UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q


(Mark
One)





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





For the
quarterly period ended  June 30,
2009





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
      EmployerIdentification
      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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes   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 companyX


(Do not check if a
smaller


reporting 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 11, 2009Common
      Stock, without par value
              
              1,878,812












BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


INDEX
TO FORM 10-Q





PART I - FINANCIAL
    INFORMATIONItem
      1.
                            Financial
      Statements
                            
                            PageCondensed
      Consolidated Balance Sheets as of December 31, 2008
                            
                            3and
      June 30, 2009 (Unaudited)Unaudited
      Condensed Consolidated Statements of Income for the Quarters and Six
      Months
                            
                            4Ended
      June 30, 2008 and 2009Unaudited
      Condensed Consolidated Statements of Shareholders’ Equity
    and
                            
                            5Comprehensive
      Income as of June 30, 2009Unaudited
      Condensed Consolidated Statements of Cash Flows for the Six
      Months
                            
                            6Ended
      June 30, 2008 and 2009Unaudited
      Notes to Condensed Consolidated Financial Statements
                            
                            8Item
      2.
                            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                            
                            16Item
      4.
                            Controls
      and Procedures
                            
                            25PART II - OTHER INFORMATIONItem
      2.
                            Unregistered
      Sales of Equity Securities and Use of Proceeds
                            
                            26Item
      4.
                            Submission
      of Matters to a Vote of Security Holders
                            
                            27Item
      6.
                            Exhibits
                            
                            28Signatures
                            
                            
                            29




2




PART I - FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS


BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED BALANCE SHEETS





December
      31,
                                    
                                    
                                    June
      30,2008
                                    
                                    
                                    2009**
                                    
                                    
                                    (Unaudited)ASSETSCURRENT
      ASSETS:Cash
      and cash equivalents
                                    
                                    $
                                    1,234,991
                                    
                                    
                                    $
                                    1,201,989Accounts
      receivable, net of allowance for doubtful accounts of $290,688 and
      $296,516, respectively
                                    
                                    
                                    2,875,732
                                    
                                    
                                    
                                    3,411,289Deferred
      tax asset
                                    
                                    
                                    195,091
                                    
                                    
                                    
                                    282,565Prepaid
      expenses and other assets
                                    
                                    
                                    418,653
                                    
                                    
                                    
                                    565,195Total
      current assets
                                    
                                    
                                    4,724,467
                                    
                                    
                                    
                                    5,461,038PROPERTY
      AND EQUIPMENT, net
                                    
                                    
                                    3,887,919
                                    
                                    
                                    
                                    3,187,748OTHER
      NONCURRENT ASSETS:Intangible
      assets, net
                                    
                                    
                                    10,621,918
                                    
                                    
                                    
                                    10,240,166Deferred
      charges and other assets
                                    
                                    
                                    160,289
                                    
                                    
                                    
                                    151,956Total
      assets
                                    
                                    $
                                    19,394,593
                                    
                                    
                                    $
                                    19,040,908LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts
      payable
                                    
                                    $
                                    1,551,851
                                    
                                    
                                    $
                                    1,732,317Accrued
      expenses
                                    
                                    
                                    1,462,258
                                    
                                    
                                    
                                    1,650,662Accrued
      payroll and related expenses
                                    
                                    
                                    1,714,550
                                    
                                    
                                    
                                    2,195,580Income
      taxes payable
                                    
                                    
                                    371,569
                                    
                                    
                                    
                                    447,469Current
      maturities of long-term debt
                                    
                                    
                                    920,000
                                    
                                    
                                    
                                    920,000Total
      current liabilities
                                    
                                    
                                    6,020,228
                                    
                                    
                                    
                                    6,946,028LONG-TERM
      LIABILITIES:Deferred
      tax liability, net
                                    
                                    
                                    618,913
                                    
                                    
                                    
                                    623,910Long-term
      debt, net of current maturities
                                    
                                    
                                    5,988,202
                                    
                                    
                                    
                                    3,850,000Other
      long-term obligations
                                    
                                    
                                    259,678
                                    
                                    
                                    
                                    193,585Total
      liabilities
                                    
                                    
                                    12,887,021
                                    
                                    
                                    
                                    11,613,523SHAREHOLDERS'
      EQUITY:Preferred
      Stock, no par value, 10,000,000 shares authorized; none
      outstanding
                                    
                                    
                                    -
                                    
                                    
                                    
                                    -Common
      Stock, no par value, 20,000,000 shares authorized; 1,863,587
      and  1,861,402 shares issued and outstanding,
      respectively
                                    
                                    
                                    -
                                    
                                    
                                    
                                    78,450Treasury
      Stock purchased in excess of Common Stock basis
                                    
                                    
                                    (266,786
                                    )
                                    
                                    
                                    -Retained
      earnings
                                    
                                    
                                    6,817,449
                                    
                                    
                                    
                                    7,381,216Accumulated
      other comprehensive loss
                                    
                                    
                                    (43,091
                                    )
                                    
                                    
                                    (32,281
                                    )Total
      shareholders' equity
                                    
                                    
                                    6,507,572
                                    
                                    
                                    
                                    7,427,385Total
      liabilities and shareholders' equity
                                    
                                    $
                                    19,394,593
                                    
                                    
                                    $
                                    19,040,908





**  Derived
from the Company’s audited consolidated balance sheet at December 31,
2008.





The
accompanying notes are an integral part of these financial
statements




3




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Quarters
      Ended
                                                          
                                                          
                                                          Six
      Months EndedJune
      30,
                                                          
                                                          
                                                          June
      30,2008
                                                          
                                                          
                                                          2009
                                                          
                                                          
                                                          2008
                                                          
                                                          
                                                          2009NET
      REVENUE:
                                                          
                                                          $
                                                          8,793,229
                                                          (1)
                                                          
                                                          $
                                                          8,886,727
                                                          (1)
                                                          
                                                          $
                                                          17,740,225
                                                          (2)
                                                          
                                                          $
                                                          17,927,238
                                                          (2)DIRECT
      EXPENSES:Clinical
      salaries and benefits
                                                          
                                                          
                                                          2,491,642
                                                          
                                                          
                                                          
                                                          2,421,007
                                                          
                                                          
                                                          
                                                          5,159,616
                                                          
                                                          
                                                          
                                                          4,997,552Dental
      supplies
                                                          
                                                          
                                                          624,037
                                                          
                                                          
                                                          
                                                          584,765
                                                          
                                                          
                                                          
                                                          1,218,222
                                                          
                                                          
                                                          
                                                          1,123,914Laboratory
      fees
                                                          
                                                          
                                                          739,161
                                                          
                                                          
                                                          
                                                          684,256
                                                          
                                                          
                                                          
                                                          1,391,874
                                                          
                                                          
                                                          
                                                          1,322,218Occupancy
                                                          
                                                          
                                                          1,203,227
                                                          
                                                          
                                                          
                                                          1,220,142
                                                          
                                                          
                                                          
                                                          2,388,906
                                                          
                                                          
                                                          
                                                          2,434,068Advertising
      and marketing
                                                          
                                                          
                                                          119,099
                                                          
                                                          
                                                          
                                                          98,829
                                                          
                                                          
                                                          
                                                          226,548
                                                          
                                                          
                                                          
                                                          183,761Depreciation
      and amortization
                                                          
                                                          
                                                          602,018
                                                          
                                                          
                                                          
                                                          612,383
                                                          
                                                          
                                                          
                                                          1,203,033
                                                          
                                                          
                                                          
                                                          1,229,994General
      and administrative
                                                          
                                                          
                                                          1,266,972
                                                          
                                                          
                                                          
                                                          1,133,811
                                                          
                                                          
                                                          
                                                          2,436,989
                                                          
                                                          
                                                          
                                                          2,295,7707,046,156
                                                          
                                                          
                                                          
                                                          6,755,193
                                                          
                                                          
                                                          
                                                          14,025,188
                                                          
                                                          
                                                          
                                                          13,587,277Contribution
      from dental offices
                                                          
                                                          
                                                          1,747,073
                                                          
                                                          
                                                          
                                                          2,131,534
                                                          
                                                          
                                                          
                                                          3,715,037
                                                          
                                                          
                                                          
                                                          4,339,961CORPORATE
      EXPENSES:General
      and administrative
                                                          
                                                          
                                                          889,204
                                                          (3)
                                                          
                                                          
                                                          1,187,732
                                                          (3)
                                                          
                                                          
                                                          1,830,308
                                                          (4)
                                                          
                                                          
                                                          2,162,920
                                                          (4)Depreciation
      and amortization
                                                          
                                                          
                                                          23,186
                                                          
                                                          
                                                          
                                                          22,161
                                                          
                                                          
                                                          
                                                          46,654
                                                          
                                                          
                                                          
                                                          44,551Operating
      income
                                                          
                                                          
                                                          834,683
                                                          
                                                          
                                                          
                                                          921,641
                                                          
                                                          
                                                          
                                                          1,838,075
                                                          
                                                          
                                                          
                                                          2,132,490Interest
      expense, net
                                                          
                                                          
                                                          58,369
                                                          
                                                          
                                                          
                                                          26,937
                                                          
                                                          
                                                          
                                                          135,997
                                                          
                                                          
                                                          
                                                          69,353Income
      before income taxes
                                                          
                                                          
                                                          776,314
                                                          
                                                          
                                                          
                                                          894,704
                                                          
                                                          
                                                          
                                                          1,702,078
                                                          
                                                          
                                                          
                                                          2,063,137Income
      tax expense
                                                          
                                                          
                                                          326,057
                                                          
                                                          
                                                          
                                                          375,111
                                                          
                                                          
                                                          
                                                          734,265
                                                          
                                                          
                                                          
                                                          866,518Net
      income
                                                          
                                                          $
                                                          450,257
                                                          
                                                          
                                                          $
                                                          519,593
                                                          
                                                          
                                                          $
                                                          967,813
                                                          
                                                          
                                                          $
                                                          1,196,619Net
      income per share of Common Stock - Basic
                                                          
                                                          $
                                                          0.21
                                                          
                                                          
                                                          $
                                                          0.28
                                                          
                                                          
                                                          $
                                                          0.46
                                                          
                                                          
                                                          $
                                                          0.64Net
      income per share of Common Stock - Diluted
                                                          
                                                          $
                                                          0.21
                                                          
                                                          
                                                          $
                                                          0.27
                                                          
                                                          
                                                          $
                                                          0.44
                                                          
                                                          
                                                          $
                                                          0.63Cash
      dividends per share of Common Stock
                                                          
                                                          $
                                                          0.17
                                                          
                                                          
                                                          $
                                                          0.17
                                                          
                                                          
                                                          $
                                                          0.34
                                                          
                                                          
                                                          $
                                                          0.34Weighted
      average number of shares ofCommon
      Stock and dilutive securities:Basic
                                                          
                                                          
                                                          2,107,415
                                                          
                                                          
                                                          
                                                          1,855,778
                                                          
                                                          
                                                          
                                                          2,109,250
                                                          
                                                          
                                                          
                                                          1,858,036Diluted
                                                          
                                                          
                                                          2,178,816
                                                          
                                                          
                                                          
                                                          1,890,929
                                                          
                                                          
                                                          
                                                          2,188,583
                                                          
                                                          
                                                          
                                                          1,887,250





(1)
            Total
      dental group practice revenue less amounts retained by dental offices.
      Dental group practice revenue was  $14,916,479 for the quarter
      ended June 30, 2008, and $15,216,028 for the quarter ended June 30,
      2009.


(2)
            Total
      dental group practice revenue less amounts retained by dental offices.
      Dental group practice revenue was  $30,170,730 for the six
      months ended June 30, 2008, and $30,557,742 for the six months ended June
      30, 2009.


(3)
            Corporate
      expense - general and administrative includes $184,618 related to
      stock-based compensation expense in the quarter ended June 30, 2008,
      and  $252,707 related to total stock-based compensation expense;
      $170,915 related to SFAS 123(R) expense and $81,792 related to a long term
      incentive program expense in the quarter ended June 30,
    2009.


(4)
            Corporate
      expense - general and administrative includes $358,030 related to
      stock-based compensation expense in the six months ended June 30, 2008,
      and $416,884 related to total stock-based compensation expense; $335,092
      related to SFAS 123(R) expense and $81,792 related to a long term
      incentive program expense in the six months ended June 30,
      2009.





The
accompanying notes are an integral part of these financial
statements




4




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE
INCOME


(UNAUDITED)





Treasury
      Stock PurchasedCommon
      Stock
                          
                          
                          in
      excess of Common
                          
                          
                          Comprehensive
                          
                          
                          Retained
                          
                          
                          Shareholders'Shares
                          
                          
                          Amount
                          
                          
                          Stock
      Basis
                          
                          
                          Income
                          
                          
                          Earnings
                          
                          
                          EquityBALANCES,
      December 31, 2008
                          
                          
                          1,863,587
                          
                          
                          $
                          -
                          
                          
                          $
                          (266,786
                          )
                          
                          $
                          (43,091
                          )
                          
                          $
                          6,817,449
                          
                          
                          $
                          6,507,572Common
      Stock options exercised
                          
                          
                          11,500
                          
                          
                          
                          78,450
                          
                          
                          
                          19,050
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          97,500Purchase
      and retirement of Common Stock
                          
                          
                          (13,685
                          )
                          
                          
                          -
                          
                          
                          
                          (170,045
                          )
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          (170,045
                          )Tax
      benefit of Common Stock options exercised
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          897
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          897Dividends
      declared on Common Stock
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          (632,852
                          )
                          
                          
                          (632,852
                          )Stock-based
      compensation expense
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          416,884
                          
                          
                          
                          -
                          
                          
                          
                          
                          
                          
                          
                          416,884Other
      comprehensive income
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          10,810
                          
                          
                          
                          -
                          
                          
                          
                          10,810Net
      income, six months ended June 30, 2009
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          -
                          
                          
                          
                          1,196,619
                          
                          
                          
                          1,196,619
                          
                          
                          
                          1,196,619Comprehensive
      income
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          1,207,429BALANCES,
      June 30, 2009
                          
                          
                          1,861,402
                          
                          
                          $
                          78,450
                          
                          
                          $
                          -
                          
                          
                          $
                          (32,281
                          )
                          
                          $
                          7,381,216
                          
                          
                          $
                          7,427,385





The
accompanying notes are an integral part of these financial
statements




5




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
      Months EndedJune
      30,2008
                                            
                                            
                                            2009CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      income
                                            
                                            $
                                            967,813
                                            
                                            
                                            $
                                            1,196,619Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                            
                                            
                                            1,249,687
                                            
                                            
                                            
                                            1,274,545Stock
      compensation expense
                                            
                                            
                                            358,030
                                            
                                            
                                            
                                            416,884Provision
      for doubtful accounts
                                            
                                            
                                            373,156
                                            
                                            
                                            
                                            303,409Provision
      for deferred income taxes
                                            
                                            
                                            38,555
                                            
                                            
                                            
                                            (82,477
                                            )Changes
      in assets and liabilities net of effects from
acquisitions:Accounts
      receivable
                                            
                                            
                                            (667,407
                                            )
                                            
                                            
                                            (838,965
                                            )Prepaid
      expenses and other assets
                                            
                                            
                                            (153,938
                                            )
                                            
                                            
                                            (146,542
                                            )Deferred
      charges and other assets
                                            
                                            
                                            10,254
                                            
                                            
                                            
                                            8,333Accounts
      payable
                                            
                                            
                                            (121,061
                                            )
                                            
                                            
                                            180,466Accrued
      expenses
                                            
                                            
                                            (227,669
                                            )
                                            
                                            
                                            199,230Accrued
      payroll and related expenses
                                            
                                            
                                            629,282
                                            
                                            
                                            
                                            481,030Income
      taxes payable
                                            
                                            
                                            449,919
                                            
                                            
                                            
                                            75,900Other
      long-term obligations
                                            
                                            
                                            (10,520
                                            )
                                            
                                            
                                            (66,093
                                            )Net
      cash provided by operating activities
                                            
                                            
                                            2,896,101
                                            
                                            
                                            
                                            3,002,339CASH
      FLOWS FROM INVESTING ACTIVITIES:Capital
      expenditures
                                            
                                            
                                            (535,866
                                            )
                                            
                                            
                                            (192,619
                                            )Development
      of new dental centers
                                            
                                            
                                            (357,045
                                            )
                                            
                                            
                                            -Net
      cash used in investing activities
                                            
                                            
                                            (892,911
                                            )
                                            
                                            
                                            (192,619
                                            )CASH
      FLOWS FROM FINANCING ACTIVITIES:Advances
      – line of credit
                                            
                                            
                                            9,306,369
                                            
                                            
                                            
                                            6,736,883Repayments
      – line of credit
                                            
                                            
                                            (10,113,435
                                            )
                                            
                                            
                                            (8,415,085
                                            )Repayments
      – Term Loan
                                            
                                            
                                            (460,000
                                            )
                                            
                                            
                                            (460,000
                                            )Proceeds
      from exercise of Common Stock options
                                            
                                            
                                            281,288
                                            
                                            
                                            
                                            97,500Purchase
      and retirement of Common Stock
                                            
                                            
                                            (648,597
                                            )
                                            
                                            
                                            (170,045
                                            )Tax
      benefit of Common Stock options exercised
                                            
                                            
                                            25,791
                                            
                                            
                                            
                                            896Common
      Stock cash dividends
                                            
                                            
                                            (675,962
                                            )
                                            
                                            
                                            (632,871
                                            )Net
      cash used in financing activities
                                            
                                            
                                            (2,284,546
                                            )
                                            
                                            
                                            (2,842,722
                                            )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                                            
                                            
                                            (281,356
                                            )
                                            
                                            
                                            (33,002
                                            )CASH
      AND CASH EQUIVALENTS, beginning of period
                                            
                                            
                                            964,150
                                            
                                            
                                            
                                            1,234,991CASH
      AND CASH EQUIVALENTS, end of period
                                            
                                            $
                                            682,794
                                            
                                            
                                            $
                                            1,201,989





The
accompanying notes are an integral part of these financial
statements




6




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)





Six
      Months EndedJune
      30,2008
                                  
                                  
                                  2009SUPPLEMENTAL
      DISCLOSURE OF CASHFLOW
      INFORMATION:Cash
      paid during the year for interest
                                  
                                  $
                                  171,078
                                  
                                  
                                  $
                                  95,225Cash
      paid during the year for income taxes
                                  
                                  $
                                  220,000
                                  
                                  
                                  $
                                  709,900NON-CASH
      ITEM:Gain/(Loss)
      recognized on interst rate swap (net of taxes)
                                  
                                  $
                                  3,308
                                  
                                  
                                  $
                                  10,810





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, 2009





(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
(“GAAP”) have been condensed or omitted pursuant to such rules and regulations,
although the Company believes that the disclosures included herein are adequate
to make the information presented not misleading. A description of the Company’s
accounting policies and other financial information is included in the audited
consolidated financial statements as filed with the Securities and Exchange
Commission in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008.





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, 2009 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, 2009 are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire
year.  The Company has evaluated all subsequent events through August
13, 2009, the date the financial statements were issued.





Effective
April 1, 2008, the Company reclassified dentist and dental hygienist 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 was approximately $84,000 and $185,000 for the quarters ended
June 30, 2009 and 2008, respectively.  The reclassification was
approximately $155,000 and $370,000 for the six months ended June 30, 2009 and
2008, respectively.





Effective
July 1, 2008, the Company reclassified dental assistant wages 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 was approximately
$1.2 million and $1.3 million for the quarters ended June 30, 2009 and 2008,
respectively.  The reclassification was approximately $2.4 million and
$2.5 million for the six months ended June 30, 2009 and 2008,
respectively.





Due to
the Company’s repurchases of Common Stock at prices higher than the original
issue price, the Company’s Common Stock balance would have been reduced to a
negative $266,786 as of December 31, 2008.  The Company reclassified
this negative balance to Treasury Stock purchased in excess of Common Stock
basis on the balance sheet.  In the Company’s form 10-K for the year
ended December 31, 2008, the negative Common Stock amount of $266,786 was offset
against retained earnings.





(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 $195,071 and $195,015 for the quarters ended
June 30, 2009 and 2008, respectively. Amortization was $390,086 and $389,975 for
the six months ended June 30, 2009 and 2008, 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




8




undiscounted
cash flows associated with the asset would be compared to the asset’s carrying
amount to determine if a write-down to market value or discounted cash flow
value would be required.





Stock
Options





The
Company recognizes compensation expense on a straight line basis over the
requisite service period of the award. Total stock-based compensation expense
included in the Company’s statement of income for the quarters ended June 30,
2009 and 2008 was approximately $253,000 and $185,000, respectively. For the
quarter ended June 30, 2009, the stock-based compensation expense consisted of
$171,000 related to stock options and $82,000 related to restricted stock units
granted under the long term incentive program (“LTIP”).  The LTIP was
adopted by the Board of Directors on June 3, 2009 and provides for long-term
performance-based cash and stock opportunities for the executive officers of the
Company.  Total stock-based compensation expense included in the
Company’s statement of income for the six months ended June 30, 2009 and 2008
was approximately $417,000 and $358,000, respectively. For the six months ended
June 30, 2009, the stock-based compensation expense consisted of $335,000
related to stock options and $82,000 related to restricted stock units granted
under the LTIP.  Total stock-based compensation expense was recorded
as a component of corporate general and administrative expense.




The
Black-Scholes option-pricing model was used to estimate the option fair values.
The option-pricing model requires a number of assumptions, of which the most
significant are expected stock price volatility, the expected pre-vesting
forfeiture rate, expected dividend rate and the expected option term (the amount
of time from the grant date until the options are exercised or expire). Expected
volatility was calculated based upon actual historical stock price movements
over the most recent periods ended June 30, 2009 equal to the expected option
term. Expected pre-vesting forfeitures were estimated based on actual historical
pre-vesting forfeitures over the most recent periods ended June 30, 2009 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.




Recent
Accounting Pronouncements




In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, Fair Value Measurements
(“SFAS No. 157”), to establish a consistent framework for measuring fair
value and expand disclosures on fair value measurements. The Company adopted
SFAS No. 157 during 2008. The adoption did not have a material effect on the
Company’s consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, The Fair Value Option for
Financial Assets and Financial Liabilities (“SFAS No.
159”).  SFAS No. 159 permits companies to elect to follow fair value
accounting for certain financial assets and liabilities in an effort to mitigate
volatility in earnings without having to apply complex hedge accounting
provisions.  SFAS No. 159 also establishes presentation and disclosure
requirements designed to facilitate comparison between entities that choose
different measurement attributes for similar types of assets and
liabilities.  The Company adopted SFAS No. 159 during 2008. The
adoption did not have a material effect on the Company’s consolidated financial
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141R,Business
Combinations(“SFAS No. 141R”),and Statement of
Financial Accounting Standards No. 160, Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB No. 51 (“SFAS No.
160”).  These new standards significantly change the accounting for
and reporting of business combination transactions and noncontrolling interests
(previously referred to as minority interests) in consolidated financial
statements.  The Company adopted SFAS No. 141R and SFAS No. 160 on
January 1, 2009.  The adoption did not have a material effect on the
Company’s consolidated financial statements.




In
October 2008, the FASB issued FASB Staff Position No. FAS 157-3,Determining the Fair Value of a
Financial Asset When the Market for That Asset is Not Active(“FSP”).
This FSP clarifies the application of SFAS No. 157 as it relates to the
valuation of financial assets in a market that is not active for those financial
assets. This FSP is effective immediately and includes those periods for which
financial statements have not been issued. The Company currently does not have
any financial assets that are valued using inactive markets, and as a result the
Company is not impacted by the issuance of this FSP.




In June
2008, the FASB issued FASB Staff Position No. EITF 03-6-1,Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities
(“FSP EITF 03-6-1”).  FSP EITF 03-6-1 concludes that unvested share-based
payment awards that contain nonforfeitable rights to dividends or dividend
equivalents are participating securities and must be included in the computation
of basic earnings per share using the two-class method.




9




The
Company adopted FSP No. EITF 03-6-1 on January 1, 2009.  The adoption
did not have a material effect on the Company’s consolidated financial
statements.




In May
2008, the FASB issued Statement of Financial Accounting Standard No. 162,The Hierarchy of Generally Accepted
Accounting Principles (“SFAS 162”).  SFAS 162 identifies the sources
of accounting principles and the framework for selecting the principles used in
the preparation of financial statements that are presented in conformity with
GAAP for nongovernmental entities. SFAS 162 was issued to include the GAAP
hierarchy in the accounting literature established by the FASB.  SFAS 162
will be effective 60 days following the Securities and Exchange Commission’s
approval of the Public Company Accounting Oversight Board amendments to AU
Section 411,The Meaning of
Presented Fairly in Conformity With Generally Accepted Accounting
Principles.  The Company does not expect the application of SFAS 162
will have a material impact on its financial position, cash flows or results of
operations.




In April
2008, the FASB issued FSP FAS No. 142-3,Determination of the Useful Life of
Intangible Assets (“FSP FAS 142-3”).  FSP FAS 142-3 amends the
factors an entity should consider in developing renewal or extension assumptions
used in determining the useful life of recognized intangible assets under SFAS
No. 142,Goodwill and Other
Intangible Assets (“SFAS 142”).  The intent of FSP FAS 142-3 is to
improve the consistency between the useful life of a recognized intangible asset
under SFAS 142 and the period of expected cash flows used to measure the fair
value of the asset under SFAS 141(R).  The Company adopted FSP FAS 142-3 on
January 1, 2009.  The adoption did not have a material effect on the
Company’s consolidated financial statements.




In March
2008, the FASB issued Statement of Financial Accounting Standard No. 161,Disclosures about Derivative
Instruments and Hedging Activities – An Amendment of FASB Statement No.
133 (“SFAS 161”). SFAS 161 enhances
required disclosures regarding derivatives and hedging activities, including
enhanced disclosures regarding how: a) an entity uses derivative instruments; b)
derivative instruments and related hedged items are accounted for under FASB
Statement No. 133,Accounting
for Derivative Instruments and Hedging Activities; and c) derivative
instruments and related hedged items affect an entity’s financial position,
financial performance and cash flows.  The Company adopted SFAS 161 on
January 1, 2009.  The adoption did not have a material effect on the
Company’s consolidated financial statements, resulting only in additional
disclosures.




In April
2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS
157-4”), which amends SFAS No. 157. FSP FAS 157-4 provides additional
guidance on estimating fair value for an asset or liability when the volume and
level of activity have significantly decreased in relation to normal market
activity for the asset or liability. FSP FAS 157-4 also provides additional
guidance on circumstances that may indicate that a transaction is not orderly
and requires additional disclosure about fair value measurement in annual and
interim reporting periods. FSP FAS 157-4 was effective for the Company for its
reporting period ended June 30, 2009 and did not have a material effect on
its consolidated financial statements.




In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures About Fair Value
of Financial Instruments (“FSP FAS 107-1”). FSP FAS 107-1 extends the
disclosure requirements of SFAS No. 107, Disclosures about Fair Value of
Financial Instruments, to interim financial statements of publicly traded
companies. FSP FAS 107-1 was effective for the Company for its reporting period
ended June 30, 2009 and did not have a material effect on its consolidated
financial statements.  The Company has provided the additional
disclosures required in Note 2.




In
May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS
165”).  SFAS 165 establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before the
financial statements are issued or are available to be issued. It requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for that date (see Note 1 above). SFAS 165 was effective for
the Company for its reporting period ended June 30, 2009, and shall be
applied prospectively. The adoption of this statement did not have a material
effect on the Company’s consolidated financial statements.




10




(3)   EARNINGS PER
SHARE





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





Quarters
      Ended June 30,2008
                                                                            
                                                                            
                                                                            2009Income
                                                                            
                                                                            
                                                                            Shares
                                                                            
                                                                            
                                                                            Per
      Share
                                                                              Amount
                                                                            
                                                                            
                                                                            Income
                                                                            
                                                                            
                                                                            Shares
                                                                            
                                                                            
                                                                            Per
      Share
                                                                              AmountBasic
      EPS:Net
      income available to shares of Common Stock
                                                                            
                                                                            $
                                                                            450,257
                                                                            
                                                                            
                                                                            
                                                                            2,107,415
                                                                            
                                                                            
                                                                            $
                                                                            0.21
                                                                            
                                                                            
                                                                            $
                                                                            519,593
                                                                            
                                                                            
                                                                            
                                                                            1,855,778
                                                                            
                                                                            
                                                                            $
                                                                            0.28Effect
      of dilutive shares of Common Stock from stock options and
      warrants
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            71,401
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            -
                                                                            
                                                                            
                                                                            
                                                                            35,151
                                                                            
                                                                            
                                                                            
                                                                            (0.01
                                                                            )Diluted
      EPS:Net
      income available to shares of Common Stock
                                                                            
                                                                            $
                                                                            450,257
                                                                            
                                                                            
                                                                            
                                                                            2,178,816
                                                                            
                                                                            
                                                                            $
                                                                            0.21
                                                                            
                                                                            
                                                                            $
                                                                            519,593
                                                                            
                                                                            
                                                                            
                                                                            1,890,929
                                                                            
                                                                            
                                                                            $
                                                                            0.27





The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the quarters ended June 30, 2009 and
2008 relates to the effect of 35,151 and 71,401 shares, respectively, of
dilutive shares of Common Stock from stock options, which are included in total
shares for the diluted calculation.  For the quarters ended June 30,
2009 and 2008, options to purchase 309,938 and 276,693 shares, respectively, of
the Company’s Common Stock were not included in the computation of dilutive
earnings per share because their effect was anti-dilutive.





Six
      Months Ended June 30,2008
                                                                      
                                                                      2009Income
                                                                      
                                                                      
                                                                      Shares
                                                                      
                                                                      
                                                                      Per
      Share
                                                                        Amount
                                                                      
                                                                      
                                                                      Income
                                                                      
                                                                      
                                                                      Shares
                                                                      
                                                                      
                                                                      Per
      Share
                                                                        AmountBasic
      EPS:Net
      income available to shares of Common Stock
                                                                      
                                                                      $
                                                                      967,813
                                                                      
                                                                      
                                                                      
                                                                      2,109,250
                                                                      
                                                                      
                                                                      $
                                                                      0.46
                                                                      
                                                                      
                                                                      $
                                                                      1,196,619
                                                                      
                                                                      
                                                                      
                                                                      1,858,036
                                                                      
                                                                      
                                                                      $
                                                                      0.64Effect
      of dilutive shares of Common Stock from stock options and
      warrants
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      79,333
                                                                      
                                                                      
                                                                      
                                                                      (0.02
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      29,214
                                                                      
                                                                      
                                                                      
                                                                      (0.01
                                                                      )Diluted
      EPS:Net
      income available to shares of Common Stock
                                                                      
                                                                      $
                                                                      967,813
                                                                      
                                                                      
                                                                      
                                                                      2,188,583
                                                                      
                                                                      
                                                                      $
                                                                      0.44
                                                                      
                                                                      
                                                                      $
                                                                      1,196,619
                                                                      
                                                                      
                                                                      
                                                                      1,887,250
                                                                      
                                                                      
                                                                      $
                                                                      0.63





The
difference in weighted average shares outstanding between basic earnings per
share and diluted earnings per share for the six months ended June 30, 2009 and
2008 relates to the effect of 29,214 and 79,333 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, 2009 and
2008, options to purchase 330,013 and 260,023 shares, respectively, of the
Company’s Common Stock were not included in the computation of dilutive earnings
per share because their effect was anti-dilutive.





(4) 
 STOCK-BASED
COMPENSATION PLANS





At the
Company’s June 2005 annual meeting of shareholders, the shareholders approved
the 2005 Equity Incentive Plan (“2005 Plan”). An amendment to the 2005 Plan was
approved at the June 2009 annual meeting of shareholders to increase the number
of authorized shares of Common Stock issuable under the 2005 Plan from 425,000
shares to 625,000 shares. The 2005 Plan provides for the grant of incentive
stock options, restricted stock, restricted stock units and stock grants to
employees (including officers and employee-directors) and non-statutory stock
options to employees, directors and




11




consultants.
The objectives of this plan include attracting and retaining the best personnel
and providing for additional performance incentives by providing employees with
the opportunity to acquire equity in the Company. As of June 30, 2009, there
were 239,898 shares available for issuance under the 2005 Plan. The exercise
price of the stock options issued under the 2005 Plan is equal to the market
price, or market price plus 10% for shareholders who own greater than 10% of the
Company, at the date of grant. These stock options expire seven years, or five
years for shareholders who own greater than 10% of the Company, from the date of
the grant and vest annually over a service period ranging from three to five
years. The 2005 Plan
is administered by a committee of two or more independent directors from the
Company’s Board of Directors (the “Committee”). The Committee determines the
eligible individuals to whom awards under the 2005 Plan may be granted, as well
as the time or times at which awards will be granted, the number of shares
subject to awards to be granted to any eligible individual, the life of any
award, and any other terms and conditions of the awards in addition to those
contained in the 2005 Plan.As of June 30, 2009, there were 146,555
vested options, 167,461 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, 2009, there were 132,500 vested
options outstanding and zero unvested options outstanding under the Employee
Plan.





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





June
      30,
                                  
                                  
                                  June
      30,Valuation
      Assumptions
                                  
                                  2008
      (5)
                                  
                                  
                                  2009
      (5)
                                  
                                  
                                  2008
                                  
                                  
                                  2009Expected
      life (1)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  4.1
                                  
                                  
                                  
                                  3.2Risk-free
      interest rate (2)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2.30
                                  %
                                  
                                  
                                  1.30
                                  %Expected
      volatility (3)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  58
                                  %
                                  
                                  
                                  69
                                  %Expected
      dividend yield
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  3.28
                                  %
                                  
                                  
                                  6.33
                                  %Expected
      Forteiture (4)
                                  
                                  
                                  -
                                  
                                  
                                  
                                  -
                                  
                                  
                                  
                                  2.00
                                  %
                                  
                                  
                                  4.97
                                  %








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


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


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


(4)
              Forfeitures
      of options granted prior to the Company’s adoption of SFAS 123(R) on
      January 1, 2006 are recorded as they occur. Forfeitures of options granted
      since the Company’s adoption of SFAS 123(R) are estimated based on
      historical experience.


(5)
              The
      Company did not issue any options during the quarters ended June 30, 2009
      or June 30, 2008.




12




A summary
of option activity as of June 30, 2009, 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, 2008
                              
                              
                              466,516
                              
                              
                              $
                              15.55
                              
                              
                              $7.88
      - $21.85
                              
                              
                              
                              3.8
                              
                              
                              
                              273Granted
                              
                              
                              19,000
                              
                              
                              $
                              10.75
                              
                              
                              $10.75
      - $10.75Exercised
                              
                              
                              (11,500
                              )
                              
                              $
                              8.48
                              
                              
                              $7.88
      - $12.50Forfeited
                              
                              
                              (27,500
                              )
                              
                              $
                              16.37
                              
                              
                              $11.50
      - $20.02Outstanding
      at June 30, 2009
                              
                              
                              446,516
                              
                              
                              $
                              15.47
                              
                              
                              $7.88
      - $21.85
                              
                              
                              
                              3.4
                              
                              
                              $
                              803Exercisable
      at June 30, 2009
                              
                              
                              279,055
                              
                              
                              $
                              14.85
                              
                              
                              $7.88
      - $21.85
                              
                              
                              
                              2.2
                              
                              
                              $
                              605





The
weighted average grant date fair values of options granted were $3.69 per option
and $7.76 per option during the six months ended June 30, 2009 and 2008,
respectively.  Net cash proceeds from the exercise of stock options
during the six months ended June 30, 2009 and 2008 were $97,500 and $281,288,
respectively. The associated income tax benefit from stock options exercised
during the six months ended June 30, 2009 and 2008 was $896 and $25,791,
respectively. As of the date of exercise, the total intrinsic values of options
exercised during the six months ended June 30, 2009 and 2008 were $67,150 and
$196,856, respectively. As of June 30, 2009, there was $922,000 of total
unrecognized compensation expense related to non-vested stock options, which is
expected to be recognized over a weighted average period of 1.53
years.





(5)      
LONG TERM INCENTIVE
PROGRAM





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





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





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





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





As of
June 30, 2009, the Company accrued approximately $76,000 related to the cash
portion and recorded $82,000 with stock-based compensation for the equity
portion, respectively, of the LTIP.




13




(6)  
  DIVIDENDS





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





Date
      Dividend Paid
                
                Quarterly
      Dividend Paid
                  per
      ShareApril
      9, 2004; July 9, 2004; October 8, 2004; January 14, 2005
                
                
                0.0375April
      8, 2005; July 8, 2005; October 14, 2005; January 13, 2006
                
                
                0.10April
      14, 2006; July 14, 2006; October 13, 2006; January 12,
2007
                
                
                0.13April
      13, 2007; July 13, 2007; October 12, 2007; January 11,
2008
                
                
                0.15April
      11, 2008; July 11, 2008; October 10, 2008; January 9, 2009
                
                
                0.17April
      10, 2009; July 10, 2009
                
                
                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 that
the Company’s Board of Directors may consider relevant.





(7)      LINE OF
CREDIT





On June
30, 2009, the Company amended its bank line of credit (“Credit
Facility”).  The amended Credit Facility extends the expiration of the
credit agreement from May 31, 2010 to May 31, 2011.  The Credit
Facility allows the Company to borrow, on a revolving basis, an aggregate
principal amount not to exceed $7.0 million at either, or a combination of, the
lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at the Company’s
option.  The Base Rate computes interest at the higher of the lender’s
“prime rate” or the Federal Funds Rate plus a margin.  The amendment
adjusts the Base Rate margin from 0.5% to 2.5%.  The LIBOR option
computes interest at the LIBOR rate as of the date such LIBOR rate loan was made
plus a LIBOR rate margin.  The amendment states that the LIBOR rate is
the higher of 1.5% or the LIBOR rate and the margin is adjusted from 1.25% to
3.875%.  A commitment fee on the average daily unused amount of the
revolving loan commitment during the preceding quarter is also assessed and was
increased from 0.25% to 0.40% as of June 1, 2009.  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, 2009, the Company had $2.7 million outstanding
under the LIBOR rate option and $4.3 million available for borrowing under the
Credit Facility.  As of June 30, 2009, the Company’s LIBOR borrowing
rate was 1.57% and, effective with the amended Credit Facility, was increased to
5.375% on July 1, 2009.  Management believes that the Base Rate margin
and the LIBOR rate margin increased as a result of the lender’s increased cost
of funds and not because of the Company’s credit quality.  The Credit
Facility requires the Company to comply with certain covenants and financial
ratios. At June 30, 2009, the Company was in full compliance with all of its
covenants under the Credit Facility.





(8)     TERM
LOAN




In
October 2006, the Company entered into a $4.6 million term loan (“Term Loan”).
Under the Term Loan, $2.3 million was borrowed at a fixed interest rate of 7.05%
and the remaining $2.3 million was borrowed at a floating interest rate of LIBOR
plus 1.5%. As of June 30, 2009, the floating rate was 1.82%.  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, 2009, $1.0 million was outstanding at the
fixed rate of 7.05% and $1.0 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, 2009, the Company was in full compliance with all of its covenants under the
Term Loan.





Historically,
the Company has not used derivative instruments or engaged in hedging
activities. On October 12, 2006, the Company entered into a fixed-for-floating
interest rate swap transaction on $2.3 million of the Term Loan.  The
Company elected to designate the swap as a cash flow hedge under SFAS No.
133.  In June 2009, the Company recognized, on its balance sheet,
approximately $11,000 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.




14


(9)     OTHER




The
Company’s retained earnings as of June 30, 2009 were approximately $7.4 million,
and the Company had a working capital deficit on that date of approximately $1.5
million. During the six months ended June 30, 2009, the Company had capital
expenditures of approximately $193,000, paid dividends of approximately $633,000
and purchased approximately $170,000 of Common Stock pursuant to the Company’s
stock repurchase program, while decreasing total bank debt by approximately $2.1
million.


15


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, 2008, 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, 2008 and 2009. 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 81 general dentists and 35 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, 2008.  There have been no
changes to these policies since the filing of that report.




Components
of Revenue and Expenses




Total
dental group practice revenue (“Revenue”) represents the revenue of the Offices
reported at estimated realizable amounts, received from dental plans, other
third-party payors and patients for dental services rendered at the
Offices.  Revenue is a non-GAAP measure.  See the
reconciliation of Revenue to net revenue on page 19.  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


16


third-party
payment arrangement. Managed dental care revenue consists of revenue received
from capitated managed dental care plans, including capitation payments and
patient co-payments. Capitated managed dental care contracts are between dental
benefits organizations and the P.C.s.





Net
revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as compensation to employed
dentists, dental hygienists and dental assistants. 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, dental hygienists and
dental assistants, 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, dental hygienists and dental assistants, (ii)
complying with all laws, rules and regulations relating to dentists, dental
hygienists and dental assistants, and (iii) maintaining proper patient
records.





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, dental hygienists and dental assistants
employed at the Office of the P.C.  Adjusted Gross Center Revenue is
comprised of all fees and charges booked each month by or on behalf of the P.C.
as a result of dental services provided to patients at the Office, less any
adjustments for uncollectible accounts, professional courtesies and other
activities that do not generate a collectible fee.  The Company’s
costs include all direct and indirect costs, overhead and expenses relating to
the Company’s provision of management services at each Office under the
Management Agreement, including (i) salaries, benefits and other direct costs of
employees who work at the Office (other than dentists’, dental hygienists’ and
dental assistants’ 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
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 and dentist recruitment expenses, (vii) personal property and
other taxes assessed against 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, dental hygienists and dental
assistants who work at the Offices of the P.C.s. This enables the Company to
manage the profitability of the Offices.  Each Management Agreement is
for a term of 40 years. Further, each Management Agreement generally may be
terminated by the P.C. only for cause, which includes a material default by or
bankruptcy of the Company. Upon expiration or termination of a Management
Agreement by either party, the P.C. must satisfy all obligations it has to the
Company.





Under the
Management Agreements, the Company negotiates and administers the capitated
managed dental care contracts on behalf of the P.C.s.  Under a
capitated managed dental care contract, the dental group practice provides
dental services to the members of the dental benefits organization and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental group practice obligated to provide them.  This
arrangement shifts the risk of utilization of these services to the dental group
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, dental hygienists and dental
assistants), 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


17


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, 2009, Revenue increased $300,000, or 2.0% to $15.2
million compared to $14.9 million for the quarter ended June 30,
2008.  For the quarter ended June 30, 2009, net revenue increased
$93,000, or 1.1% to $8.9 million compared to $8.8 million for the quarter ended
June 30, 2008.  This increase is attributable to an increase in same
store net revenue from specialty dentistry of $126,000 along with a de novo Office the Company
opened in May 2008 that generated an additional $63,000 in net revenue, offset
by a decrease in same store net revenue from general dentistry of
$95,000.  Despite a slight increase in net revenue for the quarter
ended June 30, 2009 compared to the quarter ended June 30, 2008, the Company
believes it continues to experience a general weakness in the economy in its
markets.





For the
quarter ended June 30, 2009, net income increased 15.4 % to $520,000, or $.27
per share, compared to $450,000, or $.21 per share, for the quarter ended June
30, 2008.





For the
six months ended June 30, 2009, Revenue increased $387,000, or 1.3% to $30.6
million compared to $30.2 million for the six months ended June 30,
2008.  For the six months ended June 30, 2009, net revenue increased
$187,000, or 1.1% to $17.9 million compared to $17.7 million for the six months
ended June 30, 2008.  This increase is attributable to an increase in
same store net revenue from specialty dentistry of $221,000 along with a de novo Office the Company
opened in May 2008 that generated an additional $102,000 in net revenue, offset
by a decrease in same store net revenue from general dentistry of
$136,000.  Despite a slight increase in net revenue for the six months
ended June 30, 2009 compared to the six months ended June 30, 2008, the Company
believes it continues to experience a general weakness in the economy in its
markets.





For the
six months ended June 30, 2009, net income increased 23.6% to $1.2 million, or
$.63 per share compared to $968,000 or $.44 per share for the six months ended
June 30, 2008.





During
the first six months of 2009, the Company generated $3.0 million of cash from
operations.  During this period, the Company purchased $170,000 of its
outstanding Common Stock, invested $193,000 in capital expenditures, paid
$633,000 in dividends and repaid $460,000 of the Term Loan while decreasing
borrowings under its Credit Facility by $1.7 million.


18





The
Company’s earnings before interest, taxes, depreciation, amortization and
non-cash expense associated with stock-based compensation (“Adjusted EBITDA”)
increased $378,000, or 11.0% to $3.8 million for the six months ended June 30,
2009 compared to $3.4 million for the corresponding six month period in 2008.
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 30,2008
                
                
                2009
                
                
                2008
                
                
                2009RECONCILIATION
      OF ADJUSTED EBITDA:Net
      income
                
                $
                450,257
                
                
                $
                519,593
                
                
                $
                967,813
                
                
                $
                1,196,619Add
      back:Depreciation
      and amortization - Offices
                
                
                602,018
                
                
                
                612,383
                
                
                
                1,203,033
                
                
                
                1,229,994Depreciation
      and amortization - Corporate
                
                
                23,186
                
                
                
                22,161
                
                
                
                46,654
                
                
                
                44,551Stock-based
      compensation expense
                
                
                184,618
                
                
                
                252,707
                
                
                
                358,030
                
                
                
                416,884Interest
      expense, net
                
                
                58,369
                
                
                
                26,937
                
                
                
                135,997
                
                
                
                69,353Income
      tax expense
                
                
                326,057
                
                
                
                375,111
                
                
                
                734,265
                
                
                
                866,518Adjusted
      EBITDA
                
                $
                1,644,505
                
                
                $
                1,808,892
                
                
                $
                3,445,792
                
                
                $
                3,823,919




Revenue
is total dental group practice revenue generated at the Company’s Offices from
professional services provided to patients. Amounts retained by dental Offices
represent compensation expense to the dentists, dental hygienists and dental
assistants and are 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 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 GAAP. The following table
reconciles Revenue to net revenue:





Quarters
      Ended
                    
                    
                    Six
      Months EndedJune 30,
                    
                    
                    June 30,2008
                    
                    
                    2009
                    
                    
                    2008
                    
                    
                    2009Total
      dental group practice revenue
                    
                    $
                    14,916,479
                    
                    
                    $
                    15,216,028
                    
                    
                    $
                    30,170,730
                    
                    
                    $
                    30,557,742Less
      - amounts retained by dental Offices
                    
                    
                    (6,123,250
                    )
                    
                    
                    (6,329,301
                    )
                    
                    
                    (12,430,505
                    )
                    
                    
                    (12,630,504
                    )Net
      revenue
                    
                    $
                    8,793,229
                    
                    
                    $
                    8,886,727
                    
                    
                    $
                    17,740,225
                    
                    
                    $
                    17,927,238




19


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




BIRNER
DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


CONDENSED
CONSOLIDATED STATEMENTS OF INCOME


(UNAUDITED)





Quarters
      Ended
                  
                  
                  Six
      Months EndedJune 30,
                  
                  
                  June 30,2008
                  
                  
                  2009
                  
                  
                  2008
                  
                  
                  2009NET
      REVENUE:
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %
                  
                  
                  100.0
                  %DIRECT
      EXPENSES:Clinical
      salaries and benefits
                  
                  
                  28.3
                  %
                  
                  
                  27.2
                  %
                  
                  
                  29.1
                  %
                  
                  
                  27.9
                  %Dental
      supplies
                  
                  
                  7.1
                  %
                  
                  
                  6.6
                  %
                  
                  
                  6.9
                  %
                  
                  
                  6.3
                  %Laboratory
      fees
                  
                  
                  8.4
                  %
                  
                  
                  7.7
                  %
                  
                  
                  7.9
                  %
                  
                  
                  7.4
                  %Occupancy
                  
                  
                  13.7
                  %
                  
                  
                  13.7
                  %
                  
                  
                  13.5
                  %
                  
                  
                  13.6
                  %Advertising
      and marketing
                  
                  
                  1.4
                  %
                  
                  
                  1.1
                  %
                  
                  
                  1.3
                  %
                  
                  
                  1.0
                  %Depreciation
      and amortization
                  
                  
                  6.9
                  %
                  
                  
                  6.9
                  %
                  
                  
                  6.8
                  %
                  
                  
                  6.9
                  %General
      and administrative
                  
                  
                  14.4
                  %
                  
                  
                  12.8
                  %
                  
                  
                  13.7
                  %
                  
                  
                  12.8
                  %80.1
                  %
                  
                  
                  76.0
                  %
                  
                  
                  79.1
                  %
                  
                  
                  75.8
                  %Contribution
      from dental offices
                  
                  
                  19.9
                  %
                  
                  
                  24.0
                  %
                  
                  
                  20.9
                  %
                  
                  
                  24.2
                  %CORPORATE
      EXPENSES:General
      and administrative
                  
                  
                  10.1
                  %
                  
                  
                  13.4
                  %
                  
                  
                  10.3
                  %
                  
                  
                  12.1
                  %Depreciation
      and amortization
                  
                  
                  0.3
                  %
                  
                  
                  0.3
                  %
                  
                  
                  0.3
                  %
                  
                  
                  0.3
                  %Operating
      income
                  
                  
                  9.5
                  %
                  
                  
                  10.4
                  %
                  
                  
                  10.4
                  %
                  
                  
                  11.9
                  %Interest
      expense
                  
                  
                  0.7
                  %
                  
                  
                  0.3
                  %
                  
                  
                  0.8
                  %
                  
                  
                  0.4
                  %Income
      before income taxes
                  
                  
                  8.8
                  %
                  
                  
                  10.1
                  %
                  
                  
                  9.6
                  %
                  
                  
                  11.5
                  %Income
      tax expense
                  
                  
                  3.7
                  %
                  
                  
                  4.2
                  %
                  
                  
                  4.1
                  %
                  
                  
                  4.8
                  %Net
      income
                  
                  
                  5.1
                  %
                  
                  
                  5.9
                  %
                  
                  
                  5.5
                  %
                  
                  
                  6.7
                  %


20


Quarter
Ended June 30, 2009 Compared to Quarter Ended June 30, 2008:




Net revenue. For the quarter
ended June 30, 2009, net revenue increased $93,000, or 1.1%, to $8.9 million
compared to $8.8 million for the quarter ended June 30, 2008. This increase is
attributable to an increase in same store net revenue from specialty dentistry
of $126,000 along with a de
novo Office the Company opened in May 2008 that generated an additional
$63,000 in net revenue, offset by a decrease in same store net revenue from
general dentistry of $95,000.  Despite a slight increase in net
revenue for the quarter ended June 30, 2009 compared to the quarter ended June
30, 2008, the Company believes it continues to experience a general weakness in
the economy in its markets.





Clinical salaries and
benefits. For the quarter ended June 30, 2009, clinical salaries and
benefits decreased $71,000, or 2.8%, to $2.4 million compared to $2.5 million
for the quarter ended June 30, 2008. This decrease is primarily due to reduced
administrative wages as a result of fewer front desk personnel at the Offices in
the quarter ended June 30, 2009 compared to the quarter ended June 30,
2008.  As a percentage of net revenue, clinical salaries and benefits
decreased to 27.2% for the quarter ended June 30, 2009 compared to 28.3% for the
quarter ended June 30, 2008.




Dental supplies. For the
quarter ended June 30, 2009, dental supplies decreased to $585,000 compared to
$624,000 for the quarter ended June 30, 2008, a decrease of $39,000 or
6.3%.  This decrease is attributable to three factors: (1) fewer new
dentists requesting initial dental supply inventories; (2) a 3% rebate from the
Company’s primary dental supply vendor that will be effective through 2009; and
(3) a concentrated effort that began in January 2009 to reduce dental supply
expense through the implementation of a new process for the monthly dental
supply budget.  As a percentage of net revenue, dental supplies
decreased to 6.6% for the quarter ended June 30, 2009 compared to 7.1% for the
quarter ended June 30, 2008.




Laboratory fees. For the
quarter ended June 30, 2009, laboratory fees decreased to $684,000 compared to
$739,000 for the quarter ended June 30, 2008, a decrease of $55,000 or 7.4%.
This decrease is primarily due to lower laboratory fees that were negotiated
with the Company’s significant vendors in December 2008.  As a
percentage of net revenue, laboratory fees decreased to 7.7% for the quarter
ended June 30, 2009 compared to 8.4% for the quarter ended June 30,
2008.




Occupancy. For the quarters
ended June 30, 2009 and 2008, occupancy expense remained constant at $1.2
million.    As a percentage of net revenue, occupancy
expense remained constant at 13.7% for the quarters ended June 30, 2009 and
2008.




Advertising and marketing.
For the quarter ended June 30, 2009, advertising and marketing expense decreased
to $99,000 compared to $119,000 for the quarter ended June 30, 2008, a decrease
of $20,000 or 17.0%.   This decrease is attributable to the
Company negotiating more favorable rates for its yellow page
advertising.  In May 2009, the Company initiated a radio advertising
campaign in its Denver and Colorado Springs, Colorado and Albuquerque, New
Mexico markets.  The cost associated with the campaign was $19,000 for
the quarter ended June 30, 2009.  The Company anticipates the cost of
this campaign to be $98,000 for the six months ending December 31,
2009.  As a percentage of net revenue, advertising and marketing
expense decreased to 1.1% for the quarter ended June 30, 2009 compared to 1.4%
for the quarter ended June 30, 2008.




Depreciation and
amortization-Offices.For the quarter ended June 30, 2009, depreciation
and amortization expenses attributable to the Offices increased to $612,000
compared to $602,000 for the quarter ended June 30, 2008, an increase of $10,000
or 1.7%. As a percentage of net revenue, depreciation and amortization expense
attributable to the Offices remained constant at 6.9 % for the quarters ended
June 30, 2009 and 2008.





General and
administrative-Offices. For the quarter ended June 30, 2009, general and
administrative expenses attributable to the Offices decreased to $1.1 million
compared to $1.3 million for the quarter ended June 30, 2008, a decrease of
$133,000 or 10.5%. This decrease is primarily due to decreased bad debt expense
of $67,000 and a decrease in malpractice insurance of $35,000.  As a
percentage of net revenue, general and administrative expenses attributable to
the Offices decreased to 12.8% for the quarter ended June 30, 2009 compared to
14.4% for the quarter ended June 30, 2008.




Contribution from dental
Offices.   As a result of the above, contribution from
dental Offices increased to $2.1 million for the quarter ended June 30, 2009
compared to $1.7 million for the quarter ended June 30, 2008, an increase of
$384,000 or 22.0%. As a percentage of net revenue, contribution from dental
Offices increased to 24.0% for the quarter ended June 30, 2009 compared to 19.9%
for the quarter ended June 30, 2008.




Corporate expenses - general and
administrative. For the quarter ended June 30, 2009, corporate expenses -
general and administrative increased to $1.2 million compared to $889,000 for
the quarter ended June 30, 2008, an increase of $299,000 or
33.6%.  This increase is primarily related to an increase of $143,000
in executive bonuses, $76,000 related to the cash component of the LTIP for
executives, $82,000 related to the equity component of the LTIP for executives
and $28,000 in corporate wages offset by a decrease of $36,000 in computer
maintenance that is now being recognized at the


21


Office
level.  As a percentage of net revenue, corporate expenses - general
and administrative increased to 13.4% for the quarter ended June 30, 2009
compared to 10.1% for the quarter ended June 30, 2008.




Corporate expenses - depreciation
and amortization. For the quarter ended June 30, 2009, corporate expenses
- depreciation and amortization decreased to $22,000 compared to $23,000 for the
quarter ended June 30, 2008, a decrease of $1,000 or 4.4%. As a percentage of
net revenue, corporate expenses – depreciation and amortization remained
constant at 0.3% for the quarters ended June 30, 2009 and 2008.




Operating
income.   As a result of the matters discussed above, the
Company’s operating income increased to $922,000 for the quarter ended June 30,
2009 compared to $835,000 for the quarter ended June 30, 2008, an increase of
$87,000 or 10.4%.  As a percentage of net revenue, operating income
increased to 10.4% for the quarter ended June 30, 2009 compared to 9.5% for the
quarter ended June 30, 2008.




Interest expense, net. For
the quarter ended June 30, 2009, interest expense decreased to $27,000 compared
to $58,000 for the quarter ended June 30, 2008, a decrease of $31,000 or 53.9%.
This decrease in interest expense is attributable to a reduction of the
principal amount outstanding on the Term Loan, reduced borrowings on the amended
Credit Facility and reduced interest rates.  As a percentage of net
revenue, interest expense decreased to 0.3% for the quarter ended June 30, 2009
compared to 0.7% for the quarter ended June 30, 2008.




Net
income.   As a result of the above, the Company reported
net income of $520,000 for the quarter ended June 30, 2009 compared to net
income of $450,000 for the quarter ended June 30, 2008, an increase of $69,000
or 15.4%. Net income for the quarter ended June 30, 2009 was net of income tax
expense of $375,000, while net income for the quarter ended June 30, 2008 was
net of income tax expense of $326,000. As a percentage of net revenue, net
income increased to 5.9% for the quarter ended June 30, 2009 compared to 5.1%
for the quarter ended June 30, 2008.




Six
Months Ended June 30, 2009 Compared to Six Months Ended June 30,
2008:




Net revenue. For the six
months June 30, 2009, net revenue increased $187,000, or 1.1%, to $17.9 million
compared to $17.7 million for the six months ended June 30, 2008. This increase
is attributable to an increase in same store net revenue from specialty
dentistry of $221,000 along with a de novo Office the Company
opened in May 2008 that generated an additional $102,000 in net revenue, offset
by a decrease in same store net revenue from general dentistry of
$136,000.  Despite a slight increase in net revenue for the six months
ended June 30, 2009 compared to the six months ended June 30, 2008, the Company
believes it continues to experience a general weakness in the economy in its
markets.





Clinical salaries and
benefits. For the six months ended June 30, 2009, clinical salaries and
benefits decreased $162,000, or 3.1%, to $5.0 million compared to $5.2 million
for the six months ended June 30, 2008. This decrease is primarily due to
reduced administrative wages as a result of fewer front desk personnel at the
Offices in the six months ended June 30, 2009 compared to the six months ended
June 30, 2008.  As a percentage of net revenue, clinical salaries and
benefits decreased to 27.9% for the six months ended June 30, 2009 compared to
29.1% for the six months ended June 30, 2008.




Dental supplies. For the six
months ended June 30, 2009, dental supplies decreased to $1.1 million compared
to $1.2 million for the six months ended June 30, 2008, a decrease of $94,000 or
7.7%.  This decrease is attributable to three factors: (1) fewer new
dentists requesting initial dental supply inventories; (2) a 3% rebate from the
Company’s primary dental supply vendor that will be effective through 2009; and
(3) a concentrated effort that began in January 2009 to reduce dental supply
expense through the implementation of a new process for the monthly dental
supply budget.  As a percentage of net revenue, dental supplies
decreased to 6.3% for the six months ended June 30, 2009 compared to 6.9% for
the six months ended June 30, 2008.




Laboratory fees. For the six
months ended June 30, 2009, laboratory fees decreased to $1.3 million compared
to $1.4 million for the six months ended June 30, 2008, a decrease of $70,000 or
5.0%. This decrease is primarily due to lower laboratory fees that were
negotiated with the Company’s significant vendors in December
2008.   As a percentage of net revenue, laboratory fees decreased
to 7.4% for the six months ended June 30, 2009 compared to 7.9% for the six
months ended June 30, 2008.




Occupancy. For the six months
ended June 30, 2009 and 2008, occupancy expense remained constant at $2.4
million.  As a percentage of net revenue, occupancy expense increased
to 13.6% for the six months ended June 30, 2009 compared to 13.5% for the six
months ended June 30, 2008.




Advertising and marketing.
For the six months ended June 30, 2009, advertising and marketing expense
decreased to $184,000 compared to $227,000 for the six months ended June 30,
2008, a decrease of $43,000 or 18.9%.  This decrease is attributable
to the Company negotiating more favorable rates for its yellow page
advertising.  In May 2009, the Company


22


initiated
a radio advertising campaign in its Denver and Colorado Springs, Colorado and
Albuquerque, New Mexico markets.  The cost associated with the
campaign was $19,000 for the six months ended June 30, 2009.  The
Company anticipates the cost of this campaign to be $98,000 for the six months
ending December 31, 2009.  As a percentage of net revenue, advertising
and marketing expense decreased to 1.0% for the six months ended June 30, 2009
compared to 1.3% for the six months ended June 30, 2008.




Depreciation and
amortization-Offices.For the six months ended June 30, 2009 and 2008,
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 6.9% for the six
months ended June 30, 2009 compared to 6.8% for the six months ended June 30,
2008.





General and
administrative-Offices. For the six months ended June 30, 2009, general
and administrative expenses attributable to the Offices decreased to $2.3
million compared to $2.4 million for the six months ended June 30, 2008, a
decrease of $141,000 or 5.8%.  This decrease is primarily due to
decreased bad debt expense of $78,000 and a decrease in malpractice insurance of
$58,000.  As a percentage of net revenue, general and administrative
expenses attributable to the Offices decreased to 12.8% for the six months ended
June 30, 2009 compared to 13.7% for the six months ended June 30,
2008.




Contribution from dental
Offices.   As a result of the above, contribution from
dental Offices increased $625,000 or 16.8%, to $4.3 million for the six months
ended June 30, 2009 compared to $3.7 million for the six months ended June 30,
2008. As a percentage of net revenue, contribution from dental Offices increased
to 24.2% for the six months ended June 30, 2009 compared to 20.9% for the six
months ended June 30, 2008.




Corporate expenses - general and
administrative. For the six months ended June 30, 2009, corporate
expenses - general and administrativeincreased to $2.2
million compared to $1.8 million for the six months ended June 30, 2008, an
increase of $333,000 or 18.2%. This increase is primarily related to an increase
of $243,000 in executive bonuses, $76,000 related to the cash component of the
LTIP for executives, $82,000 related to the equity component of the LTIP for
executives offset by a decrease of $72,000 in computer maintenance that is now
being recognized at the Office level.  As a percentage of net revenue,
corporate expenses - general and administrative increased to 12.1% for the six
months ended June 30, 2009 compared to 10.3% for the six months ended June 30,
2008.




Corporate expenses - depreciation
and amortization. For the six months ended June 30, 2009, corporate
expenses - depreciation and amortization decreased to $45,000 compared to
$47,000 for the six months ended June 30, 2008, a decrease of $2,000 or
4.5%.  As a percentage of net revenue, corporate expenses –
depreciation and amortization remained constant at 0.3% for the six months ended
June 30, 2009 and 2008.




Operating
income.   As a result of the matters discussed above, the
Company’s operating income increased to $2.1 million for the six months ended
June 30, 2009 compared to $1.8 million for the six months ended June 30, 2008,
an increase of $294,000 or 16.0%. As a percentage of net revenue, operating
income increased to 11.9% for the six months ended June 30, 2009 compared to
10.4% for the six months ended June 30, 2008.




Interest expense, net. For
the six months ended June 30, 2009, interest expense decreased to $69,000
compared to $136,000 for the six months ended June 30, 2008, a decrease of
$67,000 or 49.0%. This decrease in interest expense is attributable to a
reduction of the principal amount outstanding on the Term Loan, reduced
borrowings on the Credit Facility and reduced interest rates.  As a
percentage of net revenue, interest expense decreased to 0.4% for the six months
ended June 30, 2009 compared to 0.8% for the six months ended June 30,
2008.




Net
income.   As a result of the above, the Company reported
net income of $1.2 million for the six months ended June 30, 2009 compared to
net income of $968,000 for the six months ended June 30, 2008, an increase of
$229,000 or 23.6%.  Net income for the six months ended June 30, 2009
was net of income tax expense of $867,000, while net income for the six months
ended June 30, 2008 was net of income tax expense of $734,000. As a percentage
of net revenue, net income increased to 6.7% for the six months ended June 30,
2009 compared to 5.5% for the six months ended June 30, 2008.




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, 2009, the Company had a working capital deficit of approximately $1.5
million, retained earnings of $7.4 million and a cash balance of $1.2
million.




Net cash
provided by operating activities was approximately $3.0 million and $2.9 million
for the six months ended June 30, 2009 and 2008, respectively.  During
the 2009 period, excluding net income and after adding back non-cash items,
the


23


Company’s
cash provided by operating activities consisted primarily of an increase in
accounts payable and accrued expenses of approximately $861,000 and an increase
in income taxes payable of approximately $76,000, offset by an increase in
accounts receivable of $839,000, an increase in prepaid expenses and other
assets of approximately $147,000 and a decrease in other long-term obligations
of $66,000.  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.




Net cash
used in investing activities was approximately $193,000 and $893,000 for the six
months ended June 30, 2009 and 2008, respectively. For the six months ended June
30, 2009, the Company invested approximately $193,000 in the purchase of
additional equipment.  For the six months ended June 30, 2008, the
Company invested approximately $357,000 in the development of a de novo Office and $536,000
in the purchase of additional equipment, which included $163,000 to upgrade the
Company’s payroll time collection system and $157,000 to remodel an
Office.




Net cash
used in financing activities was approximately $2.8million
for the six months ended June 30, 2009 and $2.3 million for the six months ended
June 30, 2008. During the six months ended June 30, 2009, net cash used in
financing activities was comprised of approximately $170,000 used in the
purchase and retirement of Common Stock, approximately $633,000 for the payment
of dividends, approximately $1.7 million used to pay down the Credit Facility
and $460,000 to pay down the Term Loan, partially offset by approximately
$98,000 in proceeds from the exercise of Common Stock options and $1,000 in tax
benefit of Common Stock options exercised.  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 to pay down 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.




On June
30, 2009, the Company amended its Credit Facility.  The amended Credit
Facility extends the expiration of the credit agreement from May 31, 2010 to May
31, 2011.  The Credit Facility allows the Company to borrow, on a
revolving basis, an aggregate principal amount not to exceed $7.0 million at
either, or a combination of, the lender’s Base Rate or at LIBOR plus a LIBOR
rate margin, at the Company’s option.  The Base Rate computes interest
at the higher of the lender’s “prime rate” or the Federal Funds Rate plus a
margin.  The amendment adjusts the Base Rate margin from 0.5% to
2.5%.  The LIBOR option computes interest at the LIBOR rate as of the
date such LIBOR rate loan was made plus a LIBOR rate margin.  The
amendment states that the LIBOR rate is the higher of 1.5% or the LIBOR rate and
the margin is adjusted from 1.25% to 3.875%.  A commitment fee on the
average daily unused amount of the revolving loan commitment during the
preceding quarter is also assessed and was increased from 0.25% to 0.40% as of
June 1, 2009.  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, 2009, the Company had $2.7
million outstanding under the LIBOR rate option and $4.3 million available
for borrowing under the Credit Facility.  As of June 30, 2009, the
Company’s LIBOR borrowing rate was 1.57% and, effective with the amended Credit
Facility, was increased to 5.375% on July 1, 2009.  Management
believes that the Base Rate margin and the LIBOR rate margin increased as a
result of the lender’s increased cost of funds and not because of the Company’s
credit quality.  The Credit Facility requires the Company to comply
with certain covenants and financial ratios. At June 30, 2009, the Company was
in full compliance with all of its covenants under the Credit
Facility.





On
October 5, 2006, the Company entered into a $4.6 million Term Loan to finance a
“dutch auction” tender offer for shares of its Common Stock. Under the Term
Loan, $2.3 million was borrowed at a fixed interest rate of 7.05% and the
remaining $2.3 million was borrowed at a floating interest rate of LIBOR plus
1.5%.  The $2.3 million borrowed at a fixed rate was achieved by the
Company by entering into a fixed for floating interest rate swap that the
Company designates as a cash flow hedge under
SFAS No. 133.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, 2009, $1.0 million
was outstanding at the fixed rate of 7.05% and $1.0 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, 2009, the Company was in full compliance with all of its covenants under the
Term Loan.


24





As of
June 30, 2009, the Company had the following debt and lease
obligations:





Payments due by PeriodTotal
                            
                            
                            Less than1
                              year
                            
                            
                            1-3 years
                            
                            
                            3-5 years
                            
                            
                            More than
                              5 yearsDebt
      obligations
                            
                            $
                            4,770,000
                            
                            
                            $
                            920,000
                            
                            
                            $
                            3,850,000
                            
                            
                            $
                            -
                            
                            
                            $
                            -Operating
      lease obligations
                            
                            
                            8,128,281
                            
                            
                            
                            2,961,400
                            
                            
                            
                            3,793,995
                            
                            
                            
                            1,368,404
                            
                            
                            
                            4,482Total
                            
                            $
                            12,898,281
                            
                            
                            $
                            3,881,400
                            
                            
                            $
                            7,643,995
                            
                            
                            $
                            1,368,404
                            
                            
                            $
                            4,482





The Company from time to
time may purchase its Common Stock on the open market.During the quarter
ended June 30, 2009, the Company, in 16 separate transactions, purchased 7,579
shares of its Common Stock for total consideration of approximately $101,000 at
prices ranging from $11.50 to $15.04.  All purchases were made on the
open market pursuant to plans that were approved by the Board of Directors. As
of June 30, 2009, there was approximately $717,000 available for the purchase of
the Company’s Common Stock under these plans.  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





During the second
quarter of 2009, the Company signed a new lease for a de novooffice in the
Albuquerque, New Mexico market.  The Company expects this office to
open in the second half of 2010.




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, 2009.  On the basis of this review, the
Company’s management, including the Chief Executive Officer and Chief Financial
Officer, concluded that the Company’s disclosure controls and procedures were
effective as of June 30, 2009, 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 control over financial reporting (as
defined in Rules 13a – 15(f) and 15d – 15(f) of the Exchange Act) that occurred
in the quarter ended June 30, 2009 that materially affected, or are reasonably
likely to materially affect, its internal control over financial
reporting.


25





PART II.  OTHER
INFORMATION




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




Issuer
Purchases of Equity Security





The
following chart provides information regarding Common Stock purchased by the
Company during the period April 1, 2009 through June 30, 2009.





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(1)
                    
                    
                    Approximate
                      Dollar
      Value
                      Of
      Shares That
                      May
      Yet Be
                      Purchased
                      Under
      the
                      Plans
      or
                      Programs
      (1)April
      1, 2009 through April  30, 2009
                    
                    
                    2,432
                    
                    
                    $
                    11.82
                    
                    
                    
                    2,432
                    
                    
                    $
                    789,428May
      1, 2009 through May 31, 2009
                    
                    
                    1,150
                    
                    
                    
                    12.01
                    
                    
                    
                    1,150
                    
                    
                    $
                    775,616June
      1, 2009 through June 30, 2009
                    
                    
                    3,997
                    
                    
                    
                    14.62
                    
                    
                    
                    3,997
                    
                    
                    $
                    717,185Total
                    
                    
                    7,579
                    
                    
                    $
                    13.33
                    
                    
                    
                    7,579




(1)
            All purchases were made on the
      open market pursuant to plans that were approved by the Board of
      Directors.  The Company’s Board of Directors has authorized a
      stock repurchase program since 2000.  The maximum authorized
      amounts under the program have ranged from $150,000 to $2.4
      million.  Most recently, in August 2008, the Board of Directors
      approved up to $2.0 million of stock repurchases.  As of June
      30, 2009, there was approximately $717,000 available for the purchase of
      the Company’s Common Stock under these plans. 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.




26




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





(a)
            The
      Company’s Annual Meeting of Shareholders was held on June 4,
      2009.


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




For
                  
                  
                  Withheld
                    Authority
                  
                  
                  AbstainFrederick
      W.J. Birner
                  
                  
                  1,758,012
                  
                  
                  
                  11,824
                  
                  
                  
                  -Mark
      A. Birner
                  
                  
                  1,758,012
                  
                  
                  
                  11,824
                  
                  
                  
                  -





Continuing
Directors


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





After the
meeting, the following director continued to serve his three-year term as a
Class II director, which term will expire at the Company’s annual meeting in
2011:





Brooks G.
O’Neil





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


Authorization
to increase the number of shares of Common Stock available under the 2005 Equity
Incentive Plan from 425,000 to 625,000:





For
              
              Against
              
              Abstain
              
              Not
      Voted1,240,001
              
              41,136
              
              -
              
              488,699





The
matters mentioned above are described in detail in the Company’s definitive
proxy statement dated April 23, 2009 for the Annual Meeting of Shareholders held
on June 4, 2009.


27




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,
      1997.10.1
              
              Seventh
      Amendment of Second Amended and Restated Credit Agreement dated June 30,
      2009 between the Registrant and Key Bank of Colorado.31.1
              
              Rule
      13a-14(a) Certification of the Chief Executive Officer.31.2
              
              Rule
      13a-14(a) Certification of the Chief Financial Officer.32.1
              
              Section
      1350 Certifications of the Chief Executive Officer and the Chief Financial
      Officer.




28


SIGNATURES




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





BIRNER
      DENTAL MANAGEMENT SERVICES, INC.Date:  August
      13, 2009
                      By:
                      
                      /s/ Frederic W.J. BirnerName:
                      
                      Frederic
      W.J. BirnerTitle:
                      
                      Chairman
      of the Board and Chief Executive Officer(Principal
      Executive Officer)Date:  August
      13, 2009
                      By:
                      
                      /s/ Dennis N. GentyName:
                      
                      Dennis
      N. GentyTitle:
                      
                      Chief
      Financial Officer, Secretary, and Treasurer(Principal
      Financial and Accounting Officer)




29