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, 2008. Reference is 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, Related Stockholder Matters and Issuer Purchases of Equity Securities" 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 Item 1A., "Risk Factors." The Company undertakes no obligation to publicly update or revise any forward looking statements as a result of new information, future events or otherwise.

Overview

The Company was formed in May 1995, and currently provides business services to 61 Offices in Colorado, New Mexico, and Arizona staffed by 78 dentists and 33 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 27 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 and by making select 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 and contract labor dentists, dental hygienists and dental assistants. The Company's net revenue is dependent on the Revenue of the Offices. Direct expenses consist of the expenses incurred by the Company in connection with managing the Offices, including salaries and benefits (for personnel other than dentists, dental hygienists and dental assistants), supplies, 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, dental hygienists and dental assistants, (ii) complying with all laws, rules and regulations relating to dentists, dental hygienists and dental assistants, and (iii) maintaining proper patient records. The Company has made, and intends to make in the future, loans to P.C.s in Colorado, New Mexico and Arizona to fund their acquisition of dental assets from third parties in order to comply with the laws of such states.

Under the typical Management Agreement used by the Company, the P.C. pays the Company a management fee equal to the Adjusted Gross Center Revenue of the P.C. less compensation paid to the dentists, dental hygienists and dental assistants employed at the Office of the P.C. Adjusted Gross Center Revenue is comprised of all fees and charges booked each month by or on behalf of the P.C. as a result of dental services provided to patients at the Office, less any adjustments for uncollectible accounts, professional courtesies and other activities that do not generate a collectible fee. The Company's costs include all direct and indirect costs, overhead and expenses relating

to the Company's provision of management services at the Office under the Management Agreement, including (i) salaries, benefits and other direct costs of Company employees who work at the Office (other than dentists', dental hygienists' and dental assistants' salaries), (ii) direct costs of all Company employees or consultants who provide services to or in connection with the Office, (iii) utilities, janitorial, laboratory, supplies, advertising and other expenses incurred by the Company in carrying out its obligations under the Management Agreement, (iv) depreciation expense associated with the P.C.s assets and the 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, dental hygienists and dental assistants who work at the Offices of the P.C.s. This enables the Company to manage the profitability of the Offices. Each Management Agreement is for a term of 40 years. Further, each Management Agreement generally may be terminated by the P.C. only for cause, which includes a material default by or bankruptcy of the Company. Upon expiration or termination of a Management Agreement by either party, the P.C. must satisfy all obligations it has to the Company.

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, dental hygienists and dental assistants), 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.

Reclassifications and Correcting Entries

Certain reclassifications have been made to the 2006 and 2007 financial statement presentation to conform to the 2008 presentation.

Effective April 1, 2008, the Company reclassified dentist and hygiene contract labor expenses from clinical salaries

and benefits to net revenue and adjusted prior periods in this filing. The reclassification had no effect on contribution from dental offices or net income. The reclassification was approximately $599,000, $600,000 and $759,000 for the years ended December 31, 2008, 2007 and 2006, respectively.

Effective July 1, 2008, the Company reclassified dental assistant wages from clinical salaries and benefits to net revenue and adjusted prior periods in this filing. The reclassification had no effect on contribution from dental offices or net income. The reclassification was approximately $4.8 million, $4.9 million and $4.6 million for the years ended December 31, 2008, 2007 and 2006, respectively.

Due to the Company buying back common stock at prices higher than the issue price, the Company's Common Stock balance would have been reduced to a negative $266,786 as of December 31, 2008, however, the Company recognized this negative balance as a reduction of retained earnings on the balance sheet.

In January 2009, the Company identified an accounting error which understated deferred revenue and overstated Revenue by a total of approximately $247,000 over the seven year period from 2001 to 2007 as shown in the table below:

                             Pre-tax
                          overstatement     Tax     Decrease in
                           of Revenue     effect    net income

                     2001   $     3,494 $     1,139 $     2,355
                     2002        46,237      17,477      28,760
                     2003        47,724      18,660      29,064
                     2004        51,070      20,122      30,948
                     2005        43,393      15,838      27,555
                     2006        51,318      20,886      30,432
                     2007         3,640       1,450       2,190

                    Total    $  246,876 $    95,572  $  151,304

The Company has corrected this overstatement of Revenue through its retained earnings balance as of January 1, 2006 and has adjusted its Revenue and its deferred revenue liability in its financial statements for all periods presented.

Results of Operations

For the year ended December 31, 2008, Revenue decreased to $59.0 million compared to $59.4 million for the year ended December 31, 2007, a decrease of $371,000 or .6%. This decrease was attributable to a decrease of same store general dentistry Revenue of $1.4 million offset by an increase in same store specialty dentistry Revenue of $875,000, general dentistry Revenue from a de novo Office that opened in May 2009 of $105,000 and specialty dentistry Revenue from the de novo Office of $81,000.

For the year ended December 31, 2007, Revenue increased to $59.4 million compared to $57.1 million for the year ended December 31, 2006, an increase of $2.3 million or 4.0%. This increase was attributable to de novo Offices which opened in 2006 generating $1.1 million in additional general dentistry Revenue and $725,000 in specialty dentistry Revenue along with an increase in general dentistry Revenue of $92,000 at existing Offices and an increase of $364,000 in specialty dentistry Revenue at existing Offices for the year ended December 31, 2007.

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, 2008, net revenue was $33.9 million in 2006, $35.3 million in 2007 and $34.5 million in 2008. During the three years ended December 31, 2008, contribution from the dental Offices was $8.4 million in 2006, $8.7 million in 2007 and $7.3 million in 2008. During the three years ended December 31, 2008, net income was $2.3 million in 2006, $2.4 million in 2007 and $1.8 million in 2008. The Company attributes its decrease in Revenue, net revenue, contribution from dental Offices and net income in 2008 to a general weakness in the economy in the Company's

markets as reflected by a reduced number of new patient visits, patient procedures and in particular fewer crown and bridge procedures.

The Company's earnings before interest, taxes, depreciation, amortization and non cash expense associated with stock-based compensation ("Adjusted EBITDA") decreased $1.1 million, or 13.7% to $6.8 million for the year ended December 31, 2008 from $7.8 million for the year ended December 31, 2007. 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, stock-based compensation expense, interest expense/(income), net, and income tax expense to net income as in the table below.

                                                           Year Ended December 31,
                                                       2006         2007         2008

RECONCILIATION OF ADJUSTED EBITDA:
     Net income                                     $ 2,292,542  $ 2,435,107  $ 1,790,409
     Add back:
         Depreciation and amortization - Offices      2,192,411    2,541,995    2,445,956
         Depreciation and amortization - corporate     131,356      110,270      96,366
         Stock-based compensation expense              653,174      729,394      731,607
         Interest expense, net                         226,835      365,140      282,267
         Income tax expense                           1,575,899    1,650,342    1,414,962

Adjusted EBITDA                                     $ 7,072,217  $ 7,832,248  $ 6,761,567

At December 31, 2008, the Company's total assets of $19.4 million included $10.6 million of identifiable intangible assets related to Management Agreements. At that date, the Company's total shareholders' equity was $6.5 million. The Company's retained earnings as of December 31, 2008 were approximately $6.6 million and the Company had a working capital deficit on that date of approximately $1.3 million. During 2008, the Company had capital expenditures of $1.1 million and purchased approximately $4.4 million of Common Stock while increasing total bank debt by $1.2 million.

The Company's Revenue from capitated managed dental care plans was 22.9% of total dental group practice revenue in 2008, compared to 22.3% in 2007 and 21.8% in 2006.

Revenue, as defined in this report, is revenue generated at the Company's Offices from professional services provided to patients. Amounts retained by group practices represent wage expense to the dentists, dental hygienists and dental assistants 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.

                                           Years Ended December 31,
                                       2006          2007          2008

Revenue                            $ 57,089,908  $ 59,386,817  $ 59,016,250
Less - amounts retained by Offices   23,143,049    24,103,833    24,493,389

Net revenue                        $ 33,946,859  $ 35,282,984  $ 34,522,861

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,
                                   2006        2007           2008

Net revenue                       100.0 %     100.0 %     100.0 %
Direct expenses:
   Clinical salaries and benefits  26.0        26.2        28.2
   Dental supplies                  6.7         6.6         6.9
   Laboratory fees                  7.6         7.4         7.9
   Occupancy                       12.6        13.0        13.9
   Advertising and marketing        2.3         1.9         1.3
   Depreciation and amortization    6.5         7.2         7.1
   General and administrative      13.6        13.0        13.7
                                   75.3        75.4        78.9
Contribution from dental offices   24.7        24.6        21.1
Corporate expenses:
   General and administrative      12.3   (1)  11.7   (1)  10.7   (1)
   Depreciation and amortization    0.4         0.3         0.3
Operating income                   12.1        12.6        10.1
Interest expense, net               0.7         1.0         0.8
Income before income taxes         11.4        11.6         9.3
Income tax expense                  4.6         4.7         4.1
Net income                          6.8 %       6.9 %       5.2 %

(1) Corporate expense - general and administrative includes $324,120 of 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, $324,120 of equity compensation for a stock award and $405,274 of stock-based compensation expense pursuant to SFAS 123 (R) for the year ended December 31, 2007 and $731,607 of stock-based compensation expense pursuant to SFAS 123 (R) for the year ended December 31, 2008.

Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

Net revenue. Net revenue decreased to $34.5 million for the year ended December 31, 2008 compared to $35.3 million for the year ended December 31, 2007, a decrease of $760,000 or 2.2%. This decrease is attributable to a decrease in net revenue from general dentistry of $1.3 million offset by an increase in net revenue from specialty dentistry of $488,000 along with a de novo Office the Company opened in May 2008 producing $88,000 in net revenue. The Company attributes the decrease in net revenue to general weakness in the economy in the Company's markets as reflected by a reduced number of patient procedures and in particular fewer crown and bridge procedures.

Clinical salaries and benefits. Clinical salaries and benefits increased to $9.7 million for the year ended December 31, 2008 compared to $9.3 million for the year ended December 31, 2007, an increase of $490,000 or 5.3%. This increase is attributable to an increase in health insurance of $212,000, payroll taxes of $131,000, accrued vacation of $84,000 and general wage increases granted during 2008. As a percentage of net revenue, clinical salaries and benefits increased to 28.2% in 2008 from 26.2% in 2007.

Dental supplies. Dental supplies increased to $2.4 million for the year ended December 31, 2008 compared to $2.3 million for the year ended December 31, 2007, an increase of $55,000 or 2.4%. This increase includes a $24,000 initial supply purchase for the de novo Office opened during 2008. As a percentage of net revenue, dental supplies increased to 6.9% in 2008 from 6.6% in 2007.

Laboratory fees. Laboratory fees increased to $2.7 million for the year ended December 31, 2008 compared to $2.6 million for the year ended December 31, 2007, an increase of $108,000 or 4.1%. This increase is primarily related to overall increased material costs for crowns and bridges and an increased number of implant procedures, which carry an increased laboratory fee. As a percentage of net revenue, laboratory fees increased to 7.9% in 2008 from 7.4% in 2007.

Occupancy. Occupancy expenses increased to $4.8 million for the year ended December 31, 2008 from $4.6 million for the year ended December 31, 2007, an increase of $198,000 or 4.3%. 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 2007 period as well as $43,000 from the addition of one de novo Office opened during 2008. As a percentage of net revenue, occupancy expense increased to 13.9% in 2008 from 13.0% in 2007.

Advertising and marketing. Advertising and marketing decreased to $433,000 for the year ended December 31, 2008 from $678,000 for the year ended December 31, 2007, a decrease of $245,000 or 36.1%. This decrease is attributable to a shift away from television and print advertising in 2007 that the Company did not conduct in 2008. As a percentage of net revenue, advertising and marketing decreased to 1.3% in 2008 from 1.9% in 2007.

Depreciation and amortization. Depreciation and amortization, which consists of depreciation and amortization expense incurred at the Offices, decreased to $2.4 million for the year ended December 31, 2008 from $2.5 million for the year ended December 31, 2007, a decrease of $96,000 or 3.8%. This decrease was primarily the result of 2007 including amortization expense of $104,000 at one Office in order to recognize an impairment charge that was necessary in order to write down its value to market. As a percentage of net revenue, depreciation and amortization decreased to 7.1% in 2008 from 7.2% in 2007.

General and administrative. General and administrative expenses attributable to the Offices increased to $4.7 million for the year ended December 31, 2008 from $4.6 million for the year ended December 31, 2007, an increase of $139,000 or 3.0%. This increase was primarily related to increased bad debt expense of $70,000 and increased repairs and maintenance of $58,000. As a percentage of net revenue, Office general and administrative expenses increased to 13.7% in 2008 from 13.0% in 2007.

Contribution from dental Offices. As a result of the above, contribution from dental Offices decreased to $7.3 million for the year ended December 31, 2008 from $8.7 million for the year ended December 31, 2007, a decrease of $1.4 million or 16.2%. As a percentage of net revenue, contribution from dental Offices decreased to 21.1% in 2008 from 24.6% in 2007.

Corporate expenses - general and administrative. Corporate expenses - general and administrative decreased to $3.7 million for the year ended December 31, 2008 from $4.1 million for the year ended December 31, 2007, a decrease of $432,000 or 10.5%. This decrease is primarily attributable to a reduction in executive bonuses of

$507,000. As a percentage of net revenue, corporate expenses - general and administrative decreased to 10.7% in 2008 compared to 11.7% in 2007.

Corporate expenses - depreciation and amortization. Corporate expenses - depreciation and amortization decreased to 96,000 for the year ended December 31, 2008 from $110,000 for the year ended December 31, 2007, a decrease of $14,000 or 12.6%. 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 remained constant at 0.3% in 2008 and 2007.

Operating income. As a result of the above, operating income decreased to $3.5 million for the year ended December 31, 2008 from $4.5 million for the year ended December 31, 2007, a decrease of $963,000 or 21.6%. As a percentage of net revenue, operating income decreased to 10.1% in 2008 from 12.6% in 2007.

Interest expense/(income), net. Interest expense, net decreased to $282,000 for the year ended December 31, 2008 from $365,000 for the year ended December 31, 2007, a decrease of $83,000 or 22.7%. This decrease in interest expense is . . .