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                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K

 (Mark One)
              [ X ]  ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934
                  For the Fiscal Year ended December 31, 1997

                                       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 0-26688

                            UNITED DENTAL CARE, INC.
             (Exact name of registrant as specified in its charter)

    Delaware                                                   75-2309712
(State of incorporation)                    (I.R.S. Employer Identification No.)

                       13601 Preston Road, Suite 500 East
                              Dallas, Texas 75240
              (Address of principal executive offices) (Zip Code)

      Registrant's telephone number, including area code:  (972) 458-7474

       Securities registered pursuant to Section 12(b) of the Act:  None


          Securities registered pursuant to Section 12(g) of the Act:

                                Title of class:

                          COMMON STOCK, $.10 PAR VALUE


      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  XX   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. [ ]

      The aggregate market value of the shares of Common Stock held by
non-affiliates of the registrant, based on the closing price of the Common
Stock on The Nasdaq Stock Market on March 20, 1998, was approximately $126.2
million. (For the purposes of this computation, all directors, officers and 10%
beneficial stockholders of the registrant are deemed to be affiliates.)

      As of March 20, 1998, 8,950,676 shares of Common Stock were outstanding.
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<TABLE>
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                                                    TABLE OF CONTENTS

ITEM                                                                                                          PAGE
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<S>                                                                                                           <C>
                                                          PART I

ITEM 1.       BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .     3

ITEM 2.       PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    17

ITEM 3.       LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    17

ITEM 4.       SUBMISSION OF MATTERS TO A VOTE OF
              SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .    17

                                                         PART II

ITEM 5.       MARKET FOR REGISTRANT'S COMMON EQUITY
              AND RELATED STOCKHOLDER MATTERS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  17

ITEM 6.       SELECTED CONSOLIDATED FINANCIAL DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  18

ITEM 7.       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
              FINANCIAL CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . . . . . . . . . . . . . . . . .  20

ITEM 8.       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

ITEM 9.       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
              ON ACCOUNTING AND FINANCIAL DISCLOSURE   . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

                                                         PART III

ITEM 10.      DIRECTORS AND EXECUTIVE OFFICERS OF THE
              REGISTRANT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  26

ITEM 11.      EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  28

ITEM 12.      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
              AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  32

ITEM 13.      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . .  34

                                                         PART IV

ITEM 14.      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND
              REPORTS ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  34

SIGNATURES   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  38
</TABLE>
<PAGE>   3
ITEM 1.  BUSINESS

GENERAL

      United Dental Care, Inc. ("UDC" or "the Company") is a managed dental
benefits company that is licensed to operate prepaid dental plans in 29 states
and, as of December 31, 1997, provided dental coverage to approximately
1,900,000 members. The Company offers a comprehensive range of dental plans
capable of meeting the needs of employer groups of all sizes as well as
individuals. UDC's prepaid dentist networks, as of December 31, 1997, consisted
of approximately 6,700 general dentists as well as specialty dentists providing
a broad range of dental services. The Company sells its services through
multiple distribution channels, including independent brokers, third-party
arrangements with HMOs and direct sales. In 1996, the Company entered into
agreements to acquire five managed dental benefits companies and one dental
referral plan company, all six companies having approximately 500,000 members
in the aggregate. All the acquisitions were completed as of mid-1997.

      Managed dental benefits plans are usually offered as an alternative to
traditional dental indemnity insurance, although the Company has the capability
of offering dual choice plans that provide both prepaid and indemnity plans.
Industry sources report that prepaid dental plans are typically priced 20% or
more below comparable indemnity plans. Prepaid dental plans are offered by
employers to employees, frequently on a voluntary participation basis with all
or part of the premium being paid by the employee. At the time of enrollment,
participating employees and dependents become members of the prepaid dental
plan and, under most of the Company's plans, each member is entitled to select
his or her own dentist from the dentist network. The Company pays the network
dentist a fixed monthly amount, or capitation payment, for each member who
selected that dentist, regardless of the services rendered in any particular
month. In addition, the dentist is paid a separate fee, or copayment, by the
member at the time of service for many of the dental services covered under the
plan. Under the prepaid dental plans of the Company, the vast majority of all
covered dental services are provided through these capitation arrangements, in
which the Company bears little financial risk for either utilization levels or
cost of services. Many of the Company's prepaid plans have a specialty care
benefit which pays the dentist on a fee-for-service basis and is controlled by
a specialty referral process.

THE MANAGED DENTAL BENEFITS INDUSTRY

Background

      According to the U.S. Office of National Health Statistics, total
expenditures for dental care in the United States grew from approximately $14.4
billion in 1980 to approximately $47.6 billion in 1996. According to the
American Dental Association, there were approximately 138,000 active licensed
dentists engaged in private practice in the United States in 1991. The American
Dental Association estimated that in 1993 approximately 68% of the nation's
private dentists were in solo practice and approximately 20% were in two-person
practices.

      Historically, payment for dental services has been on a fee-for-service
basis. Under this system, the individual, or a dental indemnity insurance
company, pays fees established by the dentist for the dental services provided
by the dentist and the dentist has little incentive to control costs or
minimize expenses. The charges for services generally vary widely among
dentists. Since the individual pays all or a portion of the established fees,
the individual may be reluctant to incur the costs of preventive dental care.
In addition, the individual has limited access to information regarding cost
and quality for use as a basis for selecting a dentist.

Dental Indemnity Insurance

      The number of individuals in the United States with dental benefits was
estimated by the National Association of Dental Plans to be approximately 117
million in 1995, representing approximately 47% of the total United States
population. Historically, dental coverage was not an employee benefit
customarily provided by employers. The Company believes that dental benefits
are a frequently requested employee benefit. In response to employee demand,
employers have increasingly offered dental coverage to employees usually in the
form of indemnity insurance. According to a 1993 survey performed by Foster
Higgins, an employee benefits consulting firm, approximately 87% of employers
with more than 200 employees, approximately 63% of employers with 50-199
employees and approximately 39% of employers with 10-49 employees offer dental
coverage as an available employee benefit.





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Dental coverage is typically offered as a separate benefit from medical coverage
with the employer frequently paying none, or only a portion, of the premium for
the dental coverage.

      Dental indemnity insurance is similar to medical indemnity insurance in
that the individual or the employer pays a premium for the dental insurance
coverage and the insurance company pays or reimburses the dentist in whole or
in part for the charges for dental services. While dental indemnity insurance
companies have utilized mechanisms to control costs such as limiting charges to
reasonable and customary charges for the community in which the services are
rendered and utilizing preferred providers with whom discounted fee schedules
are negotiated, such mechanisms do not transfer significant risk to the dentist
or provide significant incentives to the dentist to control costs or reduce
fees or to the individual to utilize preventive dental services.

Managed Dental Benefits

      Increasing concern with the costs of health care, including dental care,
has resulted in a greater willingness by employers and consumers to consider
managed health care delivery systems. The Company believes that these alternate
benefit plans are able to provide services, or benefits, at a lower cost, or
premium, than fee-for-service alternatives.

      Companies having the management expertise and industry knowledge required
to establish and maintain a network of specialized providers such as dentists
have developed specialized managed delivery systems to provide such health care
services. HMOs, PPOs and other forms of managed health care plans for general
medical services have not customarily devoted the resources to develop
specialty managed delivery systems and frequently subcontract with companies
providing single specialty managed delivery systems such as the Company's
prepaid dental plans.

      According to the National Association of Dental Plans, prepaid dental
plans have grown from approximately 10.4 million covered members in 1991 to
20.7 million in 1995, an annual compounded growth rate of approximately 18.8%.
The Company believes the relatively high growth rate for prepaid dental plans
is attributable to: (i) the greater acceptance and utilization of managed care
alternatives by employers and employees to reduce costs; (ii) the significant
price advantage relative to indemnity plans; (iii) the cost effectiveness to
employers of prepaid plans as an employee benefit; (iv) the growing acceptance
of capitated dental plans by dentists, resulting in improved accessibility and
convenience for members; and (v) the use of these plans by several state
Medicaid programs. The number of people with dental benefits was estimated by
the National Association of Dental Plans to be approximately 117 million in
1995, of which approximately 18% were covered under prepaid dental plans
representing approximately 8% of the total United States population. The
Company believes there is significant growth opportunity for the managed dental
benefits industry.

      A prepaid dental plan pays a fixed monthly capitation payment to the
network dentist who provides dental services as needed at either no cost to the
member or at reduced fees (copayments) paid by the member. Consequently, the
risk of high utilization is shifted to the dentist, although, generally, the
dentist receives copayments for many covered services that are often greater
than the direct costs of the dentist, reducing financial risk. The capitation
method rewards efficient providers who stress routine, preventive care and
control their fixed expenses. In comparison, under the traditional
fee-for-service payment system, the risk of utilization is borne by the insurer
or the consumer, with little incentive to the dentist to be an efficient
provider. The Company believes that the ability of a managed dental benefits
plan to volume purchase, shift risk to providers and manage both the costs and
utilization of dental care typically results in premiums 40% or more below
premiums for a traditional indemnity plan.

      In addition, some prepaid dental plans provide for specialty care at
fixed copayments by the member. Unlike medical care, the majority of dental
care is provided by general dentists with some specialty care provided by
endodontists (specialists in root canal therapy), orthodontists (specialists in
tooth movement), oral surgeons (specialists in extractions), pedodontists
(specialists in dentistry for children) and periodontists (specialists in
gum-related treatment). Companies such as UDC that arrange for specialty care
at fixed copayments are further able to manage the costs and utilization of
dental services through specialty referral authorization programs and
discounted fee arrangements with specialty dentists. Medium to large employers
increasingly expect comprehensive dental care, including specialty care, from
prepaid dental plans, at stipulated copayments comparable to the type of
coverage provided by a general medical plan.





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<PAGE>   5
      According to the National Association of Dental Plans, the number of
dentists affiliated with prepaid dental plans was approximately 28,000 in 1995,
or approximately 19% of all active dentists. The Company believes that
significant growth of prepaid dental plans will continue as a result of: (i)
growing acceptance and participation in such plans by dentists; (ii) greater
acceptance of such plans by consumers who are becoming increasingly aware of
the price advantages, improved service and convenience offered by such plans;
and (iii) recognition by employers that such plans can be used to provide
important employee benefits at little or no cost to the employer. Consequently,
the Company believes prepaid dental plans will be increasingly used to replace
more expensive forms of dental coverage and provide dental coverage to greater
portions of the population that presently have no dental coverage.

      The Company believes that the managed dental benefits industry has the
potential for significant growth and is highly fragmented. The National
Association of Dental Plans estimated that, during 1995, approximately 45% of
its members operating prepaid dental plans were single-state companies. The
Company believes that large, independent, managed dental benefits companies
will have a greater opportunity to grow and expand because of growing interest
in multi-state coverage by medium and large employers and increased use by
medical HMOs that contract with large dental plans to provide dental coverage
to the medical HMO members. The Company believes that large dental plans have
the resources and systems required to satisfy the expectations of employers and
the requirements of dentists and regulatory authorities while achieving
financial economies of scale. The Company believes that the factors supporting
the growth of large dental plans will give rise to consolidation opportunities.

BUSINESS STRATEGY

      The Company's goal is to be the leading dental benefits company in the
United States with the ability to offer prepaid dental plans to employers of
all sizes. The Company intends to maintain and develop a leadership position
within each of its existing key markets and to strategically enter new markets
that afford significant growth opportunities. At present, the Company is
licensed to operate prepaid dental plans in 29 states. The Company believes
that, as a large, multi-state managed dental benefits company with significant
management depth and financial resources, it will have a competitive advantage
over smaller and single-market companies in gaining market share and
participating in the consolidation of the managed dental benefits industry. In
order to implement its strategy, the Company will:

      Offer a Full Range of Comprehensive Dental Benefits Plans. One of the
keys to the Company's success has been its ability to offer a broad range of
prepaid and dual-choice dental plans providing different levels of dental
coverage, including specialty care. The variety of its dental plans has enabled
the Company to attract both small, single-market employers and large,
multi-state employers as well as individuals. In addition, the Company has
developed prepaid and dual-choice dental plans that may be offered in
substantially all states where it is licensed so that large, multi-state
employers can provide the same dental coverage to all of their employees.

      Ensure Quality Dental Care Through Accessible Dentist Networks. The
Company's strategy is to have one of the three largest dentist networks in its
key markets, providing a full spectrum of dental care, including specialty
care. The Company believes that having provider relations representatives
located in each of its key markets enhances the quality of its dentist
networks. The local knowledge and expertise provided through these local
representatives enables the Company to develop highly accessible dentist
networks convenient for members, which is an important factor to employers in
selecting a prepaid dental plan. All local efforts are supported by the
Company's corporate and regional dental directors.

      Utilize Multiple Distribution Channel Sales Efforts. The Company sells
its dental plans to employers primarily through agents, brokers and benefit
consultants. The Company employs a sales force of approximately 90 persons, 50
of whom focus on new group sales and 40 of whom are responsible for renewal
sales. In addition, the Company sells to third- party medical HMOs that offer
its prepaid dental plans as an additional benefit to members of the medical
HMOs. The Company believes that its multiple distribution channel approach is a
competitive advantage that provides the flexibility to meet the needs of the
full spectrum of customers.

      Emphasize an Integrated Approach to Customer Service. The Company
utilizes an integrated service approach involving local and regional
specialized service representatives to optimize its operations and product
strategy for each target market. Local offices are maintained in each of the
Company's key markets with specialized sales and service representatives for
employer groups and insurance brokers and with the local provider relations
representatives for dentists. Customer service is performed by member service
centers, accessed via an 800-telephone number, with the objective of providing
consistent, responsive and efficient member service.





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      Acquire Other Managed Dental Benefits Companies. The Company intends to
continue acquisition efforts to enter target markets and to expand its market
penetration in current markets. The acquisition of U.S. Dental Management, Inc.
("US Dental") in November 1995 resulted in approximately 165,000 additional
members, and the acquisition of Associated Health Plans, Inc. ("AHP") in
January 1996 resulted in approximately 220,000 additional members. In 1996, the
Company entered into agreements to acquire five managed dental benefits
companies and one dental referral plan having approximately 500,000 members in
the aggregate. These acquisitions are as follows:

<TABLE>
<CAPTION>
                                                                                                                      EFFECTIVE
                                                                      APPROXIMATE                 STATES OF            DATE OF
                                ACQUIRED COMPANY                       MEMBERSHIP             PREPAID OPERATION       OWNERSHIP
                                ----------------                       ----------             ------------------      ---------
                 <S>                                                  <C>                  <C>                         <C>
                 Independent Dental Plans, Inc ("Independent")        10,000 (managed)             Michigan            10/01/96
                 Association Dental Plan, Inc. ("Association")        60,000 (referral)         Not applicable         10/01/96
                 OraCare DPO, Inc. ("OraCare") . . . . . . . .        150,000(managed)     New Jersey, Pennsylvania    11/01/96
                 Kansas City Dental Care, Inc. ("KCDC")  . . .        90,000 (managed)         Kansas, Missouri        11/01/96
                 United Dental Care, Inc. ("United") . . . . .        90,000 (managed)             Oklahoma            01/01/97
                 International Dental Plans, Inc. ("IDP")  . .        100,000(managed)             Florida             06/01/97
</TABLE>

The Company currently has no agreement or understanding relating to any
acquisition of other companies.  (See Subsequent Event, No. 12 in the Notes to
Consolidated Financial Statements.)

BENEFITS PLANS

Managed Dental Plans

      The Company offers a full spectrum of managed dental plans ("Plans")
through numerous state-level subsidiaries. The Plans range from lower coverage,
higher co-payment plans with low premiums to higher coverage, low co-payment
plans with higher premiums.

      Under each of the Company's Plans, a premium is paid to the Company for
the type of coverage selected, making the employee and each participating
dependent a member of the Plan. Premium payments are made by the employer or by
the employee (usually by payroll deduction) with respect to employer offered
Plans or by the member directly. A significant portion of the Company's
revenues are derived from Plans in which the member pays the entire premium.
The remainder of the Plans are paid either entirely by the employer or
partially by the employer with the member contributing the balance of the
premium. Typically, the premiums charged are fixed for a 12-month contract,
except for certain multiple year contracts that are subject to limitations on
premium increases. Recently, the increase in the dental component of the
Consumer Price Index has averaged approximately 6% per year. The Company
estimates that its increases in premiums have averaged less than 3.5% per year
and that the prepaid premiums charged by the Company are typically 40% or more
below premiums for comparable indemnity dental plans. Consequently, the Company
believes that it is able to offer Plans that are not only less expensive than
the indemnity competition, but also have had lower increases than most dental
costs and indemnity premiums.

      Many of the Company's Plans permit each member to select his or her own
individual general dentist from the Company's dentist network at the time of
enrollment. The Company intends to incorporate this flexibility into all its
Plans. Each month, the Company pays a fixed payment, or capitation, to the
member's general dentist regardless of which services are rendered in the
month. In return for the capitation payment and the specified copayments, the
general dentist agrees to provide all covered services for the member. The
effect of this capitation structure is that the Company maintains a degree of
risk relating to family size since premiums are structured on a tiered basis,
generally not differentiating based on family size.

      Although the Plans vary, typically routine preventive and diagnostic care
(exams, x-rays, sealants, teeth cleanings) is provided at no charge or at a
small co-payment, while basic care (including fillings and extractions) and
specialty care (root canal therapy and gum disease, or periodontal services) is
provided at stipulated copayments. More





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      involved major care (such as crowns and bridges) is also provided at
copayments that are frequently lower than the member's cost of coinsurance
under a comparable indemnity insurance plan. Under many of the prepaid dental
plans offered by the Company, specialty dental care by specialty dentists is
made available to members. Specialty dentists are generally reimbursed by the
Company on a discounted, fee-for-service basis and are not reimbursed on a
capitated basis. Accordingly, the Company retains the risk for the payment of
specialty care benefits in such situations. In the event that the utilization
of specialty care benefits increases under the outstanding plans of the
Company, it could substantially adversely affect the profitability of the
Company. The Company believes that a specialty care referral program with
specialty dentists providing services at fixed copayments is necessary for the
cost management of dental care services. Orthodontic care is also available
under many of the Company's Plans.

Dual Choice Plans

      The Company is able to offer employers Plans providing both managed
dental benefits and traditional indemnity insurance coverage, commonly referred
to as dual choice plans. Such Plans allow an employee to select the most
suitable type of coverage at the beginning of the contract year by offering
each employee the choice of a prepaid plan utilizing the Company's dentist
network or traditional indemnity insurance coverage utilizing any dentist, but
usually at higher premiums and with lower coverage than the prepaid plan
alternative. A dual choice plan is particularly useful when some employees
reside in areas where the Company's dentist network is less developed or in
states where the Company is not yet licensed to offer managed dental benefits.

      The indemnity portion of the dual choice plans is made available either
through United Dental Care Insurance Company ("UDCIC"), the Company's
subsidiary that is licensed to offer dental indemnity insurance in all states
where the Company operates a prepaid dental plan, or through contractual
arrangements with third party insurers. An employee who selects the indemnity
insurance option pays a portion of the charges for covered services (or
coinsurance) after satisfying any deductible. Although coinsurance payments are
typically higher than the copayments charged for the same services under the
other Company Plans, the employee may select any dentist for dental services.
In certain states, the Company has contracted with PPOs for discounted fees for
services covered under the Company's indemnity insurance.

      Currently, the Company intends to offer its dual choice plans and its
point of service plan as an enhancement to the marketing of its core business
of prepaid dental benefits. As of December 31, 1997, the Company had
approximately 90,000 indemnity members through its dual-choice plans.

Third Party Plans

      The Company offers customized plans and services through contractual
arrangements with medical HMOs, including contracts under which the Company
acts as a dental benefits subcontractor to HMOs that have contracted with state
agencies to provide Medicaid benefits or that provide Medicare benefits. Under
these arrangements, the Company often provides only preventive and diagnostic
dental benefits but may also provide more comprehensive coverages, in each case
either on a "private-label" basis or directly through the Company's Plans. As
of December 31, 1997, the Company had 31 such arrangements, which accounted for
approximately 26% of its membership and approximately 12% of its 1997 revenues.
The Company believes its size and geographic scope give it a competitive
advantage in developing additional third party HMO relationships.

Point of Service Plan

      The Company has developed a point of service plan ("POS") that provides
members of the Company's prepaid dental plans the option of receiving dental
services from dentists outside the Company's dentist network on an indemnity
basis. The POS Plan allows the member to select the dentist of the member's
choice each time services are obtained. Although the Company charges higher
premiums under the POS Plan, the Company has somewhat greater risk exposure
than under its managed dental benefit plans. As of December 31, 1997, the
Company had approximately 81,000 POS members.





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<PAGE>   8
Dental Referral Plan

      Through its acquisition of Association Dental Plan, Inc., the Company
offers a referral plan. This plan is currently delivered through a network of
approximately 10,500 providers in 36 states. The referral plan contracts with
the dentists to provide dental services to referral plan members at certain
scheduled fee-for-service rates. No capitation payments are made to dentists.
Members of the referral plan pay a fixed fee per month for the member's ability
to access the Company's referral plan network. There are no claim forms or
deductibles and no pre-authorization is required. The Company bears no
financial risk or responsibility for dental services provided to members in
conjunction with its referral product.

DENTIST NETWORKS

      The Company designs its Plans and capitation programs to create dentist
networks of general and specialty dentists that the Company believes provide
the quality of care and convenience needed to attract and retain members. The
Company's strategy is to have one of the three largest dentist networks in each
of its key markets. As of December 31, 1997, the Company had provider contracts
with approximately 6,700 dentists. Included in this number are specialty
dentists representing the specialties of endodontics, oral surgery,
orthodontics, periodontics and pedodontics. Since specialty care is covered
under many of the Company's Plans, the Company has a specialty care referral
review program in order to manage the specialty care provided.

      The Company employs about 50 provider relations representatives, located
in local offices situated in its key markets, who recruit general and specialty
dentists, determine their qualifications for participation in the Company's
network, provide administrative training to the dentist's office staff and
assist the dentists with respect to participation in the Company's network. The
Company also employs or contracts with regional dental directors. Collectively,
the provider relations representatives and the dental directors are responsible
for establishing and monitoring the Company's quality review efforts, including
credentialing and re-credentialing for network participation, review of
specialty referrals and utilization review.

      Typically, the Company seeks established, private-practice dentists who
have capacity in their practice to see at least 200 of the Company's members as
new patients. Most general dentists and specialty dentists with whom the
Company contracts have small dental offices similar to those familiar to most
consumers. Both the dentist and the facility are reviewed in the Company's
credentialing process, which incudes verification of licensure and malpractice
coverage, as well as review of any actions that may have been taken by state
regulatory authorities. In addition to professional practice capabilities, the
Company also reviews the service amenities of the office, including available
parking, days and hours of operation, a patient recall system for routine,
preventive check-ups and radiographic and sterilization equipment and
procedures. Upon determining that a dentist meets the Company's requirements
for participation in the Company's dental network, the Company offers the
dentist a provider contract setting forth the capitation payments, copayments,
limitations and exclusions and other terms and conditions applicable to the
specific Plans in which such dentist will participate. Provider contracts are
typically non-exclusive and permit the Company or the dentist to terminate the
contract with 90 days prior written notice. The Company periodically reviews
its general and specialty dentists for continued compliance with Company
requirements for participation in the Company's dentist network.

      The Company believes that the advantages to a dentist who participates in
a managed dental benefits plan include: (i) increasing the size of the
dentist's practice as a result of selection of the dentist by plan members and
referrals from plan members; (ii) increasing practice profitability through
utilization of excess capacity to accept additional patients; (iii) generation
of predictable incremental cash flow from regular capitation payments; (iv)
retention of patients seeking managed dental plan participation; and (v)
reduction of paper work and collection risks associated with conventional
fee-for-service practices.

      The general and specialty dentists are independent from the Company,
providing service to members of the Company's Plans based upon dental practice
standards in the community and their contractual arrangements with the Company.
The Company requires that its network dentists maintain malpractice insurance
and satisfy quality service standards.





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<PAGE>   9
      In connection with the OraCare acquisition, the Company acquired a dental
management company that has entered into a management agreement with the
OraCare dental professional association pursuant to which the management
company will furnish the facilities and equipment and certain management
services to the dental professional association. In combination, the dental
management company and the dental professional association employed 144
employees at December 31, 1997, engaged in providing dental services to members
of the general public and members of the Company's prepaid dental plans.

      The Company's business strategy is dependent to a large extent upon the
Company's continued maintenance of a large network of quality general and
specialty dentists in each of the Company's markets. Generally, the Company and
network dentists enter into nonexclusive contracts that can be terminated by
either party with limited notice (generally 90 days). Primarily for such
reasons, the Company did not allocate for financial statement purposes any
portion of the consideration paid in its acquisitions to the dentist networks
of the acquired companies. The Company's business may be adversely affected if
the Company is unable to establish and maintain contracts with an adequate
number of dentists in any market.

MARKETS AND OPERATIONS

      The Company currently is licensed to sell its prepaid dental plans in 29
states, and its indemnity plan in 28 states including an acquisition that was
completed effective January 1, 1997, which added the state of Oklahoma where
the Company is licensed to sell both prepaid and indemnity plans. As of
December 31, 1997, approximately 79% of all UDC prepaid plan members were
located in seven states: Arizona, Texas, New Jersey, Colorado, Florida,
Missouri and Oklahoma. The following table shows the approximate number of
managed benefits members, indemnity members, referral plan members and total
members of the Company as of December 31, 1997.

<TABLE>
<CAPTION>
                                                MANAGED
                                                BENEFITS          INDEMNITY             TOTAL
                 STATE                          MEMBERS           MEMBERS              MEMBERS
                 -----                         --------           --------             -------
<S>                                           <C>                  <C>               <C>
Arizona . . . . . . . . . . . . . . .           408,485             7,860              416,345
Texas . . . . . . . . . . . . . . . .           309,789            19,879              329,668
New Jersey  . . . . . . . . . . . . .           175,885                --              175,885
Colorado  . . . . . . . . . . . . . .           166,611             9,113              175,724
Florida . . . . . . . . . . . . . . .           137,124                --              137,124
Missouri  . . . . . . . . . . . . . .           113,544             1,261              114,805
Oklahoma  . . . . . . . . . . . . . .           107,501             2,353              109,854
New Mexico  . . . . . . . . . . . . .            81,446             2,741               84,187
Ohio  . . . . . . . . . . . . . . . .            73,233             1,555               74,788
California  . . . . . . . . . . . . .            70,441            14,807               85,248
Washington  . . . . . . . . . . . . .            36,136             7,567               43,703
Utah  . . . . . . . . . . . . . . . .            30,447            12,688               43,135
Illinois  . . . . . . . . . . . . . .            22,539             7,632               30,171
Michigan  . . . . . . . . . . . . . .            16,181                --               16,181
Nevada  . . . . . . . . . . . . . . .            12,163               891               13,054
Oregon  . . . . . . . . . . . . . . .            11,640             1,635               13,275
Nebraska  . . . . . . . . . . . . . .            11,583                --               11,583
Other States  . . . . . . . . . . . .             5,209               456                5,665
Referral members  . . . . . . . . . .                --                --               84,689
                                              ---------           -------            ---------
     TOTALS                                   1,789,957            90,438            1,965,084
                                              =========           =======            =========
</TABLE>


      The acquisition of US Dental added approximately 163,000 members located
in four states where the Company already operated prepaid plans. The
acquisition of AHP added approximately 220,000 members, all of whom were
located in Arizona. The acquisition of Independent added approximately 10,000
members, all of whom were located in Michigan. The acquisition of Association
added approximately 60,000 referral members spread across the United States.
The acquisition of OraCare, effective November 1, 1996, added approximately
150,000 prepaid members in New Jersey and Pennsylvania. The KCDC acquisition,
also effective November 1, 1996, added approximately 90,000 prepaid members in
Kansas and Missouri. The United acquisition, effective January 1, 1997, added
approximately 90,000 prepaid and indemnity members. The IDP acquisition,
effective June 1, 1997, added approximately 100,000 prepaid members.





                                       9
<PAGE>   10
      The Company sells its Plans to small, single-market employers and large,
multi-state employers, as well as to individuals. No single employer group
accounted for more than 5.8% of the Company's revenues for the year ended
December 31, 1997.

      The Company currently maintains its regional customer service centers in
Phoenix, Arizona and Dallas, Texas. In addition, the Company maintains 28 local
offices with group sales and service representatives and provider relations
representatives in its key markets having a significant concentration of
members.

SALES

      The Company sells its Plans primarily to employers through agents,
brokers and benefit consultants. The Company employs a new group sales force of
approximately 50 persons. The sales force primarily works with agents, brokers
and consultants to gain new contracts with employer groups. Additionally, the
new group sales force makes direct sales to medium and large employers who do
not use benefits advisors. Approximately three-fourths of the Company's
membership is the result of sales through brokers who receive commissions based
on premiums received by the Company from such sales. In addition, the Company
sells to medical HMOs to offer the Company's Plans as an additional benefit to
HMO members. The Company believes its multiple distribution channel approach is
a competitive advantage that provides the flexibility to meet the needs of the
full spectrum of customers.

      The Company's direct sales representatives are compensated by a
combination of base salary and commissions based upon membership growth. The
Company has implemented a direct sales effort in all of its major markets.

      The Company has actively pursued alliances with HMOs to offer its Plans
to HMO members either on a private label basis or as a separate benefit and
currently has 31 such agreements in place. The Company believes that, as HMOs
seek to differentiate their services, many will consider contracting for dental
benefit plans and that the Company has a competitive advantage in arranging
alliances with HMOs as a result of the Company's experience, size and
geographic scope.

      Sales to employers, regardless of distribution channel, involve selling
both the employer and its employees. Typically, the employee has the
opportunity to select the Company's Plans during an annual open enrollment
period. Frequently, representatives of the Company have the opportunity to make
presentations directly to the employees, while, in other cases, the employer
distributes the Company's marketing materials that explain the features and
benefits of the Company's Plan. The Company stresses: (i) the quality and size
of its dentist networks; (ii) the comprehensiveness of its Plan, including
specialty care coverage; (iii) its integrated customer service approach in
responding to member inquiries or complaints, including requests to change
general dentists; and (iv) the value of the Plan in relation to Plan premiums
and copayments.

CUSTOMER SERVICE

      At December 31, 1997, the Company employed 107 group sales and service
representatives, 53 provider relations representatives and 83 customer service
representatives with primary responsibility to service the needs of its groups
and brokers, general and specialty network dentists and members, respectively.
The Company's group sales and service representatives and provider relations
representatives are based at the local market level, while the Company's
customer service representatives are located at two regional customer service
centers in Arizona and Texas. Inquiries or complaints from members are handled
over the telephone via 800-telephone numbers by the regional customer service
representatives who provide consistent, responsive and efficient member
services. The Company believes this integrated approach enables it to respond
quickly and personally to group, broker and dentist issues where direct
interaction is critical.





                                       10
<PAGE>   11
MANAGEMENT INFORMATION SYSTEMS

      Most administrative, accounting, finance and information services are
provided from the Company's administrative offices in Dallas, Texas. The
Company maintains certain financial and administrative functions in California
and in the non-integrated acquisitions. The Company believes that, in the
managed dental benefits industry, an advanced information system can be a
significant competitive advantage. Accordingly, in 1995, the Company entered
into a contract to acquire an advanced software program specifically designed
for the managed dental benefits industry and, subsequently, has acquired the
necessary hardware to fully utilize such software. The Company believes its new
information system will significantly enhance the Company's capabilities to
provide customer service, analyze provider utilization, create opportunities to
take advantage of market conditions and support new product development.

      All of the Company's business is in the process of being converted to the
new information system. The conversion of the internally developed systems
formerly in use by International Dental Health, Inc. ("IDH") and AHP prior to
their respective acquisitions by the Company has been completed. The Company's
internally developed system and the systems used by other acquired entities are
in the process of being converted. Until the conversion is completed, the
Company believes its system and the systems of the acquired entities are
adequate for the Company's current needs. The Company expects that all of these
systems will be fully converted to the new system by the end of 1998.

      The Company has an administrative services agreement with R. E.
Harrington, Inc. ("Harrington") pursuant to which Harrington provides indemnity
claim administrative services to the Company. The Company pays Harrington 5.5%
of all claims paid by Harrington, which percentage may be reduced if Harrington
does not meet performance guarantees. The term of this agreement is from
January 1, 1997 to December 31, 1999, but the Company may terminate the
contract with 90-day advance written notice and the payment of a contractual
penalty.

US DENTAL ACQUISITION

      The Company entered into a definitive agreement dated July 19, 1995, to
purchase all of the outstanding capital stock of US Dental, a managed dental
benefits company headquartered in Phoenix, Arizona. The US Dental acquisition
closed on November 27, 1995. US Dental operated prepaid dental plans in
Arizona, Colorado, Nebraska and New Mexico, and administered a prepaid dental
plan owned by a third party in Nevada. The Company also had operations in each
state where US Dental operated prepaid dental plans.

      US Dental had revenues of approximately $13.3 million and $13.0 million
for the years ended December 31, 1995 and 1994, respectively. Revenue of $2.2
million was included in the UDC consolidated financial statements for its two
months of ownership in 1995. The prepaid dental plans offered by US Dental are
similar to the Company's Plans.

      The consideration given by the Company in connection with the US Dental
acquisition was $12.6 million, which included the present value of amounts
payable under consulting agreements and non-competition agreements entered into
with each of the two former stockholders of US Dental. Each consulting
agreement has a term of 50 months and provides for $522,264 in the aggregate to
be paid in 48 equal monthly installments commencing the third month after the
closing. Each non-competition agreement has a three-year term and provides for
$55,991 in the aggregate to be paid in 36 equal monthly installments commencing
the month of closing. In addition, at closing, US Dental paid in full loans
owed to the two former stockholders of US Dental in the aggregate principal
amount of $200,000 and a bank loan in the principal amount of $50,000.
Approximately $10.3 million of the purchase price was in the form of a
promissory note due January 18, 1996.

      In allocating, for financial statement purposes, the consideration to be
paid by it in connection with the US Dental acquisition, the Company applied
the same principles that it applied in previous acquisitions. Approximately
$11.7 million of such consideration was allocated to goodwill, approximately
$0.2 million was allocated to the non-competition and consulting agreements and
the balance of such consideration was allocated to tangible assets. No portion
of such consideration was allocated to other intangibles such as the dentist
networks and subscriber contracts.

ASSOCIATED ACQUISITION

      The Company executed a definitive stock purchase agreement dated December
14, 1995, to acquire Associated Health Plans, Inc. ("AHP"), a managed dental
benefits company, and Associated Companies, Inc. ("ACI"), the management
company for AHP (collectively "Associated"). The acquisition became effective
as of the close of business on January 31, 1996.





                                       11
<PAGE>   12
      Associated, headquartered in Tucson, Arizona, operated managed dental
benefit plans in Arizona, providing dental benefits to over 220,000 members.
AHP had revenues of approximately $14.2 million and $12.6 million for the years
ended December 31, 1995 and 1994, respectively.

      The consideration given by the Company in connection with the Associated
acquisition was $18.5 million, which included the present value of amounts
payable under non-competition agreements and other arrangements entered into
with four former shareholders of Associated which have up to four-year terms
payable as services are rendered, commencing February 1996.

      In allocating, for financial statement purposes, the consideration to be
paid by it in connection with the Associated acquisition, the Company will
apply the same principles that it applied in previous acquisitions.
Approximately $17.6 million of such consideration was allocated to goodwill,
approximately $0.6 million was allocated to the non-competition agreements and
the balance of such consideration was allocated to tangible assets.

INDEPENDENT ACQUISITION

      On June 28, 1996, the Company entered into an agreement to acquire
Independent Dental Plan, Inc. ("Independent"), which operates a prepaid dental
plan in Michigan having approximately 10,000 members. Independent had revenues
of approximately $1.7 million for the year ended December 31, 1995 and $1.3
million for the nine months ended September 30, 1996. The Independent
acquisition was completed effective October 1, 1996. The consideration paid by
the Company in connection with the Independent acquisition was approximately
$1.3 million. The amount of $1.5 million was allocated to goodwill for
financial statement purposes. In addition, in connection with the Independent
acquisition, the Company entered into employment agreements with two of the
operating officers of Independent.

ORACARE ACQUISITION

      On September 5, 1996, the Company entered into agreements to acquire
OraCare DPO, Inc. ("OraCare"), a New Jersey prepaid dental plan having
approximately 150,000 members, and to acquire a dental management company
affiliated with OraCare. Approximately 75.6% of the OraCare's members were
Medicaid members of medical HMOs that contracted with OraCare to provide the
dental benefits under their plans. Members of one medical HMO represented
approximately 34.4% of OraCare's total membership. In addition, as a part of
the acquisition, the Company agreed to cause an affiliate to acquire a dental
professional association owned by the majority stockholder of OraCare. The
affiliated management company provides management services to both the prepaid
dental plan and the dental professional association which, as of December 31,
1996, operated nine dental clinics servicing both members of the OraCare
prepaid dental plan and other third-party prepaid and fee-for-service patients.
In connection with the OraCare acquisition, the Company entered into employment
agreements with two former OraCare stockholders as operating officers of the
OraCare management company and two former stockholders as dental directors and
dental providers of the dental professional association. The acquisition became
effective November 1, 1996.

      The OraCare entities had combined revenues of $9.2 million and $7.6
million for the years ended December 31, 1995 and 1994, respectively, and $12.0
million for the nine months ended September 30, 1996. The consideration paid by
the Company in connection with the OraCare acquisition was $30.5 million plus
certain contingent payments up to a maximum aggregate amount of $6.0 million
based on the financial performance of the Company in the states of New Jersey
and Pennsylvania in 1997 and 1998. Approximately $31.5 million of the initial
consideration in the OraCare acquisition was allocated to goodwill for
financial statement purposes. Approximately $24.9 million of the purchase price
was in the form of a promissory note due January 2, 1997. This promissory note
was paid in full in January 1997.

      In response to certain regulations in New Jersey, the capital stock of
the OraCare dental professional association ("OraCare PA") was acquired by a
licensed New Jersey dentist designated by the Company. The laws of New Jersey
where the dental clinics are located prohibit dentists from sharing fees with
non-dentists and prohibits non-dentist entities from practicing dentistry.
Although the Company believes the operations of the dental management company
are and will be in material compliance with existing applicable laws, the
structure of the management relationship between the Company and the dentist
has not been the subject of any state regulatory interpretations. Prior to this
acquisition, the Company had not previously engaged in the dental practice
management business.





                                       12
<PAGE>   13
      Because of corporate practice of medicine laws in the state of New
Jersey, where OraCare operates, the Company does not own the OraCare PA, but,
instead, has the contractual right to designate, in its sole discretion and at
any time, the licensed dentist who is the owner of the OraCare PA's capital
stock at a nominal cost ("Nominee Arrangement"). In addition, the Company has
entered into an exclusive long-term management service agreement with the
OraCare PA. Through this agreement, the Company has exclusive authority over
decision making relating to all major ongoing operations of the OraCare PA with
the exception of the professional aspects of the practice of dentistry as
required by New Jersey state law. Under the management service agreement, the
Company establishes annual operating and capital budgets for the OraCare PA and
compensation guidelines for the licensed dental professionals. The management
service agreement has an initial term of ten years with options for additional
ten-year terms thereafter. Management fees are based upon billings of the
affiliated practice less the amounts necessary to pay professional compensation
and other professional expenses, and these fees are meant to compensate the
Company for expenses incurred in providing covered services plus all profits
and losses. The Company's financial interest in the OraCare PA is unilaterally
saleable and transferable by the Company and fluctuates based upon the actual
performance of the operations of the OraCare PA.

      Through the Nominee Arrangement, the Company has a significant long-term
financial interest in the OraCare PA and, therefore, according to Emerging
Issues Task Force Issue No. 97-2, "Application of FASB Statement 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," must consolidate the
results of the OraCare PA with those of the Company. Because the Company must
present consolidated financial statements, net patient service revenues are
presented in the accompanying statement of operations.

KANSAS CITY DENTAL CARE ACQUISITION

      On September 11, 1996, the Company entered into an agreement to acquire
Kansas City Dental Care, Inc. ("KCDC"), which operates prepaid dental plans in
Missouri and Kansas having approximately 90,000 members in the aggregate. KCDC
had revenues of approximately $8.4 million for the year ended December 31, 1995
and approximately $7.2 million for the nine months ended September 30, 1996.
The consideration paid by the Company in connection with the KCDC acquisition
is $12.5 million plus a contingent payment up to a maximum of $2.0 million
based on the financial performance of the Company in the states of Missouri and
Kansas in the second year after completion of the acquisition. The acquisition
became effective November 1, 1996. In 1997, the Company paid $625,000 of
contingent payments in connection with the acquisition agreement. Approximately
$13.3 million of the consideration paid in the KCDC acquisition was allocated
to goodwill for financial statement purposes. In connection with the KCDC
acquisition, the Company entered into three-year employment agreements with two
management officers of KCDC, one of whom was a stockholder and officer of KCDC
and the other of whom was the current chief executive officer (and stock option
holder) of KCDC. The company previously operated prepaid dental plans in both
states.

UICI ACQUISITIONS

      On September 10, 1996, the Company entered into definitive agreements to
acquire the following companies, one of which was wholly owned by UICI,
formerly known as United Insurance Companies, Inc., and one of which was
majority owned by UICI: (i) United Dental Care, Inc. ("United") which, through
an indemnity insurance subsidiary, operates a prepaid dental plan in Oklahoma
having approximately 90,000 members; and (ii) International Dental Plans, Inc.
("IDP"), which operates a prepaid dental plan in Florida having approximately
100,000 members. On the same date, the Company agreed to acquire Association
Dental Plan, Inc. ("Association"), a wholly owned subsidiary of UICI that
operates a multi-state dental referral plan having approximately 60,000
members. United, IDP and Association had combined revenues of approximately
$16.6 million for the year ended December 31, 1995 and $13.1 million for the
nine months ended September 30, 1996. The acquisition of Association was
completed effective October 1, 1996, the acquisition of United became effective
January 1, 1997 and the acquisition of IDP became effective June 1, 1997.

      The consideration paid by the Company in connection with the UICI
acquisition was approximately $15.8 million. In connection with the United
acquisition, the Company entered into four-year employment agreements with two
employees of United.





                                       13
<PAGE>   14
ASSOCIATION ACQUISITION

      On October 1, 1996, the Company completed the acquisition of all the
outstanding common stock of Association Dental Plan, Inc. ("Association") for
$3.2 million in cash. In the Association acquisition, the Company and two
marketing entities affiliated with UICI having approximately 5,000 dedicated
agents entered into a marketing agreement pursuant to which such agents will
market a multi-state dental referral plan having approximately 80,000 members.
Approximately $3.5 million of the initial consideration in the Association
acquisition was allocated to goodwill for financial statement purposes.

UNITED ACQUISITION

      Effective January 1, 1997, the Company completed the acquisition of all
of the outstanding common stock of United Dental Care, Inc., an Oklahoma
corporation, ("United") for $7.6 million in cash at closing, financed through
internal funds.

      The acquisition has been accounted for as a purchase and the net assets
and results of operations of United have been included in the Company's
consolidated financial statements beginning January 1, 1997. The purchase price
has been allocated to assets and liabilities of United based on their estimated
respective fair values. The purchase price exceeded the fair value of United's
assets by $5.6 million, all of which was recorded as goodwill. The Company has
not allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. As of the purchase date, an additional liability was accrued in the
amount of $525,000 for the termination or relocation of employees and other
exit costs of the acquired company.

INTERNATIONAL DENTAL PLANS ACQUISITION

      Effective June 1, 1997, the Company completed the acquisition of all the
common stock of International Dental Plans, Inc. ("IDP") for $5.0 million in
cash at closing, financed through internal funds.

      The acquisition has been accounted for as a purchase and the net assets
and results of operations of IDP have been included in the Company's
consolidated financial statements beginning June 1, 1997. The purchase price
has been allocated to assets and liabilities of IDP based on their estimated
respective fair values. The purchase price exceeded the fair value of IDP's
assets by $4.7, million all of which was recorded as goodwill. The Company has
not allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. Assets acquired and liabilities assumed totaled $1.8 million and
$1.0 million, respectively. As of the purchase date, an additional liability
was accrued in the amount of $525,000 for the termination or relocation of
employees and other exit costs of the acquired company.

COMPETITION

      There are numerous competitors wherever the Company conducts business,
creating a highly competitive marketplace. The Company's competitors include:
(i) large insurance companies with the capability to offer both managed dental
benefits and traditional dental indemnity insurance; (ii) HMOs that also offer
dental benefits; (iii) self-funded employer programs; (iv) dental PPOs; (v)
discounted, fee-for-service membership plans; and (vi) other local or regional
companies offering prepaid dental plans. The Company believes that the
competition from all of such sources will continue to increase in the future
and that insurance companies and HMOs in particular will continue to seek to
enter the managed dental benefits business and expand their dental care
markets. Many of the Company's competitors are better known to the public and
have substantially greater financial and other resources than those of the
Company.

      The Company believes the key factors in selecting a particular managed
dental benefits company include: (i) the comprehensiveness and range of prepaid
plans offered; (ii) the quality, accessibility and convenience of dentist
networks; (iii) the responsiveness of customer service; and (iv) the premium
charged. In all of the Company's markets, other prepaid dental plans and
insurance companies compete aggressively on all of these factors, particularly
in situations where the selection is through a competitive bidding process. In
recent years, the Company has seen increasing competition coming from all
competitive sectors and the Company anticipates that this trend will continue.
Certain markets also have intense price competition that could occur in all
markets in the future. Price considerations have been a significant competitive
factor in the past and the Company believes pricing will continue to be a
significant competitive factor in the future, especially with respect to
contracts awarded on the basis of competitive bidding.





                                       14
<PAGE>   15
      Larger, national indemnity insurance companies that offer both prepaid
and indemnity dental coverage may have a competitive advantage over independent
dental plans due to availability of multiple product lines, established
business relationships, better name recognition and greater financial and
information systems resources. The Company believes that it can effectively
compete with insurance companies due to the specialized focus of its management
team and resources directed towards developing competitive dental benefits
plans at generally lower premiums.

      While some medical HMOs offer their own prepaid dental plans, others
contract with independent managed dental plans for those services. The Company
believes that it can compete with HMOs that offer dental benefits and pursue
opportunities to form alliances with HMOs to offer dental benefits to HMO
members.

GOVERNMENT REGULATION

General

      State insurance laws and other governmental regulations establish various
licensing, operational, financial and other requirements relating to the
prepaid dental plan business. State insurance departments and other regulatory
agencies are typically empowered to interpret such laws and promulgate
regulations applicable to the prepaid dental plan business. The laws and
regulations relating to the health care industry in general, and prepaid dental
plans specifically, are rapidly developing and have been the subject of
numerous past and present proposals which, if adopted, could adversely affect
the Company's business. Such proposals have included proposals that would
require the Company to admit "any willing provider" to its dental networks,
create mandatory minimum capitation payments to dental providers and specify
minimum loss ratios or mandate schedules of benefits. In addition, the
Company's insurance company subsidiary is subject to numerous laws and
regulations applicable to insurance companies generally. The Company is unable
to predict the extent to which changes to existing laws and regulations will be
adopted or the effect that any such changes may have on the Company's business.

      The Company's ability to conduct its business in additional states is
subject to regulatory approvals required in connection with either acquisitions
of existing prepaid dental plan businesses or the application of the Company to
conduct its existing business in additional states. Approvals to acquire
another licensed prepaid dental plan business often require six months or
longer to obtain, while licenses and approvals necessary to commence operations
of the Company's existing business in an additional state can require two years
or longer to obtain. In addition, no assurance can be given that the Company's
applications for any such licenses or approvals will be granted, in which case
the Company's plans to expand in additional states would be adversely affected.
In circumstances where the Company is unable to obtain licenses to conduct its
business in a particular state or pending the grant of a license, the Company
would be required to conduct business through contractual arrangements with a
licensed insurance company or a licensed HMO, which arrangements are typically
less advantageous to the Company than its independent offering of its prepaid
dental plans. See "--Business Strategy."

      In addition to regulatory approvals for acquisitions and additional
licenses, various regulatory approvals and filing requirements may apply to
ongoing aspects of the Company's business such as approvals for benefits plans
offered, premium rates and certain contractual relationships with HMOs and
insurance companies. If the Company fails to maintain compliance with all
material regulations, regulatory authorities are empowered to take certain
actions against the Company such as license revocations that could adversely
affect the Company's ability to conduct business.

United Dental Care Insurance Company

      UDCIC is licensed to conduct business in 27 states. UDCIC is a
traditional indemnity insurance carrier and therefore assumes underwriting
risk. Currently, UDCIC provides the indemnity portion of some of the Company's
dual choice and point of service plans. UDCIC has not issued any other form of
insurance, and its maximum coverage under each dental insurance policy is
generally $1,000.





                                       15
<PAGE>   16
      UDCIC is regulated by the Arizona Department of Insurance and the
departments of insurance of the other states in which UDCIC is licensed to
transact insurance business. The Company's ability to expand UDCIC's insurance
operations into states in which UDCIC is not currently licensed is dependent,
for the most part on prior regulatory approval, which must be sought from the
department of insurance in each state in which the Company is applying. Such
reviews may take from six months to two years or more. Insurance companies are
heavily regulated and require significant cash deposits for capital and
surplus. The regulations of the various state insurance departments include
specific requirements with regard to such matters as minimum capital and
surplus, permitted investments, advertising, policy forms and claims processing
requirements.

      In December 1992, the National Association of Insurance Commissioners
approved risk-based capital ("RBC") standards for life and/or health insurance
companies, as well as a Model Act (the "RBC Model Act") to apply to such
standards at the state level. The RBC Model Act requires an insurance company
to submit an annual RBC report which compares its total adjusted capital with
its risk-based capital as calculated by an RBC formula which takes into account
the risk characteristics of the company's investments and products. The RBC
formula includes capital requirements for four categories or risk: asset risk,
insurance risk, interest rate risk and business risk, with capital requirements
increasing for higher levels of risk. There are four levels of progressively
more intense regulatory action against insurance companies whose total adjusted
capital does not meet the RBC standards, starting with the company being
required to submit a plan to improve its capitalization and ending with the
state insurance department placing the company under regulatory control. The
State of Arizona adopted the RBC Model Act effective January 1, 1996. At
December 31, 1997, UDCIC's total adjusted capital was $5.8 million, or 128.0%,
of the "company action level" of the RBC standard of $4.5 million. If the
capital and surplus of UDCIC do not exceed the "company action level" at
December 31, 1998, UDCIC will be required to submit a business plan to the
state regulators. The Company does not believe that compliance with the RBC
standards will adversely affect the Company's business since the Company
estimates that UDCIC will be able to satisfy such standards without the need
for significant capital contributions by the Company. In addition, the Company
does not consider that compliance with the RBC standards will adversely affect
the ability of the Company to meet its anticipated operating cash requirements.

Medicare/Medicaid Programs

      The Company contracts with certain medical HMOs that provide health
services to members under the Medicare or Medicaid programs administered by
certain state agencies. The Company provides the dental benefits coverage under
such plans of the medical HMOs. The medical HMOs receive reimbursement under
either the Medicare or Medicaid programs for the benefits provided. As a
result, the availability of such reimbursement or decreases in the level of
reimbursement or changes in regulatory requirements could have a significant
impact on the decisions of the medical HMOs to continue to offer dental
benefits. In addition, in the event that the contracts between such medical
HMOs and the state agencies are terminated or not renewed, such termination or
nonrenewal would also terminate the Company's contract with such medical HMO as
a provider for dental benefits.

EMPLOYEES

      At December 31, 1997, the Company employed approximately 660 employees,
of which about 100 were sales personnel, 80 were customer service personnel, 60
were group sales and service representatives, 60 were provider relations
personnel, 210 were administrative personnel and 150 were part of the dental
professional association and the dental management company in New Jersey. The
Company has no collective bargaining agreements with any unions and believes
that its overall relations with its employees are good.

INSURANCE

      The Company carries general liability, comprehensive property damage,
workers' compensation, professional liability and other insurance coverages
that management considers adequate for the protection of the Company's assets
and operations. There can be no assurance, however, that the coverage limits of
such policies will be adequate. A successful claim against the Company in
excess of its insurance coverage could have a material adverse effect on the
Company.





                                       16
<PAGE>   17
ITEM 2.  PROPERTIES

      The Company leases 45,889 square feet of office space for its corporate
offices in Dallas, Texas under a lease expiring March 31, 2002. In addition,
the Company leases an aggregate of approximately 97,066 square feet of space
for its other regional and local offices with lease terms expiring at various
times through July 31, 2002.

ITEM 3.  LEGAL PROCEEDINGS

      The Company is, and may be in the future, party to litigation arising in
the ordinary course of its business. The Company carries insurance protecting
it against liability arising out of, among other things, the provision of
dental care services by contracting dentists, who are not employees or agents
of the Company. Claims against the Company arising out of the provision of
dental care services by contracting dentists historically have been rare, but
there can be no assurance that the Company will not become involved in such
litigation or otherwise become subject to claims relating to its contracting
dentists in the future. While the Company has no significant pending claims,
there can be no assurance that the Company's insurance coverage will be
adequate to cover all liabilities arising out of such claims or that any such
claims will be covered by the Company's insurance. The Company is not currently
aware of any claims which are not covered by insurance and which may have a
material adverse impact upon the financial condition of the Company.

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

      There were no matters submitted to a vote of the security holders of the
Company during the fourth quarter of 1997.

                                    PART II

ITEM 5.  MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

      On September 22, 1995, the common stock of the Company began trading on
the Nasdaq National Market tier of the Nasdaq Stock Market under the symbol
"UDCI."

      The following table sets forth the range of quarterly high and low
closing sale prices on the Nasdaq Stock Market for the periods indicated.


<TABLE>
<CAPTION>
                                                 COMMON STOCK CLOSING PRICE
                                                 ---------------------------
               TIME PERIOD                           HIGH           LOW
               -----------                           ----           ---
 <S>                                                 <C>              <C>
January 1 - March 31, 1996 ......................  $  43.750     $  34.250
April 1 - June 30, 1996 .........................  $  44.250     $  37.250
July 1 - September 30, 1996 .....................  $  45.750     $  32.750
October 1 - December 31, 1996 ...................  $  36.250     $  25.000
January 1 - March 31, 1997 ......................  $  30.625     $  27.000
April 1 - June 30, 1997 .........................  $  28.125     $  14.375
July 1 - September 30, 1997 .....................  $  18.375     $  14.375
October 1 - December 31,1997 ....................  $  15.500     $  10.625
</TABLE>

      The last reported sale price per share of common stock as reported by the
Nasdaq National Market on March 20, 1998 was $17.6875. As of the date of this
report, the Company had 8,950,676 shares of common stock outstanding. As of
March 20, 1998, the Company estimates that there were approximately 1,900
owners of the Company's common stock, including approximately 200 holders of
record and approximately 1,700 persons or entities that hold common stock in
nominee name.

      The Company has not paid or declared any cash dividends on its common
stock since its inception. The Company currently intends to retain all future
earnings for use in the expansion and operation of its business. In addition,
future borrowings may limit the Company's ability to pay cash dividends. Any
payments of cash dividends in the future will depend upon the financial
condition, capital requirements and earnings of the Company, limitations on
dividend payments by subsidiaries of the Company under applicable state laws
and such other factors as the board of directors may deem relevant.





                                       17
<PAGE>   18
ITEM 6.  SELECTED CONSOLIDATED FINANCIAL DATA

      The Company's selected financial data presented below for the years ended
December 31, 1995, 1996 and 1997 and at December 31, 1996 and 1997, are derived
from the audited consolidated financial statements of the Company. The selected
financial data presented below for the Company for each of the years ended
December 31, 1993 and 1994 and at December 31, 1993, 1994 and 1995 are derived
from the audited consolidated financial statements of the Company not included
herein. This data is not necessarily indicative of the Company's future
performance. The selected financial data (in thousands, except for per share
data) set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the related Notes thereto
included herein:

<TABLE>
<CAPTION>
                                                                             Year Ended December 31,
                                                                --------------------------------------------------
                                                                 1993      1994(1)    1995(2)    1996(3)   1997 (4)
                                                                -------   -------    -------    -------   --------
<S>                                                            <C>        <C>       <C>        <C>        <C>
      STATEMENT OF OPERATIONS DATA:
         Revenues:
          Managed benefits  . . . . . . . . . . . . . . . . .   $16,805   $31,683    $62,004    $96,786   $150,951
          Indemnity . . . . . . . . . . . . . . . . . . . . .        --     5,514     16,622     15,143     18,157
          Dental centers. . . . . . . . . . . . . . . . . . .        --        --         --        820      4,857
          Interest  . . . . . . . . . . . . . . . . . . . . .       173       178        603        899        704
                                                                -------   -------    -------    -------   --------
               Total revenues . . . . . . . . . . . . . . . .    16,978    37,375     79,229    113,648    174,699
        Dental services expense:
          Managed benefits  . . . . . . . . . . . . . . . . .     7,283    15,559     33,068     56,845     97,324
          Indemnity . . . . . . . . . . . . . . . . . . . . .        --     4,567     13,682     10,590     18,504
          Dental centers  . . . . . . . . . . . . . . . . . .        --        --         --        216      7,805
                                                                -------   -------    -------    -------   --------
                Total dental services expense                     7,283    20,126     46,750     67,651    123,633

        Sales and marketing . . . . . . . . . . . . . . . . .     3,025     5,756      9,637     12,587     18,847
        General and administrative  . . . . . . . . . . . . .     3,632     7,062     14,785     18,612     29,932
        Depreciation and amortization . . . . . . . . . . . .       159       541      1,190      2,267      5,050
        Acquisition-related expenses  . . . . . . . . . . . .        --       178         --         --         --
        Interest expense  . . . . . . . . . . . . . . . . . .        --       360      1,005        536        571
                                                                -------   -------    -------    -------   --------
                Total expenses                                   14,099    34,023     73,367    101,653    178,033
        Income (loss) before provision for federal
         income taxes, cumulative effect of a change
         in accounting principle and extraordinary
         charge . . . . . . . . . . . . . . . . . . . . . . .     2,879     3,352      5,862     11,995     (3,334)
        Provision (benefit) for federal income taxes                934     1,256      2,131      4,438       (487)
                                                                -------   -------    -------    -------   --------
        Net income (loss) before cumulative effect of
         a change in accounting principle and
         extraordinary charge . . . . . . . . . . . . . . . .     1,945     2,096      3,731      7,557     (2,847)
        Cumulative effect of a change in accounting
         principle  . . . . . . . . . . . . . . . . . . . . .        44        --         --         --         --
        Extraordinary charge  . . . . . . . . . . . . . . . .        --        --        142         --         --
                                                                -------   -------    -------    -------   --------
        Net income (loss) before preferred dividends. . . . .   $ 1,901   $ 2,096    $ 3,589    $ 7,557   $ (2,847)
                                                                =======   =======    =======    =======   ========
      PER SHARE AMOUNTS:
        Net income (loss) before extraordinary charge
          Basic . . . . . . . . . . . . . . . . . . . . . . .   $  0.52   $  0.51    $  0.74    $  1.04   $  (0.32)
          Diluted . . . . . . . . . . . . . . . . . . . . . .   $  0.40   $  0.44    $  0.68    $  1.00   $  (0.32)

         Extraordinary charge per share, net of tax
          Basic . . . . . . . . . . . . . . . . . . . . . . .        --        --    $ (0.03)        --         --
          Diluted . . . . . . . . . . . . . . . . . . . . . .        --        --    $ (0.03)        --         --

        Net income (loss) per common share
          Basic . . . . . . . . . . . . . . . . . . . . . . .   $  0.52   $  0.51    $  0.71    $  1.04   $  (0.32)
          Diluted . . . . . . . . . . . . . . . . . . . . . .   $  0.40   $  0.44    $  0.66    $  1.00   $  (0.32)

      WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (000s)
        Basic . . . . . . . . . . . . . . . . . . . . . . . .     3,645     4,126      5,051      7,256      8,935
        Diluted . . . . . . . . . . . . . . . . . . . . . . .     4,662     4,717      5,449      7,543      8,935


                                                                 1993      1994       1995       1996       1997
                                                                -------   -------    -------    -------   --------
      Balance Sheet Data:
         Working capital. . . . . . . . . . . . . . . . . . .   $ 3,907   $ 1,365    $30,892    $25,420   $  3,288
         Total assets . . . . . . . . . . . . . . . . . . . .     7,283    31,404     86,588    165,672    151,440
         Total debt including current portion . . . . . . . .      ----    14,558     15,182     28,948      9,384
         Stockholders' equity . . . . . . . . . . . . . . . .     6,730     8,947     61,600    125,495    123,048
</TABLE>





                                       18
<PAGE>   19
------------------------
(1) Results of operations for IDH after August 31, 1994 are included in
    historical results of operations for the Company on a consolidated basis
    for the years ended December 31, 1994, 1995, 1996 and 1997.  See the
    Company's Consolidated Financial Statements and the Notes thereto.
(2) Results of operations for US Dental after October 31, 1995 are included in
    historical results of operations for the Company on a consolidated basis
    for the years ended December 31, 1995, 1996 and 1997.  See the Company's
    Consolidated Financial Statements and the Notes thereto.
(3) Results of operations for AHP after January 31, 1996, Independent and
    Association after September 30, 1996 and for KCDC and OraCare after October
    31, 1996 are included in historical results of operations for the Company
    on a consolidated basis for the years ended December 31, 1996 and 1997.
    See the Company's Consolidated Financial Statements and the Notes thereto.
(4) Results of operations for United after December 31, 1996 and for IDP after
    May 31, 1997 are included in historical results of operations for the year
    ended December 31, 1997.  See the company's Consolidated Financial
    statements and the Notes thereto.





                                       19
<PAGE>   20
ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS
         OF OPERATIONS

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

      Certain written and oral statements made or incorporated by reference
from time to time by the Company or its representatives in this report, other
reports, filings with the Securities and Exchange Commission, (the
"Commission"), press releases, conferences, or otherwise, are "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements include, without limitation any statement that may
predict, forecast, indicate, or imply future results, performance, or
achievements, and may contain the words "believe," "anticipate," "expect,"
"estimate,""project," "will be," "will continue," "will likely result," or
words or phrases of similar meaning. Such statements involve risks,
uncertainties and other factors which may cause actual results to differ
materially from the future results, performance or achievements expressed or
implied by such forward looking Statements. Certain risks, uncertainties and
other factors are detailed in this report and will be detailed from time to
time in reports filed by the Company with the Commission, including forms 8-K,
10-Q and 10-K, and include, among others, the following: heightened
competition, including specifically the intensification of price competition;
adverse state and federal legislation and regulation; loss of key executives;
the ability to attract and retain qualified dentists for the Company's
networks; general economic and business conditions which are less favorable
than expected; unanticipated changes in industry trends; demographic changes;
customer service, adverse publicity, fluctuations and difficulty in forecasting
operating results; the ability of the Company to sustain, manage or forecast
its growth; the entry of new competitors and the development of new products or
services by new and existing competitors; failure to obtain new customers or
failure to retain existing customers; inability to carry out marketing and
sales plans; the loss of significant suppliers, business disruptions; changes
in business strategy or development plans; liability and other claims asserted
against the Company; the ability to attract and retain qualified personnel; and
other factors referenced or incorporated by reference in this report may
include additional factors which could adversely impact the Company's business
and financial performance. Moreover, the Company operates in a very competitive
and rapidly changing environment. New risk factors emerge from time to time and
it is not possible for management to predict all such risk factors, nor can it
assess the impact of all such risk factors on the Company's business or the
extent to which any factor, or combination of factors, may cause actual results
to differ materially from those contained in any forward looking statements.
These forward looking statements represent the estimates and assumptions of
management only as of the date of this report. The Company expressly disclaims
any obligation or undertaking to disseminate any updates or revisions to any
forward looking statement contained herein to reflect any change in its
expectations with regard thereto or any change in events, conditions or
circumstances on which any statement is based. Given these risks and
uncertainties, investors should not place undue reliance on forward looking
statements as a prediction of actual results.

OVERVIEW

      The Company's predecessor began operations in Texas in 1986, and
subsequently initiated de novo operations in Ohio in 1990 and in Missouri and
Kansas in 1993. The Company entered 15 new states with prepaid members
(Arizona, California, Colorado, Idaho, Illinois, Indiana, Iowa, Minnesota,
Nebraska, Nevada, New Mexico, Oregon, Utah, Washington and Wyoming) by virtue
of the IDH acquisition in 1994. Certain of these additional states have only
limited number of prepaid members and are not considered by management to be
prime markets for future expansion.

      Effective September 1, 1994, the Company completed the acquisition of all
of the outstanding common stock of IDH for $14.3 million in cash and additional
payments of $5.4 million (consulting and non-competition agreements) over the
six year period beginning September 16, 1994. The cash portion of the purchase
price was financed through bank borrowings of $11.0 million and $3.3 million of
working capital. As a result of the IDH acquisition, the Company incurred
interest expense and the Company's amortization expense significantly increased
beginning in the third quarter of 1994. The Company repaid the entire
outstanding balance of the bank borrowings with the proceeds of the September
21, 1995 initial public offering.

      Effective November 1, 1995, the Company completed the acquisition of all
of the outstanding common stock of US Dental for $1.3 million in cash, deferred
payments of $1.0 million (consulting and non-competition agreements) and a
promissory note, maturing January 18, 1996, in the amount of $10.3 million (the
"Promissory Note").

      Effective February 1, 1996, the Company completed the acquisition of all
of the outstanding common stock of AHP for $15.0 million, which includes the
present value of amounts payable under 36-month non-competition agreements with
four former stockholders of AHP.





                                       20
<PAGE>   21
      Effective October 1, 1996, the Company completed the acquisitions of all
of the outstanding common stock of Independent for $1.3 million in cash and of
Association for $3.2 million in cash.

      Effective November 1, 1996, the Company completed the acquisitions of all
of the outstanding common stock of KCDC for $12.5 million in cash and of
OraCare for $5.6 million in cash and a promissory note, maturing January 2,
1997, in the amount of $24.9 million (the "OraCare Promissory Note"). The
OraCare Promissory Note was paid in full at maturity on January 2, 1997.

      Effective January 1, 1997, the Company completed the acquisition of all
of the outstanding common stock of United Dental Care, Inc., an Oklahoma
corporation ("United") for $7.6 million in cash.


      Effective June 1, 1997, the Company completed the acquisition of all of
the outstanding common stock of International Dental Plan, Inc., a Florida
corporation ("International"), for $5.0 million in cash.

      The Company's revenues consist primarily of managed benefits premiums for
the prepaid dental plans offered by the Company, such premiums representing
85.1% and 86.4% of total revenues for the years ended December 31, 1997 and
1996, respectively. A secondary source of revenue (representing 13.3% and 10.4%
of total revenues for the years ended December 31, 1996 and 1997, respectively)
is the indemnity premiums received by a subsidiary of the Company in connection
with dual choice plans and individual policies offered by the Company. Dual
choice plans permit members to select between the Company's prepaid dental
plans and traditional dental indemnity insurance. The dental indemnity
insurance subsidiary was acquired effective September 1, 1994, so the Company
had no revenue from this source prior to that date.

      The Company's premium revenues increased from $13.9 million for the year
ended December 31, 1992 to $169.1 million for the year ended December 31, 1997,
a compound annual growth rate of 64.8%. The increase is primarily related to
the growth in the number of members, both from internal growth and from
acquisitions, and secondarily due to premium rate increases. IDH had
approximately 370,000 prepaid members and 90,000 indemnity members when it was
acquired by the Company effective September 1, 1994. The Company had
approximately 267,000 prepaid members at that date. Subsequent acquisitions
added the following membership:

<TABLE>
<CAPTION>
                                                     APPROXIMATE
                                                      PREPAID
                     ACQUISITION                     MEMBERSHIP           EFFECTIVE DATE
                     -----------                     ----------            --------------
        <S>                                            <C>                  <C>
        US Dental . . . . . . . . . . . . . .          165,000              11/01/95
        AHP . . . . . . . . . . . . . . . . .          220,000              02/01/96
        Independent . . . . . . . . . . . . .           10,000              10/01/96
        Association . . . . . . . . . . . . .           60,000              10/01/96
        OraCare . . . . . . . . . . . . . . .          150,000              11/01/96
        KCDC  . . . . . . . . . . . . . . . .           90,000              11/01/96
        United  . . . . . . . . . . . . . . .           90,000              01/01/97
        IDP . . . . . . . . . . . . . . . . .          100,000              06/01/97
</TABLE>

      The Company estimates that premium rate increases have generally averaged
about 3.5% per year during the five-year period ended December 31, 1997.





                                       21
<PAGE>   22
RESULTS OF OPERATIONS

    The following table sets forth, for the periods indicated, the percentages
of revenues represented by certain items reflected in the Company's consolidated
statements of operations.


<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                         ---------------------------------
                                                           1995         1996          1997
                                                         ------       ------        ------
<S>                                                      <C>          <C>           <C>
Revenues:
    Managed benefits ..............................        78.2%        85.1%         86.4%
    Indemnity .....................................        21.0         13.3          10.4
    Dental centers ................................          --          1.4           5.5
       Less:  intercompany ........................          --         (0.6)         (2.7)
    Interest ......................................         0.8          0.8           0.4
                                                         ------       ------        ------
           Total revenues .........................       100.0%       100.0%        100.0%
                                                         ------       ------        ------

Expenses:
 Dental services:
    Managed benefits ..............................        41.7%        50.6%         58.4%
       Less:  intercompany ........................          --         (0.6)         (2.7)
    Indemnity .....................................        17.3          9.3          10.6
    Dental centers ................................          --          0.2           4.5
                                                         ------       ------        ------
            Subtotal ..............................        59.0         59.5          70.8
                                                         ------       ------        ------

    Gross margin ..................................        41.0         40.5          29.2

    Sales and marketing expenses ..................        12.2         11.1          10.8
    General and administrative expenses ...........        18.7         16.4          17.1
    Depreciation and amortization .................         1.5          2.0           2.9
    Acquisition-related expenses ..................          --           --            --
    Interest expense ..............................         1.2          0.5           0.3
                                                         ------       ------        ------
            Total expenses ........................        92.6         89.5         101.9
                                                         ------       ------        ------

Net income (loss) before provision for income taxes
    and extraordinary charge ......................         7.4         10.5          (1.9)
Provision (benefit) for income taxes ..............         2.7          3.9          (0.3)
                                                         ------       ------        ------

Net income (loss) before extraordinary charge .....         4.7          6.6          (1.6)
Extraordinary charge ..............................         0.2           --            --
                                                         ------       ------        ------
Net income (loss) .................................         4.5%         6.6%         (1.6)%
                                                         ======       ======        ======
</TABLE>

YEARS ENDED DECEMBER 31, 1997 AND 1996

    Revenues. Revenues increased by $61.1 million or 53.7%, to $174.7 million in
1997 from $113.6 million in 1996. Of this increase, $58.5 million, or 95.8% was
attributable to the operations added through the acquisition of US Dental, AHP,
Association, Independent, KCDC, OraCare, United and International. Revenues
increased to $116.2 million in 1997 from $93.4 million in 1996 in markets where
the Company had operations in both periods. This increase was primarily a result
of an increase in the number of members and, to a lesser extent, to premium rate
increases. During the year, members increased from 1,729,291 at December 31,
1996 to 1,965,084 at December 31, 1997.

    In the third quarter of 1997, the Company recorded an increase of $4.5
million in the reserve for estimated uncollectible premiums receivable due to
the availability of additional information regarding the collectibility of
certain receivables. This cost has been reported as a reduction in the dental
services revenue for the year and as a reduction of net premiums receivable as
of December 31, 1997.

    Dental Services. Dental services expense increased by $56.0 million, or
82.8%, to $123.6 million in 1997 from $67.6 million in 1996. Dental services
expense as a percentage of total revenues increased to 70.8% in 1997 from 59.5%
in 1996. Dental services expense for the Company's managed benefits plans, which
consist primarily of capitation payments to general dentists, increased to 67.6%
of managed benefits revenues in 1997, from 59.5% in 1996. Dental services
expense as a percentage of total revenues was higher in 1997 than 1996 due
primarily to (i) higher dental services expense on the Company's fee-for-service
products, consisting of indemnity and point-of-service,

                                       22
<PAGE>   23
(ii) the $4.2 million charge recorded in the second quarter of 1997 related to
losses associated with the two contracts related to the Company's Arizona
Medicaid membership and (iii) the $5.4 million increase in the reserve for
estimated uncollectible premiums receivable recorded in the second and third
quarters of 1997. Generally, it is management's intention to continue to
increase premiums in all markets over the next several years, as market
conditions permit, thereby increasing revenues. In most markets, amounts paid
to general dentists through capitation payments will also be increased somewhat
to maintain the Company's competitive position and to improve the economics for
managed care general dentists. The dental services expense ratio for the
Company's fee-for-service products (indemnity and point-of-service) was 98.6%
for 1997, as compared to 69.9% for 1996, due to a higher level of claims
payments and the $1.9 million addition in reserves charged in the second
quarter of 1997.

      Sales and Marketing. Sales and marketing expenses increased $6.2 million,
or 49.2%, to $18.8 million in 1997 from $12.6 million in 1996. Sales and
marketing expenses as a percentage of revenues declined to 10.8% in 1997 from
11.1% in 1996. A portion of the sales and marketing costs, such as base
salaries of field sales personnel and office rents, are fixed so that the
expenses as a percentage of revenues decline as revenues increase.

      General and Administrative. General and administrative expenses increased
$11.3 million, or 60.8%, to $29.9 million in 1997 from $18.6 million in 1996.
The increase in general and administrative expenses as a percentage of revenues
to 17.1% in 1997 from 16.4% in 1996 was primarily attributable to an increase
in salaries and benefits of additional administrative personnel and certain
one-time consulting fees incurred during the year. The Company substantially
increased such staffing and related expenses through the acquisitions completed
within the last year. Until the systems of the acquired entities are fully
integrated, the Company will not be able to achieve significant administrative
cost reduction. In addition, costs associated with the payment of
fee-for-service claims are greater in 1997 due to the larger volume of claims
paid relative to revenues during the period as well as an increase in the
percentage fee paid to the third-party administrator.

      Depreciation and Amortization. Depreciation and amortization expenses
increased $2.8 million, or 121.0% to $5.1 million in 1997 from $2.3 million in
1996. This increase was the result of amortization of the goodwill and the
consulting and non-competition agreements attributable to the acquisitions of
Associated, Independent, Association, KCDC, OraCare, United and International
and depreciation related to the Company's new computer system.

      Interest. Interest expense increased to $0.6 million in 1997 from $0.5
million in 1996. The $0.1 million increase was entirely attributable to the
imputed interest on the Agreements incurred to finance the IDH, US Dental and
AHP acquisitions and the interest on borrowings under the revolving credit
facility. The weighted average interest rate for 1997 was 9.4% which includes
commitment fees and fees related to letters of credit.

YEARS ENDED DECEMBER 31, 1996 AND 1995

      Revenues. Revenues increased by $34.4 million or 43.4%, to $113.6 million
in 1996 from $79.2 million in 1995. Of this increase, $20.4 million, or 59.3%
was attributable to the operations added through the acquisition of AHP,
Association, Independent, KCDC and OraCare and $11.2 million was attributable
to the ownership of US Dental for the entire twelve months in 1996 versus only
two months in 1995. Revenues increased to $82.0 million in 1996 from $79.2
million in 1995 in markets where the Company had operations in both periods.
This increase was primarily a result of an increase in the number of members
and, to a lesser extent, to premium rate increases. During the year, members
increased from 937,355 at December 31, 1995 to 1,729,291 at December 31, 1996.

      Dental Services. Dental services expenses increased $20.9 million, or
44.7% to $67.6 million in 1996 from $46.7 million in 1995. Total dental
services as a percentage of revenues increased to 59.5% in 1996 from 59.0% in
1995 primarily due to the increase in the dental services expenses related to
the managed benefits business. Dental service expenses for the Company's
managed benefits business (before intercompany eliminations), which consist
primarily of capitation to dentists, increased to 59.5% of managed benefits
revenues in 1996 from 53.3% in 1995. This increase is attributable to the fact
that the managed benefits plans offered by IDH, US Dental and AHP have
historically paid dentists a higher percentage of premiums than the Company's
pre-existing plans paid. Claims expense for the indemnity business was 70.0% of
indemnity revenues.





                                       23
<PAGE>   24
      Sales and Marketing. Sales and marketing expenses increased $3.0 million,
or 31.3%, to $12.6 million in 1996 from $9.6 million in 1995. Sales and
marketing expenses as a percentage of revenues declined to 11.1% in 1996 from
12.2% in 1995. This decrease was largely attributable to the change in product
mix with a higher percentage of revenues generated by managed benefits
products. Since the indemnity business generates a higher per-member-per-month
revenue than generated by the managed benefits plans, and a portion of the
sales and marketing costs, such as base salaries and printing costs, are fixed,
the expenses as a percentage of revenues decline. In addition, the commissions
paid on the indemnity business are lower as a percentage of revenues than those
paid on the managed benefits plans.

      General and Administrative. General and administrative expenses increased
$3.8 million, or 25.7%, to $18.6 million in 1996 from $14.8 million in 1995.
The decline in general and administrative expenses as a percentage of revenues
to 16.4% in 1996 from 18.7% in 1995 was primarily attributable to efficiencies
achieved through the consolidation of executive staffs and accounting
departments due to the Company's integration of its acquisitions. In addition,
there was a decrease in premium taxes as a percentage of revenue because the
Company now generates a greater percentage of its revenues in states that
charge lower premium taxes.

      Depreciation and Amortization. Depreciation and amortization expenses
increased $1.1 million, or 91.7% to $2.3 million in 1996 from $1.2 million in
1995. Most of this increase was the result of amortization of goodwill and the
Agreements entered into in connection with the acquisitions of IDH, US Dental
and AHP and the depreciation of the assets acquired.

      Interest. Interest expense decreased to $0.5 million in 1996 from $1.0 in
1995. The $0.5 million was entirely attributable to the imputed interest on the
Agreements incurred to finance the IDH, US Dental and AHP acquisitions and the
interest on the OraCare Promissory Note. The weighted average interest rates on
the Agreements and the OraCare Promissory Note during 1996 were 7.9% and 4.8%,
respectively. The weighted average interest rate on the Agreements includes the
effects of the fees for the related letters of credit.

LIQUIDITY AND CAPITAL RESOURCES

      In September 1995, the Company completed an initial public offering of
2,375,000 shares of its common stock for $22.00 per share (the "Offering"),
resulting in net proceeds of $48.0 million. The Company used approximately $9.9
million of such proceeds for the repayment of all outstanding bank
indebtedness, which had been incurred in 1994 to finance the acquisition of
IDH.

      In October 1996, the Company completed a public offering of 2,000,000
shares of its common stock for $30.00 per share (the "1996 Offering"),
resulting in net proceeds of $56.2 million. The Company used a portion of the
proceeds to complete the acquisitions of Independent, Association, OraCare and
KCDC in 1996 and of United and IDP in 1997.

      The Company's historical operating cash requirements have been met
through cash provided by operations. However, net cash used in operating
activities was $1.3 million for the year ended December 31, 1997. The increased
use of cash for operating activities in 1997 was a result of reduced net income
due to the losses incurred with the Arizona Medicaid contract, the need to
increase the indemnity and POS reserves and the writeoff of uncollectible
receivables. Additionally, at December 31, 1997, the Company had approximately
$1.8 million of income taxes receivable related to current year losses and
overpayments of estimated federal income taxes.

      On September 22, 1997, the Company borrowed $1,630,000 and on September
29, 1997 it borrowed an additional $5,000,000 against the revolving credit
facility. The majority of these funds were used to increase the capital surplus
at the Company's Arizona indemnity subsidiary, United Dental Care Insurance
Company. The revolving credit facility balance was outstanding at December 31,
1997.

      The Company's primary cash need is for capital expenditures and debt
service on the Agreements and bank loans. The principal amount of the
outstanding indebtedness of the Company at December 31, 1997 was $9.4 million,
consisting of $6.6 million outstanding balance under the revolving credit
facility and the liability for the Agreements of $2.8 million. The IDH
Agreements require a payment of $0.8 million each year. The US Dental
Agreements require monthly payments totaling $0.3 million per year. The AHP
agreements require monthly payments totaling $0.2 million per year. The OraCare
capital leases require payments of $0.2 million over the next four years.





                                       24
<PAGE>   25
      On November 14, 1996, the Company signed a revolving credit agreement
providing a $35.0 million revolving credit facility with an unaffiliated bank.
The purpose of the revolving credit facility is to provide (i) for funding
future acquisitions of managed dental benefits companies, (ii) for the issuance
of letters of credit, (iii) for capital expenditures and (iv) at the election
of the company, a working capital line of credit in an amount up to $5.0
million out of the total amount available under the revolving credit facility.
The revolving credit facility has a term of four years, expiring November 30,
2000. Outstanding indebtedness under the revolving line of credit will bear
interest payable quarterly, at the Company's option, at: (i) up to 0.25% over
the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin
over the respective rates decreasing as the ratio of total funded debt to
earnings before interest, taxes, depreciation and amortization ("EBITDA")
decreases. The Company pays an annual fee of up to 0.25% of the amount
remaining available to be drawn under the credit facility and up to 0.85% of
the amount available to be drawn under the letters of credit.

      The revolving credit facility is secured by the pledge of all the
outstanding capital stock of the direct and indirect subsidiaries of the
Company and a negative pledge on all other assets. The revolving credit
facility contains numerous covenants including, among other things, that the
Company cannot, except in certain permitted instances, (i) incur any additional
indebtedness; (ii) grant liens on any of the assets of the Company or its
subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate
with any other entity. In addition, the Company is required to satisfy on an
ongoing basis certain financial covenants. The Company's breach of any covenant
would result in an event of default under the revolving credit facility.

      On June 29, 1997, the Company signed the first amendment to the revolving
credit facility. The first amendment modified the Minimum Liquidity Coverage
Ratio covenant and allowed the Company to repurchase outstanding shares of its
capital stock. The amendment also allowed the Company to exceed the capital
expenditure limit for 1997 only. On February 20, 1998, the Company executed the
second amendment to the revolving credit facility. The second amendment
increased the limit for capital expenditures and working capital not to exceed
$15,000,000 in the aggregate at any one time. Additionally, the second
amendment provided for certain changes in the financial covenants increasing
the availability of advances to the Company. Approximately $8.4 million
remained available for working capital and capital expenditures under the
revolving credit facility at December 31, 1997.

      In 1994, the Company arranged for the issuance of two letters of credit
in the aggregate amount of $4.8 million. The letters of credit secure the
obligations of the Company under certain agreements executed in connection with
the IDH acquisition. The letters of credit decline in amount annually and
expire in September 1998. The Company pays an annual fee of up to 0.85% of the
amount remaining to be drawn under the letters of credit.

      Under applicable insurance laws of most states in which the Company
conducts business, the Company's subsidiary operating in the particular state
is required to maintain a minimum level of net worth and reserves. In general,
minimum capital requirements are more stringent for insurance companies, such
as UDCIC. The Company may be required from time to time to invest funds in one
or more of its subsidiaries to meet regulatory capital requirements. The
implementation of risk-based capital regulations in states having jurisdiction
over UDCIC may require that the Company increase its investment in UDCIC.
However, the Company does not believe that compliance with such regulations
will adversely affect the Company's ability to meet its operating cash
requirements. The Company believes that UDCIC will be able to satisfy such
regulations without the need for significant capital contributions by the
Company. Applicable laws generally limit the ability of the Company's
subsidiaries to pay dividends to the extent that required regulatory capital
would be impaired.

      Capital expenditures were approximately $7.5 million during the year
ended December 31, 1997 and $4.5 million in the year ended December 31, 1996.
Such expenditures in 1997 primarily consisted of the capitalized costs related
to the new information system, expected to be completed in 1998. In June 1995,
the Company entered into a contract to acquire a new information system to
replace its existing system. The capital cost of the conversion of all current
systems is expected to be approximately $10.2 million, of which $8.8 million
had been incurred by December 31, 1997. This capital cost includes the
capitalization of certain direct internal costs associated with the new system
in addition to external costs such as consulting fees and hardware and software
expenditures.

      Management believes that cash flow generated by operations will be
sufficient to fund the Company's normal working capital needs and capital
expenditures (other than any acquisitions) for at least the next twelve months
because the Company's operations are not capital intensive (with exception of
the funding of the information system).





                                       25
<PAGE>   26
      Management believes that the Company's operations are not materially
affected by inflation. The Company's principal costs, such as dental services
expense and sales and marketing expenses are largely related to membership
levels and are, therefore, variably related to premium revenues. Historically,
the Company's rate of premium increases has been less than the rate of increase
in dental costs in general.

YEAR 2000

      The Company has reviewed its computer software and hardware for any
issues that may occur as a result of the arrival of the year 2000 and has
determined that none of its software and hardware require a material
expenditure of funds or effort in order to continue functioning properly beyond
the year 2000. As discussed above, the Company currently relies upon Harrington
as a third-party administrator for the provision of indemnity claims
administrative services to the Company. While the Company has received
assurances from Harrington that such systems will be modified, at Harrington's
expense, before the year 2000 in order to continue functioning properly, there
is no assurance that this goal will be achieved, and, while no costs to the
Company are expected to arise, costs resulting from any operational
difficulties of Harrington or resulting from the Company's change of vendors
for this service could nevertheless arise and such amounts could be material.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

      The consolidated financial statements and supplementary data are set
forth herein commencing on page F-1 of this Form 10-K. See Item 14 for the list
of documents filed as a part of this report.

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

  None.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

<TABLE>
<CAPTION>
                                                                                      DIRECTOR OR OFFICER
 NAME                          AGE              TITLE                                   SINCE
 ----                          ---              -----                           -------------------
<S>                         <C>              <C>                                        <C>
William H. Wilcox              45     President, Chief Executive Officer          May 1996
                                      and Director
John W. McCarty                42     Senior Vice President, Chief Financial      November 1997
                                      Officer, Secretary and Treasurer
Peter R. Barnett               46     Senior Vice President, Chief Operations     January 1995
                                      Officer
Jack R. Anderson               73     Chairman of the Board of Directors          December 1985
George E. Bello                62     Director                                    December 1995
James E. Buncher               61     Director                                    February 1996
William H. Longfield           59     Director                                    January 1986
Robert J. Nettinga             47     Director                                    September 1994
James Ken Newman               54     Director                                    January 1986
Donald E. Steen                51     Director                                    May 1996
</TABLE>


      WILLIAM H. WILCOX has been the President, Chief Executive Officer and a
director of the Company since May 1996. From September 1995 to May 1996, Mr.
Wilcox served as the President of the Surgery Group of Columbia/HCA Healthcare
Corporation and from September 1994 to September 1995 he was President and
Chief Executive Officer of the Ambulatory Surgery Division of Columbia/HCA
Healthcare Corporation. Prior to assuming this position in





                                       26
<PAGE>   27
September 1994, Mr. Wilcox was the Chief Operating Officer and a member of the
board of directors of Medical Care America, Inc. from September 1993 to
September 1994. Prior to September 1993, Mr. Wilcox was the Chief Operating
Officer and a member of the board of directors of Medical Care International,
Inc. Medical Care America, Inc. was acquired by Columbia/HCA Healthcare
Corporation in September 1994. Mr. Wilcox is a member of the executive
committee of the Company's board of directors.

      JOHN W. MCCARTY has been Senior Vice President and Chief Financial
Officer, Treasurer and Secretary of the Company since November 1997. From May
1996 to October 1997, Mr. McCarty served as Executive Vice President and Chief
Financial Officer for NovaMed Eyecare Management. From May 1990 to May 1996,
Mr. McCarty served in various corporate finance roles for Columbia/HCA
Healthcare Corporation after initially joining Humana in May 1990 as Director
of Corporate Finance.

      PETER R. BARNETT, DMD, has been Senior Vice President, Chief Operations
Officer of United Dental Care, Inc. since January 1996. He joined the Company
in January 1995 as Senior Vice President, Operations. From August 1994 to
January 1995, he was the Executive Director of Prudential DMO. From March 1993
to August 1994, he was an independent consultant to managed health care
companies. From October 1991 to March 1993, he was employed as a Senior Vice
President of Pearle Vision, Inc. He served as a Vice President of Pearle
Vision, Inc. from July 1988 to October 1991; and served as Director of Dental
Operations for Pearle Health Services from January 1985 to July 1988. Prior to
May 1994, Dr. Barnett was an Assistant Professor of Dental Care Systems at the
University of Pennsylvania School of Dental Medicine and Assistant Director of
Clinic Management.

      JACK R. ANDERSON has been Chairman of the board of directors of the
Company since December 1985. Mr. Anderson has been the President of Calver
Corporation, a health care consulting and investment firm, and a private
investor since 1982. Mr. Anderson currently serves on the board of directors of
Horizon Health Corporation and PacifiCare Health Systems, Inc. Mr. Anderson is
a member of the executive committee and the compensation committee of the board
of directors of the Company.

      GEORGE E. BELLO has been Executive Vice President and Controller and a
member of the board of directors of Reliance Group Holdings, Inc., an insurance
holding company, since August 1981. He has also been President of Prometheus
Funding Corporation since November 1992 and a member of the board of directors
of that corporation since August 1985. Mr. Bello also serves on the board of
directors of Zenith National Insurance Corp., Horizon Health Corporation and
Reliance Financial Services Corporation. Mr. Bello is a member of the audit
committee of the Company's board of directors.

      JAMES E. BUNCHER has served as President, Chief Executive Officer and a
director of Community Dental Services, Inc., a dental practice management
company, since November 1997. He served as President, Health Plans Group of
Value Health, Inc., a national specialty managed care company, from September
1995 through September 1997 and as Chairman, President and Chief Executive
Officer of Community Care Network, Inc., a Value Health subsidiary, from August
1992 through September 1997. During 1992, he served as a general management
consultant to TakeCare, Inc., and, from 1987 through 1991, he served as a
general partner in Lake Investments, a Dallas, Texas based investment company.
He currently serves on the board of directors of Horizon Health Corporation and
Alliance Imaging, Inc. Mr. Buncher is a member of the audit committee of the
Company's board of directors.

      WILLIAM H. LONGFIELD has been the Chairman and Chief Executive Officer of
C.R. Bard, Inc., a multi-national developer, manufacturer and marketer of
health care products, since September 1995. Mr. Longfield was President and
Chief Executive Officer of C.R. Bard Inc. from October 1993 to September 1995,
President and Chief Operating Officer from September 1991 to October 1993 and
Executive Vice President and Chief Operating Officer from February 1989 to
September 1991. Mr. Longfield currently serves on the board of directors of
C.R. Bard, Inc., Manor Care, Inc., Horizon Health Corporation, The West
Company, Health Industry Manufacturers Association and Atlantic Health Systems.
He is currently a Trustee of Centenary College. Mr. Longfield is a member of
the compensation committee of the board of directors of the Company.

      ROBERT J. NETTINGA was a founder of the predecessor to International
Dental Health, Inc. ("IDH"), a managed dental benefits company acquired by the
Company in September 1994, and served as a director of IDH and its predecessor
from 1977 until 1994. Since September 1994, Mr. Nettinga has been a private
investor.





                                       27
<PAGE>   28
      JAMES KEN NEWMAN has been the Chief Executive Officer of Horizon Health
Corporation, a contract manager of mental health services for general acute
care hospitals, since July 1989 and Chairman since February 1992. From July
1989 until September 1997, he served as President of such corporation. Mr.
Newman currently serves on the board of directors of Horizon Health Corporation
and Telecare Corporation. Mr. Newman is a member of the executive committee of
the board of directors of the Company.

      DONALD E. STEEN has been the Chairman and Chief Executive Officer of
United Surgical Partners International since February 1998. From September 1995
through December 1997 he was the President of the International Group of
Columbia/HCA Healthcare Corporation, a health care services corporation
primarily involved in the ownership and operation of hospitals and providing
related services. From September 1994 to September 1995, he was the President
of the Western Group of Columbia/HCA Healthcare Corporation. From August 1981
to September 1994, Mr. Steen was the Chief Executive Officer of Medical Care
America, Inc., a corporation that operated ambulatory surgery centers and which
was acquired by Columbia/HCA Healthcare Corporation in September 1994. Mr.
Steen currently serves on the board of directors of Horizon Health Corporation.

ITEM 11.     EXECUTIVE COMPENSATION.

      The "Summary Compensation Table" below includes individual compensation
information on the Chief Executive Officer and those executive officers whose
compensation for 1997 exceeded $100,000 for services rendered in all capacities
during the last fiscal year.
<TABLE>
<CAPTION>
                                                 SUMMARY COMPENSATION TABLE
                                                                                                       LONG-TERM
                                                                                                     COMPENSATION
                                                                  ANNUAL COMPENSATION                ------------
                                                      --------------------------------------------    SECURITIES
                  NAME AND                                                          OTHER ANNUAL      UNDERLYING       ALL OTHER
             PRINCIPAL POSITION             YEAR        SALARY       BONUS (1)     COMPENSATION        OPTIONS (#)  COMPENSATION (2)
      --------------------------------    --------    ----------    ----------    ------------------  ------------  ----------------
      <S>                                   <C>       <C>           <C>           <C>                 <C>
      William H. Wilcox (3) ..........      1997       $306,296      $   ----     $     ----             340,000         $ 1,520
        President and Chief                 1996        190,961      $140,625           ----               ----            1,624
        Executive Officer

      John W. McCarty (4).............      1997         21,605          ----           ----              75,000            ----
        Senior Vice President
        Chief Financial Officer,
        Secretary and Treasurer

      Mark E. Pape (5)................      1997        165,000          ----           ----             20,000           2,942
        Senior Vice President               1996        165,000        82,500           ----             10,000           3,926
        Chief Financial Officer,            1995        137,760        53,400           ----             40,000           2,467
        Secretary and Treasurer

      Peter R. Barnett, DMD (6).......      1997        165,000          ----           ----             30,000           3,143
        Senior Vice President,              1996        165,000        82,500           ----             15,000           3,632
        Chief Operations Officer            1995        123,216        51,280           ----             30,000           2,586
</TABLE>

---------------------

(1)    Amounts shown for 1996 represent bonuses earned in the year ended
       December 31, 1996 and paid in 1997. Amounts shown for 1995 represent
       bonuses earned in 1995 and paid in 1996. The 1995 bonus amounts exclude
       deferred bonus payments which were paid in 1997. Such deferred amounts
       for Mr. Pape and Dr. Barnett were $19,320, and $18,030, respectively.
(2)    Represents premiums paid by the Company for the employee's health
       insurance, net of employee's contribution, and for the employee's
       long-term disability insurance.
(3)    Mr. Wilcox was elected to the position of President and Chief Executive
       Officer in May 1996. In August 1996, Mr. Wilcox was granted stock options
       to purchase 300,000 shares of common stock at $33.75 per share, which
       options would have vested in five equal installments beginning August
       1998. In May, Mr. Wilcox was granted stock options to purchase 100,000
       shares of common stock at $22.31 per share, which options vest in five
       equal installments beginning May 1999. In August 1997, Mr. Wilcox was
       granted stock options to purchase 240,000 shares of common stock at
       $17.60 per share upon the cancellation of the August 1996 grant. Under
       the terms of the August 1997 grant, options vest at the earlier of,
       certain earnings per share performance criteria at a rate of 16.67% per
       year of achievement or vest in full in August 2006.
(4)    Mr. McCarty joined the Company in November 1997, and at such time was
       granted options to purchase 75,000 shares of common stock at $13.63 per
       share. The options vest in five equal installments beginning in November
       1999.
(5)    Mr. Pape resigned his position as Senior Vice President, Chief Financial
       Officer, Secretary and Treasurer in September 1997. Mr. Pape joined the
       Company in January 1995. In January 1997, Mr. Pape was granted options to
       purchase 20,000 shares of common stock at $27.00 per share. In January
       1996, Mr. Pape was granted options to purchase 10,000 shares of common
       stock at $37.13 per share. In January 1995, Mr. Pape was granted stock
       options to purchase 40,000 shares of common stock at $6.00 per share. All
       options vest in five equal annual installments beginning two years after
       the grant date. In January 1995, Mr. Pape purchased from the Company
       warrants to purchase 40,000 shares of common stock.
(6)    Dr. Barnett joined the Company in January 1995. In August 1997, Dr.
       Barnett was granted options to purchase 10,000 shares of common stock at
       $16.00 per share. In January 1997, Dr. Barnett was granted options to
       purchase common stock at $27.00 per share. In January 1996, Dr. Barnett
       was granted options to purchase 15,000 shares of common stock at $37.13
       per share. In January 1995, Dr. Barnett was granted stock options to
       purchase 30,000 shares of common stock at $6.00 per share. All options
       vest in five equal annual installments beginning two years after the
       grant date.

                                       28
<PAGE>   29
STOCK OPTION EXERCISES, YEAR-END VALUES  AND GRANTS

      The following table sets forth certain information concerning stock
options exercised in the year ended December 31, 1997 and the number of shares
covered by unexercised stock options held by the executive officers of the
Company who held stock options as of December 31, 1997. Also reported are
values of "in-the-money" stock options representing the difference between the
respective exercise prices of such outstanding stock options and the fair
market value of the common stock as of December 31, 1997.

                          AGGREGATED OPTION EXERCISES
                   IN LAST FISCAL AND YEAR-END OPTION VALUES

<TABLE>
<CAPTION>
                                                               NUMBER OF SECURITIES
                                                              UNDERLYING UNEXERCISED         VALUE OF UNEXERCISED
                                                                 OPTIONS AT FISCAL           IN-THE-MONEY OPTIONS
                                                                YEAR END (#) (1)          AT FISCAL YEAR END ($) (2)
                         SHARES ACQUIRED   VALUE REALIZED   --------------------------   ---------------------------
         NAME            ON EXERCISE (#)        ($)         EXERCISABLE  UNEXERCISABLE   EXERCISABLE   UNEXERCISABLE
         ----            ---------------   --------------   -----------  -------------   -----------   -------------
<S>                           <C>              <C>             <C>          <C>           <C>          <C>
William H. Wilcox . . .       -----            -----           -----        340,000       $ -----       $     -----
John W. McCarty . . . .       -----            -----           -----         75,000         -----             -----
Mark E. Pape  . . . . .       -----            -----           -----         32,000         -----           152,000
Peter R. Barnett, DMD .       -----            -----           6,000         24,000        28,500           114,000
</TABLE>

-----------------
(1)  The options shown for each of the executive officers have a maximum term
     of ten years, subject to earlier termination in the event of the
     optionee's cessation of service with the Company.
(2)  Calculated based on $10.75 per share, the closing sales price of the
     common stock on The Nasdaq Stock Market on the last business day of 1997
     (December 31), less the applicable exercise price.

      The following table sets forth information regarding the grant of options
to purchase shares of common stock to the executive officers of the Company who
received such grants in the year ended December 31, 1997. No stock appreciation
rights have been granted.

                 OPTION GRANTS IN YEAR ENDED DECEMBER 31, 1997

<TABLE>
<CAPTION>
                                             INDIVIDUAL GRANTS                          POTENTIAL REALIZABLE
                          ----------------------------------------------------------      VALUE AT ASSUMED
                               NUMBER OF        PERCENT OF                              ANNUAL RATES OF STOCK
                              SECURITIES      TOTAL OPTIONS  EXERCISE OR              PRICE APPRECIATION FOR
                          UNDERLYING OPTIONS    GRANTED TO     BASE                       OPTION TERMS (3)
                              GRANTED (1)      EMPLOYEES IN   PRICE (2)   EXPIRATION   ----------  ----------
          NAME                    (#)           FISCAL YEAR    ($/SH)        DATE         5%           10%
          ----            ------------------   -------------  ---------   ----------   ----------  ----------
<S>                        <C>                    <C>          <C>        <C>          <C>         <C>
William H. Wilcox (4) .    240,000                41.7%        $17.60     08/15/2007   $2,656,451  $6,731,968
William H. Wilcox . . .    100,000                17.4          22.31     05/01/2007    1,403,064   3,555,639
John W. McCarty . . . .     75,000                13.0          13.63     11/01/2007      642,652   1,628,606
Mark E. Pape (5)  . . .     20,000                 3.5          27.00     01/29/2007      339,603     860,621
Peter R. Barnett, DMD .     10,000                 1.7          16.00     08/15/2007      109,623     254,999
Peter R. Barnett, DMD .     20,000                 3.5          27.00     01/29/2007      339,603     860,621
</TABLE>

(1)   The options shown have a maximum term of ten years, subject to earlier
      termination in the event employment with the Company is terminated. The
      options vest and are exercisable cumulatively in equal installments over
      a five year period commencing two years from the date of grant.
(2)   The exercise price per share of the options equaled or exceeded the fair
      market value of the underlying shares of common stock on the date the
      options were granted, as determined by the Company's board of directors.
(3)   There is no assurance provided to any executive officer or any other
      holder of the Company's securities that the actual stock price
      appreciation over the option term will be at the assumed 5% and 10%
      levels or at any other defined level. Unless the market price of the
      common stock does in fact appreciate over the option term, no value will
      be realized from the option grants. The closing sales price on December
      31, 1997 for the Company's common stock as reported by Nasdaq was $10.75.
(4)   In August 1997, Mr. Wilcox was granted options to purchase 240,000 shares
      of common stock at $17.60 per share upon the cancellation of the August
      1996 grant. Under the terms of the August 1997 grant, options vest at the
      earlier of the satisfaction of certain earnings per share performance
      criteria at a rate of 16.67% per year of achievement or vest in full in
      August 2006.
(5)   Mr. Pape resigned his position as Senior Vice President, Chief Financial
      Officer, Secretary and Treasurer in September 1997. Mr. Pape remained
      employed with the Company through early January 1998. Under the terms of
      his agreement, he may exercise any vested options within 90 days of the
      termination of his employment.



                                       29
<PAGE>   30
1998 EXECUTIVE INCENTIVE PLAN

      The Company has adopted an incentive bonus plan for its executive and
other officers for 1998. Under the bonus plan, officers are entitled to earn
certain cash bonuses if specified performance criteria are satisfied. The
target bonuses that may be earned by the named executive officers under the
bonus plan are: (i) $325,000 for Mr. Wilcox; (ii) $131,250 for Mr. McCarty; and
(iii) $123,750 for Dr. Barnett. The bonuses are payable in 1999.

OTHER COMPENSATION ARRANGEMENTS

      In 1996, the Company entered into employment agreements with Mr. Wilcox
and Dr. Barnett. In 1997, the Company entered into an employment agreement with
Mr. McCarty. Under their employment agreements, Mr. Wilcox, Mr. McCarty and Dr.
Barnett are entitled to base salaries that are subject to increase, but not
decrease, by the board of directors of the Company. The annual base salaries
for Mr. Wilcox, Mr. McCarty and Dr. Barnett were $300,000, $175,000 and
$165,000, respectively, as of December 31, 1997. The employment agreements
provide that the board of directors will adopt each year a bonus plan under
which the employee may earn a bonus with the terms and performance criteria of
the bonus plan to be determined by the board of directors. The employment
agreements also allow Mr. Wilcox, Mr. McCarty and Dr. Barnett to participate in
the insurance and other fringe benefit plans provided to the Company's
employees generally from time to time.

      The employment agreement with Mr. Wilcox has a term ending March 1999.
The employment agreement with Mr. McCarty has a term ending December 31, 1998
(see Exhibit 10.49). The employment agreement with Dr. Barnett has a term
ending October 1998 (see Exhibit 10.50). Each of the employment agreements is
terminable by either party thereto with or without cause upon at least 30 days
prior written notice. In addition, either party may terminate the employment
agreement "with cause" under certain circumstances. The employee can terminate
with cause if the Company materially breaches or fails to perform under the
agreement. For such purpose, all employment agreements expressly provide that,
in the event of a change of control of the Company, a material breach includes
a material decrease in responsibility and authority or the relocation of the
Company's principal executive offices without consent. The Company may
terminate an employment agreement with cause if the employee thereunder (i) is
unable to perform his duties due to illness, injury or incapacity for more than
six months, (ii) is convicted of a felony or (iii) breaches or neglects to
perform under the agreement. If an employment agreement is terminated without
cause by the Company or with cause by the employee thereunder, the terminated
employee will be entitled to receive (i) any bonus previously earned; (ii) a
severance payment of up to two years' base salary in the case of Mr. Wilcox and
one year's base salary in the cases of Mr. McCarty and Dr. Barnett; and (iii)
accelerated vesting of certain outstanding stock options and other benefits or
bonuses or, alternatively, with respect to any benefits or bonuses that cannot
be fully vested pursuant to applicable law, the terminated employee will be
entitled to receive, if allowed by law, cash equal to the amount of benefits or
bonuses forfeited. The employment agreements contain certain non-competition
and non-solicitation covenants binding on the employee during the employment
term and for specified periods thereafter, unless the employment agreement is
terminated by the Company without cause or by the employee with cause. The
employment agreement also contains certain confidentiality and non-disclosure
covenants on the part of the employee that survive termination for any reason.

BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION

  General

      The compensation committee of the board of directors of the Company
reviews and approves the salaries and annual incentive bonuses of the officers
of the Company at or above the $100,000 annual salary level and all grants of
options to purchase shares under the Company's stock option plans to officers
and key employees. The compensation committee is composed exclusively of
directors who are "disinterested persons" as defined by Securities and Exchange
Commission rules, and its members are neither employees nor former employees of
the Company nor have such individuals participated in any of the Company
executive or other employee compensation programs. During fiscal 1997, the
committee was composed of two directors, Messrs. Anderson and Newman for
January through July and Messrs. Anderson and Longfield for August through
December.

      United Dental Care's executive compensation policies are intended to
provide a competitive compensation program that will enable the Company to
attract, incentivize and retain executives who have the abilities and
leadership required to effectively discharge their duties. The compensation
policy is based on the principle that the financial rewards to the executive
should be aligned with the financial interest of the stockholders of the
Company.





                                       30
<PAGE>   31
      The Company's executive compensation program is comprised of three
elements: base salary; annual bonus incentive compensation; and long-term
incentive compensation (stock options).

  Base Salary

      Base salary compensation is based on offering competitive salaries in
comparison to market and industry practices. Independent survey data for
executive positions in other similarly sized companies is used to establish
compensation ranges for each executive position. These ranges may be
subjectively adjusted for factors such as local market conditions or unique
aspects, responsibilities or qualifications of the position not believed to
normally be associated with the position in other similarly sized companies.
Base salary ranges are reviewed annually. The base salary for each executive is
set after an annual subjective review of performance in areas of the
executive's responsibilities, including achievement of specific personal or
departmental goals, position requirements and financial performance in relation
to expected performance. No specific weighting of factors is used in evaluating
overall job performance.

  Annual Bonus Incentive Compensation

      The compensation committee authorizes the establishment and payment of
discretionary annual bonus incentive compensation based upon an assessment of
an executive's exceptional contributions to the Company. Bonuses are based upon
the overall achievement in increasing the Company's profitability and its
membership as well as improving customer service and are closely aligned with
enhancing stockholder value.

  Stock Option Grants

      The compensation committee is authorized to grant stock options to key
employees and officers of the Company. Such option grants are intended to
provide long-term incentive to increase stockholder value by improving overall
corporate performance and ensuring that operating decisions are based on
long-term results that benefit the Company and ultimately the stockholders.
Currently, stock options are not necessarily granted annually, but are granted
from time to time. While no specific formula is used, grants are generally
based upon a subjective evaluation of the grantee's past contribution to
Company performance and expected contribution toward meeting long-term
strategic goals of the Company.

                                        Members of the Compensation Committee

                                      Jack R. Anderson      William H. Longfield

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

      For 1997, executive officer compensation decisions were made by the
compensation committee. Current members of the compensation committee are
Messrs. Anderson and Longfield. Mr. Newman served as a member of the
Compensation Committee from January through July of 1997 and upon his
resignation as a member of such committee, Mr. Longfield was appointed to the
committee. None of these individuals was at any time during the year ended
December 31, 1997, or at any time prior thereto, an officer or employee of the
Company or any of its subsidiaries. No executive officer of the Company served
during 1997 as a director or as a member of the compensation committee of any
entity in which an executive officer of such entity served as a director of the
Company or as a member of the Company's compensation committee.





                                       31
<PAGE>   32
ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

      The following table sets forth, as of March 20, 1998, the beneficial
ownership of the Company's common stock: (i) by each stockholder known by the
Company to own beneficially more than 5% of the outstanding common stock; (ii)
by each director; (iii) by the Company's executive officers; and (iv) by all
executive officers and directors as a group. Except as otherwise indicated
below, each named beneficial owner has sole voting and investment power with
respect to the shares of common stock listed.

<TABLE>
<CAPTION>
                                                          SHARES OF COMMON STOCK
                                                            BENEFICIALLY OWNED
                                                          ----------------------
                      NAME                                NUMBER         PERCENT
                      ----                                ------         -------
<S>                                                     <C>              <C>
 T. Rowe Price Associates, Inc. (1)(2) . . . . . .         722,200          8.1
 Franklin Mutual Advisors, Inc.(1)(3). . . . . . .         590,700          6.6
 Cumberland Associates(1). . . . . . . . . . . . .         580,000          6.5
 T. Rowe Price New Horizons Fund, Inc. (1)(2). . .         564,500          6.3
 Putnam Investments, Inc.(1)(4) . . . . . . . . .          465,824          5.2
 Jack R. Anderson (1)(5) . . . . . . . . . . . . .       1,266,600         14.2
 Citibank, N.A. and George E. Bello,
     Trustees (1)(6) . . . . . . . . . . . . . . .         778,500          8.7
 George E. Bello (7) . . . . . . . . . . . . . . .         399,368          4.5
 James Ken Newman (8)  . . . . . . . . . . . . . .          79,666            *
 William H. Longfield(9) . . . . . . . . . . . . .          68,000            *
 Donald E. Steen   . . . . . . . . . . . . . . . .           2,000            *
 James E. Buncher  . . . . . . . . . . . . . . . .              --           --
 Robert J. Nettinga  . . . . . . . . . . . . . . .           5,150            *
 William H. Wilcox . . . . . . . . . . . . . . . .              --           --
 John W. McCarty . . . . . . . . . . . . . . . . .              --           --
 Mark E. Pape (10) . . . . . . . . . . . . . . . .          94,695          1.0
 Peter R. Barnett (11) . . . . . . . . . . . . . .          16,699            *
 All directors and executive officers as a
     group (11 persons)(12). . . . . . . . . . . .       1,932,178         21.3
</TABLE>
---------------
*  Less than 1%.

   (1)   The address of T. Rowe Price Associates, Inc. and T. Rowe Price New
         Horizons Fund, Inc. is 100 E. Pratt Street, Baltimore, MD 21202.  The
         address of Franklin Mutual Advisors, Inc, is 777 Mariners Island
         Boulevard, San Mateo, CA  94403.  The address for Cumberland
         Associates is 1114 Avenue of the Americas, New York, NY 10036.  The
         address of Putnam Investments, Inc. is One Post Office Square, Boston,
         MA 02109.  The address of Jack R.  Anderson is 16475 Dallas Parkway,
         Suite 735, Dallas, TX 75248.  The address of Citibank, N.A. and George
         E.  Bello, Trustees is c/o Citibank, N.A., 153 East 53rd Street, 25th
         Floor, New York, NY 10043.
   (2)   T. Rowe Price Associates, Inc. and T. Rowe Price New Horizons Fund,
         Inc. have jointly filed a schedule 13G dated February 12, 1998, which
         provides that T. Rowe Price Associates, Inc. has sole voting power of
         157,700 shares and sole investment power of 722,200 shares and that T.
         Rowe Price New Horizons Fund, Inc. has sole voting power of 564,000
         shares (which shares are included in the aggregate amount reported by
         T. Rowe Price Associates, Inc.). Both entities disclaim beneficial
         ownership of all such shares.
   (3)   Franklin Mutual Advisors, Inc. ("FMA"), Franklin Resources, Inc.
         ("FRI"), the parent holding corporation of FMA, and Rupert H.
         Johnson, Jr. and Charles B. Johnson, principal shareholders of FRI,
         have jointly filed a Schedule 13G dated February 6, 1998, which
         provides that FMA has sole voting and investment power with respect to
         the number of shares shown in the table and that each of FRI and
         Messrs. Johnson and Johnson disclaim beneficial ownership of all such
         shares.





                                       32
<PAGE>   33
   (4)   Putnam Investments, Inc. ("PI"), Marsh & McLennan Companies, Inc.
         ("MMC"), the parent holding company of PI, and Putnam Investment
         Management, Inc. and the Putnam Advisory Company, Inc., which are
         registered investment advisors owned by PI, have jointly filed a
         Schedule 13G dated December 5, 1996, which provides that PI has shared
         voting power of 64,224 shares and shared investment power with respect
         to 465,824 shares.  MMC and PI disclaim beneficial ownership of all
         shares covered by such Schedule 13G.
   (5)   Includes 778,500 shares held by two trusts of which Citibank, N.A. and
         George E. Bello are trustees. See Note (6) below. Relatives of Jack R.
         Anderson are beneficiaries of both trusts.  Mr. Anderson disclaims
         beneficial ownership of the shares owned by the trusts.
   (6)   Citibank, N.A. and George E. Bello are trustees having shared voting
         and investment power under two trusts owning in the aggregate the
         number of shares shown in the table.  Relatives of Mr. Anderson
         are beneficiaries of both trusts.  Mr. Anderson disclaims beneficial
         ownership of the shares owned by the trusts.
   (7)   Excludes 778,5000 shares of common stock held by the two trusts of
         which Citibank, N.A. and George E. Bello are trustees.  See Note (6)
         above.  Relatives of Mr. Anderson are beneficiaries of both trusts.
         Messrs. Anderson and Bello disclaim beneficial ownership of the shares
         owned by the trusts.
   (8)   Includes 8,000 shares of common stock issuable upon exercise of
         immediately exercisable stock options.  Also includes 10,000 shares
         held by a foundation of which Mr. Newman is a director and officer.
   (9)   Includes 8,000 shares of common stock issuable upon exercise of
         immediately exercisable stock options.
   (10)  Includes 75,000 shares of common stock issuable upon exercise of
         immediately exercisable warrants and stock options.
   (11)  Includes 15,000 shares of common stock issuable upon exercise of
         immediately exercisable stock options.
   (12)  Includes 106,000 shares of common stock issuable upon exercise of
         immediately exercisable warrants and stock options.


CHANGES IN CONTROL

      On March 10, 1998, the Company entered into an Agreement and Plan of
Merger ("the Merger Agreement") with Protective Life Corporation, a Delaware
corporation ("Protective"), and PLC Merger subsidiary Corporation, a Delaware
corporation and wholly-owned subsidiary of Protective ("MergerSub"), pursuant
to which the company would be merged with and into MergerSub (the "Merger") and
MergerSub would be the surviving corporation.

     In the Merger, the stockholders of the Company would receive for each share
of outstanding common stock of the Company ("Company Common Stock") a
combination of $9.31 in cash and 0.2893 shares of common stock, $0.50 par value
per share, of Protective ("Protective Common Stock") (after giving effect to the
two-for-one stock split announced by Protective on March 2, 1998 and payable on
April 1, 1998 to the holders of Protective Common Stock). The Merger Agreement
provides that either the Company (subject to Protective's right to increase the
merger consideration) or Protective may terminate the Merger Agreement if the
price of Protective Common Stock is below $27.50 per share and Protective may
terminate if the price of Protective Common Stock is above $32.50 per share
(after adjustment for Protective's stock split).

      In connection with the Merger Agreement, Protective and Jack R. Anderson
entered into a Stockholder Agreement dated as of March 10, 1998, pursuant to
which Mr. Anderson agreed to vote his shares of common stock of the Company in
favor of the Merger, the adoption of the Merger Agreement and the approval of
each of the transactions contemplated by the Merger Agreement.

      The Merger is subject to approval by the stockholders of the Company, the
applicable requirements of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended, regulatory approvals and other customary closing
conditions, so there can be no assurance as to whether or when the Merger will
be completed.





                                       33
<PAGE>   34
ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

      The Company has a non-competition agreement with Robert J. Nettinga and
The Adaven Group Limited Partnership and a consulting agreement with The Adaven
Group Limited Partnership. Mr. Nettinga is the president and principal
stockholder of the corporation that is the general partner of the Adaven Group
Limited Partnership. Under the non-competition agreement, the Company is
obligated to make six annual payments of $554,952.42 each ($3,329,714.50 in the
aggregate), the first of which was paid on September 16, 1994. Under the
consulting agreement, the Company is obligated to make six annual payments of
$200,000 each ($1,200,000 in the aggregate), the first of which was paid on
September 16, 1994. The Company has the right to prepay such installments on a
discounted present value basis using a discount rate of 5%. The obligations of
the Company under the non-competition agreement and the consulting agreement
are secured by a letter of credit in the original amount of $4,023,500 which
amount declines annually after the payment dates of the annual installments
under such agreements.

      The Company also has a non-competition agreement with Omega Marine
Development, Inc. and Paul C. Nettinga under which the Company is obligated to
make six annual payments of $91,897.58 ($551,385.48 in the aggregate) and a
consulting agreement with Omega Marine Development, Inc. under which the
Company is obligated to make six annual payments of $50,000 ($300,000 in the
aggregate). Paul C. Nettinga is the brother of Robert J. Nettinga. Paul C.
Nettinga is also the president of Omega Marine Development, Inc. The terms of
the non-competition agreement and the consulting agreement for Paul C. Nettinga
and Omega Marine Development, Inc. are substantially the same as the agreements
with Robert J. Nettinga and The Adaven Group Limited Partnership.

      The non-competition agreements restrict the parties thereto from
competing directly or indirectly, with the business of the Company in the
continental United States and from soliciting the employment of any employee of
the Company until September 16, 2000. Under the consulting agreements, the
parties agreed to provide to the Company services as an independent consultant
and adviser with respect to such business and financial matters as may be
reasonably requested by the Company from time to time for a period of six
years. The party providing such consulting services may not be required to
render such services outside of the state of residence of such party without
the consent of such party or at any time that the rendering of such services
would interfere with other business obligations of such party.

      The Company, certain stockholders of the Company and Robert J. Nettinga
entered into a Stockholders Agreement on September 16, 1994 pursuant to which
such stockholders agreed to vote shares of common stock of the Company owned by
them for the election of Robert J. Nettinga as a director of the Company until
the earlier of the expiration of four years from the date of such agreement or
the date when all monetary obligations of the Company have been paid under the
non-competition agreement and the consulting agreement with Robert J. Nettinga.

                                    PART IV

ITEM 14.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     The following are filed as a part of this Annual Report on Form 10-K:


<TABLE>
<CAPTION>

 1.     Consolidated Financial Statements                            Page
                                                                     ----
    <S>                                                             <C>
    Index to Consolidated Financial Statements  . . . . . . . . . .  F-1
    Report of Independent Accountants   . . . . . . . . . . . . . .  F-2
    Consolidated Balance Sheets as of December 31, 1996
       and 1997   . . . . . . . . . . . . . . . . . . . . . . . . .  F-3
    Consolidated Statements of Operations for the years ended
       December 31, 1995, 1996 and 1997   . . . . . . . . . . . . .  F-4
    Consolidated Statements of Changes in Stockholders' Equity
       for the years ended December 31, 1995. 1996 and 1997   . . .  F-5
    Consolidated Statements of Cash Flows for the years ended
       December 31, 1995, 1996 and 1997   . . . . . . . . . . . . .  F-6
    Notes to Consolidated Financial Statements  . . . . . . . . . .  F-7
</TABLE>





                                       34
<PAGE>   35
2.   FINANCIAL STATEMENT SCHEDULES

      None.

      All other schedules have been omitted because the required information is
      either inapplicable, insignificant or included in the Consolidated
      Financial Statements and Notes thereto.

3.  LIST OF EXHIBITS

<TABLE>
  <S>    <C>
3.01    Restated Certificate of Incorporation of the Company (filed as Exhibit
        3.01 to the Company's Registration Statement on Form S-1, Registration
        Number 33-94356 (the "1995 Registration Statement") and incorporated
        herein by reference).
3.02    Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to
        the 1995 Registration Statement and incorporated herein by reference).
4.01    Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995
        Registration Statement and incorporated herein by reference).
10.01   Non-Competition Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., The Adaven Group Limited Partnership and Robert J.
        Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and
        incorporated herein by reference).
10.02   Agreement for Consulting Services dated as of September 16, 1994
        between United Dental Care, Inc. and The Adaven Group Limited
        Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement
        and incorporated herein by reference).
10.03   Non-Competition Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga
        (filed as Exhibit 10.08 to the 1995 Registration Statement and
        incorporated herein by reference).
10.04   Agreement for Consulting Services dated as of September 16, 1994
        between United Dental Care, Inc. and Omega Marine Development, Inc.
        (filed as Exhibit 10.09 to the 1995 Registration Statement and
        incorporated herein by reference).
10.05   Stockholders Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., certain stockholders of United Dental Care, Inc.
        named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the
        1995 Registration Statement and incorporated herein by reference).
10.06   Irrevocable Letter of Credit dated September 16, 1994 in the amount of
        $4,023,500 in favor of The Adaven Group Limited Partnership (filed as
        Exhibit 10.11 to the 1995 Registration Statement and incorporated
        herein by reference).
10.07   Amended and Restated Application and Agreement for $4,023,500 Standby
        Letter of Credit in favor of The Adaven Group Limited Partnership dated
        September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas,
        N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on
        Form S-1, Registration Number 333-12425 (the "1996 Registration
        Statement") and incorporated herein by reference).
10.08   Administrative Services Agreement (as amended) dated as of January 1,
        1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and
        Memorandum of Understanding in connection therewith dated as of January
        1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and
        incorporated herein by reference).
10.09   Consulting Agreement dated September 27, 1995, between United Dental
        Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995
        Form 10-Q and incorporated herein by reference).
10.10   Consulting Agreement dated September 27, 1995, between United Dental
        Care, Inc. and Christopher A. Jehle (filed as Exhibit 10.10 to the 1995
        Form 10-Q and incorporated herein by reference).
10.11   Stock Purchase Agreement dated as of December 14, 1995 among United
        Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S.,
        Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable
        Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A
        10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and
        Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's
        Current Report on Form 8-K filed January 22, 1996, File No. 0-26688
        (the "Form 8-K"), and incorporated herein by reference).
10.12   First Amendment to Stock Purchase Agreement dated as of January 17,
        1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
        Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena
        Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante
        Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health
        Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to
        the Form 8-K and incorporated herein by reference).
</TABLE>





                                       35
<PAGE>   36
<TABLE>
  <S>    <C>

10.13   Non-Competition Agreement, dated January 22, 1995, between United
        Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the
        Form 8-K, and incorporated herein by reference). The three other
        Non-Competition Agreements between United Dental Care, Inc. and Joseph
        V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher,
        respectively, are identical in form except as to the parties thereto
        and are therefore omitted from this filing.
10.15   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree
        Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent
        Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to
        the 1996 Registration Statement and incorporated herein by reference).
10.16   Stock Purchase Agreement between United Dental Care, Inc., as
        Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all
        the issued and outstanding shares of capital stock of Association
        Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit
        10.28 to the 1996 Registration Statement and incorporated herein by
        reference).
10.17   Stock Purchase Agreement between United Dental Care, Inc., as
        Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all
        the issued and outstanding shares of capital stock of International
        Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to
        the 1996 Registration Statement and incorporated herein by reference).
10.18   Earnest Money Escrow Agreement among United Dental Care, Inc., UICI,
        and Texas Commerce Bank National Association, dated as of September 10,
        1996, regarding the purchase of all the issued and outstanding shares
        of capital stock of International Dental Plans, Inc., a Florida
        corporation (filed as Exhibit 10.31 to the 1996 Registration Statement
        and incorporated herein by reference).
10.19   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and UICI, United Management & Consulting, Inc., United Management &
        Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust
        U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for
        the purchase of 90% of the issued and outstanding shares of capital
        stock of United Dental Care, Inc., an Oklahoma corporation (filed as
        Exhibit 10.32 to the 1996 Registration Statement and incorporated
        herein by reference).
10.20   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal,
        D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28,
        1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July
        12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID
        July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID
        September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated
        as of September 11, 1996 (filed as Exhibit 10.34 to the 1996
        Registration Statement and incorporated herein by reference).
10.21   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani,
        Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare
        Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit
        10.36 to the 1996 Registration Statement and incorporated herein by
        reference).
10.22   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental
        Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38
        to the 1996 Registration Statement and incorporated herein by
        reference).
10.23   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S.,
        Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc.,
        dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996
        Registration Statement and incorporated herein by reference).
10.24   Letter Agreement dated November 14, 1996 between United Dental Care,
        Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of
        OraCare Dental Associates, P.A.(filed as Exhibit 10.24 to the Company's
        Annual Report on Form 10-K for the fiscal year ended December 31, 1996
        (the "1996 Form 10-K") and incorporated herein by reference).
10.25   Management Agreement dated November 14, 1996 between OraCare
        Consultants, Inc. and OraCare Dental Associates, P.A. (filed as Exhibit
        10.25 to the 1996 Form 10-K and incorporated herein by reference).
10.26   Revolving Credit Agreement, dated as of November 14, 1996, between
        United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the
        Lenders named therein, and the Lenders (filed as Exhibit 10.26 to the
        1996 Form 10-K and incorporated herein by reference).
10.27   Warrant, dated February 26, 1996, held by Mark E. Pape to purchase
        Common Stock of the Company (filed as Exhibit 10.27 to the 1996 Form
        10-K and incorporated herein by reference).
</TABLE>





                                       36
<PAGE>   37
<TABLE>
<S>     <C>
10.28   Employment Agreement dated as of May 13, 1996, between United Dental
        Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996
        Registration Statement and incorporated herein by reference).
10.29   Employment Agreement dated as of June 1, 1996, between United Dental
        Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996
        Registration Statement and incorporated herein by reference).
10.30   Employment Agreement dated as of June 1, 1996, between United Dental
        Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the
        1996 Registration Statement and incorporated herein by reference).
10.31   Master Software License and Services Agreement dated as of June 20,
        1995 between Software Technologies Corporation and United Dental Care,
        Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and
        incorporated herein by reference).
10.32   United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock
        Option Plan (filed as Exhibit 4.4 to the Company's Registration
        Statement on Form S-8, Registration Number 333-20043 and incorporated
        herein by reference).
10.33   United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5
        to the Company's Registration Statement on Form S-8, Registration
        Number 333-20043 and incorporated herein by reference).
10.34   United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr.
        Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996
        Registration Statement and incorporated herein by reference).
10.35   United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr.
        Wilcox, Mr. Pape and Dr. Barnett.
10.36   First Amendment to Revolving Credit Agreement (filed as Exhibit 10.01
        to the third quarter Form 10-Q and incorporated herein by reference).
10.37*  Stock Option Agreement dated as of August 15, 1997 between United
        Dental Care, Inc. and William H. Wilcox.
10.38*  Employment Agreement dated as of November 1, 1997 between United Dental
        Care, Inc. and John W. McCarty.
10.39*  Stock Option Agreement dated as of November 1, 1997 between United
        Dental Care, Inc. and John W. McCarty.
10.40*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Jack R. Anderson.
10.41*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and George E. Bello.
10.42*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Jamed E. Buncher.
10.43*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Robert J. Nettinga.
10.44*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Donald E. Steen.
10.45*  United Dental Care, Inc. Executive Incentive Plans for 1998.
10.46*  Family Dentist Agreement dated as of December 31, 1997 between United
        Dental Care of Arizona, Inc. and Associated Dental Care Providers,
        P.C., an Arizona professional corporation.
10.47*  Second Amendment to Revolving Credit Agreement dated February 20, 1998.
10.48   Agreement and Plan of Merger dated as of March 10, 1998 and amended as
        of March 17, 1998 by and among Protective Life Corporation, PLC Merger
        Subsidiary Corporation and the Company (filed as Exhibit 2.1 to the
        Company's Current Report on Form 8-K filed on March 16, 1998 and
        incorporated herein by reference).
10.49*  First Amendment dated March 10, 1997 to the Employment Agreement of
        November 10, 1997 between United Dental Care, Inc. and John W. McCarty.
10.50*  First Amendment dated March 10, 1997 to the Employment Agreement of
        June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett,
        DMD.
11.1*   Statement Regarding Computation of Per Share Earnings.
21.1*   List of Subsidiaries of Registrant.
23.1*   Consent of Price Waterhouse LLP.
27.1*   Financial Data Schedule.
----------------------
*   Filed herewith.
</TABLE>

(b)   Reports on Form 8-K

      The Company filed no reports on Form 8-K during the last quarter of the
period covered by this report.





                                       37
<PAGE>   38
                                   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, in the City of
Dallas, State of Texas, March 30, 1998.

                                         UNITED DENTAL CARE, INC.

                                    By:  /s/ WILLIAM H. WILCOX
                                       ---------------------------------------
                                         William H. Wilcox, President and
                                         Chief Executive Officer

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

<TABLE>
<CAPTION>
              SIGNATURE                                        TITLE                           DATE
              ---------                                        -----                           ----
<S>                                                 <C>                                      <C>
        /s/ WILLIAM H. WILCOX                     President and Chief Executive Officer       March 30, 1998
------------------------------------              (Principal Executive Officer)
            William H. Wilcox



        /s/ JOHN W. MCCARTY                       Senior Vice President and Chief             March 30, 1998
------------------------------------              Financial Officer
            John W. McCarty                       (Principal Financial Officer)


       /s/ PETER R. BARNETT, DMD                  Senior Vice President, Chief Operations     March 30, 1998
------------------------------------              Officer
           Peter R. Barnett, DMD



       /s/ PAMELA S. ASHWORTH                     Vice President, Finance                     March 30, 1998
------------------------------------              (Principal Accounting Officer)

           Pamela S. Ashworth


        /s/ JACK R. ANDERSON                      Chairman of the Board of Directors          March 30, 1998
------------------------------------
            Jack R. Anderson



        /s/ GEORGE E. BELLO                       Director                                    March 30, 1998
------------------------------------
            George E. Bello



       /s/ JAMES E. BUNCHER                       Director                                    March 30, 1998
------------------------------------
           James E. Buncher



      /s/ WILLIAM H. LONGFIELD                    Director                                    March 30, 1998
------------------------------------
          William H. Longfield



       /s/ ROBERT J. NETTINGA                     Director                                    March 30, 1998
------------------------------------
           Robert J. Nettinga


       /s/ JAMES KEN NEWMAN                       Director                                    March 30, 1998
------------------------------------
           James Ken Newman



      /s/  DONALD E. STEEN                        Director                                    March 30, 1998
------------------------------------
           Donald E. Steen
</TABLE>





                                       38
<PAGE>   39
                            UNITED DENTAL CARE, INC.

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS





<TABLE>
<CAPTION>
                                                                                                                     Page
                                                                                                                     ----
<S>                                                                                                                   <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997  . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and 1997  . . . . . . . . . . . . . F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31,
    1995, 1996 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and 1997  . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>





                                      F-1
<PAGE>   40
                       REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
      United Dental Care, Inc.

In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of changes in stockholders' equity and
of cash flows present fairly, in all material respects, the financial position
of United Dental Care, Inc. and its subsidiaries (collectively "the Company")
at December 31, 1996 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1997,
in conformity with generally accepted accounting principles.  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 of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement.  An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation.  We believe that our audits provide a reasonable basis for the
opinion expressed above.




PRICE WATERHOUSE LLP

Dallas, Texas
February 23, 1998, except for Note 12,
as to which the date is March 11, 1998





                                      F-2
<PAGE>   41

                            UNITED DENTAL CARE, INC.

                          CONSOLIDATED BALANCE SHEETS
                       (IN THOUSANDS, EXCEPT SHARE DATA)


<TABLE>
<CAPTION>
                                                                                                               DECEMBER 31,
                                                                                                           ---------------------
                                                                                                            1996           1997
                                                                                                           --------     ---------
                                              ASSETS
                 <S>                                                                                       <C>           <C>
                 Current assets:
                    Cash and cash equivalents  . . . . . . . . . . . . . . . . . . . . . . . . . .          $50,035       $12,427
                    Premiums receivable, net of allowance for doubtful accounts of $1,809 and
                       $5,729 at December 31, 1996 and 1997, respectively  . . . . . . . . . . . .           11,016        10,606
                    Accrued interest and other current assets  . . . . . . . . . . . . . . . . . .              832         4,416
                    Deferred taxes, current  . . . . . . . . . . . . . . . . . . . . . . . . . . .              957         1,592
                                                                                                           --------      --------
                               Total current assets  . . . . . . . . . . . . . . . . . . . . . . .           62,840        29,041
                 Regulatory deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            3,433         4,005
                 Furniture and equipment, net of accumulated depreciation of $3,169 and $5,112
                    at December 31, 1996 and 1997, respectively  . . . . . . . . . . . . . . . . .            7,056        12,612
                 Intangible assets, net of accumulated amortization of $2,202 and $5,218 at
                    December 31, 1996 and 1997, respectively . . . . . . . . . . . . . . . . . . .           91,066       105,479
                 Pre-operational costs, net of accumulated amortization of $238 and $94 at
                    December 31, 1996 and 1997, respectively . . . . . . . . . . . . . . . . . . .              127           295
                 Other assets  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              856             8
                 Deferred taxes, noncurrent  . . . . . . . . . . . . . . . . . . . . . . . . . . .              294            --
                                                                                                           --------      --------
                 TOTAL ASSETS  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $165,672      $151,440
                                                                                                           ========      ========
                                                LIABILITIES AND STOCKHOLDERS' EQUITY
                 Current liabilities:
                    Accounts payable and accrued expenses  . . . . . . . . . . . . . . . . . . . .           $5,805        $9,771
                    Current portion of debt and revolving credit facility  . . . . . . . . . . . .           26,191         7,981
                    Claims reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            2,172         5,936
                    Unearned premiums  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .            3,177         2,065
                    Other current liabilities  . . . . . . . . . . . . . . . . . . . . . . . . . .               75            --
                                                                                                           --------      --------
                              Total current liabilities  . . . . . . . . . . . . . . . . . . . . .           37,420        25,753
                 Deferred taxes, non-current . . . . . . . . . . . . . . . . . . . . . . . . . . .             ----         1,236
                 Long-term debt - net of current portion . . . . . . . . . . . . . . . . . . . . .            2,757         1,403
                                                                                                           --------      --------
                              Total liabilities  . . . . . . . . . . . . . . . . . . . . . . . . .           40,177        28,392
                                                                                                           --------      --------
                 Stockholders' equity:
                    Preferred stock, $.10 par value; 500,000 shares authorized; no shares
                       outstanding   . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .               --            --
                    Common stock, $.10 par value; 15,000,000 shares authorized; 8,908,416 shares
                       outstanding issued and outstanding at December 31, 1996 and 8,942,616 at
                       December 31,1997. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .              891           894
                    Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . .          108,223       108,620
                    Retained earnings  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .           16,381        13,534
                                                                                                           --------      --------
                               Total stockholders' equity  . . . . . . . . . . . . . . . . . . . .          125,495       123,048
                                                                                                           --------      --------
                 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY  . . . . . . . . . . . . . . . . . . .         $165,672      $151,440
                                                                                                           ========      ========
</TABLE>

                            See accompanying notes.





                                      F-3
<PAGE>   42
                            UNITED DENTAL CARE, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)


<TABLE>
<CAPTION>
                                                                             FOR THE YEARS ENDED DECEMBER 31,
                                                                            ----------------------------------
                                                                             1995         1996         1997
                                                                            -------      --------    --------
<S>                                                                         <C>          <C>        <C>
Revenues:
   Dental services revenue  . . . . . . . . . . . . . . . . . . . . .       $78,626      $112,749    $173,995
   Interest income  . . . . . . . . . . . . . . . . . . . . . . . . .           603           899         704
                                                                            -------      --------    --------
                                                                             79,229       113,648     174,699
Costs and expenses:
   Dental services expense  . . . . . . . . . . . . . . . . . . . . .        46,750        67,651     123,633
   Sales and marketing  . . . . . . . . . . . . . . . . . . . . . . .         9,637        12,587      18,847
   General and administrative . . . . . . . . . . . . . . . . . . . .        14,785        18,612      29,932
   Depreciation and amortization  . . . . . . . . . . . . . . . . . .         1,190         2,267       5,050
   Interest expense . . . . . . . . . . . . . . . . . . . . . . . . .         1,005           536         571
                                                                            -------      --------    --------
                                                                             73,367       101,653     178,033

Income (loss) before income taxes and extraordinary charge  . . . . .         5,862        11,995      (3,334)
Provision (benefit) for income taxes  . . . . . . . . . . . . . . . .         2,131         4,438        (487)
                                                                            -------      --------    --------
Income (loss) before extraordinary charge . . . . . . . . . . . . . .         3,731         7,557      (2,847)

Extraordinary charge, net of tax  . . . . . . . . . . . . . . . . . .          (142)           --          --
                                                                            -------      --------    --------

Net income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . .        $3,589        $7,557    $ (2,847)
                                                                             ======        ======    ========
Shares outstanding (in thousands):
   Basic  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5,051         7,256       8,935
   Diluted  . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         5,449         7,543       8,935
Per share amounts:
   Net income (loss) per common share before extraordinary charge
      Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $0.74         $1.04    $  (0.32)
      Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $0.68         $1.00    $  (0.32)

   Extraordinary charge per share, net of tax
      Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(0.03)           --          --
      Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $(0.03)           --          --

   Net income (loss) per common share
      Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $0.71         $1.04    $  (0.32)
      Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . .         $0.66         $1.00    $  (0.32)
</TABLE>


                            See accompanying notes.





                                      F-4
<PAGE>   43
                            UNITED DENTAL CARE, INC.

           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)




<TABLE>
<CAPTION>
                                        PREFERRED STOCK         COMMON STOCK       ADDITIONAL
                                        ---------------------------------------     PAID-IN      RETAINED
                                        SHARES  AMOUNT      SHARES      AMOUNT      CAPITAL       EARNINGS       TOTAL
                                        --------------- -----------------------    ----------    ----------     ---------
<S>                                     <C>      <C>       <C>            <C>                    <C>         <C>
Balance, December 31, 1994 ........        1     --     4,179,914     $     418     $   3,321     $   5,235     $   8,974
   Conversion of preferred
      to common stock .............       (1)    --             2            --            --            --            --
   Stock options exercised ........       --     --       343,500            34           431            --           465
   Stock warrants issued ..........       --     --            --            --            80            --            80
   Tax effect of stock options
      exercised ...................       --     --            --            --           527            --           527
   Shares issued in public
      offering.....................       --     --     2,375,000           238        47,727            --        47,965
   Net income .....................       --     --            --            --            --         3,589         3,589
                                        -----  -----    ---------      --------     ---------      --------     ---------
Balance, December 31, 1995 ........       --     --     6,898,416           690        52,086         8,824        61,600
   Stock options exercised ........       --     --        10,000             1            14            --            15
   Tax effect of stock options
      exercised ...................       --     --            --            --           125            --           125
   Shares issued in public
      offering.....................       --     --     2,000,000           200        55,998            --        56,198
   Net income .....................       --     --            --            --            --         7,557         7,557
                                        -----  -----    ---------      --------     ---------      --------     ---------
Balance, December 31, 1996 ........       --     --     8,908,416           891       108,223        16,381       125,495
   Stock options exercised ........       --     --        34,200             3           184            --           187
   Tax effect of stock options
       exercised ..................       --     --            --            --           213            --           213
   Net loss .......................       --     --            --            --            --        (2,847)       (2,847)
                                        -----  -----    ---------      --------     ---------      --------     ---------
Balance, December 31, 1997 ........       --     --     8,942,616      $    894     $ 108,620      $ 13,534     $ 123,048
                                        =====  =====    =========      ========     =========      ========     =========
 </TABLE>


                            See accompanying notes.





                                      F-5
<PAGE>   44
                            UNITED DENTAL CARE, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           FOR THE YEARS ENDED DECEMBER 31,
                                                                         ------------------------------------
                                                                           1995           1996          1997
                                                                         -------        -------       -------
<S>                                                                      <C>            <C>           <C>
Operating activities:
   Net income (loss)  . . . . . . . . . . . . . . . . . . . . . .         $3,589         $7,557       $(2,847)
   Adjustments to reconcile net income (loss) to net cash
      provided by (used in) operating activities:
      Depreciation and amortization . . . . . . . . . . . . . . .          1,190          2,267         5,050
      Changes in operating assets and liabilities, net of effects
         from purchase of acquisitions:
         Decrease (increase) in premiums receivable . . . . . . .         (1,049)        (4,887)          736
         (Increase) decrease in accrued interest and other
            current assets  . . . . . . . . . . . . . . . . . . .            134           (286)       (3,374)
         Decrease (increase) in deferred income taxes . . . . . .            (27)           661         1,343
         (Increase) decrease in other assets  . . . . . . . . . .           (222)           300        (5,876)
         Increase (decrease) in accounts payable, accrued
            expenses and claims reserve . . . . . . . . . . . . .           (277)        (2,168)        4,979
         Decrease in unearned premiums  . . . . . . . . . . . . .           (417)        (2,148)       (1,397)
                                                                         -------        -------       -------
            Net cash provided by (used in) operating activities .          2,921          1,296        (1,386)
Investing activities:
   Increase in regulatory deposits  . . . . . . . . . . . . . . .           (408)           (38)         (222)
   Purchases of furniture and equipment . . . . . . . . . . . . .         (2,176)        (4,518)       (7,538)
   Investment in new markets  . . . . . . . . . . . . . . . . . .            (31)          (206)         (168)
   Purchase of acquisitions (net of cash acquired)  . . . . . . .            726        (37,560)       (8,917)
                                                                         -------        -------       -------

            Net cash used in investing activities . . . . . . . .         (1,889)       (42,322)      (16,845)
Financing activities:
   Proceeds from short-term debt  . . . . . . . . . . . . . . . .           ----           ----         6,630
   Proceeds from long-term debt . . . . . . . . . . . . . . . . .          1,154           ----          ----
   Repayment of indebtedness  . . . . . . . . . . . . . . . . . .        (12,577)       (12,092)      (26,194)
   Proceeds from public offering (net)  . . . . . . . . . . . . .         47,965         56,198          ----
   Stock options exercised  . . . . . . . . . . . . . . . . . . .            465             15           187
   Issuance of stock warrants . . . . . . . . . . . . . . . . . .             80           ----          ----
                                                                         -------        -------       -------

            Net cash provided by (used in) financing activities .         37,087         44,121       (19,377)
                                                                         -------        -------       -------
Net increase (decrease) in cash and cash equivalents  . . . . . .         38,119          3,095       (37,608)
Cash and cash equivalents at beginning of period  . . . . . . . .          8,821         46,940        50,035
                                                                         -------        -------       -------
Cash and cash equivalents at end of period  . . . . . . . . . . .        $46,940        $50,035       $12,427
                                                                         =======        =======       =======
Supplemental disclosure of cash flow information:
   Cash paid during the period for:
      Interest  . . . . . . . . . . . . . . . . . . . . . . . . .           $989           $400          $434
                                                                         =======        =======       =======
      Income Taxes  . . . . . . . . . . . . . . . . . . . . . . .         $1,385         $4,104        $1,632
                                                                         =======        =======       =======
</TABLE>

Supplemental Schedule of non-cash investing and financing activities:
   In 1997, the Company fully amortized previously deferred new market
development costs of $214,000.


                            See accompanying notes.




                                      F-6
<PAGE>   45
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        BASIS OF PRESENTATION: The consolidated financial statements include
the accounts of United Dental Care, Inc., and its subsidiaries (the "Company")
for all periods presented. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company, through its
subsidiaries, contracts with independent practitioners to provide dental
services to members in the form of prepaid dental health contracts and/or
indemnity dental insurance. The Company is currently licensed to market its
prepaid dental plans in 29 states and its indemnity plan in 28 states. As of
December 31, 1997, approximately 79.0% of all UDC prepaid plan members were
located in seven states: Arizona, Texas, New Jersey, Colorado, Florida,
Missouri and Oklahoma.

        REVENUE AND EXPENSE RECOGNITION: Premium revenue is recorded in the
month for which the member is entitled to service. Unearned premiums are
reflected as current liabilities and consist of amounts billed in the current
period for services to be rendered in a subsequent period. Included in unearned
premiums are deposits which will be applied against future months' services.
Under prepaid dental health contracts, the Company contracts with dentists for
a set per-member, per- month capitation fee to provide dental care for its
members. Specialty services not covered by capitation fees are recorded as
incurred.

        INTANGIBLE ASSETS: Goodwill resulting from the Company's acquisitions
(see Note 2) is being amortized on a straight- line basis over forty years. If
facts and circumstances were to indicate the carrying amount of goodwill is
impaired, the carrying amount would be reduced to an amount representing the
undiscounted future cash flows to be generated by the operation. Also included
in intangible assets are noncompetition and consulting agreements related to:
(a) the IDH acquisition and valued at $400,000 at acquisition; (b) the US
Dental acquisition and valued at $175,000 at acquisition; (c) the AHP
acquisition and valued at $600,000 at acquisition; and (d) the OraCare
acquisition and valued at $200,000 at acquisition, all of which are being
amortized on a straight-line basis over the three to six year terms of such
agreements. Accumulated amortization related to these agreements at December
31, 1996 and 1997 was $424,000 and $865,059, respectively.

        In March 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of"
("FAS 121"), which became effective for fiscal years beginning after December
15, 1995. FAS 121 establishes standards for determining when impairment losses
on long-lived assets have occurred and how impairment losses should be
measured. The Company adopted FAS 121 effective December 31, 1995. The
financial statement impact of adopting FAS 121 was not material.

        PRE-OPERATIONAL COSTS: Organizational costs, costs associated with the
establishment of the provider network, and pre- operational costs are
capitalized and amortized over periods not exceeding 30 months. Pre-operational
costs include office rent, salaries, site selection costs, licensing and legal
fees, and other costs directly related to commencing business in a new market.

        FURNITURE AND EQUIPMENT: Furniture and equipment are recorded at cost.
As discussed more fully in Note 4, depreciation is calculated using the
straight-line method over a period of seven to ten years based on the estimated
useful life of the related asset.

        CLAIMS RESERVE: The reserve for costs expected to be incurred for
services approved during the year as well as costs incurred but not reported
are actuarial estimates based on the Company's historical claims data.

        RECLASSIFICATIONS: Certain reclassifications have been made to the 1996
consolidated balance sheet to conform to the classifications used for 1997.





                                      F-7
<PAGE>   46
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        CASH AND CASH EQUIVALENTS: For purposes of reporting cash flows, cash
and cash equivalents include cash on hand, amounts due from banks, money market
investment accounts held by brokers which are readily convertible to cash and
certificates of deposit with original maturities of less than 90 days.

        INCOME TAXES: The Company accounts for income taxes as set forth in
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," ("FAS 109"). FAS 109 prescribes an asset and liability method that
requires the recognition of deferred tax assets and liabilities for the
estimated future tax consequences attributable to differences between the
financial statement basis and the tax basis of assets and liabilities. See Note
7 for additional information.

        NET INCOME (LOSS) PER COMMON SHARE: Net income (loss) per common share
is presented on the basic and diluted bases in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" ("FAS 128"), which
was issued by the Financial Accounting Standards Board in February 1997 to
become effective for periods ending after December 15, 1997. The Company
adopted FAS 128 for the year ended December 31, 1997 and has restated net
income (loss) per share for 1995 and 1996. Basic net income (loss) per share is
calculated by dividing the net income available to common shareholders by the
weighted-average number of common shares outstanding for the period. Diluted
net income (loss) per share 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 entity. Diluted net income (loss) per share does not
include the effect of any potential issuances of common stock that would have
the effect of reducing the loss per common share. Net income (loss) per share
data are presented in the Statement of Operations, Note 11, and the attached
Exhibit 11.1. In addition, pursuant to the requirements of the Securities and
Exchange Commission, common stock equivalent shares issued at prices below the
original assumed public offering price of $18.00 per share during the twelve
months immediately preceding the date of the initial filing of the Registration
Statement related to the Company's initial public offering have been included
in the calculation of common shares and common equivalent shares using the
treasury stock method, as if they were outstanding for all periods presented.
EPS amounts for components of net income (loss) may not add to the net income
(loss) amounts presented due to rounding.

        STOCK OPTIONS: The Company has elected to follow Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25") and
related Interpretations in accounting for its employee stock options (see Note
9). Under APB 25, because the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.

        USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles 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 revenues and expenses
during the reporting period. Actual results could differ from those estimates.

        New Pronouncements: In June 1997, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" ("FAS 130"), which establishes standards for
the reporting and display of comprehensive income and its components. The
Company will adopt the standard for the year ending December 31, 1998, as
required.

        In June 1997, the FASB also issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("FAS 131"), which establishes standards for reporting information
about operating segments in annual financial statements and requires the
reporting of selected information about operating segments in interim financial
reports issued to shareholders. The Company will adopt the standard beginning
with the quarter ending March 31, 1998, but, in accordance with the standard,
will not begin reporting the information until the Company issues its annual
audited financial statements for the year ending December 31, 1998. The
financial statement impact of adopting FAS 130 and FAS 131 is not expected to
be material.

2. Acquisitions

        Effective November 1, 1995, the Company completed the acquisition of
all of the outstanding common stock of U.S. Dental Management, Inc. ("US
Dental") for $12.6 million, composed of $1.3 million in cash at closing,
principal payments totaling $1.0 million over the three year period beginning
November 30, 1995 and an additional payment of $10.3 million in January 1996
from an amount held in escrow.




                                      F-8
<PAGE>   47
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued



        The acquisition has been accounted for as a purchase and the net
assets and results of operations of US Dental and its subsidiaries have been
included in the Company's consolidated financial statements beginning November
1, 1995. The purchase price has been allocated to assets and liabilities of US
Dental based on their estimated respective fair values. The purchase price
exceeded the fair value of US Dental's net assets by $11.9 million of which
$11.7 million is recorded as goodwill and $0.2 million is recorded as the value
of non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $4.3 million and $3.6 million,
respectively. As of the purchase date, liabilities assumed included estimated
amounts accrued of $238,000 for the termination or relocation of employees and
other exit costs of the acquired company. As a result of additional information
obtained in 1996, the Company increased this liability and the corresponding
cost of US Dental by $643,000.

        Effective February 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of both Associated Health Plans, Inc.
("AHP") and Associated Companies, Inc. for $18.5 million composed of $14.4
million in cash at closing, financed through internal funds, and additional
payments to be made for up to four years commencing with February 1996.

        The acquisition has been accounted for as a purchase and the net assets
and results of operations of both have been included in the Company's
consolidated financial statements beginning February 1, 1996. The purchase
price has been allocated to assets and liabilities based on their estimated
respective fair values. The purchase price exceeded the fair value of net
assets by $18.2 million, of which $17.6 million is recorded as goodwill and
$0.6 million is recorded as the value of non-competition and consulting
agreements. As of the purchase date, liabilities assumed included an estimated
amount accrued of $555,000 for the termination or relocation of employees and
other exit costs of the acquired company.

        Effective October 1, 1996, the Company completed the acquisition of all
of the outstanding common stock of Independent Dental Plans, Inc.
("Independent") for $1.3 million in cash at closing, financed through internal
funds.

        The acquisition has been accounted for as a purchase and the net assets
and results of operations of Independent have been included in the Company's
consolidated financial statements beginning October 1, 1996. The purchase price
has been allocated to assets and liabilities of Independent based on their
estimated respective fair values. The purchase price exceeded the fair value of
Independent's net assets by $1.5 million, all of which was recorded as
goodwill. The Company has not allocated any portion of the purchase price to
any other intangible assets considered to have nominal value such as the
dentist networks and subscriber contracts. Assets acquired and liabilities
assumed totaled $0.5 million and $0.7 million, respectively.

        Effective October 1, 1996, the Company completed the acquisition of all
of the outstanding common stock of Association Dental Plan, Inc.
("Association") for $3.2 million in cash at closing, financed through internal
funds.

        The acquisition has been accounted for as a purchase and net assets and
results of operations of Association have been included in the Company's
consolidated financial statements beginning October 1, 1996. The purchase price
has been allocated to assets and liabilities of Association based on their
estimated respective fair values. The purchase price exceeded the fair value of
Association's net assets by $3.5 million, all of which was recorded as
goodwill. The Company has not allocated any portion of the purchase price to
any other intangible assets considered to have nominal value such as the
subscriber contracts. Assets acquired and liabilities assumed totaled $0.2
million and $0.5 million, respectively. As of the purchase date, liabilities
assumed included an estimated amount accrued of $400,000 for the termination or
relocation of employees and other exit costs of the acquired company.





                                      F-9
<PAGE>   48
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued



        Effective November 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of OraCare DPO, Inc. and a dental
management company affiliated with OraCare (collectively, "OraCare"). In
addition, as a part of the acquisition, the Company agreed to cause an
affiliate to acquire a dental professional association owned by the majority
stockholder of OraCare DPO, Inc. These entities were acquired for $30.5
million, composed of $5.6 million in cash at closing, financed through internal
funds, and an additional payment of $24.9 million in January 1997 from an
amount held in escrow, plus certain contingent payments up to a maximum
aggregate amount of $6.0 million based on the financial performance of the
Company in the states of New Jersey and Pennsylvania in 1997 and 1998.

        The acquisition has been accounted for as a purchase and the net assets
and results of operations of OraCare and its subsidiaries have been included in
the Company's consolidated financial statements beginning November 1, 1996. The
purchase price has been allocated to assets and liabilities of OraCare based on
their estimated respective fair values. The purchase price exceeded the fair
value of OraCare's net assets by $31.7 million of which $31.5 million is
recorded as goodwill and $0.2 million is recorded as the value of
non-competition and consulting agreements. The Company has not allocated any
portion of the purchase price to any other intangible assets considered to have
nominal value such as the dentist networks and subscriber contracts. Assets
acquired and liabilities assumed totaled $2.4 million and $3.3 million,
respectively. As of the purchase date, liabilities assumed included an
estimated amount accrued of $825,000 for the termination or relocation of
employees and other exit costs of the acquired company.

        In response to certain regulations in New Jersey, the capital stock of
the OraCare dental professional association was acquired by a company officer
who is a licensed New Jersey dentist. Additionally, the dentist has provided
the Company, for nominal consideration, with an option to transfer, at the
Company's discretion, the ownership of the dental professional association to
another licensed dentist of the Company's choosing. Successor dentists will be
required to provide a comparable option to the Company as a condition of the
transfer of the ownership of the dental professional association to each
successor dentist.

        Because of corporate practice of medicine laws in the state of New
Jersey, where OraCare operates, the Company does not own the OraCare PA, but,
instead, has the contractual right to designate, in its sole discretion and at
any time, the licensed dentist who is the owner of the OraCare PA's capital
stock at a nominal cost ("Nominee Arrangement"). In addition, the Company has
entered into an exclusive long-term management service agreement with the
OraCare PA. Through this agreement, the Company has exclusive authority over
decision making relating to all major ongoing operations of the OraCare PA with
the exception of the professional aspects of the practice of dentistry as
required by New Jersey state law. Under the management service agreement, the
Company establishes annual operating and capital budgets for the OraCare PA and
compensation guidelines for the licensed dental professionals. The management
service agreement has an initial term of ten years with options for additional
ten-year terms thereafter. Management fees are based upon billings of the
affiliated practice less the amounts necessary to pay professional compensation
and other professional expenses, and these fees are meant to compensate the
Company for expenses incurred in providing covered services plus all profits
and losses. The Company's financial interest in the OraCare PA is unilaterally
saleable and transferable by the Company and fluctuates based upon the actual
performance of the operations of the OraCare PA.

        Through the Nominee Arrangement, the Company has a significant
long-term financial interest in the OraCare PA and, therefore, according to
Emerging Issues Task Force Issue No. 97-2, "Application of FASB Statement 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," must consolidate the
results of the OraCare PA with those of the Company. Because the Company must
present consolidated financial statements, net patient service revenues are
presented in the accompanying statement of operations.

        Effective November 1, 1996, the Company completed the acquisition of
all of the outstanding common stock of Kansas City Dental Care, Inc. ("KCDC")
for $12.5 million, composed entirely of cash at closing, financed through
internal funds, plus a contingent payment up to a maximum of $2.0 million based
on the financial performance of the Company in the states of Missouri and
Kansas in the second year after completion of the acquisition. In 1997, the
Company paid $625,000 of contingent payments in connection with the acquisition
agreement.





                                      F-10
<PAGE>   49
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued



        The acquisition has been accounted for as a purchase and the net assets
and results of operations of KCDC have been included in the Company's
consolidated financial statements beginning November 1, 1996. The purchase
price has been allocated to assets and liabilities of KCDC based on their
estimated respective fair values. The purchase price exceeded the fair value of
KCDC's net assets by $13.3 million, all of which was recorded as goodwill. The
Company has not allocated any portion of the purchase price to any other
intangible assets considered to have nominal value such as the dentist networks
and subscriber contracts. Assets acquired and liabilities assumed totaled $0.8
million and $1.0 million, respectively. As of the purchase date, liabilities
assumed included an estimated amount accrued of $575,000 for the termination or
relocation of employees and other exit costs of the acquired company.

        Effective January 1, 1997, the Company completed the acquisition of all
of the outstanding common stock of United Dental Care, Inc., an Oklahoma
corporation, ("United") for $7.6 million in cash at closing, financed through
internal funds.

        The acquisition has been accounted for as a purchase and the net assets
and results of operations of United have been included in the Company's
consolidated financial statements beginning January 1, 1997. The purchase price
has been allocated to assets and liabilities of United based on their estimated
respective fair values. The purchase price exceeded the fair value of United's
assets by $5.6 million, all of which was recorded as goodwill. The Company has
not allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. Assets acquired and liabilities assumed totaled $3.6 million and
$1.1 million, respectively. As of the purchase date, an additional liability
was accrued in the amount of $525,000 for the termination or relocation of
employees and other exit costs of the acquired company.

        Effective June 1, 1997, the Company completed the acquisition of all of
the outstanding common stock of International Dental Plan, Inc. ("IDP") for
$5.0 million in cash at closing, financed through internal funds.

        The acquisition has been accounted for as a purchase and the net assets
and results of operations of IDP have been included in the Company's
consolidated financial statements beginning June 1, 1997. The purchase price
has been allocated to assets and liabilities of IDP based on their estimated,
respective fair values. The purchase price exceeded the fair value of IDP's
assets by $4.7 million, all of which was recorded as goodwill. The Company has
not allocated any portion of the purchase price to any other intangible assets
considered to have nominal value such as the dentist networks and subscriber
contracts. Assets acquired and liabilities assumed totaled $1.8 million and
$1.0 million, respectively. As of the purchase date, an additional liability
was accrued in the amount of $525,000 for the termination or relocation of
employees and other exit costs of the acquired company.

        The following represents the unaudited pro forma results of operations
as if the Company's acquisitions described above had occurred at the beginning
of 1995 (in thousands, except per share data):

<TABLE>
<CAPTION>
                                                                                   UNAUDITED
                                                                             YEAR ENDED DECEMBER 31,
                                                                    ----------------------------------------
                                                                     1995            1996            1997
                                                                    --------        --------        --------
  <S>                                                           <C>              <C>             <C>
 Revenues  . . . . . . . . . . . . . . . . . . . . . . . .          $140,437        $155,334        $177,373
 Net income(loss) before extraordinary charge  . . . . . .             3,318           8,832          (2,777)
 Extraordinary charge, net of tax  . . . . . . . . . . . .              (142)             --              --
  Net income (loss)  . . . . . . . . . . . . . . . . . . .             3,176           8,832          (2,777)

 Per share amounts:
    Net income (loss) per share before extraordinary charge
       Basic . . . . . . . . . . . . . . . . . . . . . . .          $   0.66         $  1.22         $ (0.31)
       Diluted . . . . . . . . . . . . . . . . . . . . . .              0.61            1.17           (0.31)
    Extraordinary charge per share, net of tax
       Basic . . . . . . . . . . . . . . . . . . . . . . .             (0.03)             --              --
       Diluted . . . . . . . . . . . . . . . . . . . . . .             (0.03)             --              --
    Net income (loss) per common share
       Basic . . . . . . . . . . . . . . . . . . . . . . .              0.63            1.22           (0.31)
       Diluted . . . . . . . . . . . . . . . . . . . . . .              0.58            1.17           (0.31)
</TABLE>



                                      F-11
<PAGE>   50
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        The pro forma information is based on historical information adjusted
to give effect to the amortization of goodwill and other intangibles. The pro
forma information does not necessarily reflect the actual results that would
have occurred nor is it necessarily indicative of future results of operations
of the combined operations.

3.  REGULATORY DEPOSITS

        At December 31, 1997, regulatory deposits were recorded at cost and
consisted of $1,734,000 in U.S. government obligations and $2,271,000 in
certificates of deposit insured by the Federal Deposit Insurance Corporation.
The Company has set aside certificates of deposit bearing interest at variable
rates as required by various state statutes. The fair value of all financial
instruments, determined by reference to market data, approximated their
recorded value at each of the balance sheet dates shown.

4.  FURNITURE AND EQUIPMENT

        The Company's furniture and equipment are summarized as follows (in
thousands):

<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                        1996           1997
<S>                                                       <C>            <C>
Internally developed software . . . . . . . . . .        $ 4,876         $ 8,796
Furniture, fixtures and equipment . . . . . . . .          5,184           8,215
Leasehold improvements  . . . . . . . . . . . . .            165             713
                                                         -------         -------
   Total  . . . . . . . . . . . . . . . . . . . .         10,225          17,724
   Less accumulated depreciation  . . . . . . . .         (3,169)         (5,112)
                                                         -------         -------
Total . . . . . . . . . . . . . . . . . . . . . .        $ 7,056         $12,612
                                                         =======         =======
</TABLE>

        Furniture and equipment are stated at cost less accumulated
depreciation and are depreciated or amortized over estimated useful lives of
ten years for furniture and fixtures, the shorter of (a) the life of the lease
or (b) ten years for leasehold improvements and seven years for internally
developed software. The Company is capitalizing certain costs associated with
implementing a new system for tracking and administering customer data to
replace the variety of systems in use by the Company's subsidiaries.  The core
system was functional by late 1996.  Costs of this conversion process are still
being incurred by the subsidiaries acquired during 1996 and 1997.  All such
costs are being depreciated over a seven-year period beginning from the date
the core system became functional.

Total depreciation and amortization expense relating to furniture and equipment
was $575,000, $717,000 and $1,982,000 for 1995, 1996 and 1997, respectively.

5.  LONG-TERM DEBT

        The Company acquired International Dental Health, Inc. ("IDH") in 1994.
A portion of the IDH purchase price was deferred and is payable over the period
ended January 1, 2000. The payments may be prepaid without penalty and are not
contingent upon the future operations of the Company. The present value of the
future payments (assuming no voluntary prepayments, discounted at 7.25%) is
recorded as long-term debt. One of the former shareholders of IDH was
subsequently appointed a director to the Company. The Company entered into a
letter of credit facility relating to the deferral agreements that currently
requires annual fees of up to 0.85% of the unpaid amounts under these
agreements.

        A portion of the US Dental purchase price was financed by a promissory
note in the amount of $10.3 million that was subsequently paid in full on
January 18, 1996. In addition, a portion of the US Dental purchase price in the
amount of $1.0 million was deferred and is payable over the period ended
December 31, 1999. The payments may be prepaid without penalty and are not
contingent upon the future operations of the Company. The present value of the
future payments (assuming no voluntary prepayments, discounted at 7.50%) is
recorded as long-term debt.



                                      F-12
<PAGE>   51
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        A portion of the AHP purchase price in the amount of $0.6 million was
deferred and payable in monthly installments over a three-year period. The
payments may be prepaid without penalty and are not contingent upon the future
operations of the Company. The interest rate on the deferred purchase price is
5.0% and the total amount of $0.6 million was recorded as long-term debt on the
purchase date.

        On November 14, 1996, in conjunction with the acquisition of OraCare
(see Note 2), the Company signed promissory notes in an aggregate amount of
$24.9 million. The interest rate on the promissory notes was 4.84% per annum,
payable at the notes' maturity on January 2, 1997. The Company paid the notes
in full on January 2, 1997. In addition, the Company acquired certain capital
leases primarily for dental equipment used by the dental professional
association.

        The following table summarizes the minimum required future principal
reductions (dollars in thousands):

<TABLE>
<CAPTION>
                                 DEFERRED      DEFERRED      DEFERRED
                                   IDH         US DENTAL        AHP
                                 PURCHASE      PURCHASE      PURCHASE       ORACARE
                                  PRICE         PRICE          PRICE        CAPITAL        ANNUAL
                                 PAYMENTS      PAYMENTS      PAYMENTS        LEASES         TOTAL
                                 --------      --------      --------       --------       -------
<S>                              <C>           <C>           <C>            <C>            <C>
1998  . . . . . . . . .          $    790      $    263      $    209       $     89       $ 1,351
1999  . . . . . . . . .               849           251            18             76         1,194
2000  . . . . . . . . .               142          --             --              52           194
2001  . . . . . . . . .              --            --             --              15            15
2002 and thereafter . .              --            --             --             --           --
                                 --------      --------      --------       --------       -------
TOTAL                            $  1,781      $    514      $    227       $    232       $ 2,754
                                 ========      ========      ========       ========       =======
</TABLE>

        On November 14, 1996, the Company signed a revolving credit agreement
providing a $35.0 million revolving credit facility with an unaffiliated bank.
The purpose of the revolving credit facility is to provide (i) for funding
future acquisitions of managed dental benefits companies, (ii) for the issuance
of letters of credit, (iii) for capital expenditures and (iv) at the election
of the Company, a working capital line of credit in an amount up to $5.0
million out of the total amount available under the revolving credit facility.
The revolving credit facility has a term of four years, expiring November 30,
2000.

        Outstanding indebtedness under the revolving line of credit will bear
interest payable quarterly, at the Company's option, at: (i) up to 0.25% over
the base rate of the lender or (ii) up to 1.85% over LIBOR, with the margin
over the respective rates decreasing as the ratio of total funded debt to
earnings before interest, taxes, depreciation and interest decreases. The
Company pays an annual fee of up to 0.25% of the amount remaining available to
be drawn under the credit facility and up to 0.85 % of the amount available to
be drawn under the letters of credit.

        The revolving credit facility is secured by the pledge of all the
outstanding capital stock of the direct and indirect subsidiaries of the
Company and a negative pledge on all other assets. The revolving credit
facility contains numerous covenants including, among other things, that the
Company cannot, except in certain permitted instances, (i) incur any additional
indebtedness; (ii) grant liens on any of the assets of the Company or its
subsidiaries; (iii) declare or pay any dividends; or (iv) merge or consolidate
with any other entity. In addition, the Company is required to satisfy on an
ongoing basis certain financial covenants. The Company's breach of any covenant
would result in an event of default under the revolving credit facility.
Approximately $8.4 million remained available for working capital and capital
expenditures under the revolving credit facility at December 31, 1997.

        On June 29, 1997, the Company signed the first amendment to the
revolving credit agreement. The first amendment modified the minimum liquidity
coverage ratio covenant and allowed the Company to repurchase outstanding
shares of its capital stock. The amendment also allowed the Company to exceed
the capital expenditure limit for 1997. The second amendment increased the
limit for capital expenditures and working capital not to exceed $15,000,000 in
the aggregate at any one time. Additionally, the second amendment provided for
certain changes in the financial covenants increasing the availability of
advances to the Company.



                                      F-13
<PAGE>   52
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        In September 1997, the Company borrowed a total of $6,630,000 under the
revolving credit facility. The majority of these funds was used to increase the
capital surplus at the Company's indemnity subsidiary United Dental Care
Insurance Company.

        In 1994, the Company arranged for the issuance of two letters of credit
in the aggregate amount of $4.8 million. The letters of credit secure the
obligations of the Company under certain agreements executed in connection with
the IDH acquisition. The letters of credit decline in amount annually and
expire in September 1998. The Company pays an annual fee of up to 0.85% of the
amount remaining to be drawn under the letters of credit.

6.  COMMITMENTS AND CONTINGENCIES

        The Company leases office space and certain equipment under operating
leases. Rental expense for 1995, 1996 and 1997 was $1,351,000, $1,243,000 and
$1,768,000, respectively.

        Minimum obligations under the operating leases at December 31, 1997 are
as follows (dollars in thousands):

<TABLE>
<CAPTION>
  YEAR ENDING DECEMBER 31:
  <S>                                                                 <C>
   1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . .        $1,910
   1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,548
   2000 . . . . . . . . . . . . . . . . . . . . . . . . . . . .         1,089
   2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . .           925
   2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . .           243
   Thereafter . . . . . . . . . . . . . . . . . . . . . . . . .        ------
                                                                       $5,715
                                                                       ======
</TABLE>

        The Company is, and may be in the future, party to litigation arising in
the ordinary course of its business. The Company carries insurance protecting it
against liability arising out of, among other things, the provision of dental
care services by contracting dentists, who are not employees or agents of the
Company. Claims against the Company arising out of the provision of dental care
services by contracting dentists historically have been rare, but there can be
no assurance that the Company will not become involved in such litigation or
otherwise become subject to claims relating to its contracting dentists in the
future. While the Company has no significant pending claims, there can be no
assurance that the Company's insurance coverage will be adequate to cover all
liabilities arising out of such claims or that any such claims will be covered
by the Company's insurance.  The Company is not currently aware of any claims
which are not covered by insurance and which may have a material adverse impact
upon the financial condition of the Company.

7.  INCOME TAXES

        The provision (benefit) for income taxes allocated to continuing
operations consisted of the following components (dollars in thousands):

<TABLE>
<CAPTION>
                                                               1995         1996        1997
                                                              ------       ------     -------
 <S>                                                          <C>          <C>        <C>
 Current provision (benefit) . . . . . . . . . . . . .        $2,250       $3,744      $  (46)
 Deferred provision (benefit)  . . . . . . . . . . . .          (119)         694        (441)
                                                              ------       ------     -------
 Provision (benefit) for income taxes  . . . . . . . .        $2,131       $4,438     $  (487)
                                                              ======       ======     =======
</TABLE>

        The provision for income taxes includes $0, $130,000 and $70,000 for
state income taxes for 1995, 1996 and 1997, respectively. The Company pays
premium taxes in lieu of state income taxes in several states where it has
operations.

        During 1995, 1996 and 1997 certain employees exercised 343,500, 10,000
and 34,200 nonqualified stock options, respectively, resulting in tax savings
of approximately $527,000, $125,000 and $213,000, respectively, and a
corresponding increase to capital.


                                      F-14
<PAGE>   53
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued



        A reconciliation of the difference between the federal income tax rate
and the Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
                                                       1995          1996          1997
                                                      -----         -----         -----
<S>                                                    <C>          <C>           <C>
 Federal income tax rate . . . . . . . . . . .         34.0%         34.0%        (34.0)%
 Amortization of goodwill  . . . . . . . . . .          2.0           3.0          22.9
 Tax exempt interest income  . . . . . . . . .         (1.2)         (1.4)         (0.9)
 Other . . . . . . . . . . . . . . . . . . . .          1.6           1.4          (2.6)
                                                      -----         -----         ------
     Effective tax rate  . . . . . . . . . . .         36.4%         37.0%        (14.6)%
                                                      =====         =====         ======
</TABLE>

  Deferred tax assets (liabilities) were comprised of the following at December
31:
<TABLE>
<CAPTION>
                                                                      1996            1997
                                                                     ------           ------
 <S>                                                                <C>              <C>
Premium reserve . . . . . . . . . . . . . . . . . . . . . .          $  673           $2,144
Depreciation  . . . . . . . . . . . . . . . . . . . . . . .             303              167
Consulting and non-competition agreements . . . . . . . . .              --              100
Accrued acquisition costs . . . . . . . . . . . . . . . . .             942               --
Other . . . . . . . . . . . . . . . . . . . . . . . . . . .              24               72
                                                                     ------           ------
   Gross deferred tax asset . . . . . . . . . . . . . . . .           1,942            2,483
                                                                     ------           ------
Consulting and non-competition agreements . . . . . . . . .            (691)              --
Accrued acquisition costs . . . . . . . . . . . . . . . . .              --           (2,127)
                                                                     ------           ------
   Gross deferred tax liability . . . . . . . . . . . . . .            (691)          (2,127)
                                                                     ------           ------
Net deferred tax asset  . . . . . . . . . . . . . . . . . .          $1,251           $  356
                                                                     ======           ======
</TABLE>

        The deferred tax balances above reflect adjustments made for
acquisitions completed in 1997 and prior years. The net effect of these
adjustments in 1997 resulted in an increase to goodwill of $1,625,500.

        The Company believes it will generate sufficient future taxable income
to realize its deferred tax asset. However, there can be no assurance that the
Company will realize these assets should the merger discussed in Note 12 be
finalized. The Company generated a net operating loss for 1997 of approximately
$1.6 million, which will be carried back, resulting in a refund of taxes.

        The Company is currently under examination by the Internal Revenue
Service for years 1994 and 1995. Management believes that adequate provision
has been made in the financial statements for any adjustments that might be
proposed.

8.  EXTRAORDINARY CHARGE

        In September 1995, the Company incurred an extraordinary charge due to
the early retirement of debt in the amount of $142,000, net of a tax benefit of
$73,000.

9.  STOCKHOLDERS' EQUITY

        On September 21, 1995, the Company completed its initial public
offering of common stock, issuing 2,375,000 shares at a price of $22.00 per
share before expenses. After deduction of underwriting discounts and expenses
of the offering, the aggregate net offering proceeds were $48.0 million.




                                      F-15
<PAGE>   54
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued



        On October 28, 1996, the Company completed a public offering of common
stock, issuing 2,000,000 shares at a price of $30.00 per share before expenses.
After deduction of underwriting discounts and expenses of the offering, the
aggregate net offering proceeds were $56.2 million.

        In January 1995, an executive officer of the Company purchased from the
Company warrants to purchase 40,000 shares of common stock at $6.00 per share.
The purchase price of the warrants was $2.00 each.

        The Company had an Incentive Stock Option Plan pursuant to which
200,000 shares of common stock were reserved. During 1994 and 1995, 60,000 and
80,000 stock options were exercised, respectively, at an exercise price of
$1.25 per share. These options are considered noncompensatory. The board of
directors has terminated the Incentive Stock Option Plan for the purposes of
any additional grants thereunder.

        The Company has a Key Employee Stock Option Plan pursuant to which
222,000 and 187,800 shares were reserved as of December 31, 1996 and December
31, 1997, respectively. During 1996, 10,000 stock options were exercised at an
exercise price of $1.50 and, during 1997, 34,200 stock options were exercised
at an average exercise price of $5.30. At December 31, 1997, 21,000 of the
187,800 outstanding Key Employee Stock Option Plan options were exercisable at
an average exercise price of $5.64. These options are considered compensatory
and have terms of five to ten years; the options are exercisable at various
times during the terms of the options at exercise prices ranging from $4.00 to
$6.00, which amounts, in management's estimation, were equal to or exceeded
market value at the date of grant. The board of directors has terminated the
Key Employee Stock Option Plan for the purposes of any additional grants
thereunder.

        In 1995, the Company's board of directors adopted a new employee stock
option plan (the "1995 Plan") that provides only for the grant of non-qualified
stock options. The 1995 Plan originally provided that a total of 300,000 shares
of common stock may be issued pursuant to the options granted under the 1995
Plan, and, in 1996, the stockholders approved an increase to 800,000 shares. In
addition to discretionary grants of stock options to employees, the 1995 Plan
provides for the automatic one-time grant of stock options for 16,000 shares of
common stock to certain qualifying non- employee directors who were either
serving on the board of directors of the Company when the 1995 Plan was adopted
by the board of directors





                                      F-16
<PAGE>   55
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


or subsequently elected to the board of directors (to the extent that options
are available under the 1995 Plan).  Such director options are exercisable in
25% increments beginning one year after the date of grant.  At December 31,
1997, options for 419,000 shares had been granted under the 1995 Plan, 16,000
of which were exercisable at an option price of $7.00.  These options are
considered compensatory and have terms of ten years; the options are
exercisable at various times during the terms of the options at exercise prices
ranging from $11.25 to $37.13, which amounts were equal to or exceeded market
value at the date of grant.  Option grants to employees other than directors
generally vest and are exercisable cumulatively in equal installments over a
five year period commencing two years from the date of grant.

        The combined historical activity in the Company's option plans since
December 31, 1994 has been as follows:

<TABLE>
<CAPTION>
                                      1995                       1996                        1997
                               ---------------------      ----------------------      ---------------------
                                            WEIGHTED                    WEIGHTED                   WEIGHTED
                                            AVERAGE                     AVERAGE                     AVERAGE
                               OPTIONS      EXERCISE      OPTIONS       EXERCISE      OPTIONS      EXERCISE
                                (000)        PRICE         (000)         PRICE         (000)         PRICE
                               -------      --------      --------      --------      -------       --------
<S>                           <C>          <C>             <C>            <C>         <C>            <C>
Outstanding at
   beginning of year  . . .    635.5         $3.06         374.0         $ 6.01        617.0        $22.60
   Granted  . . . . . . . .    112.0          8.60         383.0          34.51        636.0         18.67
   Exercised  . . . . . . .   (343.5)         1.35         (10.0)          1.50        (34.2)         5.30
   Forfeited  . . . . . . .    (30.0)         6.25        (130.0)         11.60       (332.0)        34.11
                              ------                      ------                       -----
Outstanding at
   end of year  . . . . . .    374.0          6.01         617.0          22.60        886.8         16.14
                              ======                      ======                       =====
Exercisable at
   end of year  . . . . . .       --            --          15.5           6.27         38.5          7.43

Weighted average
fair value of options
granted during year . . . .  $  2.24                    $  14.80                       $8.06
</TABLE>

  The following table summarizes information about fixed stock options
outstanding at December 31, 1997:

<TABLE>
<CAPTION>
                                 OPTIONS OUTSTANDING                             OPTIONS EXERCISABLE
                  -------------------------------------------------      -----------------------------
                                      WEIGHTED
                                       AVERAGE            WEIGHTED                           WEIGHTED
                                      REMAINING           AVERAGE                           AVERAGE
EXERCISE                             CONTRACTUAL          EXERCISE                          EXERCISE
 PRICE ($)         NUMBER           LIFE (YEARS)          PRICE ($)        NUMBER           PRICE ($)
----------        -------           ------------          ---------        -------          ---------
 <S>               <C>                   <C>               <C>               <C>                 <C>
 4.000             27,000                5.00              4.000                --               --
 5.500             30,000                3.83              5.500            15,000             5.50
 6.000            130,800                4.02              6.000             6,000             6.00
 7.000             32,000                7.33              7.000            16,000             7.00
11.250             60,000                9.96             11.250                --               --
13.625             75,000                9.67             13.625                --               --
16.000             57,000                9.63             16.000                --               --
17.600            240,000                9.63             17.600                --               --
22.310            100,000                9.33             22.310                --               --
27.000            104,000               10.50             27.000                --               --
37.130             31,000                7.23             37.130             1,500            37.13
                 --------                                                   ------
                  886,800                8.39             16.140            38,500             7.43
                 ========                                                   ======
</TABLE>


        The Company has elected to follow APB 25 and related Interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS
123") requires use of option valuation models that were not developed for use
in valuing employee stock options. Under APB 25, because the exercise price of
the Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.




                                      F-17
<PAGE>   56
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        Pro forma information regarding net income and earnings per share is
required by FAS 123, and has been determined as if the Company had accounted
for its employee stock options under the fair value method of FAS 123. The fair
value for each option grant has been estimated at the date of grant using a
Black-Scholes multiple option pricing model that treats each option vesting
date as a separate option for purposes of the valuation. Thus, the assumptions
concerning the risk-free interest rate may vary for each separate vesting date.
The expected life of each separate vesting date is determined by estimating the
time period between vesting and exercise, taking into account such factors as
the age and financial resources of the individual being granted the option. The
Company has not paid any dividends and does not anticipate paying dividends at
any time during the life of options granted in 1995, 1996 and 1997.

        The assumed weighted average risk-free interest rate was 7.75%, 6.07%
and 6.27% for options granted in 1995, 1996 and 1997, respectively. The assumed
weighted average volatility was zero for options granted in 1995 (the Company
was privately owned when the options were granted), 35.0% for options granted
in 1996 and 31.7% for options granted in 1997. The assumed weighted average
expected life was 4.1 years, 5.6 years and 6.0 years for options granted in
1995, 1996 and 1997, respectively.

        The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and, because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.

        For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. Forfeitures
are recognized as they occur. The Company's pro forma information follows (in
thousands except for earnings per share information):
<TABLE>
<CAPTION>
                                                    1995           1996             1997
                                                  ------          ------         --------
<S>                                               <C>             <C>            <C>
Net income (loss):
  As reported . . . . . . . . . . . . .           $3,589          $7,557         $(2,847)
  Pro forma . . . . . . . . . . . . . .           $3,558          $6,971         $(3,059)

Earnings (loss) per share:
  As reported
     Basic  . . . . . . . . . . . . . .            $0.71           $1.04          $(0.32)
     Diluted  . . . . . . . . . . . . .            $0.66           $1.00          $(0.32)
  Pro forma . . . . . . . . . . . . . .
     Basic  . . . . . . . . . . . . . .            $0.70           $0.96          $(0.34)
     Diluted  . . . . . . . . . . . . .            $0.65           $0.92          $(0.34)
</TABLE>

10.  STATUTORY NET WORTH COMPARED TO STOCKHOLDERS' EQUITY PER GENERALLY
     ACCEPTED ACCOUNTING PRINCIPLES

        Certain assets recognized under generally accepted accounting
principles are considered non-admissible under statutory accounting practices
as filed and submitted in the annual reports to the states of domicile of the
various subsidiaries required to submit such reports. These nonadmitted assets
create differences between statutory net worth as reported on the annual filing
and total stockholders' equity as recorded under generally accepted accounting
principles.




                                      F-18
<PAGE>   57
                   UNITED DENTAL CARE, INC. AND SUBSIDIARIES

             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - continued


        Statutory net worth of the Company's subsidiaries that are subject to
state insurance regulations totaled approximately $17.0 million and $26.7
million at December 31, 1996 and 1997, respectively. Of these amounts, United
Dental Care Insurance Company ("UDCIC") represents $3.8 million and $5.6
million at December 31, 1996 and 1997, respectively. UDCIC is subject to the
Arizona insurance statutes and regulations and is required to maintain minimum
capital and surplus of $500,000 and without the prior approval of the Arizona
Department of Insurance may not pay a dividend greater than the lesser of 10%
of capital and surplus as of the end of the prior year or net investment income
for the prior year. UDCIC received approval from the Arizona Department of
Insurance to pay a dividend of $2.5 million in 1996.

        Statutory net income of the Company's subsidiaries for 1996 and 1997
was $8.9 million and $3.7 million, respectively.

11.  SUPPLEMENTARY FINANCIAL INFORMATION

                 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                             1996 QUARTERS                           1997 QUARTERS
                                  ------------------------------------  ---------------------------------------
                                  FIRST    SECOND    THIRD     FOURTH     FIRST     SECOND     THIRD    FOURTH
                                  -----    ------    -----     ------     -----     ------     -----    -------
<S>                              <C>                          <C>        <C>
Revenues  . . . . . . . . . .    $24,794   $26,331   $26,713   $35,810    $45,023   $44,203   $41,493    $43,980
Net income (loss) . . . . . .    $ 1,411   $ 1,645   $ 1,876   $ 2,625    $ 1,452   $(4,433)  $(1,312)   $ 1,446

Net income (loss) per share:
   Basic earnings (loss) per
    share . . . . . . . . . .      $0.20     $0.24    $0.27      $0.32      $0.16    $(0.50)    $0.15      $0.16
   Diluted earnings (loss) per
    share . . . . . . . . . .      $0.19     $0.23    $0.26      $0.31      $0.16    $(0.50)    $0.15      $0.16
</TABLE>

There were no extraordinary items in 1996 or 1997.

12.  SUBSEQUENT EVENT

        On March 10, 1998, the Company entered into an Agreement and Plan of
Merger (the"Merger Agreement") with Protective Life Corporation ("Protective"),
a Delaware corporation, and PLC Merger Subsidiary Corporation ("MergerSub"), a
Delaware corporation and wholly-owned subsidiary of Protective, pursuant to
which the Company would be merged with and into MergerSub (the "Merger") and
MergerSub would be the surviving corporation.

        In the Merger, the stockholders of the Company would receive for each
share of outstanding common stock of the Company a combination of $9.31 in cash
and 0.2893 shares of common stock, $0.50 par value per share, of Protective
("Protective Common Stock") (after giving effect to the two-for-one stock split
announced by Protective on March 2, 1998 and payable on April 1, 1998 to the
holders of Protective Common Stock). The Merger Agreement provides that the
Company may terminate the Agreement if the price of Protective Common Stock is
below $27.50 per share and Protective may terminate the Agreement if the price
of Protective Common Stock is above $39.50 per share (after adjustment for
Protective's stock split).

        The Merger is subject to approval by the stockholders of the Company,
the applicable requirements of the Hart-Scott- Rodino Antitrust Improvements
Act of 1976, as amended, regulatory approvals and other customary closing
conditions; therefore, there can be no assurance as to whether or when the
Merger will be completed.





                                      F-19
<PAGE>   58
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
Number                             Exhibit
-----                              -------
<S>     <C>
3.01    Restated Certificate of Incorporation of the Company (filed as Exhibit
        3.01 to the Company's Registration Statement on Form S-1, Registration
        Number 33-94356 (the "1995 Registration Statement") and incorporated
        herein by reference).
3.02    Amended and Restated Bylaws of the Company (filed as Exhibit 3.02 to
        the 1995 Registration Statement and incorporated herein by reference).
4.01    Specimen Common Stock Certificate (filed as Exhibit 4.01 to the 1995
        Registration Statement and incorporated herein by reference).
10.01   Non-Competition Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., The Adaven Group Limited Partnership and Robert J.
        Nettinga (filed as Exhibit 10.06 to the 1995 Registration Statement and
        incorporated herein by reference).
10.02   Agreement for Consulting Services dated as of September 16, 1994
        between United Dental Care, Inc. and The Adaven Group Limited
        Partnership (filed as Exhibit 10.07 to the 1995 Registration Statement
        and incorporated herein by reference).
10.03   Non-Competition Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., Omega Marine Development, Inc. and Paul C. Nettinga
        (filed as Exhibit 10.08 to the 1995 Registration Statement and
        incorporated herein by reference).
10.04   Agreement for Consulting Services dated as of September 16, 1994
        between United Dental Care, Inc. and Omega Marine Development, Inc.
        (filed as Exhibit 10.09 to the 1995 Registration Statement and
        incorporated herein by reference).
10.05   Stockholders Agreement dated as of September 16, 1994 among United
        Dental Care, Inc., certain stockholders of United Dental Care, Inc.
        named therein and Robert J. Nettinga (filed as Exhibit 10.10 to the
        1995 Registration Statement and incorporated herein by reference).
10.06   Irrevocable Letter of Credit dated September 16, 1994 in the amount of
        $4,023,500 in favor of The Adaven Group Limited Partnership (filed as
        Exhibit 10.11 to the 1995 Registration Statement and incorporated
        herein by reference).
10.07   Amended and Restated Application and Agreement for $4,023,500 Standby
        Letter of Credit in favor of The Adaven Group Limited Partnership dated
        September 16, 1994 by United Dental Care, Inc. to NationsBank of Texas,
        N.A. (filed as Exhibit 10.09 to the Company's Registration Statement on
        Form S-1, Registration Number 333-12425 (the "1996 Registration
        Statement") and incorporated herein by reference).
10.08   Administrative Services Agreement (as amended) dated as of January 1,
        1995 between United Dental Care, Inc. and R.E. Harrington, Inc., and
        Memorandum of Understanding in connection therewith dated as of January
        1, 1995 (filed as Exhibit 10.28 to the 1995 Registration Statement and
        incorporated herein by reference).
10.09   Consulting Agreement dated September 27, 1995, between United Dental
        Care, Inc. and Dolores A. Kordek (filed as Exhibit 10.9 to the 1995
        Form 10-Q and incorporated herein by reference).
10.10   Consulting Agreement dated September 27, 1995, between United Dental
        Care, Inc. and Christopher A. Jehle (filed as Exhibit 10.10 to the 1995
        Form 10-Q and incorporated herein by reference).
10.11   Stock Purchase Agreement dated as of December 14, 1995 among United
        Dental Care, Inc., R. Bruce Buchanan, Joseph V. Errante, D.D.S.,
        Margaret R. Errante, D.D.S., The Francesca Irena Errante Irrevocable
        Trust U/A 10/1/95, The Alexandra Nicole Errante Irrevocable Trust U/A
        10/1/95, Timothy J. Moncher, Associated Health Plans, Inc. and
        Associated Companies, Inc. (filed as Exhibit 10.1 to the Company's
        Current Report on Form 8-K filed January 22, 1996, File No. 0-26688
        (the "Form 8-K"), and incorporated herein by reference).
10.12   First Amendment to Stock Purchase Agreement dated as of January 17,
        1996 among United Dental Care, Inc., R. Bruce Buchanan, Joseph V.
        Errante, D.D.S., Margaret R. Errante, D.D.S., The Francesca Irena
        Errante Irrevocable Trust U/A 10/1/95, The Alexandra Nicole Errante
        Irrevocable Trust U/A 10/1/95, Timothy J. Moncher, Associated Health
        Plans, Inc. and Associated Companies, Inc. (filed as Exhibit 10.2 to
        the Form 8-K and incorporated herein by reference).
10.13   Non-Competition Agreement, dated January 22, 1995, between United
        Dental Care, Inc. and R. Bruce Buchanan (filed as Exhibit 10.3 to the
        Form 8-K, and incorporated herein by reference). The three other
        Non-Competition Agreements between United Dental Care, Inc. and Joseph
        V. Errante, D.D.S., Margaret R. Errante, D.D.S. and Timothy J. Moncher,
        respectively, are identical in form except as to the parties thereto
        and are therefore omitted from this filing.
</TABLE>



<PAGE>   59
<TABLE>
  <S>    <C>

10.15   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        Gilbert G. Finger, Patricia L. Schubring, Edward K. Halstead, Birchtree
        Enterprises and Binkley & Stewart, P.C., as Sellers, and Independent
        Dental Plans, Inc. dated as of June 28, 1996 (filed as Exhibit 10.27 to
        the 1996 Registration Statement and incorporated herein by reference).
10.16   Stock Purchase Agreement between United Dental Care, Inc., as
        Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all
        the issued and outstanding shares of capital stock of Association
        Dental Plan, Inc., a District of Columbia corporation (filed as Exhibit
        10.28 to the 1996 Registration Statement and incorporated herein by
        reference).
10.17   Stock Purchase Agreement between United Dental Care, Inc., as
        Purchaser, and UICI, as Seller, dated as of September 10, 1996, for all
        the issued and outstanding shares of capital stock of International
        Dental Plans, Inc., a Florida corporation (filed as Exhibit 10.30 to
        the 1996 Registration Statement and incorporated herein by reference).
10.18   Earnest Money Escrow Agreement among United Dental Care, Inc., UICI,
        and Texas Commerce Bank National Association, dated as of September 10,
        1996, regarding the purchase of all the issued and outstanding shares
        of capital stock of International Dental Plans, Inc., a Florida
        corporation (filed as Exhibit 10.31 to the 1996 Registration Statement
        and incorporated herein by reference).
10.19   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and UICI, United Management & Consulting, Inc., United Management &
        Consulting Retirement Plan, and Marie C. Montgomery Revocable Trust
        U/T/A March 23, 1992, as Seller, dated as of September 10, 1996, for
        the purchase of 90% of the issued and outstanding shares of capital
        stock of United Dental Care, Inc., an Oklahoma corporation (filed as
        Exhibit 10.32 to the 1996 Registration Statement and incorporated
        herein by reference).
10.20   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and John E. Carlin, Ph.D., Frank J. Schloegel, III, J. Dennis Dlabal,
        D.D.S., The John E. Carlin Charitable Remainder Unitrust, UID June 28,
        1996, The Frank J. Schloegel Charitable Remainder Unitrust I, UID July
        12, 1996, The Frank J. Schloegel Charitable Remainder Unitrust II, UID
        July 12, 1996, The J. Dennis Dlabal Charitable Remainder Trust UID
        September 5, 1996, as Sellers, and Kansas City Dental Care, Inc., dated
        as of September 11, 1996 (filed as Exhibit 10.34 to the 1996
        Registration Statement and incorporated herein by reference).
10.21   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., Lisa M. Mazzone, Frank A. Pettisani,
        Jr., D.D.S., Charles A. Costa, and Donna Costa, as Sellers, and OraCare
        Consultants, Inc., dated as of September 5, 1996 (filed as Exhibit
        10.36 to the 1996 Registration Statement and incorporated herein by
        reference).
10.22   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., as Seller, and OraCare Dental
        Associates, P.A., dated as of September 5, 1996 (filed as Exhibit 10.38
        to the 1996 Registration Statement and incorporated herein by
        reference).
10.23   Stock Purchase Agreement among United Dental Care, Inc., as Purchaser,
        and Frank A. Pettisani, D.D.S., Frank A. Pettisani, Jr., D.D.S.,
        Charles A. Costa, and Donna Costa, as Sellers, and OraCare DPO, Inc.,
        dated as of September 5, 1996 (filed as Exhibit 10.39 to the 1996
        Registration Statement and incorporated herein by reference).
10.24   Letter Agreement dated November 14, 1996 between United Dental Care,
        Inc. and Peter R. Barnett, D.M.D., regarding ownership of stock of
        OraCare Dental Associates, P.A.(filed as Exhibit 10.24 to the Company's
        Annual Report on Form 10-K for the fiscal year ended December 31, 1996
        (the "1996 Form 10-K") and incorporated herein by reference).
10.25   Management Agreement dated November 14, 1996 between OraCare
        Consultants, Inc. and OraCare Dental Associates, P.A. (filed as Exhibit
        10.25 to the 1996 Form 10-K and incorporated herein by reference).
10.26   Revolving Credit Agreement, dated as of November 14, 1996, between
        United Dental Care, Inc., NationsBank of Texas, N.A., as Agent for the
        Lenders named therein, and the Lenders (filed as Exhibit 10.26 to the
        1996 Form 10-K and incorporated herein by reference).
10.27   Warrant, dated February 26, 1996, held by Mark E. Pape to purchase
        Common Stock of the Company (filed as Exhibit 10.27 to the 1996 Form
        10-K and incorporated herein by reference).
10.28   Employment Agreement dated as of May 13, 1996, between United Dental
        Care, Inc., and William H. Wilcox (filed as Exhibit 10.40 to the 1996
        Registration Statement and incorporated herein by reference).
10.29   Employment Agreement dated as of June 1, 1996, between United Dental
        Care, Inc., and Mark E. Pape (filed as Exhibit 10.41 to the 1996
        Registration Statement and incorporated herein by reference).
10.30   Employment Agreement dated as of June 1, 1996, between United Dental
        Care, Inc. and Peter R. Barnett, D.M.D. (filed as Exhibit 10.42 to the
        1996 Registration Statement and incorporated herein by reference).
10.31   Master Software License and Services Agreement dated as of June 20,
        1995 between Software Technologies Corporation and United Dental Care,
        Inc. (filed as Exhibit 10.29 to the 1995 Registration Statement and
        incorporated herein by reference).
10.32   United Dental Care, Inc. Amended and Restated 1989 Key Employee Stock
        Option Plan (filed as Exhibit 4.4 to the Company's Registration
        Statement on Form S-8, Registration Number 333-20043 and incorporated
        herein by reference).
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10.33   United Dental Care, Inc. 1995 Stock Option Plan (filed as Exhibit 4.5
        to the Company's Registration Statement on Form S-8, Registration
        Number 333-20043 and incorporated herein by reference).
10.34   United Dental Care, Inc. Executive Incentive Plans for 1996 for Mr.
        Wilcox, Mr. Pape and Dr. Barnett (filed as Exhibit 10.47 to the 1996
        Registration Statement and incorporated herein by reference).
10.35   United Dental Care, Inc. Executive Incentive Plans for 1997 for Mr.
        Wilcox, Mr. Pape and Dr. Barnett.
10.36   First Amendment to Revolving Credit Agreement (filed as Exhibit 10.01
        to the third quarter Form 10-Q and incorporated herein by reference).
10.37*  Stock Option Agreement dated as of August 15, 1997 between United
        Dental Care, Inc. and William H. Wilcox.
10.38*  Employment Agreement dated as of November 1, 1997 between United Dental
        Care, Inc. and John W. McCarty.
10.39*  Stock Option Agreement dated as of November 1, 1997 between United
        Dental Care, Inc. and John W. McCarty.
10.40*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Jack R. Anderson.
10.41*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and George E. Bello.
10.42*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Jamed E. Buncher.
10.43*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Robert J. Nettinga.
10.44*  Stock Option Agreement dated as of December 17, 1997 between United
        Dental Care, Inc. and Donald E. Steen.
10.45*  United Dental Care, Inc. Executive Incentive Plans for 1998.
10.46*  Family Dentist Agreement dated as of December 31, 1997 between United
        Dental Care of Arizona, Inc. and Associated Dental Care Providers,
        P.C., an Arizona professional corporation.
10.47*  Second Amendment to Revolving Credit Agreement dated February 20, 1998.
10.48   Agreement and Plan of Merger dated as of March 10, 1998 and amended as
        of March 17, 1998 by and among Protective Life Corporation, PLC Merger
        Subsidiary Corporation and the Company (filed as Exhibit 2.1 to the
        Company's Current Report on Form 8-K filed on March 16, 1998 and
        incorporated herein by reference).
10.49*  First Amendment dated March 10, 1997 to the Employment Agreement of
        November 10, 1997 between United Dental Care, Inc. and John W. McCarty.
10.50*  First Amendment dated March 10, 1997 to the Employment Agreement of
        June 1, 1996 between United Dental Care, Inc. and Peter R. Barnett,
        DMD.
11.1*   Statement Regarding Computation of Per Share Earnings.
21.1*   List of Subsidiaries of Registrant.
23.1*   Consent of Price Waterhouse LLP.
27.1*   Financial Data Schedule.
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*   Filed herewith.
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