UNITED
      STATES


SECURITIES
      AND EXCHANGE COMMISSION


WASHINGTON
      , D.C. 20549





**FORM
      10-Q**


(Mark
      One)





**[X]**
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





For the quarterly period ended
            June
                30, 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 August 10, 2007Common
                Stock, without par value
            
            2,124,145














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




**INDEX
      TO FORM 10-Q**










Item
                  1.
              Financial
                  Statements
              PageUnaudited
                  Condensed Consolidated Balance Sheets as of December 31, 2006 and
                  June 30,
                  20073Unaudited
                  Condensed Consolidated Statements of Income for the Quarters and
                  Six
                  Months Ended June 30, 2006 and 2007
              4Unaudited
                  Condensed Consolidated Statements of Shareholders’ Equity as of June 30,
                  2007
              5Unaudited
                  Condensed Consolidated Statements of Cash Flows for the Six Months
                  Ended
                  June 30, 2006 and 2007
              6Unaudited
                  Notes to Condensed Consolidated Financial Statements
              8Item
                  2.
              Management’s
                  Discussion and Analysis of Financial Condition and 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
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              24Item
                  6.
              Exhibits
              25Signatures
              
              26





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          2
          -*


**PART
      I - FINANCIAL INFORMATION**





**ITEM
      1.  FINANCIAL STATEMENTS**






**BIRNER
                  DENTAL MANAGEMENT SERVICES, INC. AND
                  SUBSIDIARIES****CONDENSED
                  CONSOLIDATED BALANCE SHEETS**December
                  31,
              
              
              June
                  30,ASSETS
              
              2006
              
              
              2007**
              
              
              (Unaudited)CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              888,186
              
              
              $
              801,205Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $288,513 and $295,816 respectively
              
              
              3,103,922
              
              
              
              3,523,645Deferred
                  tax asset
              
              
              185,671
              
              
              
              225,777Prepaid
                  expenses and other assets
              
              
              597,283
              
              
              
              622,592Total
                  current assets
              
              
              4,775,062
              
              
              
              5,173,219PROPERTY
                  AND EQUIPMENT, net
              
              
              5,592,672
              
              
              
              5,072,655OTHER
                  NONCURRENT ASSETS:Intangible
                  assets, net
              
              
              12,272,358
              
              
              
              11,887,154Deferred
                  charges and other assets
              
              
              181,860
              
              
              
              173,527Total
                  assets
              
              $
              22,821,952
              
              
              $
              22,306,555LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              1,648,498
              
              
              $
              1,722,365Accrued
                  expenses
              
              
              1,398,267
              
              
              
              1,253,915Accrued
                  payroll and related expenses
              
              
              1,596,770
              
              
              
              2,036,328Income
                  taxes payable
              
              
              114,016
              
              
              
              314,396Current
                  maturities of long-term debt
              
              
              953,561
              
              
              
              1,150,000Total
                  current liabilities
              
              
              5,711,112
              
              
              
              6,477,004LONG-TERM
                  LIABILITIES:Deferred
                  tax liability, net
              
              
              734,234
              
              
              
              785,639Long-term
                  debt, net of current maturities
              
              
              6,502,411
              
              
              
              4,510,867Other
                  long-term obligations
              
              
              326,550
              
              
              
              291,131Total
                  liabilities
              
              
              13,274,307
              
              
              
              12,064,641SHAREHOLDERS'
                  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  2,120,961 shares issued andoutstanding,
                  respectively
              
              
              4,191,349
              
              
              
              4,126,701Retained
                  earnings
              
              
              5,356,296
              
              
              
              6,115,213Total
                  shareholders' equity
              
              
              9,547,645
              
              
              
              10,241,914Total
                  liabilities and shareholders' equity
              
              $
              22,821,952
              
              
              $
              22,306,555** Derived
                  from the Company’s audited consolidated balance sheet at December 31,
                  2006.




The
      accompanying notes are an integral part of these financial
      statements





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          3
          -*




**BIRNER
        DENTAL MANAGEMENT SERVICES, INC. AND
        SUBSIDIARIES**
 **CONDENSED
          CONSOLIDATED STATEMENTS OF INCOME**
 **(UNAUDITED)**


Quarters
                  Ended
              
              
              Six
                  Months EndedJune
                  30,
              
              
              June
                  30,2006
              
              
              2007
              
              
              2006
              
              
              2007NET
                  REVENUE:
              
              $
              10,091,469
              
              
              $
              10,378,875
              
              
              $
              20,231,498
              
              
              $
              21,217,281DIRECT
                  EXPENSES:Clinical
                  salaries and benefits
              
              
              3,581,248
              
              
              
              3,735,091
              
              
              
              7,270,235
              
              
              
              7,575,385Dental
                  supplies
              
              
              577,569
              
              
              
              593,981
              
              
              
              1,153,206
              
              
              
              1,154,906Laboratory
                  fees
              
              
              683,362
              
              
              
              689,207
              
              
              
              1,325,258
              
              
              
              1,369,412Occupancy
              
              
              1,094,148
              
              
              
              1,141,105
              
              
              
              2,150,881
              
              
              
              2,274,157Advertising
                  and marketing
              
              
              251,979
              
              
              
              267,317
              
              
              
              460,933
              
              
              
              416,078Depreciation
                  and amortization
              
              
              528,688
              
              
              
              610,526
              
              
              
              1,008,463
              
              
              
              1,221,079General
                  and administrative
              
              
              1,139,053
              
              
              
              1,119,165
              
              
              
              2,329,922
              
              
              
              2,295,6617,856,047
              
              
              
              8,156,392
              
              
              
              15,698,898
              
              
              
              16,306,678Contribution
                  from dental offices
              
              
              2,235,422
              
              
              
              2,222,483
              
              
              
              4,532,600
              
              
              
              4,910,603CORPORATE
                  EXPENSES:General
                  and administrative
              
              
              1,141,210
              (1)
              
              
              1,054,125
              (1)
              
              
              2,222,273
              (2)
              
              
              2,300,652
              (2)Depreciation
                  and amortization
              
              
              32,446
              
              
              
              27,275
              
              
              
              66,642
              
              
              
              58,103Operating
                  income
              
              
              1,061,766
              
              
              
              1,141,083
              
              
              
              2,243,685
              
              
              
              2,551,848Interest
                  expense (income), net
              
              
              40,467
              
              
              
              89,166
              
              
              
              80,087
              
              
              
              195,319Income
                  before income taxes
              
              
              1,021,299
              
              
              
              1,051,917
              
              
              
              2,163,598
              
              
              
              2,356,529Income
                  tax expense
              
              
              398,133
              
              
              
              439,976
              
              
              
              838,107
              
              
              
              961,822Net
                  income
              
              $
              623,166
              
              
              $
              611,941
              
              
              $
              1,325,491
              
              
              $
              1,394,707Net
                  income per share of Common Stock - Basic
              
              $
              0.27
              
              
              $
              0.29
              
              
              $
              0.56
              
              
              $
              0.66Net
                  income per share of Common Stock - Diluted
              
              $
              0.25
              
              
              $
              0.26
              
              
              $
              0.52
              
              
              $
              0.60Cash
                  dividends per share of Common Stock
              
              $
              0.13
              
              
              $
              0.15
              
              
              $
              0.26
              
              
              $
              0.30Weighted
                  average number of shares ofCommon
                  Stock and dilutive securities:Basic
              
              
              2,327,419
              
              
              
              2,123,900
              
              
              
              2,349,824
              
              
              
              2,125,131Diluted
              
              
              2,506,790
              
              
              
              2,310,103
              
              
              
              2,546,337
              
              
              
              2,307,829________________________(1)
              Corporate
                  expense - general and administrative includes $81,030 of equity
                  compensation for a stock award and $78,286 related to stock-based
                  compensation expense in the quarter ended June 30, 2006, and $81,030
                  of equity compensation expense for a stock award and $100,523 related
                  to stock-based compensation expense in the quarter ended June 30,
                  2007.(2)
              Corporate
                  expense - general and administrative includes $162,060 of equity
                  compensation for a stock award and $166,031 related to stock-based
                  compensation expense in the six months ended June 30, 2006, and
                  $162,060
                  of equity compensation expense for a stock award and $190,587 related
                  to stock-based compensation expense in the six months ended June
                  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
                    
                    
                    20,666
                    
                    
                    
                    203,050
                    
                    
                    
                    -
                    
                    
                    
                    203,050Purchase
                        and retirement of Common Stock
                    
                    
                    (32,166
                    )
                    
                    
                    (708,188
                    )
                    
                    
                    -
                    
                    
                    
                    (708,188
                    )Tax
                        benefit of Common Stock options exercised
                    
                    
                    -
                    
                    
                    
                    87,843
                    
                    
                    
                    -
                    
                    
                    
                    87,843Dividends
                        declared on Common Stock
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (635,790
                    )
                    
                    
                    (635,790
                    )Stock-based
                        compensation expense
                    
                    
                    -
                    
                    
                    
                    352,647
                    
                    
                    
                    0
                    
                    
                    
                    352,647Net
                        income
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    1,394,707
                    
                    
                    
                    1,394,707BALANCES,
                        June 30, 2007
                    
                    
                    2,120,961
                    
                    
                    $
                    4,126,701
                    
                    
                    $
                    6,115,213
                    
                    
                    $
                    10,241,914


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)**Six
                  Months EndedJune
                  30,2006
              
              
              2007CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income
              
              $
              1,325,491
              
              
              $
              1,394,707Adjustments
                  to reconcile net income to netcash
                  provided by operating activities:Depreciation
                  and amortization
              
              
              1,075,105
              
              
              
              1,279,179Stock
                  compensation expense
              
              
              328,091
              
              
              
              352,647Provision
                  for doubtful accounts
              
              
              181,528
              
              
              
              295,717Provision
                  for (benefit from) deferred income taxes
              
              
              (21,267
              )
              
              
              11,299Changes
                  in assets and liabilities net of effectsfrom
                  acquisitions:Accounts
                  receivable
              
              
              (585,018
              )
              
              
              (715,438
              )Prepaid
                  expenses and other assets
              
              
              49,887
              
              
              
              (25,309
              )Deferred
                  charges and other assets
              
              
              (27,615
              )
              
              
              8,333Accounts
                  payable
              
              
              (296,552
              )
              
              
              73,867Accrued
                  expenses
              
              
              149,492
              
              
              
              (184,620
              )Accrued
                  payroll and related expenses
              
              
              700,409
              
              
              
              439,558Income
                  taxes payable
              
              
              193,778
              
              
              
              200,380Other
                  long-term obligations
              
              
              96,113
              
              
              
              (35,418
              )Net
                  cash provided by operating activities
              
              
              3,169,442
              
              
              
              3,094,902CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (973,558
              )
              
              
              (373,960
              )Development
                  of new dental centers
              
              
              (1,125,368
              )
              
              
              -Net
                  cash used in investing activities
              
              
              (2,098,926
              )
              
              
              (373,960
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Advances
                  – line of credit
              
              
              9,905,538
              
              
              
              10,431,678Repayments
                  – line of credit
              
              
              (9,386,449
              )
              
              
              (11,963,223
              )Repayments
                  – Term Loan
              
              
              -
              
              
              
              (230,000
              )Repayment
                  of long-term debt
              
              
              (80,039
              )
              
              
              (33,561
              )Proceeds
                  from exercise of Common Stock options
              
              
              182,286
              
              
              
              203,050Purchase
                  and retirement of Common Stock
              
              
              (1,349,298
              )
              
              
              (708,189
              )Tax
                  benefit of Common Stock options exercised
              
              
              43,297
              
              
              
              87,844Common
                  Stock cash dividends
              
              
              (544,291
              )
              
              
              (595,522
              )Net
                  cash used in financing activities
              
              
              (1,228,956
              )
              
              
              (2,807,923
              )NET
                  INCREASE (DECREASE) IN CASH ANDCASH
                  EQUIVALENTS
              
              
              (158,440
              )
              
              
              (86,981
              )CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              921,742
              
              
              
              888,186CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              763,302
              
              
              $
              801,205


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)**


Six
                  Months EndedJune
                  30,2006
              
              
              2007SUPPLEMENTAL
                  DISCLOSURE OF CASHFLOW
                  INFORMATION:Cash
                  paid during the year for interest
              
              $
              136,913
              
              
              $
              247,494Cash
                  paid during the year for income taxes
              
              $
              472,300
              
              
              $
              662,300





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)**


**June
      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 June 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 six months ended June 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 $194,849 for the quarters ended June 30, 2007 and 2006,
      respectively. Amortization was $389,808 and $389,597 for the six months ended
      June 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.





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          8
          -*


The
      Company adopted
      SFAS 123(R) using the modified prospective method. Under this transition method,
      stock-based compensation expense for the quarter and six months ended
      June 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 quarter ended June 30,
      2007 and 2006 was approximately $101,000 and $78,000, respectively. Total
      stock-based compensation expense included in the Company’s statement of income
      for the six months ended June 30, 2007 and 2006 was approximately $191,000
      and
      $166,000, 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 June 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 June 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 June 30, 2007, the Company had no
      unrecognized tax benefits which would affect the effective tax rate if
      recognized, and as of June 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 year 2006 federal return has
      been
      granted an extension to file until September 15, 2007. 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 return.
      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 June 30,2006
              
              
              2007Income
              
              
              Shares
              
              
              Per
                  Share Amount
              
              
              Income
              
              
              Shares
              
              
              Per
                  Share AmountBasic
                  EPS:Net
                  income available to shares of Common Stock
              
              $
              623,166
              
              
              
              2,327,419
              
              
              $
              0.27
              
              
              $
              611,941
              
              
              
              2,123,900
              
              
              $
              0.29Effect
                  of dilutive shares of Common Stock from stock options and
                  warrants
              
              
              -
              
              
              
              179,371
              
              
              
              (0.02
              )
              
              
              -
              
              
              
              186,203
              
              
              
              (0.03
              )Diluted
                  EPS:Net
                  income available to shares of Common Stock
              
              $
              623,166
              
              
              
              2,506,790
              
              
              $
              0.25
              
              
              $
              611,941
              
              
              
              2,310,103
              
              
              $
              0.26





The
      difference in weighted average shares outstanding between basic earnings per
      share and diluted earnings per share for the quarters ended June 30, 2007 and
      2006 relates to the effect of 186,203 and 179,371 shares, respectively, of
      dilutive shares of Common Stock from stock options, which are included in total
      shares for the diluted calculation.





Six
                  Months Ended June 30,2006
              
              
              2007Income
              
              
              Shares
              
              
              Per
                  Share Amount
              
              
              Income
              
              
              Shares
              
              
              Per
                  Share AmountBasic
                  EPS:Net
                  income available to shares of Common Stock
              
              $
              1,325,491
              
              
              
              2,349,824
              
              
              $
              0.56
              
              
              $
              1,394,707
              
              
              
              2,125,131
              
              
              $
              0.66Effect
                  of dilutive shares of Common Stock from stock options and
                  warrants
              
              
              -
              
              
              
              196,513
              
              
              
              (0.04
              )
              
              
              -
              
              
              
              182,698
              
              
              
              (0.06
              )Diluted
                  EPS:Net
                  income available to shares of Common Stock
              
              $
              1,325,491
              
              
              
              2,546,337
              
              
              $
              0.52
              
              
              $
              1,394,707
              
              
              
              2,307,829
              
              
              $
              0.60


The
      difference in weighted average shares outstanding between basic earnings per
      share and diluted earnings per share for the six months ended June 30, 2007
      and
      2006 relates to the effect of 182,698 and 196,513 shares, respectively, of
      dilutive shares of Common Stock from stock options, which are included in total
      shares for the diluted calculation.





*-
            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 June 30, 2007, there were 156,300 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 June
      30, 2007, there were 22,335 vested options, 186,365 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 June 30, 2007, there were 290,535 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 June 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
              
              
              Six
                  Months EndedJune
                  30,
              
              
              June
                  30,Valuation
                  Assumptions
              
              2006
              
              
              2007
                  (5)
              
              
              2006
              
              
              2007Expected
                  life (1)
              
              
              4.5
              
              
              
              -
              
              
              
              4.7
              
              
              
              4.5Risk-free
                  interest rate (2)
              
              
              5.01
              %
              
              
              -
              
              
              
              4.88
              %
              
              
              4.75
              %Expected
                  volatility (3)
              
              
              49
              %
              
              
              -
              
              
              
              49
              %
              
              
              58
              %Expected
                  dividend yield
              
              
              3.37
              %
              
              
              -
              
              
              
              3.18
              %
              
              
              3.07
              %Expected
                  Forteiture (4)
              
              
              4.47
              %
              
              
              -
              
              
              
              4.48
              %
              
              
              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 June 30,
                2007.




*-
          11
          -*


A
      summary
      of option activity as of June 30, 2007, and changes during the six 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
              
              
              (20,666
              )
              
              $
              9.83
              
              
              $
              5.50
                  - $12.50Forfeited
              
              
              (11,667
              )
              
              $
              13.60
              
              
              $
              9.66
                  - $17.61Outstanding
                  at June 30, 2007
              
              
              547,902
              
              
              $
              11.97
              
              
              $
              4.80
                  - $21.85
              
              
              
              3.2
              
              
              $
              6,560Exercisable
                  at June 30, 2007
              
              
              326,870
              
              
              $
              8.33
              
              
              $
              4.80
                  - $19.37
              
              
              
              1.9
              
              
              $
              2,724




The
      weighted average grant date fair values of options granted were $9.16 per option
      and $6.12 per option during the six months ended June 30, 2007 and 2006,
      respectively.  Net cash proceeds from the exercise of stock options
      during the six months ended June 30, 2007 and 2006 were $203,049 and $182,286,
      respectively. The associated income tax benefit from stock options exercised
      during the six months ended June 30, 2007 and 2006 was $87,844 and $43,297,
      respectively. As of the date of exercise, the total intrinsic values of options
      exercised during the six months ended June 30, 2007 and 2006 were $281,211
      and
      $818,948, respectively. As of June 30, 2007, there was $1.3 million of total
      unrecognized compensation expense related to non-vested stock options, which
      is
      expected to be recognized over a weighted average period of 1.3
      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 June 30, 2007, there was approximately $162,000 of unrecognized compensation
      expense related to the restricted stock grant. The remaining expense is expected
      to be recognized in 2007.  Beginning June 30, 2007, the Company
      reclassified amortization of deferred equity compensation to Common
      Stock.





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





Six
                  Months EndedJune
                  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 June 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 June 30, 2007, the Company had $1.5
      million outstanding and $5.5 million available for borrowing under the
      Credit Facility. This consisted of $1.5 million outstanding under the LIBOR
      rate
      option and $21,000 outstanding under the Base Rate option. The Credit Facility
      requires the Company to comply with certain covenants and financial ratios.
      At
      June 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 June 30, 2007 were approximately $6.1 million,
      and the Company had  a working capital deficit on that date of
      approximately $1.3 million. During the six months ended June 30, 2007, the
      Company had capital expenditures of approximately $374,000 and purchased
      approximately $708,000 of Common Stock while decreasing total bank debt by
      approximately $1.8 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 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 matures on September 30, 2011.  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 June 30,
      2007, the Company had $4.1 millionoutstanding
      under the Term
      Loan. The Term
      Loan requires the Company to comply with certain covenants and financial
      ratios. At June 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 six
      months ended June 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 79 general dentists and 27 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.





*-
          15
          -*


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
      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 June 30, 2007, Revenue increased $535,000, or 3.7%, to $15.1
      million compared to $14.6 million for the quarter ended June 30,
      2006.  For the quarter ended June 30, 2007, net revenue increased
      $287,000, or 2.8%, to $10.4 million compared to $10.1 million for the quarter
      ended June 30, 2006.





For
      the
      quarter ended June 30, 2007, net income decreased 1.8% to $612,000, or $.26
      per
      share compared to $623,000, or $.25 per share for the quarter ended June 30,
      2006.





For
      the
      six months ended June 30, 2007, Revenue increased $1.7 million, or 5.8%, to
      $30.8 million compared to $29.1 million for the six months ended June 30,
      2006.  For the six months ended June 30, 2007, net revenue increased
      $986,000, or 4.9%, to $21.2 million compared to $20.2 million for the six months
      ended June 30, 2006.





For
      the
      six months ended June 30, 2007, net income increased 5.2% to $1.4 million,
      or
      $.60 per share compared to $1.3 million, or $.52 per share for the six months
      ended June 30, 2006.





The
      Company continues to generate strong cash flow from
      operations.  During the first six months of 2007, the Company
      purchased $708,000 of its outstanding Common Stock, invested $374,000 in capital
      expenditures, paid $596,000 in dividends, and repaid $264,000 of long term
      debt
      while decreasing borrowings under its Credit Facility by $1.5
      million.





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
              
              
              Six
                  Months EndedJune
                  30,
              
              
              June
                  30,2006
              
              
              2007
              
              
              2006
              
              
              2007Total
                  dental group practice revenue
              
              $
              14,566,435
              
              
              $
              15,101,800
              
              
              $
              29,146,349
              
              
              $
              30,835,494Less
                  - amounts retained by dental Offices
              
              
              (4,474,966
              )
              
              
              (4,722,925
              )
              
              
              (8,914,851
              )
              
              
              (9,618,213
              )Net
                  revenue
              
              $
              10,091,469
              
              
              $
              10,378,875
              
              
              $
              20,231,498
              
              
              $
              21,217,281


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
              
              
              Six
                  Months EndedJune
                  30,
              
              
              June
                  30,2006
              
              
              2007
              
              
              2006
              
              
              2007NET
                  REVENUE:
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %DIRECT
                  EXPENSES:Clinical
                  salaries and benefits
              
              
              35.5
              %
              
              
              36.0
              %
              
              
              35.9
              %
              
              
              35.7
              %Dental
                  supplies
              
              
              5.7
              %
              
              
              5.7
              %
              
              
              5.7
              %
              
              
              5.4
              %Laboratory
                  fees
              
              
              6.8
              %
              
              
              6.6
              %
              
              
              6.6
              %
              
              
              6.5
              %Occupancy
              
              
              10.8
              %
              
              
              11.0
              %
              
              
              10.6
              %
              
              
              10.7
              %Advertising
                  and marketing
              
              
              2.5
              %
              
              
              2.6
              %
              
              
              2.3
              %
              
              
              2.0
              %Depreciation
                  and amortization
              
              
              5.2
              %
              
              
              5.9
              %
              
              
              5.0
              %
              
              
              5.8
              %General
                  and administrative
              
              
              11.3
              %
              
              
              10.8
              %
              
              
              11.5
              %
              
              
              10.8
              %77.8
              %
              
              
              78.6
              %
              
              
              77.6
              %
              
              
              76.9
              %Contribution
                  from dental offices
              
              
              22.2
              %
              
              
              21.4
              %
              
              
              22.4
              %
              
              
              23.1
              %CORPORATE
                  EXPENSES:General
                  and administrative
              
              
              11.3
              %
              
              
              10.2
              %
              
              
              11.0
              %
              
              
              10.8
              %Depreciation
                  and amortization
              
              
              0.3
              %
              
              
              0.3
              %
              
              
              0.3
              %
              
              
              0.3
              %Operating
                  income
              
              
              10.5
              %
              
              
              11.0
              %
              
              
              11.1
              %
              
              
              12.0
              %Interest
                  expense
              
              
              0.4
              %
              
              
              0.9
              %
              
              
              0.4
              %
              
              
              0.9
              %Income
                  before income taxes
              
              
              10.1
              %
              
              
              10.1
              %
              
              
              10.7
              %
              
              
              11.1
              %Income
                  tax expense
              
              
              3.9
              %
              
              
              4.2
              %
              
              
              4.1
              %
              
              
              4.5
              %Net
                  income
              
              
              6.2
              %
              
              
              5.9
              %
              
              
              6.6
              %
              
              
              6.6
              %






*-
          17
          -*


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




*Net
      revenue.* For the quarter ended June 30, 2007, net revenue increased
      $287,000, or 2.8%, to $10.4 million compared to $10.1 million for the quarter
      ended June 30, 2006. This increase is primarily attributable to net revenues
      generated from the addition of three *de novo* Offices opened either
      during the quarter ended June 30, 2006 or after June 30, 2006.





*Clinical
      salaries and benefits.* For the quarter ended June 30, 2007, clinical
      salaries and benefits increased $154,000, or 4.3%, to $3.7 million compared
      to $3.6 million for the quarter ended June 30, 2006. This increase was primarily
      due to additional employees at the three *de novo*Offices opened either
      during the quarter ended June 30, 2006 or after June 30, 2006 and annual wage
      increases that became effective February 1, 2007. As a percentage of net
      revenue, clinical salaries and benefits increased to 36.0% for the quarter
      ended
      June 30, 2007 compared to 35.5% for the quarter ended June 30,
      2006.




*Dental
      supplies.* For the quarter ended June 30, 2007, dental supplies increased to
      $594,000 compared to $578,000 for the quarter ended June 30, 2006, an increase
      of $16,000 or 2.8%. This increase was primarily related to the addition of
      the
      three *de novo* Offices opened either during the quarter ended June 30,
      2006 or after June 30, 2006.  As a percentage of net revenue, dental
      supplies remained constant at 5.7% for the quarter ended June 30, 2007 and
      2006.




*Laboratory
      fees.* For the quarter ended June 30, 2007, laboratory fees increased to
      $689,000 compared to $683,000 for the quarter ended June 30, 2006, an increase
      of $6,000 or 0.9%. As a percentage of net revenue, laboratory fees decreased
      to
      6.6% for the quarter ended June 30, 2007 compared to 6.8% for the quarter ended
      June 30, 2006.




*Occupancy.*
      For the quarter ended June 30, 2007, occupancy expense increased $47,000 or
      4.3%
      to $1.1 million.  This increase was primarily due to the three *de
      novo* Offices opened either during the quarter ended June 30, 2006 or after
      June 30, 2006 and increased rental payments resulting from the renewal of Office
      leases at current market rates for Offices whose leases expired subsequent
      to
      June 30, 2006. As a percentage of net revenue, occupancy expense increased
      to
      11.0% for the quarter ended June 30, 2007 compared to 10.8% for the quarter
      ended June 30, 2006.




*Advertising
      and marketing.* For the quarter ended June 30, 2007, advertising and
      marketing expense increased to $267,000 compared to $252,000 for the quarter
      ended June 30, 2006, an increase of $15,000 or 6.1%.  This increase is
      attributable to the Company starting a television advertising campaign in the
      Denver, Colorado market in March 2007. As a percentage of net revenue,
      advertising and marketing expense increased to 2.6% for the quarter ended June
      30, 2007 compared to 2.5% for the quarter ended June 30, 2006.




*Depreciation
      and amortization-Offices.*For the quarter ended June 30, 2007, depreciation
      and amortization expenses attributable to the Offices increased to $611,000
      compared to $529,000 for the quarter ended June 30, 2006, an increase of $82,000
      or 15.5%. 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 5.9% for the quarter ended June 30, 2007 compared to 5.2% for
      the
      quarter ended June 30, 2006.





*General
      and administrative-Offices.* For the quarters ended June 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 10.8% for the quarter ended June 30, 2007
      compared to 11.3% for the quarter ended June 30, 2006.




*Contribution
      from dental Offices.*   As a result of the above,
      contribution from dental Offices remained constant at $2.2 million for the
      quarters ended June 30, 2007 and 2006. As a percentage of net revenue,
      contribution from dental Offices decreased to 21.4% for the quarter ended June
      30, 2007 compared to 22.2% for the quarter ended June 30, 2006.




*Corporate
      expenses - general and administrative.* For the quarters ended June 30, 2007
      and 2006, corporate expenses - general and administrative**remained
      constant at $1.1 million.As a percentage
      of net revenue, corporate expenses - general and administrative decreased to
      10.2% for the quarter ended June 30, 2007 compared to 11.3% for the quarter
      ended June 30, 2006.




*Corporate
      expenses - depreciation and amortization.* For the quarter ended June 30,
      2007, corporate expenses - depreciation and amortization decreased to $27,000
      compared to $32,000 for the quarter ended June 30, 2006, a decrease of $5,000
      or
      15.9%. 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 quarter ended June 30, 2007
      and 2006.




*-
          18
          -*




*Operating
      income.*   As a result of the matters discussed above, the
      Company’s operating income remained constant at $1.1 million for the quarters
      ended June 30, 2007 and 2006. As a percentage of net revenue, operating income
      increased to 11.0% for the quarter ended June 30, 2007 compared to 10.5% for
      the
      quarter ended June 30, 2006.




*Interest
      expense.* For the quarter ended June 30, 2007, interest expense increased to
      $89,000 compared to $40,000 for the quarter ended June 30, 2006, an increase
      of
      $49,000. This increase in interest expense is attributable to the addition
      of a
      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 June 30, 2007 compared to 0.4% for the quarter ended June 30,
      2006.




*Net
      income.*   As a result of the above, the Company reported net
      income of $612,000 for the quarter ended June 30, 2007 compared to net income
      of
      $623,000 for the quarter ended June 30, 2006. Net income for the quarter ended
      June 30, 2007 was net of income tax expense of $440,000, while net income for
      the quarter ended June 30, 2006 was net of income tax expense of $398,000.
      As a
      percentage of net revenue, net income decreased to 5.9% for the quarter ended
      June 30, 2007 compared to 6.2% for the quarter ended June 30, 2006.




***Six
      Months Ended June 30, 2007 Compared to Six Months Ended June 30,
      2006:***




*Net
      revenue.* For the six months June 30, 2007, net revenue increased $986,000,
      or 4.9%, to $21.2 million compared to $20.2 million for the six months ended
      June 30, 2006. This increase is attributable to an increase in net revenue
      of
      $178,000 at the 57 Offices that were open during each full quarter and $808,000
      in net revenue from the addition of three *de novo* Offices opened either
      during the quarter ended June 30, 2006 or after June 30, 2006.





*Clinical
      salaries and benefits.* For the six months ended June 30, 2007, clinical
      salaries and benefits increased $305,000, or 4.2%, to $7.6 million compared
      to $7.3 million for the six months ended June 30, 2006. This increase was
      primarily due to additional employees at the three *de novo*Offices
      opened either during the quarter ended June 30, 2006 or after June 30, 2006
      and
      annual wage increases that became effective February 1, 2007. As a percentage
      of
      net revenue, clinical salaries and benefits decreased to 35.7% for the six
      months ended June 30, 2007 compared to 35.9% for the six months ended June
      30,
      2006.




*Dental
      supplies.* For the six months ended June 30, 2007 and 2006, dental supplies
      remained constant at $1.2 million.  As a percentage of net revenue,
      dental supplies decreased to 5.4% for the six months ended June 30, 2007
      compared to 5.7% for the six months ended June 30, 2006.




*Laboratory
      fees.* For the six months ended June 30, 2007, laboratory fees increased to
      $1.4 million compared to $1.3 million for the six months ended June 30, 2006,
      an
      increase of $44,000 or 3.3%. This increase was primarily related to the addition
      of the three *de novo* Offices opened either during the quarter ended
      June 30, 2006 or after June 30, 2006 and increased Revenue. As a percentage
      of
      net revenue, laboratory fees decreased to 6.5% for the six months ended June
      30,
      2007 compared to 6.6% for the six months ended June 30, 2006.




*Occupancy.*
      For the six months ended June 30, 2007, occupancy expense increased $123,000
      or
      5.7% to $2.3 million compared to $2.2 million for the six months ended June
      30,
      2006.  This increase was primarily due to the three *de novo*
      Offices opened either during the quarter ended June 30, 2006 or after June
      30,
      2006 and increased rental payments resulting from the renewal of Office leases
      at current market rates for Offices whose leases expired subsequent to June
      30,
      2006. As a percentage of net revenue, occupancy expense increased to 10.7%
      for
      the six months ended June 30, 2007 compared to 10.6% for the six months ended
      June 30, 2006.




*Advertising
      and marketing.* For the six months ended June 30, 2007, advertising and
      marketing expense decreased to $416,000 compared to $461,000 for the six months
      ended June 30, 2006, a decrease of $45,000 or 9.7%.  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 in 2006, which commenced in January 2006, to a television
      advertising campaign in the Denver, CO market which did not commence until
      March
      2007. As a percentage of net revenue, advertising and marketing expense
      decreased to 2.0% for the six months ended June 30, 2007 compared to 2.3% for
      the six months ended June 30, 2006.




*Depreciation
      and amortization-Offices.*For the six months ended June 30, 2007,
      depreciation and amortization expenses attributable to the Offices increased
      to
      $1.2 million compared to $1.0 million for the six months ended June 30, 2006,
      an
      increase of $213,000 or 21.1%. 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 5.8% for the six months ended June 30, 2007 compared
      to 5.0% for the six months ended June 30, 2006.


*-
          19
          -*




*General
      and administrative-Offices.* For the six months ended June 30, 2007 and
      2006, general and administrative expenses attributable to the Offices remained
      constant at $2.3 million. As a percentage of net revenue, general and
      administrative expenses decreased to 10.8% for the six months ended June 30,
      2007 compared to 11.5% for the six months ended June 30, 2006.




*Contribution
      from dental Offices.*   As a result of the above,
      contribution from dental Offices increased $378,000, or 8.3%, to $4.9 million
      for the six months ended June 30, 2007 compared to $4.5 million for the six
      months ended June 30, 2006. As a percentage of net revenue, contribution from
      dental Offices increased to 23.1% for the six months ended June 30, 2007
      compared to 22.4% for the six months ended June 30, 2006.




*Corporate
      expenses - general and administrative.* For the six months ended June 30,
      2007, corporate expenses - general and administrative**increased to
      $2.3 million compared to $2.2 million for the six months ended June 30, 2006,
      an
      increase of $78,000 or 3.5%. This increase is attributable to an increase in
      corporate wages and increased stock option expense as a result of additional
      options issued. As a percentage of net revenue, corporate expenses - general
      and
      administrative decreased to 10.8% for the six months ended June 30, 2007
      compared to 11.0% for the six months ended June 30, 2006.




*Corporate
      expenses - depreciation and amortization.* For the six months ended June 30,
      2007, corporate expenses - depreciation and amortization decreased to $58,000
      compared to $67,000 for the six months ended June 30, 2006, a decrease of $9,000
      or 12.8%. 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 six months ended June 30,
      2007 and 2006.




*Operating
      income.*   As a result of the matters discussed above, the
      Company’s operating income increased to $2.6 million for the six months ended
      June 30, 2007 compared to $2.2 million for the six months ended June 30, 2006,
      an increase of $308,000 or 13.7%. As a percentage of net revenue, operating
      income increased to 12.0% for the six months ended June 30, 2007 compared to
      11.1% for the six months ended June 30, 2006.




*Interest
      expense.* For the six months ended June 30, 2007, interest expense increased
      to $195,000 compared to $80,000 for the six months ended June 30, 2006, an
      increase of $115,000. 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 six months ended June 30, 2007 compared to 0.4% for the six months
      ended
      June 30, 2006.




*Net
      income.*   As a result of the above, the Company reported net
      income of $1.4 million for the six months ended June 30, 2007 compared to net
      income of $1.3 million for the six months ended June 30, 2006, an increase
      of
      $69,000 or 5.2%.  Net income for the six months ended June 30, 2007
      was net of income tax expense of $962,000, while net income for the six months
      ended June 30, 2006 was net of income tax expense of $838,000. As a percentage
      of net revenue, net income remained constant at 6.6% for the six months ended
      June 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 June
      30, 2007, the Company had a working capital deficit of approximately $1.3
      million.




Net
      cash
      provided by operating activities was approximately $3.1 million and $3.2 million
      for the six months ended June 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 $329,000,
      an
      increase in income taxes payable of approximately $200,000, offset by an
      increase in accounts receivable of approximately $715,000 (primarily due to
      higher Revenue), an increase in prepaid expenses and other assets of
      approximately $25,000,  and a decrease in other long-term obligations
      of approximately $35,000. 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, accrued expenses and
      accrued payroll  and related expenses of approximately $553,000, an
      increase in income taxes payable of approximately $194,000, an increase in
      other
      long-term obligations of approximately $96,000 and a decrease in prepaid
      expenses and other assets of approximately $50,000, partially offset by an
      increase in accounts receivable of approximately $585,000 (primarily due to
      higher Revenue) and an increase in deferred charges and other assets of
      approximately $28,000.




*-
          20
          -*






Net
      cash
      used in investing activities was approximately $374,000 and $2.1 million for
      the
      six months ended June 30, 2007 and 2006, respectively. For the six months ended
      June 30, 2007, the Company invested approximately $374,000 in the purchase
      of
      additional equipment. For the six months ended June 30, 2006, the Company
      invested approximately $974,000 in the purchase of additional property and
      equipment and approximately $1.1 million in the development of *de novo*
      Offices.




Net
      cash
      used in financing activities was approximately $2.8 million for the six months
      ended June 30, 2007 and $1.2 million for the six months ended June 30, 2006.
      During the six months ended June 30, 2007, net cash used in financing activities
      was comprised of approximately $1.5 million used to pay down the Credit
      Facility, approximately $708,000 used in the purchase and retirement of Common
      Stock, approximately $264,000 for the repayment of long-term debt and
      approximately $596,000 for the payment of dividends, partially offset by
      approximately $203,000 in proceeds from the exercise of Common Stock options
      and
      $88,000 in tax benefit of Common Stock options exercised. During the six months
      ended June 30, 2006, net cash used in financing activities was comprised of
      approximately $1.3 million used in the purchase and retirement of Common Stock,
      approximately $544,000 for the payment of dividends and approximately $80,000
      used in the repayment of long-term debt,  partially offset by
      approximately $519,000 advanced from the Company’s Credit Facility,
      approximately $182,000 in proceeds from the exercise of Common Stock options
      and
      $43,000 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 June 30, 2007, the Company had $1.5 million outstanding
      and $5.5 million available for borrowing under the Credit Facility. This
      consisted of $1.5 million outstanding under the LIBOR rate option and $21,000
      outstanding under the Base Rate option. The Credit Facility requires the Company
      to comply with certain covenants and financial ratios. At June 30, 2007, the
      Company was in full compliance with all of its covenants under the Credit
      Facility.




The
      Company’s retained earnings as of June 30, 2007 were approximately $6.1 million.
      The Company expects increased costs over the next 12 months as it prepares
      to
      comply with Sarbanes-Oxley Act Section 404.




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 June 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 $537,000, or 14.7% to $4.2 million for the six months ended June
      30,
      2007 compared to $3.6 million for the corresponding six 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 table
      below.


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          21
          -*





Quarters
            
            
            Six
                MonthsEnded
                June 30,
            
            
            Ended
                June 30,2006
            
            
            2007
            
            
            2006
            
            
            2007RECONCILIATION
                OF ADJUSTED EBITDA:Net
                income
            
            $
            623,166
            
            
            $
            611,941
            
            
            $
            1,325,491
            
            
            $
            1,394,707Depreciation
                and amortization - Offices
            
            
            528,688
            
            
            
            610,526
            
            
            
            1,008,463
            
            
            
            1,221,079Depreciation
                and amortization - Corporate
            
            
            32,446
            
            
            
            27,275
            
            
            
            66,642
            
            
            
            58,103Stock-based
                compensation expense
            
            
            159,316
            
            
            
            181,553
            
            
            
            328,091
            
            
            
            352,647Interest
                expense, net
            
            
            40,467
            
            
            
            89,166
            
            
            
            80,087
            
            
            
            195,319Income
                tax expense
            
            
            398,133
            
            
            
            439,976
            
            
            
            838,107
            
            
            
            961,822Adjusted
                EBITDA
            
            $
            1,782,216
            
            
            $
            1,960,437
            
            
            $
            3,646,881
            
            
            $
            4,183,677




As
      of
      June 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
              
              $
              5,660,867
              
              
              $
              1,150,000
              
              
              $
              3,360,867
              
              
              $
              1,150,000
              
              
              $
              -Operating
                  lease obligations
              
              
              7,956,363
              
              
              
              2,794,534
              
              
              
              3,885,734
              
              
              
              1,251,469
              
              
              
              24,626Other
                  long-term liabilities reflected on the balance sheet under
                  GAAP
              
              
              372,745
              
              
              
              81,613
              
              
              
              204,873
              
              
              
              85,701
              
              
              
              558Total
              
              $
              13,989,975
              
              
              $
              4,026,147
              
              
              $
              7,451,474
              
              
              $
              2,487,170
              
              
              $
              25,184




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 June
      30, 2007, the Company, in 2 separate transactions, purchased 12,698 shares
      of
      its Common Stock for total consideration of approximately $292,000 at prices
      ranging from $22.10 to $24.43. 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 June 30,
      2007, approximately $499,000 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.




*-
          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 used
      derivative instruments or engaged in hedging activities. On October 12, 2006,
      the Company entered into a fixed-for-floating interest rate swap transaction
      on
      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 June 30, 2007, the variable portion outstanding under the Term Loan
      was $2.1 million and $1.5 million was outstanding under the Credit Facility
      with
      either variable LIBOR (6.57%) or Base Rate (8.25%). 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 $22,000 for the six months ended June 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 June 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 six months ended June 30, 2007
      that materially affected, or were reasonably likely to materially affect, its
      internal control over financial reporting.


*-
          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 April 1, 2007 through June 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
                  ProgramsApril
                  1, 2007 through April 30, 2007
              
              
              5,000
              
              
              $
              24.43
              
              
              
              5,000
              
              
              $
              669,106May
                  1, 2007 through May 31, 2007
              
              
              7,698
              
              
              
              22.10
              
              
              
              7,698
              
              
              $
              498,971June  1,
                  2007 through June 30, 2007
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              $
              498,971Total
              
              
              12,698
              
              
              $
              23.02
              
              
              
              12,698
  All
      purchases were made on the open market pursuant to plans that were approved
      by
      the Board of Directors. As of June 30, 2007, there was approximately $499,000
      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.







**ITEM
      4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**




(a)
            The
                Company’s Annual Meeting of Shareholders was held on June 5,
                2007.


(b)
            The
                following directors were elected at the meeting to serve three-year
                terms
                as Class I directors.






For
              Withheld
                  Authority
              AbstainThomas
                  D. Wolf
              1,895,276
              883
              -Paul
                  E. Valuck, D.D.S.
              1,896,076
              83
              -






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          24
          -*


**Continuing
      Directors**


After
      the
      meeting, the following director continued to serve his three-year term as a
      Class II director, which term will expire at the Company’s annual meeting in
      2008:





Brooks
      G.
      O’Neil





After
      the
      meeting, the following directors continued to serve their three-year terms
      as
      Class III directors, which terms will expire at the Company’s annual meeting in
      2009:





Frederick
      W.J. Birner





Mark
      A.
      Birner





(c)
            Other
                matters voted upon at the meeting and results of those votes are
                as
                follow:




Authorization
      to increase the number of shares of common stock available under the 2005 Equity
      Incentive Plan from 300,000 to 425,000:





For
              
              Against
              
              Abstain
              
              Not
                  Voted1,184,054
              
              99,889
              
              2
              
              612,214





The
      matters mentioned above are described in detail in the Company’s definitive
      proxy statement dated April 30, 2007 for the Annual Meeting of Shareholders
      held
      on June 5, 2007.




**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,
                1997.10.49
            Fifth
                Amendment of Second Amended and Restated Credit Agreement dated April
                30,
                2007 between the Registrant and Key Bank of Colorado.31.1
            Rule
                13a-14(a) Certification of the Chief Executive
                Officer.*31.2
            Rule
                13a-14(a) Certification of the Chief Financial
                Officer.*32.1
            Section
                1350 Certifications of the Chief Executive Officer and the Chief
                Financial
                Officer.*









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          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:August
                14, 2007By:
              /s/ Frederic W.J. BirnerName:
              Frederic W.J. BirnerTitle:
              Chairman of the Board and Chief
                Executive Officer
                *(Principal
                  Executive Officer)*
  Date:August
                  14, 2007By:
                /s/ Dennis N. GentyName:
                Dennis N. GentyTitle:
                Chief Financial Officer, Secretary,
                  and
                  Treasurer
                  (*Principal
                    Financial and Accounting Officer*)


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          26
          -*