,000 partially offset by an income tax benefit of $152,000. 
For the quarter ended June 30, 2009, the loss attributable to the discontinued
operations was comprised of an operating loss of $142,000 partially offset by an
income tax benefit of $60,000.




Net
income




As a
result of the above, the Company’s net income was $217,000 for the quarter ended
June 30, 2010 compared to net income of $520,000 for the quarter ended June 30,
2009, a decrease of $303,000 or 58.3%. Net income for the quarter ended June 30,
2010 was net of income tax expense of $164,000, while net income for the quarter
ended June 30, 2009 was net of income tax expense of $375,000. The effective tax
rate was 43.0% for the quarter ended June 30, 2010 compared to 42.0% for the
quarter ended June 30, 2009.  As a percentage of revenue, net income
decreased to 1.4% for the quarter ended June 30, 2010 compared to 3.4% for the
quarter ended June 30, 2009.


22


Six
Months Ended June 30, 2010 Compared to Six Months Ended June 30,
2009:




Revenue





For the six months ended
June 30, 2010, revenue increased $1.8 million, or 6.0%, to $32.2 million
compared to $30.4 million for the six months ended June 30, 2009.This increase is primarily attributable to the four new offices which
accounted for an additional $2.2 million in revenue during the six months ended
June 30, 2010. Same store revenue (based on 59 Offices open during each full
six-month period) decreased $409,000.





Direct
expenses





Clinical salaries and
benefits. For the six months ended June 30, 2010, clinical salaries and
benefits increased $1.0 million, or 5.9%, to $18.5 million compared to
$17.4 million for the six months ended June 30, 2009. This increase is
attributable to the four new Offices, which accounted for an additional $1.4
million of clinical salaries and benefits during the six months ended June 30,
2010 while salaries and benefits at the 59 Offices open during the full six
months ended June 30, 2010 declined $325,000.  As a percentage of revenue,
clinical salaries and benefits remained constant at 57.4% for the six months
ended June 30, 2010 and 2009.




Dental supplies. For the six
months ended June 30, 2010, dental supplies increased to $1.2 million compared
to $1.1 million for the six months ended June 30, 2009, an increase of $134,000
or 12.1%.  This increase is primarily attributable to the four new Offices,
which accounted for an additional $121,000 of dental supplies during the six
months ended June 30, 2010.  As a percentage of revenue, dental supplies
increased to 3.9% for the six months ended June 30, 2010 compared to 3.7% for
the six months ended June 30, 2009.




Laboratory fees. For the six
months ended June 30, 2010, laboratory fees increased to $1.4 million compared
to $1.3 million for the six months ended June 30, 2009, an increase of $104,000
or 7.9%.  This increase is attributable to the four new Offices, which
accounted for an additional $105,000 of laboratory fees during the six months
ended June 30, 2010.  As a percentage of revenue, laboratory fees increased
to 4.4% for the six months ended June 30, 2010 compared to 4.3% for the six
months ended June 30, 2009




Occupancy. For the six months
ended June 30, 2010, occupancy expense increased to $2.6 million compared to
$2.3 million for the six months ended June 30, 2009, an increase of $253,000 or
10.8%.  This increase is primarily attributable to the four new Offices,
which accounted for an additional $200,000 of occupancy expense during the six
months ended June 30, 2010.  At the remaining 59 Offices, rent increased
$15,000, repairs and maintenance increased $23,000 and utilities increased
$21,000.  As a percentage of revenue, occupancy expense increased to 8.0%
for the six months ended June 30, 2010 compared to 7.7% for the six months ended
June 30, 2009.




Advertising and marketing.
For the six months ended June 30, 2010, advertising and marketing expense
increased to $481,000 compared to $178,000 for the six months ended June 30,
2009, an increase of $303,000 or 170.2%.  This increase is primarily
attributable to $186,000 related to a television advertising campaign the
Company initiated in February 2010 in its Denver, Colorado market, $43,000
related to an internet advertising campaign initiated in August 2009, $17,000
related to a radio advertising campaign initiated in February 2010 in the
Colorado Springs, Colorado and Albuquerque, New Mexico markets and $8,000
related to yellow page advertising.  Advertising costs of $40,000 were
recognized for a marketing plan for a new specialty dental implant center the
Company plans to open in the third quarter of 2010.  As a percentage of
revenue, advertising and marketing expense increased to 1.5% for the six months
ended June 30, 2010 compared to 0.6% for the six months ended June 30,
2009.




Depreciation and
amortization-Offices.For the six months ended June 30, 2010,
depreciation and amortization expenses attributable to the Offices increased to
$1.2 million compared to $1.1 million for the six months ended June 30, 2009, an
increase of $27,000 or 2.4%.  The increase in deprecation and amortization
is related to approximately $109,000 of additional depreciation and amortization
related to the four new Offices offset by an $82,000 decrease in depreciation
and amortization expense as a result of assets becoming fully depreciated during
the first six months of 2010 at many of the Company’s other Offices.  As a
percentage of revenue, depreciation and amortization expenses attributable to
the Offices decreased to 3.6% for the six months ended June 30, 2010 compared to
3.7% for the six months ended June 30, 2009.





General and
administrative-Offices:For the six months ended June 30, 2010,
general and administrative expenses attributable to the Offices increased to
$2.6 million compared to $2.3 million for the six months ended June 30, 2009, an
increase of $338,000 or 14.9%.  This increase is primarily attributable to
the four new Offices, which accounted for an additional $206,000 of general and
administrative expenses during the six months ended June 30, 2010.  In
addition, malpractice insurance premiums increased $64,000, repair and
maintenance expense increased $30,000 and computer supplies and maintenance
expense increased $33,000.  As a percentage of revenue, general and
administrative expenses increased to 8.1% for the six months ended June 30, 2010
compared to 7.4% for the six months ended June 30, 2009.


23




Contribution
from dental Offices




As a
result of revenue increasing $1.8 million and direct expenses increasing $2.2
million, contribution from dental Offices decreased to $4.2 million for the six
months ended June 30, 2010 compared to $4.6 million for the six months ended
June 30, 2009, a decrease of $376,000 or 8.2%. As a percentage of revenue,
contribution from dental Offices decreased to 13.1% for the six months ended
June 30, 2010 compared to 15.2% for the six months ended June 30,
2009.




Corporate
expenses




Corporate expenses - general and
administrative. For the six months ended June 30, 2010, corporate
expenses – general and administrative increased to $2.3 million compared to $2.2
million for the six months ended June 30, 2009, an increase of $92,000 or
4.3%.  This increase is primarily related to an increase of $167,000
accrued for the LTIP, an increase of $54,000 in training costs related to
improving productivity of dentists and hygienists and $29,000 of incremental
legal expenses related to responding to SEC comments pertaining to the Company’s
Form 10-K for the year ended December 31, 2008 partially offset by a decrease of
$113,000 in executive bonuses, $23,000 in 401(k) matching and $11,000 in
contract labor.  As a percentage of revenue, corporate expenses - general
and administrative decreased to 7.0% for the six months ended June 30, 2010
compared to 7.1% for the six months ended June 30, 2009.




Corporate expenses - depreciation
and amortization. For the six months ended June 30, 2010, corporate
expenses - depreciation and amortization decreased to $44,000 compared to
$45,000 for the six months ended June 30, 2009, a decrease of $1,000 or
1.4%.  As a percentage of revenue, corporate expenses – depreciation and
amortization remained constant at 0.1% for the six months ended June 30, 2010
and 2009.




Operating
income




As a
result of the matters discussed above, the Company’s operating income decreased
by $468,000, or 19.5% to $1.9 million for the six months ended June 30, 2010
compared to $2.4 million for the six months ended June 30, 2009.  As a
percentage of revenue, operating income decreased to 6.0% for the six months
ended June 30, 2010 compared to 7.9% for the six months ended June 30,
2009.




Interest
expense/(income), net




For the
six months ended June 30, 2010, interest expense increased to $97,000 compared
to $70,000 for the six months ended June 30, 2009, an increase of $27,000 or
38.7%. This increase in interest expense is attributable to higher average
balances and higher interest rates on the Credit Facility. As a percentage of
revenue, interest expense increased to 0.3% for the six months ended June 30,
2010 compared to 0.2% for the six months ended June 30, 2009.




Discontinued
operations




In May
2010, the Company closed two Offices in the Phoenix, Arizona market that
resulted in a loss from discontinued operations of $296,000 and $156,000 for the
six months ended June 30, 2010 and 2009, respectively.  For the six months
ended June 30, 2010, the loss attributable to the discontinued operations was
comprised of an operating loss of $250,000 and a loss on disposition of dental
Offices of $269,000, partially offset by an income tax benefit of
$223,000.  For the six months ended June 30, 2009, the loss attributable to
the discontinued operations was comprised of an operating loss of $269,000,
partially offset by an income tax benefit of $113,000.




Net
income




As a
result of the above, the Company’s net income was $751,000 for the six months
ended June 30, 2010 compared to net income of $1.2 million for the six months
ended June 30, 2009, a decrease of $445,000 or 37.2%. Net income for the six
months ended June 30, 2010 was net of income tax expense of $567,000, while net
income for the six months ended June 30, 2009 was net of income tax expense of
$867,000. The effective tax rate was 43.0% for the six months ended June 30,
2010 compared to 42.0% for the six months ended June 30, 2009.  As a
percentage of revenue, net income decreased to 2.3% for the six months ended
June 30, 2010 compared to 3.9% for the six months ended June 30,
2009.


24


Liquidity
and Capital Resources




The
Company finances its operations and growth through a combination of cash
provided by operating activities and the revolving Credit Facility.  As of
June 30, 2010, the Company had a working capital deficit of approximately $2.1
million, retained earnings of $7.5 million and a cash balance of
$924,000.




Net cash
provided by operating activities was approximately $2.8 million and $3.0 million
for the six months ended June 30, 2010 and 2009, respectively.  During the
six months ended June 30, 2010, excluding net income and after adding back
non-cash items, the Company’s cash provided by operating activities consisted
primarily of an increase in accounts payable and accrued expenses of
approximately $926,000 and an increase in other long-term obligations of
approximately $56,000, offset by an increase in accounts receivable of
approximately $466,000, an increase in prepaid expenses of approximately
$329,000 and a decrease in income taxes payable of $267,000.  During the
six months ended June 30, 2009, excluding net income and after adding back
non-cash items, the Company’s cash provided by operating activities consisted
primarily of an increase in accounts payable and accrued expenses of
approximately $861,000 and an increase in income taxes payable of approximately
$76,000, offset by an increase in accounts receivable of $839,000, an increase
in prepaid expenses and other assets of approximately $147,000 and a decrease in
other long-term obligations of $66,000.




Net cash
used in investing activities was approximately $1.6 million and $193,000for the six months ended
June 30, 2010 and 2009, respectively.  For the six months ended June 30,
2010, the Company invested approximately $1.3 million in the development of new
dental centers and approximately $291,000 in the purchase of additional
equipment. For the
six months ended June 30, 2009, the Company invested approximately $193,000 in
the purchase of additional equipment.




Net cash
used in financing activities was approximately $1.1million for the six months
ended June 30, 2010 and $2.8 million for the six months ended June 30, 2009.
During the six months ended June 30, 2010, net cash used in financing activities
was comprised of approximately $488,000 used in the purchase and retirement of
Common Stock, approximately $689,000 for the payment of dividends and $460,000
for the repayment of the Term Loan, partially offset by net advances on the
Credit Facility of $524,000 and approximately $19,000 in proceeds from the
exercise of Common Stock options exercised. During the six months
ended June 30, 2009, net cash used in financing activities was comprised of
approximately $170,000 used in the purchase and retirement of Common Stock,
approximately $633,000 for the payment of dividends, approximately $1.7 million
used to pay down the Credit Facility and $460,000 to pay down the Term Loan,
partially offset by approximately $98,000 in proceeds from the exercise of
Common Stock options.




On May
31, 2010, the Company amended its Credit Facility.  The amended Credit
Facility decreases the interest rate margins and extends the expiration of the
Credit Facility from May 31, 2011 to May 31, 2012.  The Credit Facility
allows the Company to borrow, on a revolving basis, an aggregate principal
amount not to exceed $7.0 million at either, or a combination of, the lender’s
Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s option. 
The Base Rate computes interest at the higher of the lender’s “prime rate” or
the Federal Funds Rate plus a margin of 0.25%.  The amendment adjusts the
Base Rate margin from 2.5% to 0.25%.  The LIBOR option computes interest at
the LIBOR rate as of the date such LIBOR rate loan was made plus a LIBOR rate
margin of 2.5%, which is a decrease from the previous 3.875% margin. 
Additionally, the amendment eliminated the LIBOR “floor” of 1.5%.  As of
June 30, 2010, the Company’s LIBOR borrowing rate was 2.85% and the Base Rate
borrowing rate was 3.5%.  A commitment fee on the average daily unused
amount of the revolving loan commitment during the preceding quarter is also
assessed and decreased from 0.40% to 0.25% as of June 1, 2010 as a result of the
amendment.  The Company may prepay any Base Rate loan at any time and any
LIBOR rate loan upon not less than three business days prior written notice
given to the lender, but the Company is responsible for any loss or cost
incurred by the lender in liquidating or employing deposits required to fund or
maintain the LIBOR rate loan.  At June 30, 2010, the Company had $4.2
million outstanding and $2.8 million available for borrowing under the
Credit Facility.  The outstanding amounts consisted of $3.0 million
outstanding under the LIBOR rate option and $1.2 million outstanding under the
Base Rate option.  The Credit Facility requires the Company to comply with
certain covenants and financial ratios. At June 30, 2010, the Company was in
full compliance with all of its covenants under the Credit
Facility.





On
October 5, 2006, the Company entered into a $4.6 million Term Loan to finance a
“dutch auction” tender offer for shares of its Common Stock. Under the Term
Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the
remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus
1.5%.  The $2.3 million borrowed at a fixed rate was achieved by the
Company by entering into a fixed for floating interest rate swap that the
Company designates as a cash flow hedge under
ASC Topic 815.The principal amount borrowed is repaid quarterly in 20
equal payments of $230,000 plus interest beginning December 31, 2006. The Term
Loan matures on September 30, 2011.  As of June 30, 2010, $575,000 was
outstanding at the fixed rate of 7.05% and $575,000 was outstanding at the LIBOR
plus 1.5% floating rate.  The Term Loan requires the
Company to comply with certain covenants and financial ratios. At June
30, 2010, the Company was in full compliance with all of its covenants under the
Term Loan.


25





As of
June 30, 2010, the Company had budgeted capital commitments for the next 12
months of approximately $1.2 million to develop a de novo specialty dental
implant Office in Denver, Colorado.





As of
June 30, 2010, the Company had the following debt and lease
obligations:





Payments due by PeriodTotal
                              
                              
                              Less than 1
                                year
                              
                              
                              1-3 years
                              
                              
                              3-5 years
                              
                              
                              More than
                                5 yearsDebt
      obligations
                              
                              $
                              5,346,097
                              
                              
                              $
                              920,000
                              
                              
                              $
                              4,426,097
                              
                              
                              $
                              -
                              
                              
                              $
                              -Operating
      lease obligations
                              
                              
                              10,032,947
                              
                              
                              
                              3,202,915
                              
                              
                              
                              4,576,044
                              
                              
                              
                              2,017,705
                              
                              
                              
                              236,283Total
                              
                              $
                              15,379,044
                              
                              
                              $
                              4,122,915
                              
                              
                              $
                              9,002,141
                              
                              
                              $
                              2,017,705
                              
                              
                              $
                              236,283





The
Company from time to time may purchase its Common Stock on the open market.
During the quarter ended June 30, 2010, the Company purchased 11,912 shares of
its Common Stock for total consideration of approximately $208,000 at prices
ranging from $17.09 to $18.00.  All purchases were made on the open market
pursuant to a stock repurchase program that was approved by the Board of
Directors. As of June 30, 2010, there was approximately $306,000 remaining
available for the purchase of the Company’s Common Stock under this
program.  There is no expiration date for this program.  Such
purchases may be made from time to time as the Company’s management deems
appropriate.





The Company believes that
cash generated from operations and borrowings under its Credit Facility will be
sufficient to fund its anticipated working capital needs, capital expenditures
and dividend payments for at least the next 12 months. In order to meet
its long-term liquidity or capital needs, the Company may issue additional
equity and debt securities, subject to market and other conditions. There can be
no assurance that such additional financing will be available on terms
acceptable to the Company or at all. The failure to obtain the funds necessary
to finance its future cash requirements could adversely affect the Company’s
ability to pursue its strategy and could negatively affect its operations in
future periods.





ITEM 4.  CONTROLS AND
PROCEDURES




Under the
supervision and with the participation of the Company’s management, including
the Chief Executive Officer and Chief Financial Officer, the Company evaluated
the design and operation of its disclosure controls and procedures (as defined
in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, or the
“Exchange Act”) as of June 30, 2010.  On the basis of this review, the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective as of June 30, 2010, to give reasonable assurance that the information
required to be disclosed by the Company in reports that it files under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the rules and forms of the SEC and to ensure that
information required to be disclosed in the reports filed or submitted under the
Exchange Act is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, in a manner  that
allows timely decisions regarding required disclosure.





There has
been no change in the Company’s internal control over financial reporting during
the three months ended June 30, 2010 that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over
financial reporting.


26





PART II.  OTHER
INFORMATION




ITEM 2.  UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS




Issuer
Purchases of Equity Securities





The
following chart provides information regarding Common Stock purchased by the
Company during the period April 1, 2010 through June 30, 2010.





Issuer Purchases of Equity SecuritiesPeriod
                
                TotalNumber
                  ofShares
                  Purchased
                
                
                AveragePrice
                  Paidper Share
                
                
                TotalNumber
                  ofShares
                  Purchasedas
                  Part ofPublicly
                  Announced
                  Plans or
                  Programs(1)
                
                
                Approximate
                  Dollar Valueof
                  SharesThat
                  MayYet Be
                  Purchased
                  Under the
                  Plans or
                  Programs(1)April
      1, 2010 through April 30, 2010
                
                
                6,197
                
                
                $
                17.38
                
                
                
                6,197
                
                
                $
                407,113May
      1, 2010 through May 31, 2010
                
                
                300
                
                
                
                17.80
                
                
                
                300
                
                
                $
                401,773June
      1, 2010 through June 30, 2010
                
                
                5,415
                
                
                
                17.60
                
                
                
                5,415
                
                
                $
                306,198Total
                
                
                11,912
                
                
                $
                17.49
                
                
                
                11,912





(1)
            The stock repurchase program has
      been ongoing for more than five years and there is no expiration date for
      the program.  Most recently, on January 23, 2008, the Board of
      Directors authorized the Company to make available open market purchases
      of its Common Stock of up to $1 million.  On May 1, 2008, the
      Company’s Board of Directors approved up to $2 million of stock
      repurchases.  On July 30, 2008, the Board of Directors approved an
      additional $1 million of stock repurchases.  On August 12, 2008, the
      Board of Directors approved up to $2 million of stock repurchases. 
      On December 16, 2009, the Board of Directors approved an additional
      $500,000 of stock repurchases.  On August 10, 2010, the Board of
      Directors approved an additional $1 million of stock repurchases. 
       Common Stock repurchases may be made from time to time as the
      Company’s management deems
appropriate.


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ITEM 6. 
 EXHIBITS




ExhibitNumber
              
              Description of Document3.1
              
              Amended
      and Restated Articles of Incorporation, incorporated herein by reference
      to Exhibits 3.1 and 3.2 to the Company’s Registration Statement on Form
      S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
      Commission on September 25, 1997.3.2
              
              Amended
      and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to
      the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
      as filed with the Securities and Exchange Commission on September 25,
      1997.4.1
              
              Reference
      is made to Exhibits 3.1 and 3.2.4.2
              
              Specimen
      Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the
      Company’s Registration Statement on Form S-1/A (SEC File No. 333-36391),
      as filed with the Securities and Exchange Commission on November 25,
      1997.10.1
              
              Ninth
      Amendment of Second Amended and Restated Credit Agreement dated May 31,
      2010 between the Company and Key Bank of Colorado.31.1
              
              Rule
      13a-14(a) Certification of the Chief Executive Officer.31.2
              
              Rule
      13a-14(a) Certification of the Chief Financial Officer.32.1
              
              Section
      1350 Certifications of the Chief Executive Officer and the Chief Financial
      Officer.


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SIGNATURES




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





BIRNER
      DENTAL MANAGEMENT SERVICES, INC.Date:  August
      13, 2010
              By:
              
              /s/ Frederic W.J. BirnerName:
              
              Frederic
      W.J. BirnerTitle:
              
              Chairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)Date: August
      13, 2010
              By:
              
              /s/ Dennis N. GentyName:
              
              Dennis
      N. GentyTitle:
              
              Chief
      Financial Officer, Secretary, and Treasurer(Principal Financial and
      Accounting
Officer)


29