<PAGE>

================================================================================

                      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

                        Commission file number 0-27064

                           First Commonwealth, Inc.
            (Exact name of registrant as specified in its charter)

          Delaware                                    75 - 2154228
(State or other jurisdiction of          (I.R.S. employer identification number)
incorporation or organization)

                444 N. Wells St., Suite 600, Chicago, IL 60610
         (Address of principal executive offices, including zip code)

                                (312) 644-1800
             (Registrant's telephone number, including area code)

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

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

              Common Stock, par value $.001 per share, including
                  associated Preferred Stock Purchase Rights
                               (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 is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]

The aggregate market value of the voting stock held by non-affiliates of the
registrant as of February 27, 1998 was approximately $42 million, based on the
closing price of $14.625 of the registrant's common stock on the Nasdaq National
Market.  This calculation does not reflect a determination that persons are
affiliates for any other purposes.

Number of shares of common stock outstanding as of February 27, 1998:  3,639,500

                     Documents Incorporated by Reference:

Part II - Portions of the registrant's 1997 Annual Report to Stockholders, as
indicated herein.

Part III - Portions of the registrant's definitive proxy statement to be
distributed in conjunction with registrant's annual stockholders' meeting to be
held in 1998 (the "Proxy Statement"), as indicated herein.

================================================================================

                                       1
<PAGE>

                                    PART I

Item 1.  Business

     First Commonwealth, Inc. is a leading provider of managed dental benefits
in the upper Midwest, including the metropolitan areas of Chicago, Milwaukee,
Detroit, Indianapolis and St. Louis. As of December 31, 1997, the Company
provided managed care and indemnity/PPO products to approximately 592,300
employees and dependents ("members") through more than 4,500 employer groups
("groups"). The Company markets a broad range of innovative dental benefit
plans which are designed to meet the needs of large, medium and smaller-sized
groups. The managed care and PPO plans offer dental benefits primarily through
the Company's managed care and PPO network of approximately 2,250 general
dentists and specialists ("providers"). The Company distributes its products
through a network of over 1,400 independent insurance brokers which target
medium and smaller-sized groups, and a direct sales unit which targets larger
groups.

     The Company's managed care plans are provided on a stand-alone basis
("managed care products") and also in conjunction with the Company's indemnity
and indemnity/PPO plans (collectively "indemnity/PPO plans") which provide
benefits outside the Company's managed care network (the combined managed
care/indemnity/PPO plans are referred to as "Managed Choice/SM/products").
The Company has integrated its PPO network with the indemnity plan component of
its Managed Choice/SM/ product to offer a point-of-service option to members,
called "Managed Choice/SM/ Triple Option." The Company also provides a "network
rental" product primarily to large Taft-Hartley funds and medical HMOs. Under
the terms of this product offering, the Company provides access to the network
of reduced fee arrangements with providers, but does not handle the claims
administration. The Company charges an access fee for these arrangements. The
Company also receives fee income for administrative services only ("ASO")
arrangements whereby the Company pays claims for self funded employers but does
not assume the underwriting risk of these claims.

     The Company receives a monthly premium for each employee who enrolls in its
managed care or indemnity plans. If covered by a managed care plan, a member
selects a provider (general dentist) from the Company's managed care network.
The Company then pays a pre-arranged fee, typically a capitation payment, to the
provider selected by the member. Certain preventative and diagnostic services
(e.g., cleanings and x-rays) are provided to members at no additional fee. The
dentist provides other dental services for a reduced fee ("co-payment") paid by
the member. If covered by an indemnity plan, the member pays fees set by the
dentist for services rendered and submits claims for reimbursement.

     The Company was founded in 1986 by Christopher C. Multhauf, Chairman of the
Board of Directors and Chief Executive Officer of the Company, David W.
Mulligan, President and Chief Operating Officer of the Company, Richard M.
Burdge, a Director of the Company and Philip N. Bredesen, a former Director of
the Company. Mr. Bredesen was previously the founder and Chairman of the Board
of HealthAmerica Corporation, which grew to operate HMOs in 17 states before
being acquired by Maxicare Health Plans, Inc. in 1986. The Company commenced
operations in 1988 with the goal of building a leading managed dental care
market position in the Chicago metropolitan area.

     Since beginning operations in 1988, the Company has grown to become one of
the upper Midwest's leading dental benefit organizations. During 1996, the
Company completed acquisitions in Milwaukee and St. Louis, and began de novo
start-ups in Detroit and Indianapolis. Effective July 18, 1996, the Company
completed the acquisition of Smileage Dental Services, Inc. ("Smileage"), a
Milwaukee, Wisconsin based dental HMO administrator which provides services to
approximately 50,000 members, and an associated reinsurance transaction, for an
aggregate purchase price (including transaction costs) of $5.6 million. The
acquisition was financed through the issuance of the Company's common stock.

     Effective December 31, 1996, the Company completed the acquisition of
Champion Dental Services, Inc. ("Champion"), a St. Louis, Missouri based prepaid
dental plan which provides services to approximately 60,000

                                      -2-
<PAGE>

members, for an aggregate purchase price (including transaction costs) of $5.6
million. The acquisition was financed through proceeds from the Company's
initial public offering and was paid in cash on January 2, 1997.

     As of January 1, 1997, the Company had increased the available market
population for the markets it serves from the Chicago metropolitan area, which
is the country's third most populous metropolitan market, with a population of
approximately 8.3 million, to include the metropolitan areas of Milwaukee,
Detroit, Indianapolis and St. Louis.  These metropolitan areas have a combined
population of approximately 18.4 million. The Company's revenues increased from
$17.3 million in 1993 to $56.6 million in 1997. Over the same period, the
Company's operating income grew from $1.6 million to $5.1 million. For the year
ended December 31, 1997, the Company's revenues increased 28% to $56.6 million
from $44.1 million in the prior year period and operating income increased 29%
to $5.1 million from $4.0 million. From December 31, 1993 to December 31, 1997,
the number of fully insured members covered by the Company's managed care and
indemnity/PPO products increased from 193,100 to 515,700.

     Several key operating strategies, including the Company's regional focus,
have contributed to the Company's growth. First, the Company has built the
largest prepaid managed dental care provider network in the Chicago metropolitan
area and maintains the quality of this network through credentialing, ongoing
peer review and Company-sponsored continuing education seminars. Second, the
Company has developed a wide range of innovative dental benefit products that it
believes have contributed to its success in attracting and retaining large
groups. For example, the Company's Managed Choice/SM/ products provide it with
the capability to completely replace a group's existing indemnity plan with the
Company's combined managed care and indemnity/PPO plan. Furthermore, the
Company's national account administration program provides its Chicago-based
employers with managed care plan options outside the Company's managed care
network service area through its relationships with independent provider
networks. Third, the Company has built an efficient business development process
that combines an extensive proprietary database with targeted direct mail and
telemarketing to contact employers, independent insurance brokers and providers.
Utilizing this process, the Company markets its products directly to large
employers, distributes its products through brokers to medium and smaller-sized
employers and continuously recruits new providers into its managed care network.
Fourth, the Company has expanded its geographic service area and is implementing
its operating strategy in other major metropolitan areas in contiguous states.
This is intended to enable the Company to continue to achieve administrative
operating efficiencies as it expands.

     The Company believes there are significant opportunities for the continued
growth of its business in its regional service area. First, the Company intends
to continue to seek to increase sales from medium and smaller-sized groups by
increasing its sales staff, telemarketing and direct mail efforts towards
brokers which sell to these market segments. The Company believes that these
market segments are currently under penetrated for managed care products.
Second, the Company intends to continue to develop innovative products in
response to group needs. Third, the Company has expanded its managed care
provider network in the markets it serves. Fourth, the Company intends to
continue to focus on achieving administrative operating efficiencies through
increased use of voice and data technologies and by emphasizing efficient
provider arrangements.

     First Commonwealth, Inc. was incorporated in Delaware in 1986. Its
principal place of business is located at 444 North Wells Street, Suite 600,
Chicago, Illinois 60610, and its telephone number is (312) 644-1800. Unless the
context otherwise requires, all references to the "Company" shall mean First
Commonwealth, Inc., together with its subsidiaries, First Commonwealth Limited
Health Services Corporation, First Commonwealth of Illinois, Inc., First
Commonwealth Insurance Company, First Commonwealth Reinsurance Company, First
Commonwealth Limited Health Service Corporation, Smileage Dental Services, Inc.
and First Commonwealth of Missouri, Inc. (formerly Champion), and its affiliate,
First Commonwealth Health Services Corporation. See "Business - Company's
Corporate Structure."

     Certain statements included or incorporated by reference in this Annual
Report on Form 10-K under the caption "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in the Annual
Report on Form 10-K constitute "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
which may cause the actual results, performance, or achievements of the Company
to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. Such factors include,
among other things, increased competition in the markets in which the Company
operates; changes in regulation affecting the Company; changes in utilization of
services; changes in arrangements relating to payments to providers; the level
of the Company's indemnity/PPO enrollment and the related indemnity/PPO risk of
indemnity/PPO plans; the ability to integrate and successfully operate acquired
businesses and the risks associated with such businesses; the possible need for,
and ability to obtain if needed, financing on acceptable terms to finance the
Company's growth strategy; the ability of the Company to operate within the
limitations imposed by any such financing arrangements; and other factors
referenced or incorporated by reference in the Annual Report on Form 10-K.

                                      -3-
<PAGE>

The Dental Benefit Marketplace

     According to the U.S. Office of National Health Statistics, total
expenditures for dental care in the United States grew from approximately $14
billion in 1980 to an estimated $48 billion in 1996. The U.S. Health Care
Financing Administration reports that expenditures for dental services account
for approximately 4% of total national health care expenditures. According to
the U.S. Department of Labor, the cost of dental services has been rising at a
higher rate than that for consumer goods. The U.S. Department of Labor
Statistics reported that, from 1987 to 1997, the Consumer Price Index for all
Urban Consumers for dental services increased 5.39% annually whereas this index
for all items increased only 3.22% annually. As a result, the Company believes
that there has been increased interest by employers in managing dental care
costs.

     Employer-sponsored dental benefits are one of the most common employee
welfare benefits. The National Association of Dental Plans ("NADP") estimates
that approximately 124 million persons, representing approximately 47% of the
total United States population, were covered by some form of dental benefit
coverage at the end of 1996. Historically, a substantial majority of dental
coverage has been through traditional indemnity plans. In recent years, however,
managed dental care has achieved increasing market acceptance. National dental
HMO enrollment has grown at an annual rate of approximately 18% between 1993 and
1996, from approximately 14.4 million covered lives in 1993 to approximately
23.8 million in 1996. The estimated rate of growth in dental HMOs for 1997 was
approximately 6-10% in terms of enrollment. This compares to over 77 million
Americans who were enrolled in medical HMOs in 1996 according to the Managed
Care Digest Services. The Company believes the relatively high growth rate for
managed dental care plans is attributable to (i) the greater acceptance of
managed care by employers and employees; (ii) the significant price advantage
relative to indemnity plans; (iii) the cost effectiveness to employers of
managed dental care plans as an employee benefit; and (iv) the acceptance of
prepaid dental plans by dentists, resulting in improved accessibility and
convenience for members. Members of dental HMO benefit plans represent
approximately 19% of the population with dental care coverage and approximately
9% of the total U.S. population. The Company believes that there will continue
to be significant growth opportunities in the managed dental benefits industry.

     Historically, larger employers have been more likely to offer dental
benefit coverage to their employees. According to the 1993 Foster Higgins Survey
of Employer Sponsored Health Plans (the "Foster Higgins Survey"), nationally
approximately 87% of employers with more than 200 employees offer some type of
dental benefit to some or all employees and approximately 64% of these employers
have a stand-alone dental plan, separate and distinct from other health and
welfare benefits offered to employees. By comparison, this survey reported that
only 47% of employers with less than 200 employees offer dental benefits. It has
been the Company's experience that many employers that do not offer dental
benefits are willing to consider offering a plan in which the employee pays the
full cost of such benefits through payroll deductions.

     The managed dental care industry as a whole is currently fragmented and
characterized by the participation of several large, national insurance
companies and many smaller independent plan sponsors. As of December 31, 1995,
the NADP estimated that there were over 140 managed dental companies in the
United States, with no dominant market leader.

     The increase in the number of dentists nationally during the last two
decades has exceeded the rate of population growth. According to the American
Dental Association ("ADA"), the number of practicing dentists in the United
States has increased from approximately 127,000 in 1982 to approximately 153,000
in 1995. In addition, the dental marketplace is highly fragmented with
approximately 90% of all dentists working in a one or two-dentist office,
according to the ADA. Also, according to a survey of dental practices published
by the ADA in 1996, the median of staff and other costs that are part of total
overhead expenses was approximately 60-65% of the gross revenues of solo and
group dental practices. The increase in the number of dentists as a proportion
of the population, the fragmented dental marketplace, the high proportion of
overhead costs for dentists and an improved level of overall dental health has
created a highly competitive environment among dentists, particularly in
metropolitan areas. The Company

                                      -4-
<PAGE>

believes that these factors have contributed to the willingness of qualified
dentists to participate in managed care and PPO networks as dentists seek to
increase practice revenues.

     As in the case of medical coverage, the substantial majority of dental
coverage is provided through traditional fee-for-service indemnity dental plans.
Under a traditional fee-for-service indemnity plan, coverage is provided based
on a reimbursement formula of the usual and customary charges submitted by the
dentist. Compared to medical coverage, the average cost of dental services is
lower and the utilization of services is more predictable. Unlike medical
coverage, dental coverage generally does not cover catastrophic risks. Dental
care is provided almost exclusively on an outpatient basis and, according to a
1997 article in the Illinois Dental News, over 90% of all dental services are
performed by general dentists. Also, dental plans generally do not include
coverage for hospitalization, typically the most expensive component of medical
services. Common features of dental indemnity plans include deductibles, maximum
annual benefits of less than $2,000 per person and significant patient cost-
sharing. Patient cost-sharing typically varies by type of dental procedure
ranging from no cost sharing for preventive procedures to 50% cost-sharing for
crowns and even greater cost-sharing for orthodontic care. This high patient
cost-sharing and the relatively predictable nature of dental expenditures
substantially limits the underwriting risk of a dental plan when compared to the
underwriting risk of a medical plan which covers catastrophic illness and
injuries. Furthermore, since most dental problems are neither life threatening
nor represent serious impairments to overall health, there is a higher degree of
patient cost sensitivity and discretion associated with obtaining dental
services. Many dental conditions also have a range of appropriate courses of
treatment, each of which has a different out-of-pocket cost for patients. For
example, a deteriorated amalgam filling may be replaced with another amalgam
filling (a low-cost alternative), a pin-retained crown build-up (a more costly
alternative) or a gold crown with associated periodontal treatment (the most
costly alternative). The level of coverage provided to the patient and the
dental plan's reimbursement methodology may influence the type of services
selected by the patient or rendered by the dentist.

     Under a traditional indemnity insurance plan or fee-for-service
arrangement, the insurer and the patient each pays a percentage of the fee
charged by the dentist, subject to cost-sharing, maximum benefit allowances and
usual and customary limits. Under such an indemnity plan, dentists have little
incentive to reduce total charges because they are compensated on a fee-for-
service basis. By contrast, under a dental HMO plan the pre-determined payments,
typically capitated payments, are fixed and co-payments for additional services
are pre-negotiated by the Company. The co-payments generally are designed to
exceed the dentist's variable costs, but are typically less than the dentist's
usual and customary fee. Fixed capitation payments that do not vary with the
frequency of services provided create an incentive for dentists to emphasize
preventive care, control costs and maintain a long-term patient relationship
that generates consistent capitation revenue. Fixed capitation payments also
substantially reduce the underwriting risk to the Company associated with the
high utilization of services.

Markets Served by the Company

     Until July 1996, the Company had focused its efforts primarily on the
Chicago metropolitan market, including Northwest Indiana, and has grown to
become one of Chicago's leading managed dental care organizations. By the
beginning of 1997, the Company had expanded into Milwaukee and St. Louis, and
had initiated de novo activity in Detroit and Indianapolis.

     The Chicago area is the country's third most populous metropolitan market
with a population of approximately 7.5 million. In addition, northwest Indiana
has a population of approximately 750,000. According to the NADP, Illinois is
the fifth largest state in terms of enrollment in managed dental care plans and
had approximately 1.1 million persons enrolled in managed dental care plans in
1995 which represented 8.2% of the state's population. As of December 31, 1994,
virtually all of the Company's 216,000 managed care members were located in
Illinois. Approximately 300,600 of the Company's 450,400 managed care members
were located in Illinois and northwest Indiana as of December 31, 1997. The
Company believes that Illinois, and particularly the Chicago metropolitan area,
offers significant opportunities for continued growth in sales of managed dental
care products,

                                      -5-
<PAGE>

especially to medium and smaller-sized employers who have historically been less
likely to offer managed dental coverage.

     The Company believes that, in the Chicago metropolitan area, there are
approximately 500 employers with 500 or more employees (employing an aggregate
of approximately 1.3 million persons), and approximately 50,000 employers with
10 - 499 employees (employing an aggregate of approximately 1.5 million
persons). Based on its database of contacts with employers in the Chicago
metropolitan area, the Company believes that a higher percentage of larger
employers have implemented managed care plans as compared to medium and smaller-
sized employers. The Company believes that medium and smaller-sized employers
have become increasingly receptive to managed dental care products in part
because of their increasing satisfaction with managed care in their medical
benefit plans.

     The metropolitan markets of Milwaukee, St. Louis, Detroit and Indianapolis
have a combined population of approximately 10.1 million. According to the NADP,
the combined states from these metropolitan areas had approximately 1.2 million
people enrolled in dental HMO plans in 1995. Approximately 139,700 of the
Company's 450,400 managed care members were primarily located in the greater
metropolitan area of the cities listed above. The Company believes that these
expansion markets continue to offer opportunities for continued growth in sales
of managed dental care and indemnity/PPO products. The Company presently has
limited marketing activity in Indianapolis and does not expect to generate
significant enrollment growth from this market in 1998.

     Since the Company's operations are located primarily in the Chicago,
Milwaukee, St. Louis, Detroit, and Indianapolis metropolitan areas, its
operations may be more adversely affected by localized economic, regulatory or
competitive conditions than more geographically diverse companies.

     The Company also markets its products to employers based in its service
areas who have employees outside the Company's managed care network service area
("out-of-area employees"). If an employer wishes to offer a managed care
product to its out-of-area employees, the Company has arrangements to provide
this option through its relationships with independent provider networks in over
40 states. The Company collects the revenue for these plans, retains a small
processing fee, and remits the premium to the out-of-area independent dental
plan carrier. Consequently, this product provides negligible gross margin to the
Company. The Company markets this product to employers based in its service
areas in order to compete with national dental plans. As of December 31, 1997,
approximately 10,100 members were enrolled with other dental care plans through
such arrangements. The Company also provides its Managed Choice/SM/ product to
employers who have some out-of-area employees, which permits such employees to
select the local managed dental care plan or indemnity coverage through the
Company.

                                      -6-
<PAGE>

Growth Strategy

     The Company plans to further expand its business through the following
strategies:

     Emphasize Medium and Smaller-sized Employers. The Company believes that
employers with 10-499 employees, which account for approximately 1.5 million
employees in the Chicago metropolitan area, continue to represent an attractive
market segment for managed care products. The Company intends to continue to
build upon its current market position and increase its sales staff,
telemarketing and direct mail efforts towards brokers which sell to medium and
smaller-sized employers.

     Continue to Expand Product Line. The Company believes that it must continue
to offer its clients and prospective clients a range of new products that vary
in cost, coverage and network access to remain competitive. The Company believes
it can expand the marketing of its Managed Choice/SM/ Triple Option product by
expanding its PPO provider network, reducing benefits for non-network
utilization, and reducing the overall cost of the product to reflect the lower
non-network benefit levels. Managed care products that vary in cost relative to
the size of the managed care network also represent areas of growth for the
Company.

     Expand Geographic Service Area. The Company has expanded its managed care
provider network in Illinois and into northwest Indiana to meet the needs of its
large client groups. In addition, during 1996, the Company expanded into four
new markets by completing two acquisitions and initiating two de novo start-ups.
The Company intends to continue marketing to groups in these new geographic
areas over the next 12 months and may continue to expand into other contiguous
or proximate markets.

     Increase Size of Quality Provider Network. A key factor in the past success
of the Company has been the size, accessibility and quality of the Company's
managed dental care provider network. The Company plans to add new, quality
providers to its networks, as well as to continue to expand the number of
qualified providers who participate in its reduced fee-for-service PPO network.
The Company believes a large, accessible network of quality providers is an
important component in attracting new enrollment into its managed care and PPO
products, both in existing markets and in any new markets developed by the
Company.

     Achieve Cost Efficiencies. The Company believes that its strategy of
focusing operations on a regional basis provides certain SG&A cost efficiencies.
Additionally, the Company has experienced a decline in its SG&A expenses as a
percentage of revenues in recent years to a level that it believes is generally
sustainable. The Company continues to enhance its management information systems
and plans to introduce new voice and data technologies in the areas of billing
and enrollment to achieve staffing economies. The Company also regards its large
regional enrollment as an effective cost-containment strategy in its provider
contracting efforts. The Company believes the combination of its volume
purchasing arrangements with providers and its administrative cost efficiencies
can contribute to the future growth of the business.

Products

     The Company offers a comprehensive range of flexible and innovative dental
benefit products that are designed to offer flexibility to an employer, its
eligible employees and their dependents. Each product is positioned to meet the
needs of key market segments that the Company has identified. The Company
primarily markets two categories of products: (i) stand-alone managed care
products and (ii) managed care plans offered in combination with indemnity/PPO
plans (marketed by the Company as Managed Choice/SM/ products). The following
table shows the enrollment growth in the Company's managed care and
indemnity/PPO plans.

                                      -7-
<PAGE>

<TABLE>
<CAPTION>
                                      As of December 31,
                                   -------------------------
                                    1995     1996     1997
                                    ----     ----     ----
<S>                                <C>      <C>      <C>
             Members
                Managed Care(1)..  265,800  341,600  450,400
                Indemnity/PPO....   36,700   56,200   65,300
                                   -------  -------  -------
                    Total........  302,500  397,800  515,700
                                   =======  =======  =======
</TABLE>
--------------
(1)  Includes members who have selected the managed care option under the
     Company's Managed Choice/SM/ products and excludes Champion members as of
     December 31, 1996.

     From 1988 to 1992, the Company primarily marketed its managed care plans on
a stand-alone basis. Beginning in 1992, the Company combined its managed care
plans with indemnity plans and began marketing this combination as its Managed
Choice/SM/ products. Since the introduction of Managed Choice/SM/ products in
1992 and the addition of a PPO option in 1996, the Company has experienced
significant enrollment growth in its indemnity products, particularly among
large employers.

     The Company also receives fee income for providing access to its PPO
network and for ASO services. As of December 31, 1997, approximately 76,600
participants were eligible to access the Company's PPO network and were covered
under its ASO arrangements. See "Fee Income Products" below.

     Managed Care Products. The Company offers a range of managed care plans
which are designed to meet the needs of target markets. These plans vary in
coverage levels and cost, which allows the Company to tailor an appropriate
managed care product to an employer's current overall benefit program. The
Company offers its managed care products on a stand-alone basis and as an
alternative to traditional indemnity dental insurance. Managed care products
generally are more cost effective to groups and members than traditional
indemnity coverage. For example, the Company typically charges 30 to 60% less in
monthly premiums for managed care plans than for its indemnity plans which
provide comparable coverage. In addition, the Company's managed dental care
products offer more comprehensive benefits than traditional dental indemnity
plans. The following table compares certain features of the Company's managed
care plans with the features of a typical indemnity dental plan.

             COMPARISON OF FIRST COMMONWEALTH'S MANAGED CARE PLANS
                      WITH A TYPICAL DENTAL INDEMNITY PLAN

<TABLE>
<CAPTION>
                               First Commonwealth               Typical Dental
Feature                        Managed Care Plans              Indemnity Plan(1)
=====================================================================================
<S>                         <C>                        <C>
Deductible                  None                       $50 per person
=====================================================================================
Annual dollar limitation    None                       $1,000 per year
      on coverage
-------------------------------------------------------------------------------------
Claim forms for               Not required; member     Required; member or dentist
 reimbursement              makes co-payment directly      may incur delays in
                                   to dentist            obtaining reimbursement
-------------------------------------------------------------------------------------
     Member's               Member co-payment fixed    Member pays any excess charges
out-of-pocket costs          in advance of service       above customary fee levels
-------------------------------------------------------------------------------------
</TABLE>
--------------

(1)  These features are also representative of indemnity plans offered by
     the Company.


                                      -8-
<PAGE>

     The Company receives a monthly premium for each employee and eligible
dependent enrolled in its managed care plans. The Company remits a predetermined
portion of the premium, typically as a capitation payment, to the participating
network dentist selected by the member to "pre-pay" for dental care to be
rendered to that member. The capitation payment is a fixed, per-member payment
which is made by the Company to the provider for each member who chooses that
dentist, regardless of the frequency or nature of services rendered.

     Members covered under the Company's managed care plans obtain certain basic
dental procedures such as exams, x-rays, cleanings and fluoride treatments at no
additional charge other than, in some cases, a small office visit co-payment.
The Company's managed care plans also establish co-payments for other services
provided by the network dentist such as fillings, root canals and crowns. The
amount of the co-payment varies in accordance with the complexity of the covered
procedure but is designed to exceed the provider's variable cost related to the
procedure. The network general dentist provides all dental care services except
those specialized services that are more appropriately delivered by dental
specialists.

     When a managed care network general dentist identifies the need for a
specialist, the general dentist completes a referral request form and forwards
it to the Company for review. Examples of dental services provided by a
specialist include oral surgery, periodontics, endodontics, pedodontics and
orthodontics. The Company's independent contractor dentist consultants review
the referral request to determine the appropriateness of the requested
treatment. If the dental consultant approves the referral request, the patient
is then referred by the network general dentist to a network specialist. The
specialist dentist receives a co-payment from the member, negotiated in advance
by the Company, for the specialty services rendered. In addition, the Company
makes monthly payments to the specialist dentists on a capitated or other basis
negotiated by the Company and the specialist.

     When an employer first introduces the Company's managed care product to its
employees, the employer offers an open enrollment period in which employees may
join the managed care plan. Employees enroll for a one year period. Each year
thereafter the employer offers an open enrollment period in which employees may
join the managed care plan and existing enrollees may terminate their coverage
under the plan. When employees enroll in the managed care plan, they select a
participating dentist from the Company's managed care network for each family
member. Unlike many competing plans, the Company's managed care plans permit
each member of an employee's family to choose a different dentist. This choice
allows an employee to select a dentist closer to work while other family members
may choose a dentist closer to home.

     The Company has designed a range of products to market to employers that
currently do not offer a dental plan and to employers that currently offer only
a traditional dental indemnity plan. A description of these products and the
manner in which they are offered to employer groups follows.

     Managed Care Plans Offered on a Voluntary Basis. The Company's managed care
plans can be offered on a voluntary (employee-pays-all) basis, in which only
those employees who wish to receive and pay for coverage do so. This product is
attractive to many employers who do not presently offer dental benefits to their
employees, because it does not require the employer to contribute toward the
cost of the dental plan. The Company believes that the primary reasons many
employers do not offer a dental plan are cost and the restrictive underwriting
requirements of dental indemnity plans. These underwriting restrictions often
include minimum financial contributions from the employer, a guaranteed minimum
number of employees participating in the dental plans and significant coverage

                                      -9-
<PAGE>

exclusions. Under the Company's managed care products offered on a voluntary
basis, the employee pays for the cost of the plan through a payroll deduction,
which may be made on a pre-tax basis if the employer has adopted a flexible
spending plan under Section 125 of the Internal Revenue Code. Furthermore,
unlike many traditional indemnity carriers, the Company does not require any
minimum number of employees to enroll in order for this employee-pay-all dental
plan to be implemented. The Company's managed care products also do not have the
extensive coverage exclusions of dental indemnity plans.

     Managed Care Plans Offered as an Alternative to an Existing Indemnity
Dental Plan. The Company also offers its managed care plans as an alternative to
an employer's existing dental indemnity program. Employees have the choice of
enrolling in the Company's managed care plan or remaining in the employer's
existing indemnity dental plan. In offering the Company's managed care plan as
an alternative, the employer does not have to change existing indemnity dental
benefits or its existing dental claims processor. Unlike traditional indemnity
plan designs, the Company's managed care plans have no deductible to satisfy, no
annual limitation on benefits, no claim forms to file and are easier for many
employees to understand because of the relatively simple co-payment structure.

     The managed care plans offered by the Company to employers as an
alternative to existing indemnity plans typically offer more comprehensive
coverage than the managed care plans offered to employees on a voluntary basis.
The more comprehensive coverage of the managed care alternative is designed to
encourage employees to move from the existing dental indemnity plan because the
managed care product provides the employer with lower cost per employee.
Employers hold an annual open enrollment period in which employees may transfer
between the traditional dental indemnity alternative and the managed care
alternative. The Company has generally experienced net growth at annual renewals
in its managed care plan when offered on such a basis.

     Managed Care Plans Offered as a Replacement for an Existing Dental
Indemnity Plan. In evaluating the Company's managed care plans, some employers
have elected to implement the managed care plan as a replacement for an existing
dental indemnity plan. The Company believes that, typically, this decision is
based on three considerations: (i) the lower cost to the employer of the
Company's managed dental care plan compared with the traditional dental
indemnity plan, (ii) the improved coverage to employees available through the
Company's managed care plans as compared with a typical indemnity dental plan
and (iii) the Company's large and accessible network of credentialed dentists.

     In addition to the Company's stand-alone managed care products, the Company
also markets its managed care plans in combination with indemnity coverage. A
discussion of these products follows.

     Managed Care Plans Combined with Indemnity Plans--Managed Choice/SM/
Products. The Company has combined its managed care plans with indemnity dental
coverage in its Managed Choice/SM/ products which offer coverage from the dental
HMO network and non-network dentists. Managed Choice/SM/ products enable the
Company to replace an employer's existing traditional dental indemnity plan
offered by a third party insurance company. Upon enrollment or for a limited
number of clients, at point of service, members select the managed care product
or the indemnity plan provided by the Company. The Company provides the out-of-
network coverage on a traditional dental indemnity basis and administers the
claims for the out-of-network coverage.

     In marketing its Managed Choice/SM/ products, the Company consults with
prospective groups to identify potential areas of cost containment for the out-
of-network coverage. Because the Company controls the design of both the managed
care and indemnity plans, it can encourage greater participation levels in the
less expensive managed care plan. Through a combination of plan design and
claims administration, the Company has helped contain the aggregate cost of its
groups' indemnity dental benefit programs through its Managed Choice/SM/
products.

     The Company has experienced considerable demand for its Managed Choice/SM/
products since their introduction in 1992. As of December 31, 1997, Managed
Choice/SM/ products accounted for approximately 142,600 (approximately 28%) of
the Company's approximately 515,700 members. Of the 142,600 Managed Choice/SM/
enrollees, approximately 84,000 are enrolled in the Company's managed care plans
and approximately 58,600 are enrolled in the Company's indemnity plans.

                                     -10-
<PAGE>

     Managed Care Plans Combined with Indemnity/PPO Plans--Managed Choice/SM/
"Triple Option" Products. The Company has integrated a PPO network with the
indemnity plan component of the Managed Choice/SM/ product to offer a point-of-
service option to members. Called the Managed Choice/SM/ Triple Option, members
have a point-of-enrollment choice between the managed care and the indemnity/
PPO plans. If a member selects the indemnity/PPO plan, the member then has a
point-of-service option to choose a participating PPO dentist or a non-
participating dentist. The member's out-of-pocket cost is reduced by selecting
a participating managed care or dental PPO provider over a non-participating
provider.

     Under the Company's Managed Choice/SM/ Triple Option product, members who
select the indemnity/PPO plan will have a benefit incentive to select the
participating PPO dentist. The reduced fee arrangements of the PPO are expected
to assist groups in containing dental costs. As of December 31, 1997, the
Company's PPO network of providers had approximately 500 more dentists than its
network of managed care providers. The Company is actively recruiting other
dentists to participate in its PPO network and intends to add more dentists to
its PPO plan to support this triple option product.

     The Company has had limited success with its Managed Choice/SM/ Triple
Option products since their introduction in 1996. As of December 31, 1997,
Managed Choice/SM/ Triple products accounted for approximately 14,700
(approximately 2.9%) of the Company's approximately 515,700 members. Of the
14,700 Managed Choice/SM/ Triple Option enrollees, approximately 8,000 are
enrolled in the Company's managed care plans and approximately 6,700 are
enrolled in the Company's indemnity/PPO plans. See "Fee Income Products" below
for members covered under this product on a self-insured basis.

     Fee Income Products. For self-insured employers, the Company provides
claims administration under an administrative services only ("ASO") arrangement
whereby the Company does not assume the underwriting risk for the indemnity
claims. The Company receives an administrative fee to process the claims and the
underwriting risk is retained by the employer sponsoring the self-insured plan.
Also under self-insured plans, the Company has offered the integration of the
PPO network into employer sponsored plans and can receive a PPO access fee for
each member who selects the indemnity/PPO self-insured plan as well as an ASO
fee for providing third party administration services. As of December 31, 1997,
the Company had approximately 31,900 members in these two categories.

     In 1996, the Company introduced a new product called a PPO network "rental"
option. Under the terms of this new product offering, the Company provides
access to its reduced fee arrangements with providers, but does not handle the
third party administration services. This product capability was developed in
response to the opportunity to market to large union Taft-Hartley funds, many of
which handle their own claims processing. The Company has been selected by a
coalition of unions representing more than 50,000 members as the endorsed PPO
vendor and enrolled the first union group on January 1, 1997. Although this PPO
network "rental" option generates modest fee income, it enhances the Company's
purchasing power in the dental community and opens up the organized labor market
as a new opportunity for the Company's other managed care products. As of
December 31, 1997, the Company had approximately 44,700 members in this
category.

                                     -11-
<PAGE>

Network Providers

     The Company believes that the size, quality and accessibility of its
network of managed care dentists has been an essential element in its managed
care enrollment growth. The Company maintains a proprietary database of dentist
contacts throughout its service area which it utilizes to continuously recruit
new providers into its network. The Company also believes that its ability to
effectively market its network of managed care dentists to employers through its
managed care products makes participation in its provider network attractive to
many dentists. The Company regards its managed care network providers as
customers and has implemented practices and procedures to attract and retain
qualified providers.

     The Company attempts to compensate managed care providers primarily on a
capitated basis because it believes that capitated compensation is the most
effective method of containing dental benefit plan costs on an ongoing basis.
The Company typically ''prepays'' the capitated amounts on the first business
day of each month for those members who have selected that dentist, thereby
creating attractive cash flow advantages to dentists who participate in the
Company's managed care network. Dentists have relative high fixed costs
associated with their practices. Many dentists are willing to negotiate their
fees and find capitation an attractive revenue source to help them cover such
costs. In addition to capitation, managed care dentists also receive co-payments
for services (other than certain preventative/diagnostic procedures) at the time
service is rendered. The Company attempts to price its members' co-payments so
that they exceed a dentist's variable costs for the procedure, but are less than
the dentist's usual and customary fee. The Company's benefit plans require a
patient to make co-payments directly to the dentist at the time of service,
which eliminates delays in payments and reduces the overhead associated with
filing claims and attendant collection efforts.

     In addition, the Company also may negotiate other payment arrangements with
managed care dentists under certain circumstances. This may involve, among other
things, contributions by the Company toward costs for infection control, cost-
sharing by the Company on a discounted fee-for-service basis, or for new
providers, minimum monthly payment arrangements. A significant portion of the
specialists with which the Company has managed care provider contracts are
compensated by the Company on a discounted and full fee-for-service basis and
not on a capitated basis. Accordingly, the Company retains the risk of its share
of the cost for services provided through such arrangements. Total payments to
specialists represented approximately 12% of the Company's payments to providers
in 1997.

     The Company believes that the large number of practicing dentists and the
high proportion of solo practitioners make the Chicago metropolitan markets
highly competitive for private practice dentists. It has been the Company's
experience within the Chicago metropolitan marketplace that dental providers are
willing to participate in its managed care network. The Company believes that
providers find participation in its managed care network attractive for several
reasons. The Company has established a record of delivering large volumes of new
patients to participating providers. The Company regards its network providers
as customers and believes that it provides higher levels of service and support
than typically provided by its competitors. These factors, coupled with the fact
that the Company's capitated payment arrangements provide attractive cash flow
advantages to its managed care dentists, have enabled the Company to attract and
retain qualified providers for its managed care network.

     The Company also believes that its managed care network must be of
demonstrable quality. The Company has developed a multi-step quality assessment
program which begins by initially qualifying interested dentists followed by a
personal office visit with the dentists. Further credentialing involves
verifying a dentist's license, the existence of professional liability coverage
and reviewing any previous claims history. Additionally, the dental office
itself is reviewed to determine if the Company's managed care quality assessment
program standards, which include proper infection control procedures, are being
followed. After dentists are added to the managed care network, they and their
practices are periodically recredentialed to ensure Company quality assessment
standards are being maintained. This recredentialing also includes a periodic
random chart audit of members who have received services from network dentists
at that practice. Additionally, a comprehensive membership complaint/inquiry
database is maintained by the Company, the contents of which are discussed with
network dentists when considered necessary. The Company administers its
continuing quality assessment program through its staff and through consulting
dentists, under the supervision of its corporate Dental Director. The Company
further demonstrates its commitment to maintaining a quality

                                     -12-
<PAGE>

oriented managed care network through routine, on-site field visits and
telephone service calls to dentists. Additionally, the Company provides an
ongoing series of continuing education seminars covering such topics as
infection control. The Company also maintains a working relationship with
professional dental organizations in dealing with issues of common interest.

     The Company believes that its managed care network must be stable in order
to offer long-term continuity of care. The Company views its providers as
customers rather than vendors of care and, consequently, focuses significant
resources upon assessing and addressing provider concerns and sources of
dissatisfaction. The Company conducts periodic network dentist satisfaction
surveys and also provides an ongoing series of continuing education seminars, at
no cost for its managed care network providers. Through these contacts, the
Company proactively works to meet network dentists' expectations. As a result,
the Company's managed care provider annual retention rate has been on average
approximately 95%.

     Managed care network providers are independent contractors who provide
services to members pursuant to contractual arrangements with the Company. The
Company's relationships with its managed care network dentists generally are
terminable at any time by either party upon short notice. The contracts do not
require managed care network dentists to provide services exclusively to members
of the Company's plans. The Company may, following any required regulatory
approval, change the terms, capitation rates, benefits and conditions of the
various plans serviced by its managed care network upon advance notice. The
Company's contracts with managed care network dentists require the dentists to
maintain their own malpractice insurance. The Company also carries insurance
protecting it against liability relating to acts or omissions of managed care
network dentists. Although no material malpractice or similar claims have been
asserted against the Company in the past, there can be no assurance that the
Company will not become involved in such litigation or otherwise become subject
to material claims relating to its managed care or PPO network dentists in the
future. In the event of litigation or claims against the Company for malpractice
by one of the providers or for negligence in credentialing one of the providers
in its networks, there is no assurance that the Company's professional liability
insurance will be sufficient to cover any liability which might result from such
litigation or claims.

     The Company's policy is to permit dentists to participate in either its
managed care network, its PPO network or both. Consistent with the practice of
other dental PPOs, if a dentist elects to only participate in the Company's PPO
network, the credentialing requirements are less extensive than those for the
managed care network and currently there are no ongoing peer review requirements
for PPO dentists. Presently, substantially all of the participating dentists in
the Company's managed care network participate in the Company's PPO network. In
addition, at December 31, 1997, the Company's PPO network had approximately 500
additional dentists that do not participate in the Company's managed care
network. The Company is actively recruiting other dentists to participate in its
PPO network and intends to add more dentists to its PPO network.

Customer Groups

     The following table shows a breakdown of the Company's groups by size as of
December 31, 1997:

<TABLE>
<CAPTION>
                                             Number of     Subscribers(2)
                                                           --------------
 Size of Group by Number of Subscribers(1)    Groups     Total   % of Total
 -----------------------------------------    ------     -----   ----------
<S>                                           <C>        <C>     <C>
     Individuals...........................      N/A      8,700        3.6%
     2-10..................................    1,418     11,900        5.0%
     11-50.................................    2,392     37,300       15.6%
     51-100................................      364     25,700       10.8%
     101-500...............................      318     63,700       26.6%
     500+..................................       57     91,800       38.4%
                                               -----    -------      -----
          Total............................    4,549    239,100      100.0%
                                               =====    =======      =====
</TABLE>

--------------
                                     -13-
<PAGE>

(1)  The number of subscribers represents the number of employees of an employer
     group who have enrolled in one of the Company's products but does not
     include dependents of such employees.

(2)  Amounts do not include subscribers in the Company's ASO, ASO/PPO, PPO
     network access, PPO network rental programs and fully insured Medicare
     HMO members.

     The Company's 10 largest groups accounted for approximately 25% of the
Company's revenues for the year ended December 31, 1997 and accounted for
approximately 17% of total members for such period. None of the Company's groups
accounted for more than 10% of the Company's revenues in 1997.

     The Company's group contracts generally provide for a defined set of dental
benefits to be delivered to members for a period of one year at specified
monthly rates. The contracts normally have fixed terms of one year and provide
for automatic renewal unless terminated by notice from either party provided a
specified period (typically 60 days) prior to the end of the term thereof.


Marketing and Sales

     The Company markets its dental benefit plans through a network of over
1,400 independent insurance brokers and a direct sales force consisting of 16
employees. This dual distribution system is designed to reach large groups as
well as smaller groups and individuals in an efficient and cost effective
manner. The Company believes that this marketing strategy provides it with a
competitive advantage by enabling it to market to a wider range of potential
groups more efficiently than companies relying on a single distribution system.

     The Company's direct sales force targets larger employers and groups which
are more likely to contribute towards the cost of dental benefits for their
employees. In marketing to large groups, the Company's sales force focuses on
stand-alone managed care products as an economical alternative to traditional
indemnity coverage as well as Managed Choice/SM/ products. The Company pays its
direct sales force through a combination of salary and bonus based upon the
number of members enrolled for new groups. As part of its growth strategy, the
Company intends to increase its internal sales and marketing staff to recruit
and manage its network of brokers and expand telemarketing and direct mail
efforts.

     The Company's independent insurance broker network focuses on offering
primarily voluntary (employee-pays-all) managed care products to medium and
smaller-sized employers which have not previously contributed toward or offered
dental care benefits to their employees. The Company believes that there are
significant opportunities for the Company to expand managed care coverage to
medium and smaller-sized employers by expanding its network of independent
brokers who can efficiently sell dental benefit products to the medium and
smaller-sized market. Brokers typically do not market the Company's dental
benefit plans on an exclusive basis. Brokers generally receive a flat percentage
of the premium collected as commission for the initial sale of the Company's
product as well as a commission for each annual renewal thereof.

     The Company has developed a proprietary business development process which
is used in conjunction with the Company's direct and brokered sales efforts.
This business development process relies heavily on a computerized prospect
tracking system which contains detailed benefit and contact information on
approximately 35,000 employers in the Chicago, Milwaukee, St. Louis and Detroit
metropolitan areas. Using this database, the Company's business development
representatives use direct mail to target employer decision makers and brokers
and telemarketing to follow up with these employer decision makers and brokers.
It has been the Company's experience that the sales cycle may be a multi-year
process, particularly since employers tend to make decisions regarding dental
coverage on an annual basis. The Company believes that the continuity of
communication which it has established with these decision makers gives the
Company a significant advantage over its competitors in the metropolitan markets
it serves. This comprehensive database also links brokers with their clients
which permits the Company's field staff to contact brokers at the time of their
clients' annual renewal periods.

                                     -14-
<PAGE>

     Marketing generally is a two-step process in which presentations are made
first to employers and then directly to employees. Once selected by an employer,
the Company typically solicits potential subscribers from the employee base
directly. During periodic "open enrollments," when employees are permitted to
change dental benefit programs, the Company uses direct mail, work site
presentations and other marketing methods to attract new subscribers. The
Company stresses its ability to provide a flexible schedule of benefits, quality
dental services oriented toward preventive care at reasonable prices and a large
panel of dentists from which to choose in these marketing efforts.

     The Company also has a member services department which assists members on
such matters as schedules of benefits, available network dentists, transfers
from one network dentist to another, emergency dental services, billing issues
and other administrative and group service matters. The member services
department also handles complaints about providers and conducts member
satisfaction surveys.

     The Company has a separate account management department that focuses on
servicing the needs of benefit managers and groups. The Company believes that
this service effort is important to group retention and enrollment growth among
group members. The Company manages its groups with a long-term strategic goal to
increasing participation in the Company's managed care plans.

Management Information Systems

     The management information systems used by the Company are designed to
facilitate subscriber and provider service. The Company depends on these systems
for comprehensive group service, premium collection and reconciliation,
administration of capitation and commission payments, member eligibility
processing, marketing support, corporate accounting and management reporting.
The Company's management information systems allow it to offer multiple plans
tailored to the needs of its groups and have the capability to interface
directly with the systems of its groups, which can facilitate expeditious
processing of changes in membership information.

     The Company periodically upgrades its hardware and software systems to (i)
enhance its capability for electronic interchange with its groups, (ii)
streamline the systems' ability to support both multi-state accounts and
multiple products for the same group, (iii) enhance the integration between the
Company's management information systems and its corporate accounting software,
(iv) improve statistical and analytical capability with respect to various
aspects of the Company's business and (v) make other technological changes to
improve the efficiency of the Company's systems. The Company plans to introduce
new voice and data technologies in 1999 and to increase the use of electronic
methods for billing, enrollment and ongoing eligibility maintenance between
employer groups and network dentists. The Company believes that these steps
should help it to limit staff increases in the future and to increase the
effectiveness and efficiency of its administrative operations.

     The Company is currently in the process of evaluating its information
technology infrastructure for Year 2000 compliance and should be substantially
completed by the end of 1998. The Company does not expect the cost to modify its
information technology infrastructure to be Year 2000 compliant to be material
to its financial condition or results of operations. The Company does not
currently have any information concerning the Year 2000 compliance status of its
customers. In the event that any of the Company's significant customers do not
successfully and timely achieve Year 2000 compliance, the Company does not
believe that its business or operations would be adversely affected.

Competition

     The Company operates in a highly competitive environment. Its competitors
principally include insurance companies, which often offer both managed dental
care and indemnity dental products in the Company's market, and independent
companies offering managed dental care products similar to those offered by the
Company. The managed dental care industry as a whole is currently fragmented and
characterized by the participation of several large, national insurance
companies and many smaller independent plan sponsors. The Company also competes
with numerous other types of businesses in the health care industry, including
health maintenance organizations, limited health services corporations, self-
funded plans which are administered by third party administrators, preferred
provider organizations and other discount fee-for-service dental plans. The
Company has experienced, and expects that it will continue to experience in the
future, increased competition from all such sources. Many of the Company's
competitors are larger and have substantially greater financial and other
resources than the Company. Price considerations have been a

                                     -15-
<PAGE>

significant competitive factor in the past and the Company believes pricing will
continue to be a significant competitive factor in the future, especially with
respect to large government and labor union contracts awarded on the basis of
competitive bidding. Currently such contracts constitute less than 5% of the
Company's total revenues. The Company believes that it competes principally on
the basis of the pricing of managed care products in comparison to traditional
indemnity plan coverage, the size, accessibility and quality of its provider
network, its service reputation and the diversity of its products. Of these, the
Company has found that provider network size, accessibility and quality, service
reputation and cost are generally the factors most critical in employer
decision-making.

     While the managed dental care business does not require substantial amounts
of capital, the Company believes that certain factors may limit the number of
new competitors that successfully enter its marketplace. These include the need
for new competitors to comply with governmental licensing requirements and to
establish provider and insurance broker networks in order to enter and compete
in the market. The Company believes that it is well positioned to continue to
compete in the Chicago, Milwaukee and St. Louis metropolitan areas as a result
of its growing network of providers and insurance brokers and the Company's
service reputation and client base. The Company also believes that it is well
positioned to compete in the Detroit and, on a longer term basis, Indianapolis
metropolitan areas as a result of the competitive size of its network of
providers and the Company's focused marketing efforts. While the Company
believes that it has successfully established one of the leading market
positions in the Chicago, Milwaukee and St. Louis metropolitan areas, there can
be no assurance that the Company will be able to continue to increase or
maintain its market share. Increased competition could adversely affect the
Company's results of operations.

Government Regulation

     The business of the Company is subject to extensive regulation, by, as may
be applicable, the insurance statutes and regulations of the states in which the
Company operates with respect to the prepaid health plan, insurance,
reinsurance, and related operations of the Company (''Insurance Regulation'').
The Company is registered in Illinois and in Michigan as a Third Party
Administrator and in Illinois as an Insurance Firm; its subsidiary, First
Commonwealth of Illinois, Inc., is registered in Illinois as a Preferred
Provider Administrator; another subsidiary, First Commonwealth Limited Health
Services Corporation, is licensed in Illinois as a Limited Health Service
Organization and in Indiana as a Limited Service Health Maintenance
Organization; another subsidiary, First Commonwealth Insurance Company, is
licensed in Illinois as a domestic life, accident and health insurer with the
intent to underwrite indemnity dental business and is awaiting additional
licensure as a Limited Health Service Organization; another subsidiary, First
Commonwealth Limited Health Service Corporation, is licensed in Wisconsin as a
Limited Service Health Organization; another subsidiary, First Commonwealth of
Missouri, Inc. (formerly Champion Dental Services, Inc.), is licensed in
Missouri as a prepaid dental plan corporation; and an affiliate, First
Commonwealth Health Services Corporation, is organized under Illinois law as a
Voluntary Health Services Plan.

     Insurance Regulation, which may vary from state to state, establishes
extensive operational, financial, reporting, and other requirements applicable
to the Company's business in such state. Depending upon the nature and scope of
regulatory requirements adopted from time to time in each of the states having
jurisdiction over the legal entities or operations of the Company, Insurance
Regulation may materially and adversely affect the business, operating results
and financial condition of the Company. Insurance Regulation generally requires
the Company to be licensed by the state insurance department in order to offer
its dental care products, administrative services or preferred provider network
in such state and otherwise conduct its operations in such state. In addition,
Insurance Regulation generally prescribes minimum levels of net worth and
reserves, limits the ability of the Company's subsidiaries to pay dividends to
the extent required surplus would be impaired, requires filings for approval of
products and services offered by the Company and its subsidiaries and the filing
of rate schedules, certain product literature, forms of contracts with
subscribers, dentists and others (which may entail substantial delay in
implementing changes or introducing new products), establishes minimum benefit
levels for the Company's dental products in some cases, provides for periodic
examinations, including quality assessment review, establishes standards for the
Company's management and other personnel, specifies measures for resolving
grievances and requires prior approval if more than a certain percentage of the
Company's outstanding voting securities are to be acquired. Changes in Insurance
Regulation or the application thereof could involve, among other things, premium
taxes, increased capitalization requirements, limitations on the payment of
dividends, distributions, or principal or interest on subordinated debt, the

                                     -16-
<PAGE>

imposition of guaranty fund assessments, mandated health benefits and other
terms of enrollment contracts, restrictions on the use of "fronting
arrangements" and reinsurance agreements, requirements for admission of or
licensing as foreign reinsurance companies, limited health service
organizations, limited service health organizations, prepaid dental plan
corporations, preferred provider administrators and third party administrators,
state health insurance reforms for groups and individuals, "any willing
provider" requirements limiting the Company's right to restrict the size of its
provider network, minimum loss ratio requirements, enterprise liability
statutes, which may increase the Company's liability for the negligent acts of
its providers, or other matters. There can be no assurance that changes in
Insurance Regulation or the application of existing Insurance Regulation,
including matters relating to the Company's limited operations outside its
service areas, will not materially and adversely affect the business or
financial condition of the Company. Failure of the Company to comply with the
Insurance Regulation could subject the Company to financial penalties, cease and
desist orders or the revocation of one or more licenses required to conduct its
business.

     Any future expansion of the Company's business may subject the Company to
additional regulation by the state or federal governments. The insurance
statutes and regulations of certain states may limit the ability of the Company
to expand its operations in or into such states, or may substantially delay the
commencement of operations in such states as a result of the need to comply with
the licensing requirements of such states. Expansion of the Company's business
by acquisition of control of existing regulated entities may subject the Company
to substantial filing and approval requirements. Furthermore, proposals have
been made in the past, and may be made again, for national and state health care
reform which, if enacted, could materially and adversely affect the business and
financial condition of the Company. It has been the Company's policy to maintain
regular contact and productive working relationships with regulators in each
jurisdiction in which it is licensed to conduct business.

     In general, Insurance Regulation of the states in which the Company and its
subsidiaries operate require a person seeking to acquire control, directly or
indirectly, of certain regulated entities or of any person controlling such
entity to file with the relevant insurance regulatory authority an application
for change of control (commonly known as a "Form A") containing certain
information regarding the identity and background of the acquiror and its
affiliates, the source and amount of funds to be used to effect the acquisition
and certain other matters. For purposes of many of these statutes and
regulations promulgated thereunder, a person that owns or controls, directly or
indirectly, 10% or more of the outstanding voting securities of any other person
is generally presumed to "control" that other person. Accordingly, any
purchase of Common Stock that would result in the purchaser having beneficial
ownership of Common Stock equal to or in excess of the specified threshold
level, which may be lower than 10% in some states or, as a result of future
regulatory action, in one or more of those states in which the Company currently
operates, pursuant to the offering of Common Stock made hereby or otherwise
(including through purchases in the open market), must file for and obtain prior
approval from all applicable regulatory authorities. Such prior approval could
also apply to the acquisition of proxies to vote specified percentages of the
outstanding Common Stock and, therefore, could delay or prevent a stockholder
from acquiring such proxies in a proxy contest. No assurance can be given that
the Company would not seek to invoke these laws and regulations in a proxy
contest or a tender offer or merger situation. Failure to comply with change of
control provisions under applicable state insurance codes by an investor
acquiring the Company's Common Stock at or above the specified threshold levels
could result in a material adverse effect on such investor, including the
possible entry of a divestiture order, and could also possibly result in adverse
regulatory action against the Company and its subsidiaries. Prospective and
current stockholders, and not the Company, are responsible for compliance with
Form A and similar filing and prior approval requirements. The Company assumes
no obligation with respect to these matters.

     The Company's business is not currently regulated at the federal level.
During 1994, however, Congress considered legislation proposing comprehensive
reform of the health care system in the United States. The Company cannot
predict whether or when future health care reform initiatives at the federal or
state level or other initiatives affecting insurance and/or managed care
providers such as the Company may be proposed, enacted or implemented or what
impact such initiatives may have on the Company's business, operating results or
financial condition.

                                     -17-
<PAGE>

Company's Corporate Structure

     The Company contracts to provide dental care benefits to groups and members
in Illinois and Indiana through First Commonwealth Limited Health Services
Corporation ("FC-Limited"), a wholly-owned subsidiary; in Wisconsin through
First Commonwealth Limited Health Service Corporation ("FC-Wisconsin"), a
wholly-owned subsidiary; in Missouri through First Commonwealth of Missouri,
Inc. ("FC-Missouri"), a wholly-owned subsidiary; and in Michigan through a
fronting arrangement described below. The Company provides administrative and
marketing services for FC-Limited, FC-Wisconsin, and FC-Missouri. Another
wholly-owned subsidiary, First Commonwealth of Illinois, Inc. ("FC-Illinois"),
contracts with dentists and dental care specialists to provide dental care
services to groups and to members for whom FC-Limited, FC-Wisconsin, and FC-
Missouri provides dental benefits. Smileage, a wholly-owned subsidiary, is a
Wisconsin based dental HMO administrator.

     As the Company has increased its indemnity business, it has entered into a
reinsurance agreement with North American Insurance Company ("North American"),
an Illinois licensed reinsurer, covering a portion of its indemnity business.
North American, in turn, has entered into an agreement with another third party
insurer, Capitol Indemnity Corporation ("Capitol"). Capitol has entered into an
agreement with another subsidiary of the Company, First Commonwealth Reinsurance
Company ("FC-RE"), whereby North American transfers most of this reinsured risk
from FC-Limited to Capitol and onto FC-RE. The Company currently retains
virtually all of the underwriting risk of its indemnity plans. FC-RE engages in
no reinsurance activity that is not related to the Company's indemnity and
managed care products.

     In addition, in 1997, the Company, acting as agent for North American and
according to a fronting arrangement, began selling managed care and indemnity
dental insurance policies in the state of Michigan. According to the reinsurance
agreement above, North American ceded all policies in Michigan to Capitol who
ceded these policies to FC-RE.

     First Commonwealth Health Services Corporation ("FCHSC") is consolidated
with the Company and its subsidiaries for financial reporting purposes. FCHSC is
not material to the financial condition or operating results of the Company.
FCHSC is licensed under the Voluntary Health Services Plans Act (the "VHSP
Act"). In accordance with the VHSP Act, FCHSC is operated and conducted as a
not-for-profit and is also governed by the provision of the General Not-for-
Profit Corporation Act. FCHSC was initially capitalized by First Commonwealth,
Inc. ("FC Inc.") through the purchase of a subordinated note. Certain officers
and trustees of FCHSC are common to the officers and directors of FC Inc.
Consistent with its authority under the VHSP Act, FCHSC provides reimbursement
to its members for covered dental care. The VHSP Act requires, among other
provisions, that FCHSC not expend more than 20% of its annual subscriber revenue
for administrative costs and 10% for marketing costs. FC Inc. provides
administrative and marketing services to FCHSC pursuant to a management
agreement.

     First Commonwealth Insurance Company was incorporated in Illinois during
1997 and is a wholly owned subsidiary. It is currently licensed as a domestic
life, accident and health insurer with the intent to underwrite indemnity dental
business and is awaiting additional licensure under the LHSO Act. As of December
31, 1997, it had not yet commenced business.

Risk Management

     The Company maintains general and professional liability insurance to cover
the risk of operating its managed care dental plans. In addition, each dentist
in the provider network is required to maintain malpractice insurance.

     The Company seeks to enter into capitation arrangements whenever possible
as its primary means of managed care dentist compensation. In addition to
capitation arrangements, the Company also may negotiate other payment
arrangements with dentists and specialists. Such arrangements may involve, among
other things, contributions by the Company toward costs for infection control,
discounted fee-for-service pricing arrangements, or for new providers, minimum
monthly payment arrangements. Certain specialists with which the Company has
provider contracts are compensated by the Company on a discounted or full fee-
for-service basis and not on a capitated basis. Accordingly, the Company retains
the risk of its share of the cost for services provided under these compensation
arrangements. If the number of managed care providers covered under other
compensation requirements materially increase, or the cost of such arrangements
becomes significantly higher than projected, including utilization of specialty
care benefits, the Company's profitability could be materially and adversely
affected. Total payments to specialists represented approximately 12% of the
Company's payments to managed care providers in 1997.

                                     -18-
<PAGE>

     In addition, an increasing portion of the Company's business is the sale of
indemnity/PPO plans as part of its Managed Choice/SM/ product. The Company
retains virtually all of the underwriting risk of its indemnity/PPO products.
Although dental indemnity/PPO plans have limitations on coverage (including
limits on procedures covered, amounts covered per procedure and annual and
lifetime benefits), due to variability in both the utilization of services and
the cost per service under an indemnity/PPO plan, increased indemnity/PPO
enrollment increases the underwriting risk undertaken by the Company. The dental
benefit costs associated with the Company's Managed Choice/SM/ products include
an estimate of dental expenses incurred by its members outside of the Company's
provided network, but which have not yet been reported to the Company. If the
utilization or cost per service incurred outside of the Company's network were
to be greater than estimated, the Company's business, operating results or
financial condition could be materially and adversely affected. The Company has
not experienced any significant adverse variations between such estimated and
actual expenses, but there can be no assurance that such variations will not
occur in the future.

     The Company staffs its claims processing operation with individuals
experienced in dental terminology and procedures such as hygienists, dental
office assistants and dentist consultants, who review claims submitted for
appropriateness. The Company also uses specific underwriting criteria as an
integral part of its risk management program for its indemnity/PPO plans.
Utilizing specific underwriting criteria, the Company attempts to assure that
each employer group's profile is consistent with relevant rating assumptions. In
addition, high patient cost-sharing in dental plans substantially limits the
underwriting risk of a dental plan, particularly when compared to the risk in a
medical plan. Furthermore, unlike medical plans, dental plans typically do not
cover catastrophic risks.

Employees

     The Company had approximately 135 employees as of December 31, 1997. None
of the Company's employees is covered by a collective bargaining agreement. The
Company believes its relations with its employees are good.


Item 2.   Properties

     The Company does not own any real estate; it leases approximately 24,000
feet of office space in Chicago. The lease has a term expiring in 2000, with an
option for the Company to extend the lease through 2003. In addition, the
Company leases approximately 1,700 feet of office space in Milwaukee with a term
expiring in 1999; 1,700 feet of office space in St. Louis with a term expiring
in 2000; 500 feet of office space in Detroit with a term expiring in 1998, and
500 feet of office space in Indianapolis with a term expiring in 1998.


Item 3.   Legal Proceedings

     The Company is involved from time to time in routine legal and regulatory
proceedings incidental to its business. The Company is not involved in any
currently pending lawsuits or proceedings that it believes will have,
individually or in the aggregate, a material adverse effect on the Company.


Item 4.   Submission of Matters to a Vote of Security Holders

          None.

                                     -19-
<PAGE>

                                    PART II


Item 5.  Market for Registrant's Common Equity and Related Stockholder
Matters

     (a) Incorporated herein by reference from section entitled "Related
Stockholder Matters and Market for the Company's Common Stock" in the
Company's 1997 Annual Report to Stockholders, which is included as Exhibit
13 to this Annual Report on Form 10-K.

     (b)   Use of Proceeds from Registered Securities

     The following information is reported pursuant to Item 701(f) of
Regulation S-K:
     The Company filed a registration statement on Form S-1 which became
effective on November 16, 1995 (Registration No. 33-97426).
     The offering commenced on November 16, 1995 and terminated after the
sale of all securities registered.
     The managing underwriters for this offering were William Blair &
Company and Piper Jaffray Inc.
     The offering related to the Company's Common Stock, par value $.001
per share, and was for the account of the Company and certain selling
shareholders, as follows:
<TABLE>
<CAPTION>
                                                      Company      Selling Shareholders
                                                     ----------    --------------------
<S>                                                  <C>           <C>
Number of Shares Registered and Sold                    530,000          1,577,200

Aggregate Price of Offering Registered and Sold      $7,950,000        $23,658,000
</TABLE>

     The following amounts of expenses were incurred for the Company's account
in connection with the issuance and distribution of the securities registered
for each category listed below:

<TABLE>
<S>                                       <C>                                                    <C>
                                              Direct or indirect payments to directors,
                                          officers, general partners of the issuer or their
                                             associates; to persons owning ten percent or
                                            more of any class of equity securities of the        Direct or indirect
                                               issuer; and to affiliates of the issuer           payments to others
                                          -------------------------------------------------      ------------------
Underwriting discounts and                                                                0              $  556,500
commissions

Finders Fees                                                                              0              $        0

Expenses paid to or for underwriters                                                      0              $   20,000

Other Expenses                                                                      $50,000              $  715,173

Total Expenses                                                                      $50,000              $1,291,673

   Net offering proceeds to the Company after total expenses:                                    $6,608,327

Purchase and installation of
machinery and equipment                                                                   0              $  789,877

   Acquisition of other businesses                                                  $     0              $5,818,450
   Total                                                                                         $6,608,327
</TABLE>

     The use of proceeds reported herein does not represent a material change
from the use of proceeds described in the prospectus.

                                      -20-
<PAGE>

Item 6.  Selected Financial Data

     Incorporated herein by reference from section entitled "Selected
Consolidated Financial and Operating Data" in the Company's 1997 Annual Report
to Stockholders, which is included as Exhibit 13 to this Annual Report on Form
10-K.

Item 7.  Management's Discussion and Analysis of Financial Condition and Results
of Operations

     Incorporated herein by reference from section entitled "Management's
Discussion and Analysis of Results of Operations and Financial Condition" in the
Company's 1997 Annual Report to Stockholders, which is included as Exhibit 13 to
this Annual Report on Form 10-K.

Item 7A. Quantitative and Qualitative Disclosures about Market Risk

     Not Applicable

Item 8.  Financial Statements and Supplementary Data

     Incorporated herein by reference from sections entitled "Financial
Statements" and "Notes to Consolidated Financial Statements" in the Company's
1997 Annual Report to Stockholders, which is included as Exhibit 13 to this
Annual Report on Form 10-K.

Item 9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

     None.

                                      -21-
<PAGE>

                                   PART III


Item 10.  Directors and Executive Officers of the Registrant

     The information contained under the headings "Election of Directors" and
"Executive Officers" in the Proxy Statement (which Proxy Statement will be filed
with the Securities and Exchange Commission on or before May 5, 1998) is
incorporated herein by reference.


Item 11.  Executive Compensation

     Except for information referred to in Item 402(a)(8) of Regulation S-K, the
information contained under the headings "Election of Directors" and "Executive
Compensation and Other Information" in the Proxy Statement (which Proxy
Statement will be filed with the Securities and Exchange Commission on or before
May 5, 1998) is incorporated herein by reference.


Item 12.  Security Ownership of Certain Beneficial Owners and Management

     The information contained under the heading "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement (which Proxy Statement
will be filed with the Securities and Exchange Commission on or before May 5,
1998) is incorporated herein by reference.


Item 13.  Certain Relationships and Related Transactions

     The information contained under the heading "Certain Relationships and
Related Transactions" in the Proxy Statement (which Proxy Statement will be
filed with the Securities and Exchange Commission on or before May 5, 1998)
is incorporated herein by reference.

                                      -22-
<PAGE>

                                    PART IV


Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K

     (a)(1)    Financial Statements

     The following financial statements are filed as part of this report:

          Report of Independent Public Accountants on Consolidated
          Financial Statements.*

          Consolidated Balance Sheets of the Company as of December 31,
          1997, 1996 and 1995.*

          Consolidated Statements of Income of the Company for the years
          ended December 31, 1997, 1996 and 1995.*

          Consolidated Statements of Changes in Stockholders' Equity of the
          Company for the years ended December 31, 1997, 1996 and 1995.*

          Consolidated Statements of Cash Flows of the Company for the
          years ended December 31, 1997, 1996 and 1995.*

          Notes to Consolidated Financial Statements.*

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

* Incorporated herein by reference from the Company's 1997 Annual Report to
Stockholders.

     (a)(2) Financial Statement Schedules
<TABLE>
<CAPTION>
<S>                                                                                    <C>
     Report of Independent Public Accountants on Financial Statement Schedule          Page 26

     Schedule II  --  Valuation and Qualifying Accounts                                Page 27
</TABLE>


     All other schedules for which provision is made in the applicable
accounting regulation of the Securities and Exchange Commission are not required
under the related instructions or are inapplicable, and therefore have been
omitted.

     (a)(3)    Exhibits
               --------

     The following Exhibits are filed herewith or incorporated herein:

<TABLE>
<CAPTION>
Exhibit No.                             Description
-----------                             -----------

        <C>      <S>
        3.1  --  Second Restated Certificate of Incorporation of the Company, as amended (1)

        3.2  --  Restated By-laws of the Company (2)

        4.1  --  Stockholders Rights Agreement between the Company and First Chicago Trust Company of
                 New York (1)
</TABLE>

                                      -23-
<PAGE>

Exhibit No.                              Description
-----------                              -----------

       10.1  --     First Commonwealth, Inc. Management Bonus Plan (1)(3)

       10.2  --     1987 Statutory-Nonstatutory Stock Option Plan, as amended
                    (1)(3)

       10.3  --     1995 Long-Term Incentive Plan, as amended as of February 18,
                    1998 (3)

       10.4  --     First Commonwealth, Inc. Salary Savings Plan (1)(3)

       10.5  --     Employment Agreement between the Company and Christopher C.
                    Multhauf (1)(3)

       10.6  --     Employment Agreement between the Company and David W.
                    Mulligan (1)(3)

       10.7  --     Employment Agreement between the Company and Gregory D.
                    Stobbe, as amended (1)(3)

       10.8  --     Employment Agreement between the Company and Mark R.
                    Lundberg (1)(3)

       10.9  --     Employment Agreement between the Company and Scott B.
                    Sanders (1)(3)

       10.10 --     Reinsurance Agreement between First Commonwealth Limited
                    Insurance Company and First Commonwealth Reinsurance Company
                    (1)

       10.11 --     Reinsurance Agreement between North American Insurance
                    Company and First Commonwealth Reinsurance Company (1)

       10.12 --     Form of First Commonwealth Limited Health Services
                    Corporation Group Master Contract (1)

       10.13 --     Form of First Commonwealth of Illinois, Inc. Dental Provider
                    Agreement (1)

       10.14 --     Form of First Commonwealth of Illinois, Inc. Participating
                    PPO Dentist Contract (1)

       10.15 --     Lease Agreement between 444 North Wells Limited Partnership
                    as sole beneficiary of American National Bank & Trust
                    Company of Chicago Trust No. 56647 as Landlord and the
                    Company as Tenant, as amended (1)

       10.16 --     Administrative Master Contract, dated December 12, 1990,
                    between First Commonwealth of Illinois, Inc. and First
                    Commonwealth Limited Health Services Corporation (1)

       10.17 --     Administrative Contract, dated December 12, 1990, between
                    First Commonwealth, Inc. and First Commonwealth Limited
                    Health Services Corporation (1)

                                     -24-
<PAGE>

Exhibit No.                        Description
-----------                        -----------

      10.18  --     Management Agreement, dated November 20, 1987, between First
                    Commonwealth, Inc. and First Commonwealth Health Services
                    Corporation (1)

      10.19  --     Administrative Master Contract, dated February 1, 1989,
                    between First Commonwealth of Illinois, Inc. and First
                    Commonwealth Health Services Corporation, as amended (1)

      10.20  --     Public Offering Agreement among the Company, Christopher C.
                    Multhauf, David W. Mulligan and the Selling Stockholders
                    identified therein (1)

      10.21  --     Stock Exchange Agreement, dated July 18, 1996, by and among
                    the Company and the Shareholders of Smileage Dental
                    Services, Inc., is hereby incorporated by reference to
                    Exhibit 2.1 to the Company's Current Report on Form 8-K,
                    dated July 18, 1996

      10.22  --     Registration Rights Agreement, dated July 18, 1996, between
                    the Company and the Holders of Registrable Securities
                    referred to therein, is hereby incorporated by reference to
                    Exhibit 99.1 to the Company's Current Report on Form 8-K,
                    dated July 18, 1996

      10.23  --     Stock Purchase Agreement, dated as of October 2, 1996, among
                    the Company, Group Health Plan, Inc., Champion Dental
                    Services, Inc. and Coventry Corporation, is hereby
                    incorporated by reference to Exhibit 10.1 to the Company's
                    Quarterly Report on Form 10-Q for the quarter ended
                    September 30, 1996

      11     --     Statement re: computation of per share earnings (included
                    in Exhibit 13 filed herewith)

      13     --     1997 Annual Report to Stockholders

      21     --     Subsidiaries of the Registrant

      23     --     Consent of Arthur Andersen LLP

      24     --     Powers of Attorney (included on signature page)

      27     --     Financial Data Schedule

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

(1)  Incorporated herein by reference to an exhibit with the same number as
     filed with the Company's Registration Statement on Form S-1, as amended
     (Registration No. 33-97426).

(2)  Incorporated herein by reference to an exhibit with the same number as
     filed with the Company's Quarterly Report on Form 10-Q for the quarter
     ended June 30, 1996.

(3)  Represents management contract or compensatory plan or arrangement.

     (b)  Reports on Form 8-K

          No reports on Form 8-K were filed in the fourth quarter of 1997.

                                     -25-
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
                        ON FINANCIAL STATEMENT SCHEDULE


To the Stockholders and Board of Directors of
First Commonwealth, Inc.:

     We have audited in accordance with generally accepted auditing standards
the consolidated financial statements included in FIRST COMMONWEALTH, INC. AND
SUBSIDIARIES' 1997 Annual Report to Stockholders incorporated by reference in
this Form 10-K, and have issued our report thereon dated February 11, 1998. Our
audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The schedule included on page 25 is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.


ARTHUR ANDERSEN LLP

Chicago, Illinois
February 11, 1998

                                     -26-
<PAGE>

                   FIRST COMMONWEALTH, INC. AND SUBSIDIARIES

                SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
   Period                                                      Additions
   ------                                           -------------------------------
                                       Balance at    Charged to
Year Ended                            Beginning of   Costs and     Charged to Other                            Balance at
December 31,       Description           Period       Expenses    Accounts-Describe   Deductions-Describe    End of Period
-----------   ----------------------  ------------  -----------   -----------------   -------------------    -------------
<S>           <C>                     <C>            <C>          <C>                 <C>                     <C>
    1995      Claims liability         $  387,714   $ 5,451,936          --              $ 4,581,969(1)        $1,257,681
              Allowance for doubtful
              accounts                 $  116,782   $   192,808          --              $   112,274(2)        $  197,316
    1996      Claims liability         $1,257,681   $ 8,341,669          --              $ 8,019,681(1)        $1,579,669
              Allowance for doubtful
              accounts                 $  197,316   $   104,000          --              $    31,762(2)        $  289,554
    1997      Claims liability         $1,579,669   $10,506,867          --              $10,482,207(1)        $1,604,329
              Allowance for doubtful
              accounts                 $  289,554   $   204,655          --              $   160,197(2)        $  334,012
</TABLE>
-------------------
(1)   Payment for claims
(2)   Write-off of bad debt
                                      -27-
<PAGE>

                                  SIGNATURES

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

Date:  March 30, 1998               FIRST COMMONWEALTH, INC

                                By: /s/ Christopher C. Multhauf
                                    --------------------------------------------
                                    Christopher C. Multhauf
                                    Chairman of the Board of Directors and Chief
                                    Executive Officer


                       POWER OF ATTORNEY AND SIGNATURES

     Each of the undersigned officers and directors of First Commonwealth, Inc.
hereby severally constitutes and appoints Christopher C. Multhauf, David W.
Mulligan and Scott B. Sanders, and each of them singly, our true and lawful
attorneys, with full power to them and each of them singly, to sign for us in
our names in the capacities indicated below, all amendments to this Annual
Report on Form 10-K, and generally to do all things in our names and on our
behalf in such capacities to enable First Commonwealth, Inc. to comply with the
provisions of the Securities Act of 1934, as amended, and all requirements of
the Securities and Exchange Commission.

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed by the following persons in the
capacities indicated on this 30th day of March, 1998.
<TABLE>
<CAPTION>
            Name                                     Capacity
            ----                                     --------
<S>                                      <C>
/s/ Christopher C. Multhauf              Chairman of the Board of Directors and
--------------------------------------   Chief Executive Officer
    Christopher C. Multhauf              (principal executive officer)


/s/ David W. Mulligan                    Director, President, Secretary and
--------------------------------------   Chief Operating Officer
    David W. Mulligan


/s/ Scott B. Sanders                     Chief Financial Officer and Treasurer
--------------------------------------   (principal financial and accounting
    Scott B. Sanders                     officer)


/s/ Richard M. Burdge, Sr.               Director
--------------------------------------
    Richard M. Burdge, Sr.


/s/ William J. McBride                   Director
--------------------------------------
    William J. McBride


/s/ Jackson W. Smart, Jr.                Director
--------------------------------------
    Jackson W. Smart, Jr.
</TABLE>
                                     -28-
<PAGE>

                                 Exhibit Index
                                 -------------

<TABLE>
<CAPTION>
Exhibit No.                         Description
-----------                         -----------
<C>         <S>  <C>
    10.3    --   1995 Long-Term Incentive Plan, as amended as of February 18,
                 1998

      13    --   1997 Annual Report to Stockholders

      21    --   Subsidiaries of the Registrant

      23    --   Consent of Arthur Andersen LLP

      24    --   Powers of Attorney (included on signature page)

      27    --   Financial Data Schedule
</TABLE>
                                     -29-