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 endedJune
30, 2008


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, a non-accelerated filer, or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
One):




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





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  [
]  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 14, 2008Common
      Stock, without par value
            
            1,946,273










BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


INDEX
TO FORM 10-Q





PART I - FINANCIAL
INFORMATION





Item
      1.   Financial Statements
            PageCondensed
      Consolidated Balance Sheets as of December 31, 2007 and June 30, 2008
      (Unaudited)
            3Unaudited
      Condensed Consolidated Statements of Income for the Quarters and Six
      Months Ended June 30, 2007 and 2008
            4Unaudited
      Condensed Consolidated Statements of Shareholders’ Equity and
      Comprehensive Income as of June 30, 2008
            5Unaudited
      Condensed Consolidated Statements of Cash Flows for the Six Months Ended
      June 30, 2007 and 2008
            6Unaudited
      Notes to Condensed Consolidated Financial Statements
            8Item
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            15Item
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            24Item
      4.
            Controls
      and Procedures
            24PART II - OTHER INFORMATIONItem
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            25Item
      4.
            Submission
      of Matters to a Vote of Security Holders
            25Item
      6.
            Exhibits
            26Signatures
            27





-
2 -


PART I - FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS





BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETSDecember
      31,
            
            
            June
      30,ASSETS
            
            2007
            
            
            2008**
            
            
            (Unaudited)CURRENT
      ASSETS:Cash
      and cash equivalents
            
            $
            964,150
            
            
            $
            682,794Accounts
      receivable, net of allowance for doubtfulaccounts
      of $291,827 and $289,677, respectively
            
            
            3,008,550
            
            
            
            3,302,801Deferred
      tax asset
            
            
            178,591
            
            
            
            240,615Income
      taxes receivable
            
            
            26,817
            
            
            
            -Prepaid
      expenses and other assets
            
            
            620,365
            
            
            
            774,303Total
      current assets
            
            
            4,798,473
            
            
            
            5,000,513PROPERTY
      AND EQUIPMENT, net
            
            
            4,533,531
            
            
            
            4,558,396OTHER
      NONCURRENT ASSETS:Intangible
      assets, net
            
            
            11,393,590
            
            
            
            11,011,949Deferred
      charges and other assets
            
            
            171,687
            
            
            
            161,433Total
      assets
            
            $
            20,897,281
            
            
            $
            20,732,291LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
            
            $
            1,945,420
            
            
            $
            1,824,359Accrued
      expenses
            
            
            1,334,785
            
            
            
            1,146,224Accrued
      payroll and related expenses
            
            
            1,456,477
            
            
            
            2,085,759Income
      taxes payable
            
            
            -
            
            
            
            423,102Current
      maturities of long-term debt
            
            
            920,000
            
            
            
            920,000Total
      current liabilities
            
            
            5,656,682
            
            
            
            6,399,444LONG-TERM
      LIABILITIES:Deferred
      tax liability, net
            
            
            633,667
            
            
            
            734,246Long-term
      debt, net of current maturities
            
            
            4,784,511
            
            
            
            3,517,445Other
      long-term obligations
            
            
            291,266
            
            
            
            280,746Total
      liabilities
            
            
            11,366,126
            
            
            
            10,931,881SHAREHOLDERS'
      EQUITY:Preferred
      Stock, no par value, 10,000,000 sharesauthorized;
      none outstanding
            
            
            -
            
            
            
            -Common
      Stock, no par value, 20,000,000 shares authorized;2,123,440
      and  2,116,947 shares issued and outstanding,
      respectively
            
            
            3,028,515
            
            
            
            3,045,027Retained
      earnings
            
            
            6,536,796
            
            
            
            6,786,231Accumulated
      other comprehensive loss
            
            
            (34,156
            )
            
            
            (30,848
            )Total
      shareholders' equity
            
            
            9,531,155
            
            
            
            9,800,410Total
      liabilities and shareholders' equity
            
            $
            20,897,281
            
            
            $
            20,732,291** Derived
      from the Company’s audited consolidated balance sheet at December 31,
      2007.





The
accompanying notes are an integral part of these financial
statements


-
3 -








BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)Quarters
      Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2007
            
            
            2008
            
            
            2007
            
            
            2008NET
      REVENUE:
            
            $
            10,265,570
            
            
            $
            10,044,161
            
            
            $
            20,955,907
            
            
            $
            20,249,109DIRECT
      EXPENSES:Clinical
      salaries and benefits
            
            
            3,621,786
            
            
            
            3,742,574
            
            
            
            7,314,011
            
            
            
            7,668,500Dental
      supplies
            
            
            593,981
            
            
            
            624,037
            
            
            
            1,154,906
            
            
            
            1,218,222Laboratory
      fees
            
            
            689,207
            
            
            
            739,161
            
            
            
            1,369,412
            
            
            
            1,391,874Occupancy
            
            
            1,141,105
            
            
            
            1,203,227
            
            
            
            2,274,157
            
            
            
            2,388,906Advertising
      and marketing
            
            
            267,317
            
            
            
            119,099
            
            
            
            416,078
            
            
            
            226,548Depreciation
      and amortization
            
            
            610,526
            
            
            
            602,018
            
            
            
            1,221,079
            
            
            
            1,203,033General
      and administrative
            
            
            1,119,165
            
            
            
            1,266,972
            
            
            
            2,295,661
            
            
            
            2,436,9898,043,087
            
            
            
            8,297,088
            
            
            
            16,045,304
            
            
            
            16,534,072Contribution
      from dental offices
            
            
            2,222,483
            
            
            
            1,747,073
            
            
            
            4,910,603
            
            
            
            3,715,037CORPORATE
      EXPENSES:General
      and administrative
            
            
            1,054,125
            (1)
            
            
            889,204
            (1)
            
            
            2,300,652
            (2)
            
            
            1,830,308
            (2)Depreciation
      and amortization
            
            
            27,275
            
            
            
            23,186
            
            
            
            58,103
            
            
            
            46,654Operating
      income
            
            
            1,141,083
            
            
            
            834,683
            
            
            
            2,551,848
            
            
            
            1,838,075Interest
      expense
            
            
            89,166
            
            
            
            58,369
            
            
            
            195,319
            
            
            
            135,997Income
      before income taxes
            
            
            1,051,917
            
            
            
            776,314
            
            
            
            2,356,529
            
            
            
            1,702,078Income
      tax expense
            
            
            439,976
            
            
            
            326,057
            
            
            
            961,822
            
            
            
            734,265Net
      income
            
            $
            611,941
            
            
            $
            450,257
            
            
            $
            1,394,707
            
            
            $
            967,813Net
      income per share of Common Stock - Basic
            
            $
            0.29
            
            
            $
            0.21
            
            
            $
            0.66
            
            
            $
            0.46Net
      income per share of Common Stock - Diluted
            
            $
            0.26
            
            
            $
            0.21
            
            
            $
            0.60
            
            
            $
            0.44Cash
      dividends per share of Common Stock
            
            $
            0.15
            
            
            $
            0.17
            
            
            $
            0.30
            
            
            $
            0.34Weighted
      average number of shares ofCommon
      Stock and dilutive securities:Basic
            
            
            2,123,900
            
            
            
            2,107,415
            
            
            
            2,125,131
            
            
            
            2,109,250Diluted
            
            
            2,310,103
            
            
            
            2,178,816
            
            
            
            2,307,829
            
            
            
            2,188,583





(1)
            Corporate
      expense - general and administrative includes $81,030 of  equity
      compensation for a stock award and $100,523 related to stock-based
      compensation expense in the quarter ended June 30, 2007,
      and  $184,618 related to stock-based compensation expense in the
      quarter ended June 30, 2008.(2)
            Corporate
      expense - general and administrative includes $162,060
      of  equity compensation for a stock award and $190,587 related
      to stock-based compensation expense in the six months ended June 30, 2007,
      and $358,030 related to stock-based compensation expense in the six months
      ended June 30, 2008.




The
accompanying notes are an integral part of these financial
statements


-
4 -








BIRNER
      DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
      INCOME(UNAUDITED)Common
      Stock
            
            
            Comprehensive
      Income
            
            
            Retained
      Earnings
            
            
            Shareholders'
      EquityShares
            
            
            AmountBALANCES,
      December 31, 2007
            
            
            2,123,440
            
            
            $
            3,028,515
            
            
            $
            (34,156
            )
            
            $
            6,536,796
            
            
            $
            9,531,155Common
      Stock options exercised
            
            
            25,685
            
            
            
            281,288
            
            
            
            
            
            
            
            -
            
            
            
            281,288Purchase
      and retirement of Common Stock
            
            
            (32,178
            )
            
            
            (648,597
            )
            
            
            
            
            
            
            -
            
            
            
            (648,597
            )Tax
      benefit of Common Stock options exercised
            
            
            -
            
            
            
            25,791
            
            
            
            
            
            
            
            -
            
            
            
            25,791Dividends
      declared on Common Stock
            
            
            -
            
            
            
            -
            
            
            
            
            
            
            
            (718,378
            )
            
            
            (718,378
            )Stock-based
      compensation expense
            
            
            -
            
            
            
            358,030
            
            
            
            
            
            
            
            -
            
            
            
            358,030Other
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            3,308
            
            
            
            
            
            
            
            3,308Net
      income, six months ended June 30, 2008
            
            
            -
            
            
            
            -
            
            
            
            967,813
            
            
            
            967,813
            
            
            
            967,813Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            971,121BALANCES,
      June 30, 2008
            
            
            2,116,947
            
            
            $
            3,045,027
            
            
            $
            (30,848
            )
            
            $
            6,786,231
            
            
            $
            9,800,410




The
accompanying notes are an integral part of these financial
statements




-
5 -




BIRNER DENTAL MANAGEMENT
      SERVICES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Six
      Months EndedJune
      30,2007
            
            
            2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
            
            $
            1,394,707
            
            
            $
            967,813Adjustments
      to reconcile net income to netcash
      provided by operating activities:Depreciation
      and amortization
            
            
            1,279,179
            
            
            
            1,249,687Stock
      compensation expense
            
            
            352,647
            
            
            
            358,030Provision
      for doubtful accounts
            
            
            295,717
            
            
            
            373,156Provision
      for deferred income taxes
            
            
            11,299
            
            
            
            38,555Changes
      in assets and liabilities net of effectsfrom
      acquisitions:Accounts
      receivable
            
            
            (715,438
            )
            
            
            (667,407
            )Prepaid
      expenses and other assets
            
            
            (25,309
            )
            
            
            (153,938
            )Deferred
      charges and other assets
            
            
            8,333
            
            
            
            10,254Accounts
      payable
            
            
            73,867
            
            
            
            (121,061
            )Accrued
      expenses
            
            
            (184,620
            )
            
            
            (227,669
            )Accrued
      payroll and related expenses
            
            
            439,558
            
            
            
            629,282Income
      taxes payable
            
            
            200,380
            
            
            
            449,919Other
      long-term obligations
            
            
            (35,418
            )
            
            
            (10,520
            )Net
      cash provided by operating activities
            
            
            3,094,902
            
            
            
            2,896,101CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
            
            
            (373,960
            )
            
            
            (535,866
            )Development
      of new dental centers
            
            
            -
            
            
            
            (357,045
            )Net
      cash used in investing activities
            
            
            (373,960
            )
            
            
            (892,911
            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      – line of credit
            
            
            10,431,678
            
            
            
            9,306,369Repayments
      – line of credit
            
            
            (11,963,223
            )
            
            
            (10,113,435
            )Repayments
      – Term Loan
            
            
            (230,000
            )
            
            
            (460,000
            )Repayment
      of long-term debt
            
            
            (33,561
            )
            
            
            -Proceeds
      from exercise of Common Stock options
            
            
            203,050
            
            
            
            281,288Purchase
      and retirement of Common Stock
            
            
            (708,189
            )
            
            
            (648,597
            )Tax
      benefit of Common Stock options exercised
            
            
            87,844
            
            
            
            25,791Common
      Stock cash dividends
            
            
            (595,522
            )
            
            
            (675,962
            )Net
      cash used in financing activities
            
            
            (2,807,923
            )
            
            
            (2,284,546
            )NET
      INCREASE (DECREASE) IN CASH ANDCASH
      EQUIVALENTS
            
            
            (86,981
            )
            
            
            (281,356
            )CASH
      AND CASH EQUIVALENTS, beginning of period
            
            
            888,186
            
            
            
            964,150CASH
      AND CASH EQUIVALENTS, end of period
            
            $
            801,205
            
            
            $
            682,794




The
accompanying notes are an integral part of these financial
statements


-
6 -








BIRNER DENTAL MANAGEMENT
      SERVICES, INC. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(UNAUDITED)Six
      Months EndedJune
      30,2007
            
            
            2008SUPPLEMENTAL
      DISCLOSURE OF CASHFLOW
      INFORMATION:Cash
      paid during the year for interest
            
            $
            247,494
            
            
            $
            171,078Cash
      paid during the year for income taxes
            
            $
            662,300
            
            
            $
            220,000NON-CASH
      ITEM:Gain
      recognized on interst rate swap (net of taxes)
            
            $
            -
            
            
            $
            3,308




The
accompanying notes are an integral part of these financial
statements


-
7 -





BIRNER DENTAL MANAGEMENT SERVICES,
INC. AND SUBSIDIARIES


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)


June
30, 2008





(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, 2007.





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, 2008 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, 2008 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.





Effective
April, 1, 2008, the Company has reclassified dentist and hygiene contract labor
expenses from clinical salaries and benefits to net revenue and has adjusted
prior periods in this filing.  The reclassification had no effect on
contribution from dental offices or net income.  The reclassification
for the quarter ended June 30, 2007 was approximately $113,000, for the six
months ended June 30, 2007 was approximately $261,000, for the quarter ended
June 30, 2008 was approximately $185,000 and for the six months ended June 30,
2008 was approximately $370,000.








(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 Management Agreement. The assigned value of the Management Agreement is
amortized using the straight-line method over a period of 25
years.  Amortization was $195,015 and $194,932 for the quarters ended
June 30, 2008 and 2007, respectively. Amortization was $389,975 and $389,808 for
the six months ended June 30, 2008 and 2007, respectively.





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





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





Stock
Options





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


-
8 -





The Company adopted SFAS
123(R) using the modified prospective method. Under this transition method,
stock-based compensation expense for the quarter and six months ended
June 30, 2008 includes: (i) compensation expense for all stock-based
compensation awards granted prior to, but not yet vested as of January 1, 2006,
based on the grant date fair value estimated in accordance with the original
provision of SFAS 123; and (ii) compensation expense for all stock-based
compensation awards granted subsequent to January 1, 2006, based on the grant
date fair value estimated in accordance with the provision of SFAS 123(R). The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. Total stock-based compensation expense
included in the Company’s statement of income for the quarters ended June 30,
2008 and 2007 was approximately $185,000 and $101,000, respectively. Total
stock-based compensation expense included in the Company’s statement of income
for the six months ended June 30, 2008 and 2007 was approximately $358,000 and
$191,000, 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, 2008 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, 2008 for
the expected option term. From January 1, 2006 through December 31, 2007, the
expected option term was calculated using the “simplified” method permitted by
Staff Accounting Bulletin 107.   Starting January 1, 2008, the
expected option term was calculated based on historical experience of the terms
of previous options.




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, 2008, the Company had no
unrecognized tax benefits which would affect the effective tax rate if
recognized, and as of June 30, 2008, the Company had no accrued interest or
penalties related to uncertain tax positions.




On
initial application, FIN 48 was applied to all tax positions for which the
statute of limitations remained open. The tax years 2004-2007 remain open to
examination by taxing jurisdictions to which the Company is subject. The IRS
report issued in July 2006 made no changes to the Company’s federal income tax
return for 2004. No other federal or state examinations are ongoing or have been
performed in the past three years.


SFAS
160
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests
in Consolidated Financial Statements” (“SFAS 160”). In SFAS 160, the FASB
established accounting and reporting standards that require noncontrolling
interests to be reported as a component of equity, changes in a parent’s
ownership interest while the parent retains its controlling interest to be
accounted for as equity transactions, and any retained noncontrolling equity
investment upon the deconsolidation of a subsidiary to be initially measured at
fair value. SFAS 160 is effective for annual periods beginning on or after
December 15, 2008. Retroactive application of SFAS 160 is prohibited. The
Company is currently evaluating the requirements of SFAS 160 and the
potential impact on our financial statements.
  SFAS
141(R)
  In
December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business
Combinations” (“SFAS 141(R)”). In SFAS 141(R), the FASB retained the
fundamental requirements of Statement No. 141 to account for all business
combinations using the acquisition method (formerly the purchase method) and for
an acquiring entity to be identified in all business combinations. However, the
new standard requires the acquiring entity in a business combination to
recognize all (and only) the assets acquired and liabilities assumed in the
transaction; establishes the acquisition-date fair value as the measurement
objective for all assets acquired and liabilities assumed; and requires the
acquirer to disclose to investors and other users all of the information they
need to evaluate and understand the nature and financial effect of the business
combination. SFAS 141(R) is effective for annual periods beginning on or
after December 15, 2008. The Company is currently evaluating the
requirements of SFAS 141(R) and the potential impact on our financial
statements.
  -
9 -




(3) EARNINGS PER
SHARE





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





Quarters
      Ended June 30,2007
            
            
            2008Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS:Net
      income available to shares of Common Stock
            
            $
            611,941
            
            
            
            2,123,900
            
            
            $
            0.29
            
            
            $
            450,257
            
            
            
            2,107,415
            
            
            $
            0.21Effect
      of dilutive shares of Common Stock from stock options and
      warrants
            
            
            -
            
            
            
            186,203
            
            
            
            (0.03
            )
            
            
            -
            
            
            
            71,401
            
            
            
            -Diluted
      EPS:Net
      income available to shares of Common Stock
            
            $
            611,941
            
            
            
            2,310,103
            
            
            $
            0.26
            
            
            $
            450,257
            
            
            
            2,178,816
            
            
            $
            0.21








The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended June 30, 2008 and
2007 relates to the effect of 71,401 and 186,203 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation.  For the quarter ended June 30,
2008, options to purchase 276,693 shares of the Company’s Common Stock were not
included in the computation of dilutive income per share because their effect
was anti-dilutive.





Six
      Months Ended June 30,2007
            
            
            2008Income
            
            
            Shares
            
            
            Per
      Share Amount
            
            
            Income
            
            
            Shares
            
            
            Per
      Share AmountBasic
      EPS:Net
      income available to shares of Common Stock
            
            $
            1,394,707
            
            
            
            2,125,131
            
            
            $
            0.66
            
            
            $
            967,813
            
            
            
            2,109,250
            
            
            $
            0.46Effect
      of dilutive shares of Common Stock from stock options and
      warrants
            
            
            -
            
            
            
            182,698
            
            
            
            (0.06
            )
            
            
            
            
            
            
            79,333
            
            
            
            (0.02
            )Diluted
      EPS:Net
      income available to shares of Common Stock
            
            $
            1,394,707
            
            
            
            2,307,829
            
            
            $
            0.60
            
            
            $
            967,813
            
            
            
            2,188,583
            
            
            $
            0.44




The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 2008 and
2007 relates to the effect of 79,333 and 182,698 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation. For the six months ended June 30, 2008,
options to purchase 260,023 shares of the Company’s Common Stock were not
included in the computation of dilutive income per share because their effect
was anti-dilutive.


-
10 -


(4) STOCK-BASED COMPENSATION
PLANS





At the
Company’s June 2005 annual meeting of shareholders, the shareholders approved
the 2005 Equity Incentive Plan (“2005 Plan”). The 2005 Plan was amended at the
June 2007 annual meeting of shareholders to reserve 425,000 shares of Common
Stock for issuance. The 2005 Plan provides for the grant of incentive stock
options, restricted stock, restricted stock units and stock grants to employees
(including officers and employee-directors) and non-statutory stock options to
employees, directors and consultants. The objectives of this plan include
attracting and retaining the best personnel, providing for additional
performance incentives by providing employees with the opportunity to acquire
Common Stock. As of June 30, 2008, there were 70,632 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, 2008, there were 71,638 vested options, 211,644 unvested
options and 60,000 vested 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, 2008, there were 142,000 vested
options outstanding and 11,500 unvested options outstanding under the Employee
Plan.





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





Quarters
      Ended
            
            Six
      Months EndedJune
      30,
            
            June
      30,Valuation
      Assumptions
            
            2007
      (6)
            
            2008
      (6)
            
            2007
            
            2008Expected
      life
            
            -
            
            -
            
            4.5
            (1)
            4.1
            (2)Risk-free
      interest rate (3)
            
            -
            
            -
            
            4.75%
            
            2.30%Expected
      volatility (4)
            
            -
            
            -
            
            58%
            
            58%Expected
      dividend yield
            
            -
            
            -
            
            3.07%
            
            3.28%Expected
      Forteiture (5)
            
            -
            
            -
            
            5.32%
            
            2.00%


_____________________________




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


(2)
            The
      expected life, in years, of stock options is estimated based on historical
      experience.


(3)
            The
      risk-free interest rate is based on U.S. Treasury bills whose term is
      consistent with the expected life of the stock
  options.


(4)
            The
      expected volatility is estimated based on historical and current stock
      price data for the Company.


(5)
              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.


6)
              The
      Company did not issue any options during the quarters ended June 30, 2007
      or June 30, 2008.




-
11 -


A summary
of option activity as of June 30, 2008, 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, 2007
            
            377,133
            
            $         14.36
            
            $  5.50
      - $21.85
            
            3.7
            
            2,677Granted
            
            98,000
            
            $         20.69
            
            $19.40
      - $21.00Exercised
            
            (25,685)
            
            $         10.95
            
            $  7.88
      - $19.54Forfeited
            
            (12,666)
            
            $         16.36
            
            $12.50
      - $19.54Outstanding
      at June 30, 2008
            
            436,782
            
            $         15.92
            
            $  5.50
      - $21.85
            
            3.9
            
            $1,161Exercisable
      at June 30, 2008
            
            213,638
            
            $         12.62
            
            $  5.50
      - $21.85
            
            2.4
            
            $1,086




The
weighted average grant date fair values of options granted were $7.76 per option
and $9.16 per option during the six months ended June 30, 2008 and 2007,
respectively.  Net cash proceeds from the exercise of stock options
during the six months ended June 30, 2008 and 2007 were $281,288 and $203,049,
respectively. The associated income tax benefit from stock options exercised
during the six months ended June 30, 2008 and 2007 was $25,791 and $87,844,
respectively. As of the date of exercise, the total intrinsic values of options
exercised during the six months ended June 30, 2008 and 2007 were $196,856 and
$281,211, respectively. As of June 30, 2008, there was $1.5 million of total
unrecognized compensation expense related to non-vested stock options, which is
expected to be recognized over a weighted average period of 2.2
years.





(5) RESTRICTED STOCK
GRANT





On July
1, 2005, the Company granted 60,000 shares of restricted Common Stock to the
Company’s Chairman and Chief Executive Officer (the “Employee”) under the 2005
Plan. In connection with the grant of restricted stock, the Company agreed to
reimburse the Employee an amount equal to the tax liability associated with the
grant. Such reimbursement totaled approximately $586,000 which was recognized as
an expense during the third quarter of 2005. As of December 31, 2007, all
compensation expense related to the restricted stock grant had been recognized.
The final 20,000 shares of restricted stock vested on January 1,
2008.  Beginning June 30, 2007, the Company reclassified deferred
equity compensation to Common Stock.





A summary
of the vesting status of the shares of restricted stock as of June 30, 2008, and
the changes during the six months then ended, is presented below:




Six
      Months EndedJune
      30, 2008Number
      of Restricted Shares
              
              Weighted-Average
                Grant-Date
      Fair ValueNon-vested
      at December 31, 2007
              
              20,000
              
              $13.51Granted
              
              -
              
              -Vested
              
              (20,000)
              
              13.51Forfeited
              
              -
              
              -Non-vested
      at June 30, 2008
              
              -
              
              $13.51
  -
12 -





(6) DIVIDENDS





Since
March 9, 2004, the Company has declared the following quarterly cash
dividends.




Divdend
      Declaration Date
            
            Quarterly
      Dividend
              Declared
      per ShareMarch
      9, 2004
            
            0.0375February
      10, 2005
            
            0.10January
      10, 2006
            
            0.13January
      19, 2007
            
            0.15January
      17, 2008
            
            0.17





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





(7) LINE OF
CREDIT





On April
22, 2008, the Company amended its bank line of credit (“Credit
Facility”).  The amended Credit Facility extends the expiration of the
credit agreement from May 31, 2009 to May 31, 2010. 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, 2008, the Company had $1.4
million outstanding and $5.6 million available for borrowing under the
Credit Facility. This consisted of $1.4 million outstanding under the LIBOR rate
option and $47,000 outstanding under the Base Rate option. The Credit Facility
requires the Company to comply with certain covenants and financial ratios. At
June 30, 2008, 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, 2008 were approximately $6.8 million,
and the Company had a working capital deficit on that date of approximately $1.4
million. During the six months ended June 30, 2008, the Company had capital
expenditures of approximately $893,000, paid dividends of approximately $676,000
and purchased approximately $649,000 of Common Stock while decreasing total bank
debt by approximately $1.3 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
“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 Tender Offer in
accordance with applicable securities laws. These shares represented
approximately 9.2% of the shares of Common Stock of the Company outstanding as
of September 30, 2006. The Tender Offer was funded from a $4.6 million term loan
(“Term Loan”). Under the Term Loan, $2.3 million was borrowed at a fixed
interest rate of 7.05% and the remaining $2.3 million was borrowed at a floating
interest rate of LIBOR plus 1.5%. As of June 30, 2008, the rate was 4.30%. The
principal amount borrowed is repaid quarterly in 20 equal payments of $230,000
plus interest beginning December 31, 2006. The Term Loan matures on September
30, 2011.  As of June 30, 2008, $1.5 million was outstanding at the
fixed rate of 7.05% and $1.5 million was outstanding at the LIBOR plus 1.5%
floating rate.  The Term Loan requires the
Company to comply with certain covenants and financial ratios. At June
30, 2008, the Company was in full compliance with all of its covenants under the
Term Loan.


-
13 -







(10)SUBSEQUENT
EVENTS




On July
16, 2008, the Company purchased 89,201 shares of its Common Stock for total
consideration of approximately $1.4 million.  On July 30, 2008, the
Board of Directors of the Company approved an additional $1 million of stock
repurchases.  On August 14, 2008, the Company purchased 82,473 shares
of its Common Stock in a privately-negotiated transaction for total
consideration of approximately $1.2 million, which leaves approximately $330,000
of the authorized amount available for stock repurchases.




-
14 -


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




Forward-Looking
Statements




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





Such
forward-looking statements involve certain risks and uncertainties that could
cause actual results to differ materially from anticipated results. These risks
and uncertainties include regulatory constraints, changes in laws or regulations
concerning the practice of dentistry or dental practice management companies,
the availability of suitable new markets and suitable locations within such
markets, changes in the Company’s operating or expansion strategy, the general
economy of the United States and the specific markets in which the Company’s
Offices are located or are proposed to be located, trends in the health care,
dental care and managed care industries, as well as the risk factors set forth
in Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the
fiscal year ended December 31, 2007, 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, 2007 and 2008. 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 61 Offices in Colorado, New
Mexico and Arizona staffed by 79 general dentists and 31 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 develops a de
novo Office or acquires an existing dental practice.  These
responsibilities are set forth in a Management Agreement, as described
below.





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




Critical
Accounting Policies




The
Company’s critical accounting policies are set forth in its Annual Report on
Form 10-K for the year ended December 31, 2007.  There have been no
changes to these policies since the filing of that report.




-
15 -


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 and
contract labor 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.





-
16 -


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, 2008, Revenue decreased $185,000, or 1.2% to $14.9
million compared to $15.1 million for the quarter ended June 30,
2007.  For the quarter ended June 30, 2008, net revenue decreased
$221,000, or 2.2% to $10.0 million compared to $10.3 million for the quarter
ended June 30, 2007.  This decrease is attributable to a decrease in
net revenue from general dentistry of $319,000 offset  by an increase
in net revenue from specialty dentistry of $98,000.  The Company
attributes the decreases in Revenue and net revenue to general weakness in the
economy in the Company’s markets as reflected by a reduced number of patient
procedures and in particular fewer crown and bridge procedures.





For the
quarter ended June 30, 2008, net income decreased 26.4 % to $450,000, or $.21
per share compared to $612,000, or $.26 per share for the quarter ended June 30,
2007.





For the
six months ended June 30, 2008, Revenue decreased $665,000, or 2.2% to $30.2
million compared to $30.8 million for the six months ended June 30,
2007.  For the six months ended June 30, 2008, net revenue decreased
$707,000, or 3.4%, to $20.2 million compared to $21.0 million for the six months
ended June 30, 2007.  This decrease is attributable to a decrease in
net revenue from general dentistry of $989,000 offset  by an increase
in net revenue from specialty dentistry of $282,000.  The Company
attributes the decreases in Revenue and net revenue to general weakness in the
economy in the Company’s markets as reflected by a reduced number of patient
procedures and in particular fewer crown and bridge procedures.





For the
six months ended June 30, 2008, net income decreased 30.6% to $968,000, or $.44
per share compared to $1.4 million or $.60 per share for the six months ended
June 30, 2007.





The
Company continues to generate strong cash flow from
operations.  During the first six months of 2008, the Company
purchased $649,000 of its outstanding Common Stock, invested $893,000 in capital
expenditures, paid $676,000 in dividends, and repaid $460,000 of the Term Loan
while decreasing borrowings under its Credit Facility by $807,000.





-
17 -


The
Company’s earnings before interest, taxes, depreciation, amortization and non
cash expense associated with stock-based compensation (“Adjusted EBITDA”)
decreased $738,000, or 17.6% to $3.4 million for the six months ended June 30,
2008 compared to $4.2 million for the corresponding six month period in 2007.
Although Adjusted EBITDA is not a GAAP measure of performance or liquidity, the
Company believes that it may be useful to an investor in evaluating the
Company’s ability to meet future debt service, capital expenditures and working
capital requirements. However, investors should not consider these measures in
isolation or as a substitute for operating income, cash flows from operating
activities or any other measure for determining the Company’s operating
performance or liquidity that is calculated in accordance with GAAP. In
addition, because Adjusted EBITDA is not calculated in accordance with GAAP, it
may not necessarily be comparable to similarly titled measures employed by other
companies. A reconciliation of Adjusted EBITDA to net income can be made by
adding depreciation and amortization expense - Offices, depreciation and
amortization expense – corporate, stock-based compensation expense, interest
expense, net and income tax expense to net income as in the following
table.





Quarters
            
            
            Six
      MonthsEnded
      June 30,
            
            
            Ended
      June 30,2007
            
            
            2008
            
            
            2007
            
            
            2008RECONCILIATION
      OF ADJUSTED EBITDA:Net
      income
            
            $
            611,941
            
            
            $
            450,257
            
            
            $
            1,394,707
            
            
            $
            967,813Add
      back:Depreciation
      and amortization - Offices
            
            
            610,526
            
            
            
            602,018
            
            
            
            1,221,079
            
            
            
            1,203,033Depreciation
      and amortization - Corporate
            
            
            27,275
            
            
            
            23,186
            
            
            
            58,103
            
            
            
            46,654Stock-based
      compensation expense
            
            
            181,553
            
            
            
            184,618
            
            
            
            352,647
            
            
            
            358,030Interest
      expense, net
            
            
            89,166
            
            
            
            58,369
            
            
            
            195,319
            
            
            
            135,997Income
      tax expense
            
            
            439,976
            
            
            
            326,057
            
            
            
            961,822
            
            
            
            734,265Adjusted
      EBITDA
            
            $
            1,960,437
            
            
            $
            1,644,505
            
            
            $
            4,183,677
            
            
            $
            3,445,792





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.





Quarters
      Ended
            
            
            Six
      Months EndedJune
      30,
            
            
            June
      30,2007
            
            
            2008
            
            
            2007
            
            
            2008Total
      dental group practice revenue
            
            $
            15,101,800
            
            
            $
            14,916,479
            
            
            $
            30,835,494
            
            
            $
            30,170,730Less
      - amounts retained by dental Offices
            
            
            (4,836,230
            )
            
            
            (4,872,318
            )
            
            
            (9,879,587
            )
            
            
            (9,921,621
            )Net
      revenue
            
            $
            10,265,570
            
            
            $
            10,044,161
            
            
            $
            20,955,907
            
            
            $
            20,249,109




-
18 -


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 SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF INCOME(UNAUDITED)Quarters
      Ended
            
            Six
      Months EndedJune
      30,
            
            June
      30,2007
            
            2008
            
            2007
            
            2008NET
      REVENUE:
            100.0
      %
            
            100.0
      %
            
            100.0
      %
            
            100.0
      %DIRECT
      EXPENSES:Clinical
      salaries and benefits
            35.3
      %
            
            37.3
      %
            
            34.9
      %
            
            37.9
      %Dental
      supplies
            5.8
      %
            
            6.2
      %
            
            5.5
      %
            
            6.0
      %Laboratory
      fees
            6.7
      %
            
            7.4
      %
            
            6.5
      %
            
            6.9
      %Occupancy
            11.1
      %
            
            12.0
      %
            
            10.9
      %
            
            11.8
      %Advertising
      and marketing
            2.6
      %
            
            1.2
      %
            
            2.0
      %
            
            1.1
      %Depreciation
      and amortization
            5.9
      %
            
            6.0
      %
            
            5.8
      %
            
            5.9
      %General
      and administrative
            10.9
      %
            
            12.6
      %
            
            11.0
      %
            
            12.0
      %78.4
      %
            
            82.6
      %
            
            76.6
      %
            
            81.7
      %Contribution
      from dental offices
            21.6
      %
            
            17.4
      %
            
            23.4
      %
            
            18.3
      %CORPORATE
      EXPENSES:General
      and administrative
            10.3
      %
            
            8.9
      %
            
            11.0
      %
            
            9.0
      %Depreciation
      and amortization
            0.3
      %
            
            0.2
      %
            
            0.3
      %
            
            0.2
      %Operating
      income
            11.1
      %
            
            8.3
      %
            
            12.2
      %
            
            9.1
      %Interest
      expense
            0.9
      %
            
            0.6
      %
            
            0.9
      %
            
            0.7
      %Income
      before income taxes
            10.2
      %
            
            7.7
      %
            
            11.2
      %
            
            8.4
      %Income
      tax expense
            4.3
      %
            
            3.2
      %
            
            4.6
      %
            
            3.6
      %Net
      income
            6.0
      %
            
            4.5
      %
            
            6.7
      %
            
            4.8
      %







-
19 -


Quarter
Ended June 30, 2008 Compared to Quarter Ended June 30, 2007:




Net revenue. For the quarter
ended June 30, 2008, net revenue decreased $221,000, or 2.2%, to $10.0 million
compared to $10.3 million for the quarter ended June 30, 2007. This decrease is
attributable to a decrease in net revenue from general dentistry of $319,000
offset  by an increase in net revenue from specialty dentistry of
$98,000.  The Company attributes the decrease to general weakness in
the economy in the Company’s markets as reflected by a reduced number of patient
procedures and in particular fewer crown and bridge procedures.





Clinical salaries and
benefits. For the quarter ended June 30, 2008, clinical salaries and
benefits increased $121,000, or 3.3%, to $3.7 million compared to $3.6
million for the quarter ended June 30, 2007. This increase was primarily related
to increased health insurance premiums and increased wages for support
staff.  The increased wages are partially due to annual wage increases
that became effective February 1, 2008.  As a percentage of net
revenue, clinical salaries and benefits increased to 37.3% for the quarter ended
June 30, 2008 compared to 35.3% for the quarter ended June 30,
2007.




Dental supplies. For the
quarter ended June 30, 2008, dental supplies increased to $624,000 compared to
$594,000 for the quarter ended June 30, 2007, an increase of $30,000 or 5.1%.
This increase was related to the addition of one de novo Office that opened in
May 2008 along with new dentists requesting new dental supplies.  As a
percentage of net revenue, dental supplies increased to 6.2% for the quarter
ended June 30, 2008 compared to 5.8% for the quarter ended June 30,
2007.




Laboratory fees. For the
quarter ended June 30, 2008, laboratory fees increased to $739,000 compared to
$689,000 for the quarter ended June 30, 2007, an increase of $50,000 or 7.2%.
This increase in primarily related to an increase in implant procedures
performed by the specialty dentists.  As a percentage of net revenue,
laboratory fees increased to 7.4% for the quarter ended June 30, 2008 compared
to 6.7% for the quarter ended June 30, 2007.




Occupancy. For the quarter
ended June 30, 2008, occupancy expense increased to $1.2 million compared to
$1.1 million for the quarter ended June 30, 2007, an increase of $62,000 or
5.4%.This
increase was related to one de
novo Office that opened in May 2008, increased rental payments resulting
from the renewal of Office leases at current market rates for Offices whose
leases expired subsequent to June 30, 2007 and increased utility
costs.  As a percentage of net revenue, occupancy expense increased to
12.0% for the quarter ended June 30, 2008 compared to 11.1% for the quarter
ended June 30, 2007.




Advertising and marketing.
For the quarter ended June 30, 2008, advertising and marketing expense decreased
to $119,000 compared to $267,000 for the quarter ended June 30, 2007, a decrease
of $148,000 or 55.4%.  This decrease is attributable to the Company’s
television advertising campaign in the Denver, Colorado market in the quarter
ending June 30, 2007 that was not conducted in the quarter ending June 30,
2008.  As a percentage of net revenue, advertising and marketing
expense decreased to 1.2% for the quarter ended June 30, 2008 compared to 2.6%
for the quarter ended June 30, 2007.




Depreciation and
amortization-Offices.For the quarter ended June 30, 2008, depreciation
and amortization expenses attributable to the Offices decreased to $602,000
compared to $611,000 for the quarter ended June 30, 2007, a decrease of $9,000
or 1.4%. As a percentage of net revenue, depreciation and amortization expense
attributable to the Offices increased to  6.0% for the quarter ended
June 30, 2008 compared to 5.9% for the quarter ended June 30, 2007.





General and
administrative-Offices. For the quarter ended June 30, 2008, general and
administrative expenses attributable to the Offices increased to $1.3 million
compared to $1.1 million for the quarter ended June 30, 2007, an increase of
$148,000 or 13.2%. This increase is primarily related to increased bad debt
expense and professional fees along with the cost of opening one de novo Office in May
2008.  As a percentage of net revenue, general and administrative
expenses attributable to the Offices increased to 12.6% for the quarter ended
June 30, 2008 compared to 10.9% for the quarter ended June 30,
2007.




Contribution from dental
Offices.   As a result of the above, contribution from
dental Offices decreased to $1.7 million for the quarter ended June 30, 2008
compared to $2.2 million for the quarter ended June 30, 2007, a decrease of
$475,000 or 21.4%. As a percentage of net revenue, contribution from dental
Offices decreased to 17.4% for the quarter ended June 30, 2008 compared to 21.6%
for the quarter ended June 30, 2007.




Corporate expenses - general and
administrative. For the quarter ended June 30, 2008, corporate expenses -
general and administrativedecreased to $889,000
compared to $1.1 million for the quarter ended June 30, 2007, a decrease of
$165,000 or 15.6%.  This decrease is primarily related to a decrease
of $167,000 in executive bonuses.  As a percentage of net revenue,
corporate expenses - general and administrative decreased to 8.9% for the
quarter ended June 30, 2008 compared to 10.3% for the quarter ended June 30,
2007.




-
20 -






Corporate expenses - depreciation
and amortization. For the quarter ended June 30, 2008, corporate expenses
- depreciation and amortization decreased to $23,000 compared to $27,000 for the
quarter ended June 30, 2007, a decrease of $4,000 or 15.0%. 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 decreased to
0.2% for the quarter ended June 30, 2008 compared to .3% for the quarter ended
June 30, 2007.




Operating
income.   As a result of the matters discussed above, the
Company’s operating income decreased to $835,000 million for the quarter ended
June 30, 2008 compared to $1.1 million for the quarter ended June 30, 2007, a
decrease of $306,000 or 26.9%.  As a percentage of net revenue,
operating income decreased to 8.3% for the quarter ended June 30, 2008 compared
to 11.1% for the quarter ended June 30, 2007.




Interest expense. For the
quarter ended June 30, 2008, interest expense decreased to $58,000 compared to
$89,000 for the quarter ended June 30, 2007, a decrease of $31,000 or 34.5%.
This decrease in interest expense is attributable to a reduction in the $4.6
million term loan (“Term Loan”) that was used to finance the Company’s “dutch
auction” tender offer (the “Tender Offer”) completed in October 2006, reduced
borrowings on the amended bank line of credit (“Credit Facility”) and reduced
interest rates.  As a percentage of net revenue, interest expense
decreased to 0.6% for the quarter ended June 30, 2008 compared to 0.9% for the
quarter ended June 30, 2007.




Net
income.   As a result of the above, the Company reported
net income of $450,000 for the quarter ended June 30, 2008 compared to net
income of $612,000 for the quarter ended June 30, 2007, a decrease of $162,000
or 26.4%. Net income for the quarter ended June 30, 2008 was net of income tax
expense of $326,000, while net income for the quarter ended June 30, 2007 was
net of income tax expense of $440,000. As a percentage of net revenue, net
income decreased to 4.5% for the quarter ended June 30, 2008 compared to 6.0%
for the quarter ended June 30, 2007.




Six
Months Ended June 30, 2008 Compared to Six Months Ended June 30,
2007:




Net revenue. For the six
months June 30, 2008, net revenue decreased $707,000, or 3.4%, to $20.2 million
compared to $21.0 million for the six months ended June 30, 2007. This decrease
is attributable to a decrease in net revenue from general dentistry of $989,000
offset  by an increase in net revenue from specialty dentistry of
$282,000.  The Company attributes the decrease to general weakness in
the economy in the Company’s markets as reflected by a reduced number of patient
procedures and in particular fewer crown and bridge procedures.





Clinical salaries and
benefits. For the six months ended June 30, 2008, clinical salaries and
benefits increased $354,000, or 4.8%, to $7.7 million compared to $7.3
million for the six months ended June 30, 2007. This increase was primarily due
to increased costs related to employee benefits including accrued vacation,
health insurance premiums and Company contribution to the 401(k) employee
savings plan. Wages for support staff also increased, partially due to annual
wage increases that became effective February 1, 2008.  As a
percentage of net revenue, clinical salaries and benefits increased to 37.9% for
the six months ended June 30, 2008 compared to 34.9% for the six months ended
June 30, 2007.




Dental supplies. For the six
months ended June 30, 2008 and 2007, dental supplies remained constant at $1.2
million.  As a percentage of net revenue, dental supplies increased to
6.0% for the six months ended June 30, 2008 compared to 5.5% for the six months
ended June 30, 2007.




Laboratory fees. For the six
months ended June 30, 2008 and 2007, laboratory fees remained constant at $1.4
million. As a percentage of net revenue, laboratory fees increased to 6.9% for
the six months ended June 30, 2008 compared to 6.5% for the six months ended
June 30, 2007.




Occupancy. For the six months
ended June 30, 2008, occupancy expense increased $115,000 or 5.0% to $2.4
million compared to $2.3 million for the six months ended June 30,
2007.  This increase was related to the one de novo Office that opened in
May 2008, increased rental payments resulting from the renewal of Office leases
at current market rates for Offices whose leases expired subsequent to June 30,
2007 and increased utility costs.   As a percentage of net
revenue, occupancy expense increased to 11.8% for the six months ended June 30,
2008 compared to 10.9% for the six months ended June 30, 2007.




-
21 -


Advertising and marketing.
For the six months ended June 30, 2008, advertising and marketing expense
decreased to $227,000 compared to $416,000 for the six months ended June 30,
2007, a decrease of $190,000 or 45.6%.  This decrease is attributable
to the Company’s television advertising campaign in the Denver, Colorado market
in the six months ending June 30, 2007 that was not conducted in the six months
ending June 30, 2008.  As a percentage of net revenue, advertising and
marketing expense decreased to 1.1% for the six months ended June 30, 2008
compared to 2.0% for the six months ended June 30, 2007.




Depreciation and
amortization-Offices.For the six months ended June 30, 2008 and 2007,
depreciation and amortization expenses attributable to the Offices remained
constant at $1.2 million. As a percentage of net revenue, depreciation and
amortization expenses attributable to the Offices increased to 5.9% for the six
months ended June 30, 2008 compared to 5.8% for the six months ended June 30,
2007.





General and
administrative-Offices. For the six months ended June 30, 2008, general
and administrative expenses attributable to the Offices increased to $2.4
million compared to $2.3 million for the six months ended June 30, 2007, an
increase of $141,000 or 6.2%. This increase is primarily related to increased
bad debt expense, office supplies, equipment maintenance and professional fees
along with the cost of opening one de novo Office in May 2008
partially offset by decreased malpractice insurance and recruiting
costs.  As a percentage of net revenue, general and administrative
expenses attributable to the Offices increased to 12.0% for the six months ended
June 30, 2008 compared to 11.0% for the six months ended June 30,
2007.




Contribution from dental
Offices.   As a result of the above, contribution from
dental Offices decreased $1.2 million or 24.3%, to $3.7 million for the six
months ended June 30, 2008 compared to $4.9 million for the six months ended
June 30, 2007. As a percentage of net revenue, contribution from dental Offices
decreased to 18.3% for the six months ended June 30, 2008 compared to 23.4% for
the six months ended June 30, 2007.




Corporate expenses - general and
administrative. For the six months ended June 30, 2008, corporate
expenses - general and administrativedecreased to $1.8
million compared to $2.3 million for the six months ended June 30, 2007, a
decrease of $470,000 or 20.4%. This decrease is primarily related to a decrease
of $492,000 in executive bonuses. As a percentage of net revenue, corporate
expenses - general and administrative decreased to 9.0% for the six months ended
June 30, 2008 compared to 11.0% for the six months ended June 30,
2007.




Corporate expenses - depreciation
and amortization. For the six months ended June 30, 2008, corporate
expenses - depreciation and amortization decreased to $47,000 compared to
$58,000 for the six months ended June 30, 2007, a decrease of $11,000 or 19.7%.
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 decreased to 0.2% for the six months ended June 30, 2008 compared
to .3% for the six months ended June 20, 2007.




Operating
income.   As a result of the matters discussed above, the
Company’s operating income decreased to $1.8 million for the six months ended
June 30, 2008 compared to $2.6 million for the six months ended June 30, 2007, a
decrease of $714,000 or 28.0%. As a percentage of net revenue, operating income
decreased to 9.1% for the six months ended June 30, 2008 compared to 12.2% for
the six months ended June 30, 2007.




Interest expense. For the six
months ended June 30, 2008, interest expense decreased to $136,000 compared to
$195,000 for the six months ended June 30, 2007, a decrease of $59,000 or 30.4%.
This decrease in interest expense is attributable to a reduction in the Term
Loan that was used to finance the Tender Offer completed in October 2006,
reduced borrowings on the Credit Facility and reduced interest
rates.  As a percentage of net revenue, interest expense decreased to
0.7% for the six months ended June 30, 2008 compared to 0.9% for the six months
ended June 30, 2007.




Net
income.   As a result of the above, the Company reported
net income of $968,000 for the six months ended June 30, 2008 compared to net
income of $1.4 million for the six months ended June 30, 2007, a decrease of
$427,000 or 30.6%.  Net income for the six months ended June 30, 2008
was net of income tax expense of $734,000, while net income for the six months
ended June 30, 2007 was net of income tax expense of $962,000. As a percentage
of net revenue, net income decreased to 4.8% for the quarter ended June 30, 2008
compared to 6.7% for the quarter ended June 30, 2007.




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, 2008, the Company had a working capital deficit of approximately $1.4
million and retained earnings of $6.8 million.




-
22 -







Net cash
provided by operating activities was approximately $2.9 million and $3.1 million
for the six months ended June 30, 2008 and 2007, respectively.  During
the 2008 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 $281,000 and
an increase in income taxes payable of approximately $450,000, offset by an
increase in accounts receivable of $667,000 and an increase in prepaid expenses
and other assets of approximately $154,000.  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.




Net cash
used in investing activities was approximately $893,000 and $374,000 for the six
months ended June 30, 2008 and 2007, respectively. For the six months ended June
30, 2008, the Company invested approximately $536,000 in the purchase of
additional equipment, which includes $163,000 to upgrade the Company’s payroll
time collection system, $157,000 to remodel an Office and $357,000 in the
development of a de
novo Office. For the six months ended June 30, 2007, the Company invested
approximately $374,000 in the purchase of additional equipment.




Net cash
used in financing activities was approximately $2.3million
for the six months ended June 30, 2008 and $2.8 million for the six months ended
June 30, 2007. During the six months ended June 30, 2008, net cash used in
financing activities was comprised of approximately $649,000 used in the
purchase and retirement of Common Stock, approximately $676,000 for the payment
of dividends, approximately $807,000 used to pay down the Credit Facility and
$460,000 for the repayment of the Term Loan, partially offset by approximately
$281,000 in proceeds from the exercise of Common Stock options and $26,000 in
tax benefit of Common Stock options exercised.  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 the Term Loan and other 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.




On April
22, 2008, the Company amended the Credit Facility.  The amended Credit
Facility extends the expiration of the credit agreement from May 31, 2009 to May
31, 2010. 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, 2008, the Company had $1.4 million outstanding
and $5.6 million available for borrowing under the Credit Facility. This
consisted of $1.4 million outstanding under the LIBOR rate option and $47,000
outstanding under the Base Rate option.The Credit Facility
requires the Company to comply with certain covenants and financial ratios. At
June 30, 2008, the Company was in full compliance with all of its covenants
under the Credit Facility.




On
October 5, 2006, the Company entered into a $4.6 million Term Loan to finance
the 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 $2.3 million borrowed at a fixed rate was
achieved by the Company by entering into a fixed for floating interest rate swap
and the Company designates such swapas a cash flow hedge
under SFAS No. 133.The principal amount borrowed will be paid quarterly
in 20 equal payments of approximately $230,000 plus interest beginning December
31, 2007. The Term Loan expires September 30, 2011. The Term Loan requires the
Company to comply with certain covenants and financial ratios. At June 30, 2008,
the Company was in full compliance with all of its covenants under the Term
Loan.





-
23 -




As of
June 30, 2008, the Company had the following debt and lease
obligations:


Payments
      due by PeriodTotal
              
              
              Less
      than 1 year
              
              
              1-3
      years
              
              
              3-5
      years
              
              
              More
      than 5 yearsLong-term
      debt obligations
              
              $
              4,437,445
              
              
              $
              920,000
              
              
              $
              3,287,445
              
              
              $
              230,000
              
              
              $
              -Operating
      lease obligations
              
              
              9,636,968
              
              
              
              3,106,032
              
              
              
              4,622,047
              
              
              
              1,851,069
              
              
              
              57,820Total
              
              $
              14,074,413
              
              
              $
              4,026,032
              
              
              $
              7,909,492
              
              
              $
              2,081,069
              
              
              $
              57,820




The Company from time to
time may purchase its Common Stock on the open market.During the quarter
ended June 30, 2008, the Company, in two separate transactions, purchased 6,858
shares of its Common Stock for total consideration of approximately $127,000 at
prices ranging from $18.00 to $18.68.  On January 23, 2008, the
Company announced that the Board of Directors had approved an increase in the
authorized amount up to $1 million of stock repurchases.  On May 1,
2008, the Company’s Board of Directors approved up to $2 million of stock
repurchases.  On July 16, 2008, the Company purchased 89,201 shares of
its Common Stock for total consideration of approximately $1.4
million.  On July 30, 2008, the Board of Directors of the Company
approved an additional $1 million of stock repurchases.  On August 14,
2008, the Company purchased 82,473 shares of its Common Stock in a
privately-negotiated transaction for total consideration of approximately $1.2
million, which leaves approximately $330,000 of the authorized amount available
for stock repurchases.  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.




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.  In June 2008, the Company recognized, on its balance sheet,
approximately $22,000 of other comprehensive income to mark up the value of the
cash flow hedge net of taxes.  As required by SFAS 157, the Company
calculated the value of the cash flow hedge using Level II inputs.




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, 2008, the variable portion outstanding under the Term Loan
was $1.5 million (at a LIBOR rate of 4.30%) and $1.4 million was outstanding
under the Credit Facility with either LIBOR (3.71%)or Base Rate (5.0%).The Company may
repay the Credit Facility and Term Loan balances in full at any time without
penalty.  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
$17,000 for the six months ended June 30, 2008.






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, 2008.  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 quarter ended June 30, 2008 that materially affected, or were
reasonably likely to materially affect, its internal control over financial
reporting.


-
24 -





PART II.  OTHER
INFORMATION







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




The
following chart provides information regarding Common Stock purchased by the
Company during the period April 1, 2008 through June 30, 2008.




Issuer
      Purchases of Equity SecuritiesPeriod
            
            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, 2008 through April  30, 2008
            
            3,174
            
            $             18.83
            
            3,174
            
            $         567,044May
      1, 2008 through May 31, 2008
            
            3,684
            
            18.15
            
            3,684
            
            $      1,933,126June
      1, 2008 through June 30, 2008
            
            -
            
            -
            
            -
            
            $      1,933,126Total
            
            6,858
            
            $             18.47
            
            6,858





All
purchases were made on the open market pursuant to plans that were approved by
the Board of Directors. On January 23, 2008, the
Board of Directors authorized the Company to make available open market
purchases of its Common Stock up to $1 million. On May 1, 2008, the
Company’s Board of Directors approved up to $2 million of stock repurchases. On
July 16, 2008, the Company purchased 89,201 shares of its Common Stock for total
consideration of approximately $1.4 million.  On July 30, 2008, the
Board of Directors of the Company approved an additional $1 million of stock
repurchases.  On August 14, 2008, the Company purchased 82,473 shares
of its Common Stock in a privately-negotiated transaction for total
consideration of approximately $1.2 million, which leaves approximately $330,000
of the authorized amount available for stock repurchases.  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 10,
      2008.


(b)
            The
      following director was elected at the meeting to serve a three-year term
      as a Class II director.






For
            Withheld
              Authority
            AbstainBrooks
      G. O'Neil
            2,009,006
            1,642
            -




Continuing
Directors




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




After the
meeting, the following directors continued to serve their three-year terms as
Class I directors, which terms will expire at the Company’s annual meeting in
2010:





Thomas D.
Wolf


Paul E.
Valuck





(c)
            No
      other matters were voted upon at the 2008 annual
  meeting.


-
25 -




ITEM
6.   EXHIBITS




ExhibitNumber
            Description of
      Document3.1
            Amended
      and Restated Articles of Incorporation, incorporated herein by reference
      to Exhibit 3.1 and 3.2 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 November 25,
      1997.31.1
            Rule
      13a-14(a) Certification of the Chief Executive Officer.31.2
            Rule
      13a-14(a) Certification of the Chief Financial Officer.32.1
            Section
      1350 Certifications of the Chief Executive Officer and the Chief Financial
      Officer.





-
26 -




SIGNATURES




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





BIRNER
      DENTAL MANAGEMENT SERVICES, INCDate: 
      August 14, 2008
            By:
            /s/ Frederic
      W.J. BirnerName:
            Frederic
      W.J. BirnerTitle:
            Chairman
      of the Board and Chief Executive Officer
              (Principal
      Executive Officer)




Date: 
      August 14, 2008
              By:
              /s/ Dennis
      N. GentyName:
              Dennis
      N. GentyTitle:
              Chief
      Financial Officer, Secretary, and Treasurer
                (Principal Financial and
      Accounting Officer)


- 27
-