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    September 30,
          2007
  **OR**
 
 **[  ]**
              **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 incorporation or 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)
  N/A(Former
                  name, former address and former fiscal year, if changed since last
                  report)
 
 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
        [ ]
 
 Indicate
        by check mark whether the Registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
        the
        Exchange Act).
 
 Large
        accelerated filer  [
        ]                                           Accelerated
        filer  [
        ]                                
Non-accelerated
        filer  [X]
 
 Indicate
        by check mark whether the Registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act). Yes [
        ]     
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 November 10, 2007Common
                  Stock, without par value
              
              2,025,598
 
  
   **BIRNER
        DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
  **INDEX
        TO FORM 10-Q**
  **PART
        I - FINANCIAL INFORMATION**
 
 
 Item
                  1.   Financial Statements
              PageUnaudited
                  Condensed Consolidated Balance Sheets as of December 31,
                  2006and
                  September 30, 2007
              3Unaudited
                  Condensed Consolidated Statements of Income for the Quarters and
                  NineMonths
                  Ended September 30, 2006 and 2007
              4Unaudited
                  Condensed Consolidated Statements of Shareholders’ Equity as of September
                  30, 2007
              5Unaudited
                  Condensed Consolidated Statements of Cash Flows for the Nine Months
                  Ended
                  September 30, 2006 and 2007
              6Unaudited
                  Notes to Condensed Consolidated Financial Statements
              8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Conditionand
                  Results of Operations
              14Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              23Item
                  4.
              Controls
                  and Procedures
              23**PART
                  II - OTHER INFORMATION**Item
                  1.
              Legal
                  Proceedings
              24Item
                  1A.
              Risk
                  Factors
              24Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              24Item
                  6.
              Exhibits
              25Signatures
              
              26
 
  *-
            2
            -*
  **PART
        I - FINANCIAL INFORMATION**
 
 **ITEM
        1.  FINANCIAL STATEMENTS**
 
 **BIRNER
        DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **CONDENSED
        CONSOLIDATED BALANCE SHEETS**
 
 
 December
                  31,
              
              
              September
                  30,ASSETS
              
              2006
              
              
              2007**
              
              
              (Unaudited)CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              888,186
              
              
              $
              740,176Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $288,513 and $301,450 respectively
              
              
              3,103,922
              
              
              
              3,462,540Deferred
                  tax asset
              
              
              185,671
              
              
              
              223,198Prepaid
                  expenses and other assets
              
              
              597,283
              
              
              
              505,741Total
                  current assets
              
              
              4,775,062
              
              
              
              4,931,655PROPERTY
                  AND EQUIPMENT, net
              
              
              5,592,672
              
              
              
              4,785,649OTHER
                  NONCURRENT ASSETS:Intangible
                  assets, net
              
              
              12,272,358
              
              
              
              11,692,222Deferred
                  charges and other assets
              
              
              181,860
              
              
              
              173,477Total
                  assets
              
              $
              22,821,952
              
              
              $
              21,583,003LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              1,648,498
              
              
              $
              1,695,347Accrued
                  expenses
              
              
              1,398,267
              
              
              
              1,283,658Accrued
                  payroll and related expenses
              
              
              1,596,770
              
              
              
              1,952,714Income
                  taxes payable
              
              
              114,016
              
              
              
              586,726Current
                  maturities of long-term debt
              
              
              953,561
              
              
              
              1,150,000Total
                  current liabilities
              
              
              5,711,112
              
              
              
              6,668,445LONG-TERM
                  LIABILITIES:Deferred
                  tax liability, net
              
              
              734,234
              
              
              
              725,942Long-term
                  debt, net of current maturities
              
              
              6,502,411
              
              
              
              5,147,823Other
                  long-term obligations
              
              
              326,550
              
              
              
              318,738Total
                  liabilities
              
              
              13,274,307
              
              
              
              12,860,948SHAREHOLDERS'
                  EQUITY:Preferred
                  Stock, no par value, 10,000,000 sharesauthorized;
                  none outstanding
              
              
              -
              
              
              
              -Common
                  Stock, no par value, 20,000,000 sharesauthorized;
                  2,132,461 and  2,023,598 shares issued andoutstanding,
                  respectively
              
              
              4,191,349
              
              
              
              2,275,340Retained
                  earnings
              
              
              5,356,296
              
              
              
              6,446,715Total
                  shareholders' equity
              
              
              9,547,645
              
              
              
              8,722,055Total
                  liabilities and shareholders' equity
              
              $
              22,821,952
              
              
              $
              21,583,003** Derived
                  from the Company’s audited consolidated balance sheet at December 31,
                  2006.
 
 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
                  September
                    30,
              
              
              Nine
                  Months Ended
                September
                  30,2006
              
              
              2007
              
              
              2006
              
              
              2007NET
                  REVENUE:
              
              $
              9,756,186
              
              
              $
              10,077,204
              
              
              $
              29,988,004
              
              
              $
              31,294,484DIRECT
                  EXPENSES:Clinical salaries and benefits
              
              
              3,540,887
              
              
              
              3,708,692
              
              
              
              10,811,123
              
              
              
              11,284,077Dental supplies
              
              
              597,488
              
              
              
              608,885
              
              
              
              1,750,695
              
              
              
              1,763,791Laboratory fees
              
              
              635,446
              
              
              
              628,877
              
              
              
              1,960,704
              
              
              
              1,998,289Occupancy
              
              
              1,059,477
              
              
              
              1,174,333
              
              
              
              3,210,359
              
              
              
              3,448,489Advertising and marketing
              
              
              176,830
              
              
              
              143,023
              
              
              
              637,763
              
              
              
              559,100Depreciation and amortization
              
              
              572,788
              
              
              
              609,470
              
              
              
              1,581,250
              
              
              
              1,830,548General and administrative
              
              
              1,126,326
              
              
              
              1,126,024
              
              
              
              3,456,569
              
              
              
              3,421,6857,709,242
              
              
              
              7,999,304
              
              
              
              23,408,463
              
              
              
              24,305,979Contribution from dental offices
              
              
              2,046,944
              
              
              
              2,077,900
              
              
              
              6,579,541
              
              
              
              6,988,505CORPORATE
                  EXPENSES:General and administrative
              
              
              948,371
              (1)
              
              
              894,079
              (1)
              
              
              3,170,644
              (2)
              
              
              3,194,729
              (2)Depreciation and amortization
              
              
              32,396
              
              
              
              26,785
              
              
              
              99,038
              
              
              
              84,887Operating income
              
              
              1,066,177
              
              
              
              1,157,036
              
              
              
              3,309,859
              
              
              
              3,708,889Interest expense
              
              
              38,875
              
              
              
              90,832
              
              
              
              118,962
              
              
              
              286,151Income before income taxes
              
              
              1,027,302
              
              
              
              1,066,204
              
              
              
              3,190,897
              
              
              
              3,422,738Income tax expense
              
              
              394,498
              
              
              
              431,164
              
              
              
              1,232,604
              
              
              
              1,392,985Net income
              
              $
              632,804
              
              
              $
              635,040
              
              
              $
              1,958,293
              
              
              $
              2,029,753Net income per share of Common Stock - Basic
              
              $
              0.27
              
              
              $
              0.31
              
              
              $
              0.84
              
              
              $
              0.96Net income per share of Common Stock - Diluted
              
              $
              0.25
              
              
              $
              0.28
              
              
              $
              0.77
              
              
              $
              0.89Cash dividends per share of Common Stock
              
              $
              0.13
              
              
              $
              0.15
              
              
              $
              0.39
              
              
              $
              0.45Weighted average number of shares ofCommon Stock and dilutive securities:Basic
              
              
              2,311,901
              
              
              
              2,074,314
              
              
              
              2,337,049
              
              
              
              2,108,006Diluted
              
              
              2,493,941
              
              
              
              2,243,889
              
              
              
              2,528,388
              
              
              
              2,287,075


____________________




(1)
            Corporate expense - general and administrative
                includes
                $81,030 of equity compensation for a stock award and $78,620 related
                to stock-based compensation expense in the quarter ended September
                30,
                2006, and $81,030 of equity compensation expense for a stock award
                and $102,100 related to stock-based compensation expense in the quarter
                ended September 30, 2007.


(2)
            Corporate expense - general and administrative
                includes
                $243,090 of equity compensation for a stock award and $244,651
                related to stock-based compensation expense in the nine months ended
                September 30, 2006, and $243,090 of equity compensation expense for a
                stock award and $292,686 related to stock-based compensation expense
                in
                the nine months ended September 30, 2007.




The
      accompanying notes are an integral part of these financial
      statements





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            4
            -*








**BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY**


**(UNAUDITED)**







Common
                  StockShares
              
              
              Amount
              
              
              Retained
                  Earnings
              
              
              Shareholders'
                  EquityBALANCES,
                  December 31, 2006
              
              
              2,132,461
              
              
              $
              4,191,349
              
              
              $
              5,356,296
              
              
              $
              9,547,645Common
                  Stock options exercised
              
              
              24,550
              
              
              
              256,753
              
              
              
              -
              
              
              
              256,753Purchase
                  and retirement ofCommon
                  Stock
              
              
              (133,413
              )
              
              
              (2,808,158
              )
              
              
              -
              
              
              
              (2,808,158
              )Tax
                  benefit of Common Stockoptions
                  exercised
              
              
              -
              
              
              
              99,620
              
              
              
              -
              
              
              
              99,620Dividends
                  declared on CommonStock
              
              
              -
              
              
              
              -
              
              
              
              (939,334
              )
              
              
              (939,334
              )Stock-based
                  compensation expense
              
              
              -
              
              
              
              535,776
              
              
              
              -
              
              
              
              535,776Net
                  income
              
              
              -
              
              
              
              -
              
              
              
              2,029,753
              
              
              
              2,029,753BALANCES,
                  September 30, 2007
              
              
              2,023,598
              
              
              $
              2,275,340
              
              
              $
              6,446,715
              
              
              $
              8,722,055




The
      accompanying notes are an integral part of these financial
      statements




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            5
            -*








**BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**





Nine
                Months EndedSeptember
                30,2006
            
            
            2007CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                income
            
            $
            1,958,293
            
            
            $
            2,029,753Adjustments
                to reconcile net income to netcash
                provided by operating activities:Depreciation
                and amortization
            
            
            1,680,288
            
            
            
            1,915,435Stock
                compensation expense
            
            
            487,741
            
            
            
            535,776Provision
                for doubtful accounts
            
            
            562,683
            
            
            
            501,556Provision
                for (benefit from) deferred income taxes
            
            
            (51,015
            )
            
            
            (45,819
            )Changes
                in assets and liabilities net of effectsfrom
                acquisitions:Accounts
                receivable
            
            
            (944,976
            )
            
            
            (860,174
            )Prepaid
                expenses and other assets
            
            
            147,448
            
            
            
            91,542Deferred
                charges and other assets
            
            
            (27,615
            )
            
            
            8,383Accounts
                payable
            
            
            (400,027
            )
            
            
            46,849Accrued
                expenses
            
            
            141,077
            
            
            
            (141,674
            )Accrued
                payroll and related expenses
            
            
            618,789
            
            
            
            355,944Income
                taxes payable
            
            
            31,888
            
            
            
            472,710Other
                long-term obligations
            
            
            85,763
            
            
            
            (7,811
            )Net
                cash provided by operating activities
            
            
            4,290,337
            
            
            
            4,902,470CASH
                FLOWS FROM INVESTING ACTIVITIES:Capital
                expenditures
            
            
            (1,129,880
            )
            
            
            (528,276
            )Development
                of new dental centers
            
            
            (1,811,974
            )
            
            
            -Net
                cash used in investing activities
            
            
            (2,941,854
            )
            
            
            (528,276
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Advances
                – line of credit
            
            
            15,067,330
            
            
            
            16,161,137Repayments
                – line of credit
            
            
            (14,809,325
            )
            
            
            (16,825,726
            )Repayments
                – Term Loan
            
            
            -
            
            
            
            (460,000
            )Repayment
                of long-term debt
            
            
            (112,266
            )
            
            
            (33,561
            )Proceeds
                from exercise of Common Stock options
            
            
            224,786
            
            
            
            256,753Purchase
                and retirement of Common Stock
            
            
            (1,364,964
            )
            
            
            (2,808,158
            )Tax
                benefit of Common Stock options exercised
            
            
            238,485
            
            
            
            99,620Common
                Stock cash dividends
            
            
            (844,813
            )
            
            
            (912,269
            )Net
                cash used in financing activities
            
            
            (1,600,767
            )
            
            
            (4,522,204
            )NET
                INCREASE (DECREASE) IN CASH ANDCASH
                EQUIVALENTS
            
            
            (252,284
            )
            
            
            (148,010
            )CASH
                AND CASH EQUIVALENTS, beginning of period
            
            
            921,742
            
            
            
            888,186CASH
                AND CASH EQUIVALENTS, end of period
            
            $
            669,458
            
            
            $
            740,176




The
      accompanying notes are an integral part of these financial
      statements





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            6
            -*








**BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(UNAUDITED)**








Nine
                Months EndedSeptember
                30,2006
            
            
            2007SUPPLEMENTAL
                DISCLOSURE OF CASHFLOW
                INFORMATION:Cash
                paid during the year for interest
            
            $
            169,487
            
            
            $
            350,677Cash
                paid during the year for income taxes
            
            $
            1,012,000
            
            
            $
            866,475





The
      accompanying notes are an integral part of these financial
      statements








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            7
            -*








**BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**


**NOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)**


**September
      30, 2007**





(1)       UNAUDITED
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





The
      condensed consolidated financial statements included herein have been prepared
      by Birner Dental Management Services, Inc. (the “Company”) pursuant to the rules
      and regulations of the Securities and Exchange Commission. Certain information
      and footnote disclosures normally included in financial statements prepared
      in
      accordance with accounting principles generally accepted in the United States
      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 Securities and Exchange
      Commission in the Company’s Annual Report on Form 10-K for the year ended
      December 31, 2006.





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 September 30, 2007 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 nine months ended September 30, 2007 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.








(2)      SIGNIFICANT
      ACCOUNTING POLICIES





*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 (“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 (“Management Agreement”). The Management Agreement represents the
      Company's right to manage the Offices during the 40-year term of the agreement.
      The assigned value of the Management Agreement is amortized using the
      straight-line method over a period of 25 years.  Amortization was
      $194,932 and $194,848 for the quarters ended September 30, 2007 and 2006,
      respectively. Amortization was $584,740 and $584,446 for the nine months ended
      September 30, 2007 and 2006, respectively.





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





In
      the
      event that 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 were 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*





On
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      (“SFAS”) No. 123(R), "Share-Based Payment."  This standard revises
      SFAS 123, “Accounting for Stock-Based Compensation” and supersedes Accounting
      Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.”
Under SFAS 123(R), the Company is required to measure the cost of employee
      services received in exchange for stock options and similar  awards
      based on the grant date fair value of the award and recognize this cost in
      the
      income statement over the period during which an employee is required to provide
      service in exchange for the award.








*-
            8
            -*





The
      Company adopted
      SFAS 123(R) using the modified prospective method. Under this transition method,
      stock-based compensation expense for the quarter and nine months ended
      September 30, 2007 includes: (i) compensation expense for all stock-based
      compensation awards granted prior to, but not yet vested as of January 1, 2006,
      based on the grant date fair value estimated in accordance with the original
      provision of SFAS 123; and (ii) compensation expense for all stock-based
      compensation awards granted subsequent to January 1, 2006, based on the grant
      date fair value estimated in accordance with the provision of SFAS 123(R).
      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 September
      30, 2007 and 2006 was approximately $102,000 and $79,000, respectively. Total
      stock-based compensation expense included in the Company’s statement of income
      for the nine months ended September 30, 2007 and 2006 was approximately $293,000
      and $245,000, respectively. 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 ending September 30, 2007 equal to the expected
      option term. Expected pre-vesting forfeitures were estimated based on actual
      historical pre-vesting forfeitures over the most recent periods ending September
      30, 2007 for the expected option term. The expected option term was calculated
      using the “simplified” method permitted by Staff Accounting Bulletin
      107.





Prior
      to
      January 1, 2006, the Company accounted for stock options using the intrinsic
      value method wherein compensation expense was recognized on stock options
      granted only for the excess of the market price of the Company’s Common Stock
      over the option exercise price on the date of grant. All options of the Company
      were granted at amounts equal to or higher than the fair value of the Common
      Stock, so no compensation expense was recorded.





*Income
      Taxes*




Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      No. 48, *Accounting for Uncertainty in Income Taxes* (“FIN 48”).
      FIN 48 clarifies the accounting for uncertainty in income taxes recognized
      in a company’s financial statements in accordance with FASB Statement
      No. 109, *Accounting for Income Taxes*. FIN 48 requires a
      company to determine whether it is more likely than not that a tax position
      will
      be sustained upon examination based upon the technical merits of the position.
      If the more-likely-than-not threshold is not met, a company must measure the
      tax
      position to determine the amount to recognize in the financial statements.
      The
      application of income tax law and regulations is inherently complex and subject
      to change. The Company is required to make many subjective assumptions and
      judgments regarding the income tax exposures. Changes in these subjective
      assumptions and judgments can materially affect amounts recognized in the
      Company’s financial statements.




At
      the
      adoption date of January 1, 2007 and at September 30, 2007, the Company had
      no unrecognized tax benefits which would affect the effective tax rate if
      recognized, and as of September 30, 2007, the Company had no accrued interest
      or
      penalties related to uncertain tax positions.




On
      initial application, FIN 48 was applied to all tax positions for which the
      statute of limitations remained open. The tax years 2003-2006 remain open to
      examination by taxing jurisdictions to which the Company is subject. The IRS
      report issued in July 2006 made no changes to the Company’s federal income tax
      return for 2004. No other federal or state exams are ongoing or have been
      performed in the past three years.











*-
            9
            -*





(3)      EARNINGS
      PER SHARE





The
      Company calculates earnings per share in accordance with SFAS No. 128, “Earnings
      Per Share.”





Quarters
                Ended September 30,2006
            
            
            2007Income
            
            
            Shares
            
            
            Per
                Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
                Share AmountBasic
                EPS:Net
                income available to shares of Common Stock
            
            $
            632,804
            
            
            
            2,311,901
            
            
            $
            0.27
            
            
            $
            635,040
            
            
            
            2,074,314
            
            
            $
            0.31Effect
                of dilutive shares of Common Stock from stock options and
                warrants
            
            
            -
            
            
            
            182,040
            
            
            
            (0.02
            )
            
            
            -
            
            
            
            169,575
            
            
            
            (0.03
            )Diluted
                EPS:Net
                income available to shares of Common Stock
            
            $
            632,804
            
            
            
            2,493,941
            
            
            $
            0.25
            
            
            $
            635,040
            
            
            
            2,243,889
            
            
            $
            0.28








The
      difference in weighted average shares outstanding between basic earnings per
      share and diluted earnings per share for the quarters ended September 30, 2007
      and 2006, relates to the effect of 169,575 and 182,040 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 September
      30, 2007 and 2006 options to purchase 17,000 and 69,200 shares, respectively,
      of
      the Company’s Common Stock were not included in the computation of dilutive
      income per share because their effect was anti-dilutive.





Nine
                Months Ended September 30,2006
            
            2007Income
            
            Shares
            
            Per
                Share Amount
            
            Income
            
            Shares
            
            Per
                Share AmountBasic
                EPS:Net
                income available to shares of Common Stock
            $     1,958,293
            
            2,337,049
            
            $            0.84
            
            $     2,029,753
            
            2,108,006
            
            $          0.96Effect
                of dilutive shares of Common Stock from stock options and
                warrants
            -
            
            191,339
            
            (0.07)
            
            
            
            179,069
            
            (0.07)Diluted
                EPS:Net
                income available to shares of Common Stock
            $     1,958,293
            
            2,528,388
            
            $            0.77
            
            $     2,029,753
            
            2,287,075
            
            $          0.89




The
      difference in weighted average shares outstanding between basic earnings per
      share and diluted earnings per share for the nine months ended September 30,
      2007 and 2006 relates to the effect of 179,069 and 191,339 shares, respectively,
      of dilutive shares of Common Stock from stock options, which are included in
      total shares for the diluted calculation. For the nine months ended September
      30, 2006, options to purchase 158,200 shares of the Company’s Common Stock were
      not included in the computation of dilutive income 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”). The 2005 Plan was amended at the
      June 2007 annual meeting of shareholders to reserve 425,000 shares of Common
      Stock for issuance. 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, providing for additional
      performance incentives by providing employees with the opportunity to acquire
      Common Stock. As of September 30, 2007, there were 162,966 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 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
      September 30, 2007, there were 28,119 vested options, 172,031 unvested options,
      40,000 vested restricted shares and 20,000 unvested restricted shares
      outstanding 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, and as amended on September 4,
      1997,
      February 28, 2002, and June 8, 2004, reserved 479,250 shares of Common Stock
      for
      issuance. 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 September 30, 2007, there were 288,535
      vested options outstanding and 34,667 unvested options outstanding under the
      Employee Plan.





The
      Dental Center
      Stock Option Plan (“Dental Center Plan”) was adopted by the Board of Directors
      effective as of October 30, 1995, and as amended on September 4, 1997,
      reserved 160,475 shares of Common Stock for issuance. The Dental Center Plan
      provided for the grant of non-statutory stock options to professional
      corporations that operate the Offices (“P.C.s”) that are parties to Management
      Agreements with the Company, and to dentists or dental hygienists who are either
      employed by or are an owner of the P.C.s. The Dental Center Plan expired by
      its
      terms on October 30, 2005. As of September 30, 2007, there were 14,000 vested
      options outstanding and no unvested options outstanding under the Dental Center
      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
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,Valuation
                Assumptions
            
            2006
            
            2007
                (5)
            
            2006
            
            2007Expected
                life (1)
            
            5.8
            
            -
            
            5.5
            
            4.5Risk-free
                interest rate (2)
            
            4.87%
            
            -
            
            4.87%
            
            4.75%Expected
                volatility (3)
            
            65%
            
            -
            
            61%
            
            58%Expected
                dividend yield
            
            2.98%
            
            -
            
            3.03%
            
            3.07%Expected
                Forteiture (4)
            
            5.20%
            
            -
            
            5.01%
            
            5.32%


_____________________________




(1)
            The
                expected life, in years, of stock options is estimated using the
                simplified-method calculation.


(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
                of options granted prior to the Company’s adoption of SFAS 123(R) on
                January 1, 2006 are recorded as they occur. Forfeitures of options
                granted
                since the Company’s adoption of SFAS 123(R) are estimated based on
                historical experience.


(5)
            The
                Company did not issue any options during the quarter ended September
                30,
                2007.




*-
            11
            -*





A
      summary
      of option activity as of September 30, 2007, and changes during the nine months
      then ended, is presented below:




Number
                of Options
            
            Weighted-Average
                Exercise Price
            
            Range
                of Exercise Prices
            
            Weighted-Average
                Remaining Contractual Term (years)
            
            Aggregate
                Intrinsic Value (thousands)Outstanding
                at December 31, 2006
            
            563,235
            
            $         11.63
            
            $  4.80
                - $19.75Granted
            
            17,000
            
            $         21.84
            
            $21.75
                - $21.85Exercised
            
            (24,550)
            
            $         10.46
            
            $  5.50
                - $15.41Forfeited
            
            (18,333)
            
            $         14.74
            
            $  9.66
                - $17.61Outstanding
                at September 30, 2007
            
            537,352
            
            $         11.90
            
            $  4.80
                - $21.85
            
            2.9
            
            $6,394Exercisable
                at September 30, 2007
            
            330,654
            
            $           8.44
            
            $   4.80
                - $19.75
            
            1.7
            
            $2,792




The
      weighted average grant date fair values of options granted were $9.16 per option
      and $7.24 per option during the nine months ended September 30, 2007 and 2006,
      respectively.  Net cash proceeds from the exercise of stock options
      during the nine months ended September 30, 2007 and 2006 were $256,753 and
      $224,786, respectively. The associated income tax benefit from stock options
      exercised during the nine months ended September 30, 2007 and 2006 was $99,620
      and $238,485, respectively. As of the date of exercise, the total intrinsic
      values of options exercised during the nine months ended September 30, 2007
      and
      2006 were $312,204 and $868,298, respectively. As of September 30, 2007, there
      was $1.2 million of total unrecognized compensation expense related to
      non-vested stock options, which is expected to be recognized over a weighted
      average period of 1.2 years.





(5)       RESTRICTED
      STOCK GRANT





On
      July
      1, 2005, the Company granted 60,000 shares of restricted Common Stock to the
      Company’s Chairman and Chief Executive Officer (the “Employee”) under the 2005
      Plan. In connection with the grant of restricted stock, the Company agreed
      to
      reimburse the Employee an amount equal to the tax liability associated with
      the
      grant. Such reimbursement was made by the Company and totaled approximately
      $586,000 which was recognized as an expense during the third quarter of 2005.
      As
      of September 30, 2007, there was approximately $81,000 of unrecognized
      compensation expense related to the restricted stock grant. The remaining
      expense is expected to be recognized in the fourth quarter of
      2007.  Beginning June 30, 2007, the Company reclassified deferred
      equity compensation to Common Stock.





A
      summary
      of the vesting status of the shares of restricted stock as of September 30,
      2007, and the changes during the nine months then ended, is presented
      below:





Nine
                Months EndedSeptember
                30, 2007Number
                of Restricted Shares
            
            Weighted-Average
                Grant-Date Fair ValueNon-vested
                at December 31, 2006
            
            40,000
            
            $13.51Granted
            
            -
            
            -Vested
            
            (20,000)
            
            13.51Forfeited
            
            -
            
            -Non-vested
                at September 30, 2007
            
            20,000
            
            $13.51





*-
            12
            -*






(6)DIVIDENDS





On
      March
      9, 2004, the Company announced a quarterly cash dividend of $.0375 per share.
      On
      February 10, 2005, the Company announced an increase in the amount of the
      quarterly dividend to $.10 per share. On January 10, 2006, the Company announced
      an increase in the amount of the quarterly dividend to $.13 per share. On
      January 11, 2007, the Company announced an increase in the amount of the
      quarterly dividend to $.15 per share. 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. Such factors include
      the
      Board of Directors’ assessment of the Company’s financial position, capital
      requirements and liquidity, the existence of a stock repurchase program, loan
      agreement restrictions, results of operations and such other factors the
      Company’s Board of Directors may consider relevant.





(7)      
      LINE OF CREDIT





On
      April
      30, 2007, the Company amended its bank line of credit (“Credit
      Facility”).  The amended Credit Facility decreases the LIBOR rate
      margin from 1.50% to 1.25% and extends the expiration of the credit agreement
      from May 31, 2008 to May 31, 2009. 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 lender’s Base Rate computes
      interest at the higher of the lender’s “prime rate” or the Federal Funds Rate
      plus one-half percent (0.5%).  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 1.25%.  A commitment fee of 0.25% on the average daily
      unused amount of the revolving loan commitment during the preceding quarter
      is
      also assessed. 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 September 30, 2007, the Company had
      $2.4 million outstanding and $4.6 million available for borrowing under the
      Credit Facility. This consisted of $1.6 million outstanding under the LIBOR
      rate
      option and $788,000 outstanding under the Base Rate option. The Credit Facility
      requires the Company to comply with certain covenants and financial ratios.
      At
      September 30, 2007, the Company was in full compliance with all of its covenants
      under the Credit Facility.




(8)     
       CAPITAL EXPENDITURES




The
      Company’s retained earnings as of September 30, 2007 were approximately $6.4
      million, and the Company had a working capital deficit on that date of
      approximately $1.7 million. During the nine months ended September 30, 2007,
      the
      Company had capital expenditures of approximately $528,000 and purchased
      approximately $2.8 million of Common Stock while decreasing total debt by
      approximately $1.2 million.





(9)    
       DUTCH AUCTION TENDER OFFER AND TERM LOAN




On
      October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
      per share, 212,396 shares of its Common Stock that were properly tendered and
      not withdrawn pursuant to the Company’s “Dutch Auction” tender offer. The
      212,396 shares purchased were comprised of the 175,000 shares the Company
      offered to purchase and 37,396 shares that were purchased pursuant to the
      Company's right to purchase up to an additional 2% of the outstanding shares
      as
      of August 31, 2006, without extending the Dutch Auction tender offer in
      accordance with applicable securities laws. These shares represented
      approximately 9.2% of the shares outstanding as of September 30, 2006. The
      Dutch
      Auction tender offer was funded from 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%. The principal amount borrowed will be paid quarterly in 20 equal
      payments of approximately $230,000 plus interest beginning December 31, 2006.
      The Term Loan matures on September 30, 2011.  As of September 30,
      2007, $2 million is outstanding at the fixed rate of 7.05% and $2 million is
      outstanding at the LIBOR plus 1.5% floating rate.  On October 12,
      2006, the Company entered into a fixed-for-floating interest rate swap
      transaction on the Term Loan and in February 2007 designated  it as a
      cash flow hedge under Statement of Financial Accounting Standards (“SFAS”) No.
      133, "Accounting for Derivatives."  Under SFAS 133, the Company is
      required to recognize
      all derivatives as either assets or liabilities in the statement of financial
      position and measure those instruments at fair value unless (i) a hedge of
      the
      exposure to changes in the fair value of a recognized asset or liability or
      an
      unrecognized firm commitment, (ii) a hedge of the exposure to variable cash
      flows of a forecasted transaction, or (iii) a hedge of the foreign currency
      exposure of a net investment in a foreign operation, an unrecognized firm
      commitment, an available-for-sale security, or a foreign-currency-denominated
      forecasted transaction. The swap was entered into for purposes other than
      trading purposes. At September 30, 2007 the difference between fair value and
      the recorded value is not material and therefore no mark to market adjustment
      on
      the balance sheet has been made.  At September 30,
      2007, the
      Company had $4.0 millionoutstanding
      under the Term
      Loan. The Term
      Loan requires the Company to comply with certain covenants and financial
      ratios. At September 30, 2007, the Company was in full compliance with
      all of its covenants under the Term Loan.





*-
            13
            -*





**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 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, 2006, this report, 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 nine
      months ended September 30, 2006 and 2007. 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 60 Offices in Colorado,
      New
      Mexico and Arizona staffed by 84 general dentists and 32 specialists. The
      Company derives all of its Revenue (as defined below) 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 acquires a new practice or develops a *de novo* Office, which 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**




In
      June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB
      Interpretation No. (“FIN”) 48, “Accounting for Uncertainty in Income Taxes—An
      Interpretation of FASB Statement No. 109,” which prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      The
      Company adopted the provisions of FIN 48 on January 1, 2007 and has
      analyzed filing positions in its federal and state jurisdictions where the
      Company is required to file income tax returns, as well as for all open tax
      years in these jurisdictions. The Company believes its income tax filing
      positions and deductions will be sustained under audit and believes it does
      not
      have significant uncertain tax positions that, in the event of adjustment,
      will
      result in a material effect on its results of operations or financial position.
      See Note 2 to Condensed Consolidated Financial Statements, Significant
      Accounting Policies.





*-
            14
            -*





The
      Company’s critical accounting policies are set forth in its Annual Report on
      Form 10-K for the year ended December 31, 2006.  Except for FIN 48,
      there have been no changes to these policies since the filing of that
      report.




**Components
      of Revenue and Expenses**




Total
      dental group practice revenue (“Revenue”) represents the revenue of the Offices
      reported at estimated realizable amounts, received from dental plans, other
      third-party payors and patients for dental services rendered at the
      Offices.  The Company’s Revenue is derived principally from
      fee-for-service revenue and managed dental care revenue. Fee-for-service revenue
      consists of 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 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.





Net
      revenue represents Revenue less amounts retained by the Offices. The amounts
      retained by the Offices represent amounts paid as compensation to employed
      dentists and hygienists. The Company’s net revenue is dependent on the Revenue
      of the Offices. Direct expenses consist of the expenses incurred by the Company
      in connection with managing the Offices, including salaries and benefits for
      personnel other than dentists and hygienists, dental supplies, dental laboratory
      fees, occupancy costs, advertising and marketing, depreciation and amortization
      and general and administrative (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, advertising, development and professional services
      to
      the Offices.





Under
      each of the Management Agreements, the Company manages the business and
      marketing aspects of the Offices, including (i) providing capital, (ii)
      designing and implementing marketing and advertising programs, (iii) negotiating
      for the purchase of supplies, (iv) staffing, (v) recruiting, (vi) training
      of
      non-dental personnel, (vii) billing and collecting certain fees for dental
      services provided by the Offices, (viii) arranging for certain legal and
      accounting services, and (ix) negotiating with third party payors. Under the
      Management Agreements, the P.C. is responsible for, among other things (i)
      supervision of all dentists and dental hygienists, (ii) complying with all
      laws,
      rules and regulations relating to dentists and dental hygienists, and (iii)
      maintaining proper patient records.  The Company has made, and intends
      to make in the future, loans to P.C.s in Colorado, New Mexico and Arizona to
      fund their acquisition of dental assets from third parties in order to comply
      with the laws of such states.





Under
      the
      typical Management Agreement used by the Company, 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 and dental hygienists 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 at each Office under the Management Agreement, including
      (i)
      salaries, benefits and other direct costs of employees who work at the Office
      (other than dentist and hygienist salaries), (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 Offices are borne by the Company,
      except for the compensation of the dentists and hygienists who work at the
      Offices of the P.C.s. This enables the Company to manage the profitability
      of
      the Offices.  Each Management Agreement is for a term of 40 years.
      Further, 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.





Under
      the
      Management Agreements, the Company negotiates and administers the capitated
      managed dental care 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





*-
            15
            -*





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
      Offices (other than compensation of dentists and hygienists), the risk of
      over-utilization of dental services at the Offices 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. Under a preferred provider plan, the dental
      group practice is paid for dental services provided based on a fee schedule
      that
      is a discount to the usual and customary fees paid under an indemnity insurance
      agreement.





The
      Company seeks to increase its fee-for-service business by increasing the patient
      volume at existing Offices through effective marketing and advertising programs
      and by opening *de novo* Offices. The Company seeks to supplement this
      fee-for-service business with revenue from contracts with capitated managed
      dental care plans.  Although the Company’s fee-for-service business
      generally is more profitable than its capitated managed dental care business,
      capitated managed dental care business serves to increase 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 contract terms.  In addition,
      the profitability of 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.




**Results
      of Operations**




For
      the
      quarter ended September 30, 2007, Revenue increased $444,000, or 3.1% to $14.7
      million compared to $14.3 million for the quarter ended September 30,
      2006.  For the quarter ended September 30, 2007, net revenue increased
      $321,000, or 3.3% to $10.1 million compared to $9.8 million for the quarter
      ended September 30, 2006.





For
      the
      quarter ended September 30, 2007, net income increased .4% to $635,000, or
      $.28
      per share compared to $633,000, or $.25 per share for the quarter ended
      September 30, 2006.





For
      the
      nine months ended September 30, 2007, Revenue increased $2.1 million, or 4.9%,
      to $45.6 million compared to $43.4 million for the nine months ended September
      30, 2006.  For the nine months ended September 30, 2007, net revenue
      increased $1.3 million, or 4.4%, to $31.3 million compared to $30.0 million
      for
      the nine months ended September 30, 2006.





For
      the
      nine months ended September 30, 2007, net income increased 3.6% or $71,000
      to
      $2.0 million.  Earnings per share for the nine months ended September
      30, 2007 increased 14.6% to $.89 per share compared to $.77 per share for the
      nine months ended September 30, 2006.





The
      Company continues to generate strong cash flow from
      operations.  During the first nine months of 2007, the Company
      purchased $2.8 million of its outstanding Common Stock, invested $528,000 in
      capital expenditures, paid $912,000 in dividends, and repaid $494,000 of long
      term debt while decreasing borrowings under its Credit Facility by
      $665,000.





Revenue
      is total dental group practice revenue generated at the Company’s Offices from
      professional services provided to its patients. Amounts retained by dental
      Offices represents compensation expense to the dentists and hygienists and
      is
      subtracted from total dental group practice revenue to arrive at net revenue.
      The Company reports net revenue in its financial statements to comply with
      Emerging Issues Task Force Issue No. 97-2, Application of SFAS No. 94
      (Consolidation of All Majority Owned Subsidiaries) and APB Opinion No. 16
      (Business Combinations) to Physician Practice Management Entities and Certain
      Other Entities With Contractual Management Arrangements. Revenue is not a U.S.
      generally accepted accounting principles (“GAAP”) measure. The Company discloses
      Revenue and believes it is useful to investors because it is a critical
      component for management’s evaluation of Office performance. However, investors
      should not consider this measure in isolation or as a substitute for net
      revenue, operating income, cash flows from operating activities or any other
      measure for determining the Company’s operating performance that is calculated
      in accordance with generally accepted accounting principles. The following
      table
      reconciles Revenue to net revenue.







*-
          16
          -*




Quarters
                  Ended
              
              
              Nine
                  Months EndedSeptember
                  30,
              
              
              September
                  30,2006
              
              
              2007
              
              
              2006
              
              
              2007Total
                  dental group practice revenue
              
              $
              14,282,765
              
              
              $
              14,726,411
              
              
              $
              43,429,434
              
              
              $
              45,561,904Less
                  - amounts retained by dental Offices
              
              
              (4,526,579
              )
              
              
              (4,649,207
              )
              
              
              (13,441,430
              )
              
              
              (14,267,420
              )Net
                  revenue
              
              $
              9,756,186
              
              
              $
              10,077,204
              
              
              $
              29,988,004
              
              
              $
              31,294,484
 The
        following table sets forth the percentages of net 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
            
            Nine
                Months EndedSeptember
                30,
            
            September
                30,2006
            
            2007
            
            2006
            
            2007NET
                REVENUE:
            100.0
                %
            
            100.0
                %
            
            100.0
                %
            
            100.0
                %DIRECT
                EXPENSES:Clinical
                salaries and benefits
            36.3
                %
            
            36.8
                %
            
            36.1
                %
            
            36.1
                %Dental
                supplies
            6.1
                %
            
            6.0
                %
            
            5.8
                %
            
            5.6
                %Laboratory
                fees
            6.5
                %
            
            6.2
                %
            
            6.5
                %
            
            6.4
                %Occupancy
            10.9
                %
            
            11.7
                %
            
            10.7
                %
            
            11.0
                %Advertising
                and marketing
            1.8
                %
            
            1.4
                %
            
            2.1
                %
            
            1.8
                %Depreciation
                and amortization
            5.9
                %
            
            6.1
                %
            
            5.3
                %
            
            5.9
                %General
                and administrative
            11.5
                %
            
            11.2
                %
            
            11.5
                %
            
            10.9
                %79.0
                %
            
            79.4
                %
            
            78.1
                %
            
            77.7
                %Contribution
                from dental offices
            21.0
                %
            
            20.6
                %
            
            21.9
                %
            
            22.3
                %CORPORATE
                EXPENSES:General
                and administrative
            9.7
                %
            
            8.8
                %
            
            10.6
                %
            
            10.2
                %Depreciation
                and amortization
            0.3
                %
            
            0.3
                %
            
            0.3
                %
            
            0.3
                %Operating
                income
            10.9
                %
            
            11.5
                %
            
            11.0
                %
            
            11.8
                %Interest
                expense
            0.4
                %
            
            0.9
                %
            
            0.4
                %
            
            0.9
                %Income
                before income taxes
            10.5
                %
            
            10.6
                %
            
            10.6
                %
            
            10.9
                %Income
                tax expense
            4.0
                %
            
            4.3
                %
            
            4.1
                %
            
            4.4
                %Net
                income
            6.5
                %
            
            6.3
                %
            
            6.5
                %
            
            6.5
                %







*-
            17
            -*





***Quarter
      Ended September 30, 2007 Compared to Quarter Ended September 30,
      2006:***




*Net
      revenue.* For the quarter ended September 30, 2007, net revenue increased
      $321,000, or 3.3%, to $10.1 million compared to $9.8 million for the quarter
      ended September 30, 2006. This increase is primarily attributable to net revenue
      generated from three *de novo* Offices the Company opened between June
      and August 2006.





*Clinical
      salaries and benefits.* For the quarter ended September 30, 2007, clinical
      salaries and benefits increased $168,000, or 4.7%, to $3.7 million compared
      to $3.5 million for the quarter ended September 30, 2006. This increase was
      primarily due to additional employees at the three *de novo*Offices
      opened between June and August 2006, and annual wage increases that became
      effective February 1, 2007. As a percentage of net revenue, clinical salaries
      and benefits increased to 36.8% for the quarter ended September 30, 2007
      compared to 36.3 % for the quarter ended September 30, 2006.




*Dental
      supplies.* For the quarter ended September 30, 2007, dental supplies
      increased to $609,000 compared to $597,000 for the quarter ended September
      30,
      2006, an increase of $12,000 or 1.9%. As a percentage of net revenue, dental
      supplies decreased to 6.0% for the quarter ended September 30, 2007 compared
      to
      6.1% for the quarter ended September 30, 2006.




*Laboratory
      fees.* For the quarter ended September 30, 2007, laboratory fees decreased
      to $629,000 compared to $635,000 for the quarter ended September 30, 2006,
      a
      decrease of $7,000 or 1.0 %. As a percentage of net revenue, laboratory fees
      decreased to 6.2% for the quarter ended September 30, 2007 compared to 6.5%
      for
      the quarter ended September 30, 2006.




*Occupancy.*
      For the quarter ended September 30, 2007, occupancy expense increased to $1.2
      million compared to $1.1 million for the quarter ended September 30, 2006,
      an
      increase of $115,000 or 10.8 %.  This increase was primarily due to a
      $60,000 reduction in rent expense in the quarter ended September 30, 2006 due
      to
      a settlement over past due rent and increased rental payments resulting from
      the
      renewal of Office leases at current market rates for Offices whose leases
      expired subsequent to September 30, 2006.As
      a percentage of net revenue, occupancy expense increased to 11.7% for the
      quarter ended September 30, 2007 compared to 10.9 % for the quarter ended
      September 30, 2006.




*Advertising
      and marketing.* For the quarter ended September 30, 2007, advertising and
      marketing expense decreased to $143,000 compared to $177,000 for the quarter
      ended September 30, 2006, a decrease of $34,000 or 19.1%.  This
      decrease is attributable to the Company discontinuing its television advertising
      campaign in the Denver, Colorado market in July 2007. As a percentage of net
      revenue, advertising and marketing expense decreased to 1.4 % for the quarter
      ended September 30, 2007 compared to 1.8 % for the quarter ended September
      30,
      2006.




*Depreciation
      and amortization-Offices.*For the quarter ended September 30, 2007,
      depreciation and amortization expenses attributable to the Offices increased
      to
      $609,000 compared to $573,000 for the quarter ended September 30, 2006, an
      increase of $37,000 or 6.4%. The increase in the Company’s depreciable asset
      base is a result of purchasing tenant improvements and new equipment for three
      *de novo*Offices. As a percentage of net revenue, depreciation and
      amortization increased to 6.1% for the quarter ended September 30, 2007 compared
      to 5.9% for the quarter ended September 30, 2006.





*General
      and administrative-Offices.* For the quarters ended September 30, 2007 and
      2006, general and administrative expenses attributable to the Offices remained
      constant at $1.1 million. As a percentage of net revenue, general and
      administrative expenses decreased to 11.2 % for the quarter ended September
      30,
      2007 compared to 11.5% for the quarter ended September 30, 2006.




*Contribution
      from dental Offices.*   As a result of the above,
      contribution from dental Offices increased $31,000, or 1.5%, to $2.1 million
      for
      the quarter ended September 30, 2007 compared to $2.0 million for the quarter
      ended September 30, 2006. As a percentage of net revenue, contribution from
      dental Offices decreased to 20.6% for the quarter ended September 30, 2007
      compared to 21.0% for the quarter ended September 30, 2006.




*Corporate
      expenses - general and administrative.* For the quarter ended September 30,
      2007, corporate expenses – general and administrative decreased to $894,000
      compared to $948,000 for the quarter ended September 30, 2006, a decrease of
      $54,000 or 5.7%.  This decrease is primarily related to a decrease of
      $209,000 in executive bonuses offset by an increase in corporate wages of
      $64,000, an increase in health insurance costs of $41,000 and an increase in
      professional fees of $44,000.As a percentage
      of net revenue, corporate expenses - general and administrative decreased to
      8.8
      % for the quarter ended September 30, 2007 compared to 9.7% for the quarter
      ended September 30, 2006.




*Corporate
      expenses - depreciation and amortization.* For the quarter ended September
      30, 2007, corporate expenses - depreciation and amortization decreased to
      $27,000 compared to $32,000 for the quarter ended September 30, 2006, a decrease
      of $5,000 or 17.3%. The decrease is related to the decrease in the Company’s
      depreciable asset base. As a percentage of net revenue, corporate expenses
–
depreciation and amortization remained constant at 0.3% for the quarters ended
      September 30, 2007 and 2006.







*-
            18
            -*





*Operating
      income.*   As a result of the matters discussed above, the
      Company’s operating income increased by $91,000, or 8.5% to $1.2 million for the
      quarter ended September 30, 2007 compared to $1.1 million for the quarter ended
      September 30, 2006.  As a percentage of net revenue, operating income
      increased to 11.5% for the quarter ended September 30, 2007 compared to 10.9%
      for the quarter ended September 30, 2006.




*Interest
      expense.* For the quarter ended September 30, 2007, interest expense
      increased to $91,000 compared to $39,000 for the quarter ended September 30,
      2006, an increase of $52,000. This increase in interest expense is attributable
      to the addition of the Term Loan to finance the Dutch Auction tender offer
      completed in October 2006. As a percentage of net revenue, interest expense
      increased to 0.9% for the quarter ended September 30, 2007 compared to 0.4%
      for
      the quarter ended September 30, 2006.




*Net
      income.*   As a result of the above, the Company reported net
      income of $635,000 for the quarter ended September 30, 2007 compared to net
      income of $633,000 for the quarter ended September 30, 2006. Net income for
      the
      quarter ended September 30, 2007 was net of income tax expense of $431,000,
      while net income for the quarter ended September 30, 2006 was net of income
      tax
      expense of $394,000. As a percentage of net revenue, net income decreased to
      6.3% for the quarter ended September 30, 2007 compared to 6.5% for the quarter
      ended September 30, 2006.




***Nine
      Months Ended September 30, 2007 Compared to Nine Months Ended September 30,
      2006:***




*Net
      revenue.* For the nine months ended September 30, 2007, net revenue
      increased $1.3 million, or 4.4%, to $31.3 million compared to $30.0 million
      for
      the nine months ended September 30, 2006. This increase is primarily
      attributable to the addition of four *de novo* Offices opened between
      March and August 2006.  These four *de novo* offices
      contributed $1.2 million more net revenue in the nine months ended September
      30,
      2007 compared to the nine months ended September 30, 2006.





*Clinical
      salaries and benefits.* For the nine months ended September 30, 2007,
      clinical salaries and benefits increased $473,000, or 4.4%, to $11.3
      million compared to $10.8 million for the nine months ended September 30,
      2006. This increase was primarily due to additional employees at the four *de
      novo*Offices opened between March and August 2006 and annual wage increases
      that became effective February 1, 2007. As a percentage of net revenue, clinical
      salaries and benefits remained constant at 36.1% for the nine months ended
      September 30, 2007 and 2006.




*Dental
      supplies.* For the nine months ended September 30, 2007 and 2006, dental
      supplies remained constant at $1.8 million.  As a percentage of net
      revenue, dental supplies decreased to 5.6% for the nine months ended September
      30, 2007 compared to 5.8% for the nine months ended September 30,
      2006.




*Laboratory
      fees.* For the nine months ended September 30, 2007 and 2006, laboratory
      fees remained constant at $2.0 million.  As a percentage of net
      revenue, laboratory fees decreased to 6.4% for the nine months ended September
      30, 2007 compared to 6.5% for the nine months ended September 30,
      2006.




*Occupancy.*
      For the nine months ended September 30, 2007, occupancy expense increased
      $238,000 or 7.4% to $3.4 million compared to $3.2 million for the nine months
      ended September 30, 2006.  This increase was primarily due to the four
*de novo* Offices opened between March and August 2006, a $60,000
      reduction in rent expense in the nine months ending September 30, 2006 due
      to a
      settlement over past due rent at one of the Offices and increased rental
      payments resulting from the renewal of Office leases at current market rates
      for
      Offices whose leases expired subsequent to September 30, 2006.  As a
      percentage of net revenue, occupancy expense increased to 11.0% for the nine
      months ended September 30, 2007 compared to 10.7% for the nine months ended
      September 30, 2006.




*Advertising
      and marketing.* For the nine months ended September 30, 2007, advertising
      and marketing expense decreased to $559,000 compared to $638,000 for the nine
      months ended September 30, 2006, a decrease of $79,000 or 12.3%.  This
      decrease is attributable to a shift away from a comprehensive television and
      print advertising campaign in the Albuquerque, New Mexico and Colorado Springs,
      Colorado markets which commenced in January 2006 and ran throughout the 9 months
      ended September 30, 2006 to a television advertising campaign in the Denver,
      Colorado market, which ran from March 2007 to July 2007. As a percentage of
      net
      revenue, advertising and marketing expense decreased to 1.8% for the nine months
      ended September 30, 2007 compared to 2.1% for the nine months ended September
      30, 2006.




*Depreciation
      and amortization-Offices.*For the nine months ended September 30, 2007,
      depreciation and amortization expenses attributable to the Offices increased
      to
      $1.8 million compared to $1.6 million for the nine months ended September 30,
      2006, an increase of $249,000 or 15.8%. The increase in the Company’s
      depreciable asset base is a result of purchasing tenant improvements and new
      equipment for four *de novo*Offices that opened between March and August
      2006. As a percentage of net revenue, depreciation and amortization increased
      to
      5.9% for the nine months ended September 30, 2007 compared to 5.3% for the
      nine
      months ended September 30, 2006.





*-
            19
            -*








*General
      and administrative-Offices.* For the nine months ended September 30, 2007,
      general and administrative expenses attributable to the Offices decreased to
      $3.4 million compared to $3.5 million for the nine months ended September 30,
      2006, a decrease of $35,000 or 1.0%. As a percentage of net revenue, general
      and
      administrative expenses decreased to 10.9% for the nine months ended September
      30, 2007 compared to 11.5% for the nine months ended September 30,
      2006.




*Contribution
      from dental Offices.*   As a result of the above,
      contribution from dental Offices increased $409,000, or 6.2%, to $7.0 million
      for the nine months ended September 30, 2007 compared to $6.6 million for the
      nine months ended September 30, 2006. As a percentage of net revenue,
      contribution from dental Offices increased to 22.3% for the nine months ended
      September 30, 2007 compared to 21.9% for the nine months ended September 30,
      2006.




*Corporate
      expenses - general and administrative.* For the nine months ended September
      30, 2007 and 2006, corporate expenses - general and administrative remained
      constant at $3.2 million. As a percentage of net revenue, corporate expenses
      -
      general and administrative decreased to 10.2% for the nine months ended
      September 30, 2007 compared to 10.6% for the nine months ended September 30,
      2006.




*Corporate
      expenses - depreciation and amortization.* For the nine months ended
      September 30, 2007, corporate expenses - depreciation and amortization decreased
      to $85,000 compared to $99,000 for the nine months ended September 30, 2006,
      a
      decrease of $14,000 or 14.3%. The decrease is related to the decrease in the
      Company’s depreciable asset base. As a percentage of net revenue, corporate
      expenses – depreciation and amortization remained constant at 0.3% for the nine
      months ended September 30, 2007 and 2006.




*Operating
      income.*   As a result of the matters discussed above, the
      Company’s operating income increased to $3.7 million for the nine months ended
      September 30, 2007 compared to $3.3 million for the nine months ended September
      30, 2006, an increase of $399,000 or 12.1%. As a percentage of net revenue,
      operating income increased to 11.8% for the nine months ended September 30,
      2007
      compared to 11.0% for the nine months ended September 30, 2006.




*Interest
      expense.* For the nine months ended September 30, 2007, interest expense
      increased to $286,000 compared to $119,000 for the nine months ended September
      30, 2006, an increase of $167,000. This increase in interest expense is
      attributable to the addition of the Term Loan to finance the Dutch Auction
      tender offer completed in October 2006. As a percentage of net revenue, interest
      expense increased to 0.9% for the nine months ended September 30, 2007 compared
      to 0.4% for the nine months ended September 30, 2006.




*Net
      income.*   As a result of the above, the Company’s net income
      increased $71,000 or 3.6% to $2.0 million for the nine months ended September
      30, 2007 compared to the nine months ended September 30, 2006.  Net
      income for the nine months ended September 30, 2007 was net of income tax
      expense of $1.4 million, while net income for the nine months ended September
      30, 2006 was net of income tax expense of $1.2 million. As a percentage of
      net
      revenue, net income remained constant at 6.5% for the nine months ended
      September 30, 2007 and 2006.




**Liquidity
      and Capital Resources**




The
      Company finances its operations and growth through a combination of cash
      provided by operating activities and the Credit Facility.  As of
      September 30, 2007, the Company had a working capital deficit of approximately
      $1.7 million.




Net
      cash
      provided by operating activities was approximately $4.9 million and $4.3 million
      for the nine months ended September 30, 2007 and 2006,
      respectively.  During the 2007 period, 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 $261,000, an increase in income taxes payable of approximately
      $473,000 and a decrease of prepaid expenses and other assets of approximately
      92,000, offset by an increase in accounts receivable of approximately $860,000
      (primarily due to higher Revenue).  During the 2006 period, 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 $360,000, a decrease in prepaid expenses
      and
      other assets of approximately $147,000, an increase in other long-term
      obligations of approximately $86,000 and an increase in income taxes payable
      of
      approximately $32,000, offset by an increase in accounts receivable of
      approximately $945,000 (primarily due to higher Revenue).




Net
      cash
      used in investing activities was approximately $528,000 and $2.9 millionfor
      the nine months ended September 30, 2007 and 2006, respectively. For the nine
      months ended September 30, 2007, the Company invested approximately $528,000
      in
      the purchase of additional equipment. For the nine months ended September 30,
      2006, the Company invested approximately $1.1 million in the purchase of
      additional property and equipment and approximately $1.8 million in the
      development of *de novo* Offices.







*-
            20
            -*





Net
      cash
      used in financing activities was approximately $4.5million
      for the nine months ended September 30, 2007 and $1.6 million for the nine
      months ended September 30, 2006. During the nine months ended September 30,
      2007, net cash used in financing activities was comprised of approximately
      $2.8
      million used in the purchase and retirement of Common Stock, approximately
      $912,000 for the payment of dividends, approximately $665,000 used to pay down
      the Credit Facility and approximately $494,000 for the repayment of long-term
      debt, partially offset by approximately $257,000 in proceeds from the exercise
      of Common Stock options and $100,000 in tax benefit of Common Stock options
      exercised.  During the nine months ended September 30, 2006, net cash
      used in financing activities was comprised of approximately $1.4 million used
      in
      the purchase and retirement of Common Stock, approximately $845,000 for the
      payment of dividends and approximately $112,000 used in the repayment of
      long-term debt, partially offset by approximately $258,000 advanced from the
      Company’s Credit Facility, approximately $225,000 in proceeds from the exercise
      of Common Stock options and $238,000 in tax benefit of Common Stock options
      exercised.




On
      April
      30, 2007, the Company amended the Credit Facility.  The amended Credit
      Facility decreases the LIBOR rate margin from 1.50% to 1.25% and extends the
      expiration of the credit agreement from May 31, 2008 to May 31, 2009. 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 lender’s Base Rate computes interest at the higher of the lender’s
“prime rate” or the Federal Funds Rate plus one-half percent
      (0.5%).  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
      1.25%.  A commitment fee of 0.25% on the average daily unused amount
      of the revolving loan commitment during the preceding quarter is also assessed.
      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 September 30, 2007, the Company had $2.4
      million outstanding and $4.6 million available for borrowing under the
      Credit Facility. This consisted of $1.6 million outstanding under the LIBOR
      rate
      option and $788,000 outstanding under the Base Rate option.The Credit Facility
      requires the Company to comply with certain covenants and financial ratios.
      At
      September 30, 2007, the Company was in full compliance with all of its covenants
      under the Credit Facility.




The
      Company’s retained earnings as of September 30, 2007 were approximately $6.4
      million. During the nine months ended September 30, 2007, the Company spent
      $40,000 on consultants to help with the documentation and testing to comply
      with  Sarbanes-Oxley Act Section 404.  The Company
      anticipates spending up to an additional $20,000 during the fourth quarter
      and
      the first quarter of 2008 to complete the documentation and
      testing.  The Company expects to spend no more than approximately an
      additional $60,000 in 2008 to update the documentation and testing and have
      the
      work audited in order to comply in 2008.




On
      October 5, 2006, the Company entered into a $4.6 million Term Loan to finance
      its Dutch Auction tender offer. Under the Term Loan, $2.3 million is borrowed
      at
      a fixed interest rate of 7.05% and the remaining $2.3 million is borrowed at
      a
      floating interest rate of LIBOR plus 1.5%. The principal amount borrowed will
      be
      paid quarterly in 20 equal payments of approximately $230,000 plus interest
      beginning December 31, 2006. The Term Loan expires September 30, 2011. The Company designates
      this
      fixed-for-floating interest rate swap as a cash flow hedge under SFAS No. 133.
      The Term Loan requires the Company to comply with certain covenants and
      financial ratios. At September 30, 2007, the Company was in full compliance
      with
      all of its covenants under the Term Loan.





The
      Company’s earnings before interest, taxes, depreciation, amortization and non
      cash expense associated with stock-based compensation (“Adjusted EBITDA”)
      increased $682,000, or 12.5% to $6.2 million for the nine months ended September
      30, 2007 compared to $5.5 million for the corresponding nine month period in
      2006. 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
      can be made by adding 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.




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          21
          -*





Quarters
            
            
            Nine
                MonthsEnded
                September 30,
            
            
            Ended
                September 30,2006
            
            
            2007
            
            
            2006
            
            
            2007RECONCILIATION
                OF ADJUSTED EBITDA:Net
                income
            
            $
            632,804
            
            
            $
            635,040
            
            
            $
            1,958,293
            
            
            $
            2,029,753Depreciation
                and amortization - Offices
            
            
            572,788
            
            
            
            609,470
            
            
            
            1,581,250
            
            
            
            1,830,548Depreciation
                and amortization - Corporate
            
            
            32,396
            
            
            
            26,785
            
            
            
            99,038
            
            
            
            84,887Stock-based
                compensation expense
            
            
            159,650
            
            
            
            183,130
            
            
            
            487,741
            
            
            
            535,776Interest
                expense, net
            
            
            38,875
            
            
            
            90,832
            
            
            
            118,962
            
            
            
            286,151Income
                tax expense
            
            
            394,498
            
            
            
            431,164
            
            
            
            1,232,604
            
            
            
            1,392,985Adjusted
                EBITDA
            
            $
            1,831,011
            
            
            $
            1,976,421
            
            
            $
            5,477,888
            
            
            $
            6,160,100




As
      of
      September 30, 2007, the Company had the following known contractual
      obligations:


Payments
                  due by PeriodTotal
              
              
              Less
                  than 1 year
              
              
              1-3
                  years
              
              
              3-5
                  years
              
              
              More
                  than 5 yearsLong-term
                  debt obligations
              
              $
              6,297,823
              
              
              $
              1,150,000
              
              
              $
              3,997,823
              
              
              $
              1,150,000
              
              
              $
              -Operating
                  lease obligations
              
              
              7,961,437
              
              
              
              2,786,316
              
              
              
              3,892,947
              
              
              
              1,238,199
              
              
              
              43,975Other
                  long-term liabilities reflected onthe
                  balance sheet under GAAP
              
              
              402,755
              
              
              
              84,017
              
              
              
              181,198
              
              
              
              135,224
              
              
              
              2,316Total
              
              $
              402,755
              
              
              $
              84,017
              
              
              $
              181,198
              
              
              $
              135,224
              
              
              $
              2,316




The
      Company from time to time
      may purchase its Common Stock on the open market. During 2006, the Company,
      in
      67 separate transactions, purchased 305,161 shares of its Common Stock for
      total
      consideration of approximately $6.1 million at prices ranging from $15.00 to
      $21.75 per share. In April 2006, the Company purchased 54,250 shares through
      a
      private transaction that was approved by the Board of Directors. On October
      5,
      2006, the Company purchased, through a Dutch Auction tender offer that was
      approved by the Board of Directors, 212,396 shares of its Common Stock at $21.75
      for total consideration of $4.6 million. During the quarter ended
      September 30, 2007, the Company, in 6 separate transactions, purchased 1,247
      shares of its Common Stock for total consideration of approximately $25,000
      at
      prices ranging from $19.37 to $20.90. On August 17, 2007, the Company purchased
      100,000 shares through a private transaction that was approved by the Board
      of
      Directors at a price of $20.75 per share.  On March 16, 2007, the
      Board of Directors authorized the Company to increase by approximately $679,000
      the amount available to make open market purchases of its Common Stock. As
      of
      September 30, 2007, approximately $474,000 of the previously authorized amount
      was available for open market purchases. There is no expiration date on these
      plans. 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 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. 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.




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            22
            -*





**ITEM
        3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
        RISK**
  Market
        risk represents the risk of loss that may impact the financial position,
        results
        of operations or cash flows of the Company due to adverse changes in financial
        and commodity market prices and rates. Historically, the Company has not On
        October 12, 2006, the Company entered into a fixed-for-floating interest
        rate
        swap transaction on the Term Loan and designated it as a cash flow hedge
        under
        SFAS No. 133.


*Interest
      Rate Risk.*The interest payable on the Credit Facility and
      a portion of the Term Loan is variable based on floating interest rates (either
      LIBOR or Base Rate) and, therefore is affected by changes in market interest
      rates. At September 30, 2007, the variable portion outstanding under the Term
      Loan was $2 million and $2.4 million was outstanding under the Credit Facility
      with either variable LIBOR (7.07%)or Base Rate (7.75%).The
      Company may
      repay the Credit Facility and Term Loan balances in full at any time without
      penalty.  As a result, the Company does not believe that any
      reasonably possible near-term changes in interest rates would result in a
      material effect on future earnings, fair values or cash flows of the
      Company.  The Company estimates that a 1.0% increase in the interest
      rate on the Credit Facility and Term Loan would have resulted in additional
      interest expense of approximately $33,000 for the nine months ended September
      30, 2007.




**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 September 30, 2007.  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 are designed, and are effective, 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 Securities and Exchange
      Commission 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
      were no changes in the Company’s internal controls over financial reporting that
      occurred in the nine months ended September 30, 2007 that materially affected,
      or were reasonably likely to materially affect, its internal control over
      financial reporting.





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            23
            -*





**PART
      II.  OTHER INFORMATION**








**ITEM
      1.  LEGAL PROCEEDINGS**




From
      time
      to time the Company is subject to litigation incidental to its business. The
      Company is not presently a party to any material litigation. Such claims, if
      successful, could result in damage awards exceeding, perhaps substantially,
      applicable insurance coverage.







**ITEM
      1A.  RISK FACTORS**




There
      have been no material changes in the Company’s risk factors from those disclosed
 in the Company’s Annual Report on Form 10-K for the year ended December
      31, 2006.







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




The
      following chart provides information regarding Common Stock purchases by the
      Company during the period July 1, 2007 through September 30, 2007.





**Issuer
                Purchases of Equity Securities**Period
            
            Total
                Number Of Shares Purchased
            
            
            Average
                Price Paid per Share
            
            
            Total
                Number Of Shares Purchased as Part of Publicly Announced Plans or
                Programs
            
            
            Approximate
                Dollar Value Of Shares That May Yet Be Purchased Under the Plans
                or
                ProgramsJuly
                1, 2007 through July 31, 2007
            
            
            400
            
            
            $
            20.90
            
            
            
            400
            
            
            $
            490,611August
                1, 2007 through August 31, 2007
            
            
            100,000
            
            
            
            20.75
            
            
            
            -
            
            
            $
            490,611September  1,
                2007 through September 30, 2007
            
            
            847
            
            
            
            19.61
            
            
            
            847
            
            
            $
            474,002Total
            
            
            101,247
            
            
            $
            20.74
            
            
            
            1,247




All
        purchases in July and September were made on the open market pursuant to
        plans
        that were approved by the Board of Directors. As of September 30, 2007, there
        was approximately $474,002 available for the purchase of the Company’s Common
        Stock under such plans that have been approved by the Board of Directors.
        There
        is no expiration date on these plans. Purchases under these plans may be
        made
        from time to time, as the Company’s management deems appropriate.  On
        August 17, 2007, the Company purchased, in a single private transaction approved
        by the Board of Directors and outside of previously announced repurchase
        plans,
        100,000 shares of its Common Stock.
 
 On
        March
        16, 2007, the Board of Directors authorized the Company to increase by
        approximately $679,000 the amount available to make open market purchases
        of its
        Common Stock. As of September 30, 2007, approximately $474,000 of the previously
        authorized amount was available for open market purchases. There is no
        expiration date on these plans. Such purchases may be made from time to time
        as
        the Company’s management deems appropriate.


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            24
            -*







**ITEM
      6.   EXHIBITS**





**Exhibit**
              **Number**
            **Description
                of Document**3.1
            Amended
                and Restated Articles of Incorporation, incorporated herein by reference
                to Exhibit 3.1 to the Company’s Registration Statement of 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 (SEC File No. 333-36391), as
                filed with the Securities and Exchange Commission on September 25,
                1997.31.1
            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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            25
            -*










**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) 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:November13, 2007By:
                /s/ Frederic W.J. BirnerName:
                Frederic W.J. BirnerTitle:
                Chairman of the Board and Chief
                  Executive Officer
                  *(Principal
                    Executive Officer)*
  Date:November
                    13, 2007By:
                  /s/ Dennis N. GentyName:
                  Dennis N. GentyTitle:
                  Chief Financial Officer, Secretary,
                    and
                    Treasurer
                    (*Principal
                      Financial and Accounting Officer*)
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            26
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