**UNITED
          STATES SECURITIES**
 **AND
          EXCHANGE COMMISSION**
 **WASHINGTON,
          D.C. 20549**
 
 **FORM
          10-K**
 
 **[X]**
              **ANNUAL
                  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934**
  For 
                        the fiscal year ended:        December
                        31, 2006
 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
                (State
                  or other jurisdiction of incorporation or organization)
              
              84-1307044
                (IRS
                  EmployerIdentification
                  No.)
 
 3801
                  EAST FLORIDA AVENUE, SUITE 508
                DENVER,
                  COLORADO
                (Address
                  of principal executive offices)
              
              80210
                (Zip
                  Code)
 
 Registrant’s
        telephone number: (303)
        691-0680
 
 Securities
        registered pursuant to Section 12(b) of the Act:
 
 Common
                  Stock, without par value
              
              Nasdaq
                  Capital Market
 
 Securities
        registered pursuant to Section 12(g) of the Act:
 
 None
                (Title
                  of Class)
 
  Indicate
        by check mark if the registrant is a well-known seasoned issuer, as defined
        in
        Rule 405 of the Securities Act. Yes [ ]   No
        [X]
 
 Indicate
        by check mark if the registrant is not required to file reports pursuant
        to
        Section 13 or Section 15(d) of the Act. Yes [ ]   No
        [X]
  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 if disclosure of delinquent filers pursuant to Item 405 of
        Regulation S-K is not contained herein, and will not be contained, to the
        best
        of Registrant’s knowledge, in definitive proxy or information statements
        incorporated by reference in Part III of this Form 10-K or any amendment
        to this
        Form 10-K. [ ]
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer. See definition of accelerated
        filer and large accelerated filer in Ruler 12b-2 or the Exchange Act.
 
 Large
        accelerated filer [ ] Accelerated filer Non-accelerated
        filer [X]
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Act). Yes [ ] No
        [ X ]
 
 Indicate
        by check mark whether the Registrant is an accelerated filer (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
                Common
                  Stock, without par value
              
              Shares
                  Outstanding as of March 26, 2007
                2,123,082
 
 
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            1
            -*
  
 The
        aggregate market value of the Registrant’s voting stock held by non-affiliates
        of the Registrant computed by reference to the last reported sale price of
        its
        Common Stock as of June 30, 2006, the last business day of the Registrant’s most
        recent completed second fiscal quarter, was $21,876,840. This calculation
        assumes that certain parties may be affiliates of the Registrant and that
        1,411,409 shares of Common Stock are held by non-affiliates.
 
 On
        July
        13, 2005, the Company announced that its Board of Directors had declared
        a
        2-for-1 stock split of its common stock. The 2-for-1 stock split, which was
        effected as a dividend, was distributed on August 8, 2005, to shareholders
        of
        record at the close of business on August 1, 2005. The stock split increased
        the
        number of shares outstanding on August 8, 2005 from 1,210,295 to 2,420,590.
        All
        shares and earnings per share calculations for all periods in this document
        reflect the effect of the stock split.
 
 DOCUMENTS
        INCORPORATED BY REFERENCE
 
 The
        information required by Part III of this Report (Items 10,11,12, 13 and 14)
        is
        incorporated by reference from the Registrant’s Proxy Statement to be filed
        pursuant to Regulation 14A within 120 days of the end of the Registrant’s fiscal
        year end.
 
 FORWARD-LOOKING
        STATEMENTS
 
 Statements
        contained in this Annual Report on Form 10-K (“Annual Report”) of Birner Dental
        Management Services, Inc. (the “Company”), which are not historical in nature,
        are forward-looking statements within the meaning of the Private Securities
        Litigation Reform Act of 1995. These forward-looking statements include
        statements in Item 1., “Business,” Item 1A., “Risk Factors,” Item 5., “Market
        for the Registrant’s Common Equity Related Stockholder Matters and Issuer
        Purchases of Equity Securities” and Item 7., “Management’s Discussion and
        Analysis of Financial Condition and Results of Operations,” regarding, for
        example, the intent, belief or current expectations of the Company or its
        officers with respect to the development or acquisition of additional dental
        practices and the successful integration of such practices 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.
 
 Investors
        and prospective investors are cautioned that any such forward-looking statements
        are not guarantees of future performance and involve risks and uncertainties.
        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,
        failure to consummate or successfully integrate proposed developments or
        acquisitions of dental practices, the ability of the Company to manage
        effectively an increasing number of dental practices, the general economy
        of the
        United States and the specific markets in which the Company’s dental practices
        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,” 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.
 
  
 Birner
        Dental Management Services, Inc.
 Form
        10-K
 Table
        of
        Contents
 
 
 Part
              Item(s)
              
              PageI.
              1.
              Business
              41A.
              Risk
                  Factors
              112.
              Properties
              183.
              Legal
                  Proceedings
              214.
              Submission
                  of Matters to a Vote of Security Holders
              21II.
              5.
              Market
                  for Registrant’s Common Equity, Related Stockholder Matters and Issuer
                  Purchases of Equity Securities
              226.
              Selected
                  Financial Data
              257.
              Management’s
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              267A.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              378.
              Financial
                  Statements and Supplementary Data
              389.
              Changes
                  in and Disagreements with Accountants on Accounting and Financial
                  Disclosure
              639A.
              Controls
                  and Procedures
              639B.
              Other
                  Information
              63III.
              10.
              Directors
                  and Executive Officers of the Registrant
              6411.
              Executive
                  Compensation
              6412.
              Security
                  Ownership of Certain Beneficial Owners and Management
              6413.
              Certain
                  Relationships and Related Transactions
              6414.
              Principal
                  Accountant Fees and Services
              64IV.
              15.
              Exhibits,
                  Financial Statement Schedules
              65Signatures
              66
 
 
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            2
            -*
  **PART
        I**
 
 **ITEM
        1. BUSINESS**
  **General**
  The
        Company develops, acquires and provides business services to geographically
        dense dental practice networks in select markets, currently including Colorado,
        New Mexico and Arizona. With its 43 dental practices (“Offices”) in Colorado and
        nine Offices in New Mexico, the Company believes, based on industry knowledge
        and contacts, that it is the largest provider of dental management services
        in
        Colorado and New Mexico. The Company currently provides business services
        to 60
        Offices, of which 35 were acquired and 25 were developed internally
        (“ *de
        novo* Offices”). The Company provides a solution to the needs of dentists, patients,
        and third-party payors by allowing the Company’s affiliated dentists to provide
        high-quality, efficient dental care in patient-friendly, family practice
        settings. Dentists practicing at the various locations provide comprehensive
        general dentistry services, and the Company offers specialty dental services
        through affiliated specialists.
 
 **Dental
        Services Industry**
 
 According
        to the Centers for Medicare and Medicaid Services (“CMS”), dental expenditures
        in the U.S. increased from $38.9 billion in 1993 to $86.6 billion in 2005.
        CMS
        also projects that dental expenditures will reach approximately $163.4 billion
        by 2016, representing an increase of approximately 88.7% over 2005 dental
        expenditures. The Company believes this growth is driven by (i) an increase
        in
        the number of people covered by third-party payment arrangements and the
        resulting increase in their utilization of dental services, (ii) an increasing
        awareness of the benefits of dental treatments, (iii) the retention of teeth
        into later stages of life, (iv) the general aging of the population, as older
        patients require more extensive dental services, and (v) a growing awareness
        of
        and demand for preventative and cosmetic services.
 
 Traditionally,
        most dental patients have paid for dental services themselves rather than
        through third-party payment arrangements such as indemnity insurance, preferred
        provider plans or managed dental plans. More recently, factors such as increased
        consumer demand for dental services and the desire of employers to provide
        enhanced benefits for their employees have resulted in an increase in
        third-party payment arrangements for dental services. Current market trends,
        including the rise of third-party payment arrangements, have contributed
        to the
        increased consolidation of practices in the dental services industry and
        to the
        formation of dental practice management companies. **** The
        Company believes that the percentage of people covered by third-party payment
        arrangements will continue to increase due in part to the popularity of such
        arrangements.
 
 **Patient
        Services**
 
 The
        Company’s affiliated Offices seek to develop long-term relationships with
        patients. Dentists practicing at the Offices provide comprehensive general
        dentistry services, including crowns and bridges, fillings (including
        state-of-the-art gold, porcelain and composite inlays/onlays), and aesthetic
        procedures such as porcelain veneers and bleaching. In addition, hygienists
        provide cleanings and periodontal services including root planing and scaling.
        If appropriate, the patient is offered specialty dental services, such as
        orthodontics, oral surgery pediatrics, endodontics and periodontics, which
        are
        available at certain of the Company’s Offices. Affiliated specialists rotate
        through certain Offices of the Company providing these services. By offering
        a
        broad range of dental services within a single practice, the Company is able
        to
        distinguish itself from its competitors and realize operating efficiencies
        and
        economies of scale through higher utilization of professionals and facilities.
 
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            3
            -*
  **Dental
        Practice Management Model**
 
 The
        Company has developed a dental practice management model designed to achieve
        its
        goal of providing personalized, high-quality dental care in a patient friendly
        setting similar to that found in a traditional private practice. The Company’s
        dental practice management model consists of the following components:
 
 ***Recruiting
        of Dentists*** *.* The
        Company seeks dentists with excellent skills and experience, who are sensitive
        to patient needs, interested in establishing long-term patient relationships
        and
        are motivated by financial incentives to enhance Office operating performance.
        The Company believes that practicing in its network of Offices offers dentists
        advantages over a solo or smaller group practice, including relief from the
        burden of most administrative responsibilities and the resulting ability
        to
        focus more time on practicing dentistry. Advantages to dentists affiliated
        with
        the Company also include relief from capital commitments, a compensation
        structure that rewards productivity, employee benefits such as health insurance,
        a 401(k) plan, continuing education, paid holidays and vacation, and payment
        of
        professional membership fees and malpractice insurance. The Company’s effort to
        recruit managing dentists is primarily focused on dentists with three or
        more
        years of practice experience. From time to time, the Company will recruit
        associate dentists graduating from residency programs.
 
 The
        Company advertises for the dentists it seeks in national and regional dental
        journals, local market newspapers, professional conferences and directly
        at
        dental schools with strong residency programs. In addition, the Company has
        found that its existing affiliated dentists provide a good referral source
        for
        recruiting future dentists.
 
 ***Training
        of Non-Dental Employees*** *.* The
        Company has developed a formalized training program for non-dental employees,
        which is conducted by the Company’s staff. This program includes training in
        patient interaction, scheduling, use of the computer system, office procedures
        and protocols, and third-party payment arrangements. The Company also offers
        formalized mandatory training programs for employees regarding the CFR Title
        29
        Occupational Safety and Health Act (OSHA), CFR Title 40 Environmental Protection
        Agency, State dental practice law, State and local regulations and the Health
        Insurance Portability and Accountability Act (HIPAA) to ensure compliance
        with
        government regulations. Additionally, the Company encourages its employees
        to
        attend continuing education seminars as a supplement to the Company’s formalized
        training program. Company regional directors also meet with the Company’s senior
        management and administrative staff to review pertinent and timely topics
        and
        generate ideas that can be shared with all Offices. Management believes that
        its
        training program and ongoing meetings with employees have contributed to
        an
        improvement in the operations at its Offices.
 
 ***Staffing
        Model*** *.* The
        Company’s staffing model attempts to maximize profitability in the Offices by
        adjusting personnel according to an Office’s revenue level. Staffing at mature
        Offices can vary based on the number of treatment rooms, but generally includes
        one to three dentists, two to four dental assistants, one to three hygienists,
        one to three hygiene assistants and two to five front office personnel. Staffing
        at *de
        novo* Offices
        typically consists initially of one dentist, one dental assistant and one
        front
        office person. As the patient base builds at an Office, additional staff
        is
        added to accommodate the growth as provided in the staffing model developed
        by
        the Company. The Company currently has a staff of four regional directors
        in
        Colorado, one regional director for New Mexico and one regional director
        for
        Arizona. These regional directors are each responsible for between nine and
        14
        Offices. These directors oversee operations, training and development of
        non-dental employees, recruiting and work to implement the Company’s dental
        practice management model.
 
 ***Management
        Information Systems*** *.* The
        Company has a networked management information system, which allows the Company
        to receive uniform data that can be analyzed easily in order to measure and
        improve operating performance in the Offices. The Company’s system enables it to
        maintain on-line contact with each of its Offices and allows the Company
        to
        monitor the Offices by obtaining real-time data relating to patient and
        insurance information, treatment plans, scheduling, revenues and collections.
        The Company provides each Office with monthly operating and financial data,
        which is analyzed and used to improve the Office’s performance.
 
 ***Advertising
        and Marketing*** *.* The
        Company seeks to increase patient volume at its Offices through television,
        print advertising and other marketing techniques. The Company’s advertising
        efforts are primarily aimed at increasing patient awareness and emphasize
        the
        high-quality care provided, as well as the timely, individualized attention
        received from the Company’s affiliated dentists. During 2006, the Company’s
        television and print advertising emphasized the New Mexico and Colorado Springs,
        Colorado markets. During 2005, the Company’s television and print advertising
        focused on the Denver, Colorado market.
 
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            4
            -*
  ***Quality
        Assurance*** *.* The
        Company has designed and implemented a quality assurance program for dental
        personnel, including a background check. Each affiliated dentist is a graduate
        of an accredited dental program, and most State licensing authorities require
        dentists to undergo annual training. The dentists and hygienists practicing
        at
        the Offices obtain a portion of their required continuing education through
        the
        Company’s internal training programs.
 
 ***Purchasing/Vendor
        Relationships*** *.* The
        Company has negotiated arrangements with a number of its more significant
        vendors, including dental laboratory and supply providers, to reduce unit
        costs.
        By aggregating supply purchasing and laboratory usage, the Company believes
        that
        it has received favorable pricing compared to solo or smaller group practices.
        This system of centralized buying and distribution on an as-needed basis
        reduces
        the storage of inventory and supplies at the Offices.
 
 **Payor
        Mix**
 
 The
        Company’s payors include indemnity insurers, preferred provider plans, managed
        dental care plans, and uninsured cash patients. The Company seeks to supplement
        its fee-for-service business with revenue derived from contracts with capitated
        managed dental care plans. The Company negotiates the managed care contracts
        on
        behalf of the professional corporations that operate the Offices (the “P.C.s”),
        and the P.C.s enter into the contracts with the various managed care plans.
 
 Capitated
        managed dental care plans accounted for 33.5% of the Company’s total dental
        group practice revenue in 2006. During the years ended December 31, 2004,
        2005,
        and 2006, the Company derived the corresponding percentages of total dental
        group practice revenue from the following listed companies’ capitated managed
        dental care plans (includes capitation premiums and co-payments): Aetna
        Healthcare was responsible for 8.0%, 7.8% and 9.9% respectively, CIGNA Dental
        Health was responsible for 6.9%, 7.2% and 7.5% respectively, and Fortis Benefits
        Insurance Company was responsible for 4.6%, 4.1% and 4.0% respectively.
 
 **The
        Company Dentist Philosophy**
 
 The
        Company seeks to develop long-term relationships with its dentists by building
        the practice at each of its Offices around a managing dentist. The Company’s
        dental practice management model provides managing dentists the autonomy
        and
        independence of a private family practice setting without the capital commitment
        and without the administrative burdens such as billing/collections, payroll,
        accounting, and marketing. This gives the managing dentists the ability to
        focus
        primarily on providing high-quality dental care to their patients. The managing
        dentist retains the responsibilities of team building and developing long-term
        relationships with patients and staff by building trust and providing a
        friendly, relaxed atmosphere in his or her Office. The managing dentist
        exercises his or her own clinical judgment in matters of patient care. In
        addition, managing dentists have a financial incentive to improve the operating
        performance of their Offices through a bonus based upon the operating
        performance of the Office.
 
 When
        the
        revenues of an Office justify expansion, associate dentists can be added
        to the
        team. Depending on performance and abilities, an associate dentist may be
        given
        the opportunity to become a managing dentist.
 
 **Expansion
        Program**
 
 Since
        its
        formation in May 1995, the Company has acquired 42 practices, including six
        practices that have been consolidated with existing Offices and one practice
        that was closed during 2004. Of those acquired practices (including the six
        practices consolidated with existing Offices and the one practice closed
        during
        2004), 34 were located in Colorado, five were located in New Mexico, and
        three
        were located in Arizona. Although the Company has acquired and integrated
        several group practices, many of the Company’s acquisitions have been solo
        dental practices. The Company has developed 26 *de
        novo* Offices
        (including one practice that was consolidated with an existing Office).  During
        2006, the Company opened four *de
        novo* Offices;
        two in Phoenix, Arizona and one each in the Denver, Colorado and Albuquerque,
        New Mexico markets.
 
 The
        Company expects to increase revenue in existing markets by enhancing the
        operating performance of its existing Offices. Enhancing operating performance
        will principally be accomplished through the expansion of specialty services
        and
        the aggressive recruitment of additional dentists and hygienists to further
        utilize existing physical capacity in the Offices. Additionally, the Company
        has
        remodeled certain Offices to expand the number of
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            5
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  treatment
        rooms in an Office so that more patients can be treated by the Company’s
        affiliated dentists, hygienists and staff. Also, the Company has completed
        26 *de
        novo* Office
        openings and continues to look for potential future development sights.
        Furthermore, the Company evaluates potential acquisition candidates, from
        time
        to time, and if it finds one that is suitable for its dental practice management
        model, it may consummate such acquisition.
 
 **Affiliation
        Model**
 
 ***Relationship
        with Professional Corporations (P.C.s)***
 
 Each
        Office is operated by a P.C., which is owned by one of four different licensed
        dentists affiliated with the Company. The Company’s President, Mark A. Birner,
        DDS, is one of the four dentists and individually owns 50 P.C.s. The Company
        has
        entered into agreements with the owners of the P.C.s which provide that upon
        the
        death, disability, incompetence or insolvency of the owner, a loss of the
        owner’s license to practice dentistry, a termination of the owner’s employment
        by the P.C. or the Company, a conviction of the owner for a criminal offense,
        or
        a breach by the P.C. of the Management Agreement (as defined below) with
        the
        Company, the Company may require the owner to sell his or her shares in the
        P.C.
        for a nominal amount to a third-party designated by the Company. These
        agreements also prohibit the owner from transferring or pledging the shares
        in
        the P.C.s except to parties approved by the Company who agree to be bound
        by the
        terms of the agreements. Upon a transfer of the shares to another party,
        the
        owner agrees to resign all positions held as an officer or director of the
        P.C.
 
 One
        licensed dentist who owns a P.C. operating an Office in Colorado has entered
        into stock purchase, pledge and security agreements with the Company. Under
        this
        agreement, if certain events occur including the failure to perform the
        obligations under the employment agreement with the P.C., cessation of
        employment with the P.C. for any reason, death or insolvency or directly
        or
        indirectly causing the P.C. to breach its obligations under the Management
        Agreement, then the Company may cause the P.C. to redeem the dentist’s ownership
        interest in the P.C. for an agreed price which is not considered to be material
        by the Company. Two of the three directors of this P.C. are nominees of the
        Company, and the dentist has given the Company’s Chief Executive Officer, Fred
        Birner, an irrevocable proxy to vote his shares in the P.C.
 
 ***Management
        Agreements with Affiliated Offices***
 
 The
        Company derives all of its revenue from its management agreements with the
        P.C.s
        (the “Management Agreements”). Under each of the Management Agreements, the
        Company provides business and marketing services at the Offices, including
        (i)
        providing capital, (ii) designing and implementing marketing programs, (iii)
        negotiating for the purchase of supplies, (iv) staffing, (v) recruiting,
        (vi)
        training of non-dental personnel, (vii) billing and collecting patient fees,
        (viii) arranging for certain legal and accounting services, and (ix) negotiating
        with managed care organizations. The P.C. is responsible for, among other
        things, (i) supervision of all dentists and dental hygienists, (ii) ensuring
        compliance with all laws, rules and regulations relating to dentists and
        dental
        hygienists, and (iii) maintaining proper patient records. The Company has
        made,
        and intends to make in the future, loans to P.C.s in Colorado, New Mexico
        and
        Arizona to fund their acquisition of dental assets from third parties in
        order
        to comply with the laws of such states. Because the Company’s financial
        statements are consolidated with the financial statements of the P.C.s, these
        loans are eliminated in consolidation.
 
 Under
        the
        typical Management Agreement used by the Company, the P.C. pays the Company
        a
        management fee equal to the Adjusted Gross Center Revenue of the P.C. less
        compensation paid to the dentists and dental hygienists employed at the Office
        of the P.C. Adjusted Gross Center Revenue is comprised of all fees and charges
        booked each month by or on behalf of the P.C. as a result of dental services
        provided to patients at the Office, less any adjustments for uncollectible
        accounts, professional courtesies and other activities that do not generate
        a
        collectible fee. The Company’s costs include all direct and indirect costs,
        overhead and expenses relating to the Company’s provision of management services
        at the Office under the Management Agreement, including (i) salaries, benefits
        and other direct costs of Company employees who work at the Office, (ii)
        direct
        costs of all Company employees or consultants who provide services to or
        in
        connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
        advertising and other expenses incurred by the Company in carrying out its
        obligations under the Management Agreement, (iv) depreciation expense associated
        with the P.C.’s assets and the assets of the Company used at the Office, and the
        amortization of intangible asset value relating to the Office, (v) interest
        expense on indebtedness incurred by the Company to finance any of its
        obligations under the Management Agreement, (vi) general and malpractice
        insurance expenses, lease expenses and dentist recruitment expenses,
        (vii)
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            6
            -*
  personal
        property and other taxes assessed against the Company’s or the P.C.’s assets
        used in connection with the operation of the Office, (viii) out-of-pocket
        expenses of the Company’s personnel related to mergers or acquisitions involving
        the P.C., (ix) corporate overhead charges or any other expenses of the Company
        including the P.C.’s pro rata share of the expenses of the accounting and
        computer services provided by the Company, and (x) a collection reserve in
        the
        amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially
        all
        costs associated with the provision of dental services at the Office are
        borne
        by the Company, other than the compensation of the dentists and hygienists
        who
        work at the Offices of the P.C.s. This enables the Company to manage the
        profitability of the Offices. Each Management Agreement is for a term of
        40
        years. Further, each Management Agreement generally may be terminated by
        the
        P.C. only for cause, which includes a material default by or bankruptcy of
        the
        Company. Upon expiration or termination of a Management Agreement by either
        party, the P.C. must satisfy all obligations it has to the Company.
 
 The
        Company plans to continue to use the current form of its Management Agreement
        to
        the extent possible. However, the terms of the Management Agreement are subject
        to change to comply with existing or new regulatory requirements or to enable
        the Company to compete more effectively.
 
 ***Employment
        Agreements***
 
 Most
        dentists practicing at the Offices have entered into employment agreements
        or
        independent contractor agreements with a P.C. The majority of these agreements
        can be terminated by either party without cause with 90 days notice. The
        agreements typically contain non-competition provisions for a period of up
        to
        three to five years following their termination within a specified geographic
        area, usually a specified number of miles from the associated Office, and
        restrict solicitation of patients and employees. The employment agreement
        for
        one of the managing dentists who is also a shareholder of a P.C. has a term
        of
        20 years and can only be terminated by the employer P.C. upon the occurrence
        of
        certain events. If the employment of this managing dentist is terminated
        for any
        reason, the employer P.C. has the right to redeem the shares of the P.C.
        operating the Office, which are held by the managing dentist, for a nominal
        price. Managing dentists receive compensation based upon a specified amount
        per
        hour worked or a percentage of production attributable to their work, or
        a bonus
        based upon the operating performance of the Office, whichever is greater.
        Associate dentists are compensated based upon a specified amount per hour
        worked
        or a percentage of production attributable to their work, whichever is greater.
        Specialists are compensated based upon an hourly or monthly guarantee or
        a
        percentage of their own work, whichever is greater. The P.C. with whom the
        dentist has entered into an employment agreement pays the dentists’
compensation.
 
 As
        of
        December 31, 2006, the Company had 83 general dentists, 31 specialists and
        67
        hygienists that were employed by the P.C.s, and 385 non-dental
        employees.
 
 **Competition**
 
 The
        dental services industry is highly fragmented, consisting primarily of solo
        and
        smaller group practices. The dental practice management segment of this industry
        is highly competitive and is expected to become more competitive. In this
        regard, the Company expects that the provision of multi-specialty dental
        services at convenient locations will become increasingly more common. The
        Company is aware of several dental practice management companies that are
        operating in its markets, including Dental One, Bright Now, American Dental
        Partners, Inc. and Dental Health Centers of America. Companies with dental
        practice management businesses similar to that of the Company, which currently
        operate in other parts of the country, may begin targeting the Company’s
        existing markets for expansion. Such competitors may have a greater financial
        track record and soundness, superior affiliation models, a better reputation
        of
        existing affiliated practices, more management expertise or otherwise enjoy
        competitive advantages, which may make it difficult for the Company to compete
        against them.
 
 The
        business of providing general and specialty dental services is highly
        competitive in the markets in which the Company operates. The Company believes
        it competes with other providers of dental and specialty services on the
        basis
        of factors such as brand name recognition, convenience, cost and the quality
        and
        range of services provided. Competition may include practitioners who have
        more
        established practices and reputations. The Company also competes against
        established practices in the retention and recruitment of general dentists,
        specialists, hygienists and other personnel. If the availability of such
        individuals begins to decline in the Company’s markets, it may become more
        difficult to attract and retain qualified personnel to sufficiently staff
        the
        existing Offices or to meet the staffing needs of the Company’s planned
        expansion.
 
  *-
            7
            -*
  **Government
        Regulation**
 
 The
        practice of dentistry is regulated at both the state and federal levels,
        and the
        regulation of health care-related companies is increasing. There can be no
        assurance that the regulatory environment in which the Company or the P.C.s
        operate will not change significantly in the future. The laws and regulations
        of
        all states in which the Company operates impact the Company’s operations but do
        not currently materially restrict the Company’s operations in those states. In
        addition, state and federal laws regulate health maintenance organizations
        and
        other managed care organizations for which dentists may be providers. In
        connection with its operations in existing markets and expansion into new
        markets, the Company may become subject to additional laws, regulations and
        interpretations or enforcement actions. The laws regulating health care are
        broad and subject to varying interpretations, and there is currently a lack
        of
        case law construing such statutes and regulations. The ability of the Company
        to
        operate profitably will depend in part upon the ability of the Company and
        the
        P.C.s to operate in compliance with applicable health care regulations.
 
 ***State
        Regulation***
 
 The
        laws
        of many states, including Colorado and New Mexico, permit a dentist to conduct
        a
        dental practice only as an individual, a member of a partnership or an employee
        of a professional corporation, limited liability company or limited liability
        partnership. These laws typically prohibit, either by specific provision
        or as a
        matter of general policy, non-dental entities, such as the Company, from
        practicing dentistry, from employing dentists and, in certain circumstances,
        hygienists or dental assistants, or from otherwise exercising control over
        the
        provision of dental services. Under the Management Agreements, the P.C.s
        control
        all clinical aspects of the practice of dentistry and the provision of dental
        services at the Offices, including the exercise of independent professional
        judgment regarding the diagnosis or treatment of any dental disease, disorder
        or
        physical condition. Persons to whom dental services are provided at the Offices
        are patients of the P.C.s and not of the Company. The Company does not employ
        the dentists who provide dental services at the Offices nor does the Company
        have or exercise any control or direction over the manner or methods in which
        dental services are performed or interfere in any way with the exercise of
        professional judgment by the dentists.
 
 Many
        states, including Colorado, limit the ability of a person other than a licensed
        dentist, to own or control dental equipment or offices used in a dental
        practice. Some states allow leasing of equipment and office space to a dental
        practice under a bona fide lease, if the equipment and office remain under
        the
        control of the dentist. Some states, including New Mexico, require all
        advertisements to be in the name of the dentist. A number of states, including
        Arizona, Colorado and New Mexico, also regulate the content of advertisements
        of
        dental services. In addition, Colorado, New Mexico and Arizona, and many
        other
        states impose limits on the tasks that may be delegated by dentists to
        hygienists and dental assistants. Some states require entities designated
        as
“clinics” to be licensed, and may define clinics to include dental practices
        that are owned or controlled in whole or in part by non-dentists. These laws
        and
        their interpretations vary from state to state and are enforced by the courts
        and by regulatory authorities with broad discretion.
 
 Many
        states have fraud and abuse laws which are similar to the federal fraud and
        abuse law described below, and which in many cases apply to referrals for
        items
        or services reimbursable by any third-party payor, not just by Medicare and
        Medicaid. A number of states, including Arizona, Colorado and New Mexico,
        prohibit the submitting of false claims for dental services.
 
 Many
        states, including Colorado and New Mexico, also prohibit “fee-splitting” by
        dentists with any party except other dentists in the same Professional
        Corporation or practice entity. In most cases, these laws have been construed
        to
        apply to the practice of paying a portion of a fee to another person for
        referring a patient or otherwise generating business, and not to prohibit
        payment of reasonable compensation for facilities and services (other than
        the
        generation of referrals), even if the payment is based on a percentage of
        the
        practice’s revenues.
 
 In
        addition, many states have laws prohibiting paying or receiving any
        remuneration, direct or indirect, that is intended to include referrals for
        health care items or services, including dental items and services.
 
 In
        addition, there are certain regulatory risks associated with the Company’s role
        in negotiating and administering managed care contracts. The application
        of
        state insurance laws to third party payor arrangements, other than
        fee-for-service arrangements, is an unsettled area of law with little guidance
        available. As the P.C.s contract with third-party payors, on a capitation
        or
        other basis under which the relevant P.C. assumes financial risk, the
        P.C.s
  *-
            8
            -*
  may
        become subject to state insurance laws. Specifically, in some states, regulators
        may determine that the Company or the P.C.s are engaged in the business of
        insurance, particularly if they contract on a financial-risk basis directly
        with
        self-insured employers or other entities that are not licensed to engage
        in the
        business of insurance. In Arizona, Colorado and New Mexico, the P.C.s currently
        only contract on a financial-risk basis with entities that are licensed to
        engage in the business of insurance and thus are not subject to the insurance
        laws of those states. To the extent that the Company or the P.C.s are determined
        to be engaged in the business of insurance, the Company may be required to
        change the method of payment from third-party payors and the Company’s revenue
        may be materially and adversely affected.
 
 ***Federal
        Regulation***
 
 Federal
        laws generally regulate reimbursement, billing and self-referral practices
        under
        Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
        under Medicare or Medicaid, the impact of these laws on the Company to date
        has
        been negligible. There can be no assurance, however, that the P.C.s will
        not
        have patients in the future covered by these laws, or that the scope of these
        laws will not be expanded in the future, and if expanded, such laws or
        interpretations of the laws could have a material adverse effect on the
        Company’s business, financial condition and operating results.
 
 Federal
        regulations also allow state licensing boards to revoke or restrict a dentist’s
        license in the event the dentist defaults in the payment of a
        government-guaranteed student loan, and further allow the Medicare program
        to
        offset overdue loan payments against Medicare income due to the defaulting
        dentist’s employer. The Company cannot assure compliance by dentists with the
        payment terms of their student loans, if any.
 
 Revenues
        of the P.C.s or the Company from all insurers, including governmental insurers,
        are subject to significant regulation. Some payors limit the extent to which
        dentists may assign their revenues from services rendered to beneficiaries.
        Under these “reassignment” rules, the Company may not be able to require
        dentists to assign their third-party payor revenues unless certain conditions
        are met, such as acceptance by dentists of assignment of the payor receivable
        from patients, reassignment to the Company of the sole right to collect the
        receivables, and written documentation of the assignment. In addition,
        governmental payment programs such as Medicare and Medicaid limit reimbursement
        for services provided by dental assistants and other ancillary personnel
        to
        those services which were provided “incident to” a dentist’s services. Under
        these “incident to” rules, the Company may not be able to receive reimbursement
        for services provided by certain members of the Company’s Offices’ staff unless
        certain conditions are met, such as requirements that services must be of
        a type
        commonly furnished in a dentist’s office and must be rendered under the
        dentist’s direct supervision and that clinical Office staff must be employed by
        the dentist or the P.C. The Company does not currently derive a significant
        portion of its revenue under such programs.
 
 The
        operations of the Offices are also subject to compliance with regulations
        promulgated by OSHA relating to such matters as heat sterilization of dental
        instruments and the use of barrier techniques such as masks, goggles and
        gloves.
        The Company incurs expenses on an ongoing basis relating to OSHA monitoring
        and
        compliance.
 
 During
        2003, health care providers, including the Company, were required to comply
        with
        the electronic data security and privacy requirements of HIPAA. HIPAA delegates
        enforcement authority to the Centers for Medicare Services Office for Civil
        Rights. Noncompliance with HIPAA regulations can result in severe penalties
        up
        to $250,000 in fines and up to ten years in prison. As of December 31, 2006,
        the
        Company believes that it was in full compliance with all requirements of
        HIPPA
        and there has been no material impact on the Company due to the implementation
        of these new regulations.
 
 Although
        the Company believes its operations as currently conducted are in material
        compliance with existing applicable laws and regulations, there can be no
        assurance that the Company’s contractual arrangements will not be successfully
        challenged as violating applicable laws and regulations or that the
        enforceability of such arrangements will not be limited as a result of such
        laws
        and regulations. In addition, there can be no assurance that the business
        structure under which the Company operates, or the advertising strategy the
        Company employs, will not be deemed to constitute the unlicensed practice
        of
        dentistry or the operation of an unlicensed clinic or health care facility.
        The
        Company has not sought judicial or regulatory interpretations with respect
        to
        the manner in which it conducts its business. There can be no assurance that
        a
        review of the business of the Company and the P.C.s by courts or regulatory
        authorities will not result in a determination that could materially and
        adversely affect their operations or that the regulatory environment will
        not
        change so as to restrict the Company’s existing or
  *-
            9
            -*
  future
        operations. In the event that any legislative measures, regulatory provisions
        or
        rulings or judicial decisions restrict or prohibit the Company from carrying
        on
        its business or from expanding its operations to certain jurisdictions,
        structural and organizational modifications of the Company’s organization and
        arrangements may be required which could have a material adverse effect on
        the
        Company, or the Company may be required to cease operations.
 
 **Insurance**
 
 The
        Company believes that its existing insurance coverage is adequate to protect
        it
        from the risks associated with the ongoing operation of its business. This
        coverage includes property and casualty, general liability, workers
        compensation, director’s and officer’s corporate liability, employment practices
        liability, excess liability and professional liability insurance for the
        Company
        and for dentists, hygienists and dental assistants at the Offices.
 
 **Seasonality**
 
 The
        Company’s past financial results have fluctuated somewhat due to seasonal
        variations in the dental service industry, with Revenue typically declining
        in
        the fourth calendar quarter. The Company expects this seasonal fluctuation
        to
        continue in the future.
 
 **Trademark**
 
 The
        Company is the registered owner of the PERFECT TEETH® trademark in the United
        States. The Company uses the PERFECT TEETH name t o
        distinguish the Company’s Offices from other dental offices in the markets in
        which it operates. Also, the Company promotes brand awareness and generates
        demand through marketing and advertising utilizing the PERFECT
        TEETH name.
 
 **Company
        Website**
 
 Information
        related to the following items can be found on the Company’s website at
        www.bdms-perfectteeth.com: i) Company filings with the Securities and Exchange
        Commission, and ii) officers, directors and ten percent shareholders filings
        on
        Forms 3, 4 and 5. The Company’s website is not a part of, or incorporated by
        reference in, this Annual Report.
 
 **ITEM
        1A. Risk Factors**
  ***The
        Company’s Operations and Growth Strategy Place Significant Demands on
        Management.***
 
 The
        Company’s ability to compete effectively will depend upon its ability to hire,
        train, and assimilate additional management and other employees, and its
        ability
        to expand, improve, and effectively utilize its operating, management, marketing
        and financial systems to accommodate its expanded operations. Any failure
        by the
        Company’s management to effectively anticipate, implement, and manage the
        changes required to sustain the Company’s growth may have a material adverse
        effect on the Company’s business, financial condition, and operating results.
        See Item 1. “Business - Expansion Program.”
 
 The
        success of the Company depends on the continued services of three members
        of the
        Company’s senior management, its Chief Executive Officer, Fred Birner, its
        President, Mark Birner, D.D.S., and its Chief Financial Officer, Treasurer
        and
        Secretary, Dennis Genty. The Company believes its future success will depend
        in
        part upon its ability to attract and retain qualified management personnel.
        Competition for such personnel is intense and the Company competes for qualified
        personnel with numerous other employers, some of which have greater financial
        and other resources than the Company. The loss of the services of one or
        more
        members of the Company’s senior management or the failure to add or retain
        qualified management personnel could have a material adverse effect on the
        Company’s business, financial condition and operating results.
 
 ***The
        Company is heavily dependent upon the recruitment and retention of dentists
        and
        other personnel and its failure to do so may have a material adverse effect
        on
        the Company’s finances, capital and operations.***
  *-
            10
            -*
  The
        Company believes that the profitability and operations of its Offices and
        its
        expansion strategy are dependent on the availability and successful recruitment
        and retention of dentists, dental assistants, hygienists, specialists, and
        other
        personnel. The Company may not be able to recruit or retain dentists and
        other
        personnel for its existing and *de
        novo* or
        acquired Offices, which may have a material adverse effect on the Company’s
        expansion strategy and its business, financial condition and operating results.
        See Item 1. “Business - Dental Practice Management Model.”
 
 ***The
        Company is not the owner of the P.C.s and is heavily dependent on its affiliated
        dentists and management agreements.***
 
 The
        Company receives management fees for services provided to the P.C.s under
        Management Agreements. The Company owns most of the non-dental operating
        assets
        of the Offices but does not employ or contract with dentists, employ hygienists,
        or control the provision of dental care. The Company’s revenue is dependent on
        the revenue generated by the P.C.s. Therefore, effective and continued
        performance of dentists providing services for the P.C.s is essential to
        the
        Company’s long-term success. Under each Management Agreement, the Company pays
        substantially all of the operating and non-operating expenses associated
        with
        the provision of dental services except for the salaries and benefits of
        the
        dentists and hygienists and principal and interest payments of loans made
        to the
        P.C. by the Company. Any material loss of revenue by the P.C.s would have
        a
        material adverse effect on the Company’s business, financial condition, and
        operating results, and any termination of a Management Agreement (which is
        permitted in the event of a material default or bankruptcy by either party)
        could have such an effect. In the event of a breach of a Management Agreement
        by
        a P.C., there can be no assurance that the legal remedies available to the
        Company will be adequate to compensate the Company for its damages resulting
        from such breach. See Item 1. “Business - Affiliation Model.”
 
 ***The
        Company is exposed to uncertainty and risks associated with de novo Office
        development*** *.*
 
 The
        Company utilizes internal and external resources to identify locations in
        suitable markets for the development of *de
        novo* Offices.
        Identifying locations in suitable geographic markets and negotiating leases
        can
        be a lengthy and costly process. Furthermore, the Company will need to provide
        each *de
        novo* Office
        with the appropriate equipment, furnishings, materials and supplies.
        Additionally, *de
        novo* Offices
        must be staffed with one or more dentists. Because a *de
        novo* Office
        may be staffed with a dentist with no previous patient base, significant
        advertising and marketing expenditures may be required to attract patients.
        There can be no assurance that a *de
        novo* Office
        will become profitable for the Company. See Item 1. “Business - Expansion
        Program.”
 
 ***The
        Company may need additional capital and there is no guarantee additional
        financing would be available.***
 
 Implementation
        of the Company’s growth strategy has required significant capital resources.
        Such resources will be needed to establish additional *de
        novo* Offices,
        maintain or upgrade the Company’s management information systems, and for the
        effective integration, operation and expansion of the Offices. The Company
        historically has used principally cash and promissory notes as consideration
        in
        acquisitions of dental practices and intends to continue to do so. If the
        Company’s capital requirements over the next several years exceed cash flow
        generated from operations and borrowings available under the Company’s existing
        Credit Facility or any successor credit facility, the Company may need to
        issue
        additional equity securities and incur additional debt. If additional funds
        are
        raised through the issuance of equity securities, dilution to the Company’s
        existing shareholders may result. Additional debt or non-Common Stock equity
        financings could be required to the extent that the Common Stock fails to
        maintain a market value sufficient to warrant its use for future financing
        needs. If additional funds are raised through the incurrence of debt, such
        debt
        instruments will likely contain restrictive financial, maintenance and security
        covenants. The Company may not be able to obtain additional required capital
        on
        satisfactory terms, if at all. The failure to raise the funds necessary to
        finance the expansion of the Company’s operations or the Company’s other capital
        requirements could have a material and adverse effect on the Company’s ability
        to pursue its strategy and on its business, financial condition and operating
        results. See Item 7. “Managements Discussion and Analysis of Financial Condition
        and Results of Operations—Liquidity and Capital Resources.”
 
 ***The
        Company’s ability to pay dividends is restricted by several
        factors.***
 
 Various
        factors may hinder the Company’s payment of cash dividends. The Company began
        paying a quarterly cash dividend in 2004, and increased the quarterly cash
        dividend in February 2005, January 2006 and January 2007. However, the payment
        of dividends in the future is subject to the discretion of the Company’s Board
        of Directors, and various factors may prevent the Company from paying dividends.
        Such factors include the
  *-
            11
            -*
  Company’s
        financial position, capital requirements and liquidity, the existence of
        a stock
        repurchase program, any loan agreement restrictions, state corporate law
        restrictions, results of operations and such other factors the Company’s Board
        of Directors may consider relevant. **
 
 ***The
        Company is subject to federal, state, regional, local and other laws and
        regulations that could give rise to substantial liabilities or otherwise
        adversely affect our cost, manner or feasibility of doing business.*** ******
 
 The
        practice of dentistry is regulated at both the state and federal levels.
        There
        can be no assurance that the regulatory environment in which the Company
        or the
        P.C.s operate will not change significantly in the future. In addition, state
        and federal laws regulate health maintenance organizations and other managed
        care organizations for which dentists may be providers. In general, regulation
        of health care companies is increasing. In connection with its operations
        in
        existing markets and expansion into new markets, the Company may become subject
        to additional laws, regulations and interpretations or enforcement actions.
        The
        laws regulating health care are broad and subject to varying interpretations,
        and there is currently a lack of case law construing such statutes and
        regulations. The ability of the Company to operate profitably will depend
        in
        part upon the ability of the Company to operate in compliance with applicable
        health care regulations.
 
 The
        laws
        of many states, including Colorado and New Mexico, permit a dentist to conduct
        a
        dental practice only as an individual, a member of a partnership or an employee
        of a professional corporation, limited liability company or limited liability
        partnership. These laws typically prohibit, either by specific provision
        or as a
        matter of general policy, non-dental entities, such as the Company, from
        practicing dentistry, from employing dentists and, in certain circumstances,
        hygienists or dental assistants, or from otherwise exercising control over
        the
        provision of dental services.
 
 Many
        states, including Colorado, limit the ability of a person other than a licensed
        dentist to own or control dental equipment or offices used in a dental practice.
        In addition, Arizona, Colorado, New Mexico, and many other states impose
        limits
        on the tasks that may be delegated by dentists to hygienists and dental
        assistants. Some states, including Arizona, Colorado and New Mexico, regulate
        the content of advertisements of dental services. Some states require entities
        designated as “clinics” to be licensed, and may define clinics to include dental
        practices that are owned or controlled in whole or in part by non-dentists.
        These laws and their interpretations vary from state to state and are enforced
        by the courts and by regulatory authorities with broad discretion.
 
 Many
        states, including Colorado and New Mexico, also prohibit “fee-splitting” by
        dentists with any party except other dentists in the same professional
        corporation or practice entity. In most cases, these laws have been construed
        as
        applying to the practice of paying a portion of a fee to another person for
        referring a patient or otherwise generating business, and not to prohibit
        payment of reasonable compensation for facilities and services (other than
        the
        generation of referrals), even if the payment is based on a percentage of
        the
        practice’s revenues.
 
 ***Little
        to no precedence dealing with the regulatory uncertainties could adversely
        affect the Company’s feasibility of doing business.***
 
 Many
        states have fraud and abuse laws, which apply to referrals for items or services
        reimbursable by any third-party payor, not just by Medicare and Medicaid.
        A
        number of states, including Arizona, Colorado and New Mexico, prohibit the
        submitting of false claims for dental services.
 
 In
        addition, there are certain regulatory risks associated with the Company’s role
        in negotiating and administering managed care contracts. The application
        of
        state insurance laws to third party payor arrangements, other than
        fee-for-service arrangements, is an unsettled area of law with little guidance
        available. Specifically, in some states, regulators may determine that the
        P.C.s
        are engaged in the business of insurance, particularly if they contract on
        a
        financial-risk basis directly with self-insured employers or other entities
        that
        are not licensed to engage in the business of insurance. If the P.C.s are
        determined to be engaged in the business of insurance, the Company may be
        required to change the method of payment from third-party payors and the
        Company’s business, financial condition and operating results may be materially
        and adversely affected.
 
 Federal
        laws generally regulate reimbursement and billing practices under Medicare
        and
        Medicaid programs. The federal fraud and abuse statute prohibits, among other
        things, the payment, offer, solicitation or receipt of any form of remuneration,
        directly or indirectly, in cash or in kind to induce or in exchange for (i)
        the
        referral of a person for services reimbursable by Medicare or Medicaid, or
        (ii)
        the purchasing, leasing, ordering or arranging for or
  *-
            12
            -*
  recommending
        the purchase, lease or order of any item, good, facility or service which
        is
        reimbursable under Medicare or Medicaid. Because the P.C.s receive no revenue
        under Medicare and Medicaid, the impact of these laws on the Company to date
        has
        been negligible. There can be no assurance, however, that the P.C.s will
        not
        have patients in the future covered by these laws, or that the scope of these
        laws will not be expanded in the future, and if expanded, such laws or
        interpretations there under could have a material adverse effect on the
        Company’s business, financial condition and operating results.
 
 During
        2003, health care providers, including the Company, were required to comply
        with
        the electronic data security and privacy requirements of HIPPA. HIPAA delegates
        enforcement authority to the Centers for Medicare Services Office for Civil
        Rights. Noncompliance with HIPAA regulations can result in severe penalties
        up
        to $250,000 in fines and up to ten years in prison. As of December 31, 2006,
        the
        Company believes that it was in full compliance with all requirements of
        HIPPA
        and there has been no material impact on the Company due to the implementation
        of these new regulations.
 
 Although
        the Company believes that its operations as currently conducted are in material
        compliance with applicable laws, there can be no assurance that the Company’s
        contractual arrangements will not be successfully challenged as violating
        applicable fraud and abuse, self-referral, false claims, fee-splitting,
        insurance, facility licensure or certificate-of-need laws or that the
        enforceability of such arrangements will not be limited as a result of such
        laws. In addition, there can be no assurance that the business structure
        under
        which the Company operates, or the advertising strategy the Company employs,
        will not be deemed to constitute the unlicensed practice of dentistry or
        the
        operation of an unlicensed clinic or health care facility. The Company has
        not
        sought judicial or regulatory interpretations with respect to the manner
        in
        which it conducts its business. There can be no assurance that a review of
        the
        business of the Company and the P.C.s by courts or regulatory authorities
        will
        not result in a determination that could materially and adversely affect
        their
        operations or that the regulatory environment will not change so as to restrict
        the Company’s existing or future operations. In the event that any legislative
        measures, regulatory provisions or rulings or judicial decisions restrict
        or
        prohibit the Company from carrying on its business or from expanding its
        operations to certain jurisdictions, structural and organizational modifications
        of the Company’s organization and arrangements may be required, which could have
        a material adverse effect on the Company, or the Company may be required
        to
        cease operations or change the way it conducts business. See Item 1. “Business -
        Government Regulation.”
 
 ***The
        Company’s failure to effectively evaluate and integrate acquisitions may have
        negative effects on the Company’s results of operations and financial
        condition.***
 
 Since
        its
        organization in May 1995, the Company has completed 42 dental practice
        acquisitions, six of which have been consolidated into existing Offices and
        one
        of which was closed during 2004. The success of future acquisitions will
        depend
        on several factors, including the following:
 
 ·
              *Ability
                  to Identify Suitable Dental Practices*.
                  Identifying appropriate acquisition candidates and negotiating
                  and
                  consummating acquisitions can be a lengthy and costly process.
                  Furthermore, the Company may compete for acquisition opportunities
                  with
                  companies that have greater resources than the Company. There can
                  be no
                  assurance that suitable acquisition candidates will be identified
                  or that
                  acquisitions will be consummated on terms favorable to the Company,
                  on a
                  timely basis or at all. If a planned acquisition fails to occur
                  or is
                  delayed, the Company’s quarterly financial results may be materially lower
                  than expectations, resulting in a decline, perhaps substantial,
                  in the
                  market price of its Common Stock. In addition, increasing consolidation
                  in
                  the dental management services industry may result in an increase
                  in
                  purchase prices required to be paid by the Company to acquire dental
                  practices.
 
 ·
              *Integration
                  of Dental Practices*.
                  The integration of acquired dental practices into the Company’s networks
                  is a difficult, costly and time consuming process which, among
                  other
                  things, requires the Company to attract and retain competent and
                  experienced management and administrative personnel and to implement
                  and
                  integrate reporting and tracking systems, management information
                  systems
                  and other operating systems. In addition, such integration may
                  require the
                  expansion of accounting controls and procedures and the evaluation
                  of
                  certain personnel functions. There can be no assurance that substantial
                  unanticipated problems, costs or delays associated with such integration
                  efforts or with such acquired practices will not occur. There also
                  can be
                  no assurance that the Company will be able to successfully integrate
                  acquired practices in a timely manneror
                  at all, or that any acquired practices will have a positive impact
                  on the
                  Company’s results of operations and financial condition.
  *-
            13
            -*
  
 ***The
        health care industry’s cost-containment initiatives may lead to less than
        historical per patient profit margins.***
 
 The
        health care industry, including the dental services market, is experiencing
        a
        trend toward cost containment, as payors seek to impose lower reimbursement
        rates upon providers. The Company believes that this trend will continue
        and
        will increasingly affect the provision of dental services. This may result
        in a
        reduction in per-patient and per-procedure revenue from historic levels.
        Significant reductions in payments to dentists or other changes in reimbursement
        by payors for dental services may have a material adverse effect on the
        Company’s business, financial condition and operating results.
 
 ***A
        portion of the Company’s net revenue is derived from capitated payment
        arrangements, failure to properly manage and negotiate the terms of the
        contracts may have an adverse effect on the Company’s results of operations and
        financial condition.***
 
 A
        portion
        of the Company’s net revenue is derived from capitated managed dental care
        contracts. Under a capitated managed dental care contract, the dental practice
        provides dental services to the members of the plan 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 practice which is obligated to provide them, and may receive a co-pay
        for
        each service provided. This arrangement shifts the risk of utilization of
        such
        services to the dental group practice that provides the dental services.
        Because
        the Company assumes responsibility under its 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 provision of dental services at
        the
        Offices (other than compensation and benefits of dentists and hygienists),
        the
        risk of over-utilization of dental services at the Offices under capitated
        managed dental care plans is effectively shifted to the Company. In contrast,
        under traditional indemnity insurance arrangements, the insurance company
        reimburses reasonable charges that are billed for the dental services provided.
 
 In
        2006,
        the Company derived approximately 13.8% of its total group practice revenue
        (“Revenue”) from capitated managed dental care contracts, and 19.7% of its
        Revenue from associated co-payments. Risks associated with capitated managed
        dental care contracts include principally (i) the risk that the capitation
        payments and any associated co-payments do not adequately cover the costs
        of
        providing the dental services, (ii) the risk that one or more of the P.C.s
        may
        be terminated as an approved provider by managed dental care plans with which
        they contract, (iii) the risk that the Company will be unable to negotiate
        future capitation arrangements on satisfactory terms with managed care dental
        plans, and (iv) the risk that large subscriber groups will terminate their
        relationship with such managed dental care plans which would reduce patient
        volume and capitation and co-payment revenue. There can be no assurance that
        the
        Company will be able to negotiate future capitation arrangements on behalf
        of
        P.C.s on satisfactory terms or at all, or that the fees offered in current
        capitation arrangements will not be reduced to levels unsatisfactory to the
        Company. Moreover, to the extent that costs incurred by the Company’s affiliated
        dental practices in providing services to patients covered by capitated managed
        dental care contracts exceed the revenue under such contracts, the Company’s
        business, financial condition and operating results may be materially and
        adversely affected. See Item 1. “Business - Payor Mix.”
 
 ***If
        federal or state regulations change to require licensure the Company’s business
        model may be adversely affected.***
 
 Federal
        and state laws regulate insurance companies and certain other managed care
        organizations. Many states, including Colorado, also regulate the establishment
        and operation of networks of health care providers. In most states, these
        laws
        do not apply to discounted-fee-for-service arrangements. These laws also
        do not
        generally apply to networks that are paid on a capitated basis, unless the
        entity with which the network provider is contracting is not a licensed health
        insurer or other managed care organization. There are exceptions to these
        rules
        in some states. For example, certain states require a license for a capitated
        arrangement with any party unless the risk-bearing entity is a professional
        corporation that employs the professionals. The Company believes its current
        activities do not constitute the provision of insurance in Colorado or New
        Mexico, and thus, it is in compliance with the insurance laws of these states
        with respect to the operation of its Offices. There can be no assurance that
        these laws will not be changed or that interpretations of these laws by the
        regulatory authorities in those states, or in the states in which the Company
        expands, will not require licensure or a restructuring of some or all of
        the
        Company’s operations. In the event that the Company is required to become
        licensed under these laws, the
  *-
            14
            -*
  licensure
        process can be lengthy and time consuming and, unless the regulatory authority
        permits the Company to continue to operate while the licensure process is
        progressing, the Company could experience a material adverse change in its
        business while the licensure process is pending. In addition, many of the
        licensing requirements mandate strict financial and other requirements, which
        the Company may not immediately be able to meet. Further, once licensed,
        the
        Company would be subject to continuing oversight by and reporting to the
        respective regulatory agency. The regulatory framework of certain jurisdictions
        may limit the Company’s expansion into, or ability to continue operations
        within, such jurisdictions if the Company is unable to modify its operational
        structure to conform to such regulatory framework. Any limitation on the
        Company’s ability to expand could have a material adverse effect on the
        Company’s business, financial condition and operating results.
 
 ***The
        Company may see increased costs and/or lower Revenue arising from health
        care
        reform*** *.*
 
 Federal
        and state governments currently are considering various types of health care
        initiatives and comprehensive revisions to the health care and health insurance
        systems. Some of the proposals under consideration, or others that may be
        introduced, could, if adopted, have a material adverse effect on the Company’s
        business, financial condition and operating results. It is uncertain what
        legislative programs, if any will be adopted in the future, or what action
        Congress or state legislatures may take regarding health care reform proposals
        or legislation. In addition, changes in the health care industry, such as
        the
        growth of managed care organizations and provider networks, may result in
        lower
        payments for the services of the Company’s managed practices.
 
 ***The
        substantial value of its intangible assets may impair the Company’s results of
        operations and financial condition.***
 
 At
        December 31, 2006, intangible assets on the Company’s consolidated balance sheet
        were $12.3 million, representing 53.8% of the Company’s total assets at that
        date. The Company expects the amount allocable to intangible assets on its
        balance sheet to increase in the future in connection with additional
        acquisitions, which will increase the Company’s amortization expense. In the
        event of any sale or liquidation of the Company or a portion of its assets,
        there can be no assurance that the value of the Company’s intangible assets will
        be realized. In addition, the Company continually evaluates whether events
        and
        circumstances have occurred indicating that any portion of the remaining
        balance
        of the amount allocable to the Company’s intangible assets may not be
        recoverable. When factors indicate that the amount allocable to the Company’s
        intangible assets should be evaluated for possible impairment, the Company
        may
        be required to reduce the carrying value of such assets. Any future
        determination requiring the write off of a significant portion of unamortized
        intangible assets could have a material adverse effect on the Company’s
        business, financial condition and operating results.
 
 ***Professional
        liability may produce unforeseen expenses and lower operating
        results.***
 
 In
        recent
        years, dentists have become subject to an increasing number of lawsuits alleging
        malpractice. Some of these lawsuits involve large claims and significant
        defense
        costs. Any suits involving the Company or dentists at the Offices, if
        successful, could result in substantial damage awards that may exceed the
        limits
        of the Company’s insurance coverage. The Company provides practice management
        services; it does not engage in the practice of dentistry or control the
        practice of dentistry by the dentists or their compliance with regulatory
        requirements directly applicable to providers. There can be no assurance,
        however, that the Company will not become subject to litigation in the future
        as
        a result of the dental services provided at the Offices. The Company maintains
        professional liability insurance for itself and provides for professional
        liability insurance covering dentists, hygienists and dental assistants at
        the
        Offices. While the Company believes it has adequate liability insurance
        coverage, there can be no assurance that the coverage will be adequate to
        cover
        losses or that coverage will continue to be available upon terms satisfactory
        to
        the Company. In addition, certain types of risks and liabilities, including
        penalties and fines imposed by governmental agencies, are not covered by
        insurance. Malpractice insurance, moreover, can be expensive and varies from
        state to state. Successful malpractice claims could have a material adverse
        effect on the Company’s business, financial condition and operating results. See
        Item 1. “Business - Insurance.”
 
 ***Non-competition
        covenants and other arrangements with the Company’s affiliated dentists may not
        be enforceable and thus reduce future patient visits in a particular
        geographical area.***
 
 The
        Management Agreements require the P.C.s to enter into employment agreements
        with
        dentists which include non-competition provisions typically for three to
        five
        years after termination of employment within a specified
  *-
            15
            -*
  geographic
        area, usually a specified number of miles from the relevant Office, and restrict
        solicitation of employees and patients. In Colorado, covenants not to compete
        are prohibited by statute with certain exceptions. Permitted covenants not
        to
        compete are enforceable in Colorado only to the extent their terms are
        reasonable in both duration and geographic scope. Arizona and New Mexico
        courts
        have enforced covenants not to compete if their terms are found to be
        reasonable. It is thus uncertain whether a court will enforce a covenant
        not to
        compete in those states in a given situation. In addition, there is little
        judicial authority regarding whether a practice management agreement will
        be
        viewed as the type of protectable business interest that would permit it
        to
        enforce such a covenant or to require a P.C. to enforce such covenants against
        dentists formerly employed by the P.C. Since the intangible value of a
        Management Agreement depends primarily on the ability of the P.C. to preserve
        its business, which could be harmed if employed dentists went into competition
        with the P.C., a determination that the covenants not to compete contained
        in
        the employment agreements between the P.C. and its employed dentists are
        unenforceable could have a material adverse impact on the Company. See Item
        1.
“Business - Affiliation Model- Employment Agreements.” In addition, the Company
        is a party to various agreements with managing dentists who own the P.C.s,
        which
        restrict the dentists’ ability to transfer the shares in the P.C.s. See Item 1.
“Business - Affiliation Model - Relationship with P.C.s.” There can be no
        assurance that these agreements will be enforceable in a given situation.
        A
        determination that these agreements are not enforceable could have a material
        adverse impact on the Company.
 
 ***The
        dental industry is affected by seasonality, which could produce less than
        desirable effects on Revenue during the later part of the fiscal
        year.***
 
 The
        Company’s past financial results have fluctuated somewhat due to seasonal
        variations in the dental service industry, with Revenue typically declining
        in
        the fourth calendar quarter. The Company expects this seasonal fluctuation
        to
        continue in the future.
 
 ***The
        Company competes in a market that is exceedingly competitive, which may result
        in reduced gross profit margins and market share*** .
 
 The
        dental practice management segment of the dental services industry is highly
        competitive and is expected to become increasingly more competitive. There
        are
        several dental practice management companies that are operating in the Company’s
        markets. There are also a number of companies with dental practice management
        businesses similar to that of the Company currently operating in other parts
        of
        the country which may enter the Company’s existing markets in the future. As the
        Company seeks to expand its operations into new markets, it is likely to
        face
        competition from dental practice management companies, which already have
        established a strong business presence in such locations. The Company’s
        competitors may have a greater financial track record and soundness, superior
        affiliation models, a better reputation of existing affiliated practices,
        more
        management expertise or otherwise enjoy competitive advantages, which may
        make
        it difficult for the Company to compete against them or to acquire additional
        Offices on terms acceptable to the Company. See Item 1. “Business -
        Competition.”
 
 The
        business of providing general dental and specialty dental services is highly
        competitive in the markets in which the Company operates. Competition for
        providing dental services may include practitioners who have more established
        practices and reputations. The Company competes against established practices
        in
        the retention and recruitment of general dentists, specialists, hygienists
        and
        other personnel. If the availability of such dentists, specialists, hygienists
        and other personnel begins to decline in the Company’s markets, it may become
        more difficult to attract qualified dentists, specialists, hygienists and
        other
        personnel. There can be no assurance that the Company will be able to compete
        effectively against other existing practices or against new single or
        multi-specialty dental practices that enter its markets, or to compete against
        such practices in the recruitment and retention of qualified dentists,
        specialists, hygienists and other personnel. See Item 1. “Business -
        Competition.”
 
 ***Various
        factors outside of the Company’s control affect the volatility of the Company’s
        stock price*** .
 
 The
        market price of the Common Stock could be subject to wide fluctuations in
        response to quarterly variations in operating results of the Company or its
        competitors, changes in earnings estimates by analysts, developments in the
        industry or changes in general economic conditions.
 
 ***NASDAQ
        has certain set stock market listing standards for share prices or market
        capitalization, failure to comply with the standards may result in the Company
        being de-listed from the exchange.***
  *-
            16
            -*
  Due
        to
        its size the Company’s stock is thinly-held and trades with low volume. If the
        Company is unable to establish and maintain investor appeal and NASDAQ listing
        standard, the Company may be forced to de-list with NASDAQ.
 
  *-
            17
            -*
  **ITEM
        2. Properties**
  **Offices
        and Facilities**
 
 The
        Company’s corporate headquarters are located at 3801 E. Florida Avenue, Suite
        508, Denver, Colorado, in approximately 9,500 square feet occupied under
        a lease
        that expires October 31, 2010. The Company believes that this space is adequate
        for its current needs. The Company also leases real estate at the location
        of
        each Office under leases ranging in term from one to five years with options
        to
        renew the leases for specific periods subsequent to their original terms.
        The
        Company believes the facilities at each of its Offices are adequate for their
        current level of business. The Company generally anticipates leasing and
        developing *de
        novo* Offices
        in its current markets rather than significantly expanding the size of its
        existing Offices.
 
  *-
            18
            -*
  **Location
        of Offices**
 
 
  
 
 
  *-
            19
            -*
  **Existing
        Offices**
 
 As
        of the
        date of this Annual Report, the Company managed a total of 60 Offices in
        Colorado, New Mexico, and Arizona. The following table identifies each Office,
        the location of each Office, the date each Office was acquired or *de
        novo* developed, and any specialty dental services offered at that Office in addition
        to comprehensive general dental services:
 
 **Office
                  Name**
              **Office
                  Address**
              **Date
                  Acquired/**
                **Developed*******
              **Specialty****Services****Colorado*****Boulder***Perfect Teeth/Boulder
              4155
                  Darley, #F
              September
                  1997Perfect
                  Teeth/Folsom
              1840
                  Folsom, Suite 201
              April
                  1998
              1,4***Brighton***Perfect Teeth/Brighton
              530
                  East Bromley Lane, #100
              November
                  2004****Castle Rock***Perfect Teeth/Castle Rock
              390
                  South Wilcox, Unit D
              October
                  1995***Colorado Springs***Perfect Teeth/Cheyenne Meadows
              827
                  Cheyenne Meadows Road
              June
                  1998*Perfect
                  Teeth/Garden of the Gods
              4329
                  Centennial Boulevard
              July
                  1996*Perfect
                  Teeth/South 8th Street
              1050
                  South Eighth Street
              August
                  1998
              1,2,3,4,5Perfect
                  Teeth/Uintah Gardens
              1768
                  West Uintah Street
              May
                  1996*Perfect
                  Teeth/Union & Academy
              5050
                  North Academy
              September
                  1997
              1,2,3,4,5Perfect Teeth/Woodman Valley
              6914
                  North Academy Boulevard, Unit 1B
              April
                  1998*Perfect Teeth/Powers
              5929
                  Constitution Avenue
              March
                  1999****Denver***Perfect
                  Teeth/64th and Ward
              12650
                  West 64th Avenue, Unit J
              January
                  1996*Perfect
                  Teeth/88th and Wadsworth
              8749
                  Wadsworth Boulevard
              September
                  1997
              1,2,
                  4,5Perfect
                  Teeth/Arapahoe
              7600
                  East Arapahoe Road, #311
              October
                  1995Perfect
                  Teeth/Bowmar
              5151
                  South Federal Boulevard, #G-2
              October
                  1995Perfect
                  Teeth/Buckley and Quincy
              4321
                  South Buckley Road
              September
                  1997
              1Perfect
                  Teeth/Central Denver
              1633
                  Fillmore Street, Suite 200
              May
                  1996Perfect
                  Teeth/East 104th Avenue
              2200
                  East 104th Avenue, #112
              May
                  1996
              1Perfect
                  Teeth/East Cornell
              12200
                  East Cornell Avenue, # E
              August
                  1996
              2,5Perfect
                  Teeth/East Iliff
              16723
                  East Iliff Avenue
              May
                  1997Glendale
                  Dental Group
              4521
                  East Virginia Avenue
              February
                  1999Perfect
                  Teeth/Golden
              17211
                  South Golden Road, #100
              June
                  1999*Perfect Teeth/Green Mountain
              13035
                  West Alameda Parkway
              December
                  1998*Perfect Teeth/Green Valley Ranch
              18607
                  E. 48thAve, Unit 104
              June
                  2006*Perfect Teeth/Highlands Ranch
              9227
                  Lincoln Avenue, Suite 100
              July
                  1999*
              1Perfect
                  Teeth/Ken Caryl
              7660
                  South Pierce
              September
                  1997Perfect
                  Teeth/Leetsdale
              7150
                  Leetsdale Drive, #110A
              March
                  1996*Mississippi Dental Group
              11175
                  East Mississippi Avenue, #110
              September
                  1998Perfect
                  Teeth/Monaco and Evans
              2223
                  S. Monaco, Suite F
              November
                  1995
              1,3,4Perfect
                  Teeth/North Sheridan
              11550
                  North Sheridan, #101
              May
                  1996Perfect Teeth/Parker
              11005
                  South Parker Road
              December
                  1998*
              1Perfect
                  Teeth/Sheridan and 64th Avenue
              5169
                  West 64th Avenue
              May
                  1996Perfect
                  Teeth/Smoky Hill
              20269
                  E. Smoky Hill Rd., Unit H
              January
                  2005*Perfect
                  Teeth/South Holly Street
              8211
                  South Holly Street
              September
                  1997
              5Perfect
                  Teeth/Speer
              700
                  East Speer Boulevard
              February
                  1997Perfect
                  Teeth/West 38th Avenue
              7760
                  West 38th Avenue, #200
              May
                  1996Perfect
                  Teeth/West 120th Avenue
              6650
                  West 120th Avenue, A-6
              September
                  1997
              3Perfect
                  Teeth/West Jewell
              8064
                  West Jewell
              April
                  1998Perfect
                  Teeth/Yale
              7515
                  West Yale Avenue, Suite A
              April
                  1997
              1,2,3,4***Fort Collins***Perfect
                  Teeth/South Fort Collins
              1355
                  Riverside Avenue, Unit D
              May
                  1996***Greeley***Perfect Teeth/Greeley
              902
                  14th Street
              September
                  1997***Longmont***Perfect Teeth/Longmont
              641
                  Ken Pratt Boulevard
              September
                  1997***Loveland***Perfect Teeth/ Loveland
              3400
                  West Eisenhower Boulevard
              September
                  1996
  *-
            20
            -*
  
 **Office
                  Name**
              **Office
                  Address**
              **Date
                  Acquired/**
                **Developed*******
              **Specialty****Services****New
                  Mexico*****Albuquerque***Perfect
                  Teeth/Alice
              5909
                  Alice NE
              February
                  1998Perfect
                  Teeth/Candelaria
              6101
                  Candelaria NE
              April
                  1997Perfect Teeth/Cottonwood
              10250
                  Cottonwood Park NW, Suite 100
              August
                  2006*
              1,3,5Perfect Teeth/Cubero Drive
              5900
                  Cubero Drive NE, Suite E
              September
                  1998Perfect
                  Teeth/Four Hills
              13140-E
                  Central Avenue, SE
              August
                  1997*Perfect
                  Teeth/Fourth Street
              5721
                  Fourth Street NW
              August
                  1997Perfect
                  Teeth/Wyoming and Candelaria
              8501
                  Candelaria NE, Suite D3
              August
                  1997
              1,3,5***Rio Rancho***Perfect Teeth/Rio Rancho
              4500
                  Arrowhead Ridge Drive
              July
                  1999****Santa Fe***Perfect Teeth/Plaza Del Sol
              720
                  St. Michael Drive, Suite O
              May
                  1998*
              1**Arizona*****Goodyear***Perfect Teeth/Palm Valley
              14175
                  West Indian School Bypass Road, #B6
              March
                  2000****Gilbert***Perfect Teeth/Gilbert
              81
                  West Guadalupe Road, Suite 101
              March
                  2006*
              1,2,3***Mesa*****Perfect
                  Teeth/Power & McDowell
              2733
                  North Power Road, Suite 101
              October
                  2000***Perfect
                  Teeth/Guadalupe
              8257
                  E. Guadalupe Road, Suite 121
              August
                  2006****Peoria***Perfect Teeth/Olive
              10613
                  West Olive Avenue, Suite 201
              September
                  2004*
              1,2,3,4,5***Scottsdale***Perfect Teeth/Bell Road & 64thStreet
              6345
                  East Bell Road, Suite 1
              July
                  1998
              1,2,3,5***Surprise***Perfect Teeth/Waddell
              13856
                  W. Waddell Rd, Ste 102
              October
                  2005*
              4***Tempe***Perfect Teeth/Elliot and McClintock
              7650
                  S. McClintock Dr., #110
              June
                  1999*
  (1)
              Orthodontics
 (2)
              Periodontics
 (3)
              Oral
                  Surgery
 (4)
              Pediatrics
 (5)
              Endodontics
 
 *
        Indicates *de
        novo* Office
        opening date. Dates without * indicates acquired Office.
 
 The
        Offices typically are located either in shopping centers, professional office
        buildings or stand-alone buildings. The majority of the *de
        novo* Offices
        are located in supermarket-anchored shopping centers. The Offices have from
        four
        to 19 treatment rooms and range in size from 1,200 square feet to 7,300 square
        feet.
 
 **ITEM
        3. LEGAL PROCEEDINGS.** ****
 
 From
        time
        to time the Company is subject to litigation incidental to its business.
        Such
        claims, if successful, could result in damage awards exceeding, perhaps
        substantially, applicable insurance coverage. The Company is not presently
        a
        party to any material litigation.
  
 **ITEM
        4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS** **.**
 
 None.
  *-
            21
            -*
  
 **PART
        II**
 
 **ITEM
        5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
        PURCHASES OF EQUITY SECURITIES.**
 
 **Price
        Range of Common Stock**
 
 The
        Common Stock is quoted on the Nasdaq Capital Market under the symbol “BDMS”. The
        following table sets forth, for the period indicated, the range of high and
        low
        sales prices per share of Common Stock, as reported on The Nasdaq Capital
        Market
        and adjusted to reflect the August 1, 2005, 2-for1 stock split:
 
 HIGH
              
              LOW2005First
                  Quarter
              $13.63
              
              $9.18Second
                  Quarter
              14.80
              
              10.75Third
                  Quarter
              17.46
              
              14.50Fourth
                  Quarter
              21.53
              
              16.002006First
                  Quarter
              $21.07
              
              $17.00Second
                  Quarter
              17.50
              
              14.96Third
                  Quarter
              22.00
              
              14.72Fourth
                  Quarter
              21.00
              
              17.142007First
                  Quarter (January 1, 2007 through March30,
                  2007)
              $27.00
              
              $18.77
 
 At
        March
        30, 2007, the last reported sale price of the Company’s Common Stock was $24.50
        per  share.
        As
        of the same date, there were  2,123,682  shares
        of
        Common Stock outstanding held by approximately  197  holders
        of record and approximately 471  beneficial
        owners .
 
 **Dividend
        Policy**
 
 On
        March
        9, 2004, the Company announced a quarterly cash dividend of $.0375 per share.
        On
        February 10, 2005, the Company announced an increase in the amount of the
        quarterly dividend to $.10 per share. On January 10, 2006, the Company announced
        an increase in the amount of the quarterly dividend to $.13 per share. On
        January 9, 2007 the Company announced an increase in the amount of the quarterly
        dividend to $.15 per share. However, the payment of dividends in the future
        is
        subject to the discretion of the Company’s Board of Directors, and various
        factors may prevent the Company from paying dividends. Such factors include
        the
        Company’s financial position, capital requirements and liquidity, the existence
        of a stock repurchase program, any loan agreement restrictions, state corporate
        law restrictions, results of operations and such other factors the Company’s
        Board of Directors may consider relevant.
 
  *-
            22
            -*
  **Purchases
        of Equity Securities by the Issuer**
 
 The
        following chart provides information regarding Common Stock repurchases by
        the
        Company during the period October 1, 2006 through December 31,
        2006.
 **Issuer
                    Purchases of Equity Securities**Period
                
                Total
                    Number of Shares Purchased
                
                Average
                    Price Paid per Share
                
                Total
                    Number of Shares Purchased as Part of Publicly Announced Plans
                    or
                    Programs
                
                Approximate
                    Dollar Value of Shares that May Yet Be Purchased Under the Plans
                    or
                    ProgramsOctober
                    1, 2006 through October 31, 2006
                
                213,061
                
                $
                    21.74
                
                665
                
                $
                    588,416November
                    1, 2006 through November 30, 2006
                
                802
                
                $
                    19.45
                
                802
                
                $
                    572,665December
                    1, 2006 through December 31, 2006
                
                2,359
                
                $
                    19.59
                
                2,359
                
                $
                    526,443Total
                
                216,222
                
                $
                    21.71
                
                3,826
 All
        purchases listed above were made pursuant to publicly announced plans. There
        are
        no expiration dates on any of the plans. Common Stock repurchases may be
        made
        from time to time as the Company’s management deems appropriate.
 
 On
        October 5, 2006, the Company accepted for payment, at a purchase price of
        $21.75
        per share, 212,396 shares of its Common Stock that were properly tendered
        and
        not withdrawn pursuant to the Company’s “dutch auction” tender offer (“Tender
        Offer”). The 212,396 shares purchased were comprised of the 175,000 shares the
        Company offered to purchase and 37,396 shares that were purchased pursuant
        to
        the Company's right to purchase up to an additional 2% of the outstanding
        shares
        as of August 31, 2006, without extending the Tender Offer in accordance with
        applicable securities laws. These shares represented approximately 9.2% of
        the
        shares outstanding as of September 30, 2006. The Tender Offer was funded
        from a
        $4.6 million term loan (“Term Loan”). Under the Term Loan, $2.3 million is
        borrowed at a fixed interest rate of 7.05% and the remaining $2.3 million
        is
        borrowed at a floating interest rate of Libor plus 1.5%. As of December 31,
        2006, the rate was 6.85%. The principal amount borrowed will be paid quarterly
        in 20 equal payments of approximately $230,000 plus interest beginning December
        31, 2006. The term loan matures on September 30, 2011.
 
  *-
            23
            -*
  **Performance
        Graph***
 
 The
        following line graph compares the percentage change from December 31, 2001
        through December 31, 2006 for (i) the Common Stock, (ii) the Nasdaq Composite
        Index, (iii) the S&P Healthcare Sector and (iv) the S&P 500 Composite
        Index. Historical stock price performance is not necessarily indicative of
        future stock price performance.
  Comparison
        of 5-Year Cumulative Total Return **
 Assumes
        Initial Investment of $100
 
 
 
 
 Description
                
                12/31/2001
                
                12/31/2002
                
                12/31/2003
                
                12/31/04
                
                12/31/05
                
                12/31/06BIRNER
                    DENTAL
                
                $
                100.00
                
                $
                219.02
                
                $
                253.54
                
                $
                307.18
                
                $
                417.85
                
                $
                415.29NASDAQ
                    Composite -Total
                    Returns
                
                
                100.00
                
                
                68.47
                
                
                118.48
                
                
                127.07
                
                
                128.44
                
                
                137.96S&P
                    - Healthcare
                
                
                100.00
                
                
                80.03
                
                
                93.34
                
                
                93.58
                
                
                98.43
                
                
                104.21S&P
                    500 Index -Total
                    Returns
                
                
                100.00
                
                
                76.63
                
                
                103.01
                
                
                112.01
                
                
                115.01
                
                
                128.63
 *This
        Section is not “soliciting material,” is not deemed “filed” with the Securities
        and Exchange Commission and is not to be incorporated by reference in any
        filing
        of the Company under the Securities Act of 1933, as amended, or the Securities
        Exchange Act of 1934, as amended, whether made before or after the date hereof
        and irrespective of any general incorporation language in any such
        filing.
 
 **Total
        return based on $100 initial investment and reinvestment of
        dividends.
 
 
  *-
            24
            -*
  ITEM
        6.
        SELECTED FINANCIAL DATA.
 
 The
        following table sets forth selected consolidated financial and operating
        data
        for the Company. The data for the years ended December 31, 2004, 2005 and
        2006
        should be read in conjunction with the Company’s consolidated financial
        statements included elsewhere in this document. The selected consolidated
        financial data for the 2002 and 2003 periods are derived from the Company’s
        historical consolidated financial statements.
 
 A
        2-for-1
        split of the Company’s common stock became effective as of August 1, 2005.All
        earnings per share data in the following table reflect the stock split.
 
 The
        data
        in the following table is in thousands except per share data, number of Offices
        and number of dentists:
 
 **Years
                    Ended December 31,****2002**
                
                **2003**
                
                **2004**
                
                **2005**
                
                **2006****Statements
                    of Income Data: (1)**Net
                    revenue
                
                
                
                
                $
                30,536
                
                $
                30,539
                
                $
                32,170
                
                $
                36,716
                
                $
                39,387Direct
                    expenses
                
                
                
                
                
                25,351
                
                
                25,032
                
                
                26,249
                
                
                28,944
                
                
                30,934Contribution
                    from dental offices
                
                
                
                
                
                5,185
                
                
                5,507
                
                
                5,921
                
                
                7,772
                
                
                8,453Corporate
                    expenses
                
                
                
                
                
                3,304
                
                
                3,292
                
                
                3,272
                
                
                4,375
                
                
                4,306Operating
                    income
                
                
                
                
                
                1,881
                
                
                2,215
                
                
                2,649
                
                
                3,397
                
                
                4,147Income
                    from continuing operations before income taxes
                
                
                
                
                
                1,536
                
                
                2,061
                
                
                2,590
                
                
                3,409
                
                
                3,920Income
                    tax expense
                
                
                
                
                
                580
                
                
                806
                
                
                1,023
                
                
                1,245
                
                
                1,597Income
                    from continuing operations
                
                
                
                
                
                956
                
                
                1,255
                
                
                1,567
                
                
                2,164
                
                
                2,323Operating
                    loss attributable to assets disposed of
                
                
                
                
                
                35
                
                
                116
                
                
                120
                
                
                -
                
                
                -Loss
                    recognized on dispositions
                
                
                
                
                
                -
                
                
                -
                
                
                192
                
                
                -
                
                
                -Income
                    tax benefit
                
                
                
                
                
                13
                
                
                45
                
                
                125
                
                
                -
                
                
                -Loss
                    on discontinued operations
                
                
                
                
                
                22
                
                
                71
                
                
                187
                
                
                -
                
                
                -Net
                    income
                
                
                
                
                
                934
                
                
                1,184
                
                
                1,380
                
                
                2,164
                
                
                2,323*Basic
                    earnings per share of Common Stock:*(2)Net
                    income – continuing operations
                
                
                
                
                
                0.32
                
                
                0.48
                
                
                0.65
                
                
                0.91
                
                
                1.02Net
                    income (loss) – discontinued operations
                
                
                
                
                
                (0.01
                )
                
                (0.03
                )
                
                (0.08
                )
                
                -
                
                
                -Net
                    income per share of Common Stock
                
                
                
                
                
                0.31
                
                
                0.45
                
                
                0.57
                
                
                0.91
                
                
                1.02*Diluted
                    earnings per share of Common Stock*:
                    (2)Net
                    income – continuing operations
                
                
                
                
                
                0.30
                
                
                0.44
                
                
                0.60
                
                
                0.82
                
                
                0.94Net
                    loss – discontinued operations
                
                
                
                
                
                0.01
                
                
                0.02
                
                
                0.07
                
                
                -
                
                
                -Net
                    income per share of Common Stock
                
                
                
                
                
                0.29
                
                
                0.42
                
                
                0.53
                
                
                0.82
                
                
                0.94**Balance
                    Sheet Data: (3)**Cash
                    and cash equivalents
                
                
                
                
                $
                1,073
                
                $
                1,111
                
                $
                756
                
                $
                922
                
                $
                888Working
                    capital (deficit)
                
                
                
                
                
                (1,541
                )
                
                (109
                )
                
                (56
                )
                
                (96
                )
                
                (936
                )Total
                    assets
                
                
                
                
                
                24,230
                
                
                22,210
                
                
                21,860
                
                
                22,033
                
                
                22,822Long-term
                    debt, less current maturities
                
                
                
                
                
                1,087
                
                
                2,736
                
                
                1,079
                
                
                2,887
                
                
                6,502Total
                    shareholders’ equity
                
                
                
                
                
                16,759
                
                
                14,411
                
                
                15,128
                
                
                13,201
                
                
                9,548Dividends
                    declared per share of Common Stock
                
                
                
                
                $
                -
                
                $
                -
                
                $
                0.15
                
                $
                0.40
                
                $
                0.52**Operating
                    Data:**Number
                    of Offices (3)
                
                
                
                
                
                54
                
                
                54
                
                
                55
                
                
                57
                
                
                60Number
                    of dentists (3)(4)
                
                
                
                
                
                90
                
                
                95
                
                
                102
                
                
                107
                
                
                114Total
                    net revenue per Office
                
                
                
                
                $
                565
                
                $
                566
                
                $
                585
                
                $
                644
                
                $
                656
 ____________________
 
 (1)
              Acquisitions
                  of Offices and development of*de
                  novo*Offices affect the comparability of the data. In 2004, the Company
                  closed
                  one existing Office and opened two*de
                  novo*Offices. In 2005, the Company opened two*de
                  novo*Offices. In 2006, the Company consolidate two offices into one
                  and opened
                  four*de
                  novo*Offices.
 (2)
              Computed
                  on the basis described in Note 2 of Notes to Consolidated Financial
                  Statements of the Company.
 (3)
              Data
                  is as of the end of the respective periods
                  presented.
 (4)
              This
                  represents the actual number of dentists employed by the P.C.s
                  and
                  specialists who contract with the P.C.s to provide specialty dental
                  services.
  *-
            25
            -*
  **ITEM
        7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
        OPERATIONS.**
 
 **General**
 
 The
        following discussion and analysis relates to factors that have affected the
        consolidated results of operations and financial condition of the Company
        for
        the three years ended December 31, 2006. Reference should also be made to
        the
        Company’s consolidated financial statements and related notes thereto and the
        Selected Financial Data included elsewhere in this Annual Report. This
        discussion and analysis contains forward-looking statements. Discussions
        containing such forward-looking statements may be found in the material set
        forth below and under Item 1. “Business,” Item 5., “Market for the Registrant’s
        Common Equity and Related Stockholder Matters” as well as in this Annual Report
        generally. Investors and prospective investors are cautioned that any such
        forward-looking statements are not guarantees of future performance and involve
        risks and uncertainties. Actual events or results may differ materially from
        those discussed in the forward-looking statements as a result of various
        factors, including, without limitation the risk factors set forth in this
        Item
        1A., “Risk Factors.”
 
 **Overview**
 
 The
        Company was formed in May 1995, and currently provides business services
        to 60
        Offices in Colorado, New Mexico, and Arizona staffed by 83 dentists and 31
        specialists. The Company has acquired 42 practices (six of which were
        consolidated into existing Offices and one of which was closed during 2004)
        and
        opened 26 *de
        novo* Offices
        (one of which was consolidated into an existing Office). The Company derives
        all
        of its Revenue (as defined below) from its Management Agreements with the
        P.C.s.
        In addition, the Company assumes a number of responsibilities when it acquires
        a
        new practice or develops a *de
        novo* Office,
        which are set forth in the Management Agreement, as described below. The
        Company
        expects to expand in existing markets primarily by enhancing the operating
        performance of its existing Offices and by developing *de
        novo* Offices.
        The Company has historically expanded in existing markets by acquiring solo
        and
        group dental practices and may do so in the future if an economically feasible
        opportunity presents itself.
 
 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.
 
 **Components
        of Revenue and Expenses**
 
 Total
        dental group practice revenue (“Revenue”) represents the revenue of the Offices,
        reported at estimated realizable amounts, received from third-party payors
        and
        patients for dental services rendered at the Offices. Net revenue represents
        Revenue less amounts retained by the Offices. The amounts retained by the
        Offices represent amounts paid as compensation to employed dentists and
        hygienists. The Company’s net revenue is dependent on the Revenue of the
        Offices. Direct expenses consist of the expenses incurred by the Company
        in
        connection with managing the Offices, including salaries and benefits (for
        personnel other than dentists and hygienists), dental supplies, dental
        laboratory fees, occupancy costs, advertising and marketing, depreciation
        and
        amortization and general and administrative (including office supplies,
        equipment leases, management information systems and other expenses related
        to
        dental practice operations). The Company also incurs personnel and
        administrative expenses in connection with maintaining a corporate function
        that
        provides management, administrative, marketing, development and professional
        services to the Offices.
 
 Under
        each of the Management Agreements, the Company provides business and marketing
        services at the Offices, including (i) providing capital, (ii) designing
        and
        implementing marketing programs, (iii) negotiating for the purchase of supplies,
        (iv) staffing, (v) recruiting, (vi) training of non-dental personnel, (vii)
        billing and collecting patient fees, (viii) arranging for certain legal and
        accounting services, and (ix) negotiating with managed care organizations.
        The
        P.C. is responsible for, among other things, (i) supervision of all dentists
        and
        dental hygienists, (ii) complying with all laws, rules and regulations relating
        to dentists and dental hygienists, and (iii) maintaining proper patient records.
        The Company has made, and intends to make in the future, loans to P.C.s in
        Colorado, New Mexico and Arizona to fund their acquisition of dental assets
        from
        third parties in order to comply with the laws of such states.
  *-
            26
            -*
  
 Under
        the
        typical Management Agreement used by the Company, the P.C. pays the Company
        a
        management fee equal to the Adjusted Gross Center Revenue of the P.C. less
        compensation paid to the dentists and dental hygienists employed at the Office
        of the P.C. Adjusted Gross Center Revenue is comprised of all fees and charges
        booked each month by or on behalf of the P.C. as a result of dental services
        provided to patients at the Office, less any adjustments for uncollectible
        accounts, professional courtesies and other activities that do not generate
        a
        collectible fee. The Company’s costs include all direct and indirect costs,
        overhead and expenses relating to the Company’s provision of management services
        at the Office under the Management Agreement, including (i) salaries, benefits
        and other direct costs of Company employees who work at the Office, (ii)
        direct
        costs of all Company employees or consultants who provide services to or
        in
        connection with the Office, (iii) utilities, janitorial, laboratory, supplies,
        advertising and other expenses incurred by the Company in carrying out its
        obligations under the Management Agreement, (iv) depreciation expense associated
        with the P.C.s assets and the assets of the Company used at the Office, and
        the
        amortization of intangible asset value relating to the Office, (v) interest
        expense on indebtedness incurred by the Company to finance any of its
        obligations under the Management Agreement, (vi) general and malpractice
        insurance expenses, lease expenses and dentist recruitment expenses, (vii)
        personal property and other taxes assessed against the Company’s or the P.C.s
        assets used in connection with the operation of the Office, (viii) out-of-pocket
        expenses of the Company’s personnel related to mergers or acquisitions involving
        the P.C., (ix) corporate overhead charges or any other expenses of the Company
        including the P.C.s pro rata share of the expenses of the accounting and
        computer services provided by the Company, and (x) a collection reserve in
        the
        amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially
        all
        costs associated with the provision of dental services at the Office are
        borne
        by the Company, other than the compensation and benefits of the dentists
        and
        hygienists who work at the Offices of the P.C.s. This enables the Company
        to
        manage the profitability of the Offices. Each Management Agreement is for
        a term
        of 40 years. Further, each Management Agreement generally may be terminated
        by
        the P.C. only for cause, which includes a material default by or bankruptcy
        of
        the Company. Upon expiration or termination of a Management Agreement by
        either
        party, the P.C. must satisfy all obligations it has to the Company.
 
 The
        Company’s Revenue is derived principally from fee-for-service Revenue and
        Revenue from capitated managed dental care plans. Fee-for-service Revenue
        consists of P.C. revenue received from indemnity dental plans, preferred
        provider plans and direct payments by patients not covered by any third-party
        payment arrangement. Managed dental care Revenue consists of P.C. revenue
        received from capitated managed dental care plans, including capitation payments
        and patient co-payments. Capitated managed dental care contracts are between
        dental benefits organizations and the P.C.s. Under the Management Agreements,
        the Company negotiates and administers these contracts on behalf of the P.C.s.
        Under a capitated managed dental care contract, the dental group practice
        provides dental services to the members of the dental benefits organization
        and
        receives a fixed monthly capitation payment for each plan member covered
        for a
        specific schedule of services regardless of the quantity or cost of services
        to
        the participating dental group practice obligated to provide them. This
        arrangement shifts the risk of utilization of these services to the dental
        group
        practice providing the dental services. Because the Company assumes
        responsibility under the Management Agreements for all aspects of the operation
        of the dental practices (other than the practice of dentistry) and thus bears
        all costs of the P.C.s associated with the provision of dental services at
        the
        Office (other than compensation of dentists and hygienists), the risk of
        over-utilization of dental services at the Office under capitated managed
        dental
        care plans is effectively shifted to the Company. In addition, dental group
        practices participating in a capitated managed dental care plan often receive
        supplemental payments for more complicated or elective procedures. In contrast,
        under traditional indemnity insurance arrangements, the insurance company
        pays
        whatever reasonable charges are billed by the dental group practice for the
        dental services provided. See Item 1. “Business - Payor Mix.”
 
 The
        Company seeks to increase its fee-for-service business by increasing the
        patient
        volume of existing Offices through effective marketing and advertising programs,
        adding additional specialty services 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 provides a greater margin 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 contractual 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.
  *-
            27
            -*
  **Results
        of Operations**
 
 For
        the
        year ended December 31, 2006, Revenue increased to $57.1 million compared
        to
        $52.5 million for the year ended December 31, 2005, an increase of $4.6 million
        or 8.8%. This was attributable to an increase in specialty Revenue of $1.8
        million, an increase in general dentistry at existing offices of $1.1 million
        and new *de
        novo* offices
        generating $1.7 million in additional Revenue for the year ended December 31,
        2006.
 
 For
        the
        year ended December 31, 2005, Revenue increased to $52.5 million compared
        to
        $46.5 million for the year ended December 31, 2004, an increase of $6.1 million
        or 13.1%. This was attributable to an increase in specialty Revenue of $3.8
        million, an increase in general dentistry at existing offices of $694,000
        and
        new *de
        novo* offices
        generating $1.5 million in additional production for the year ended December
        31,
        2005.
 
 The
        Company has grown primarily through the ongoing development of a dense dental
        practice network and the implementation of its dental practice management
        model.
        During the three years ended December 31, 2006, net revenue was $32.2 million
        in
        2004, $36.7 million in 2005 and $39.4 million in 2006. During the three years
        ended December 31, 2006, contribution from dental offices increased from
        $5.9
        million in 2004 to $7.8 million for 2005, and increased to $8.5 million for
        2006. During the three years ended December 31, 2006, income from continuing
        operations increased from $1.6 million for 2004 to $2.2 million in 2005 and
        to
        $2.3 million in 2006.
 
 At
        December 31, 2006, the Company’s total assets of $22.8 million included $12.3
        million of identifiable intangible assets related to Management Agreements.
        At
        that date, the Company’s total shareholders’ equity was $9.5 million.
 
 The
        Company’s Revenue from capitated managed dental care plans was 33.5% of total
        dental group practice revenue in 2006, compared to 29.0% in 2005 and 28.2%
        in
        2004.
 
 Revenue,
        as defined in this report, is total dental group practice revenue generated
        at
        the Company’s offices from professional services provided to its patients.
        Amounts retained by group practices represent compensation expense to the
        dentists and hygienists and is subtracted from total dental group practice
        revenue to arrive at net revenue. The Company reports net revenue in its
        financial statements to comply with Emerging Issues Task Force Issue No.
        97-2,
        Application of SFAS No. 94 (Consolidation of All Majority Owned Subsidiaries)
        and APB Opinion No. 16 (Business Combinations) to Physician Practice Management
        Entities and Certain Other Entities With Contractual Management Arrangements.
        Revenue is not a generally accepted accounting principles measure. The Company
        discloses Revenue 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 or liquidity that is calculated in accordance with
        generally accepted accounting principles. The following table reconciles
        Revenue
        to net revenue (excluding discontinued operations).
 Years
                    Ended December 31,2004
                
                2005
                
                2006Total
                    dental group practice revenue
                
                $
                46,460,595
                
                $
                52,526,276
                
                $
                57,141,226Less
                    - amounts retained by Offices
                
                
                14,290,190
                
                
                15,810,159
                
                
                17,754,230Net
                    revenue
                
                $
                32,170,405
                
                $
                36,716,117
                
                $
                39,386,996
 
  *-
            28
            -*
  The
        following table sets forth the percentages of net revenue represented by
        certain
        items reflected in the Company’s Consolidated Statements of Income. The
        information contained in the table represents the historical results of the
        Company. The information that follows should be read in conjunction with
        the
        Company’s consolidated financial statements and related notes thereto.
 
 Years
                  Ended December 31,2004
              
              2005
              
              2006Net
                  revenue
              100.0
              %
              100.0
              %
              100.0%Direct
                  expenses:Clinical
                  salaries and benefits
              37.2
              
              37.0
              
              36.1Dental
                  supplies
              6.2
              
              6.0
              
              5.8Laboratory
                  fees
              7.5
              
              6.7
              
              6.6Occupancy
              11.1
              
              10.5
              
              10.8Advertising
                  and
                  marketing
              2.1
              
              2.6
              
              2.0Depreciation
                  and amortization
              5.6
              
              4.6
              
              5.6General
                  and administrative
              11.9
              
              11.4
              
              11.781.6
              
              78.8
              
              78.5Contribution
                  from dental offices
              18.4
              
              21.2
              
              21.5Corporate
                  expenses:General
                  and administrative
              9.5
              
              11.5
              (1)
              10.6Depreciation
                  and amortization
              0.6
              
              0.4
              
              0.3Operating
                  income
              8.3
              
              9.3
              
              10.5Interest
                  expense, net
              0.2
              
              -
              
              0.6Income
                    from continuing operations
                  before income taxes
              8.1
              
              9.3
              
              10.0Income
                  tax expense
              3.2
              
              3.4
              
              4.1Income
                  from continuing operations
              4.9
              
              5.9
              
              5.9Loss
                    attributable to discontinued operations,
                  net of income taxes
              0.6
              
              -
              
              -Net
                  income
              4.3
              %
              5.9
              %
              5.9%






(1)
              Corporate
                  expense - general and administrative includes $162,060 of deferred
                  equity
                  compensation for a stock award and $585,844 one-time expense related
                  to
                  the reimbursement of an employees's income taxes in connection
                  with a
                  stock award for the year ended December 31, 2005, and $324,120
                  of deferred
                  equity compensation for a stock award and $329,054 of stock-based
                  compensation expense pursuant to SFAS 123 (R) for the year ended
                  December
                  31, 2006.





*-
            29
            -*





***Year
      Ended December 31, 2006 Compared to Year Ended December 31,
      2005***





*Net
      revenue.* Net
      revenue increased to $39.4 million for the year ended December 31, 2006 compared
      to $36.7 million for the year ended December 31, 2005, an increase of $2.7
      million or 7.3%. This was attributable to an increase in specialty net revenue
      of $735,000, an increase in general dentistry net revenue at existing offices
      of
      $895,000 and new *de
      novo* offices
      generating $1.0 million in additional net revenue for the year ended December
      31, 2006.




*Clinical
      salaries and benefits.* Clinical
      salaries and benefits increased to $14.2 million for the year ended December
      31,
      2006 compared to $13.6 million for the year ended December 31, 2005, an increase
      of $623,000 or 4.6%. This is the result of the addition of additional employees
      to support the increased number of dentists working in 2006 over 2005 and
      general wage increases granted during 2006. As a percentage of net revenue,
      clinical salaries and benefits decreased from 37.0% in 2005 to 36.1% in 2006.





*Dental
      supplies.* Dental
      supplies increased to $2.3 million for the year ended December 31, 2006 compared
      to $2.2 million for the year ended December 31, 2005, an increase of $63,000
      or
      2.9%.  This
      increase is attributable to increased production. Additionally, the need to
      make
      initial dental supply orders, which tend to be larger than ongoing dental supply
      orders, for the four *de
      novo* offices
      that were opened during 2006 contributed to the increased dental supply expense.
      As a percentage of net revenue, dental supplies decreased from 6.0% in 2005
      to
      5.8% in 2006.





*Laboratory
      fees.* Laboratory
      fees increased to $2.6 million for the year ended December 31, 2006 compared
      to
      $2.4 for the year ended December 31, 2005, and increase of $145,000 or 5.9%.
      This increase is attributable to increased production. As a percentage of net
      revenue, laboratory fees decreased from 6.7% in 2005 to 6.6% in
      2006.





*Occupancy.* Occupancy
      expenses increased to $4.3 million for the year ended December 31, 2006 from
      $3.9 million for the year ended December 31, 2005, an increase of $404,000
      or
      10.5%.  This
      increase was due to increased rental payments resulting from the renewal of
      Office leases at current market rates for Offices whose leases expired
      subsequent to the 2005 period as well as the addition of four *de
      novo* offices
      during 2006 and two *de
      novo* offices
      during the latter part of 2005. As a percentage of net revenue, occupancy
      expense increased to 10.8% in 2006 from 10.5% in 2005.





*Advertising
      and marketing.* Advertising
      and marketing decreased to $797,000 for the year ended December 31, 2006 from
      $952,000 for the year ended December 31, 2005, a decrease of $155,000 or 16.3%.
      This decrease is attributable to a shift in the Company’s television and print
      advertising from the relatively expensive Denver, Colorado market in 2005 to
      the
      Albuquerque, New Mexico and Colorado Springs, Colorado markets in 2006. As
      a
      percentage of net revenue, advertising and marketing decreased to 2.0% in 2006
      from 2.6% in 2005.





*Depreciation
      and amortization.* Depreciation
      and amortization, which consists of depreciation and amortization expense
      incurred at the Offices, increased to $2.2 million for the year ended December
      31, 2006 from $1.7 million for the year ended December 31, 2005, an increase
      of
      $489,000 or 28.7%.  This
      increase was primarily the result of tenant improvement and equipment purchased
      at the four new *de
      novo* Offices
      and the expansion of one Office. As a percentage of net revenue, depreciation
      and amortization increased to 5.6% in 2006 from 4.6% in 2005.





*General
      and administrative.* General
      and administrative expenses attributable to the Offices increased to $4.6
      million for the year ended December 31, 2006 from $4.2 million for the year
      ended December 31, 2005, an increase of $420,000 or 10.1%. The addition of
      four *de
      novo* Offices
      accounted for $167,000 of the increase and the remaining was the result of
      higher costs for recruiting, office supplies, repairs and maintenance, laundry,
      postage, mileage reimbursement, bad debt expense, credit card fees, and gross
      receipts tax based on higher revenues in the New Mexico Offices. As a percentage
      of net revenue, Office general and administrative expenses increased from 11.4%
      in 2005 to 11.7% in 2006.





*Contribution
      from dental offices.* As
      a
      result of the above, contribution from dental offices increased to $8.5 million
      for the year ended December 31, 2006 from $7.8 million for the year ended
      December 31, 2005, an increase of $681,000 or 8.8%. As a percentage of net
      revenue, contribution from dental offices increased to 21.5% in 2006 from 21.2%
      in 2005.





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            30
            -*





*Corporate
      expenses - general and administrative.* Corporate
      expenses - general and administrative remained constant at $4.2 million for
      the
      years ended December 31, 2006 and 2005. As a percentage of net revenue,
      corporate expenses - general and administrative decreased to 10.6% in 2006
      compared to 11.5% in 2005.




*Corporate
      expenses - depreciation and amortization.* Corporate
      expenses - depreciation and amortization decreased to $131,000 for the year
      ended December 31, 2006 from $140,000 for the year ended December 31, 2005,
      a
      decrease of $8,000 or 5.9%.  This
      decrease was primarily the result of older assets becoming fully depreciated
      somewhat offset by the addition of new depreciable assets. As a percentage
      of
      net revenue, corporate expenses - depreciation and amortization decreased to
      0.3% in 2006 from 0.4% in 2005.





*Operating
      income.* As
      a
      result of the above, operating income increased to $4.1 million for the year
      ended December 31, 2006 from $3.4 million for the year ended December 31, 2005,
      an increase of $750,000 or 22.1%. As a percentage of net revenue, operating
      income increased to 10.5% in 2006 from 9.3% in 2005.





*Interest
      expense/(income), net.* Interest
      expense, net increased to $227,000 for the year ended December 31, 2006 from
      ($12,000) for the year ended December 31, 2005, an increase of $239,000. This
      increase in interest expense is attributable to higher interest expense on
      the
      Company’s Credit Facility due to increased rates and increased balances on the
      credit line, the interest associated with the Term Loan and lower charges for
      late payments on customer accounts receivable. As a percentage of net revenue,
      interest expense, net increased to 0.6% in 2006 from 0.0% in 2005.





*Net
      income.* As a
      result of the above, the Company’s net income was $2.3 million for the year
      ended December 31, 2006 compared to net income of $2.2 million for the year
      ended December 31, 2005, an increase of $159,000 or 7.3%. As a percentage of
      net
      revenue, net income remained constant at 5.9% for the years ended 2006 and
      2005.
      Net income for the year ended December 31, 2006 was net of income tax expense
      of
      $1.6 million while net income for the year ended December 31, 2005 was net
      of
      income tax expense of $1.2 million.





***Year
      Ended December 31, 2005 Compared to Year Ended December 31,
      2004***





*Net
      revenue.* Net
      revenue increased to $36.7 million for the year ended December 31, 2005 compared
      to $32.2 million for the year ended December 31, 2004, an increase of $4.5
      million or 14.1%. This was attributable to an increase in specialty net revenue
      of $2.8 million, an increase in general dentistry at existing offices of
      $825,000 and new *de
      novo* offices
      generating $1.0 million in additional production for the year ended December
      31,
      2005.




*Clinical
      salaries and benefits.* Clinical
      salaries and benefits increased to $13.6 million for the year ended December
      31,
      2005 compared to $12.0 million for the year ended December 31, 2004, an increase
      of $1.6 million or 13.3%. This is the result of the addition of additional
      employees to support the increased number of dentists working in 2005 over
      2004
      and general wage increases granted during 2005. As a percentage of net revenue,
      clinical salaries and benefits decreased from 37.2% in 2004 to 37.0% in 2005.





*Dental
      supplies.* Dental
      supplies increased to $2.2 million for the year ended December 31, 2005 compared
      to $2.0 million for the year ended December 31, 2004, an increase of $228,000
      or
      11.5%.  This
      increase is attributable to increased production and increased emphasis on
      specialty dentistry which tends to have higher dental supply costs.
      Additionally, the need to make initial dental supply orders, which tend to
      be
      larger than ongoing dental supply orders, for the two *de
      novo* offices
      that were opened during 2005 contributed to the increased dental supply expense.
      As a percentage of net revenue, dental supplies decreased from 6.2% in 2004
      to
      6.0% in 2005.





*Laboratory
      fees.* Laboratory
      fees remained constant at $2.4 million for the years ended December 31, 2005
      and
      December 31, 2004. As a percentage of net revenue, laboratory fees decreased
      from 7.5% in 2004 to 6.7% in 2005.





*Occupancy.* Occupancy
      expenses increased to $3.9 million for the year ended December 31, 2005 from
      $3.6 million for the year ended December 31, 2004, an increase of $280,000
      or
      7.8%.  This
      increase was due to increased rental payments resulting from the renewal of
      Office leases at current market rates for Offices whose leases expired
      subsequent to the 2004 period as well as the addition of two *de
      novo* offices
      during 2005 and two *de
      novo* offices
      during the latter part of 2004. As a percentage of net revenue, occupancy
      expense decreased to 10.5% in 2005 from 11.1% in 2004.





*Advertising
      and marketing.* Advertising
      and marketing increased to $952,000 for the year ended December 31, 2005 from
      $678,000 for the year ended December 31, 2004, an increase of $274,000 or 40.4%.
      This increase is





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            31
            -*





attributable
      to a new television and print advertising campaign in the Denver, Colorado
      market, which began in January 2005. As a percentage of net revenue, advertising
      and marketing increased to 2.6% in 2005 from 2.1% in 2004.





*Depreciation
      and amortization.* Depreciation
      and amortization, which consists of depreciation and amortization expense
      incurred at the Offices, decreased to $1.7 million for the year ended December
      31, 2005 from $1.8 million for the year ended December 31, 2004, a decrease
      of
      $85,000 or 4.7%.  This
      decrease was primarily the result of older assets becoming fully depreciated
      somewhat offset by the addition of new depreciable assets. As a percentage
      of
      net revenue, depreciation and amortization decreased to 4.6% in 2005 from 5.6%
      in 2004.





*General
      and administrative.* General
      and administrative expenses attributable to the Offices increased to $4.2
      million for the year ended December 31, 2005 from $3.8 million for the year
      ended December 31, 2004, an increase of $357,000 or 9.3%. This increase was
      the
      result of higher costs for recruiting, training, bio-waste disposal, bad debt
      expense, legal fees, and credit card fees. As a percentage of net revenue,
      Office general and administrative expenses decreased from 11.9% in 2004 to
      11.4%
      in 2005.





*Contribution
      from dental offices.* As
      a
      result of the above, contribution from dental offices increased to $7.8 million
      for the year ended December 31, 2005 from $5.9 million for the year ended
      December 31, 2004, an increase of $1.9 million or 31.3%. As a percentage of
      net
      revenue, contribution from dental offices increased to 21.2% in 2005 from 18.4%
      in 2004.





*Corporate
      expenses - general and administrative.* Corporate
      expenses - general and administrative increased to $4.2 million for the year
      ended December 31, 2005 from $3.1 million for the year ended December 31, 2004,
      an increase of $1.2 million or 38.7%. This increase was primarily due to a
      grant
      of restricted stock issued on July 1, 2005 and the reimbursement of taxes
      related to the grant which totaled $748,000 in 2005. Other items affecting
      the
      increase in corporate expenses - general and administrative include an increase
      in bonuses of $319,000, an increase in health insurance expenses of $43,000,
      and
      an increase in payroll taxes of $45,000 in the year ended December 31, 2005
      compared to the year ended December 31, 2004. As a percentage of net revenue,
      corporate expenses - general and administrative increased to 11.5% in 2005
      compared to 9.5% in 2004, of which 2.0% is attributable to equity compensation
      expense.




*Corporate
      expenses - depreciation and amortization.* Corporate
      expenses - depreciation and amortization decreased to $140,000 for the year
      ended December 31, 2005 from $217,000 for the year ended December 31, 2004,
      a
      decrease of $77,000 or 35.7%.  This
      decrease was primarily the result of older assets becoming fully depreciated
      somewhat offset by the addition of new depreciable assets. As a percentage
      of
      net revenue, corporate expenses - depreciation and amortization decreased to
      0.4% in 2005 from 0.6% in 2004.





*Operating
      income.* As
      a
      result of the above, operating income increased to $3.4 million for the year
      ended December 31, 2005 from $2.6 million for the year ended December 31, 2004,
      an increase of $748,000 or 28.2%. As a percentage of net revenue, operating
      income increased to 9.3% in 2005 from 8.3% in 2004.





*Interest
      expense/(income), net.* Interest
      expense, net decreased to ($12,000) for the year ended December 31, 2005 from
      $59,000 for the year ended December 31, 2004, a decrease of $71,000. This
      decrease was primarily the result of increased interest income on customer
      balances and a decrease in interest on seller notes due to lower outstanding
      balances. As a percentage of net revenue, interest expense, net decreased to
      0.0% in 2005 from 0.2% in 2004.





*Discontinued
      operations* .
      In
      September 2004, the Company closed an office in the Phoenix market that resulted
      in a net loss from discontinued operations of $188,000 for the year ended
      December 31, 2004. This loss for the year ended December 31, 2004 was comprised
      of an operating loss of $120,000 and a loss on the disposition of assets of
      $193,000, partially offset by an income tax benefit of $125,000.








*-
            32
            -*





*Net
      income.* As a
      result of the above, the Company reported net income of $2.2 million for the
      year ended December 31, 2005 compared to net income of $1.4 million for the
      year
      ended December 31, 2004, an increase of $785,000 or 56.9%. As a percentage
      of
      net revenue, net income increased to 5.9% in 2005 from 4.3% in 2004. Net income
      for the year ended December 31, 2005 was net of income tax expense of $1.2
      million while net income for the year ended December 31, 2004 was net of income
      tax expense of $898,000.





The
      Company’s earnings before interest, taxes, depreciation, amortization,
      discontinued operations (before income tax benefit) and non cash expense
      associated with stock-based compensation (“Adjusted EBITDA”) increased $1.1
      million, or 19.0% to $7.1 million for the year ended December 31, 2006 from
      $6.0
      million for the year ended December 31, 2005. Although Adjusted EBITDA is not
      a
      generally accepted accounting principle (“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, amortization of equity
      compensation, stock-based compensation related to SFAS 123(R), interest
      expense/(income), net and income tax expense to net income as in the table
      below.


Year
                  Ended December 31,2004
              
              2005
              
              2006RECONCILIATION
                  OF ADJUSTED EBITDA:Net
                  income
              
              $
              1,379,597
              
              $
              2,164,303
              
              $
              2,322,974Add
                  back:Discontinued
                    operations -       (before
                  income tax expense)
              
              
              312,669
              
              
              -
              
              
              -Depreciation
                  and amortization - Offices
              
              
              1,787,892
              
              
              1,703,330
              
              
              2,192,411Depreciation
                  and amortization - Corporate
              
              
              216,926
              
              
              139,512
              
              
              131,356Amortization
                  of deferred equity compensation expense
              
              
              -
              
              
              162,060
              
              
              324,120Stock-based
                  compensation expense related toSFAS 123(R)
              
              
              -
              
              
              -
              
              
              329,054Interest
                  expense (income), net
              
              
              59,062
              
              
              (12,204
              )
              
              226,835Income
                  tax expense
              
              
              898,186
              
              
              1,244,960
              
              
              1,596,785Adjusted
                  EBITDA
              
              
              4,654,332
              
              
              5,401,961
              
              
              7,123,535Reimbursement
                    of income taxes related to restrictedstock grant
              
              
              -
              
              
              585,844
              
              
              -Adjusted
                  EBITDA before reimbursement of incometaxes
                  related to restricted stock grant
              
              $
              4,654,332
              
              $
              5,987,805
              
              $
              7,123,535





**Critical
      Accounting Policies**





The
      Company’s financial statements have been prepared in accordance with accounting
      principles generally accepted in the United States, which require the Company
      to
      make estimates and judgments that affect the reported amounts of assets,
      liabilities, revenues and expenses, and the related disclosures. A summary
      of
      those significant accounting policies can be found in the Company’s Notes to
      Consolidated Financial Statements. The estimates used by management are based
      upon the Company’s historical experiences combined with management’s
      understanding of current facts and circumstances. Certain of the Company’s
      accounting policies are considered critical as they are





*-
            33
            -*





both
      important to the portrayal of the Company’s financial condition and the results
      of its operations and require significant or complex judgments on the part
      of
      management. Management has not determined how reported amounts would differ
      based on the application of different accounting policies. Management has also
      not determined the likelihood that materially different amounts could be
      reported under different conditions or using different assumptions. Management
      believes that the following represent the critical accounting policies of the
      Company as described in Financial Reporting Release No. 60, “Cautionary Advice
      Regarding Disclosure About Critical Accounting Policies”, which was issued by
      the Securities and Exchange Commission: Impairment of intangible and long-lived
      assets, allowance for doubtful accounts and deferred income taxes.





At
      December 31, 2006, intangible assets on the Company’s consolidated balance sheet
      were $12.3 million, representing 53.8% of the Company’s total assets at that
      date. The Company's dental practice acquisitions involve the purchase of
      tangible and intangible assets and the assumption of certain liabilities of
      the
      acquired Offices. As part of the purchase price allocation, the Company
      allocates the purchase price to the tangible and 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. The Management
      Agreement represents the Company's right to manage the Offices during the
      40-year term of the agreement. The assigned value of the Management Agreement
      is
      amortized using the straight-line method over a period of 25 years. The Company
      reviews the recorded amount of intangible assets and other long-lived assets
      for
      impairment for each Office whenever events or changes in circumstances indicate
      the carrying amount of the assets may not be recoverable. If this review
      indicates that the carrying amount of the assets may not be recoverable as
      determined based on the undiscounted cash flows of each Office, whether acquired
      or developed, the carrying value of the asset is reduced to fair value. Among
      the factors that the Company will continually evaluate are unfavorable changes
      in each Office, relative market share and local market competitive environment,
      current period and forecasted operating results, cash flow levels of Offices
      and
      the impact on the net revenue earned by the Company, and the legal and
      regulatory factors governing the practice of dentistry. As of December 31,
      2006,
      a review by the Company determined that there was no permanent impairment of
      any
      long-lived or intangible asset at any Office.





The
      Company’s allowance for doubtful accounts reflects a reserve that reduces
      customer accounts receivable to the net amount estimated to be collectible.
      Estimating the credit-worthiness of customers and the recoverability of customer
      accounts requires management to exercise considerable judgment. In estimating
      uncollectible amounts, management considers factors such as general economic
      and
      industry-specific conditions, historical customer performance and anticipated
      customer performance. While management considers the Company’s processes to be
      adequate to effectively quantify its exposure to doubtful accounts, changes
      in
      economic, industry or specific customer conditions may require the Company
      to
      adjust its allowance for doubtful accounts.





Deferred
      income taxes are recognized for the expected tax consequences in future years
      for differences between the tax bases of assets and liabilities and their
      financial reporting amounts, based upon enacted tax laws and statutory tax
      rates
      applicable to the periods in which the differences are expected to affect
      taxable income. The Company’s significant deferred tax assets are related to:
      Accruals not currently deductible, allowance for doubtful accounts and
      depreciation expense for tax which is less than depreciation expense for books.
      The Company has not established a valuation allowance to reduce deferred tax
      assets as the Company expects to fully recover these amounts in future periods.
      The Company’s significant deferred tax liability is the result of intangible
      asset amortization expense for tax being greater than the intangible asset
      amortization expense for books. Management reviews and adjusts those estimates
      annually based upon the most current information available. However, because
      the
      recoverability of deferred taxes is directly dependent upon the future operating
      results of the Company, actual recoverability of deferred taxes may differ
      materially from management’s estimates.





**Liquidity
      and Capital Resources**





The
      Company finances its operations and growth through a combination of cash
      provided by operating activities, a bank line of credit (the “Credit Facility”)
      and, from time to time, seller notes.





Net
      cash
      provided by operating activities was $3.8 million, $4.4 million and $5.3 million
      for the years ended December 31, 2004, 2005 and 2006, respectively. During
      the
      year ended December 31, 2006, the Company’s cash provided by operating
      activities excluding net income and non-cash items consisted primarily of an
      increase in other long-term obligations of approximately $131,000, a decrease
      of
      prepaid assets and other expenses of approximately $8,000, offset by an increase
      in deferred charges and other assets of approximately $28,000, a





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            34
            -*





decrease
      in accounts payable, accrued expenses and accrued payroll of approximately
      $77,000 and an increase in accounts receivable of $611,000 and a decrease in
      income taxes payable of approximately $61,000. During the year ended December
      31, 2005, the Company’s cash provided by operating activities excluding net
      income and non-cash items consisted primarily of an increase in income taxes
      payable of approximately $256,000 and a decrease of prepaid assets and other
      expenses of approximately $195,000, offset by a decrease in accounts payable,
      accrued expenses and accrued payroll of approximately $103,000 and an increase
      in accounts receivable of $913,000. During the year ended December 31, 2004,
      the
      Company’s cash provided by operating activities excluding net income and
      non-cash items consisted primarily of an increase in accounts payable, accrued
      expenses and accrued payroll of approximately $467,000, offset by an increase
      is
      accounts receivable of $755,000 and a decrease in income taxes payable of
      approximately $146,000.





Net
      cash
      used in investing activities was $1.8 million, $1.9 million and $3.2 million
      for
      the years ended December 31, 2004, 2005 and 2006 respectively. During the year
      ended December 31, 2006, the Company invested $1.3 million in the purchase
      of
      additional property and equipment and $2.0 million in the development of new
      Offices. During the year ended December 31, 2005, the Company invested $1.3
      million in the purchase of additional property and equipment and $569,000 in
      the
      development of new Offices. During the year ended December 31, 2004, the Company
      invested $905,000 in the purchase of additional property and equipment and
      $845,000 in the development of new Offices.





For
      the
      years ended December 31, 2004, 2005 and 2006, net cash used in financing
      activities was $2.4 million, $2.3 million and $2.2 million,
      respectively.  For
      the
      year ended December 31, 2006, net cash used in financing activities was
      comprised of a $4.6 million increase in borrowings under the Credit Facility
      and
      Term Loan, $423,000 of proceeds from the exercise of Common Stock options and
      $237,000 from the tax benefit of Common Stock options exercised. This was offset
      by $6.1 million for the purchase of Common Stock, $1.1 million for the payment
      of Common Stock dividends and $145,000 for the repayment of long-term debt.
      For
      the year ended December 31, 2005, net cash used in financing activities was
      comprised of a $2.0 million increase in borrowings under the Credit Facility,
      $600,000 of proceeds from the exercise of Common Stock options and $403,000
      from
      the tax benefit of Common Stock options exercised. This was offset by $4.3
      million for the purchase of Common Stock, $802,000 for the payment of Common
      Stock dividends and $167,000 for the repayment of long-term debt. For the year
      ended December 31, 2004, net cash used in financing activities was comprised
      of
      $1.1 million for the pay-down on the Credit Facility, $741,000 for the repayment
      of long-term debt, $778,000 for the purchase and retirement of Common Stock
      and
      $269,000 for the payment of Common Stock dividends. This was partially offset
      by
      $235,000 of proceeds from the exercise of Common Stock options and $241,000
      from
      the tax benefit of Common Stock options exercised.





On
      April
      25, 2006, the Company amended its Credit Facility. The amended 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 a LIBOR rate plus a LIBOR Rate Margin, at the Company’s option.
      The lender’s Base Rate computes interest at the higher of the lender’s “prime
      rate” or the Federal Funds Rate plus one-half percent (0.5%). As of December 31,
      2006, the Base Rate was 8.25%. The LIBOR option computes interest at the LIBOR
      Rate as of the date such LIBOR Rate loan was made plus a LIBOR Rate Margin
      of
      1.50%. As of December 31, 2006, the LIBOR Rate was 6.85%. A commitment fee
      of
      0.25% on the average daily unused amount of the revolving loan commitment during
      the preceding quarter will also be assessed. The Company may prepay any Base
      Rate Loan at any time and any LIBOR Rate Loan upon not less than three business
      days prior written notice given to the lender, but the Company will be
      responsible for any loss or cost incurred by the lender in liquidating or
      employing deposits required to fund or maintain the LIBOR Rate loan. The amended
      Credit Facility expires on May 31, 2008. At December 31, 2006, the Company
      had
      $3.1 million outstanding and $3.9 million available for borrowing under the
      revolving loan. This consisted of $1.6 million outstanding under the Base Rate
      Option and $1.5 million borrowings outstanding under the LIBOR Rate option.
      The
      Credit Facility requires the Company to maintain certain financial ratios on
      an
      ongoing basis. At December 31, 2006, the Company was in full compliance with
      all
      of its covenants under this agreement.





On
      October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
      per share, 212,396 shares of its Common Stock that were properly tendered and
      not withdrawn pursuant to the Company’s “dutch auction” tender offer. The
      212,396 shares purchased were comprised of the 175,000 shares the Company
      offered to purchase and 37,396 shares that were purchased pursuant to the
      Company's right to purchase up to an additional 2% of the outstanding shares
      as
      of August 31, 2006, without extending the Tender Offer in accordance with
      applicable securities laws. These shares represented approximately 9.2% of
      the
      shares outstanding as of September 30, 2006.





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            35
            -*





The
      Tender Offer was funded from a $4.6 million term loan. Under the Term Loan,
      $2.3
      million is borrowed at a fixed interest rate of 7.05% and the remaining $2.3
      million is borrowed at a floating interest rate of Libor plus 1.5%. The
      principal amount borrowed will be paid quarterly in 20 equal payments of
      approximately $230,000 plus interest beginning December 31, 2006. The term
      loan
      matures on September 30, 2011.





On
      February 10, 2005, the Company announced an increase in the amount of the
      quarterly cash dividend from $.038 per share to $.10 per share. On January
      10,
      2006, the Company announced an increase in the amount of the quarterly dividend
      from $.10 per share to $.13 per share. On January 9, 2007, the Company announced
      an increase in the amount of the quarterly dividend from $.13 to $.15 per
      share.





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 need
      to
      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 raise 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. See “Risk Factors - Need for Additional Capital;
      Uncertainty of Additional Financing” in this report, Item 1A.





The
      Company from time to time may purchase its Common Stock on the open market.
      The
      shares purchased and the purchase price per share for transactions prior to
      August 1, 2005 have been adjusted to reflect the 2-for-1 stock split. During
      2003, the Company, in 84 separate transactions, purchased 592,390 shares of
      its
      Common Stock for total consideration of approximately $3.9 million at prices
      ranging from $4.77 to $7.10 per share. During 2004, the Company, in seven
      separate transactions, purchased 108,000 shares of its Common Stock for total
      consideration of approximately $778,000 at prices ranging from $6.33 to $9.25
      per share. During 2005, the Company, in 40 separate transactions, purchased
      311,961 shares of its Common Stock for total consideration of approximately
      $4.3
      million at prices ranging from $9.00 to $19.31 per share. During 2006, the
      Company, in 67 separate transactions, purchased 305,161 shares of its Common
      Stock for total consideration of approximately $6.1 million at prices ranging
      from $15.00 to $21.75 per share. In April 2006, the Company purchased 54,250
      shares through a private transaction that was approved by the Board of
      Directors. On October 5, 2006, the Company purchased, through a Board of
      Directors approved Dutch Auction Tender Offer, 212,396 shares of its Common
      Stock at $21.75 for total consideration of $4.6 million. As of December 31,
      2006, approximately $526,000 of the previously authorized amount was available
      for open-market purchases.





**Contractual
      Obligations**





At
      December 31, 2006, the Company had contractual obligations and commitments
      primarily with regard to lease arrangements and bank notes. The Company
      anticipates that these contractual obligations will be funded by cash on hand,
      cash generated by operations, or borrowings under the Company’s Credit Facility.
      The Company’s retained earnings as of December 31, 2006 were approximately $5.4
      million and the Company had a working capital deficit on that date of
      approximately $947,000. During 2006, the Company had capital expenditures of
      $3.2 million and purchased approximately $6.1 million of Common Stock while
      increasing total bank debt by $4.5 million.





As
      of
      December 31, 2006, the Company had the following known contractual
      obligations:


Payments
                  due by PeriodTotal
              
              Less
                  than 1 year
              
              1-3
                  years
              
              3-5
                  years
              
              More
                  than 5 yearsLong-Term
                  Debt Obligations
              
              
              7,455,972
              
              
              953,561
              
              
              4,892,411
              
              
              1,610,000
              
              
              -Operating
                  Lease Obligations
              
              
              7,960,591
              
              
              2,665,576
              
              
              3,811,429
              
              
              1,429,495
              
              
              54,091Other
                  Long-Term Liabilities Reflected on the Balance Sheet Under GAAP
              
              
              404,772
              
              
              81,822
              
              
              204,412
              
              
              117,653
              
              
              885Total
              
              
              15,821,335
              
              
              3,700,959
              
              
              8,908,252
              
              
              3,157,148
              
              
              54,976





*-
            36
            -*





**Recent
      Accounting Pronouncements**





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123(R), "Share-Based Payment" (“SFAS 123(R)”), which is a revision of SFAS 123,
      Accounting for Stock-Based Compensation. SFAS 123(R) is effective for public
      companies for interim or annual periods beginning after June 15, 2005,
      supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
      amends SFAS No. 95, Statement of Cash Flows. SFAS 123(R) requires all
      share-based payments to employees, including grants of employee stock options,
      to be recognized in the income statement based on their fair values. Pro-forma
      disclosure is no longer an alternative. The Company adopted SFAS 123(R) at
      the
      beginning of fiscal year 2006.





In
      July 2006, the FASB issued Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109.”* Interpretation
      48 clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement 109,
“ *Accounting
      for Income Taxes.”* Interpretation
      48 is effective for fiscal year 2007. The Company does not expect the adoption
      of this pronouncement to have a material effect on the consolidated financial
      statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
      regarding the process of quantifying financial statement misstatements and
      the
      potential under current practice for the build up of improper amounts on the
      balance sheet. The Company has adopted the bulletin during 2006. The adoption
      did not have a material effect on the Company’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS 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
      provisions of SFAS No. 157 are effective beginning in our fiscal year 2008
      and are currently not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      September 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans* (“SFAS
      No. 158”). SFAS No. 158 requires an employer to recognize the
      over-funded or under-funded status of a defined benefit pension plan and other
      postretirement plans as an asset or liability on its balance sheet and recognize
      changes in its funded status in the year in which the change occurs through
      accumulated other non-owner changes in equity. SFAS No. 158 is effective for
      fiscal year 2006. The Company does not expect the adoption of SFAS 158 to have
      an impact on our results of operations or financial condition.








**ITEM
      7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK.**





Market
      risk represents the risk of loss that may impact the financial position, results
      of operations or cash flows of the Company due to adverse changes in financial
      and commodity market prices and rates. Historically, the Company has not used
      derivative instruments or engaged in hedging activities. On October 12, 2006,
      the Company entered into a fixed-for-floating interest rate swap transaction
      on
      a 59 month Term Loan. If the Company were to designate it as a hedge, this
      transaction would qualify as a cash flow hedge under SFAS No. 133. As of
      December 31, 2006, the Company had elected not to designate it as a cash flow
      hedge and has not recorded it as a cash flow hedge. As of February 2007, the
      Company elected to designate it as a cash flow hedge.





*Interest
      Rate Risk.* The
      interest payable on the Company’s Credit Facility and a portion of the Term Loan
      is variable based upon the LIBOR rate and the prime rate and, therefore,
      affected by changes in market interest rates. At December 31, 2006, $2.2 million
      was outstanding under the Term Loan and $1.5 million under the Credit Facility
      with a interest rate of 6.85% (LIBOR) and $1.6 million was outstanding under
      the
      Credit Facility with an interest rate of 8.25% (Prime). The Company may repay
      the Credit Facility and Term Loan balance in full at any time without penalty.
      As a result, the Company does not believe that any reasonably possible near-term
      changes in interest rates would result in a material effect on future earnings,
      fair values or cash flows of the Company. The Company estimates that a 1.0%
      increase in the interest rate on the Company’s Credit Facility and Term Loan
      would have resulted in additional interest expense of approximately $34,000
      for
      the year ended December 31, 2006.








*-
            37
            -*





**ITEM
      8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.**





**INDEX
      TO FINANCIAL STATEMENTS**





Birner
      Dental Management Services, Inc. and subsidiaries’ consolidated financial
      statements as of December 31, 2005 and 2006 and for each of the three years
      ended December 31, 2006:




PageReport
                  of Independent Registered Public Accounting Firm
              39Consolidated
                  Balance Sheets
              40Consolidated
                  Statements of Income
              41Consolidated
                  Statements of Shareholders’ Equity
              42Consolidated
                  Statements of Cash Flows
              43Notes
                  to Consolidated Financial Statements
              45










*-
            38
            -*








**REPORT
      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**











To
      the
      Board of Directors


Birner
      Dental Management Services, Inc.


Denver,
      Colorado





We
      have
      audited the accompanying consolidated balance sheets of Birner Dental Management
      Services, Inc. and subsidiaries as of December 31, 2006 and 2005, and the
      related consolidated statements of income, shareholders’ equity and cash flows
      for each of the three years in the period ended December 31, 2006. These
      financial statements are the responsibility of the Company's management. Our
      responsibility is to express an opinion on these financial statements based
      on
      our audits.





We
      conducted our audits in accordance with the standards of the Public Company
      Accounting Oversight Board (United States). Those standards require that we
      plan
      and perform the audit to obtain reasonable assurance about whether the financial
      statements are free of material misstatement. The Company is not required to
      have, nor were we engaged to perform, an audit of its internal control over
      financial reporting. Our audit included consideration of internal control over
      financial reporting as a basis for designing audit procedures that are
      appropriate in the circumstances, but not for the purpose of expressing an
      opinion on the effectiveness of the Company’s internal control over financial
      reporting. Accordingly, we express no such opinion. An audit includes examining,
      on a test basis, evidence supporting the amounts and disclosures in the
      financial statements. An audit also includes assessing the accounting principles
      used and significant estimates made by management, as well as evaluating the
      overall financial statement presentation. We believe that our audits provide
      a
      reasonable basis for our opinion.





In
      our
      opinion, the financial statements referred to above present fairly, in all
      material respects, the financial position of Birner Dental Management Services,
      Inc. and subsidiaries as of December 31, 2006 and 2005, and the results of
      their
      operations and their cash flows for each of the three years in the period ended
      December 31, 2006, in conformity with U.S. generally accepted accounting
      principles.





As
        discussed in Note 2 to the accompanying consolidated financial statements,
        effective January 1, 2006, the Company adopted Statement of Financial Accounting
        Standards No. 123(R), *Share-Based
        Payment.*





/s/
HEIN
      & ASSOCIATES LLP





HEIN
      & ASSOCIATES LLP











Denver,
      Colorado,


March
      29,
      2007







*-
            39
            -*




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


**CONSOLIDATED
        BALANCE SHEETS**
  December
                  31,ASSETS
              
              2005
              
              2006CURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              921,742
              
              $
              888,186Accounts
                  receivable, net of allowance for doubtfulaccounts
                  of $261,031 and $288,513, respectively
              
              
              3,215,369
              
              
              3,103,922Deferred
                  tax asset
              
              
              160,411
              
              
              185,671Prepaid
                  expenses and other assets
              
              
              605,599
              
              
              597,283Total
                  current assets
              
              
              4,903,121
              
              
              4,775,062PROPERTY
                  AND EQUIPMENT, net
              
              
              3,939,452
              
              
              5,592,672OTHER
                  NONCURRENT ASSETS:Intangible
                  assets, net
              
              
              13,036,652
              
              
              12,272,358Deposits
              
              
              154,245
              
              
              181,860Total
                  assets
              
              $
              22,033,470
              
              $
              22,821,952LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              2,065,076
              
              $
              1,648,498Accrued
                  expenses
              
              
              1,110,526
              
              
              1,398,267Accrued
                  payroll and related expenses
              
              
              1,502,877
              
              
              1,596,770Income
                  taxes payable
              
              
              175,259
              
              
              114,016Current
                  maturities of long-term debt
              
              
              145,150
              
              
              953,561Total
                  current liabilities
              
              
              4,998,888
              
              
              5,711,112LONG-TERM
                  LIABILITIES:Deferred
                  tax liability, net
              
              
              750,346
              
              
              734,234Long-term
                  debt, net of current maturities
              
              
              2,887,166
              
              
              6,502,411Other
                  long-term obligations
              
              
              195,723
              
              
              326,550Total
                  liabilities
              
              
              8,832,123
              
              
              13,274,307COMMITMENTS,
                  CONTINGENCIES AND SUBSEQUENT EVENTS (Note 9)SHAREHOLDERS'
                  EQUITY:Preferred
                  Stock, no par value, 10,000,000 sharesauthorized;
                  none outstanding
              
              
              -
              
              
              -Common
                  Stock, no par value, 20,000,000 sharesauthorized;
                  2,343,675 and 2,132,361 shares issued andoutstanding,
                  respectively
              
              
              9,628,457
              
              
              4,515,469Deferred
                  equity compensation
              
              
              (648,240
              )
              
              (324,120
              )Retained
                  earnings
              
              
              4,221,130
              
              
              5,356,296Total
                  shareholders' equity
              
              
              13,201,347
              
              
              9,547,645Total
                  liabilities and shareholders' equity
              
              $
              22,033,470
              
              $
              22,821,952
  The
        accompanying notes are an integral part of these consolidated financial
        statements.


*-
            40
            -*




**BIRNER
          DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
          STATEMENTS OF INCOME**
  Years
                    Ended December 31,2004
                
                
                2005
                
                
                
                2006NET
                    REVENUE:
                
                $
                32,170,405
                
                $
                36,716,117
                
                
                $
                39,386,996DIRECT
                    EXPENSES:Clinical
                    salaries and benefits
                
                
                11,985,523
                
                
                13,578,650
                
                
                
                14,201,712Dental
                    supplies
                
                
                1,987,951
                
                
                2,215,685
                
                
                
                2,279,107Laboratory
                    fees
                
                
                2,398,743
                
                
                2,446,344
                
                
                
                2,591,499Occupancy
                
                
                3,584,515
                
                
                3,864,640
                
                
                
                4,268,641Advertising
                    and marketing
                
                
                678,193
                
                
                951,916
                
                
                
                797,042Depreciation
                    and amortization
                
                
                1,787,892
                
                
                1,703,330
                
                
                
                2,192,411General
                    and administrative
                
                
                3,826,401
                
                
                4,183,471
                
                
                
                4,603,74526,249,218
                
                
                28,944,036
                
                
                
                30,934,157Contribution
                    from dental offices
                
                
                5,921,187
                
                
                7,772,081
                
                
                
                8,452,839CORPORATE
                    EXPENSES:General
                    and administrative
                
                
                3,054,747
                
                
                4,235,510
                
                )
                
                4,174,889Depreciation
                    and amortization
                
                
                216,926
                
                
                139,512
                
                
                
                131,356Operating
                    income
                
                
                2,649,514
                
                
                3,397,059
                
                
                
                4,146,594Interest
                    expense (income), net
                
                
                59,062
                
                
                (12,204
                )
                
                
                226,835Income
                    from continuing operations before income taxes
                
                
                2,590,452
                
                
                3,409,263
                
                
                
                3,919,759Income
                    tax expense
                
                
                1,023,254
                
                
                1,244,960
                
                
                
                1,596,785Income
                    from continuing operations
                
                
                1,567,198
                
                
                2,164,303
                
                
                
                2,322,974DISCONTINUED
                    OPERATIONS (Note 4):Operating
                    (loss) attributable to assets disposed of
                
                
                (120,169
                )
                
                -
                
                
                
                -(Loss)
                    recognized on dispositions
                
                
                (192,500
                )
                
                -
                
                
                
                -Income
                    tax benefit
                
                
                125,068
                
                
                -
                
                
                
                -Loss
                    on discontinued operations
                
                
                (187,601
                )
                
                -
                
                
                
                -Net
                    Income
                
                $
                1,379,597
                
                $
                2,164,303
                
                
                $
                2,322,974Net
                    income (loss) per share of Common Stock - Basic:Continued
                    operations
                
                $
                0.65
                
                $
                0.91
                
                
                $
                1.02Discontinued
                    operations
                
                
                (0.08
                )
                
                -
                
                
                
                -Net
                    income per share of Common Stock - Basic
                
                $
                0.57
                
                $
                0.91
                
                
                $
                1.02Net
                    income (loss) per share of Common Stock - Diluted:Continued
                    operations
                
                $
                0.60
                
                $
                0.82
                
                
                $
                0.94Discontinued
                    operations
                
                
                (0.07
                )
                
                -
                
                
                
                -Net
                    income per share of Common Stock - Diluted
                
                $
                0.53
                
                $
                0.82
                
                
                $
                0.94Cash
                    dividends per share of Common Stock
                
                $
                0.15
                
                $
                0.40
                
                
                $
                0.52Weighted
                    average number of shares ofCommon
                    Stock and dilutive securities:Basic
                
                
                2,415,844
                
                
                2,367,923
                
                
                
                2,279,859Diluted
                
                
                2,631,054
                
                
                2,624,286
                
                
                
                2,469,540
  (1)
                Corporate
                    expense - general and administrative includes $162,060 of deferred
                    equity
                    compensation for a stock award and $585,844 one-time expense
                    related to
                    the reimbursement of an employees's income taxes in connection
                    with a
                    stock award for the year ended December 31, 2005, and $324,120
                    of deferred
                    equity compensation for a stock award and $329,054 of stock-based
                    compensation expense pursuant to SFAS 123 (R) for the year ended
                    December
                    31, 2006.
   The
          accompanying notes are an integral part of these consolidated financial
          statements.
  *-
            41
            -*





**BIRNER
        DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF SHAREHOLDERS' EQUITY**
  Common
                  Stock
              
              Deferred
                  EquityShares
              
              Amount
              
              Compensation
              
              Retained
                  Earnings
              
              Shareholders'
                  EquityBALANCES,
                  December 31, 2003
              
              
              2,407,022
              
              $
              12,428,363
              
              $
              -
              
              $
              1,982,884
              
              $
              14,411,247Common
                  Stock options exercised
              
              
              117,998
              
              
              234,749
              
              
              -
              
              
              -
              
              
              234,749Purchase
                  and retirement of Common Stock
              
              
              (108,000
              )
              
              (777,962
              )
              
              -
              
              
              -
              
              
              (777,962
              )Tax
                  benefit of Common Stock options exercised
              
              
              -
              
              
              240,661
              
              
              -
              
              
              -
              
              
              240,661Dividends
                  declared on Common Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              (359,942
              )
              
              (359,942
              )Net
                  Income, year-ended December 31, 2004
              
              
              
              
              
              
              
              
              
              
              
              1,379,597
              
              
              1,379,597BALANCES,
                  December 31, 2004
              
              
              2,417,020
              
              $
              12,125,811
              
              $
              -
              
              $
              3,002,539
              
              $
              15,128,350Common
                  Stock options exercised
              
              
              178,616
              
              
              600,254
              
              
              -
              
              
              -
              
              
              600,254Purchase
                  and retirement of Common Stock
              
              
              (311,961
              )
              
              (4,311,000
              )
              
              -
              
              
              -
              
              
              (4,311,000
              )Tax
                  benefit of Common Stock options exercised
              
              
              -
              
              
              403,092
              
              
              -
              
              
              -
              
              
              403,092Dividends
                  declared on Common Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              (945,712
              )
              
              (945,712
              )Equity
                  compensation Grant
              
              
              60,000
              
              
              810,300
              
              
              (810,300
              )
              
              -
              
              
              -Amortization
                  of deferred equity compensation
              
              
              -
              
              
              -
              
              
              162,060
              
              
              -
              
              
              162,060Net
                  Income, year-ended December 31, 2005
              
              
              
              
              
              
              
              
              
              
              
              2,164,303
              
              
              2,164,303BALANCES,
                  December 31, 2005
              
              
              2,343,675
              
              $
              9,628,457
              
              $
              (648,240
              )
              $
              4,221,130
              
              $
              13,201,347Common
                  Stock options exercised
              
              
              93,847
              
              
              422,552
              
              
              -
              
              
              -
              
              
              422,552Purchase
                  and retirement of Common Stock
              
              
              (305,081
              )
              
              (6,057,538
              )
              
              -
              
              
              -
              
              
              (6,057,538
              )Tax
                  benefit of Common Stock options exercised
              
              
              -
              
              
              237,217
              
              
              -
              
              
              -
              
              
              237,217Dividends
                  declared on Common Stock
              
              
              -
              
              
              -
              
              
              -
              
              
              (1,187,808
              )
              
              (1,187,808
              )Tender
                  offer expense
              
              
              -
              
              
              (44,273
              )
              
              -
              
              
              -
              
              
              (44,273
              )Stock-based
                  compensation expense
              
              
              -
              
              
              329,054
              
              
              -
              
              
              -
              
              
              329,054Amortization
                  of deferred equity compensation
              
              
              -
              
              
              -
              
              
              324,120
              
              
              -
              
              
              324,120Net
                  Income, year-ended December 31, 2006
              
              
              
              
              
              
              
              
              
              
              
              2,322,974
              
              
              2,322,974BALANCES,
                  December 31, 2006
              
              
              2,132,441
              
              $
              4,515,469
              
              $
              (324,120
              )
              $
              5,356,296
              
              $
              9,547,645








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





*-
            42
            -*






Page
      1 of 2




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


**CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
   Years
                  Ended December 31,2004
              
              2005
              
              2006CASH
                  FLOWS FROM OPERATING ACTIVITIES:Net
                  income from continuing operations
              
              $
              1,567,198
              
              $
              2,164,303
              
              $
              2,322,974Adjustments
                  to reconcile continuing operations netincome
                  to net cash provided by operating activities:Depreciation
                  and amortization
              
              
              2,004,816
              
              
              1,842,843
              
              
              2,323,767Stock
                  compensation expense
              
              
              -
              
              
              -
              
              
              329,054Loss
                  on disposition of property
              
              
              733
              
              
              815
              
              
              -Provision
                  for doubtful accounts
              
              
              435,813
              
              
              673,613
              
              
              722,622Provision
                  for (benefit from) deferred income taxes
              
              
              306,741
              
              
              54,868
              
              
              (41,372
              )Amortization
                  of debt issuance costs
              
              
              3,441
              
              
              -
              
              
              -Amortization
                  of deferred equity compensation
              
              
              -
              
              
              162,060
              
              
              324,120Changes
                  in assets and liabilities net of effectsfrom
                  acquisitions:Accounts
                  receivable
              
              
              (754,594
              )
              
              (912,796
              )
              
              (611,175
              )Prepaid
                  expenses and other assets
              
              
              (65,284
              )
              
              195,072
              
              
              8,316Deposits
              
              
              (7,420
              )
              
              5,195
              
              
              (27,615
              )Accounts
                  payable
              
              
              352,428
              
              
              186,386
              
              
              (416,578
              )Accrued
                  expenses
              
              
              28,185
              
              
              (457,761
              )
              
              245,658Accrued
                  payroll and related expenses
              
              
              86,560
              
              
              168,078
              
              
              93,892Income
                  taxes payable
              
              
              (146,133
              )
              
              255,577
              
              
              (61,243
              )Other
                  long-term obligations
              
              
              (3,312
              )
              
              18,982
              
              
              130,827Net
                  cash provided by operating activities
              
              
              3,809,172
              
              
              4,357,235
              
              
              5,343,247CASH
                  FLOWS FROM INVESTING ACTIVITIES:Capital
                  expenditures
              
              
              (905,356
              )
              
              (1,299,325
              )
              
              (1,251,151
              )Development
                  of new dental centers
              
              
              (845,071
              )
              
              (569,220
              )
              
              (1,961,542
              )Net
                  cash used in investing activities
              
              
              (1,750,427
              )
              
              (1,868,545
              )
              
              (3,212,693
              )CASH
                  FLOWS FROM FINANCING ACTIVITIES:Advances
                  - line of credit
              
              
              17,325,000
              
              
              22,022,377
              
              
              21,298,996Repayments
                  - line of credit
              
              
              (18,425,000
              )
              
              (20,068,772
              )
              
              (21,100,190
              )Advances
                  - term loan
              
              
              -
              
              
              -
              
              
              4,600,000Repayments
                  - term loan
              
              
              -
              
              
              -
              
              
              (230,000
              )Repayment
                  of long-term debt
              
              
              (741,495
              )
              
              (167,217
              )
              
              (145,150
              )Proceeds
                  from exercise of Common Stock options
              
              
              234,749
              
              
              600,254
              
              
              422,552Purchase
                  and retirement of Common Stock
              
              
              (777,962
              )
              
              (4,311,000
              )
              
              (6,101,809
              )Tax
                  benefit of Common Stock options exercised
              
              
              240,661
              
              
              403,092
              
              
              237,217Common
                  Stock cash dividends
              
              
              (269,303
              )
              
              (801,863
              )
              
              (1,145,726
              )Net
                  cash used in financing activities
              
              
              (2,413,350
              )
              
              (2,323,129
              )
              
              (2,164,110
              )NET
                  INCREASE (DECREASE) IN CASH ANDCASH
                  EQUIVALENTS
              
              
              (354,605
              )
              
              165,561
              
              
              (33,556
              )CASH
                  AND CASH EQUIVALENTS, beginning of period
              
              
              1,110,786
              
              
              756,181
              
              
              921,742CASH
                  AND CASH EQUIVALENTS, end of period
              
              $
              756,181
              
              $
              921,742
              
              $
              888,186




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




*-
          43
          -*




Page
        2 of
        2




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


**CONDENSED
        CONSOLIDATED STATEMENTS OF CASH FLOWS**
 **(UNAUDITED)**
  Years
                  Ended December 31,2004
              
              2005
              
              2006SUPPLEMENTAL
                  DISCLOSURE OF CASHFLOW
                  INFORMATION:Cash
                  paid during the year for interest
              
              $
              123,198
              
              $
              130,831
              
              $
              270,427Cash
                  paid during the year for income taxes
              
              $
              622,701
              
              $
              576,489
              
              $
              1,463,248






The
        accompanying notes are an integral part of these consolidated financial
        statements.
  *-
            44
            -*





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


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**




(1)  DESCRIPTION
      OF BUSINESS AND ORGANIZATION




Birner
      Dental Management Services, Inc., a Colorado corporation (the ''Company''),
      was
      incorporated in May 1995 and provides business services to dental group
      practices. As of December 31, 2004, 2005 and 2006, the Company managed 55,
      57 and 60 dental practices (collectively referred to as the ''Offices''),
      respectively. The Company provides management services, which are designed
      to
      improve the efficiency and profitability of the dental practices. These Offices
      are organized as professional corporations and the Company provides its
      management activities with the Offices under long-term management agreements
      (the ''Management Agreements'').





The
      Company has grown primarily through acquisitions and *de
      novo* developments. The following table highlights the Company’s growth through
      December 31, 2006 as follows:








Acquisitions
            
            *De
                Novo*Developments
            
            Office
                Consolidations/ Closings2000 and Prior
            42
            
            18
            
            (4)2001
            -
            
            -
            
            (2)2002
            -
            
            -
            
            -2003
            -
            
            -
            
            -2004
            -
            
            2
            
            (1)2005
            -
            
            2
            
            -2006
            -
            
            4
            
            (1)Total
            42
            
            26
            
            (8)







The
      Company's operations and expansion strategy are dependent, in part, on the
      availability of dentists, hygienists and other professional personnel and the
      ability to hire and assimilate additional management and other employees to
      accommodate expanded operations.





(2)   SIGNIFICANT
      ACCOUNTING POLICIES





Basis
      of Presentation/Basis of Consolidation





The
      accompanying consolidated financial statements have been prepared on the accrual
      basis of accounting. These financial statements present the financial position
      and results of operations of the Company and the Offices, which are under the
      control of the Company. All intercompany accounts and transactions have been
      eliminated in the consolidation. Certain prior year amounts have been
      reclassified to conform to the presentation used in 2006. Such reclassification
      had no effect on net income.





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





*-
            45
            -*





the
      provision of hygiene services) including personnel recruitment and training,
      comprehensive administrative business and marketing support and advice, and
      facilities, equipment, and support personnel as required to operate the
      practice.





The
      Emerging Issues Task Force (''EITF'') Issue 97-2 of the Financial Accounting
      Standards Board (“FASB”) covers financial reporting matters relating to the
      physician practice management industry, including the consolidation of
      professional corporation revenue and expenses, the accounting for business
      combinations and the treatment of stock options for dentists as employee
      options. The Company’s accounting policies in these areas are conducted in
      accordance with the provisions of EITF Issue 97-2.





Net
      Revenue





“Net
      revenue from consolidated dental offices” represents the ''Total dental group
      practice revenue'' less amounts retained by the Offices for compensation paid
      by
      the professional corporations to dentists and hygienists. Dentists receive
      compensation based upon a specified amount per hour worked or a percentage
      of
      revenue or collections attributable to their work, and a bonus based upon the
      operating performance of the Office.





A
      summary
      of the components of net revenue for the years ended December 31, 2004, 2005,
      and 2006 follows:


Years
                  Ended December 31,2004
              
              2005
              
              2006Total
                  dental group practice revenue
              
              $
              46,460,595
              
              $
              52,526,276
              
              $
              57,141,226Less
                  - amounts retained by Offices
              
              
              14,290,190
              
              
              15,810,159
              
              
              17,754,230Net
                  revenue
              
              $
              32,170,405
              
              $
              36,716,117
              
              $
              39,386,996


''Total
      dental group practice revenue'' represents the revenue of the consolidated
      and
      managed Offices reported at the estimated realizable amounts from insurance
      companies, preferred provider and health maintenance organizations (i.e.,
      third-party payors) and patients for services rendered, net of contractual
      and
      other adjustments, as defined in this report as Revenue. Dental services are
      billed and collected by the Company in the name of the Offices.





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





During
      2004, 2005 and 2006, 11.1%, 11.6% and 13.8% respectively, of the Company's
      Revenue was derived from capitated managed dental care contracts. Under these
      contracts, the Offices receive a fixed monthly payment for each covered plan
      member for a specific schedule of services regardless of the quantity or cost
      of
      services provided by the Offices. Additionally, the Offices may receive co-pays
      from the patient for certain services provided. Revenue from the Company’s
      capitated managed dental care contracts is recognized as earned on a monthly
      basis.





During
      the years ended December 31, 2004, 2005 and 2006, the following companies were
      responsible for the corresponding percentages of the Company’s total dental
      group practice revenue (includes capitation premiums and co-payments): Aetna
      Healthcare was responsible for 8.0%, 7.8% and 9.9% respectively, CIGNA Dental
      Health was responsible for 6.9%, 7.2% and 7.5% respectively, and Fortis Benefits
      Insurance Company was responsible for 4.6%, 4.1% and 4.0%
      respectively.





Contribution
      From Dental Offices





The
      ''Contribution from dental offices'' represents the excess of net revenue from
      the operations of the Offices over direct expenses associated with operating
      the
      Offices. The revenue and direct expense amounts relate exclusively to business
      activities associated with the Offices. The contribution from dental offices
      provides an indication of the level of earnings generated from the operation
      of
      the Offices to cover corporate expenses, interest expense charges and income
      taxes.





*-
            46
            -*





Advertising
      and Marketing





The
      costs
      of advertising, promotion and marketing are expensed as incurred.





Cash
      and Cash Equivalents





For
      purposes of the consolidated balance sheets and statements of cash flows, cash
      and cash equivalents include money market accounts and all highly liquid
      investments with original maturities of three months or less.





Accounts
      Receivable





Accounts
      receivable represents receivables from patients and other third-party payors
      for
      dental services provided. Such amounts are recorded net of contractual
      allowances and other adjustments at time of billing. In those instances when
      payment is not received at the time of service, the Offices record receivables
      from their patients, most of who are local residents and are insured under
      third-party payor agreements. In addition, the Company has estimated allowances
      for uncollectible accounts. The Company’s allowance for doubtful accounts
      reflects a reserve that reduces customer accounts receivable to the net amount
      estimated to be collectible. Accounts are normally considered delinquent after
      120 days. However, estimating the credit-worthiness of customers and the
      recoverability of customer accounts requires management to exercise considerable
      judgment. In estimating uncollectible amounts, management considers factors
      such
      as general economic and industry-specific conditions, historical customer
      performance and anticipated customer performance. Management continually
      monitors and periodically adjusts the allowances associated with these
      receivables.





Property
      and Equipment





Property
      and equipment are stated at cost or fair market value at the date of
      acquisition, net of accumulated depreciation. Property and equipment are
      depreciated using the straight-line method over their useful lives of five
      years
      and leasehold improvements are amortized over the remaining life of the leases.
      Depreciation was $1,259,837; $1,092,401and $1,544,473 for the years ended
      December 31, 2004, 2005 and 2006, respectively.





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
      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. The Management
      Agreement represents the Company's right to manage the Offices during the
      40-year term of the agreement. The assigned value of the Management Agreement
      is
      amortized using the straight-line method over a period of 25 years. Amortization
      was $757,025, $750,441 and $779,294 for the years ended December 31, 2004,
      2005
      and 2006, respectively.





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





Impairment
      of Long-Lived and Intangible Assets





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







*-
            47
            -*





Concentrations
      of Credit Risk





Financial
      instruments, which potentially subject the Company to concentration of credit
      risk, are primarily cash and cash equivalents and accounts receivable. The
      Company maintains its cash balances in the form of bank demand deposits and
      money market accounts with financial institutions that management believes
      are
      creditworthy. The Company may be exposed to credit risk generally associated
      with healthcare and retail companies. The Company established an allowance
      for
      uncollectible accounts based upon factors surrounding the credit risk of
      specific customers, historical trends and other information. The Company has
      no
      significant financial instruments with off-balance sheet risk of accounting
      loss, such as foreign exchange contracts, option contracts or other foreign
      currency hedging arrangements.





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States requires management to make estimates
      and assumptions that affect the reported amounts of assets and liabilities
      and
      disclosure of contingent assets and liabilities at the date of the financial
      statements and the reported amounts of revenue and expenses during the reporting
      period.





The
      application of accounting policies requires the use of judgment and estimates.
      As it relates to the Company, estimates and forecasts are required to determine
      any impairment of assets, allowances for bad debts, deferred tax asset valuation
      reserves, if any, deferred revenue and employee benefit-related
      liabilities.




These
      matters that are subject to judgments and estimation are inherently uncertain,
      and different amounts could be reported using different assumptions and
      estimates. Management uses its best estimates and judgments in determining
      the
      appropriate amount to reflect in the financial statements, using historical
      experience and all available information. The Company also uses outside experts
      where appropriate. The Company applies estimation methodologies consistently
      from year to year.





Income
      Taxes





The
      Company accounts for income taxes (Note 10) pursuant to Statement of Financial
      Accounting Standards (''SFAS'') No. 109, ''Accounting for Income Taxes,'' which
      requires the use of the asset and liability method of computing deferred income
      taxes. The objective of the asset and liability method is to establish deferred
      tax assets and liabilities for the temporary differences between the book basis
      and the tax basis of the Company's assets and liabilities at enacted tax rates
      expected to be in effect when such amounts are realized or settled.





Earnings
      Per Share





The
      Company has adopted SFAS No. 128, which establishes standards for computing
      and
      presenting earnings per share (“EPS”) for entities with publicly held common
      stock. The standard requires presentation of two categories of EPS - basic
      EPS
      and diluted EPS. Basic EPS excludes dilution and is computed by dividing income
      available to common stockholders by the weighted-average number of common shares
      outstanding for the year. Diluted EPS reflects the potential dilution that
      could
      occur if securities or other contracts to issue Common Stock were exercised
      or
      converted into Common Stock or resulted in the issuance of Common Stock that
      then shared in the earnings of the Company.





Years
                  Ended December 31,2004
              
              2005
              
              2006Weighted
                  Average
              
              Per
                  Share
              
              
              
              Weighted
                  Average
              
              Per
                  Share
              
              
              
              Weighted
                  Average
              
              Per
                  ShareIncome
              
              Shares
              
              Amount
              
              Income
              
              Shares
              
              Amount
              
              Income
              
              Shares
              
              AmountBasic
                  EPS:Net
                  income
              
              $
              1,379,597
              
              
              2,415,844
              
              $
              .57
              
              $
              2,164,303
              
              
              2,367,923
              
              $
              .91
              
              $
              2,322,974
              
              
              2,279,859
              
              $
              1.02Diluted
                  EPS:Net
                  income
              
              $
              1,379,597
              
              
              2,631,054
              
              $
              .53
              
              $
              2,164,303
              
              
              2,624,286
              
              $
              .82
              
              $
              2,322,974
              
              
              2,469,540
              
              $
              .94





*-
            48
            -*










The
      difference between basic earnings per share and diluted earnings per share
      for
      the years ended December 31, 2004, 2005 and 2006 relates to the effect of
      215,210, 256,363 and 189,681 respectively, of dilutive shares of Common Stock
      from stock options and warrants which are included in total shares for the
      diluted calculation determined under the treasury stock method as prescribed
      by
      SFAS 128. For the year ended December 31, 2006, options to purchase 85,500
      shares of the Company’s Common Stock were not included in the computation of
      dilutive income per share because their effect was anti-dilutive. Basic and
      diluted EPS amounts have been adjusted to reflect the 2-for-1 stock split,
      effective August 1, 2005.





Comprehensive
      Income





The
      FASB
      issued SFAS 130 “Reporting Comprehensive Income” in June 1997 which established
      standards for reporting and displaying comprehensive income and its components
      in a full set of general purpose financial statements. In addition to net
      income, comprehensive income includes all changes in equity during a period,
      except those resulting from investments by and distributions to owners. For
      2004, 2005 and 2006, net income and comprehensive income were the
      same.





Costs
      of Start-up Activities





Start-up
      costs and organization costs are expensed as they are incurred.





Segment
      Reporting





The
      Company operates in one business segment, which is to provide business services
      dental practices. The Company currently provides business services to Offices
      in
      the states of Arizona, Colorado and New Mexico. All aspects of the Company’s
      business are structured on a practice-by-practice basis. Financial analysis
      and
      operational decisions are made at the individual Office level. The Company
      does
      not evaluate performance criteria based upon geographic location, type of
      service offered or source of revenue.





Stock-Based
      Compensation Plans





On
      January 1, 2006, the Company adopted SFAS. 123(R). This standard revises SFAS
      123, “Accounting for Stock-Based Compensation” and supersedes Accounting
      Principles Board (“APB”) Opinion 25, “Accounting for Stock Issued to Employees.”
Under SFAS 123(R), the Company is required to measure the cost of employee
      services received in exchange for stock options and similar awards based on
      the
      grant date fair value of the award and recognize this cost in the income
      statement over the period during which an employee is required to provide
      service in exchange for the award.





The
      Company adopted SFAS 123(R) using the modified prospective method. Under this
      transition method, stock-based compensation expense for the year ended December
      31, 2006 includes: (i) compensation expense for all stock-based compensation
      awards granted prior to, but not yet vested as of January 1, 2006, based on
      the
      grant date fair value estimated in accordance with the original provision of
      SFAS 123; and (ii) compensation expense for all stock-based compensation awards
      granted subsequent to January 1, 2006, based on the grant date fair value
      estimated in accordance with the provision of SFAS 123(R). The Company
      recognizes compensation expense on a straight line basis over the requisite
      service period of the award. Total stock-based compensation expense included
      in
      the Company’s statement of income for the year ended December 31, 2006 was
      approximately $329,000. Total stock-based compensation expense was recorded
      as a
      component of corporate general and administrative expense. In accordance with
      the modified prospective method, financial results for prior periods have not
      been restated.




The
      Black-Scholes option-pricing model was used to estimate the option fair values.
      The option-pricing model requires a number of assumptions, of which the most
      significant are expected stock price volatility, the expected pre-vesting
      forfeiture rate, expected dividend rate and the expected option term (the amount
      of time from the grant date until the options are exercised or expire). Expected
      volatility was calculated based upon actual historical stock price movements
      over the most recent periods ending December 31, 2006 equal to the expected
      option term. Expected pre-vesting forfeitures were estimated based on actual
      historical pre-vesting forfeitures over the most







*-
            49
            -*







recent
      periods ending December 31, 2006 for the expected option term. The expected
      option term was calculated using the “simplified” method permitted by Staff
      Accounting Bulletin 107.







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





If
      the
      Company had accounted for its stock-based compensation plans in accordance
      with
      SFAS No. 123, the Company's net income and net income per share of Common Stock
      for the year ended December, 2005 and 2004 would have been reported as
      follows:




2004
            
            2005Net
                income:As
                reported
            
            $
            1,379,597
            
            $
            2,164,303Stock
                based compensation included in net income
            
            
            -
            
            
            -Fair
                value of stock based compensation,net
                of income taxes
            
            
            299
            
            
            (222,701
            )Pro
                forma
            
            $
            1,379,896
            
            $
            1,941,602Net
                income per share, basic:As
                reported
            
            $
            0.57
            
            $
            0.91Stock
                based compensation included in net income
            
            
            -
            
            
            -Fair
                value of stock based compensation,net
                of income taxes
            
            
            -
            
            
            (0.09
            )Pro
                forma
            
            $
            0.57
            
            $
            0.82Net
                income per share, diluted:As
                reported
            
            $
            0.53
            
            $
            0.82Stock
                based compensation included in net income
            
            
            -
            
            
            -Fair
                value of stock based compensation,net
                of income taxes
            
            
            -
            
            
            (0.08
            )Pro
                forma
            
            $
            0.53
            
            $
            0.74








Pro-forma
      compensation expense under SFAS 123, among other computational differences,
      does
      not consider potential pre-vesting forfeitures. Because of these differences,
      the pro-forma stock compensation expense presented above for the prior 12 month
      periods ended December 31, 2005 and 2004 under SFAS 123 and the stock
      compensation expense recognized during the current 12 month period ended
      December 31, 2006 under SFAS 123(R)
      are not directly comparable. In accordance with the modified prospective
      transition method of SFAS 123(R),
      the prior comparative 12 month results have not been restated.





Recent
      Accounting Pronouncements





In
      December 2004, the FASB issued Statement of Financial Accounting Standards
      No.
      123(R), "Share-Based Payment" (“SFAS 123(R)”), which is a revision of SFAS 123,
      Accounting for Stock-Based Compensation. SFAS 123(R) is effective for public
      companies for interim or annual periods beginning after June 15, 2005,
      supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and
      amends SFAS No. 95, Statement of Cash





*-
            50
            -*





Flows.
      SFAS 123(R) requires all share-based payments to employees, including grants
      of
      employee stock options, to be recognized in the income statement based on their
      fair values. Pro-forma disclosure is no longer an alternative. The Company
      adopted SFAS 123(R) at the beginning of fiscal year 2006.





In
      July 2006, the FASB issued Interpretation No. 48, “ *Accounting
      for Uncertainty in Income Taxes—an interpretation of FASB Statement
      No. 109.”* Interpretation
      48 clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise’s financial statements in accordance with FASB Statement 109,
“ *Accounting
      for Income Taxes.”* Interpretation
      48 is effective for fiscal year 2007. The Company does not expect the adoption
      of this pronouncement to have a material effect on the consolidated financial
      statements.





In
      September 2006, the SEC issued Staff Accounting Bulletin No. 108,
      regarding the process of quantifying financial statement misstatements and
      the
      potential under current practice for the build up of improper amounts on the
      balance sheet. The Company has adopted the bulletin during 2006. The adoption
      did not have a material effect on the Company’s consolidated financial
      statements.





In
      September 2006, the FASB issued SFAS 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
      provisions of SFAS No. 157 are effective beginning in our fiscal year 2008
      and are currently not expected to have a material effect on the Company’s
      consolidated financial statements.





In
      September 2006, the Financial Accounting Standards Board issued Statement
      of Financial Accounting Standards No. 158, *Employers’ Accounting for Defined Benefit Pension and Other Postretirement
      Plans* (“SFAS
      No. 158”). SFAS No. 158 requires an employer to recognize the
      over-funded or under-funded status of a defined benefit pension plan and other
      postretirement plans as an asset or liability on its balance sheet and recognize
      changes in its funded status in the year in which the change occurs through
      accumulated other non-owner changes in equity. SFAS No. 158 is effective for
      fiscal year 2006. The Company does not expect the adoption of SFAS 158 to have
      an impact on our results of operations or financial condition.





Reclassifications





Certain
      reclassifications have been made to the 2004 and 2005 financial statement
      presentation to conform to the 2006 presentation. These reclassifications had
      no
      effect on net income as previously stated.





(3)  ACQUISITIONS





With
      each
      Office acquisition, the Company enters into a contractual arrangement, including
      a Management Agreement, which has a term of 40 years. Pursuant to these
      contractual arrangements the Company provides all business and marketing
      services at the Offices, other than the provision of dental services, and
      believes it has long-term and unilateral control over the assets and business
      operations of each Office. Accordingly, acquisitions are considered business
      combinations and treated under the purchase method of accounting. The Company
      has not completed any acquisitions since October 1, 2002.







( 4)  DISCONTINUED
      OPERATIONS




During
      the third quarter of 2004, the Company closed an office in the Phoenix, Arizona
      market. Discontinued operations are defined in Statement of Financial Accounting
      Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived
      Assets”, as a component of the Company that has either been disposed of or is
      classified as held for sale if both the operations and cash flows of the
      component have been or will be eliminated from ongoing operations of the Company
      as a result of the disposal transaction and the Company will not have any
      significant continuing involvement in the operations of the component after
      the
      disposal transaction. SFAS No. 144 further provides that the assets and
      liabilities of the component, if any, that has been classified as discontinued
      operations be presented separately in the Company’s balance sheet. The results
      of operations of the component of the Company that has been classified as
      discontinued operations are also reported as discontinued operations for all
      periods presented. The loss recognized on dispositions is primarily the result
      of the write-off of intangible assets, net of accumulated
      amortization.








*-
            51
            -*





(5)  PROPERTY
      AND EQUIPMENT




Property
      and equipment consist of the following:


December
                  31,2005
              
              2006Dental
                  equipment
              
              $
              5,463,370
              
              $
              6,404,663Furniture
                  and fixtures
              
              
              1,129,628
              
              
              1,270,669Leasehold
                  improvements
              
              
              5,834,408
              
              
              7,467,332Computer
                  equipment, software and related items
              
              
              2,134,495
              
              
              2,106,081Instruments
              
              
              1,029,376
              
              
              782,93015,591,277
              
              
              18,031,675Less
                  - accumulated depreciation
              
              
              (11,651,825
              )
              
              (12,439,003
              )Property
                  and equipment, net
              
              $
              3,939,452
              
              $
              5,592,672





(6)  INTANGIBLE
      ASSETS





Intangible
      assets consist of Management Agreements:





Amortization
              
              December
                  31,Period
              
              2005
              
              2006Management
                  agreements
              
              
              25
                  years
              
              $
              18,708,623
              
              $
              18,723,623Less
                  - accumulated amortization
              
              
              
              
              
              (5,671,971
              )
              
              (6,451,265
              )Intangible
                  assets, net
              
              
              
              
              $
              13,036,652
              
              $
              12,272,358


The
      estimated aggregate amortization expense on the Management Agreements for each
      of the five succeeding fiscal years is as follows:


2007
                
                $
                779,3942008
                
                
                779,3942009
                
                
                779,3942010
                
                
                779,3942011
                
                
                779,394$
                3,896,970


*-
            52
            -*








(7)  DEBT





Debt
      consists of the following:


December
                  31,2005
              
              2006Revolving
                  credit agreement with a bank not to exceed$5.0
                  million, at either, or a combination of, lender’sBase
                  Rate (7.25% at December 31, 2005) or a LIBOR ratePlus
                  1.50% (5.83% at December 31, 2005), collateralized by theCompany’s
                  accounts receivable and Management Agreements, due inMay
                  2007.
              
              $
              2,853,605
              
              $
              -Revolving
                  credit agreement with a bank not to exceed$7.0
                  million, at either, or a combination of, lender’sBase
                  Rate (8.25% at December 31, 2006) or a LIBOR ratePlus
                  1.50% (6.85% at December 31, 2006), collateralized by theCompany’s
                  accounts receivable and Management Agreements, due inMay
                  2008.
              
              
              -
              
              
              3,052,411$4.6
                  Term Loan with a bank, $2.3 was borrowed at a fixed rate of
                  7.05%and
                  the remaining was borrowed at a floating intereste rate ofLIBOR
                  plus 1.5% (6.85% at December 31, 2006), the principal is paidback
                  in 20 equal quarterly payments of approximately $230,000 plusinterest
                  beginning December 31, 2006, collateralized by theCompany’s
                  accounts receivable and Management Agreements,matures
                  on September 30, 2011.
              
              
              -
              
              
              4,370,000Acquisition
                  notes payable:Due
                  in April 2006; interest at 8%; no collateral; monthly principal
                  andinterest
                  payments of $4,400.
              
              
              17,400
              
              
              -Due
                  in March 2007, interest at 8%, no collateral, monthly principal
                  andinterest
                  payments of $11,335.
              
              
              161,311
              
              
              33,561$
              3,032,316
              
              $
              7,455,972Less
                  - current maturities
              
              
              (145,150
              )
              
              (953,561
              )Long
                -term debt, net of current
                maturities
              
              $
              2,887,166
              
              $
              6,502,411







*-
            53
            -*





Credit
      Facility





On
      April
      25, 2006, the Company amended its bank line of credit (“Credit Facility”). The
      amended Credit Facility allows the Company to borrow, on a revolving basis,
      an
      aggregate principal amount not to exceed $7.0 million at either, or a
      combination of, the lender’s Base Rate or at LIBOR plus a LIBOR rate margin, at
      the Company’s option. The lender’s Base Rate computes interest at the higher of
      the lender’s “prime rate” or the Federal Funds Rate plus one-half percent
      (0.5%). The LIBOR option computes interest at the LIBOR rate as of the date
      such
      LIBOR Rate loan was made plus a LIBOR Rate margin of 1.50%. A commitment fee
      of
      0.25% on the average daily unused amount of the Revolving Loan commitment during
      the preceding quarter will also be assessed. The Company may prepay any Base
      Rate loan at any time and any LIBOR Rate loan upon not less than three business
      days prior written notice given to the lender, but the Company will be
      responsible for any loss or cost incurred by the lender in liquidating or
      employing deposits required to fund or maintain the LIBOR Rate loan. The amended
      Credit Facility expires on May 31, 2008. At December 31, 2006, the Company
      had
      $3.1 million  outstanding
      and $3.9 million available for borrowing under the Credit Facility. This
      consisted of $1.6 million outstanding under the Base Rate option and $1.5
      million outstanding under the LIBOR Rate option. The Credit Facility requires
      the Company to maintain certain financial ratios on an ongoing basis. At
      December 31, 2006, the Company was in full compliance with all of its covenants
      under the Credit Facility.




Term
      Loan




On
      October 5, 2006, the Company accepted for payment, at a purchase price of $21.75
      per share, 212,396 shares of its Common Stock that were properly tendered and
      not withdrawn pursuant to the Company’s “dutch auction” tender offer. The
      212,396 shares purchased were comprised of the 175,000 shares the Company
      offered to purchase and 37,396 shares that were purchased pursuant to the
      Company's right to purchase up to an additional 2% of the outstanding shares
      as
      of August 31, 2006, without extending the Tender Offer in accordance with
      applicable securities laws. These shares represented approximately 9.2% of
      the
      shares outstanding as of September 30, 2006. The Tender Offer was funded from
      a
      $4.6 million term loan. Under the Term Loan, $2.3 million was borrowed at a
      fixed interest rate of 7.05% and the remaining $2.3 million was borrowed at
      a
      floating interest rate of Libor plus 1.5%. The principal amount borrowed will
      be
      paid quarterly in 20 equal payments of approximately $230,000 plus interest
      beginning December 31, 2006. At December 31, 2006, the Company had $4.4
      million  outstanding
      under the Term Loan. The term loan matures on September 30, 2011. At December
      31, 2006, the Company was in full compliance with all of its covenants under
      the
      Term Loan.





The
      Term
      Loan is a fixed-for-floating interest rate swap. If the Company were to
      designate it as a hedge, this transaction would qualify as a cash flow hedge
      under SFAS No. 133. As of December 31, 2006, the Company had elected not to
      designate it as a cash flow hedge and has not recorded it as a cash flow hedge.
      As of February 2007, the Company has elected to designate it as a cash flow
      hedge.





The
      scheduled maturities of debt are as follows:





Year
              
              
              Amount2007
              
              $
              953,5612008
              
              
              3,972,4112009
              
              
              920,0002010
              
              
              920,000Thereafter
              
              
              690,000$
              7,455,972







*-
            54
            -*





(8)  SHAREHOLDERS'
      EQUITY




Treasury
      Stock





The
      Company from time to time may purchase its Common Stock on the open market.
      The
      shares purchased and the purchase price per share for transactions prior to
      August 1, 2005 have been adjusted to reflect the 2-for-1 stock split. During
      2004, the Company, in seven separate transactions, purchased 108,000 shares
      of
      its Common Stock for total consideration of approximately $778,000 at prices
      ranging from $6.33 to $9.25 per share. During 2005, the Company, in 40 separate
      transactions, purchased 311,961 shares of its Common Stock for total
      consideration of approximately $4.3 million at prices ranging from $9.00 to
      $19.31 per share. During 2006, the Company, in 67 separate transactions,
      purchased 305,161 shares of its Common Stock for total consideration of
      approximately $6.1 million at prices ranging from $15.00 to $21.75 per share.
      In
      April 2006, the Company purchased 54,250 shares through a private transaction
      that was approved by the Board of Directors. On October 5, 2006, the Company
      purchased, through a Board of Directors approved Dutch Auction Tender Offer,
      212,396 shares of its Common Stock at $21.75 for total consideration of $4.6
      million. As of December 31, 2006, approximately $526,000 of the previously
      authorized amount was available for open-market purchases.





Stock-Based
      Compensation Plans





At
      the
      Company’s June 2005 annual meeting of shareholders, the shareholders approved
      the 2005 Equity Incentive Plan (“2005 Plan”), which reserved 300,000 shares of
      Common Stock for issuance. The 2005 Plan provides for the grant of incentive
      stock options, restricted stock, restricted stock units and stock grants to
      employees (including officers and employee-directors) and non-statutory stock
      options to employees, directors and consultants. The objectives of this plan
      include attracting and retaining the best personnel, providing for additional
      performance incentives by providing employees with the opportunity to acquire
      Common Stock. As of December 31, 2006, there were 44,300 shares available for
      issuance under the 2005 Plan. The exercise price of the stock options issued
      under the 2005 Plan is equal to the market price, or market price plus 10%
      for
      shareholders who own greater than 10% of the Company, at the date of grant.
      These stock options expire seven years, or five years for shareholders who
      own
      greater than 10% of the Company, from the date of the grant and vest annually
      over a service period ranging from three to five years. The 2005 Plan is
      administered by a committee of two or more outside directors from the Company’s
      Board of Directors (the “Committee”). The Committee determines the eligible
      individuals to whom awards under the 2005 Plan may be granted, as well as the
      time or times at which awards will be granted, the number of shares to be
      granted to any eligible individual, the life of any award, and any other terms
      and conditions of the awards in addition to those contained in the 2005 Plan.
      As
      of December 31, 2006, there were 41,001 vested options outstanding and 214,699
      unvested options 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 December 31, 2006, there were 269,869
      vested options outstanding and 83,666 unvested options outstanding under the
      Employee Plan.





The
      Dental Center Stock Option Plan (“Dental Center Plan”) was adopted by the Board
      of Directors effective as of October 30, 1995, and as amended on September
      4,
      1997, reserved 160,475 shares of Common Stock for issuance. The Dental Center
      Plan provided for the grant of non-statutory stock options to professional
      corporations that operate the Offices (“P.C.s”) that are parties to Management
      Agreements with the Company, and to dentists or dental hygienists who are either
      employed by or are an owner of the P.C.s. The Dental Center Plan expired by
      its
      terms on October 30, 2005. As of December 31, 2006, there were 14,000 vested
      options outstanding and no unvested options outstanding under the Dental Center
      Plan.








*-
            55
            -*





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




For
                  years ended December 31,Valuation
                  Assumptions(1)
              
              2004
              
              2005
              
              2006Expected
                  life(2)
              
              3.4
              
              3.9
              
              5.0Risk-free
                  interest rate(3)
              
              3.30%
              
              3.95%
              
              4.76%Expected
                  volatility(4)
              
              38%
              
              45%
              
              53%Expected
                  dividend yield
              
              1.58%
              
              2.49%
              
              2.86%


_____________________________




(1)
            Beginning
                on the date of adoption of SFAS 123(R), January 1, 2006, forfeitures
                are
                estimated based on historical experience. For the year ended December
                31,
                2006, the forfeiture rate used is 5.09%. Prior to the adoption of
                SFAS
                123(R), forfeitures were recorded as they
                occurred.


(2)
            The
                expected life, in years, of stock options is estimated using the
                simplified-method calculation.


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


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




A
      summary
      of stock option activity as of December 31, 2004, 2005 and 2006, and changes
      during the years then ended, are presented below:


Number
                  of Options/ Warrants
              
              Weighted-Average
                  Exercise Price
              
              Range
                  of Exercise Prices
              
              Weighted-Average
                  Remaining Contractual Term (years)
              
              Aggregate
                  Intrinsic Value (thousands)Balance
                  at December 31, 2003
              
              
              603,996
              
              $
              4.30
              
              $
              1.00
                  - $18.00Granted
              
              
              80,000
              
              $
              7.83
              
              $
              7.50
                  - $ 7.88Exercised
              
              
              117,998
              
              $
              1.99
              
              $
              1.00
                  - $ 6.00Forfeited
              
              
              38,584
              
              $
              7.60
              
              $
              1.00
                  - $ 18.00Balance
                  at December 31, 2004
              
              
              527,414
              
              $
              5.11
              
              $
              1.00
                  - $17.50
              
              
              3.0
              
              $
              2,550Granted
              
              
              382,000
              
              $
              14.30
              
              $
              9.66
                  - $19.37Exercised
              
              
              178,616
              
              $
              3.36
              
              $
              1.00
                  - $ 7.50Canceled
              
              
              75,416
              
              $
              9.69
              
              $
              5.50
                  - $17.50Balance
                  at December 31, 2005
              
              
              655,382
              
              $
              10.42
              
              $
              1.00
                  - $19.37
              
              
              4.2
              
              $
              6,828Granted
              
              
              49,700
              
              $
              17.49
              
              $
              14.81
                  - $19.75Exercised
              
              
              93,847
              
              $
              4.50
              
              $
              1.00
                  - $13.00Canceled
              
              
              48,000
              
              $
              15.10
              
              $
              12.50
                  - $17.61Balance
                  at December 31, 2006
              
              
              563,235
              
              $
              11.63
              
              $
              4.80
                  - $19.75
              
              
              3.7
              
              $
              6,550Exercisable
                  at December 31, 2004
              
              
              397,414
              
              $
              4.77
              
              $
              1.00
                  - $17.50
              
              
              2.7
              
              $
              2,068Exercisable
                  at December 31, 2005
              
              
              357,382
              
              $
              6.29
              
              $
              1.00
                  - $ 9.75
              
              
              2.5
              
              $
              2,250Exercisable
                  at December 31, 2006
              
              
              304,870
              
              $
              7.95
              
              $
              4.80
                  - $19.37
              
              
              2.1
              
              $
              2,425





*-
            56
            -*





The
      weighted average grant date fair value of options granted was $7.00, $4.67
      and
      $2.20 per option during the years ended December 31, 2006, 2005 and 2004,
      respectively. Net cash proceeds from the exercise of stock options during the
      years ended December 31, 2006, 2005 and 2004 were $422,552, $600,253 and
      $234,749, respectively. The associated income tax benefit from stock options
      exercised during the year ended December 31, 2006, 2005 and 2004, respectively
      was $621,795, $878,140 and $630,002, respectively. As of the date of exercise,
      the total intrinsic value of options exercised during the twelve months ended
      December 31, 2006, 2005 and 2004 was $1.3 million, $2.0 million and $720,000,
      respectively. As of December 31, 2006, there was $1.3 million of total
      unrecognized compensation expense related to non-vested stock options, which
      is
      expected to be recognized over a weighted average period of 1.48
      years.





The
      following table summarizes information about the options outstanding at December
      31, 2006:


Options
                  Outstanding
              
              Options
                  ExercisableRange
                  of Exercise Prices
              
              Number
                  of Options Outstanding at December 31, 2006
              
              Weighted
                  Average Remaining Contractual Life
              
              Weighted
                  Average Exercise Price
              
              Number
                  of Options Exercisable at December 31, 2006
              
              Weighted
                  Average Exercise Price$
                  3.91 — 7.92
              
              
              214,202
              
              
              1.5
              
              $
              6.26
              
              
              214,202
              
              $
              6.267.93
                  — 11.88
              
              
              91,333
              
              
              3.8
              
              
              9.72
              
              
              69,667
              
              
              9.7411.89
                  — 15.84
              
              
              83,000
              
              
              5.6
              
              
              13.13
              
              
              -
              
              
              -15.85
                  — 19.80
              
              
              174,700
              
              
              5.4
              
              
              18.50
              
              
              21,001
              
              
              19.30$
                  3.91 — 19.80
              
              
              563,235
              
              
              3.7
              
              $
              11.63
              
              
              304,870
              
              $
              7.95
  Restricted
      Stock





On
      July
      1, 2005, the Company granted 60,000 shares of restricted Common Stock to the
      Company’s Chairman and Chief Executive Officer (the “Employee”). In connection
      with the grant of restricted stock, the Company agreed to reimburse the Employee
      an amount equal to the tax liability associated with the grant. Such
      reimbursement was made by the Company and totaled approximately $586,000 which
      was recognized as an expense during the third quarter of 2005. As of December
      31, 2006, there was approximately $324,000 of unrecognized compensation expense
      related to the restricted stock grant. The expense is expected to be recognized
      over a period of 1.0 years.





A
      summary
      of the vesting status of the shares of restricted stock as of December 31,
      2005
      and 2006, and the changes during the 12 months then ended, is presented
      below:


Number
                  of Restricted
                Stock
                  Shares
              
              Weighted-Average
                Grant-Date
                  Fair ValueNon-vested
                  at December 31, 2004
              
              
              -
              
              $
              -Granted
              
              
              60,000
              
              
              13.51Vested
              
              
              -
              
              
              -Forfeited
              
              
              -
              
              
              -Non-vested
                  at December 31, 2005
              
              
              60,000
              
              
              13.51Granted
              
              
              -
              
              
              -Vested
              
              
              (20,000
              )
              
              13.51Forfeited
              
              
              -
              
              
              -Non-vested
                  at December 31, 2006
              
              
              40,000
              
              $
              13.51


*-
            57
            -*








(9)  COMMITMENTS
      AND CONTINGENCIES




Operating
      Lease Obligations





The
      Company leases office space under leases accounted for as operating leases.
      The
      original lease terms are generally one to five years with options to renew
      the
      leases for specific periods subsequent to their original terms. Rent expense
      for
      these leases totaled $2,828,775, $2,993,959 and $3,378,072 for the years ended
      December 31, 2004, 2005, and  2006,
      respectively.





Future
      minimum lease commitments for operating leases with remaining terms of one
      or
      more years are as follows:


Years
                    ending, December 31,
                
                
                Amount2007
                
                $
                2,665,5762008
                
                
                2,181,7502009
                
                
                1,629,6792010
                
                
                1,116,9782011
                
                
                312,517Thereafter
                
                
                54,091$
                7,960,591
  
 Certain
        of the Company’s office space leases are structured to include scheduled and
        specified rent increases over the lease term. From time to time the Company
        receives incentives from the landlord including tenant improvement discounts
        and
        periods of free rent. The Company has recognized the effects of these rent
        escalations, tenant improvement discounts and periods of free rent on a
        straight-line basis over the lease terms.





Litigation





From
      time
      to time the Company is subject to litigation incidental to its business, which
      could include litigation as a result of the dental services provided at the
      Offices, although the Company does not engage in the practice of dentistry
      or
      control the practice of dentistry. The Company maintains general liability
      insurance for itself and provides for professional liability insurance to the
      dentists, dental hygienists and dental assistants at the Offices. Management
      believes the Company is not presently a party to any material litigation.








*-
            58
            -*





(10)  INCOME
      TAXES





The
      Company accounts for income taxes through recognition of deferred tax assets
      and
      liabilities for the expected future income tax consequences of events, which
      have been included in the financial statements or tax returns. Under this
      method, deferred tax assets and liabilities are determined based on the
      difference between the financial statement and tax basis of assets and
      liabilities using enacted tax rates in effect for the year in which the
      differences are expected to reverse.





Income
      tax expense for the years ended December 31, consists of the
      following:


2004
              
              2005
              
              2006Current:Federal
              
              $
              515,142
              
              $
              1,069,508
              
              $
              1,455,771State
              
              
              76,303
              
              
              120,604
              
              
              183,135591,445
              
              
              1,190,112
              
              
              1,638,906Deferred:Federal
              
              
              260,518
              
              
              52,095
              
              
              34,400State
              
              
              46,223
              
              
              2,753
              
              
              7,721306,741
              
              
              54,848
              
              
              42,121Total
                  income tax expense
              
              $
              898,186
              
              $
              1,244,960
              
              $
              1,596,785
  The
      Company's effective tax rate differs from the statutory rate due to the impact
      of the following (expressed as a percentage of income before income taxes):


2004
              
              2005
              
              2006Statutory
                    federal income taxexpense
              
              
              34.0
              %
              
              34.0
              %
              
              34.0
              %State
                  income tax expense
              
              
              4.8
              
              
              3.0
              
              
              4.0Effect
                  of permanent differences -travel and entertainment expenses
              
              
              -
              
              
              0.5
              
              
              0.4ISO stock grants
              
              
              -
              
              
              -
              
              
              3.0Other
              
              
              0.6
              
              
              (1.0
              )
              
              (0.7
              )39.4
              %
              
              36.5
              %
              
              40.7
              %





*-
            59
            -*





Temporary
      differences comprise the deferred tax assets and liabilities in the consolidated
      balance sheet as follows:


December 31,2005
              
              2006Deferred
                  tax assets current:Accruals
                  not currently deductible
              
              $
              60,697
              
              $
              76,036Allowance
                  for doubtful accounts
              
              
              99,714
              
              
              109,635160,411
              
              
              185,671Deferred
                  tax assets long-term:Depreciation
                  for tax under books
              
              
              584,358
              
              
              930,761584,358
              
              
              930,761Deferred
                  tax liabilities long-term:Intangible
                    asset amortization for tax over books
              
              
              (1,334,704
              )
              
              (1,664,995
              )(1,334,704
              )
              
              (1,664,995
              )Net
                  deferred tax asset (liability)
              
              $
              (589,935
              )
              $
              (548,563
              )


Deferred
      income taxes are recognized for the expected tax consequences in future years
      for differences between the tax bases of assets and liabilities and their
      financial reporting amounts, based upon enacted tax laws and statutory tax
      rates
      applicable to the periods in which the differences are expected to affect
      taxable income. The Company’s significant deferred tax assets are related to:
      Accruals not currently deductible, allowance for doubtful accounts and
      depreciation expense for tax which is less than depreciation expense for books.
      The Company has not established a valuation allowance to reduce deferred tax
      assets as the Company expects to fully recover these amounts in future periods.
      The Company’s significant deferred tax liability is the result of intangible
      asset amortization expense for tax being greater than the intangible asset
      amortization expense for books. Management reviews and adjusts those estimates
      annually based upon the most current information available. However, because
      the
      recoverability of deferred taxes is directly dependent upon the future operating
      results of the Company, actual recoverability of deferred taxes may differ
      materially from management’s estimates.





In
      2004,
      2005 and 2006, tax benefits associated with the exercise of non-qualified
      options reduced taxes payable by approximately $241,000, $325,000 and $236,000,
      respectively, and increased equity by the same amount.





The
      Company is aware of the risk that the recorded deferred tax assets may not
      be
      realizable. However, management believes that it will obtain the full benefit
      of
      the deferred tax assets on the basis of its evaluation of the Company’s
      anticipated profitability over the period of years that the temporary
      differences are expected to become tax deductions. It believes that sufficient
      book and taxable income will be generated to realize the benefit of these tax
      assets.





*-
            60
            -*





(11)  BENEFIT
      PLANS




Profit
      Sharing 401(k)/Stock Bonus Plan





The
      Company has a 401(k)/stock bonus plan, which was established April 1, 1997.
      Eligible employees may make voluntary contributions to the plan. Effective
      November 1, 2005, the Company announced that it would start matching 20% of
      the
      first 6% of each employee’s contribution. The Company contributed $9,938 and
      $89,351 towards the plan for the years ended December 31, 2005 and 2006,
      respectively. For the year ended December 31, 2004, the Company did not make
      any
      contributions to the plan. In addition, the Company may make profit sharing
      contributions during certain years, which may be made, at the Company's
      discretion, in cash or in Common Stock of the Company. For the years ended
      December 31, 2004, 2005 and 2006 the Company did not make any profit sharing
      contributions.





Other
      Company Benefits





The
      Company provides a health and welfare benefit plan to all regular full-time
      employees. The plan includes health and life insurance, and a cafeteria plan.
      In
      addition, regular full-time and regular part-time employees are entitled to
      certain dental benefits.




(12)  DISCLOSURES
      ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS




SFAS
      No.
      107, ''Disclosures About Fair Value of Financial Instruments,'' requires
      disclosure about the fair value of financial instruments. Carrying amounts
      for
      all financial instruments included in current assets and current liabilities
      approximate estimated fair values due to the short maturity of those
      instruments. The fair values of the Company's note payable are based on similar
      rates currently available to the Company. The carrying values and estimated
      fair
      values were estimated to be substantially the same at December 31, 2005 and
      2006.





*-
            61
            -*





(13)  QUARTERLY
      RESULTS OF OPERATIONS (UNAUDITED )





The
      following summarizes certain quarterly results of operations: A 2-for-1 split
      of
      the Company’s common stock became effective as of August 1, 2005. All earnings
      per share in the following table reflect the stock split.


Net
                  Revenue
              
              Contribution
                  From Dental Offices
              
              Net
                  Income
              
              Net
                  Income Per Share of Common Stock - Diluted2004
                  quarter ended:31-Mar-04
              
              $
              8,210,196
              
              $
              1,661,010
              
              $
              429,016
              
              $
              0.1730-Jun-04
              
              
              8,177,042
              
              
              1,559,563
              
              
              424,209
              
              
              0.1630-Sep-04
              
              
              8,015,735
              
              
              1,332,448
              
              
              180,485
              
              
              0.0731-Dec-04
              
              
              7,767,432
              
              
              1,368,166
              
              
              345,887
              
              
              0.13$
              32,170,405
              
              $
              5,921,187
              
              $
              1,379,597
              
              $
              0.532005
                  quarter ended:31-Mar-05
              
              $
              9,367,731
              
              $
              2,095,604
              
              $
              699,643
              
              $
              0.2630-Jun-05
              
              
              9,393,284
              
              
              1,974,485
              
              
              633,268
              
              
              0.2430-Sep-05
              
              
              9,264,449
              
              
              2,115,191
              
              
              414,390
              
              
              0.1631-Dec-05
              
              
              8,690,653
              
              
              1,586,801
              
              
              417,005
              
              
              0.16$
              36,716,117
              
              $
              7,772,081
              
              $
              2,164,306
              
              $
              0.822006
                  quarter ended:31-Mar-06
              
              $
              10,140,029
              
              $
              2,297,178
              
              $
              702,325
              
              $
              0.2730-Jun-06
              
              
              10,091,469
              
              
              2,235,422
              
              
              623,166
              
              
              0.2530-Sep-06
              
              
              9,756,186
              
              
              2,046,944
              
              
              632,804
              
              
              0.2531-Dec-06
              
              
              9,399,312
              
              
              1,873,295
              
              
              364,679
              
              
              0.17$
              39,386,996
              
              $
              8,452,839
              
              $
              2,322,974
              
              $
              0.94





(14)   SUBSEQUENT
      EVENTS





On
      January 9, 2007, the Company announced the increase in the amount of the
      quarterly cash dividend from $.13 per share to $.15 per share.
















*-
            62
            -*





**ITEM
      9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE.**





None.




**ITEM
      9A. CONTROLS AND PROCEDURES**





**Evaluation
      of disclosure controls and procedures.**





The
      Company carried out an evaluation, under the supervision and with the
      participation of the Company’s management, including the Company’s Chief
      Executive Officer and Chief Financial Officer, of the effectiveness of the
      design and operation of the Company’s disclosure controls and procedures as of
      the end of the period covered by this Annual Report. Based upon that evaluation,
      the Company’s Chief Executive Officer and Chief Financial Officer concluded that
      the Company’s disclosure controls and procedures are effective in timely
      alerting them to material information relating to the Company required to be
      included in the Company’s periodic SEC filings.





**Changes
      in internal controls.**





There
      were no changes in our internal controls that have materially affected, or
      are
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting. The Company did not need to implement any corrective
      actions with regard to any significant deficiency or material weakness in its
      internal controls.





**ITEM
      9B. OTHER INFORMATION**





None.











*-
            63
            -*





**PART
      III**




**ITEM
      10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
      REGISTRANT.**





The
      information required by this Item 10 is incorporated in this report by reference
      to the applicable information set forth in the Company’s proxy statement for the
      2007 Annual Meeting of Shareholders, which will be filed no later than 120
      days
      after the close of the fiscal year with the Securities Exchange Commission.





**ITEM
      11. EXECUTIVE COMPENSATION.**





The
      information required by this Item 11 is incorporated in this report by reference
      to the applicable information set forth in the Company’s proxy statement for the
      2007 Annual Meeting of Shareholders, which will be filed no later than 120
      days
      after the close of the fiscal year with the Securities Exchange Commission.





**ITEM
      12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
      MANAGEMENT.**





The
      information required by this Item 12 is incorporated in this report by reference
      to the applicable information set forth in the Company’s proxy statement for the
      2007 Annual Meeting of Shareholders, which will be filed no later than 120
      days
      after the close of the fiscal year with the Securities Exchange Commission.





**ITEM
      13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.**





The
      information required by this Item 13 is incorporated in this report by reference
      to the applicable information set forth in the Company’s proxy statement for the
      2007 Annual Meeting of Shareholders, which will be filed no later than 120
      days
      after the close of the fiscal year with the Securities Exchange Commission.





**ITEM
      14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.**





The
      information required by this Item 14 is incorporated in this report by reference
      to the applicable information set forth in the Company’s proxy statement for the
      2007 Annual Meeting of Shareholders, which will be filed no later than 120
      days
      after the close of the fiscal year with the Securities Exchange Commission.





*-
            64
            -*








**PART
      IV**




**ITEM
      15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES**





(a)(1)
      Financial Statements:




Report
      of
      Independent Registered Public Accounting Firm





Consolidated
      Balance Sheets -


As
      of
      December 31, 2005 and 2006





Consolidated
      Statements of Income -


Years
      ended December 31, 2004, 2005 and 2006





Consolidated
      Statements of Shareholders’ Equity -


Years
      ended December 31, 2004, 2005 and 2006





Consolidated
      Statements of Cash Flows -


Years
      ended December 31, 2004, 2005 and 2006





Notes
      to
      Consolidated Financial Statements







(2)
      Financial Statement Schedules:





Report
      of
      Independent Registered Public Accounting Firm on Schedule





II
      -
      Valuation and Qualifying Accounts -


Three
      Years Ended December 31, 2006





Because
      the Company is primarily a holding company and all subsidiaries are wholly
      owned, only consolidated statements are being filed. Schedules other than those
      listed above are omitted because of the absence of the conditions under which
      they are required or because the information is included in the financial
      statements or notes to the financial statements.





(b)  The
      Exhibit Index lists the exhibits filed with this report.








*-
            65
            -*








**SIGNATURES**





Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the Registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.


BIRNER
        DENTAL MANAGEMENT SERVICES, INC.




/s/
                  Frederic W.J. Birner
              Chairman
                  of the Board, Chief Executive
              April
                  2, 2007Frederic
                  W.J. Birner
              Officer
                  and Director*(Principal
                  Executive**Officer)*




Pursuant
      to the requirements of the Securities Exchange Act of 1934, this report has
      been
      signed below by the following persons on behalf of the registrant and in the
      capacities and on the dates indicated.








/s/
                Frederic W.J. Birner
            Chairman
                of the Board, Chief Executive
            April
                2, 2007Frederic
                W.J. Birner
            Officer
                and Director*(Principal
                Executive**Officer)*/s/
                Dennis N. Genty
            Chief
                Financial Officer, Secretary and
            April
                2, 2007Dennis
                N. Genty
            Treasurer
                (*Principal
                Financial and Accounting**Officer)*/s/
                Mark A. Birner
            President
                and Director
            April
                2, 2007Mark
                A. Birner, D.D.S./s/
                Brooks G. O’Neil
            Director
            April
                2, 2007Brooks
                G. O’Neil/s/
                Paul E. Valuck
            Director
            April
                2, 2007Paul
                E. Valuck D.D.S./s/
                Thomas D. Wolf
            Director
            April
                2, 2007Thomas
                D. Wolf









*-
            66
            -*





REPORT
      OF
      INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





We
      have
      audited in accordance with the standards of the Public Company Accounting
      Oversight Board (United States), the consolidated financial statements of Birner
      Dental Management Services, Inc. for the years ended December 31, 2004, 2005
      and
      2006 included in this Form 10-K and have issued our report thereon dated March
      29, 2007. Our audits were made for the purpose of forming an opinion on the
      basic financial statements taken as a whole. This Schedule II - Valuation and
      Qualifying Accounts is the responsibility of the Company’s management and is
      presented for purposes of complying with the Securities and Exchange
      Commission’s rules and is not part of the basic financial statements. The
      information included in this schedule for the years ended December 31, 2004,
      2005 and 2006 has been subjected to the auditing procedures applied in the
      audits of the basic financial statements and, in our opinion, fairly states
      in
      all material respects the financial data required to be set forth therein in
      relation to the basic financial statements taken as a whole.






/s/
Hein
&
Associates
      LLP


Hein
      & Associates LLP





Denver,
      Colorado,


March
      29,
      2007











*-
            67
            -*




Birner
        Dental Management Services, Inc. and Subsidiaries
 Financial
        Statement Schedule
 II
–
        Valuation and Qualifying Accounts
 Allowance
        for Doubtful Accounts
  Description
              
              Balance
                  at beginning of period
              
              Charged
                  to costs and expenses
              
              Charged
                  to other accounts *
              
              Deductions**
              
              Balance
                  at end of period2006
              
              $
              261,031
              
              $
              722,622
              
              $
              -
              
              $
              695,140
              
              $
              288,5132005
              
              $
              232,543
              
              $
              673,613
              
              $
              -
              
              $
              645,125
              
              $
              261,0312004
              
              $
              215,838
              
              $
              435,813
              
              $
              -
              
              $
              419,108
              
              $
              232,543




*  Allowance
      recorded, as the result of accounts receivable acquired.


**  Charges
      to the account are for the purpose for which the reserves were
      created.








*-
            68
            -*





**Index
      of Exhibits**





**Exhibit**
              **Number**
            **Description
                of Document**3.1
            Amended
                and Restated Articles of Incorporation, incorporated herein by reference
                to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (SEC
                File No. 333-36391), as filed with the Securities and Exchange Commission
                on September 25, 1997.3.2
            Amended
                and Restated Bylaws, incorporated herein by reference to Exhibit
                3.3 to
                the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
                as filed with the Securities and Exchange Commission on September
                25,
                1997.4.1
            Reference
                is made to Exhibits 3.1 through 3.2.4.2
            Specimen
                Stock Certificate, incorporated herein by reference to Exhibit 4.2
                to the
                Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as
                filed with the Securities and Exchange Commission on September 25,
                1997.10.1
            Form
                of Indemnification Agreement entered into between the Registrant
                and its
                Directors and Executive Officers, incorporated herein by reference
                to
                Exhibit 10.1 to the Company’s Registration Statement on Form S-1 (SEC File
                No. 333-36391), as filed with the Securities and Exchange Commission
                on
                September 25, 1997.10.13
            Credit
                Agreement, dated October 31, 1996, between the Registrant and Key
                Bank of
                Colorado, as amended by First Amendment to Loan Documents, dated
                as of
                September 3, 1997, incorporated herein by reference to Exhibit 10.13
                to
                the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
                as filed with the Securities and Exchange Commission on September
                25,
                1997.10.14
            Form
                of Managed Care Contract with Prudential, incorporated herein by
                reference
                to Exhibit 10.14 to the Company’s Registration Statement on Form S-1 (SEC
                File No. 333-36391), as filed with the Securities and Exchange Commission
                on September 25, 1997.10.15
            Form
                of Managed Care Contract with PacifiCare, incorporated herein by
                reference
                to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (SEC
                File No. 333-36391), as filed with the Securities and Exchange Commission
                on September 25, 1997.10.17
            Agreement,
                dated August 21, 1997, between the Registrant and James Abramowitz,
                D.D.S., and Equity Resources Limited Partnership, a Colorado limited
                partnership, incorporated herein by reference to Exhibit 10.17 to
                the
                Company’s Registration Statement on Form S-1 (SEC File No. 333-36391), as
                filed with the Securities and Exchange Commission on September 25,
                1997.10.18
            Form
                of Management Agreement, incorporated herein by reference to Exhibit
                10.18
                to the Company’s Registration Statement on Form S-1 (SEC File No.
                333-36391), as filed with the Securities and Exchange Commission
                on
                September 25, 1997.10.20
            Form
                of Stock Transfer and Pledge Agreement, incorporated herein by reference
                to Exhibit 10.20 to the Company’s Registration Statement on Form S-1 (SEC
                File No. 333-36391), as filed with the Securities and Exchange Commission
                on September 25, 1997.10.23
            Birner
                Dental Management Services, Inc. 1995 Employee Stock Option Plan,
                including forms of Incentive Stock Option Agreement and Non-statutory
                Stock Option Agreement under the Employee Plan, incorporated herein
                by
                reference to Exhibit 10.23 to the Company’s Registration Statement on Form
                S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
                Commission on September 25, 1997.10.24
            Birner
                Dental Management Services, Inc. 1995 Stock Option Plan for Managed
                Dental
                Centers, including form of Non-statutory Stock Option Agreement under
                the
                Dental Center Plan, incorporated herein by reference to Exhibit 10.24
                to
                the Company’s Registration Statement on Form S-1 (SEC File No. 333-36391),
                as filed with the Securities and Exchange Commission on September
                25,
                1997.10.25
            Profit
                Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated herein
                by
                reference to Exhibit 10.25 to the Company’s Registration Statement on Form
                S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
                Commission on September 25, 1997.10.26
            Form
                of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S.,
                incorporated herein by reference to Exhibit 10.26 of Pre-Effective
                Amendment No. 1 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 7, 1997.10.27
            Stock
                Purchase, Pledge and Security Agreement, dated October 27, 1997,
                between
                the Company and William Bolton, D.D.S., incorporated herein by reference
                to Exhibit 10.27 of Pre-Effective Amendment No. 1 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 7,
                1997.10.29
            Second
                Amendment to Loan Documents dated November 19, 1997 between the Registrant
                and Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.29 of Pre-Effective Amendment No. 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,
                1997.10.32
            Third
                Amendment to Loan Documents date September 31, 1998 between the Registrant
                and Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.32 of the Company’s Form 10-Q for the quarterly period ended September
                30, 1998 filed with the Securities and Exchange Commission on November
                16,
                1998.10.33
            Fourth
                Amendment to Loan Document dated December 31, 1998 between the Registrant
                and Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.33 of the Company’s Form 10-K for the annual period ended December 31,
                1998 filed with the Securities and Exchange Commission on March 31,
                1999.10.34
            Fifth
                Amendment to Loan Document dated May 28, 1999 between the Registrant
                and
                Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.34 of
                the Company’s Form 10-Q for the quarterly period ended June 30, 1999 filed
                with the Securities and Exchange Commission on August 12,
                1999.10.35
            Sixth
                Amendment to Loan Document dated September 20, 1999 between the Registrant
                and Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.35 of the Company’s Form 10-Q for the quarterly period ended September
                30, 1999 filed with the Securities and Exchange Commission on November
                15,
                1999.10.36
            Seventh
                Amendment to Loan Document dated March 24, 2000 between the Registrant
                and
                Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.36 of
                the Company’s Form 10-K for the annual period ended December 31, 1999
                filed with the Securities and Exchange Commission on March 30,
                2000.10.37
            Eighth
                Amendment to Loan Document dated September 29, 2000 between Registrant
                and
                Key Bank of Colorado, incorporated herein by reference to Exhibit
                10.37 of
                the Company’s Form 10-Q for the quarterly period ended September 30, 2000
                filed with the Securities and Exchange Commission on November 13,
                2000.10.38
            Amended
                and Restated Credit Agreement dated December 17, 2001 between Registrant
                and Key Bank of Colorado, incorporated herein as Exhibit 10.38 of
                the
                Company’s Form 10-K for the annual period ended December 31,
                2001.10.39
            First
                Amendment to Amended and Restated Credit Agreement dated April 30,
                2002
                between Registrant and Key Bank of Colorado, incorporated herein
                as
                Exhibit 10.39 of the Company’s Form 10-Q for the quarterly period ended
                March 31, 2002 filed with the Securities and Exchange Commission
                on May 6,
                2002.10.40
            Second
                Amendment to Amended and Restated Credit Agreement dated September
                9, 2002
                between Registrant and Key Bank of Colorado, incorporated herein
                as
                Exhibit 10.40 of the Company’s Form 10-Q for the quarterly period ended
                September 30, 2002 filed with the Securities and Exchange Commission
                on
                November 8, 2002.10.41
            Fourth
                Amendment to Amended and Restated Credit Agreement dated April 24,
                2003
                between the Registrant and Key Bank of Colorado, incorporated herein
                as
                Exhibit 10.41 of the Company’s Form 10-Q for the quarterly period ended
                March 31, 2003 filed with the Securities and Exchange Commission
                on May 8,
                2003.10.42
            Birner
                Dental Management Services, Inc. Code of Ethics, incorporated herein
                by
                reference to Exhibit 10.42 of Form 10-K (SEC File No. 23367), as
                filed
                with Securities and Exchange Commission on March 30, 2004.10.43
            Second
                Amended and Restated Credit Agreement dated August 7, 2003 between
                Registrant and Key Bank of Colorado, incorporated herein as Exhibit
                10.41
                of the Company’s Form 10-K for the annual period ended December 31,
                2003.10.44
            Second
                Amendment to Second Amended and Restated Credit Agreement dated April
                29,
                2005 between the Registrant and Key Bank of Colorado, incorporated
                herein
                as Exhibit 10.43 of the Company’s Form 10-K for the annual period ended
                December 31, 2005.10.45
            Form
                of Restricted Stock Agreement and Grant Notice under 2005 Equity
                Incentive
                Plan, incorporated herein by reference to Exhibit 10.2 on Form 8-K
                (SEC
                File No. 000-23367), as filed with the Securities and Exchange Commission
                on July 19, 2005.10.46
            Third
                Amendment to Second Amended and Restated Credit Agreement dated April
                25,
                2006 between the Registrant and Key Bank of Colorado, incorporated
                herein
                as Exhibit 10.43 of the Company’s Form 10-K for the annual period ended
                December 31, 200610.47
            Fourth
                Amendment to Second Amended and Restated Credit Agreement dated August
                31,
                2006 between the Registrant and Key Bank of Colorado, incorporated
                herein
                as Exhibit 10.43 of the Company’s Form 10-K for the annual period ended
                December 31, 200610.48
            Third
                Amended and Restated Security Agreement between the Company and KeyBank
                National Association dated August 30, 2006 of the Company’s Form 10-K for
                the annual period ended December 31, 2006.23*
            Hein
                & Associates LLP consent dated March 29, 2007.31.1*
            Certification
                of 10-K report pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002
                by Chief Executive Officer.31.2
                *
            Certification
                of 10-K report pursuant to Section 302 of the Sarbanes-Oxley Act
                of 2002
                by Chief Financial Officer.32.1*
            Certification
                of 10-K report pursuant to Section 906 of the Sarbanes-Oxley Act
                of
                2002.


*
      Filed
      with this Form 10-K.