<PAGE>

                                 UNITED STATES
                      SECURITIES AND EXCHANGE COMMISSION
                            WASHINGTON, D.C. 20549


                                   FORM 10-K


[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
    EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 0-23367
                                 -------


                    BIRNER DENTAL MANAGEMENT SERVICES, INC.
-------------------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)


           COLORADO                                               84-1307044
------------------------------------                         ------------------
(State or other jurisdiction of                              (I.R.S. Employer
incorporation or organization)                               Identification No.)

3801 EAST FLORIDA AVENUE, SUITE 508
        DENVER, COLORADO                                            80210
-------------------------------------------------------------------------------
(Address of principal executive offices)                          (Zip Code)


Registrant's telephone number:  (303) 691-0680
                                --------------


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


     Title of each class      Name of each exchange on which registered
     -------------------      -----------------------------------------
     None.                    None.


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


                        Common Stock, without par value
                        -------------------------------

                                (Title of Class)


     Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days. Yes      X      No
                                                --------     -------


     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of Registrant's

                                       1
<PAGE>

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 Registrant's voting stock held as of
March 20, 1997 by non-affiliates of the Registrant was $29,650,565.  This
calculation assumes that certain parties may be affiliates of the Registrant and
that, therefore, 4,651,069 shares of voting stock are held by non-affiliates.
As of March 20, 1997, the Registrant had 6,668,451 shares of its common stock
outstanding.

                      DOCUMENTS INCORPORATED BY REFERENCE

     The Registrant's definitive Proxy Statement for the Annual Meeting of
shareholders to be held on May 29, 1998 is incorporated by reference in Part
III.

                           FORWARD-LOOKING STATEMENTS

     Statements contained in this Annual Report on Form 10-K ("Annual Report")
of Birner Dental Management Services, Inc. (the "Company") which are not
historical in nature are forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995.  These forward-looking
statements include statements in Items 1. and 2., "Business and Properties,"
Item 5., "Market for the Registrant's Common Equity and Related Stockholder
Matters" and Item 7., "Management's Discussion and Analysis of Financial
Condition and Results of Operations," regarding intent, belief or current
expectations of the Company or its officers with respect to the development or
acquisition of additional dental Offices and the successful integration of such
Offices into the Company's network, recruitment of additional dentists, funding
of the Company's expansion, capital expenditures, payment or nonpayment of
dividends and cash outlays for income taxes.


     Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include regulatory constraints, changes in laws or
regulations concerning the practice of dentistry or dental practice management
companies, the availability of suitable new markets and suitable locations
within such markets, changes in the Company's operating or expansion strategy,
failure to consummate or successfully integrate proposed developments or
acquisitions of dental Offices, the ability of the Company to manage effectively
an increasing number of dental Offices, the general economy of the United States
and the specific markets in which the Company's dental Offices are located or
are proposed to be located, trends in the health care, dental care and managed
care industries, as well as the risk factors set forth in Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Risk
Factors," and other factors as may be identified from time to time in the
Company's filings with the Securities and Exchange Commission or in the
Company's press releases.

                                       2
<PAGE>

                    BIRNER DENTAL MANAGEMENT SERVICES, INC.


                                ANNUAL REPORT ON


                                   FORM 10-K


                        FOR YEAR ENDED DECEMBER 31, 1997



                                     PART I
                                     ------


ITEMS 1 AND 2.   BUSINESS AND PROPERTIES.
------------------------------------------

GENERAL

  The Company acquires, develops, and manages geographically dense dental
practice networks in select markets, currently including Colorado and New
Mexico. With its 30 Offices in Colorado, the Company believes, based on industry
knowledge and contacts, that it is the largest provider of dental management
services in Colorado. The Company and its dental practice management model,
which was developed by the Company's President, Mark Birner, D.D.S., provide a
solution to the needs of dentists, patients, and third-party payors by allowing
the Company's affiliated dentists to provide high-quality, efficient dental care
in patient-friendly, family practice settings. Dentists practicing at the
Offices provide comprehensive general dentistry services, and the Company
increasingly offers specialty dental services through affiliated specialists.
The Company manages 35 dental practices ("Offices"), of which 29 were acquired
and six were developed internally ("de novo Offices").  The success of the
Company's dental practice network in Colorado has led to its expansion into New
Mexico and its evaluation of additional markets.

DENTAL SERVICES INDUSTRY

  According to the U.S. Health Care Financing Administration (''HCFA''), dental
expenditures in the U.S. increased from $30.4 billion in 1990 to $42.9 billion
in 1995. HCFA also projects that dental expenditures will reach approximately
$79.1 billion by 2005, representing an increase of approximately 84.4% over 1995
dental expenditures. The Company believes this growth is driven by (i) an
increase in the number of people covered by third-party payment arrangements and
the resulting increase in their utilization of dental services, (ii) an
increasing awareness of the benefits of dental treatments, (iii) the retention
of teeth into later stages of life, (iv) the general aging of the population, as
older patients require more extensive dental services, and (v) a growing
awareness of and demand for preventative and cosmetic services.

  The dental services industry is undergoing rapid change throughout the United
States.  Although total expenditures for dental care services in the United
States have grown, the industry is highly fragmented.  According to the American
Dental Association, in 1995 there were approximately 153,300 active dentists in
the United States, of which approximately 88% practiced either alone or with one
other dentist. Dental services typically are offered by local providers,
primarily solo practitioners or small groups of general dentists or specialists,
practicing at a single location.

  Traditionally, most dental patients have paid for dental services themselves
rather than through third-party payment arrangements such as indemnity
insurance, preferred provider plans or managed dental plans. More recently,
factors such as increased consumer demand for dental services and the desire of
employers to provide enhanced benefits for their employees have resulted in an
increase in third-party payment arrangements for dental services. These third-
party payment arrangements include indemnity insurance,

                                       3
<PAGE>

preferred provider plans and capitated managed dental care plans. Current market
trends, including the rise of third-party payment arrangements, have contributed
to the increased consolidation of practices in the dental services industry and
to the formation of dental practice management companies. According to the
National Association of Dental Plans, in 1995 approximately 117 million persons,
or approximately 45% of all persons in the U.S., were covered by some form of
third-party dental care plan. The remaining 143 million, or 55% of all persons
in the U.S., were not covered by any third-party plan. The Company believes that
the percentage of people covered by third-party payment arrangements will
continue to increase, due in part to the popularity of such arrangements.

  The Company believes that the fragmented dental services industry will
increasingly consolidate due to (i) the shift to third-party reimbursement and
the advantages enjoyed by larger group practices in negotiating with third-party
payors, (ii) the economies of scale for cost-effective management of patient
care, (iii) the desire to capture revenues from higher-margin specialty
procedures, which would otherwise be referred to non-affiliated specialists,
(iv) the need for access to the capital resources necessary to acquire and
maintain state-of-the art dental equipment, clinical facilities and management
information systems, and (v) the growing importance of sophisticated marketing
programs directed toward patients and third-party payors.

THE BIRNER STRATEGY

  The Company's objective is to be the leading dental practice management
company in the markets it serves. The key elements of the Company's strategy
include:

  Develop and Operate Geographically Dense Dental Practice Networks.
Management believes that clustering its Offices allows the Company to implement
other key elements of its strategy which maximize revenue and operating
performance. With 30 Offices in the Colorado market, the Company has built
successful, geographically dense dental practice networks, and the Company only
intends to enter markets which will support such networks.

  Capitalize on Flexible Growth Strategy.   Once the Company has identified an
attractive market, it can enter that market and subsequently increase the
density of its dental practice network through multiple methods. The Company has
demonstrated its ability to make acquisitions of large group practices, to
acquire solo and small group practices, and to develop de novo Offices. The
Company believes its experience in acquiring solo and small group practices will
become increasingly important, as the majority of all dentists practice either
alone or with one other dentist. Therefore, the Company believes its experience
with multiple expansion methods allows it to capitalize on the opportunities
presented by a market and represents a significant competitive advantage.

  Enhance Operating Performance.   The Company enhances the operating
performance of its Offices through the implementation and application of its
dental practice management model. Key components of this model include providing
a designated managing dentist with economic incentives to improve Office
operating performance, a proprietary patient scheduling system, a training
program for non-dental employees, and a system for optimizing revenue through
managing payor mix. The Company believes its model provides an ideal setting for
dentists to develop long-term relationships with patients.

  Capture Specialty Service Revenue.   By operating geographically dense
networks, the Company can effectively utilize affiliated specialists. As the
Company achieves density in a market, it intends to offer a complete range of
specialty services to its patients. This enables the Company to capture revenue
from specialty services that would otherwise be lost to non-affiliated
providers. Specialty services typically are provided on a fee-for-service basis
and generally yield a higher margin than general dentistry services.

                                       4
<PAGE>

  Develop Brand Identity.   The Company's marketing programs have been designed
to reinforce the association of the PERFECT TEETH(R) name and logo with high-
quality, convenient dental care. The Company's marketing efforts are intended to
increase patient flow and generally are targeted at fee-for-service patients.
Where appropriate, the Company operates its offices under the PERFECT TEETH(R)
name with the PERFECT TEETH(R) logo prominently and attractively displayed. The
Company's geographically dense networks allow it to spread the cost of its
marketing programs, particularly television and radio advertising, across a
larger base of patient revenue.

EXPANSION PROGRAM

 OVERVIEW

  Since its formation in May 1995, the Company has acquired 32 practices,
including three practices that have been consolidated into existing Offices. Of
those acquired practices, 28 were located in Colorado and four were located in
New Mexico. Although the Company has acquired and integrated several group
practices, many of the Company's acquisitions have been of solo dental
practices. The Company also has developed six de novo Offices. Therefore, the
Company is not dependent on any particular expansion strategy and can capitalize
on the opportunities presented by a market.

  The following table sets forth the increase in the number of Offices managed
by the Company from 1995 through the date of this Annual Report, including the
number of de novo Offices and acquired Offices in each such year:


<TABLE>
<CAPTION>
                                            1995 (1)             1996               1997               1998(2)
                                       ------------------  -----------------  -----------------  --------------------
<S>                                    <C>                 <C>                <C>                <C>
Offices at beginning of the period...                  0                   4                 18                 34
De novo Offices......................                  0                   5                  1                  0
Acquired Offices (3).................                  4                   9                 15                  1
                                                 -------                ----               ----               ----
Offices at end of the period.........                  4                  18                 34                 35
                                                 =======                ====               ====               ====
</TABLE>

(1) From October 1, 1995 through December 31, 1995.
(2) From January 1,  1998, through March 30, 1998.
(3) For 1996, does not include three practices that were acquired and
    consolidated with existing Offices.

 ACQUISITION STRATEGY

  Prior to entering a new market, the Company considers the population,
demographics, market potential, competitive and regulatory environment, supply
of available dentists, needs of managed care plans or other large payors and
general economic conditions within the market. Once the Company has established
a presence in a new market, the Company seeks to increase its density in that
market by making further acquisitions and by developing de novo Offices. The
Company identifies potential acquisition candidates through a variety of means,
including selected inquiries of dentists by the Company, direct inquiries by
dentists, referrals from other dentists, participation in professional
conferences and referrals from practice brokers.

  The Company seeks to identify and acquire dental practices for which the
Company believes application of its dental practice management model will
improve revenue and operating performance, and it has demonstrated its ability
to identify and improve such practices.

                                       5
<PAGE>

 RECENT ACQUISITIONS

  Gentle Dental Acquisition. On September 8, 1997, the Company acquired nine
dental practices operated under the name Gentle Dental which are located in
Boulder, Colorado Springs, Denver, Greeley and Longmont, Colorado for $3.5
million (the "Gentle Dental Acquisition"). The sum of $2.1 million was paid in
cash, and the Company issued a $1.4 million note which was repaid from the
proceeds of the Company's initial public offering. The Gentle Dental practices
employ 11 dentists and generated $4.1 million in revenue for the year ended
December 31, 1996 and $5.4 million in revenue for the year ended December 31,
1997. These practices have operated with a management team headed by James
Abramowitz, D.D.S., who has practiced dentistry since 1972. Dr. Abramowitz was
an early pioneer in the negotiation of capitated managed dental care contracts
in Colorado. Dr. Abramowitz and his management team developed the Gentle Dental
network beginning in 1992, and they have become part of the Company's management
team. With the Gentle Dental Acquisition, the Company has 30 Offices in
Colorado, solidifying the Company's presence in this market and making it, to
its knowledge, the largest dental practice network in Colorado.

  New Mexico Acquisitions.   The Company identified New Mexico as an attractive
new market for the implementation of its dental practice management model based
on favorable demographics, the relative low penetration of managed care, and the
absence of a dominant dental practice network. Since April 1997, the Company has
acquired four solo dental practices in Albuquerque, New Mexico. The Company will
seek to increase its density further in this market through acquisitions of
practices and the development of de novo Offices, as it has done in the Colorado
market.

 DE NOVO OFFICE DEVELOPMENTS

  One method by which the Company enters new markets and expands its operations
in existing markets is through the development of de novo Offices. Three of the
Company's four Colorado Springs Offices and two of the Company's 20 Denver
Offices were de novo developments. In addition, in August 1997, the Company
opened a de novo Office in Albuquerque, New Mexico. The Company generally
locates de novo Offices in areas in which there is significant population growth
and/or population turnover. All of the Company's current de novo Offices are
located in supermarket-anchored shopping centers. The Company seeks prime retail
locations for its de novo Offices, generally located in high-growth suburban
areas of the market. These locations provide high visibility of the Company's
signage and easy walk-in access for its customers. Historically, the Company has
used consistent office designs, colors, logo and signage for each of its de novo
Offices.

  The average investment by the Company in each of its six de novo Offices has
been approximately $170,000, which includes the cost of equipment, leasehold
improvements and working capital associated with the initial operations. The
five de novo Offices opened between January 8, 1996 and July 15, 1996 began
generating positive contribution from dental offices, on average, within three
months of opening.  From time to time, the Company has been able to negotiate
favorable managed care contracts to facilitate the development of a de novo
Office and reduce the period of time it takes for a de novo Office to become
profitable.


 THE BIRNER DENTIST PHILOSOPHY

  The Company seeks to develop long-term relationships with its dentists by
building the practice at each of its Offices around a managing dentist. The
Company's dental practice management model provides managing dentists the
autonomy and independence of a private family practice setting without the
capital commitment and the administrative burdens such as billing/collections,
payroll, accounting, and marketing. This gives the managing dentists the ability
to focus primarily on providing high-quality dental care to their patients. The

                                       6
<PAGE>

managing dentist retains the responsibilities of team building and developing
long-term relationships with patients and staff by building trust and providing
a friendly, relaxed atmosphere in his or her Office. The managing dentist
determines which personnel, including dental assistants and hygienists, to hire
or terminate, and exercises his or her own clinical judgment in matters of
patient care. In addition, managing dentists are given an economic incentive to
improve the operating performance of their Offices, in the form of a bonus based
upon the operating performance of the Office. Each managing dentist also has
been granted stock options in the Company that typically vest over a three-to-
five year period.

     When the revenues of an Office justify expansion, one or more associate
dentists can be added to the team. Associate dentists are typically recent
graduates from residency programs, and usually spend up to two years working
with a managing dentist. Depending on his or her performance and abilities, an
associate dentist may be given the opportunity to become a managing dentist in
another of the Offices.

OPERATIONS

                              LOCATION OF OFFICES


[Map showing the location of the Company's Offices appears here]

                                       7
<PAGE>

EXISTING OFFICES

  The Company manages a total of 35 Offices in Colorado and New Mexico. The
following table shows the location of each Office, the date each Office was
acquired or de novo developed, and the specialty dental services currently
offered at that Office in addition to comprehensive general dental services:


<TABLE>
<CAPTION>                          DATE
LOCATION                           ACQUIRED/DEVELOPED*       SPECIALTY SERVICES
---------------------------------- -----------------------   ----------------------------

<S>                                 <C>                      <C>
COLORADO
Boulder                             September 1997              --
Castle Rock                         October 1995                Orthodontics
 Colorado Springs
  Austin Bluffs                     January 1996*               --
  Garden of the Gods                July 1996*                  --
  Uintah Gardens                    May 1996*                   Orthodontics, Oral Surgery
  Union and Academy                 September 1997              --
 Denver
  64/th/ and Ward Road              January 1996*               --
  88/th/ and Wadsworth              September 1997              --
  Arapahoe                          October 1995                Orthodontics
  Bow Mar                           October 1995                Orthodontics
  Buckley and Mississippi           September 1997              --
  Central Denver                    May 1996                    Orthodontics
  East 104/th/ Avenue               May 1996                    Orthodontics
  East Cornell                      August 1996                 --
  East Iliff                        May 1997                    --
  Ken Caryl                         September 1997              --
  Leetsdale                         March 1996*                 --
  Monaco and Evans                  November 1995               Oral Surgery, Periodontics
  North Sheridan                    May 1996                    Orthodontics, Oral Surgery
  Sheridan and 64th Avenue          May 1996                    --
  South Galena                      May 1996                    Orthodontics
  South Holly Street                September 1997              --
  Speer                             February 1997               --
  West 38/th/ Avenue                May 1996                    Orthodontics, Endodontics
  West 120/th/ Avenue               September 1997              --
  Yale                              April 1997                  --
 Fort Collins                       May 1996                    Oral Surgery
 Greeley                            September 1997              --
 Longmont                           September 1997              --
 Loveland                           September 1996              --

NEW MEXICO
 Albuquerque
  Alice                             February 1998               --
  Candelaria                        April 1997                  Orthodontics
  Four Hills                        August 1997*                --
  Fourth Street                     August 1997                 --
  Wyoming and Candelaria            August 1997                 --
</TABLE>

                                       8
<PAGE>

  The Offices typically are located either in shopping centers, professional
office buildings or stand-alone buildings. Currently, all of the de novo Offices
are located in supermarket-anchored shopping centers. The Offices have from
three to 16 treatment rooms and range in size from 1,200 square feet to 7,400
square feet.

 PATIENT SERVICES

  The Company seeks to develop long-term relationships with patients. A
comprehensive exam and evaluation is conducted during a patient's first visit.
Through patient education and other on-going relationship building, the patients
develop an awareness of the benefits of a comprehensive, long-term dental care
plan. The Company believes that it will retain these patients longer, and that
these patients will have a higher utilization of Birner's dental services
including specialty, elective, and cosmetic services.

  Dentists practicing at the Offices provide comprehensive general dentistry
services, including full coverage crowns and bridges, fillings (including state-
of-the-art gold, porcelain and composites inlays/onlays), and aesthetic
procedures such as porcelain veneers and bleaching. In addition, hygienists
provide cleanings and periodontal services including root planing and scaling.
At certain of the Offices, the patient is offered specialty dental services,
such as orthodontics, oral surgery, endodontics and periodontics. These services
are provided by affiliated specialists who rotate through several offices in a
particular market. The addition of specialty services is a key component of the
Company's strategy, as it enables the Company to capture revenue from typically
higher margin services that would otherwise be referred to non-affiliated
providers. In addition, by offering a broad range of dental services within a
single practice, the Company is able to distinguish itself from its competitors
and realize operating efficiencies and economics of scale through higher
utilization of professionals and facilities.


 DENTAL PRACTICE MANAGEMENT MODEL

  The Company has developed a dental practice management model designed to
achieve its goal of providing personalized, high-quality dental care in a
patient friendly setting similar to that found in a traditional private
practice. The Company believes that its model differentiates it from other
dental practice management companies and provides it with significant
competitive advantages in attracting and retaining dental care professionals,
negotiating with third party payors, and attracting and retaining patients. The
Company's dental practice management model consists of the following components:

  Recruiting of Dentists.   The Company seeks dentists with excellent skills and
experience, who are sensitive to patient needs, interested in establishing long-
term patient relationships and are motivated by financial incentives to enhance
Office operating performance. The Company believes that practice in its network
of Offices offers both recently graduated dentists and more experienced dentists
advantages over a solo or smaller group practice, including relief from the
burden of administrative responsibilities and the resulting ability to focus
almost exclusively on practicing dentistry. Advantages to dentists affiliated
with the Company also include a compensation structure that rewards
productivity, employee benefits such as health insurance, a 401(k) plan,
continuing education, payment of professional membership fees and malpractice
insurance, and, for affiliated specialists, the Company believes this
affiliation offers a steadier stream of referrals. The Company's efforts to
recruit dentists is focused on dentists with approximately three years or more
of practice experience. The Company typically recruits associate dentists
graduating from residency programs. In the Company's experience, many dentists
in the early stages of their careers have incurred substantial student loans. As
a result, they face significant financial constraints in starting their own
practices or buying into existing practices, especially in view of the capital-
intensive nature of modern dentistry.

                                       9
<PAGE>

  The Company advertises for the dentists it seeks in national and regional
dental journals, local market newspapers, and directly at dental schools with
strong residency programs. In addition, the Company has found that its existing
affiliated dentists provide a good referral source for recruiting future
dentists.

  Training of Non-Dental Employees.   The Company has developed a formalized
training program for non-dental employees which is conducted by the Company's
field representatives. This program includes training in patient interaction,
scheduling, use of the computer system, office procedures and protocol, and
third-party payment arrangements. Depending on a new employee's position and
experience, employment with the Company begins with three to five days of formal
training. The Company encourages employees to attend continuing education
seminars. In addition, the field representatives have monthly meetings with
administrative staff to review pertinent and timely topics and generate ideas
that can be shared with all Offices. Management believes the training program
the Company has established and the on-going monthly meetings with employees
have contributed to the improvement in operating performance of its Offices.

  Proprietary Patient Scheduling.   The Company has developed a proprietary
patient scheduling system which was designed by its President, Mark Birner,
D.D.S., to maximize Office and personnel utilization and profitability while
providing high-quality care to the patients. The Company's scheduling system is
designed to control the revenue mix by balancing fee-for-service and capitated
managed dental care patients.

  Staffing Model.   The Company's staffing model attempts to maximize Office
profitability by adjusting personnel according to an Office's revenue level.
Staffing at mature Offices can vary based on the number of treatment rooms, but
generally includes one to two dentists, two to four dental assistants, one to
two hygienists, one to two hygiene assistants and two to four front office
personnel. Staffing at de novo Offices typically consists of one dentist, one
dental assistant and one front office person. As the patient base builds at an
Office, additional staff are added to accommodate the growth as provided in the
staffing model developed by the Company. The Company currently has a staff of
five field representatives in Colorado, one of whom also covers New Mexico.
These field representatives, who are each responsible for up to 10 Offices,
oversee the operations and training of non-dental employees and work to
implement the Company's dental practice management model to maximize revenues
and profitability.

  Management Information Systems.   All of the Offices, except for the nine
Offices recently acquired in connection with the Gentle Dental Acquisition, have
the same management information system, which allows the Company to receive
uniform data that can be analyzed easily in order to measure and improve Office
operating performance. As part of its acquisition integration process, the
Company intends to convert the Offices acquired in the Gentle Dental Acquisition
to its management information system. The Company has installed a computer
system which enables it to link its headquarters on-line with each of its
Offices. This system allows the Company to monitor the Offices by obtaining
real-time data relating to patient and insurance information, treatment plans,
scheduling, revenues and collections. In addition, various month-end management
reports are generated, including accounts receivable aging and information that
allows the Company to analyze the economics of the managed care plans for which
each Office is a provider.

  The Company provides each Office with monthly operating data and financial
statements, and uses the data to make recommendations to improve Office
financial performance. The Company believes that these monthly reports allow the
Offices to make periodic operating adjustments which help improve results. In
addition, the Company uses the information system to provide data for case
management.

  Advertising and Marketing.   The Company seeks to increase patient volume at
its Offices through television, radio, print advertising and other marketing
techniques. The Company's advertising efforts, which are principally aimed at
increasing its fee-for-service business, emphasize the high-quality care
provided at its Offices and that the Company's affiliated dentists have more
time to spend with patients. Because of its market density, the Company is able
cost effectively to use television and radio advertising to increase patient
volume.

                                       10
<PAGE>

  The Company believes that its PERFECT TEETH(R) name is associated with high-
quality dental care in Colorado, and intends to operate other Offices under this
name where appropriate. When desirable, the PERFECT TEETH(R) logo is prominently
displayed in an attractive sign at each Office. The Company also utilizes Yellow
Pages advertisements, direct mail campaigns and other forms of advertising to
highlight the Office's high-quality dental care and customer-oriented service.
The Company's six de novo Offices are all located in supermarket-anchored
shopping centers and have consistent design, layout and color.

  Quality Assurance.   The Company has designed and implemented a quality
assurance program for dental personnel which includes a thorough background
check and formal training at the time of hiring. Quarterly site visits to the
Offices and monthly meetings of all of the Company's dentists help reinforce
elements of the Company's quality assurance program. Each affiliated dentist is
a graduate of an accredited dental program, and state licensing authorities
require dentists to undergo annual training. The dentists and hygienists
practicing at the Offices can obtain some of the required continuing education
training through the Company's internal training programs.

  Purchasing/Vendor Relationships.   The Company has negotiated arrangements
with a number of its more significant vendors, including dental laboratory and
supply providers to reduce per unit costs. By aggregating supply purchasing and
laboratory usage, the Company believes that it has received favorable pricing
compared to solo or smaller group practices. Dental equipment and supplies are
obtained by the Company as directed by the Offices, and administrative supplies
are purchased by the Company and distributed on an as-needed basis to each
Office, thereby limiting storage of unused inventory and supplies. Additionally,
the Company has been able to negotiate favorable bulk purchases of dental
equipment by its Offices.


 PAYOR MIX

  The Company's payors include indemnity insurers, preferred provider plans,
managed dental care plans, and uninsured patients. The Company seeks to optimize
revenue mix at each Office between fee-for-service business and capitated
managed care plans, taking into account the local dental market. While fee-for-
service business generally is more profitable than capitated managed dental care
business, capitated managed dental care business serves to increase facility
utilization and dentist productivity. Consequently, the Company seeks to
supplement its fee-for-service business with revenue derived from contracts with
capitated managed dental care plans. The Company negotiates the managed care
contracts on behalf of the P.C.s, but the P.C.s enter into the contracts with
the various managed care plans. Managed care relationships also provide
increased co-payment revenue, referrals of additional fee-for-service patients
and opportunities for dentists practicing at the Offices to educate patients
about the benefits of elective dental procedures that may not be covered by the
patients' capitated managed dental care plans.

  Although only approximately 9% of individuals in the United States were
enrolled in managed dental care plans in 1995, the Company believes that
capitated managed dental care will play an increasingly important role in the
provision of dental services. The Company believes that its experience with
capitated managed dental care contracts positions the Company well for an
environment with increased managed care penetration.

  Capitated managed dental care plans typically pay participating dental group
practices a fixed monthly amount for each plan member covered for a specified
schedule of services regardless of the quantity or cost of such services. This
arrangement shifts the risk and reward of utilization and efficiency to the
dental group practice that provides the dental services. Because the Company
assumes responsibility under its Management Agreements with the P.C.s for all
aspects of the operation of the dental practices (other than the provision of
dental care) and thus bears all costs of the P.C.s associated with operating the
Offices (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the

                                       11
<PAGE>

Offices under capitated managed dental care plans is effectively shifted to the
Company. In addition, members of capitated managed dental care plans may pay the
P.C.s additional amounts as co-payments for more complex procedures. The
relative size of capitation payments and co-payments varies in accordance with
the level of benefits provided and plan design.

  During the fiscal year ended December 31, 1996, approximately 13.7% and 10.0%
of the Company's total dental group practice revenue, net came from Prudential
Dental Maintenance Organization, Inc. ("Prudential") and PacifiCare of
Colorado, Inc. ("PacifiCare"), respectively. During the fiscal year ended
December 31, 1997, Prudential, PacifiCare and CIGNA Dental Health were
responsible for 11.5%, 13.4% and 11.5%, respectively, of the Company's total
dental group practice revenue, net.


AFFILIATION MODEL

 RELATIONSHIP WITH P.C.S

  Each Office is operated by a professional corporation ("P.C.") which employs
or contracts with the dentists and dental hygienists who practice at that
Office. All but four of the P.C.s operating Offices located in Colorado are
solely owned by the Company's President, Mark Birner, D.D.S. The P.C.s operating
Offices located in New Mexico, and the remaining four P.C.s operating Offices in
Colorado, are owned by the managing dentists for such Offices.  The Company has
entered into agreements with each of the owners of the P.C.s operating Offices
in New Mexico and with the Company's President, Dr. Birner, as the owner of 26
P.C.s operating Colorado Offices. These agreements provide that upon the death,
disability, incompetency or insolvency of the owner of the P.C., a loss of the
owner's license to practice dentistry, a termination of the owner's employment
by the P.C. or the Company, a conviction of the owner for a criminal offense, or
a breach by the P.C. of the Management Agreement with the Company, the Company
may require the owner to sell his or her shares in the P.C. to a third-party
designated by the Company at nominal value. Each agreement with Dr. Birner also
permits the Company in its sole discretion to require Dr. Birner to transfer his
shares in the P.C. to another party designated by the Company. These agreements
also prohibit the dentist from transferring or pledging the shares in the P.C.s
owned by the dentists except to parties approved by the Company who agree to be
bound by the terms of the agreements. Upon a transfer of the shares to another
party, the dentist agrees to resign all positions held as an officer or the
director of the P.C.

  Two of the four managing dentists who own P.C.s operating Offices in Colorado
have entered into stock purchase, pledge and security agreements with the
Company. Under these agreements, if certain events occur including the failure
of the dentist to perform his obligations under the employment agreement with
the P.C., the cessation of the dentist's employment with the P.C. for any
reason, the death or insolvency of the dentist or the dentist's causing the P.C.
to breach its obligations under the Management Agreement, then the Company may
cause the P.C. to redeem the dentist's ownership interest in the P.C. for an
agreed price which is not considered to be material by the Company. Two of the
three directors of these P.C.s are nominees of the Company and the dentists have
given Fred Birner irrevocable proxies to vote their shares in the P.C.s.

  In the two remaining Colorado P.C.s and one New Mexico P.C. owned by managing
dentists, the Company has a right of first refusal to purchase the shares owned
by managing dentists and the right to elect one-half of the directors and vote
one-half of the shares in such P.C.s.


 MANAGEMENT AGREEMENTS WITH AFFILIATED OFFICES

  The Company derives all of its revenue from its Management Agreements with the
P.C.s. Under each of the Management Agreements, the Company manages the business
and marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating on

                                       12
<PAGE>

behalf of the P.C.s for the purchase of supplies, (iv) providing a patient
scheduling system, (v) staffing, (vi) recruiting, (vii) training of non-dental
personnel, (viii) billing and collecting patient fees, (ix) arranging for
certain legal and accounting services, and (x) negotiating on behalf of the
P.C.s with managed care organizations. The P.C. is responsible for, among other
things, (i) employing and supervising all dentists and dental hygienists, (ii)
complying with all laws, rules and regulations relating to dentists and dental
hygienists, (iii) maintaining proper patient records, and (iv) cooperating in
the obtaining of professional liability insurance. The Company has made, and
intends to make in the future, loans to P.C.s in both Colorado and New Mexico to
fund their acquisition of dental assets from third parties in order to comply
with the laws of such states. Bonuses payable to dentists based on the operating
performance of the P.C.s take into account principal and interest payments made
on the loans, resulting in the dentists sharing with the Company the economic
benefits or detriments associated with assets acquired by the P.C.s using such
loans. Because the Company consolidates the financial statements of the P.C.s
with its financial statements, these loans are eliminated in consolidation.

  Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed by the
P.C. Adjusted Gross Center Revenue is comprised of all fees and charges booked
each month by or on behalf of the P.C. as a result of dental services provided
to patients at the Office, less any adjustments for uncollectible accounts,
professional courtesies and other activities that do not generate a collectible
fee. The Company's costs include all direct and indirect costs, overhead and
expenses relating to the Company's provision of management services at the
Offices under the Management Agreements, including (i) salaries, benefits and
other direct costs of employees of the Company that work at the Office,
including dental assistants, (ii) direct costs of all employees or consultants
of the Company who provide services to or in connection with the Office, (iii)
utilities, janitorial, laboratory, supplies, advertising and other expenses
incurred by the Company in carrying out its obligations under the Management
Agreement, (iv) depreciation expense associated with the P.C.'s assets and the
assets of the Company used at the Office, and the amortization of intangible
asset value as a result of any acquisition or merger of another dental practice
relating to the Office, (v) interest expense on indebtedness incurred by the
Company to finance any of its obligations under the Management Agreement, (vi)
malpractice insurance expenses, lease expenses and dentist recruitment expenses,
(vii) personal property and other taxes assessed against the Company's or the
P.C.'s assets used in connection with the operation of the Office, (viii) out-
of-pocket expenses of the Company's personnel related to mergers or acquisitions
involving the P.C., (ix) corporate overhead charges or any other expenses of
Company including the P.C.'s pro rata share of the expenses of the accounting
and computer services provided by the Company, and (x) a collection reserve in
the amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially
all costs associated with the provision of dental services at the Offices are
borne by the Company, other than the compensation and benefits of the dentists
and hygienists who are employed by the P.C.s.

  Management Agreements are for terms of 40 years, and are structured such that
they may be terminated by the Company or by the P.C. only for ''cause,'' which
includes a material default by or bankruptcy of the other party. Upon expiration
or termination by either party of a Management Agreement, the P.C. must satisfy
all obligations it has to the Company. The Company has agreed during the term of
the existing Management Agreements not to acquire or develop de novo any Offices
within three miles of the Office of the P.C. without the P.C.'s consent.

  The Company plans to continue to use the current form of its Management
Agreement to the extent possible. However, the terms of the Management
Agreements are subject to change to comply with existing or new regulatory
requirements or to enable the Company to compete more effectively.


 EMPLOYMENT AGREEMENTS

                                       13
<PAGE>

  Most dentists practicing at the Offices have entered into employment
agreements or independent contractor agreements with the P.C.s. The majority of
such agreements are terminable without cause by either party upon two to seven
days' notice. Some of the employment agreements for managing dentists who are
also the shareholder of a P.C. have terms of 20 to 30 years and are only
terminable by the P.C. upon the occurrence of certain events. Upon termination
of employment of the managing dentists for any reason, the P.C. has the right to
redeem the shares of the P.C. held by the managing dentist. Such agreements
typically contain non-competition provisions for up to three to five years
following their termination within a specified geographic area, usually a
specified number of miles from the relevant Office, and restrict solicitation of
patients and employees of the Offices. Managing dentists receive compensation
based upon a specified amount per hour worked or a percentage of collections
attributable to their work, and a bonus based upon the operating performance of
the Office. Associate dentists are compensated based upon a specified amount per
hour worked, and a potential for bonuses in certain situations. Specialists are
compensated based upon a percentage of collections or revenue attributable to
their work. The dentists' compensation and benefits are paid by the P.C. with
whom the dentist has entered into an employment agreement.


COMPETITION

  The dental services industry is highly fragmented, consisting primarily of
solo and smaller group practices. The dental practice management segment of this
industry is highly competitive and is expected to become more competitive. In
this regard, the Company expects that the provision of multi-specialty dental
services at convenient locations will become increasingly more common. The
Company is aware of several dental practice management companies that are
operating in its markets, including Valley Forge Dental Associates, Inc.
Dentalco, Inc. and Dental Health Clinics of America. Companies with dental
practice management businesses similar to that of the Company which currently
operate in other parts of the country, may begin targeting the Company's
existing markets for expansion. Such competitors may have greater financial
resources or otherwise enjoy competitive advantages which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company. As the Company seeks to expand its operations
into new markets, it is likely to face competition from dental practice
management companies which already have established a strong business presence
in such locations.

  The business of providing general dental, orthodontic and other specialty
dental services is highly competitive in the markets in which the Company
operates. The Company believes it competes with other providers of dental and
specialty services on the basis of factors such as brand name recognition,
convenience, cost and the quality and range of services provided. Competition
may include practitioners who have more established practices and reputations.
The Company also competes against established practices in the retention and
recruitment of general dentists, specialists, hygienists and other personnel. If
the availability of such dentists, specialists, hygienists and other personnel
begins to decline in the Company's markets, it may become more difficult to
attract qualified dentists, specialists, hygienists and other personnel to staff
the Offices sufficiently or to expand them.


GOVERNMENT REGULATION

  The practice of dentistry is regulated at both the state and federal levels,
and the regulation of health care-related companies is increasing. There can be
no assurance that the regulatory environment in which the Company or the P.C.s
operate will not change significantly in the future. The laws and regulations of
all states in which the Company operates impact the Company's operations but do
not currently materially restrict the Company's operations in those states. In
addition, state and federal laws regulate health maintenance organizations and
other managed care organizations for which dentists may be providers. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to

                                       14
<PAGE>

additional laws, regulations and interpretations or enforcement actions. The
laws regulating health care are broad and subject to varying interpretations,
and there is currently a lack of case law construing such statutes and
regulations. The ability of the Company to operate profitably will depend in
part upon the ability of the Company and the P.C.s to operate in compliance with
applicable health care regulations.


 STATE REGULATION

  The laws of many states, including Colorado and New Mexico, permit a dentist
to conduct a dental practice only as an individual, a member of a partnership or
an employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services. Under the Management Agreements,
the P.C.s control all clinical aspects of the practice of dentistry and the
provision of dental services at the Offices, including the exercise of
independent professional judgment regarding the diagnosis or treatment of any
dental disease, disorder or physical condition. Persons to whom dental services
are provided at the Offices are patients of the P.C.s and not of the Company and
the Company does not have or exercise any control or direction over the manner
or methods in which dental services are performed, nor does the Company
interfere in any way with the exercise of professional judgment by the dentists
who are employees or independent contractors of the P.C.s.

  Many states, including Colorado, limit the ability of a person other than a
licensed dentist, to own or control dental equipment or offices used in a dental
practice. Some states allow leasing of equipment and office space to a dental
practice, under a bona fide lease, if the equipment and office remain under the
control of the dentist. Some states, including New Mexico, require all
advertisements to be in the name of the dentist. A number of states, including
Colorado, also regulate the content of advertisements of dental services. In
addition, Colorado, New Mexico, and many other states impose limits on the tasks
that may be delegated by dentists to hygienists and dental assistants. Some
states require entities designated as ''clinics'' to be licensed, and may define
clinics to include dental practices that are owned or controlled in whole or in
part by non-dentists. These laws and their interpretations vary from state to
state and are enforced by the courts and by regulatory authorities with broad
discretion.

  Many states have fraud and abuse laws which are similar to the federal fraud
and abuse law described below, and which in many cases apply to referrals for
items or services reimbursable by any third-party payor, not just by Medicare
and Medicaid. A number of states, including Colorado and New Mexico, prohibit
the submitting of false claims for dental services.

  Many states, including Colorado and New Mexico, also prohibit ''fee-
splitting'' by dentists with any party except other dentists in the same
professional corporation or practice entity. In most cases, these laws have been
construed as applying to the practice of paying a portion of a fee to another
person for referring a patient or otherwise generating business, and not to
prohibit payment of reasonable compensation for facilities and services (other
than the generation of referrals), even if the payment is based on a percentage
of the practice's revenues.

  In addition, many states have laws prohibiting paying or receiving any
remuneration, direct or indirect, that is intended to include referrals for
health care items or services, including dental items and services.

  In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third-party payor arrangements, other than fee-for-
service arrangements, is an unsettled area of law with little guidance
available. As the P.C.s contract with third-party payors, on a capitation or
other basis under which the relevant P.C. assumes financial risk, the P.C.s may
become subject to state insurance laws. Specifically, in some states,

                                       15
<PAGE>

regulators may determine that the Company or the P.C.s are engaged in the
business of insurance, particularly if they contract on a financial-risk basis
directly with self-insured employers or other entities that are not licensed to
engage in the business of insurance. In Colorado and New Mexico, the P.C.s
currently only contract on a financial-risk basis with entities that are
licensed to engage in the business of insurance and thus are not subject to the
insurance laws of those states. To the extent that the Company or the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's revenue may be materially and adversely affected.


 FEDERAL REGULATION

  Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. Because the P.C.s currently receive no revenue
under Medicare or Medicaid, the impact of these laws on the Company to date has
been negligible. There can be no assurance, however, that the P.C.s will not
have patients in the future covered by these laws, or that the scope of these
laws will not be expanded in the future, and if expanded, such laws or
interpretations thereunder could have a material adverse effect on the Company's
business, financial condition and operating results.

  The federal fraud and abuse statute prohibits, subject to certain safe
harbors, the payment, offer, solicitation or receipt of any form of remuneration
in return for, or in order to induce: (i) the referral of a person for service,
(ii) the furnishing or arranging to furnish items or services, or (iii) the
purchase, lease or order or the arrangement or recommendation of a purchase,
lease or order of any item or service which is, in each case, reimbursable under
Medicare or Medicaid. The statute reflects the federal government's policy of
increased scrutiny of joint ventures and other transactions among healthcare
providers in an effort to reduce potential fraud and abuse related to Medicare
and Medicaid costs. Because dental services are covered under various government
programs, including Medicare and Medicaid, this federal law applies to dentists
and the provision of dental services.

  Significant prohibitions against dentist self-referrals for services covered
by Medicare and Medicaid programs were enacted, subject to certain exceptions,
by Congress in the Omnibus Budget Reconciliation Act of 1993. These
prohibitions, commonly known as Stark II, amended prior physician and dentist
self-referral legislation known as Stark I (which applied only to clinical
laboratory referrals) by dramatically enlarging the list of services and
investment interest to which the self-referral prohibitions apply. Effective
January 1, 1995, Stark II prohibits a physician or dentist, or a member of his
or her immediate family, from making referrals for certain ''designated health
services'' to entities in which the physician or dentist has an ownership or
investment interest, or with which the physician or dentist has a compensation
arrangement. ''Designated health services'' include, among other things,
clinical laboratory services, radiology and other diagnostic services, radiation
therapy services, durable medical equipment, prosthetics, outpatient
prescription drugs, home health services and inpatient and outpatient hospital
services. Stark II prohibitions include referrals within the physician's or
dentist's own group practice (unless such practice satisfies the ''group
practice'' exception) and referrals in connection with the physician's or
dentist's employment arrangements with the P.C. (unless the arrangement
satisfies the employment exception). Stark II also prohibits billing the
Medicare or Medicaid programs for services rendered following prohibited
referrals. Noncompliance with, or violation of Stark II can result in exclusion
from the Medicare and Medicaid programs and civil and criminal penalties. The
Company believes that its operations as presently conducted do not pose a
material risk under Stark II, primarily because the Company does not provide
''designated health services.'' Nevertheless, there can be no assurance that
Stark II will not be interpreted or hereafter amended in a manner that has a
material adverse effect on the Company's operations as presently conducted.

  Proposed federal regulations also govern physician incentive plans associated
with certain managed care organizations that offer risk-based Medicare or
Medicaid contracts. These regulations define physician incentive plans to
include any compensation arrangement (such as capitation arrangements, bonuses
and

                                       16
<PAGE>

withholds) that may directly or indirectly have the effect of reducing or
limiting services furnished to patients covered by the Medicare or Medicaid
programs. Direct monetary compensation which is paid by a managed care plan,
dental group or intermediary to a dentist for services rendered to individuals
covered by the Medicare or Medicaid programs is subject to these regulations, if
the compensation arrangement places the dentist at substantial financial risk.
When applicable, the regulations generally require disclosure to the federal
government or, upon request, to a Medicare beneficiary or Medicaid recipient
regarding such financial incentives, and require the dentist to obtain stop-loss
insurance to limit the dentist's exposure to such financial risk. The
regulations specifically prohibit physician incentive plans which involve
payments made to directly induce the limitation or reduction of medically
necessary covered services. A recently enacted federal law specifically exempts
managed care arrangements from the application of the federal anti-kickback
statute (the principal federal health care fraud and abuse law), but there is a
risk this exemption may be repealed. It is unclear how the Company will be
affected in the future by the interplay of these laws and regulations.

  The Company may be subject to Medicare rules governing billing agents. These
rules prohibit a billing agent from receiving a fee based on a percentage of
Medicare collections and may require Medicare payments for the services of
dentists to be made directly to the dentist providing the services or to a lock
box account opened in the name of the applicable P.C.

  Federal regulations also allow state licensing boards to revoke or restrict a
dentist's license in the event such dentist defaults in the payment of a
government-guaranteed student loan, and further allow the Medicare program to
offset such overdue loan payments against Medicare income due to the defaulting
dentist's employer. The Company cannot assure compliance by dentists with the
payment terms of their student loans, if any.

  Revenues of the P.C.s or the Company from all insurers, including governmental
insurers, are subject to significant regulation. Some payors limit the extent to
which dentists may assign their revenues from services rendered to
beneficiaries. Under these ''reassignment'' rules, the Company may not be able
to require dentists to assign their third-party payor revenues unless certain
conditions are met, such as acceptance by dentists of assignment of the payor
receivable from patients, reassignment to the Company of the sole right to
collect the receivables, and written documentation of the assignment. In
addition, governmental payment programs such as Medicare and Medicaid limit
reimbursement for services provided by dental assistants and other ancillary
personnel to those services which were provided ''incident to'' a dentist's
services. Under these ''incident to'' rules, the Company may not be able to
receive reimbursement for services provided by certain members of the Company's
Offices' staff unless certain conditions are met, such as requirements that
services must be of a type commonly furnished in a dentist's office and must be
rendered under the dentist's direct supervision and that clinical Office staff
must be employed by the dentist or the P.C. The Company does not currently
derive a significant portion of its revenue under such programs.

  The operations of the Offices are also subject to compliance with regulations
promulgated by the Occupational Safety and Health Administration (''OSHA''),
relating to such matters as heat sterilization of dental instruments and the use
of barrier techniques such as masks, goggles and gloves. The Company incurs
expenses on an ongoing basis relating to OSHA monitoring and compliance.

  Although the Company believes its operations as currently conducted are in
material compliance with existing applicable laws, there can be no assurance
that the Company's contractual arrangements will not be successfully challenged
as violating applicable fraud and abuse, self-referral, false claims, fee-
splitting, insurance, facility licensure or certificate-of-need laws or that the
enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs will
not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by

                                       17
<PAGE>

courts or regulatory authorities will not result in a determination that could
materially and adversely affect their operations or that the regulatory
environment will not change so as to restrict the Company's existing or future
operations. In the event that any legislative measures, regulatory provisions or
rulings or judicial decisions restrict or prohibit the Company from carrying on
its business or from expanding its operations to certain jurisdictions,
structural and organizational modifications of the Company's organization and
arrangements may be required which could have a material adverse effect on the
Company, or the Company may be required to cease operations.


INSURANCE

  The Company maintains professional liability insurance for itself and provides
for professional liability insurance covering dentists, hygienists and dental
assistants at the Offices.


TRADEMARK

  The Company is the registered owner of the PERFECT TEETH(R) trademark in the
United States.


FACILITIES AND EMPLOYEES

  The Company's corporate headquarters are located at 3801 E. Florida Avenue,
Suite 508, Denver, Colorado, in approximately 4,685 square feet occupied under a
lease which expires in September 2002, and the Company believes this facility is
adequate for its current needs. The Company also leases real estate at the
location of each Office under leases ranging in term from month-to-month to 10
years. The Company believes the facilities at each of its Offices are adequate
for the current level of business at such Offices. The Company generally
anticipates leasing and developing new Offices in its current markets as well as
in certain other geographic markets rather than significantly expanding the size
of its existing Offices.

  As of December 31, 1997, the Company had 47 affiliated dentists and 63
affiliated hygienists who were employed by the P.C.s, six affiliated specialists
who contract with the P.C.s to provide specialty dental services, and 246 non-
dental employees.

ITEM 3.   LEGAL PROCEEDINGS.
----------------------------

     From time to time the Company is subject to litigation incidental to its
business. The Company is not presently a party to any material litigation. Such
claims, if successful, could result in damage awards exceeding, perhaps
substantially, applicable insurance coverage.

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

     Not applicable.

                                       18
<PAGE>

                                    PART II
                                    -------


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


     The Company's Common Stock ("Common Stock") is quoted on the Nasdaq Stock
Market National Market under the symbol "BDMS."  The following table sets forth,
for the period indicated, the range of high and low sales prices per share of
Common Stock, as reported on the Nasdaq Stock Market National Market:


<TABLE>
<CAPTION>


1998                                                          HIGH                  LOW
---                                                    -------------------  -------------------
<S>                                                  <C>                  <C>

First Quarter (February 12, 1998 through March 27,                7- 1/2               5-5/16
 1998
</TABLE>

     At March 20, 1998, the last reported sale price of the Common Stock was $6-
3/8 per share, and the number of holders of record of the Common Stock was
approximately 104.

     The Company has not declared or paid dividends on its Common Stock since
its formation, and the Company does not anticipate paying dividends in the
foreseeable future.  The Company's existing credit facility prohibits the
payment of cash dividends on the Common Stock without the lender's consent.  Any
future credit facility which the Company may obtain is also likely to prohibit
the payment of dividends.  Declaration or payment of dividends, if any, in the
future, will be at the discretion of the Board of Directors and will depend on
the Company's then current financial condition, results of operations, capital
requirements and other factors deemed relevant by the Board.

     On February 17, 1998, the Company's $6.8 million principal amount 9.0%
convertible debentures issued in May 1996 and December 1996 were converted into
Common Stock in accordance with the terms of these securities and in conjunction
with the closing of the Company's initial public offering.

     The Company's registration statement on Form S-1 (SEC File No. 333-36391)
covering the Company's initial public offering of 2,100,000 shares (including
266,184 shares sold by selling shareholders) of Common Stock at $7.00 per share,
was declared effective on February 12, 1998. Joseph Charles and Associates, Inc.
was the managing underwriter. The gross proceeds to the Company in the offering
were $12,836,712 and the expenses incurred were as follows: (i) $1,370,671 for
the underwriters discount and non-accountable expense allowance; and (ii)
approximately $1,089,000 for other expenses, including legal, accounting and
printing fees. The Company used the net proceeds in the offering of
approximately $10,400,000 as follows: (i) approximately $2,600,000 was used to
repay the Company's outstanding indebtedness under a bank line of credit (the
"Credit Facility"), including accrued and unpaid interest; (ii) approximately
$1,300,000 was used to repay a note issued in connection with the Gentle Dental
Acquisition; and (iii) approximately $6,500,000 is expected to be used for
potential acquisitions and development of additional de novo Offices and for
working capital and general corporate purposes. On February 27, 1998, the
Company used $598,500 to acquire a single dental practice in Albuquerque, New
Mexico. As of the date of this Annual Report, the balance of the net proceeds
was invested in short-term, investment grade, interest-bearing securities.

  During the fiscal year ended December 31, 1997, the Company has issued and/or
sold unregistered securities as set forth below:

     1. In May 1997, the Company repurchased 137,550 shares of Common Stock from
  Paul Valuck, D.D.S. issued in connection with the terms of an asset purchase
  agreement, for the purchase price of $330,000.

                                       19
<PAGE>

     2. In June 1997, the Company awarded to Fred Birner, Mark Birner and Dennis
  Genty, the founders of the Company warrants to purchase an aggregate of 27,510
  shares of Common Stock of the Company, at an exercise price of $6.00 per
  share.

     3. A warrant to purchase up to 1,834 shares of Common Stock of the Company
  was awarded to James Ciccarelli, a director of the Company in July 1997, at an
  exercise price of $6.54 per share.

     4. In August 1997, 34,387 shares of Common Stock was issued to W. Frederic
  Birner, M.D. pursuant to an exercise of a warrant, for the total exercise
  price of $20,000.

     5. From January 1, 1997 to December 31, 1997, the Company issued options to
  purchase 149,199 shares of Common Stock under the Employee Plan, with a
  weighted average of $8.49 per share, and 49,625 shares of Common Stock under
  the Dental Center Plan, with a weighted average of $7.84 per share.

     6. In November 1997, an individual exercised options to purchase 208 shares
  of Common Stock granted pursuant to the Employee Plan at a weighted average
  exercise price of $2.09 per share.

  The sales of securities described in paragraphs 2 through 4 were issued in
reliance upon the exemption from registration under the Securities Act provided
by Section 4(2) thereof or Regulation D thereunder. The purchasers were either
accredited investors as defined in Regulation D or sophisticated investors and
all had adequate access, through their relationships with the Company and its
officers, to information about the Company. The purchasers represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were placed on the share certificates or contained in the instruments
representing the securities. The sales of securities described in paragraphs 5
and 6 were issued in reliance upon the exemption from registration under the
Securities Act provided by Rule 701 promulgated thereunder for transactions
pursuant to compensatory benefit plans as provided under Rule 701. The options
granted under the Employee Plan were granted to selected employees, directors
and consultants of the Company. The options granted under the Dental Center Plan
were granted to selected P.C.s which are parties to management agreements with
the Company and to dentists and dental hygienists employed by the P.C.s.


ITEM 6.   SELECTED CONSOLIDATED FINANCIAL DATA.
-----------------------------------------------

     The selected consolidated statement of operations data for the period from
inception (May 17, 1995) to December 31, 1995, and for the years ended December
31, 1996 and 1997 and the selected consolidated balance sheet data at December
31, 1995, 1996 and 1997 for the Company have been derived from the Consolidated
Financial Statements of the Company that have been audited by Arthur Andersen
LLP, independent public accountants, which are included elsewhere in this Annual
Report.  The selected data for 1994 and 1995 for the Company's predecessor have
been derived from financial statements of the predecessor that have been audited
by Arthur Andersen LLP, independent public accountants, which are included
elsewhere in this Annual Report.  The following selected consolidated financial
information should be read in conjunction with the Consolidated Financial
Statements and Notes thereto of the Company included elsewhere in this Annual
Report. All amounts are stated in thousands except per share amounts.

                                       20
<PAGE>

<TABLE>
<CAPTION>
                                                           The Company (1)
                                               ------------------------------------------
                                               Year Ended     Year Ended     Inception to
                                               December 31,   December 31,   December 31,
                                               1997           1996           1995 (2)
                                               ------------   ------------   ------------
Consolidated Statements of Operations Data:
<S>                                            <C>            <C>            <C>
NET REVENUE                                     $12,742        $5,373         $  300

DIRECT EXPENSES:
 Clinical salaries and benefits                   4,768         1,750            125
 Dental supplies                                  1,081           778             42
 Laboratory fees                                  1,172           483             28
 Occupancy                                        1,100           315             20
 Advertising and marketing                          409           280             35
 Depreciation and amortization                      549           323             14
 General and administrative                       1,072           673             42
                                                -------        ------         ------
                                                 10,151         4,602            306
                                                -------        ------         ------
 Contribution from dental offices                 2,591           771             (6)
 Corporate expenses-
   General and administrative                     1,360           722            149
   Unsuccessful acquisition costs                   252             -              -
   Depreciation and amortization                    102            58              4
                                                -------        ------         ------
 Operating income (loss)                            877            (9)          (159)
 Interest expense, net                             (843)         (326)            (1)
                                                -------        ------         ------
 Income (loss) before income taxes                   34          (335)          (160)
 Income taxes                                         -             -              -
                                                -------        ------         ------
 Net income (loss)                              $    34        $ (335)        $ (160)
                                                =======        ======         ======

 Net income (loss) per share, basic
   and diluted(3)                                   .01          (.10)          (.06)

 Weighted average number of
   shares and dilutive securities
     Basic                                        3,218         3,297          2,657
     Diluted                                      3,457         3,297          2,657

</TABLE>

                                             December 31,
                                           ----------------
                                             1997     1996
                                           -------   ------

Consolidated Balance Sheet Data (4):
Cash and cash equivalents                  $   977   $1,798
Working capital                               (458)   1,817
Total assets                                15,564    9,553
Long-term debt, less current maturities     10,198    6,829
Total shareholders' equity                   1,388    1,684

<TABLE>
<CAPTION>
                                               The Company (1)
                                ------------------------------------------
                                 Year Ended     Year Ended    Inception to
                                December 31,   December 31,   December 31,
                                    1997           1996           1995 (2)
                                ------------   ------------   ------------
<S>                             <C>            <C>            <C>
Selected Operating Data:
Number of offices (4)                 34              18             4
Number of dentists (4)(5)             53              24             6
Total net revenue per office     $374,773       $298,513       $74,990
</TABLE>

(1)     The comparability of the data is affected by acquisitions of Offices and
     development of de novo Offices. The Company was operating four Offices as
     of December 1995. During 1996 the Company acquired nine Offices and opened
     five de novo Offices. Fifteen additional Office acquisitions and one de
     novo Office increased the Company's operations for the year ended December
     31, 1997.


                                       21
<PAGE>

(2) The Company was formed on May 17, 1995, and had no substantial operations
    until October 1, 1995.
(3) Computed on the basis described in (Note 2) of Notes to Consolidated
    Financial Statements of the Company.
(4) Data is as of the end of the respective periods presented.
(5) Includes dentists employed by the P.C.s, but excludes specialists who are
    independent contractors.

                                       22
<PAGE>

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

GENERAL

  The following discussion of the results of operations and financial condition
of the Company should be read in conjunction with the Consolidated Financial
Statements and the Notes thereto of the Company included elsewhere in this
Annual Report. This Annual Report contains forward-looking statements.
Discussions containing such forward-looking statements may be found in the
material set forth below and under Items 1 and 2. ''Business and Properties,''
as well as in this Annual Report generally.  Prospective investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth in this Item 7 under the heading "Risk Factors."


OVERVIEW

  The Company was formed in May 1995, and currently manages 35 Offices in
Colorado and New Mexico staffed by 49 dentists. The Company has acquired 32
Offices (three of which were consolidated into existing Offices) and opened six
de novo Offices. Of the 32 acquired Offices, only three (the first three
practices, which were acquired from the Company's President, Mark Birner,
D.D.S.) were acquired from affiliates of the Company. The Company derives all of
its Revenue (as defined below) from its Management Agreements with the P.C.s. In
addition, the Company assumes a number of responsibilities when it acquires a
new practice or develops a de novo Office, which are set forth in the Management
Agreement, as described below. The Company expects to expand in existing and new
markets by acquiring solo and group dental practices, by developing de novo
Offices and by enhancing the operating performance of its existing Offices.
Generally, the Company seeks to acquire dental practices for which the Company
believes application of its dental practice management model will improve
operating performance. See Items 1 and 2. ''Business and Properties --
Operations -- Dental Practice Management Model.''

  The Company was formed with the intention of becoming the leading dental
practice management company in Colorado. The Company's success in the Colorado
market has led to its expansion into New Mexico and its evaluation of additional
markets. The Company commenced operations in Colorado in October 1995 with the
acquisition of three Offices, and acquired a fourth Office in November 1995. In
1996, the Company opened five de novo Offices and acquired 12 practices in
several transactions. In 1997, the Company developed one de novo Office and
acquired 15 practices.

  The combined purchase amounts for the four Offices acquired in 1995, the 12
practices acquired in 1996, and the 15 practices acquired in 1997 were $412,134,
$4,372,338 and $5,315,263, respectively. The average investment by the Company
in each of its six de novo Offices has been approximately $170,000, which
includes the cost of equipment, leasehold improvements and working capital
associated with the Offices. The five de novo Offices opened between January 8,
1996 and July 15, 1996 began generating positive contribution from dental
offices, on average, within three months of opening. See Items 1 and 2.
"Business and Properties -- Expansion Program."

  The Company has experienced significant growth in net revenue (as defined
below) and operating profitability. The Company has achieved these results in
Colorado primarily through the development of a dense dental practice network
and the implementation of its dental practice management model. The Company's
net revenue increased from $300,000 in 1995 to $5.4 million for the year ended
December 31, 1996 and was $12.7 million in the year ended December 31, 1997.
Contribution from dental offices has increased dramatically from a loss of
($6,516) in 1995, to a profit of $771,000 in 1996, and to a profit of $2.6
million for the year ended December 31, 1997. Contribution from dental offices
as a percentage of Revenue increased from (2.2)% for the year ended December 31,
1995 to 14.3% for the year ended December 31, 1996, and to 20.3% for the year
ended December 31, 1997. Operating income also improved substantially from a
loss of ($159,000) in 1995 to a loss of ($9,000) in the year ended December 31,
1996 to an operating profit of $877,000 for the year ended December 31, 1997.

                                       23
<PAGE>

  At December 31, 1997, the Company's total assets of $15.6 million included
$8.9 million of identifiable intangible assets related to Management Agreements.
At that date, the Company's total shareholders' equity was $1.4 million. The
Company reviews the recorded amount of intangible assets and other fixed assets
for impairment for each Office whenever events or changes in circumstances
indicate the carrying amount of the assets may not be recoverable. If this
review indicates that the carrying amount of the assets may not be recoverable
as determined based on the undiscounted cash flows of each Office, whether
acquired or developed, the carrying value of the asset is reduced to fair value.
Among the factors that the Company will continually evaluate are unfavorable
changes in each Office, relative market share and local market competitive
environment, current period and forecasted operating results, cash flow levels
of Offices and the impact on the net revenue earned by the Company, and the
legal and regulatory factors governing the practice of dentistry.


COMPONENTS OF REVENUE AND EXPENSES

  Total dental group practice revenue, net ("Revenue") represents the revenue
of the Offices reported at estimated realizable amounts, received from third-
party payors and patients for dental services rendered at the Offices. Net
revenue represents Revenue less amounts retained by the Offices. The amounts
retained by the Offices represent amounts paid as salary, benefits and other
payments to employed dentists and hygienists. The Company's net revenue is
dependent on the Revenue of the Offices. Management service fee revenue
represents the net revenue earned by the Company for the two Offices for which
the Company has management agreements, but does not have control. Direct
expenses consist of the expenses incurred by the Company in connection with
managing the Offices, including salaries and benefits (for personnel other than
dentists and hygienists), dental supplies, dental laboratory fees, occupancy
costs, advertising and marketing, depreciation and amortization and general and
administrative (including office supplies, equipment leases, management
information systems and other expenses related to dental practice operations).
The Company also incurs personnel and administrative expenses in connection with
maintaining a corporate function that provides management, administrative,
marketing, development and professional services to the Offices.

  Under the Management Agreements, the Company manages the business and
marketing aspects of the Offices, including (i) providing capital, (ii)
designing and implementing marketing programs, (iii) negotiating on behalf of
the P.C.s for the purchase of supplies, (iv) providing a patient scheduling
system, (v) staffing, (vi) recruiting, (vii) training of non-dental personnel,
(viii) billing and collecting patient fees, (ix) arranging for certain legal and
accounting services, and (x) negotiating on behalf of the P.C.s with managed
care organizations. The P.C. is responsible for, among other things, (i)
employing and supervising all dentists and dental hygienists, (ii) complying
with all laws, rules and regulations relating to dentists and dental hygienists,
(iii) maintaining proper patient records, and (iv) cooperating in the obtaining
of professional liability insurance. The Company has made, and intends to make
in the future, loans to P.C.s in both Colorado and New Mexico to fund their
acquisition of dental assets from third parties in order to comply with the laws
of such states. Bonuses payable to dentists based on the operating performance
of the P.C.s take into account principal and interest payments made on the
loans, resulting in the dentists sharing with the Company the economic benefits
or detriments associated with assets acquired by the P.C.s using such loans.
Because the Company consolidates the financial statements of the P.C.s with its
financial statements, these loans are eliminated in consolidation.

  Under the typical Management Agreement used by the Company, the P.C. pays the
Company a management fee equal to the Adjusted Gross Center Revenue of the P.C.
less compensation paid to the dentists and dental hygienists employed by the
P.C. Adjusted Gross Center Revenue is comprised of all fees and charges booked
each month by or on behalf of the P.C. as a result of dental services provided
to patients at the Office, less any adjustments for uncollectible accounts,
professional courtesies and other activities that do not generate a collectible
fee. The Company's costs include all direct and indirect costs, overhead and
expenses relating to the Company's provision of management services at each
Office under a Management Agreement, including (i) salaries, benefits and other
direct costs of employees of the Company that work at the Office, including
dental assistants, (ii) direct costs of all employees or consultants of the
Company who provide services to or in connection with the Office, (iii)
utilities, janitorial, laboratory, supplies, advertising and other expenses
incurred by the Company in carrying out its obligations under the Management
Agreement, (iv) depreciation expense associated with the P.C.'s assets and the
assets of the Company used at the Office, and the amortization of intangible

                                       24
<PAGE>

asset value as a result of any acquisition or merger of another dental practice
relating to the Office, (v) interest expense on indebtedness incurred by the
Company to finance any of its obligations under the Management Agreement, (vi)
malpractice insurance expenses, lease expenses and dentist recruitment expenses,
(vii) personal property and other taxes assessed against the Company's or the
P.C.'s assets used in connection with the operation of the Office, (viii) out-
of-pocket expenses of the Company's personnel related to mergers or acquisitions
involving the P.C., (ix) corporate overhead charges or any other expenses of
Company including the P.C.'s pro rata share of the expenses of the accounting
and computer services provided by the Company, and (x) a collection reserve in
the amount of 5.0% of Adjusted Gross Center Revenue. As a result, substantially
all costs associated with the provision of dental services at the Offices are
borne by the Company, other than the compensation and benefits of the dentists
and hygienists who are employed by the P.C.s. This enables the Company to manage
the profitability of the Offices. Each Management Agreement is for a term of 40
years. Further, each Management Agreement generally may be terminated by the
P.C. only for cause, which includes a material default by or bankruptcy of the
Company.

  The Company's Revenue is derived principally from fee-for-service Revenue and
Revenue from capitated managed dental care plans. Fee-for-service Revenue
consists of Revenue of the P.C.s received from indemnity dental plans, preferred
provider plans and direct payments by patients not covered by any third-party
payment arrangement. Managed dental care Revenue consists of Revenue of the
P.C.s received from capitated managed dental care plans, including capitation
payments and patient co-payments. Capitated managed dental care contracts are
between dental benefits organizations and the P.C.s. Under the Management
Agreements, the Company negotiates and administers these contracts on behalf of
the P.C.s. Under a capitated managed dental care contract, the dental group
practice provides dental services to the members of the dental benefits
organization and receives a fixed monthly capitation payment for each plan
member covered for a specific schedule of services regardless of the quantity or
cost of services to the participating dental group practice obligated to provide
them. This arrangement shifts the risk of utilization of these services to the
dental group practice providing the dental services. Because the Company assumes
responsibility under the Management Agreements for all aspects of the operation
of the dental practices (other than the practice of dentistry) and thus bears
all costs of the P.C.s associated with the provision of dental services at the
Office (other than compensation and benefits of dentists and hygienists), the
risk of over-utilization of dental services at the Office under capitated
managed dental care plans is effectively shifted to the Company. In addition,
dental group practices participating in a capitated managed dental care plan
often receive co-payments for more complicated or elective procedures. In
contrast, under traditional indemnity insurance arrangements, the insurance
company pays whatever reasonable charges are billed by the dental group practice
for the dental services provided. See Items 1 and 2. ''Business and Properties -
- Payor Mix.''

  The Company seeks to increase its fee-for-service business by increasing the
patient volume of existing Offices through effective marketing and advertising
programs, opening new Offices and acquiring solo and group practices. The
Company seeks to supplement this fee-for-service business with Revenue from
contracts with capitated managed dental care plans. Although the Company's fee-
for-service business generally is more profitable than its capitated managed
dental care business, capitated managed dental care business serves to increase
facility utilization and dentist productivity.

  The relative percentage of the Company's Revenue derived from fee-for-service
business and capitated managed dental care contracts varies from market to
market depending on the availability of capitated managed dental care contracts
in any particular market and the Company's ability to negotiate favorable terms
in such contracts. In addition, the profitability of managed dental care Revenue
varies from market to market depending on the level of capitation payments and
co-payments in proportion to the level of benefits required to be provided.
Variations in the relative penetration and popularity of capitated managed
dental care from market to market across the country, however, make it difficult
to determine whether the Company's experience in new markets will be consistent
with its experience in the Colorado market. The Company expects that the level
of profitability of its operations in new markets entered through acquisition
will vary depending in part on these factors and may not replicate or be
comparable to the Company's results in the Colorado market.




                                       25
<PAGE>

RESULTS OF OPERATIONS

  As a result of the recent rapid expansion of its business through acquisitions
and the development of de novo Offices, and the Company's limited period of
affiliation with these Offices, the Company believes that the period-to-period
comparisons set forth below may not be representative of future operating
results.

  The Company has experienced significant growth in Revenue which has increased
from $7.3 million for the year ended December 31, 1996 to $17.2 million for the
year ended December 31, 1997, an increase of 135.8%. The Company acquired 15
practices and opened one de novo Office during 1997 which, in the aggregate,
contributed $4.4 million of the $9.9 million increase. The remainder of the
increase in Revenue of $5.5 million was attributable to the 18 Offices that
existed at the beginning of 1997. Revenue at the four Offices in existence
during both full periods increased from $2.7 million in 1996 to $3.3 million in
1997, an increase of $0.6 million, or 22.5%. The Company's Revenue increased
from $448,000 for the year ended December 31, 1995 (a partial year of
operations) to $7.3 million for the year ended December 31, 1996.

  The following table sets forth the percentages of net revenue represented by
certain items reflected in the Company's consolidated statements of operations.
The information contained in the table represents the historical results of the
Company. The information that follows should be read in conjunction with the
Consolidated Financial Statements and Notes thereto of the Company.


<TABLE>
<CAPTION>
                                                    INCEPTION TO    YEAR ENDED     YEAR ENDED
                                                    -------------  -------------  -------------
                                                    DECEMBER 31,   DECEMBER 31,   DECEMBER 31,
                                                    -------------  -------------  -------------
                                                      1995 (1)         1996           1997
                                                    -------------  -------------  -------------
--------------------------------------------------

<S>                                                 <C>            <C>            <C>
Net revenue                                                100.0%         100.0%         100.0%
Direct expenses:
  Clinical salaries and benefits                            41.9           32.5           37.4
  Dental supplies                                           14.1           14.5            8.5
  Laboratory fees                                            9.4            9.0            9.2
  Occupancy                                                  6.5            5.9            8.6
  Advertising and marketing                                 11.5            5.2            3.2
  Depreciation and amortization                              4.6            6.0            4.4
  General and administrative                                14.2           12.5            8.4
                                                         -------          -----          -----
                                                           102.2           85.6           79.7
                                                         -------          -----          -----
Contribution from dental offices                            (2.2)          14.4           20.3
Corporate expenses --
  General and administrative                                49.6           13.4           10.7
  Unsuccessful acquisition costs                              --             --            2.0
  Depreciation and amortization                              1.3            1.1            0.8
                                                         -------          -----          -----
Operating (loss) income                                    (53.1)          (0.1)           6.8
Interest expense, net                                       (0.3)          (6.1)          (6.6)
                                                         -------          -----          -----
(Loss) income before income taxes                          (53.4)          (6.2)           0.2
Income taxes                                                 0.0            0.0            0.0
                                                         -------          -----          -----
Net (loss) income                                         (53.4)%         (6.2)%           0.2%
                                                         =======          =====          =====
</TABLE>
--------------

(1) The Company was formed on May 17, 1995, and had no substantial operations
    until October 1, 1995.


YEAR ENDED DECEMBER 31,  1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

  Net revenue.   Net revenue increased from $5.4 million for the year ended
December 31, 1996 to $12.7 million for the year ended December 31, 1997, an
increase of $7.3 million, or 137.1%.  The Company acquired 15 practices and
opened one de novo Office during 1997 which contributed $3.0 million of the
increase.  The remainder of the increase in net revenue of $4.3 million was
attributable to the 18 Offices that existed at the beginning of 1997.

  Clinical salaries and benefits.   Clinical salaries and benefits increased
from $1.7 million to $4.8 million for the year ended December 31, 1996 and 1997,
respectively, an increase of $3.0 million or  172.4%. This increase was due

                                       26
<PAGE>

primarily to the increased number of Offices and the corresponding addition of
non-dental personnel. As a percentage of net revenue, clinical salaries and
benefits increased from 32.5% in 1996 to 37.4% in 1997.

  Dental supplies.   Dental supplies increased from $778,000 for the year ended
December 31, 1996 to $1.1 million for the year ended December 31, 1997, an
increase of $303,000 or 39.0%. This increase was due to the increased Revenue
generated at the Offices. As a percentage of net revenue, dental supplies
decreased from 14.5% in 1996 to 8.5% in 1997.

  Laboratory fees. Laboratory fees increased from $483,000 in 1996 to $1.2
million for 1997, an increase of $688,000 or 142.5%. This increase was due to
the increased Revenue generated at the Offices. As a percentage of net revenue,
laboratory fees increased marginally from 9.0% in 1996 to 9.2% in 1997.

  Occupancy.   Occupancy increased from $315,000 in 1996 to $1.1 million in
1997, an increase of $785,000 or 248.9%. This increase was due to the increased
number of Offices as well as certain Offices which were only open for part of
the year ended December 31, 1996. As a percentage of net revenue, occupancy
expense increased from 5.9% in 1996 to 8.6% in 1997.

  Advertising and marketing.   Advertising and marketing increased from $280,000
for the year ended December 31, 1996 to $409,000 for the year ended December 31,
1997, an increase of $128,000 or 45.8%. This increase was primarily due to
increased advertising, including television, Yellow Pages and radio advertising
in 1997. The Company's increased density in the Colorado market enabled it cost
effectively to increase its advertising expense. As a percentage of net revenue,
advertising and marketing decreased from 5.2% in 1996 to 3.2% in 1997.

  Depreciation and amortization.   Depreciation and amortization, which consists
of depreciation and amortization expense incurred at the Offices, increased from
$323,000 in 1996 to $549,000 in 1997, an increase of $226,000 or 69.9%. This
increase was due to the increased number of Offices as well as certain Offices
which were only open for part of the year ended December 31, 1996. As a
percentage of net revenue, depreciation and amortization decreased from 6.0% in
1996 to 4.4% in 1997.

  General and administrative.   General and administrative, which is
attributable to the Offices, increased from $673,000 in 1996 to $1.1 million in
1997, an increase of $399,000 or 59.4%. This increase was due to the increased
number of Offices as well as certain Offices which were only open for part of
the year ended December 31, 1996. Additionally, the Company expanded its
corporate infrastructure to manage the growth and some of these costs were
passed on to the Offices. As a percentage of net revenue, general and
administrative expenses decreased from 12.5% in 1996 to 8.4% in 1997.

  Contribution from dental offices.   As a result of the above, contribution
from dental offices increased from $771,000 for the year ended December 31, 1996
to $2.6 million for the year ended December 31, 1997, an increase of $1.8
million or 236.3%. As a percentage of net revenue, contribution from dental
offices increased from 14.4% in 1996 to 20.3% in 1997.

  Corporate expenses -- general and administrative.   Corporate expenses --
general and administrative increased from $721,000 in 1996 to $1.4 million in
1997, an increase of $639,000 or 88.6%. This increase was due to expansion of
the Company's infrastructure to manage growth, primarily through the addition of
personnel. As a percentage of net revenue, corporate expense -- general and
administrative decreased from 13.4% in 1996 to 10.7% in 1997.

  Corporate expenses -- acquisition costs.   During the year ended December 31,
1997, the Company incurred a one-time charge of $252,234 related to due
diligence costs and audit fees in connection with a potential acquisition of a
group of dental practices. As a result of its due diligence, the Company
determined not to proceed with the acquisition.

  Corporate expenses -- depreciation and amortization.   Corporate expenses --
depreciation and amortization  increased from $58,000 in the year ended December
31, 1996 to $102,000 in the year ended December 31, 1997, an increase of $44,000
or 75.5%. This increase was a result of the Company's expansion of its corporate
infrastructure,

                                       27
<PAGE>

primarily investments in computer equipment to manage future growth. As a
percentage of net revenue, corporate expenses -- depreciation and amortization
decreased from 1.1% in 1996 to 0.8% in 1997.

  Operating income (loss).   As a result of the above, operating income (loss)
increased from an operating loss of ($9,000) in 1996 to $877,000 in 1997, an
increase of $886,000.  As a percentage of net revenue, operating income (loss)
increased from a loss of (0.1%) in 1996 to 6.8% in 1997.

  Interest expense, net.   Interest expense, net increased from $327,000 in 1996
to $843,000 in 1997, an increase of $517,000 or 158.3%. This increase was
primarily the result of interest expense and financing costs associated with the
Company's $6.8 million principal amount 9.0% convertible debentures issued in
May 1996 and December 1996. As a percentage of net revenue, interest expense,
net increased from 6.1% in 1996 to 6.6% in 1997.

  Net income (loss).  As a result of the above, net income (loss) increased from
a loss of ($335,000) in the year ended December 31, 1996 to $34,000 in the year
ended December 31, 1997, an increase of $369,000. The Company paid no income
taxes in other periods. As a percentage of net revenue, net income (loss)
increased from a loss of (6.2%) in 1996 to 0.2% in 1997.


YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

  The year ended December 31, 1996 represents a full year of operation while the
year ended December 31, 1995 reflects operations from October 1, 1995, the date
the Company acquired its first Offices, and start-up expenses from the Company's
inception at May 17, 1995 to October 1, 1995.

  Net revenue.   Net revenue increased from $300,000 in 1995 to $5.4 million in
1996, an increase of $5.1 million. The Company acquired its first three Offices
on October 1, 1995 and acquired its fourth Office on November 17, 1995 and,
therefore, had limited operations during 1995. These four Offices contributed
$2.0 million of net revenue in 1996, and the nine Offices acquired and five de
novo Offices developed by the Company during 1996 contributed $3.4 million.

  Clinical salaries and benefits.   Clinical salaries and benefits increased
from $125,000 to $1.7 million for 1995 and 1996, respectively, an increase of
$1.6 million. The increased clinical salaries and benefits were due primarily to
the full year of operations in 1996, the increased number of Offices and the
corresponding addition of non-dental personnel. As a percentage of net revenue,
clinical salaries and benefits decreased from 41.9% in 1995 to 32.5% in 1996.

  Dental supplies. Dental supplies increased from $42,000 for 1995 to $778,000
for 1996, an increase of $735,000 due to the increased Revenue generated at the
Offices. As a percentage of net revenue, dental supplies increased from 14.1% in
1996 to 14.5% in 1997.

  Laboratory fees.   Laboratory fees increased from $28,000 for 1995 to $483,000
for 1996, an increase of $455,000. This increase was due to the increased
Revenue generated at the Offices. As a percentage of net revenue, laboratory
fees decreased slightly from 9.4% in 1995 to 9.0% in 1996.

  Occupancy.   Occupancy increased from $20,000 for 1995 to $315,000 for 1996,
an increase of $296,000. This increase was due to the increased number of
Offices which grew from four at December 31, 1995, a period with only three
months of operations, to 18 Offices at December 31, 1996. As a percentage of net
revenue, occupancy expense decreased slightly from 6.5% in 1995 to 5.9% in 1996.

  Advertising and marketing.   Advertising and marketing increased from $35,000
for 1995 to $280,000 for 1996 period, an increase of $246,000. The Company's
only method of advertising and marketing in 1995 was Yellow Pages advertising.
The Company began television advertising in Colorado Springs in January 1996 and
in the Denver market in September 1996. Additionally, the Company conducted an
extensive direct mail marketing campaign during the opening of each of its de
novo Offices in 1996. As a percentage of net revenue, advertising and marketing
decreased from 11.5% in 1995 to 5.2% in 1996.

                                       28
<PAGE>

  Depreciation and amortization.   Depreciation and amortization, which consists
of depreciation and amortization expense incurred at the Offices, increased from
$14,000 in 1995 to $323,000 in 1996 an increase of $310,000. This increase was
due to the increased number of Offices as well as certain Offices which were
only open part of the year in 1995. Also contributing to the increase were the
five de novo Offices opened by the Company from January 9, 1996 to July 15,
1996. As a percentage of net revenue, depreciation and amortization increased
from 4.6% in 1995 to 6.0% in 1996.

  General and administrative.  General and administrative, which is attributable
to the Offices, increased from $43,000 in 1995 to $673,000 in 1996, an increase
of $630,000. This increase was a result of the full year of operations during
1996 and the increased number of Offices, as well as certain Offices which were
only open for part of the year in 1995. Additionally, the Company expanded its
corporate infrastructure to manage the growth and a portion of those costs are
passed on to the Offices. As a percentage of net revenue, general and
administrative expenses decreased from 14.2% in 1995 to 12.5% in 1996.

  Contribution from dental offices.   As a result of the above, contribution
from dental offices increased from a loss of ($7,000) for 1995 to $771,000 for
1996, an increase of $777,000. As a percentage of net revenue, contribution from
dental offices increased from (2.2)% in 1995 to 14.4% in 1996.

  Corporate expenses -- general and administrative.   Corporate expenses --
general and administrative increased from $149,000 in 1995 to $721,000 in 1996,
an increase of $572,000. This increase was due to a full period of operations
during 1996 and expansion of the Company's infrastructure to manage growth,
primarily through the addition of personnel. As a percentage of net revenue,
corporate expenses -- general and administrative decreased from 49.6% in 1995 to
13.4% in 1996. During 1995, the Company had certain start-up costs prior to
generating revenue on October 1, 1995 which contributed to the higher corporate
expense -- general and administrative as a percentage of net revenue.

  Corporate expenses -- depreciation and amortization.   Corporate expenses --
depreciation and amortization increased from $4,000 in 1995 to $58,000 in 1996,
an increase of $54,000. This increase was a result of the Company's expansion of
its corporate infrastructure, primarily investments in computer equipment to
manage future growth. As a percentage of net revenue, corporate expenses --
depreciation and amortization decreased from 1.3% in 1995 to 1.1% in 1996.

  Operating income (loss).   As a result of the above, operating income (loss)
improved from a loss of ($159,000) in 1995 to a loss of ($9,000) in 1996, an
improvement of $151,000. As a percentage of net revenue, operating income (loss)
increased from (53.1)% in 1995 to (0.1)% in 1996.

  Interest expense, net.   Interest expense, net increased from $1,000 in 1995
to $327,000 in 1996, an increase of $326,000. This increase was primarily the
result of interest expense and financing costs associated with the Company's
$6.8 million principal amount 9.0% convertible debentures issued in May 1996 and
December 1996. As a percentage of net revenue, interest expense, net increased
from 0.3% to 6.1% in 1996.

  Net income (loss).   As a result of the above, net income (loss) increased
from a loss of ($160,000) in 1995 to a loss of ($335,000) in 1996.


LIQUIDITY AND CAPITAL RESOURCES

  Since its inception, the Company has financed its growth through a combination
of private sales of convertible subordinated debentures and Common Stock, cash
provided by operating activities, a bank line of credit (the ''Credit
Facility'') and seller notes.

  Net cash provided by (used in) operating activities was $26,000, ($546,000)
and $2.2 million for the years ended December 31, 1995, 1996 and 1997,
respectively.  Net cash provided by (used in) operations during these periods,
after adding back depreciation and amortization, consisted primarily of
increases in accounts payable and accrued expenses.

                                       29
<PAGE>

In the year ended December 31, 1997, net income contributed $34,000 to net cash
provided by operating activities for the period.

  Net cash used in investing activities was $348,000, $4.8 million and $4.2
million for the years ended December 31, 1995, 1996 and 1997, respectively.  In
the year ended December 31, 1997, $3.4 million was utilized for acquisitions and
$1.1 million was invested in the purchase of additional property and equipment,
including $165,000 for the de novo Offices.  These capital expenditures were
partially offset by $200,000 of cash obtained from the acquisition of existing
dental offices. In 1996, $3.7 million was utilized for acquisitions and $1.0
million was invested in the purchase of additional property and equipment,
including $493,009 in the de novo Offices.

  For the years ended December 31, 1996 and December 31, 1997, net cash provided
by financing activities was $5.7 million and $1.1 million, respectively. In the
year ended December 31, 1997, the cash provided was comprised of $225,000 from
the private sale of convertible subordinated debentures and $250,000 in net
borrowings from the Credit Facility and proceeds of $2.0 million from a term
loan used to finance the Gentle Dental Acquisition. This was partially offset by
$847,000 for costs associated with the public offering, $271,000 used for the
repayment of long term debt and $219,000 used to repurchase common stock. Net
cash provided by financing activities in 1996 totaled $5.7 million. This was
comprised of $6.6 million from the private sale of convertible subordinated
debentures and $100,000 in net borrowings from the Credit Facility, partially
offset by $579,000 used for the repayment of long-term debt and $402,000 used
for the payment of subordinated debenture issuance and other financing costs.
Net cash provided by financing activities in 1995 totaled $1.8 million. This was
comprised of $1.8 million from the private sale of Common Stock, which was
partially offset by $19,647 used for the repayment of long-term debt.

  Under the Company's Credit Facility, during its three year term, the Company
may borrow up to $10.0 million for working capital needs. Advances will bear
interest at the lender's base rate or at the applicable LIBOR rate plus 2.25%,
at the Company's option, and the Company will be obligated to pay an annual
facility fee of .25% of the average unused amount of the line of credit during
the previous full calendar quarter. Borrowings are limited to an availability
formula based on the Company's adjusted EBITDA.  At December 31, 1997, the
Company had total outstanding borrowings of $2.35 million under the Credit
Facility. The Credit Facility is secured by a lien on the Company's accounts
receivable and its Management Agreements. The Credit Facility prohibits the
payment of dividends and other distributions to shareholders, restricts or
prohibits the Company from incurring indebtedness, incurring liens, disposing of
assets, making investments or making acquisitions, and requires the Company to
maintain certain financial ratios on an ongoing basis.

  The Company has outstanding indebtedness of approximately $162,000 represented
by notes issued in connection with various practice acquisitions, each of which
bears interest at rates varying from 7.0% to 9.0%. The Company's current
material commitments for capital expenditures total approximately $860,000,
consisting of approximately $350,000 for the expansion of two Offices and
approximately $170,000 for each of three planned de novo Office developments.
The Company anticipates that these capital expenditures will be funded by cash
on hand, cash generated by operations, or borrowings under the Company's Credit
Facility. The Company's accumulated deficit as of December 31, 1997 was
approximately $462,000, and the Company had a working capital deficit on that
date of approximately ($458,000).

  The Company completed on February 17, 1998 a public offering of 2,100,000
shares of Common Stock at an initial public offering price of $7.00 per share,
resulting in net proceeds to the Company of approximately $10.4 million.
Approximately $2.6 million of the net proceeds was used to repay outstanding
indebtedness under the Credit Facility and to repay the $1.3 million note issued
in connection with the Gentle Dental Acquisition. The Company believes that the
remaining net proceeds from the offering, together with cash generated from
operations and borrowings under its Credit Facility, will be sufficient to fund
its anticipated working capital needs, capital expenditures and future
acquisitions for at least the next 12 months. In the event the Company is not
able to successfully negotiate a new Credit Facility at the end of its term or
identifies and completes future acquisitions more quickly than it currently
anticipates, the Company's current sources of liquidity may not be adequate. In
addition, in order to meet its long-term liquidity needs the Company may issue
additional equity and debt securities, subject to market and other conditions.
There can be no assurance that such additional financing will be available on
terms acceptable to the Company. The failure to raise the funds necessary to
finance its future cash requirements could adversely affect the Company's
ability to pursue
                                       30
<PAGE>

its strategy and could negatively affect its operations in future periods. See
''Risk Factors-- Need for Additional Capital; Uncertainty of Additional
Financing'' in this Item 7.

RISK FACTORS

     This Annual Report contains forward-looking statements. Discussions
containing such forward-looking statements may be found in the material set
forth in this Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Items 1 and 2. "Business and Properties"
and Item 5. "Market for the Registrant's Common Equity and Related Stockholder
Matters," as well as in this Annual Report generally. Investors are cautioned
that any such forward-looking statements are not guarantees of future
performance and involve risks and uncertainties. Actual events or results may
differ materially from those discussed in the forward-looking statements as a
result of various factors, including, without limitation, the risk factors set
forth below and the matters set forth in this Annual Report generally.


     Demands on Management from Growth; Limited Operating History.  The Company
has been providing dental practice management services since October 1995.
Although the Company provides management services for 35 Offices, the Company
has been providing management services to 16 of these Offices for less than one
year. Prior to April 1997, the Company provided dental practice management
services exclusively in Colorado. The Company's growth has placed, and will
continue to place, strains on the Company's management, operations and systems.
The growth has required the hiring and training of additional employees to
oversee the operations and training of non-dental employees in the new Offices,
the use of management resources to integrate the operations of the new Offices
with the operations of the Company, and the incurring of incremental costs to
convert to or install the Company's management information system. The Company's
ability to compete effectively will depend upon its ability to hire, train and
assimilate additional management and other employees, and its ability to expand,
improve and effectively utilize its operating, management, marketing and
financial systems to accommodate its expanded operations. Any failure by the
Company's management effectively to anticipate, implement and manage the changes
required to sustain the Company's growth may have a material adverse effect on
the Company's business, financial condition and operating results. See Items 1
and 2. ''Business and Properties -- Expansion Program.''

     Risks Associated with Acquisition Strategy.  The Company has grown
substantially in a relatively short period of time, in large part through
acquisitions of existing Offices and through the development of de novo Offices.
Since its organization in May 1995, the Company has completed 32 dental practice
acquisitions (including one acquisition in February 1998), three of which have
been consolidated into existing Offices. The success of the Company's
acquisition strategy will depend on factors which include the following:

     * Ability to Identify Suitable Dental Practices. The Company devotes
substantial time and resources to acquisition-related activities. Identifying
appropriate acquisition candidates and negotiating and consummating acquisitions
can be a lengthy and costly process. Furthermore, the Company may compete for
acquisition opportunities with companies that have greater resources than the
Company. There can be no assurance that suitable acquisition candidates will be
identified or that acquisitions will be consummated on terms favorable to the
Company, on a timely basis or at all. If a planned acquisition fails to occur or
is delayed, the Company's quarterly financial results may be materially lower
than analysts' expectations, which likely would cause a decline, perhaps
substantial, in the market price of the Common Stock. In addition, increasing
consolidation in the dental management services industry may result in an
increase in purchase prices required to be paid by the Company to acquire dental
practices.

     * Integration of Dental Practices. The integration of acquired dental
practices into the Company's networks is a difficult, costly and time consuming
process which, among other things, requires the Company to attract and retain
competent and experienced management and administrative personnel and to
implement and integrate reporting and tracking systems, management information
systems and other operating systems. In addition, such integration may require
the expansion of accounting controls and procedures and the evaluation of
certain personnel functions. There can be no assurance that substantial
unanticipated problems, costs or delays associated with such integration efforts
or

                                       31
<PAGE>

with such acquired practices will not occur. As the Company pursues its
acquisition strategy, there can be no assurance that the Company will be able
successfully to integrate acquired practices in a timely manner or at all, or
that any acquired practices will have a positive impact on the Company's results
of operations and financial condition.

     * Management of Acquisitions.   The success of the Company's acquisition
strategy will depend in part on the Company's ability to manage effectively an
increasing number of Offices, some of which are expected to be located in
markets geographically distant from markets in which the Company presently
operates. The addition of Offices may impair the Company's ability to provide
management services efficiently and successfully to existing Offices and to
manage and supervise adequately the Company's employees. The Company's results
of operations and financial condition could be materially adversely affected if
it is unable to do so effectively.

     * Availability of Funds for Acquisitions.   The Company's acquisition
strategy will require that substantial capital investment and adequate financing
be available to the Company. Funds are needed for (i) the purchase of assets of
dental practices, (ii) the integration of operations of acquired dental
practices, and (iii) the purchase of additional equipment and technology for
acquired practices. In addition, increasing consolidation in the dental services
industry may result in an increase in purchase prices required to be paid by the
Company to acquire dental practices. Any inability of the Company to obtain
suitable financing could cause the Company to limit or otherwise modify its
acquisition strategy, which could have a material adverse effect on the
Company's results of operations and financial condition. See ''Risk Factors --
Need for Additional Capital; Uncertainty of Additional Financing'' in this Item
7.

     * Ability to Increase Revenues and Operating Income of Acquired Practices.
A key element of the Company's growth strategy is to increase revenues and
operating income at its acquired Offices. There can be no assurance that the
Company's revenues and operating income from its acquired Offices will improve
at rates comparable to the historical improvement rates experienced by the
Company's existing Offices or at all, or that revenues or operating income from
existing Offices will continue to improve at such historical rates or at all.
Any failure by the Company in improving revenues or operating income at its
Offices could have a material adverse effect on the Company's results of
operations and financial condition.

     Risks Associated with De Novo Office Development.  The Company intends to
devote a substantial amount of time and resources to identify locations in
suitable markets for the development of de novo Offices. Identifying locations
in suitable geographic markets and negotiating leases can be a lengthy and
costly process. Furthermore, the Company will need to provide each new Office
with the appropriate equipment, furnishings, materials and supplies. To date,
the Company's average cost to open a de novo Office has been approximately
$170,000. Future de novo development may require a greater investment by the
Company. Additionally, new Offices must be staffed with one or more dentists.
Because a new Office may be staffed with a dentist with no previous patient
base, significant advertising and marketing expenditures may be required to
attract patients. There can be no assurance that a de novo Office will become
profitable for the Company. See Items 1 and 2. "Business and Properties --
Expansion Program -- De Novo Office Developments."


     Dependence on Management Agreements, the P.C.s and Affiliated Dentists.
The Company receives management fees for services provided to the P.C.s under
management agreements (the "Management Agreements"). The Company owns most of
the non-dental operating assets of the Offices but does not employ or contract
with dentists, employ hygienists or control the provision of dental care. The
Company's revenue is dependent on the revenue generated by the P.C.s. Therefore,
effective and continued performance of dentists providing services for the P.C.s
is essential to the Company's long-term success. Under each Management
Agreement, the Company pays substantially all of the operating and non-operating
expenses associated with the provision of dental services except for the
salaries and benefits of the dentists and hygienists and principal and interest
payments of loans made to the P.C. by the Company. Any material loss of revenue
by the P.C.s would have a material adverse effect on the Company's business,
financial condition and operating results, and any termination of a Management
Agreement (which is permitted in the event of a material default or bankruptcy
by either party) could have such an effect. In the event of a breach of a
Management Agreement by a P.C., there can be no assurance that the legal
remedies available to the Company will be adequate to compensate the Company for
its damages resulting from such breach. See Items 1 and 2. "Business and
Properties -- Affiliation Model."

                                       32
<PAGE>

     Government Regulation.    The practice of dentistry is regulated at both
the state and federal levels. There can be no assurance that the regulatory
environment in which the Company or P.C.s operate will not change significantly
in the future. In addition, state and federal laws regulate health maintenance
organizations and other managed care organizations for which dentists may be
providers. In general, regulation of health care companies is increasing. In
connection with its operations in existing markets and expansion into new
markets, the Company may become subject to additional laws, regulations and
interpretations or enforcement actions. The laws regulating health care are
broad and subject to varying interpretations, and there is currently a lack of
case law construing such statutes and regulations. The ability of the Company to
operate profitably will depend in part upon the ability of the Company to
operate in compliance with applicable health care regulations.

  The laws of many states, including Colorado and New Mexico, permit a dentist
to conduct a dental practice only as an individual, a member of a partnership or
an employee of a professional corporation, limited liability company or limited
liability partnership. These laws typically prohibit, either by specific
provision or as a matter of general policy, non-dental entities, such as the
Company, from practicing dentistry, from employing dentists and, in certain
circumstances, hygienists or dental assistants, or from otherwise exercising
control over the provision of dental services.

  Many states, including Colorado, limit the ability of a person other than a
licensed dentist to own or control dental equipment or offices used in a dental
practice. In addition, Colorado, New Mexico, and many other states impose limits
on the tasks that may be delegated by dentists to hygienists and dental
auxiliaries. Some states, including Colorado, regulate the content of
advertisements of dental services. Some states require entities designated as
"clinics" to be licensed, and may define clinics to include dental practices
that are owned or controlled in whole or in part by non-dentists. These laws and
their interpretations vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion.

  Many states, including Colorado and New Mexico, also prohibit "fee-
splitting" by dentists with any party except other dentists in the same
professional corporation or practice entity. In most cases, these laws have been
construed as applying to the practice of paying a portion of a fee to another
person for referring a patient or otherwise generating business, and not to
prohibit payment of reasonable compensation for facilities and services (other
than the generation of referrals), even if the payment is based on a percentage
of the practice's revenues.

  Many states have fraud and abuse laws which apply to referrals for items or
services reimbursable by any third-party payor, not just by Medicare and
Medicaid. A number of states, including Colorado and New Mexico, prohibit the
submitting of false claims for dental services.

  In addition, there are certain regulatory risks associated with the Company's
role in negotiating and administering managed care contracts. The application of
state insurance laws to third-party payor arrangements, other than fee-for-
service arrangements, is an unsettled area of law with little guidance
available. Specifically, in some states, regulators may determine that the P.C.s
are engaged in the business of insurance, particularly if they contract on a
financial-risk basis directly with self-insured employers or other entities that
are not licensed to engage in the business of insurance. If the P.C.s are
determined to be engaged in the business of insurance, the Company may be
required to change the method of payment from third-party payors and the
Company's business, financial condition and operating results may be materially
and adversely affected.

  Federal laws generally regulate reimbursement and billing practices under
Medicare and Medicaid programs. The federal fraud and abuse statute prohibits,
among other things, the payment, offer, solicitation or receipt of any form of
remuneration, directly or indirectly, in cash or in kind to induce or in
exchange for (i) the referral of a person for services reimbursable by Medicare
or Medicaid, or (ii) the purchasing, leasing, ordering or arranging for or
recommending the purchase, lease or order of any item, good, facility or service
which is reimbursable under Medicare or Medicaid. Because the P.C.s receive no
revenue under Medicare and Medicaid, the impact of these laws on the Company to
date has been negligible. There can be no assurance, however, that the P.C.s
will not have patients in the future covered by these laws, or that the scope of
these laws will not be expanded in the future, and if expanded, such

                                       33
<PAGE>

laws or interpretations thereunder could have a material adverse effect on the
Company's business, financial condition and operating results.

  Although the Company believes that its operations as currently conducted are
in material compliance with applicable laws, there can be no assurance that the
Company's contractual arrangements will not be successfully challenged as
violating applicable fraud and abuse, self-referral, false claims, fee-
splitting, insurance, facility licensure or certificate-of-need laws or that the
enforceability of such arrangements will not be limited as a result of such
laws. In addition, there can be no assurance that the business structure under
which the Company operates, or the advertising strategy the Company employs,
will not be deemed to constitute the unlicensed practice of dentistry or the
operation of an unlicensed clinic or health care facility. The Company has not
sought judicial or regulatory interpretations with respect to the manner in
which it conducts its business. There can be no assurance that a review of the
business of the Company and the P.C.s by courts or regulatory authorities will
not result in a determination that could materially and adversely affect their
operations or that the regulatory environment will not change so as to restrict
the Company's existing or future operations. In the event that any legislative
measures, regulatory provisions or rulings or judicial decisions restrict or
prohibit the Company from carrying on its business or from expanding its
operations to certain jurisdictions, structural and organizational modifications
of the Company's organization and arrangements may be required, which could have
a material adverse effect on the Company, or the Company may be required to
cease operations or change the way it conducts business. See Items 1 and 2.
"Business and Properties -- Government Regulation".

     Need for Additional Capital; Uncertainty of Additional Financing.
Implementation of the Company's growth strategy has required and is expected to
continue to require significant capital resources. Such resources will be needed
to acquire or establish additional Offices, maintain or upgrade the Company's
management information systems, and for the effective integration, operation and
expansion of the Offices. The Company historically has used principally cash and
promissory notes as consideration in acquisitions of dental practices and
intends to continue to do so. If the Company's capital requirements over the
next several years exceed cash flow generated from operations and borrowings
available under the Company's existing credit facility or any successor credit
facility, the Company may need to issue additional equity securities and incur
additional debt. If additional funds are raised through the issuance of equity
securities, dilution to the Company's existing shareholders may result.
Additional debt or non-Common Stock equity financings could be required to the
extent that the Common Stock fails to maintain a market value sufficient to
warrant its use for future financing needs. If additional funds are raised
through the incurrence of debt, such debt instruments will likely contain
restrictive financial, maintenance and security covenants. The Company's
existing credit facility limits the amount the Company may spend in any calendar
year to acquire dental practices. The Company may not be able to obtain
additional required capital on satisfactory terms, if at all. The failure to
raise the funds necessary to finance the expansion of the Company's operations
or the Company's other capital requirements could have a material and adverse
effect on the Company's ability to pursue its strategy and on its business,
financial condition and operating results. See "Liquidity and Capital
Resources" in this Item 7.

     Reliance on Certain Personnel.  The success of the Company, including its
ability to complete and integrate acquisitions, depends on the continued
services of a relatively limited number of members of the Company's senior
management, including its President, Mark Birner, D.D.S., its Chief Executive
Officer, Fred Birner, and its Chief Financial Officer, Treasurer and Secretary,
Dennis Genty. Some key employees have only recently joined the Company. The
Company believes its future success will depend in part upon its ability to
attract and retain qualified management personnel. Competition for such
personnel is intense and the Company competes for qualified personnel with
numerous other employers, some of which have greater financial and other
resources than the Company. The loss of the services of one or more members of
the Company's senior management or the failure to add or retain qualified
management personnel could have a material adverse effect on the Company's
business, financial condition and operating results.

     Dependence Upon Availability of Dentists and Other Personnel.  The
Company's operations and expansion strategy are dependent on the availability
and successful recruitment and retention of dentists, dental assistants,
hygienists, specialists and other personnel. The Company may not be able to
recruit or retain dentists and other

                                       34
<PAGE>

personnel for its existing and newly established Offices, which may have a
material adverse effect on the Company's expansion strategy and its business,
financial condition and operating results. See Items 1 and 2. "Business and
Properties -- Operations -- Dental Practice Management Model."

     Risks Associated with Cost-Containment Initiatives.  The health care
industry, including the dental services market, is experiencing a trend toward
cost containment, as payors seek to impose lower reimbursement rates upon
providers. The Company believes that this trend will continue and will
increasingly affect the provision of dental services. This may result in a
reduction in per-patient and per-procedure revenue from historic levels.
Significant reductions in payments to dentists or other changes in reimbursement
by payors for dental services may have a material adverse effect on the
Company's business, financial condition and operating results.

     Risks Associated with Capitated Payment Arrangements.  Part of the
Company's growth strategy involves selectively obtaining capitated managed
dental care contracts. Under a capitated managed dental care contract, the
dental practice provides dental services to the members of the plan and receives
a fixed monthly capitation payment for each plan member covered for a specific
schedule of services regardless of the quantity or cost of services to the
participating dental practice which is obligated to provide them, and may
receive a co-pay for each service provided. This arrangement shifts the risk of
utilization of such services to the dental group practice that provides the
dental services. Because the Company assumes responsibility under its Management
Agreements for all aspects of the operation of the dental practices (other than
the practice of dentistry) and thus bears all costs of the provision of dental
services at the Offices (other than compensation and benefits of dentists and
hygienists), the risk of over-utilization of dental services at the Offices
under capitated managed dental care plans is effectively shifted to the Company.
In contrast, under traditional indemnity insurance arrangements, the insurance
company reimburses reasonable charges that are billed for the dental services
provided.

  In 1996, the Company derived approximately 20.4% of its revenues from
capitated managed dental care contracts, and 28.0% of its revenues from
associated co-payments. Risks associated with capitated managed dental care
contracts include principally (i) the risk that the capitation payments and any
associated co-payments do not adequately cover the costs of providing the dental
services, (ii) the risk that one or more of the P.C.s may be terminated as an
approved provider by managed dental care plans with which they contract, (iii)
the risk that the Company will be unable to negotiate future capitation
arrangements on satisfactory terms with managed care dental plans, and (iv) the
risk that large subscriber groups will terminate their relationship with such
managed dental care plans which would reduce patient volume and capitation and
co-payment revenue. There can be no assurance that the Company will be able to
negotiate future capitation arrangements on behalf of P.C.s on satisfactory
terms or at all, or that the fees offered in current capitation arrangements
will not be reduced to levels unsatisfactory to the Company. Moreover, to the
extent that costs incurred by the Company's affiliated dental practices in
providing services to patients covered by capitated managed dental care
contracts exceed the revenue under such contracts, the Company's business,
financial condition and operating results may be materially and adversely
affected. See Items 1 and 2. "Business and Properties -- Operations -- Payor
Mix."

     Risks of Becoming Subject to Licensure.  Federal and state laws regulate
insurance companies and certain other managed care organizations. Many states,
including Colorado, also regulate the establishment and operation of networks of
health care providers. In most states, these laws do not apply to discounted-
fee-for-service arrangements. These laws also do not generally apply to networks
that are paid on a capitated basis, unless the entity with which the network
provider is contracting is not a licensed health insurer or other managed care
organization. There are exceptions to these rules in some states. For example,
certain states require a license for a capitated arrangement with any party
unless the risk-bearing entity is a professional corporation that employs the
professionals. The Company believes its current activities do not constitute the
provision of insurance in Colorado or New Mexico, and thus, it is in compliance
with the insurance laws of these states with respect to the operation of its
Offices. There can be no assurance that these laws will not be changed or that
interpretations of these laws by the regulatory authorities in those states, or
in the states in which the Company expands, will not require licensure or a
restructuring of some or all of the Company's operations. In the event that the
Company is required to become licensed under these laws, the licensure

                                       35
<PAGE>

process can be lengthy and time consuming and, unless the regulatory authority
permits the Company to continue to operate while the licensure process is
progressing, the Company could experience a material adverse change in its
business while the licensure process is pending. In addition, many of the
licensing requirements mandate strict financial and other requirements which the
Company may not immediately be able to meet. Further, once licensed, the Company
would be subject to continuing oversight by and reporting to the respective
regulatory agency. The regulatory framework of certain jurisdictions may limit
the Company's expansion into, or ability to continue operations within, such
jurisdictions if the Company is unable to modify its operational structure to
conform with such regulatory framework. Any limitation on the Company's ability
to expand could have a material adverse effect on the Company's business,
financial condition and operating results.

     Risks Arising From Health Care Reform.  Federal and state governments
currently are considering various types of health care initiatives and
comprehensive revisions to the health care and health insurance systems. Some of
the proposals under consideration, or others that may be introduced, could, if
adopted, have a material adverse effect on the Company's business, financial
condition and operating results. It is uncertain what legislative programs, if
any, will be adopted in the future, or what actions Congress or state
legislatures may take regarding health care reform proposals or legislation. In
addition, changes in the health care industry, such as the growth of managed
care organizations and provider networks, may result in lower payments for the
services of the Company's managed practices.

     Risks Associated with Intangible Assets.  The Family Dental Acquisition and
the Gentle Dental Acquisition resulted in significant increases in the Company's
intangible assets. At December 31, 1997, intangible assets on the Company's
consolidated balance sheet were $8.9 million, representing 57% of the Company's
total assets at that date. The Company expects the amount allocable to
intangible assets on its balance sheet to increase in the future in connection
with additional acquisitions, which will increase the Company's amortization
expense. In the event of any sale or liquidation of the Company or a portion of
its assets, there can be no assurance that the value of the Company's intangible
assets will be realized. In addition, the Company continually evaluates whether
events and circumstances have occurred indicating that any portion of the
remaining balance of the amount allocable to the Company's intangible assets may
not be recoverable. When factors indicate that the amount allocable to the
Company's intangible assets should be evaluated for possible impairment, the
Company may be required to reduce the carrying value of such assets. Any future
determination requiring the write off of a significant portion of unamortized
intangible assets could have a material adverse effect on the Company's
business, financial condition and operating results.

     Possible Exposure to Professional Liability.  In recent years, dentists
have become subject to an increasing number of lawsuits alleging malpractice and
related legal theories. Some of these lawsuits involve large claims and
significant defense costs. Any suits involving the Company or dentists at the
Offices, if successful, could result in substantial damage awards that may
exceed the limits of the Company's insurance coverage. The Company provides
practice management services; it does not engage in the practice of dentistry or
control the practice of dentistry by the dentists or their compliance with
regulatory requirements directly applicable to providers. There can be no
assurance, however, that the Company will not become subject to litigation in
the future as a result of the dental services provided at the Offices. The
Company maintains professional liability insurance for itself and provides for
professional liability insurance covering dentists, hygienists and dental
assistants at the Offices. While the Company believes it has adequate liability
insurance coverage, there can be no assurance that the coverage will be adequate
to cover losses or that coverage will continue to be available upon terms
satisfactory to the Company. In addition, certain types of risks and
liabilities, including penalties and fines imposed by governmental agencies, are
not covered by insurance. Malpractice insurance, moreover, can be expensive and
varies from state to state. Successful malpractice claims could have a material
adverse effect on the Company's business, financial condition and operating
results. See Items 1 and 2. "Business and Properties -- Insurance."

     Risks Associated with Non-Competition Covenants and Other Arrangements with
Managing Dentists.  The Management Agreements require the P.C.s to enter into
employment agreements with dentists which include non-competition provisions
typically for three to five years after termination of employment within a
specified geographic

                                       36
<PAGE>

area, usually a specified number of miles from the relevant Office, and restrict
solicitation of employees and patients. In Colorado, covenants not to compete
are prohibited by statute with certain exceptions. One exception permits
enforcement of covenants not to compete against executive and management
personnel and officers and employees who constitute professional staff to
executive and management personnel. Permitted covenants not to compete are
enforceable in Colorado only to the extent their terms are reasonable in both
duration and geographic scope. New Mexico courts have enforced covenants not to
compete if their terms are found to be reasonable. It is thus uncertain whether
a court will enforce a covenant not to compete in those states in a given
situation. In addition, there is little judicial authority regarding whether a
practice management agreement will be viewed as the type of protectable business
interest that would permit it to enforce such a covenant or to require a P.C. to
enforce such covenants against dentists formerly employed by the P.C. Since the
intangible value of a Management Agreement depends primarily on the ability of
the P.C. to preserve its business, which could be harmed if employed dentists
went into competition with the P.C., a determination that the covenants not to
compete contained in the employment agreements between the P.C. and its employed
dentists are unenforceable could have a material adverse impact on the Company.
See Items 1 and 2. "Business and Properties -- Affiliation Model -- Employment
Agreements." In addition, the Company is a party to various agreements with
managing dentists who own the P.C.s, which restrict the dentists' ability to
transfer the shares in the P.C.s. See Items 1 and 2. "Business and
Properties -- Affiliation Model -- Relationship with P.C.s." There can be no
assurance that these agreements will be enforceable in a given situation. A
determination that these agreements are not enforceable could have a material
adverse impact on the Company.

     Competition.  The dental practice management segment of the dental services
industry is highly competitive and is expected to become increasingly more
competitive. There are several dental practice management companies that are
operating in the Company's markets. There are also a number of companies with
dental practice management businesses similar to that of the Company currently
operating in other parts of the country which may enter the Company's existing
markets in the future. As the Company seeks to expand its operations into new
markets, it is likely to face competition from dental practice management
companies which already have established a strong business presence in such
locations. The Company's competitors may have greater financial or other
resources or otherwise enjoy competitive advantages which may make it difficult
for the Company to compete against them or to acquire additional Offices on
terms acceptable to the Company. See Items 1 and 2. "Business and Properties --
Competition."

  The business of providing general dental and specialty dental services is
highly competitive in the markets in which the Company operates. Competition for
providing dental services may include practitioners who have more established
practices and reputations. The Company competes against established practices in
the retention and recruitment of general dentists, specialists, hygienists and
other personnel. If the availability of such dentists, specialists, hygienists
and other personnel begins to decline in the Company's markets, it may become
more difficult to attract qualified dentists, specialists, hygienists and other
personnel. There can be no assurance that the Company will be able to compete
effectively against other existing practices or against new single or multi-
specialty dental practices that enter its markets, or to compete against such
practices in the recruitment and retention of qualified dentists, specialists,
hygienists and other personnel. See Items 1 and 2. "Business and Properties --
Competition."

     Volatility of Stock Price.  The market price of the Common Stock could be
subject to wide fluctuations in response to quarter-by-quarter variations in
operating results of the Company or its competitors, changes in earnings
estimates by analysts, developments in the industry or changes in general
economic conditions.

     Restrictions on Payment of Dividends.  The Company has not declared or paid
cash dividends on its Common Stock since its formation, and the Company does not
anticipate paying cash dividends on its Common Stock in the foreseeable future.
The payment of dividends is prohibited under the terms of the Company's existing
credit facility and

                                       37
<PAGE>

may be prohibited under any future credit facility which the Company may obtain.
See Item 5. "Market for Registrant's Common Equity and Related Stockholder
Matters" and "Liquidity and Capital Resources" in this Item 7.

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


            BIRNER DENTAL MANAGEMENT SERVICES, INC. AND SUBSIDIARIES


                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                            Page
                                                                           ------
<S>                                                              <C>
Birner Dental Management Services, Inc. and Subsidiaries
  Report of Independent Public Accountants                                   39

  Consolidated Balance Sheets as of December 31, 1997 and 1996               40

  Consolidated Statements of Operations for the years
   ended December 31, 1997 and 1996 and for the period from
   inception (May 17, 1995) to December 31, 1995                             41

  Consolidated Statements of Shareholders' Equity for the years
    ended December 31, 1997, and 1996 and for the period from
    inception (May 17, 1995) to December 31, 1995                            42

  Consolidated Statements of Cash Flows for the years ended
    December 31, 1997 and 1996 and for the period from
    inception (May 17, 1995) to December 31, 1995                         43-44

  Notes to Consolidated Financial Statements                                 45
</TABLE>

                                       38
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To the Shareholders of
 Birner Dental Management Services, Inc.:


We have audited the accompanying consolidated balance sheets of Birner Dental
Management Services, Inc. (a Colorado corporation) and subsidiaries as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, shareholders' equity and cash flows for the years ended December 31,
1997 and 1996 and for the period from inception (May 17, 1995) to December 31,
1995.  These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Birner Dental Management
Services, Inc. and subsidiaries as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for the years ended December
31, 1997 and 1996 and for the period from inception (May 17, 1995) to December
31, 1995, in conformity with generally accepted accounting principles.



Denver, Colorado,

March 18, 1998.

                                       39
<PAGE>

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

                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------



<TABLE>
<CAPTION>
                                                                         December 31,
                                                                    -----------------------
                      ASSETS                                            1997        1996
                      ------                                        -----------  ----------
<S>                                                                 <C>          <C>
CURRENT ASSETS:
 Cash and cash equivalents                                          $   977,454  $1,797,552
 Accounts receivable, net of allowances of approximately
   $97,700 and $26,200, respectively, for uncollectible accounts      1,374,304     848,851
 Notes receivable -- related parties                                     35,507      30,196
 Prepaid expenses                                                       284,865     179,727
 Deferred offering costs                                                846,528           -
                                                                    -----------  ----------
       Total current assets                                           3,518,658   2,856,326
                                                                    -----------  ----------
PROPERTY AND EQUIPMENT, net                                           2,630,945   1,809,775

OTHER NONCURRENT ASSETS:
 Intangible assets, net                                               8,947,952   4,336,759
 Deferred charges and other assets                                      458,191     441,603
 Notes receivable -- related parties, net of current portion              8,052     108,355
                                                                    -----------  ----------
       Total assets                                                 $15,563,798  $9,552,818
                                                                    ===========  ==========

          LIABILITIES AND SHAREHOLDERS' EQUITY
          ------------------------------------
CURRENT LIABILITIES:
 Accounts payable and accrued expenses                              $ 3,252,761  $  903,235
 Short-term borrowings                                                  682,907      94,785
 Current maturities of capital lease obligations                         41,391      41,500
                                                                    -----------  ----------
       Total current liabilities                                      3,977,059   1,039,520
                                                                    -----------  ----------
LONG TERM LIABILITIES:
 Long-term borrowings                                                 3,392,114     208,215
 Convertible subordinated debentures                                  6,780,000   6,555,000
 Capital lease obligations, net of current maturities                    26,249      65,957
                                                                    -----------  ----------
       Total liabilities                                             14,175,422   7,868,692

COMMITMENTS AND CONTINGENCIES (Note 10)

SHAREHOLDERS' EQUITY:
 Preferred Stock, no par value, 10,000,000 shares
   authorized; none outstanding                                               -           -
 Common Stock, no par value, 20,000,000 shares
   authorized; 3,196,243 and 3,299,205, shares issued and
   outstanding at December 31, 1997 and 1996, respectively            1,850,094   2,179,659
 Accumulated deficit                                                   (461,718)   (495,533)
                                                                    -----------  ----------
   Total shareholders' equity                                         1,388,376   1,684,126
                                                                    -----------  ----------
   Total liabilities and shareholders' equity                       $15,563,798  $9,552,818
                                                                    ===========  ==========

</TABLE>
   The accompanying notes are an integral part of these consolidated balance
                                    sheets.

                                       40
<PAGE>

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

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     -------------------------------------


<TABLE>
<CAPTION>

                                                                     Inception
                                              Years Ended         (May 17, 1995)
                                              December 31,              to
                                       ------------------------    December 31,
                                          1997          1996           1995
                                       -----------   ----------   --------------
<S>                                    <C>           <C>          <C>
NET REVENUE                            $12,742,293   $5,373,229   $  299,960

DIRECT EXPENSES:
 Clinical salaries and benefits          4,767,444    1,749,985      125,371
 Dental supplies                         1,081,080      777,769       42,392
 Laboratory fees                         1,171,429      483,140       28,262
 Occupancy                               1,100,447      315,423       19,532
 Advertising and marketing                 408,612      280,186       34,533
 Depreciation and amortization             549,332      323,401       13,745
 General and administrative              1,072,224      672,759       42,641
                                       -----------   ----------   ----------
                                        10,150,568    4,602,663      306,476
                                       -----------   ----------   ----------
 Contribution from dental offices        2,591,725      770,566       (6,516)
 Corporate expenses-
   General and administrative            1,360,537      721,313      148,825
   Unsuccessful acquisition costs          252,234            -            -
   Depreciation and amortization           101,709       57,941        3,888
                                       -----------   ----------   ----------
 Operating income (loss)                   877,245       (8,688)    (159,229)
 Interest expense, net                    (843,430)    (326,590)      (1,026)
                                       -----------   ----------   ----------
 Income (loss) before income taxes          33,815     (335,278)    (160,255)
 Income taxes                                    -            -            -
                                       -----------   ----------   ----------
 Net income (loss)                     $    33,815   $ (335,278)  $ (160,255)
                                       ===========   ==========   ==========

 Net income (loss)  per share, basic
   and diluted                         $       .01   $     (.10)  $     (.06)
                                       ===========   ==========   ==========

 Weighted average number of
   shares and dilutive securities
     Basic                               3,218,392    3,296,543    2,657,352
     Diluted                             3,456,973    3,296,543    2,657,352
</TABLE>

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


                                       41
<PAGE>

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


                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                ------------------------------------------------
<TABLE>
<CAPTION>
                                             Common Stock      Accumulated      Total
                                       ----------------------   Earnings    Shareholders'
                                         Shares      Amount     (Deficit)      Equity
                                       ---------   ----------   ---------    ----------
<S>                                    <C>         <C>          <C>          <C>
INCEPTION, May 17, 1995
 Issuance of Common Stock to
   founders for cash                   2,017,400   $   22,000   $    -       $   22,000
 Contribution of capital for
   dental offices                           -          52,010        -           52,010
 Issuance of Common Stock pursuant
   to private placement                  255,407      278,524        -          278,524
 Issuance of Common Stock pursuant
   to private placement                  829,243    1,627,740        -        1,627,740
 Private placement costs                    -        (201,615)       -         (201,615)
 Issuance of Common Stock for
   dental office acquisition             155,890      306,000        -          306,000
 Issuance of Common Stock                 36,680       80,000        -           80,000
 Net loss                                   -            -       (160,255)     (160,255)
                                       ---------   ----------   ---------    ----------
BALANCES, December 31, 1995            3,294,620   2,164,659     (160,255)    2,004,404
 Issuance of Common Stock for
   dental office acquisition               4,585      15,000         -          15,000
 Net loss                                   -           -        (335,278)    (335,278)
                                       ---------   ----------   ---------    ----------
BALANCES, December 31, 1996            3,299,205    2,179,659    (495,533)    1,684,126
 Purchase and retirement of
   Common Stock                         (137,550)    (330,000)       -         (330,000)
 Exercise of warrants                     34,380         -           -             -
 Exercise of stock options                   208          435        -              435
 Net income                                 -            -         33,815        33,815
                                       ---------   ----------   ---------    ----------
BALANCES, December 31, 1997            3,196,243   $1,850,094   $(461,718)   $1,388,376
                                       =========   ==========   =========    ==========
</TABLE>

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

                                       42
<PAGE>

                                                                     Page 1 of 2


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

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     --------------------------------------
<TABLE>
<CAPTION>
                                                                                            Inception
                                                                    Years Ended          (May 17, 1995)
                                                                    December 31,               To
                                                            -------------------------     December 31,
                                                                1997          1996            1995
                                                            -----------   -----------    --------------
<S>                                                         <C>           <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income (loss)                                          $    33,815   $  (335,278)   $ (160,255)
 Adjustments to reconcile net income (loss) to net
   cash provided by (used in) operating activities-
     Depreciation and amortization                              651,041       381,342        17,633
     Provision for bad debts                                     71,516        23,800         2,400
     Amortization of debenture issuance costs                    87,838        30,261             -
     Changes in assets and liabilities, net of effects
       from acquisitions-
         Accounts receivable                                   (417,049)     (555,905)      (16,223)
         Prepaid expenses                                       (79,647)     (143,924)      (29,953)
         Accounts payable and accrued expenses                1,898,471        54,121       252,570
         Other noncurrent assets                                      -             -       (40,469)
                                                            -----------   -----------    ----------
     Net cash provided by (used in) operating
       activities                                             2,245,985      (545,583)       25,703
                                                            -----------   -----------    ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Notes receivable -- related parties                             94,992      (138,551)            -
 Capital expenditures                                          (912,976)     (486,379)      (99,418)
 Development of new dental offices                             (165,103)     (493,009)     (244,741)
 Cash acquired from existing dental offices                     200,058             -       102,132
 Acquisition of dental offices                               (3,402,536)   (3,677,469)     (106,134)
                                                            -----------   -----------    ----------
     Net cash used in investing activities                   (4,185,565)   (4,795,408)     (348,161)
                                                            -----------   -----------    ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Proceeds from convertible subordinated debentures              225,000     6,555,000             -
 Net activity from line of credit                               250,000       100,000             -
 Proceeds from borrowings                                     2,000,000             -             -
 Repayment of borrowings                                       (270,618)     (579,285)      (19,647)
 Payment of debenture issuance and other financing costs        (19,629)     (401,716)            -
 Public offering costs                                         (846,528)            -             -
 Issuances of Common Stock, net of offering costs                   435             -     1,806,649
 Purchase and retirement of Common Stock                       (219,178)            -             -
                                                            -----------   -----------    ----------
     Net cash provided by financing activities                1,119,482     5,673,999     1,787,002
                                                            -----------   -----------    ----------
NET (DECREASE) INCREASE IN CASH AND CASH
 EQUIVALENTS                                                   (820,098)      333,008     1,464,544

CASH AND CASH EQUIVALENTS,  beginning of period               1,797,552     1,464,544             -
                                                            -----------   -----------    ----------
CASH AND CASH EQUIVALENTS,  end of period                   $   977,454   $ 1,797,552    $1,464,544
                                                            ===========   ===========    ==========
</TABLE>


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



                                       43
<PAGE>

                                                                     Page 2 of 2


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

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     --------------------------------------

<TABLE>
<CAPTION>
                                                                                   Inception
                                                           Years Ended          (May 17, 1995)
                                                           December 31,               To
                                                     ------------------------    December 31,
                                                        1997          1996           1995
                                                     ---------    -----------   --------------
<S>                                                  <C>          <C>           <C>
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
   Cash paid during the period for interest          $ 652,362    $   243,530   $  14,601
                                                     ---------    -----------   ---------
   Cash paid for taxes                               $       -    $         -   $       -
                                                     =========    ===========   =========

SUPPLEMENTAL DISCLOSURES OF
 NONCASH INVESTING AND
 FINANCING ACTIVITIES:
   Contribution of capital for dental offices        $        -   $         -   $  52,010
   Property purchased under capital leases                    -       107,457      31,932
   Common Stock issued for-
     Acquisition of dental offices                            -        15,000     306,000
   Notes payable for -
     Acquisition of dental offices                    1,642,000        90,000     550,000
     Purchase and retirement of Common Stock            110,822             -           -
   Liabilities assumed, incurred for acquisitions-
     Notes payable                                            -       130,000           -
     Accounts payable and accrued liabilities           451,055       507,320      89,224
   Accounts receivable acquired through
     acquisitions                                       179,920       238,786      91,783
   Other assets acquired through acquisitions            25,491             -           -
   34,380 shares issued for cashless exercise
   of 36,680 warrants in 1997                                 -             -           -
</TABLE>

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

                                       44
<PAGE>

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

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                   ------------------------------------------



(1)  DESCRIPTION OF BUSINESS AND REORGANIZATION
     -------------------------------------------

Birner Dental Management Services, Inc. (''Birner''), a Colorado corporation
(the ''Company''), was incorporated on May 17, 1995 (''Inception'') and manages
dental group practices. As of December 31, 1997 and December 31, 1996 the
Company managed 34 and 18 dental practices (collectively referred to as the
''Offices''), respectively. Birner provides management services, which are
designed to improve the efficiency and profitability of the dental practices.
These Offices are organized as professional corporations and Birner provides its
management activities with the Offices under long-term management agreements
(the "Management Agreements").

The Company was formed by three individuals on May 17, 1995, with an initial
capital investment of $22,000 for 2,017,400 shares of Common Stock. The Company
had no substantial operations until October 1, 1995, when it acquired three
dental offices from one of the founders and executed Management Agreements for
those practices. The Company acquired assets of approximately $721,000,
liabilities of $669,000 and recorded existing equity of $52,000 as a
contribution of capital. The assets and liabilities acquired in this transaction
were recorded at predecessor cost.

The Company has grown principally through acquisitions. In late 1995, the
Company acquired one existing Office. In 1996, the Company acquired twelve
existing Offices, three were consolidated into existing locations, and developed
five Offices.  In 1997, the Company acquired fifteen existing offices and
developed one Office.  The Company's operations and expansion strategy are
dependent, in part, on the availability of dentists, hygienists and other
professional personnel and the ability to hire and assimilate additional
management and other employees to accommodate expanded operations.

On October 20, 1997, the Company's shareholders approved a .917-for-one reverse
stock split. The Company's financial statements have been retroactively adjusted
for all periods presented to reflect this transaction.

(2)  SIGNIFICANT ACCOUNTING POLICIES
     --------------------------------

   Basis of Presentation/Basis of Consolidation
   --------------------------------------------

The accompanying consolidated financial statements have been prepared on the
accrual basis of accounting. These financial statements present the financial
position and results of operations of the Company and the Offices, which are
under the control of the Company. All intercompany accounts and transactions
have been eliminated in the consolidation.

                                       45

<PAGE>

The Company treats Offices as consolidated subsidiaries where it has a perpetual
and unilateral controlling financial interest over the assets and operations of
the Offices. The Company has obtained control of substantially all of the
Offices via long-term contractual management arrangements. Certain key features
of these arrangements either enable the Company at any time and in its sole
discretion to cause a change in the shareholder of the P.C. (i.e., ''nominee
shareholder'') or allow the Company to vote the shares of stock held by the
owner of the P.C. and to elect a majority of the board of directors of the P.C.
The accompanying statements of operations reflect net revenue, which is the
amount billed to patients less physicians' and hygienists' compensation. Direct
expenses consist of all the expenses incurred in operating the Offices and paid
by the Company.  Under the management agreements the Company assumes
responsibility for the management of most aspects of the Offices' business
(other than the provision of dental services) including personnel recruitment
and training, comprehensive administrative business and marketing support and
advice, and facilities, equipment, and support personnel as required to operate
the practice. The accompanying consolidated financial statements are presented
without regard to where the costs are incurred since under the management and
other agreements the Company believes it has perpetual and unilateral control
over the assets and operations of substantially all of the Offices.


The Emerging Issues Task Force (''EITF'') of the Financial Accounting Standards
Board ("FASB") reached a consensus on Issue 97-2 on November 20, 1997. EITF
Issue 97-2 covers financial reporting matters relating to the physician practice
management industry, including the consolidation of professional corporation
revenue and expenses, the accounting for business combinations and the treatment
of stock options for physicians as employee options. The Company's historic
accounting policies in these areas have been consistent with the consensus
reached in EITF Issue 97-2.


A summary of the components of net revenue for the years ended December 31, 1997
and 1996 and for the period ending December 31, 1995, follows:
<TABLE>
<CAPTION>
                                                                             Inception
                                                       Years Ended         (May 17, 1995)
                                                       December 31,             To
                                                ------------------------    December 31,
                                                    1997         1996          1995
                                                -----------   ----------   --------------
<S>                                             <C>           <C>          <C>
 Total dental group practice revenue, net       $17,176,583   $7,283,976     $447,995
 Less --revenue from managed offices, net         1,345,231       94,676            -
                                                -----------   ----------     --------
 Dental office revenue, net                      15,831,352    7,189,300      447,995
 Less -- amounts retained by dental offices       4,134,542    1,882,005      148,035
                                                -----------   ----------     --------
 Net revenue from consolidated dental offices    11,696,810    5,307,295      299,960
 Management service fee revenue                   1,045,483       65,934            -
                                                -----------   ----------     --------
       Net revenue                              $12,742,293   $5,373,229     $299,960
                                                ===========   ==========     ========
</TABLE>

                                       46
<PAGE>

   Total Dental Group Practice Revenue, Net
   -----------------------------------------

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

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

During 1997 and 1996, 23.7%, and 20.0%, respectively, of the Company's gross
revenue was derived from capitated managed dental care contracts. Under these
contracts the Offices receive a fixed monthly payment for each covered plan
member for a specific schedule of services regardless of the quantity or cost of
services provided by the Offices. The Offices may receive a co-pay from the
patient for each service provided.

During the year ended December 31, 1997, approximately 11.5%, 13.4% and 11.5% of
the Company's gross revenue came from Prudential Dental Maintenance
Organization, Inc. ("Prudential"), PacifiCare and CIGNA, respectively. During
the year ended December 31, 1996, Prudential was responsible for 13.7% and
PacifiCare was responsible for 10.0%, of the Company's gross revenue.

   Net Revenue from Consolidated Dental Offices
   --------------------------------------------

Net revenue represents the "Dental offices revenue, net" less amounts retained
by the Offices primarily for compensation paid by the professional corporations
to dentists and hygienists. Dentists receive compensation based upon a specified
amount per hour worked or a percentage of collections attributable to their
work, and a bonus based upon the operating performance of the Office.  The
Company's net revenue is dependent upon the revenue of the Offices.  The
Company's historical net revenue and operating income levels would be the same
as those reported even if the Company employed all of the dentists and
hygienists.

  Management Service Fee Revenue
  ------------------------------

For two of the Offices for which the Company has management agreements, but does
not have control, the Company receives management services fee revenue included
with net revenue in the accompanying statements of operations along with the
direct expenses associated with the Office operations. Management service fee
revenue represents net revenue (as defined above) from these offices.

   Contribution From Dental Offices
   ---------------------------------

The "contribution from dental offices" represents the excess of net revenue
from the operations of the offices over direct expenses associated with
operating the Offices. The revenue and direct expense amounts relate exclusively
to business activities associated with the Offices. The contribution from dental
offices provides an indication of the level of earnings generated from

                                       47
<PAGE>

the operation of the Offices to cover corporate expenses, interest expense
charges and income taxes.

   Advertising and Marketing
   --------------------------

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

   Cash and Cash Equivalents
   --------------------------

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

   Accounts Receivable
   -------------------

Accounts receivable represents receivables from patients and other third-party
payors for dental services provided. Such amounts are recorded net of
contractual allowances and other adjustments at time of billing. In addition,
the Company has estimated allowances for uncollectible accounts.

In those instances when payment is not received at the time of service, the
Offices record receivables without collateral from their patients, most of whom
are local residents and are insured under third-party payor agreements.
Management continually monitors and periodically adjusts the allowances
associated with these receivables.

   Property and Equipment
   -----------------------

Property and equipment are stated at cost or fair market value at dates of
acquisition, net of accumulated depreciation and amortization. Property and
equipment are depreciated using the straight-line method over their useful lives
of five years and leasehold improvements are amortized over the remaining life
of the lease including renewals. Equipment held under capital lease obligations
is amortized on a straight-line basis over the shorter of the lease term or
estimated life of the asset. Depreciation was $387,896, $265,967 and $11,004 for
the years ended December 31, 1997 and 1996, and for the period from inception to
December 31, 1995, respectively.

   Intangible Assets
   ------------------

The Company's dental practice acquisitions involve the purchase of tangible and
intangible assets and the assumption of certain liabilities of the acquired
Offices. As part of the purchase price allocation, the Company allocates the
purchase price to the tangible and identifiable intangible assets acquired and
liabilities assumed, based on estimated fair market values. Costs of acquisition
in excess of the net estimated fair value of tangible and identifiable
intangible assets acquired and liabilities assumed is allocated to the
Management Agreement. The Management Agreement represents the Company's right to
manage the Offices during the 40 year term of the agreement. The assigned value
of the Management Agreement is amortized using the straight-line method over a
period of 25 years.

                                       48
<PAGE>

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

The Company reviews the recorded amount of intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of the
asset may not be recoverable. If this review indicates that the carrying amount
of the asset may not be recoverable, as determined based on the undiscounted
cash flows net of the Offices acquired over the remaining amortization periods,
the carrying value of the asset is reduced to fair value. Among the factors that
the Company will continually evaluate are unfavorable changes in each dental
Office's relative market share and local market competitive environment, current
period and forecasted operating results, cash flow levels of the dental Offices
and the impact on the net revenue earned by the Company, and legal and
regulatory factors governing the practice of dentistry.

   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 revenue and expenses during the reporting period. Actual
results could differ from those estimates.

   Income Taxes
   -------------

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

                                       49
<PAGE>

   Earnings Per Share
   -------------------

In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" which
specifies the computation, presentation and disclosure requirements for earnings
per share.  SFAS 128 is effective for periods ended after December 15, 1997 and
requires retroactive restatement of prior period earnings per share.  The
statement replaces the "primary earnings per share" calculation with a "basic
earnings per share" and replaces the "fully diluted earnings per share"
calculation with "diluted earnings per share." Adoption of SFAS 128 did not have
an effect on the Company's previously reported net loss per common share.  The
following table presents a reconciliation of basic and diluted income (loss) per
share calculations:


<TABLE>
<CAPTION>
                                                 Years Ended December 31,
                              --------------------------------------------------------------    Inception (May 17, 1995) to
                                          1997                             1996                       December 31, 1995
                              ----------------------------   -------------------------------   -------------------------------
                                                     Per                               Per                               Per
                                                    Share                             Share                             Share
                              Income     Shares     Amount     Loss        Shares     Amount     Loss        Shares     Amount
                              -------   ---------   ------   ---------    ---------   ------   ---------    ---------   ------
<S>                           <C>       <C>         <C>      <C>          <C>         <C>      <C>          <C>         <C>
Basic EPS
Net income (loss)
 applicable to
 common shares                $33,815   3,218,392   $  .01   $(335,278)   3,296,543   $(.10)   $(160,255)   2,657,352   $(.06)

Effect of Dilutive common
 shares from stock
 options and warrants            -        238,581      -          -            -          -         -            -          -

Diluted Earnings Per Share    -------   ---------   ------   ---------    ---------   ------   ---------    ---------   ------
 Net income (loss)
  applicable to
  common shares               $33,815   3,456,973   $  .01   $(335,278)   3,296,543   $(.10)   $(160,255)   2,657,352   $(.06)
                              =======   =========   ======   =========    =========   ======   =========    =========   ======

</TABLE>
All options and warrants to purchase common shares were excluded from the
computation of diluted earnings per share in 1996 and 1995 since they were
antidilutive as a result of the Company's net loss in those years.  The
conversion of the May and December Debentures were excluded from diluted
earnings per share for 1997 as the effect of the exclusion of the related
interest expense for 1997 would have an anti-dilutive effect on diluted earnings
per share.


Pursuant to Securities and Exchange Commission rules, common stock and common
stock equivalent shares issued by the Company at prices below the initial public
offering price during the twelve month period prior to the offering ("cheap
stock") were previously included in the calculation of basic earnings per share
as if they were outstanding regardless of whether they were antidilutive.
Subsequent to December 31, 1997, guidance was issued to redefine cheap stock.
As a result, 129,126 shares which were originally treated as cheap stock and
included in weighted average shares outstanding, have been excluded.  This
change in the weighted average shares had no impact on the net loss per share
previously reported for all years.


   Recent Accounting Pronouncements
   ---------------------------------


The FASB issued SFAS No. 130 "Reporting Comprehensive Income" in June 1997 which
established standards for reporting and displaying comprehensive income and its
components in a full set of general purpose financial statements.  In addition
to net income (loss),

                                       50
<PAGE>

comprehensive income includes all changes in equity during a period, except
those resulting from investments by and distributions to owners. The Company
will adopt SFAS 130, which is effective for fiscal years beginning after
December 15, 1997, in the first quarter of 1998.

In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" that establishes standards for reporting
information about operating segments in annual and interim financial statements.
SFAS 131 also establishes standards for related disclosures about products and
services, geographic areas and major customers.  SFAS 131 is effective for
fiscal years beginning after December 15, 1997 and will be adopted in 1998.

(3)  ACQUISITIONS
     ------------

During 1995, 1996 and 1997, the Company acquired various dental practices. In
connection with each Office acquisition, the Company entered into contractual
arrangements, including Management Agreements which have a term of 40 years.
Pursuant to these contractual arrangements the Company manages all aspects of
the Offices, other than the provision of dental services, and believes it has
perpetual and unilateral control over the assets and business operations of the
Offices. Accordingly, these acquisitions are considered business combinations.

On November 17, 1995, the Company acquired all of the assets and assumed certain
liabilities of a Colorado sole proprietorship (the ''1995 Acquisition'') for
shares of Common Stock and cash.

On May 29, 1996, the Company acquired all the assets and assumed all liabilities
of Family Dental Care Fort Collins, a sole proprietorship, Family Dental Group
I, P.C., a Colorado professional corporation and Family Dental Care Westminster,
a Colorado general partnership, collectively "Family Dental Acquisition" for
$3,284,018. Family Dental Acquisition consists of seven Offices located in
Colorado.

At various dates between July 3, 1996 and September 17, 1996 the Company
acquired all the assets of four dental practices for a total purchase price of
$470,000. In addition, in August 1996, the Company acquired the operating assets
in a Colorado practice ("East Cornell") and obtained certain rights to manage
the practice. These four 1996 acquisitions and the East Cornell acquisition are
collectively referred to as the "Additional 1996 Acquisitions."

In the period January 1, 1997 through June 30, 1997, the Company acquired all
the assets of three dental practices for a total purchase price of $645,000, at
various dates from January 28, 1997 through March 25, 1997. All the assets in
another Colorado practice ("Yale") and certain rights to manage the practice
were acquired in April 1997.  The three 1997 acquisitions and the Yale
acquisition are collectively referred to as the "Early 1997 Acquisitions."

                                       51
<PAGE>

The Company acquired two unrelated New Mexico dental practices for approximately
$457,500 in August 1997 (the "Late 1997 Acquisitions").

                                       52
<PAGE>

On September 8, 1997, the Company acquired nine dental practices, operated under
the name of Gentle Dental, located in Colorado for $3.5 million.

The acquisitions (excluding East Cornell and Yale) have been accounted for using
the purchase method of accounting. Accordingly, the purchase price has been
allocated to the tangible and intangible assets acquired and liabilities assumed
based on the estimated fair values at the dates of acquisition. The Company does
not expect the final allocations to differ significantly from the amounts
estimated at date of acquisition. The estimated fair value of assets acquired
and liabilities assumed for these acquisitions are summarized as follows:
<TABLE>
<CAPTION>
                                                     Family        Additional          Early             Late           Gentle
                                     1995            Dental           1996             1997              1997           Dental
                                  Acquisition     Acquisition     Acquisition       Acquisition      Acquisition     Acquisition
                                  -----------     -----------     ------------      -----------      -----------     -----------
<S>                               <C>             <C>             <C>              <C>               <C>             <C>
Accounts receivable, net          $  24,845       $  218,786        $   -          $  20,000         $    -          $   159,920
Property and equipment, net          10,350          417,755         104,713         112,000            13,000            96,478
Other Assets                           -                -               -               -                 -              225,549
Liabilities assumed                    -            (475,084)        (15,236)           -               (2,500)         (467,770)
Intangible assets                   376,939        3,122,561         365,523         513,000           444,500         3,485,823
Less: Fair value of Common
        Stock issued               (306,000)            -            (15,000)           -                                   -
      Deferred purchase price
        (payable in cash)              -                -            (90,000)       (130,000)         (112,000)       (1,400,000)
                                  ---------       ----------        --------       ---------         ---------       -----------
Cash purchase price               $ 106,134       $3,284,018        $350,000       $ 515,000         $ 343,000       $ 2,100,000
                                  =========       ==========        ========       =========         =========       ===========
</TABLE>

East Cornell and Yale are not treated as business combinations because the
contractual arrangements do not provide complete and unilateral control of the
operations of the Offices.

Operating results of the acquired practices are included in the accompanying
statements of operations from the date of acquisition. The following unaudited
pro forma information reflects the effect of the acquisitions (excluding East
Cornell and Yale) on the consolidated results of operations of the Company as if
the acquisitions occurred at January 1, 1996. Actual results may differ
substantially from pro forma results and cannot be considered indicative of
future operations.

                                       53
<PAGE>

                                                   Years Ended
                                                   December 31,
                                           -------------------------
                                              1997          1996
                                           -----------   -----------
       Net revenue                         $15,702,147   $11,321,000
                                           ===========   ===========
       Net income (loss)                   $    66,151   $  (252,000)
                                           ===========   ===========
       Net loss per common share, basic    $       .02   $      (.08)
                                           ===========   ===========

In connection with the agreements with the dentists associated with East Cornell
and Yale, whereby the Company acquired an interest in the practices and obtained
the rights to manage the practices, the Company recorded intangible assets of
$522,000 related to the Management Agreements obtained in these transactions. In
each case, the dentist has an option to put the remaining interest in the Office
to the Company at an exercise price which is calculated based upon the
performance of the Office (the ''put option price''). The option is exercisable
contingent upon certain conditions as outlined in the agreement. The option
exercise periods run for seven years beginning August 30, 1999 and April 21,
2000, respectively. The excess of the put option price over the fair value of
the remaining interest (if any) will be charged to earnings or, if the put
option is exercised, the amount paid will be recorded as an additional cost of
acquisition.

(4)  NOTES RECEIVABLE -- RELATED PARTIES
---- -----------------------------------

Notes receivable from related parties consist of the following:
<TABLE>
<CAPTION>
                                                                 December 31,
                                                             -------------------
                                                               1997       1996
                                                             --------   --------
<S>                                                          <C>        <C>
     Note receivable from affiliated dentist and
       shareholder, unsecured, 8% interest; due
       April 15, 2004, paid in 1997.                         $      -   $108,355
     Notes receivable from affiliated dentist, unsecured,
       paid in 1997.                                                -      5,196
     Note receivable from CEO and shareholder, unsecured,
       principal and interest due, December 31, 1998,
       interest rate of 6% per annum.                          25,000     25,000
     Note receivable from affiliated dentist, unsecured,
       monthly principal and interest payments, interest
       rate of 8% per annum.                                   13,559          -
     Note receivable from affiliated dentist, unsecured,
       monthly principal and interest payments of $845,
       interest rate at 5%, due June 20, 1998.                  5,000          -
                                                             --------   --------
                                                               43,559    138,551
       Less -- current maturities                             (35,507)   (30,196)
                                                             --------   --------
       Notes receivable -- related parties, long-term        $  8,052   $108,355
                                                             ========   ========
</TABLE>

                                       54
<PAGE>

(5)    PROPERTY AND EQUIPMENT
       ----------------------
       Property and equipment consist of the following:

                                                       December 31,
                                                 -----------------------
                                                    1997         1996
                                                 ----------   ----------
     Dental equipment                            $1,331,737   $  777,360
     Furniture and fixtures                         317,746      183,494
     Leasehold improvements                       1,099,873      786,339
     Computer equipment                             546,456      339,553
                                                 ----------   ----------
                                                  3,295,812    2,086,746
         Less -- Accumulated depreciation and
          amortization                             (664,867)    (276,971)
                                                 ----------   ----------
         Property and equipment, net             $2,630,945   $1,809,775
                                                 ==========   ==========

Property and equipment held under capital leases included in the above balances
and the related accumulated amortization is as follows:

                                                   December 31,
                                               -------------------
                                                 1997       1996
                                               --------   --------
     Leased property and equipment             $103,277   $103,277
       Less -- Accumulated depreciation and
         amortization                           (52,594)   (31,938)
                                               --------   --------
     Leased property and equipment, net        $ 50,683   $ 71,339
                                               ========   ========

(6)  DEFERRED CHARGES, OTHER ASSETS AND DEFERRED OFFERING COSTS
     ----------------------------------------------------------


Deferred charges and other assets consist primarily of deferred debenture costs,
organization costs and Office development costs. Deferred debenture costs are
associated with the 9% convertible subordinated debentures issued in May and
December 1996. These costs are being amortized using the effective interest rate
method over the life of the debentures of five years (Note 8). Organization
costs are amortized on a straight-line basis over the period of expected benefit
of five years. Deferred financing costs are related to the acquisition of the
revolving credit agreement and are amortized over the life of the revolver of
three years (Note 8). Office development costs represent capital costs to third
parties incurred in connection with pending acquisitions or new Offices which
are in the process of being opened. These costs will be capitalized when the
acquisitions are finalized or when the new Offices are opened, and will be

                                       55
<PAGE>

expensed if the acquisition is not completed. During the year ended December 31,
1997, the Company wrote off $252,234 of costs for an acquisition that was not
completed.

  Deferred charges and other assets consist of the following:

                                             December 31,
                                         ------------------
                                           1997      1996
                                         --------  --------
        Deferred debenture costs, net    $288,286  $352,544
        Organization costs, net            36,722    49,954
        Deferred financing costs, net      27,711    18,913
        Office development costs           28,713    20,192
        Deposits                           76,759         -
                                         --------  --------
                                         $458,191  $441,603
                                         ========  ========

Costs associated with the Offering of $846,528 have been deferred at December
31, 1997.  On February 11, 1998, the Company completed its Offering and offset
these costs against the proceeds of the Offering, (see Note 14).

(7)    INTANGIBLE ASSETS
       -----------------

Intangible assets consist of Management Agreements:

                                                            December 31,
                                       Amortization  -----------------------
                                          Period        1997         1996
                                       ------------  ----------   ----------
     Management Agreements               25 years    $9,313,685   $4,452,578
     Less -- Accumulated amortization                  (365,733)    (115,819)
                                                     ----------   ----------
     Intangible assets, net                          $8,947,952   $4,336,759
                                                     ==========   ==========


                                       56
<PAGE>

(8)    BORROWINGS
       ----------

Borrowings consist of the following:
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                      ------------------------
                                                                          1997         1996
                                                                      -----------   ----------
<S>                                                                   <C>           <C>
 Revolving credit agreement with a bank not to exceed
   $800,000, interest payable quarterly at a rate of prime +0.5%      $   350,000   $  100,000
   (9% at December 31, 1997), personally guaranteed by the
   three founders of the Company, due in October 1999, balance
   paid in February 1998, see Note 14.
 Term Loan with a bank, principal of $2,000,000, interest at
   9%.  Paid in February 1998, see Note 14.                             2,000,000            -
 Acquisition notes payable --
   Paid in July 1997, interest at 8%.                                           -       35,000
   Paid in January 1997.                                                        -       50,000
   Due in December 1999, interest at 7%, monthly principal
     and interest payments of $2,239.                                      50,000            -
   Due in May 2000, interest at 9%, monthly principal and
     interest payments of $2,544.                                          64,034            -
   Due in September 2002, interest at 9%, monthly principal and
     interest payments of $2,325.                                         105,993            -
   Due in September 2000, interest at 8%, monthly principal and
     interest payments of $28,387, paid in February 1998,
     see Note 14.                                                       1,342,686            -
 Convertible subordinated debentures maturing May 15, 2001
   (the ''May Debentures''), interest payable semi-annually at
   a rate of 9%, 20% of outstanding principal redeemable by
   the Company in 1999 and 2000, conversion price for the
   stock is $3.82 per share (converted to Common Stock in February
   1998, see Note 14).                                                  4,970,000    4,970,000
 Convertible subordinated debentures maturing December 27, 2001,
   (the ''December Debentures''), interest payable semi-
   annually at a rate of 9%, 20% of outstanding principal
   redeemable by the Company in 1999 and 2000, conversion
   price for the stock is $5.45 per share (converted to Common
   Stock in February 1998, see Note 14).                                1,810,000    1,585,000
 Notes payable assumed for an affiliated dentist; with monthly
   aggregate principal and interest payments of $3,771;
   average interest rate of 14%; maturing August 2000
   to December 2000.                                                       64,505      118,000
 Note payable to an affiliated dentist; interest at 8%;
   monthly principal and interest payments of $2,247.                      97,803            -
                                                                      -----------   ----------
                                                                       10,855,021    6,858,000
 Less -- current maturities                                              (682,907)     (94,785)
                                                                      -----------   ----------
 Borrowings, long-term                                                $10,172,114   $6,763,215
                                                                      ===========   ==========
</TABLE>


                                       57
<PAGE>

   Conversion of the Debentures
   -----------------------------

The holders of December Debentures and May Debentures have the right,
exercisable at any time to maturity, to convert the principal amount thereof (or
any portion thereof that is an integral multiple of $1,000) into shares of
Common Stock of the Company at the conversion rate of $5.45 and $3.82 per share,
respectively, subject to adjustment upon the occurrence of certain events, as
outlined in the debenture agreements.

Any time six months after the effective date of a public offering, the Company
has the right to require conversion of the December Debentures and the May
Debentures if the Common Stock trades for 20 to 30 consecutive trading days at a
price equal to or greater than $7.50 and $6.50 per share, respectively. The
Debentures are to be redeemed by the Company at the rate of 20% on the third
anniversary, 20% on the fourth anniversary and the balance at maturity. All
redemption amounts will include accrued interest to the date of redemption.  On
February 11, 1998, all outstanding debentures were converted into common stock
of the Company, see Note 14.

  The scheduled maturities of notes payable and debentures are as follows:


                                            Debentures    Other
                                            ----------  ----------

          Years ending December 31,
            1998                            $        -  $  682,907
            1999                                     -   2,395,735
            2000                                     -     916,621
            2001                              6,780,00      52,929
            2002                                     -      26,829
                                            ----------  ----------
                                            $6,780,000  $4,075,021
                                            ==========  ==========


In August 1997, the Company requested each debenture holder to convert their
debentures concurrent with the initial public offering.  In return for this
early conversion, the Company agreed to pay six months of additional interest
and allow some of the shares obtained from the conversion to be included in the
public offering. The additional interest cost of $305,100 was expensed upon
completing the conversion and payment of the interest (see Note 14). All holders
of debentures have agreed to this early conversion.


(9)  SHAREHOLDERS' EQUITY
     --------------------

     Stock Option Plans
     -------------------

The Employee Stock Option Plan (the "Employee Plan") was adopted by the Board
of Directors effective as of October 30, 1995, and as amended on September 4,
1997, has 917,000 shares of Common Stock reserved for issuance. The Employee
Plan provides for the grant of incentive stock options, to employees (including
officers and employee-directors) and non-statutory stock options to employees,
directors and consultants.

                                       58
<PAGE>

The Dental Center Plan (the "Dental Center Plan") was adopted by the Board
Effective as of October 30, 1995, and as amended on September 4, 1997, has
641,900 shares of Common Stock reserved for issuance. The Dental Center Plan
provides for the grant of non-statutory stock options to P.C.s that are parties
to Management Agreements with the Company, and to dentists or dental hygienists
who are either employed by or an owner of the P.C.s. The Employee Plan and
Dental Center Plan are administered by a committee appointed by the Board, which
determines recipients and types of options to be granted, including the exercise
price, the number of shares, the grant dates, and the exercisability thereof.
The term of any stock option granted may not exceed 10 years. The exercise price
of options granted under the Employee Plan and the Dental Center Plan is
determined by the committee, provided that the exercise price of a stock option
cannot be less than 100% of the fair market value of the shares subject to the
option on the date of grant, or 110% of the fair market value for awards to more
than 10% stockholders. Options granted under the plans vest at the rate
specified in the option agreements, which generally provide that options vest in
three to five equal annual installments.


A summary of stock options under both the Employee and the Dental Center Plans
as of December 31, 1997, 1996 and 1995 and changes during the periods then ended
is presented below:
<TABLE>
<CAPTION>
                                       1997                  1996                 1995
                               --------------------  -------------------  -------------------
                                           Weighted             Weighted             Weighted
                                           Average              Average              Average
                                           Exercise             Exercise             Exercise
                                Shares      Price     Shares     Price     Shares     Price
                               ---------   --------  --------   --------  -------    --------
<S>                            <C>         <C>       <C>        <C>       <C>        <C>
Outstanding at beginning of
 period                          361,273    $3.12      23,567    $1.96          -    $   -
    Granted                      198,824    $8.28     340,457    $3.20     23,567    $1.96
    Canceled                    (118,668)   $3.04      (2,751)   $2.76          -    $   -
    Exercised                       (208)   $2.09           -        -          -    $   -
                               ---------    -----    --------    -----    -------    -----
Outstanding at end of
 period                          441,221              361,273              23,567
                               =========             ========             =======

Exercisable at end of
 period                          149,575               15,100                   -
                               =========             ========             =======

Weighted average fair value
 of options granted                $2.48             $   0.92               $0.53
                               =========             ========             =======
</TABLE>

                                       59
<PAGE>

The following tables summarize information about the options outstanding at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
                                             Options Outstanding                   Options Exercisable
                                  -----------------------------------------     -------------------------
                                                    Weighted
                                     Number         Average        Weighted        Number        Weighted
                                  Outstanding      Remaining       Average      Exercisable      Average
                                  December 31,    Contractual      Exercise     December 31,     Exercise
Range of Exercise Prices              1997            Life          Price           1997          Price
------------------------          ------------    -----------      --------     ------------     --------
<S>                               <C>             <C>              <C>          <C>              <C>
$1.96 -- 3.95                       179,877           5.32          $2.80          117,484        $2.59
$3.95 -- 5.94                        85,991           5.80          $4.58           29,224        $4.43
$5.94 -- 7.93                        65,107           6.61          $7.38             -           $  -
$7.93 -- 9.90                       110,246           6.13          $9.48            2,867        $9.81
                                    -------           ----          -----          -------        -----
$1.96 -- 9.90                       441,221           5.80          $5.49          149,575        $3.09
                                    =======           ====          =====          =======        =====

                                             Options Outstanding                   Options Exercisable
                                  -----------------------------------------     -------------------------
                                                    Weighted
                                     Number         Average        Weighted        Number        Weighted
                                  Outstanding      Remaining       Average      Exercisable      Average
                                  December 31,    Contractual      Exercise     December 31,     Exercise
Range of Exercise Prices              1996           Life           Price          1996           Price
------------------------          ------------    -----------      --------     ------------     --------
$1.96 -- 2.84                       185,484           5.96          $2.27          11,890         $1.96
$2.84 -- 3.71                        48,143           6.43          $3.44            -            $  -
$3.71 -- 4.58                       118,201           6.69          $4.15           3,210         $4.36
$4.58 -- 5.45                         9,445           6.89          $4.63            -            $  -
                                    -------           ----          -----          ------         -----
$1.96 -- 5.45                       361,273           6.26          $3.12          15,100         $2.48
                                    =======           ====          =====          ======         =====
</TABLE>

   Warrants
   ---------

At December 31, 1997, there are outstanding warrants or contractual obligations
to issue warrants to purchase approximately 381,041 shares of the Company's
Common Stock. Total warrants of 90,169 were issued in connection with the
private placement of the Company's Common Stock, 137,733 for the issuance of
convertible subordinated debentures and 119,210


                                       60
<PAGE>

for personal guarantees provided for certain Company bank debt. The warrants
granted for the personal guarantees of Company bank debt included 27,510 to each
of the three founders and 36,680 to the father of two of the founders. In August
1997, this individual was issued 34,380 shares of Common Stock in a cashless
exercise of the warrants.

                                       61
<PAGE>

A summary of warrants as of December 31, 1997, 1996 and 1995, and changes during
the periods then ended is presented below:
<TABLE>
<CAPTION>
                                       1997                  1996               1995
                                           Weighted            Weighted            Weighted
                                           Average             Average             Average
                                           Exercise            Exercise            Exercise
                                Shares     Price      Shares   Price      Shares   Price
                               --------    --------   -------  --------   -------  --------
<S>                            <C>         <C>        <C>      <C>        <C>      <C>
Outstanding at beginning of
 period                         388,377     $3.34     126,849   $1.55        -      $  -
   Granted                       29,344     $6.04     261,528   $4.20     126,849   $1.55
   Canceled                        -           -         -         -         -         -
   Exercised                    (36,680)    $0.54        -         -         -         -
                               --------     -----     -------   ------    -------   -----
Outstanding at end of
 period                         381,041               388,377             126,849
                               ========               =======             =======
Warrants exercisable at
 end of period                  360,409               347,112             126,849
                               ========               =======             =======
Weighted average exercise
 price of warrants
 outstanding                   $   3.81               $  3.34             $  1.55
                               ========               =======             =======
Weighted average remaining
 contractual life at end of
 period                            3.77                  4.33                4.68
                               ========               =======             =======
</TABLE>

The Company uses the intrinsic value method to account for options granted to
employees and directors.  For purposes of the pro forma disclosures under SFAS
No. 123 presented below, the Company has computed the fair values of all non-
compensatory options and warrants granted to employees, directors and dentists
using the Black-Scholes pricing model and the following weighted average
assumptions:

                                        1997         1996        1995
                                      ---------   ----------   -------
          Risk-free interest rate         5.63%        5.52%     5.36%
          Expected dividend yield            0%           0%        0%
          Expected lives              3.8 years   3.93 years   3 years
          Expected volatility               61%          61%       61%


To estimate lives of options for this valuation, it was assumed options will be
exercised one year after becoming fully vested and the Company has completed an
initial public offering of its Common Stock. All options are initially assumed
to vest. Cumulative compensation cost

                                       62
<PAGE>

recognized in pro forma net income or loss with respect to options that are
forfeited prior to vesting is adjusted as a reduction of pro forma compensation
expense in the period of forfeiture. As the Company's Common Stock was not yet
publicly traded, the expected market volatility was based on the volatility of
comparable publicly traded companies. Actual volatility of the Company's Common
Stock may vary. Fair value computations are highly sensitive to the volatility
factor assumed; the greater the volatility, the higher the computed fair value
of options granted.

The total fair value of options and warrants granted was computed to be
approximately $550,113, $368,872 and $12,542, for the years ended December 31,
1997 and 1996, and for the period ended December 31, 1995, respectively. These
amounts are amortized ratably over the vesting periods of the options or
recognized at the date of grant if no vesting period is required. Pro forma
stock-based compensation, net of the effect of forfeitures, was $196,670,
$136,105, and $2,040 for the years ended December 31, 1997 and 1996, and for the
period ended December 31, 1995, respectively.


If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income (loss) and pro forma net
loss per common share would have been reported as follows:

                                           1997        1996        1995
                                         ---------   ---------   ---------
  Net income (loss):
     As reported                         $  33,815   $(335,278)  $(160,255)
     Pro forma                           $(162,855)  $(471,383)  $(162,295)
  Net income (loss) per share, basic:
     As reported                         $     .01   $    (.10)  $    (.06)
     Pro forma                           $    (.05)  $    (.14)  $    (.06)


Weighted average shares used to calculate pro forma net income (loss) per share
were determined as described in Note 2, except in applying the treasury stock
method to outstanding options, if dilutive net proceeds assumed received upon
exercise were increased by the amount of compensation cost attributable to
future service periods and not yet recognized as pro forma expense.


(10)  COMMITMENTS AND CONTINGENCIES
      -----------------------------

   Operating and Capital Lease Obligations
   ---------------------------------------

The Company leases certain office equipment and office space under leases
accounted for as operating leases. The original lease terms are generally one to
five years with options to renew the leases for specific periods subsequent to
their original terms. Rent expense for these leases totaled, $659,902, $361,102
and $91,187 for the years ended December 31, 1997 and 1996, and for the period
ended December 31, 1995, respectively.  Rent expense for leases entered into in
1997 with related parties totaled $126,609.


                                       63
<PAGE>

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

          Years ending December 31,
            1998                         $1,000,549
            1999                            922,255
            2000                            816,994
            2001                            618,635
            2002                            468,651
            Thereafter                      651,577
                                         ----------
                                         $4,478,661
                                         =========

The Company leases certain phone systems under capital leasing arrangements. The
future minimum lease payments are as follows:

          Years ending December 31,
            1998                                           $ 47,563
            1999                                             22,185
            2000                                              5,512
            2001                                              1,614
                                                           --------
          Total principal and interest                       76,874

          Less: interest                                     (9,234)
                                                           --------
          Total principal                                    67,640
          Less: current portion                             (41,391)
                                                           --------
                                                           $ 26,249
                                                           ========

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

(11)  INCOME TAXES
      ------------

The Company accounts for income taxes through recognition of deferred tax assets
and liabilities for the expected future income tax consequences of events which
have been included in the financial statements or tax returns. Under this
method, deferred tax assets and liabilities are determined based on the
difference between the financial statement and tax bases of assets and
liabilities using enacted tax rates in effect for the year in which the
differences are expected to reverse. At December 31, 1997, the Company had tax
net operating loss carryforwards of approximately $505,000 which will expire in
2010 and 2011.

                                       64
<PAGE>

The Company's effective tax rate differs from the statutory rate due to the
impact of the following (expressed as a percentage of net income (loss) before
taxes):

                                       1997     1996     1995
                                      ------   ------   ------
Statutory federal income tax
 expense (benefit)                     34.0%    (34.0)%  (34.0)%
State income tax effect, net            3.3      (3.3)    (3.3)
Valuation allowance, net change       (37.3)     37.3     37.3
                                      -----    ------   ------
                                          -%        -%       -%
                                      =====    ======   ======

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

                                                    December 31,
                                                ---------------------
                                                  1997        1996
                                                ---------   ---------
     Deferred tax asset:
       Tax loss carryforwards                   $ 207,300   $ 202,600
       Accruals not currently deductible              -        15,200
       Allowance for doubtful accounts             36,700         -
       Depreciation for books over tax             35,200      12,000
                                                ---------   ---------
                                                  279,200     229,800
     Deferred tax liability:
       Intangible asset amortization for tax
         over books                               (99,400)    (47,400)
       Accruals                                    (7,400)        -
                                                ---------   ---------
       Net deferred tax asset                     172,400     182,400
       Valuation allowance                       (172,400)   (182,400)
                                                ---------   ---------
                                                $     -     $     -
                                                =========   =========

The Company established a valuation allowance at December 31, 1997 and 1996, due
to the uncertainty of the utilization of tax loss carryforwards against future
taxable income.

                                       65
<PAGE>

(12)  BENEFIT PLANS
      --------------

      Profit Sharing 401(k)/Stock Bonus Plan
      ---------------------------------------

The Company has a 401(k)/stock bonus plan. Eligible employees may make voluntary
contributions to the plan, which may be matched by the Company, at its
discretion, up to 2% of the employee's compensation.  In addition, the Company
may make profit sharing contributions during certain years, which may be made,
at the Company's discretion, in cash or in Common Stock of the Company. The plan
was established effective April 1, 1997, and the Company did not make any
contributions to the plan through December 31, 1997.


      Other Company Benefits
      -----------------------

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


(13)  DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
      ------------------------------------------------------

  SFAS No. 107, ''Disclosures About Fair Value of Financial Instruments,''
requires disclosure about the fair value of financial instruments. Carrying
amounts for all financial instruments included in current assets and current
liabilities approximate estimated fair values due to the short maturity of those
instruments. The fair values of the Company's note payable and capital lease
obligations are based on similar rates currently available to the Company. The
carrying values and estimated fair values were estimated to be substantially the
same at December 31, 1997 and 1996. The fair value of the Company's convertible
subordinated debentures at December 31, 1997, is estimated to be approximately
$11.4 million.


(14)  SUBSEQUENT EVENTS
      ------------------

On February 11, 1998, the Company completed its initial offering of its common
stock to the public.  The Company sold 1,833,816 shares with an additional
266,184 being sold by existing shareholders for a total of 2,100,000 shares
registered on the Nasdaq National Market under the trading symbol "BDMS".  The
Company received net proceeds, after paying all offering costs, of approximately
$10.4 million.  Approximately $2 million and $0.6 million of the net proceeds
were used to repay the term loan and revolving line of credit with a bank,
respectively.  An additional $1.3 million was used to repay a note issued in
connection with the Gentle Dental Acquisition. The Company expects the remaining
net proceeds of approximately $6.5 million will be used for potential
acquisitions and development of new offices, for working capital and general
corporate purposes.

In connection with the offering, 1,633,142 shares of common stock were issued to
all Debenture holders for the early conversion of the December and May
Debentures.  The Company paid six months of additional interest of $305,100 to
induce the conversion, along with accrued interest of $171,238.  Upon conversion
of the debentures, the carrying amount of $6,780,000 was credited to
shareholders' equity, net of remaining deferred debenture issuance costs of
$288,286.

                                       66
<PAGE>

The following represents the unaudited pro forma condensed consolidated balance
sheet as if the Company had completed the offering, and applied the proceeds as
described above and converted the Debentures at December 31, 1997.

Cash and cash equivalents                        $ 7,156,000

Other current assets                               1,695,000
                                                 -----------
  Total current assets                             8,851,000
                                                 -----------
Property and equipment, net                        2,631,000
Intangible assets, net                             8,948,000
Deferred charges and other assets                    178,000
                                                 -----------
   Total assets                                  $20,608,000
                                                 ===========

Current liabilities                              $ 2,432,000

Long-term liabilities                                301,000
                                                 -----------
   Total liabilities                               2,733,000

 Total shareholders' equity                       17,875,000
                                                 -----------
   Total liabilities and shareholders' equity    $20,608,000
                                                 ===========

Had the Company completed the offering as of January 1, 1997, pro forma net
income would have been $727,730 (unaudited) and pro forma earnings per share
would have been $0.11 per share (unaudited) on both a basic and diluted basis.

On February 11, 1998, concurrent with the completion of the public offering, the
Company amended its revolving credit agreement with a bank, which increased the
borrowing limit from $800,000 to $10,000,000 with interest being payable at
LIBOR plus 2.25% maturing on February 11, 2001.

On February 27, 1998, the Company acquired all the assets of a New Mexico
partnership and obtained certain rights to manage the practice for a total
purchase price of $630,000.  The consideration consisted of $598,500 payable in
cash with the remaining $31,500 being payable in common stock of the Company.

                                       67
<PAGE>

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

     Not applicable.


                                PART III
                                --------


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

     This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders on May 29, 1998.


ITEM 11.  EXECUTIVE COMPENSATION.
---------------------------------

     This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders on May 29, 1998.


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

     This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders on May 29, 1998.


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

     This information is incorporated by reference from the Company's Proxy
Statement to be filed with the Securities and Exchange Commission in connection
with the Company's annual meeting of stockholders on May 29, 1998.

                                       68
<PAGE>

                                PART IV
                                -------

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


(a)(1)   Financial Statements:



          Consolidated Statements of Operations -
               Years ended December 31, 1997, 1996 and 1995


          Consolidated Balance Sheets -
               December 31, 1997 and 1996


          Consolidated Statements of Cash Flows -
               Years ended December 31, 1997, 1996 and 1995


          Consolidated Statements of Shareholders' Equity -
               Years ended December 31, 1997, 1996 and 1995


          Notes to Consolidated Financial Statements

          Report of Independent Public Accountants

 (2)   Financial Statement Schedules:

          II - Valuation and Qualifying Accounts -
                 Years ended December 31, 1997, 1996 and 1995


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

(b)    Reports on Form 8-K:

       Not applicable.

(c)    Exhibits:

<TABLE>
<CAPTION>
   EXHIBIT
-------------
   NUMBER                                           DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<C>            <S>
          3.1  Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.1
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
          3.2  Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
          4.1  Reference is made to Exhibits 3.1 through 3.2.
          4.2  Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
         10.1  Form of Indemnification Agreement entered into between the Registrant and its Directors and
               Executive Officers, incorporated herein by reference to Exhibit 10.1 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
</TABLE>
                                       69
<PAGE>

<TABLE>
<CAPTION>

   EXHIBIT
-------------
   NUMBER      DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<S>            <C>
         10.2  Warrant Agreement dated December 27, 1996, between the Registrant and Cohig & Associates,
               Inc., incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on
               Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on
               September 25, 1997.
         10.3  Warrant Agreement dated May 29, 1996, between the Registrant and Cohig, incorporated herein by
               reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.4  Warrant Agreement dated October 3, 1995, between the Registrant and Cohig, incorporated herein by
               reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.5  Warrant Certificate dated June 30, 1997, issued to Fred Birner, incorporated herein by reference
               to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
         10.6  Warrant Certificate dated November 1, 1996, issued to Fred Birner, incorporated herein by
               reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.7  Warrant Certificate dated June 30, 1997, issued to Mark Birner, incorporated herein by reference
               to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
         10.8  Warrant Certificate dated November 1, 1996, issued to Mark Birner, incorporated herein by
               reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.9  Warrant Certificate dated June 30, 1997, issued to Dennis Genty, incorporated herein by reference
               to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.10  Warrant Certificate dated November 1, 1996, issued to Dennis Genty, incorporated herein by
               reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.11  Warrant Certificate dated August 1, 1996, issued to James Ciccarelli, incorporated herein by reference
               to Exhibit 10.11 of the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.12  Warrant Certificate dated July 15, 1997 issued to James Ciccarelli, incorporated herein by
               reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.13  Credit Agreement, dated October 31, 1996, between the Registrant and Key Bank of Colorado, as
               amended by First Amendment to Loan Documents, dated as of September 3, 1997, incorporated herein
               by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.14  Form of Managed Care Contract with Prudential, incorporated herein by reference to Exhibit 10.14
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.15  Form of Managed Care Contract with PacifiCare, incorporated herein by reference to Exhibit 10.15
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.16  Letter Agreement dated October 17, 1996, between the Registrant and James Ciccarelli, as
               amended by letter agreement dated September 24, 1997 between the Registrant and James
               Ciccarelli, incorporated herein by reference to Exhibit 10.16 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.
</TABLE>
                                       70
<PAGE>

<TABLE>
<CAPTION>

   EXHIBIT
-------------
   NUMBER      DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<S>            <C>
        10.17  Agreement, dated August 21, 1997, between the Registrant and James Abramowitz, D.D.S., and
               Equity Resources Limited Partnership, a Colorado limited partnership, incorporated herein by
               reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.18  Form of Management Agreement, incorporated herein by reference to Exhibit 10.18 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
        10.19  Employment Agreement dated September 8, 1997 between the Registrant and James Abramowitz,
               D.D.S. , incorporated herein by reference to Exhibit 10.19 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.
        10.20  Form of Stock Transfer and Pledge Agreement, incorporated herein by reference to Exhibit 10.20 to
               the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.21  Indenture, dated as of December 27, 1996, between the Registrant and Colorado National Bank, a
               national banking association, as Trustee, incorporated herein by reference to Exhibit 10.21 to
               the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.22  Indenture, dated as of May 15, 1996, between the Registrant and Colorado National Bank, a
               national bank association, as Trustee, incorporated herein by reference to Exhibit 10.22 of the
               Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities
               and Exchange Commission on September 25, 1997.
        10.23  Birner Dental Management Services, Inc. 1995 Employee Stock Option Plan, including forms of
               Incentive Stock Option Agreement and Non-statutory Stock Option Agreement under the
               Employee Plan, incorporated herein by reference to Exhibit 10.23 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.
        10.24  Birner Dental Management Services, Inc. 1995 Stock Option Plan for Managed Dental Centers,
               including form of Non-statutory Stock Option Agreement under the Dental Center Plan, incorporated
               herein by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (SEC
               File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.25  Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated herein by reference to
               Exhibit 10.25 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.26  Form of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S., incorporated herein by
               reference to Exhibit 10.26 of Pre-Effective Amendment No. 1 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on November 7, 1997.
        10.27  Stock Purchase, Pledge and Security Agreement, dated October 27, 1997, between the Company
               and William Bolton, D.D.S., incorporated herein by reference to Exhibit 10.27 of Pre-Effective
               Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 7, 1997.
        10.28  Stock Purchase, Pledge and Security Agreement, dated October 27, 1997, between the Company
               and Scott Kissinger, D.D.S., incorporated herein by reference to Exhibit 10.28 of Pre-Effective
               Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 7, 1997.
        10.29  Second Amendment to Loan Documents dated November 19, 1997 between the Registrant and
               Key Bank of Colorado, incorporated herein by reference to Exhibit 10.29 of Pre-Effective
               Amendment No. 2 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 25, 1997.
</TABLE>
                                       71
<PAGE>

<TABLE>
<CAPTION>

   EXHIBIT
-------------
   NUMBER      DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<S>            <C>
        10.30  Form of Financial Consulting Agreement between the Company and Joseph Charles & Associates,
               Inc., incorporated herein by reference to Exhibit 10.30 of Post-Effective Amendment No. 2 to the
               Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on January 14, 1998.
        10.31  Form of Purchase Option for the Purchase of Shares of Common Stock granted to Joseph Charles
               & Associates, Inc., incorporated herein by reference to Exhibit 10.31 of Post-Effective Amendment
               No. 2 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with
               the Securities and Exchange Commission on January 14, 1998.
         23.1  Consent of Arthur Andersen LLP, Independent Public Accountants.
         24.1  Power of Attorney.
         27.1  Financial Data Schedule.
</TABLE>

                                       72
<PAGE>

     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.


     Date:  March 31, 1998.



                              BIRNER DENTAL MANAGEMENT SERVICES, INC.

                              a Colorado corporation




                              By:     /s/ Frederic W.J. Birner
                                 -----------------------------
                                 Name:  Frederic W.J. Birner
                                 Title: Chairman of the Board, Chief Executive
                                        Officer and Director (Principal
                                        Executive Officer)


                              By:     /s/ Mark A. Birner
                                 -----------------------
                                 Name:  Mark A. Birner, D.D.S.
                                 Title: President and Director


                              By:     /s/ Dennis N. Genty
                                 ------------------------
                                 Name:  Dennis N. Genty
                                 Title: Chief Financial Officer, Secretary,
                                        Treasurer and Director (Principal
                                        Financial and Accounting Officer)


                              By:           *
                                 ------------------------
                                 Name:  James M. Ciccarelli
                                 Title: Director

-------------------------
* By power-of-attorney


/s/ Frederic W.J. Birner
-------------------------
Frederic W.J. Birner
Attorney-in-Fact

                                       73
<PAGE>

                                EXHIBIT INDEX
                                -------------

<TABLE>
<CAPTION>
   EXHIBIT
-------------
   NUMBER                                           DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<C>            <S>
          3.1  Amended and Restated Articles of Incorporation, incorporated herein by reference to Exhibit 3.1
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
          3.2  Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.3 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
          4.1  Reference is made to Exhibits 3.1 through 3.2.
          4.2  Specimen Stock Certificate, incorporated herein by reference to Exhibit 4.2 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
         10.1  Form of Indemnification Agreement entered into between the Registrant and its Directors and
               Executive Officers, incorporated herein by reference to Exhibit 10.1 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
         10.2  Warrant Agreement dated December 27, 1996, between the Registrant and Cohig & Associates,
               Inc., incorporated herein by reference to Exhibit 10.2 to the Company's Registration Statement on
               Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange Commission on
               September 25, 1997.
         10.3  Warrant Agreement dated May 29, 1996, between the Registrant and Cohig, incorporated herein by
               reference to Exhibit 10.3 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.4  Warrant Agreement dated October 3, 1995, between the Registrant and Cohig, incorporated herein by
               reference to Exhibit 10.4 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.5  Warrant Certificate dated June 30, 1997, issued to Fred Birner, incorporated herein by reference
               to Exhibit 10.5 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
         10.6  Warrant Certificate dated November 1, 1996, issued to Fred Birner, incorporated herein by
               reference to Exhibit 10.6 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.7  Warrant Certificate dated June 30, 1997, issued to Mark Birner, incorporated herein by reference
               to Exhibit 10.7 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
         10.8  Warrant Certificate dated November 1, 1996, issued to Mark Birner, incorporated herein by
               reference to Exhibit 10.8 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
         10.9  Warrant Certificate dated June 30, 1997, issued to Dennis Genty, incorporated herein by reference
               to Exhibit 10.9 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.10  Warrant Certificate dated November 1, 1996, issued to Dennis Genty, incorporated herein by
               reference to Exhibit 10.10 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.11  Warrant Certificate dated August 1, 1996, issued to James Ciccarelli, incorporated herein by reference
               to Exhibit 10.11 of the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.12  Warrant Certificate dated July 15, 1997 issued to James Ciccarelli, incorporated herein by
               reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.13  Credit Agreement, dated October 31, 1996, between the Registrant and Key Bank of Colorado, as
               amended by First Amendment to Loan Documents, dated as of September 3, 1997, incorporated herein
               by reference to Exhibit 10.13 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.14  Form of Managed Care Contract with Prudential, incorporated herein by reference to Exhibit 10.14
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.15  Form of Managed Care Contract with PacifiCare, incorporated herein by reference to Exhibit 10.15
               to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.16  Letter Agreement dated October 17, 1996, between the Registrant and James Ciccarelli, as
               amended by letter agreement dated September 24, 1997 between the Registrant and James
               Ciccarelli, incorporated herein by reference to Exhibit 10.16 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.

</TABLE>
                                       74
<PAGE>

<TABLE>
<CAPTION>

   EXHIBIT
-------------
   NUMBER                                         DESCRIPTION OF DOCUMENT
-------------  --------------------------------------------------------------------------------------------------
<S>            <C>
        10.17  Agreement, dated August 21, 1997, between the Registrant and James Abramowitz, D.D.S., and
               Equity Resources Limited Partnership, a Colorado limited partnership, incorporated herein by
               reference to Exhibit 10.17 to the Company's Registration Statement on Form S-1 (SEC File No.
               333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.18  Form of Management Agreement, incorporated herein by reference to Exhibit 10.18 to the Company's
               Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and
               Exchange Commission on September 25, 1997.
        10.19  Employment Agreement dated September 8, 1997 between the Registrant and James Abramowitz,
               D.D.S. , incorporated herein by reference to Exhibit 10.19 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.
        10.20  Form of Stock Transfer and Pledge Agreement, incorporated herein by reference to Exhibit 10.20 to
               the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.21  Indenture, dated as of December 27, 1996, between the Registrant and Colorado National Bank, a
               national banking association, as Trustee, incorporated herein by reference to Exhibit 10.21 to
               the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on September 25, 1997.
        10.22  Indenture, dated as of May 15, 1996, between the Registrant and Colorado National Bank, a
               national bank association, as Trustee, incorporated herein by reference to Exhibit 10.22 of the
               Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities
               and Exchange Commission on September 25, 1997.
        10.23  Birner Dental Management Services, Inc. 1995 Employee Stock Option Plan, including forms of
               Incentive Stock Option Agreement and Non-statutory Stock Option Agreement under the
               Employee Plan, incorporated herein by reference to Exhibit 10.23 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on September 25, 1997.
        10.24  Birner Dental Management Services, Inc. 1995 Stock Option Plan for Managed Dental Centers,
               including form of Non-statutory Stock Option Agreement under the Dental Center Plan, incorporated
               herein by reference to Exhibit 10.24 to the Company's Registration Statement on Form S-1 (SEC
               File No. 333-36391), as filed with the Securities and Exchange Commission on September 25, 1997.
        10.25  Profit Sharing 401(k)/Stock Bonus Plan of the Registrant, incorporated herein by reference to
               Exhibit 10.25 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on September 25, 1997.
        10.26  Form of Stock Transfer and Pledge Agreement with Mark Birner, D.D.S., incorporated herein by
               reference to Exhibit 10.26 of Pre-Effective Amendment No. 1 to the Company's Registration
               Statement on Form S-1 (SEC File No. 333-36391), as filed with the Securities and Exchange
               Commission on November 7, 1997.
        10.27  Stock Purchase, Pledge and Security Agreement, dated October 27, 1997, between the Company
               and William Bolton, D.D.S., incorporated herein by reference to Exhibit 10.27 of Pre-Effective
               Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 7, 1997.
        10.28  Stock Purchase, Pledge and Security Agreement, dated October 27, 1997, between the Company
               and Scott Kissinger, D.D.S., incorporated herein by reference to Exhibit 10.28 of Pre-Effective
               Amendment No. 1 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 7, 1997.
        10.29  Second Amendment to Loan Documents dated November 19, 1997 between the Registrant and
               Key Bank of Colorado, incorporated herein by reference to Exhibit 10.29 of Pre-Effective
               Amendment No. 2 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as
               filed with the Securities and Exchange Commission on November 25, 1997.
        10.30  Form of Financial Consulting Agreement between the Company and Joseph Charles & Associates,
               Inc., incorporated herein by reference to Exhibit 10.30 of Post-Effective Amendment No. 2 to the
               Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with the
               Securities and Exchange Commission on January 14, 1998.
        10.31  Form of Purchase Option for the Purchase of Shares of Common Stock granted to Joseph Charles
               & Associates, Inc., incorporated herein by reference to Exhibit 10.31 of Post-Effective Amendment
               No. 2 to the Company's Registration Statement on Form S-1 (SEC File No. 333-36391), as filed with
               the Securities and Exchange Commission on January 14, 1998.
         23.1  Consent of Arthur Andersen LLP, Independent Public Accountants.
         24.1  Power of Attorney.
         27.1  Financial Data Schedule.
</TABLE>

                                       75