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

FORM 10-Q

|     |  |                                                                                                                                              
|---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------
|[X]  |  | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003, OR
|     |  |                                                                                                                                              
|[  ] |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM      TO              

Commission File No.: 001-13457

ORTHODONTIC CENTERS OF AMERICA, INC.

(Exact name of registrant as specified
in its charter)


|                                                                        |  |                                                
|----------------------------------------------------------------------- |  | -----------------------------------------------
|Delaware
(State or other jurisdiction of incorporation or organization) |  | 72-1278948
(I.R.S. Employer Identification No.)

3850 N. Causeway Boulevard, Suite 800
Metairie, Louisiana 70002
(504) 834-4392
(Address, including zip code, of principal executive offices and
Registrants telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). YES [X] NO [  ]

At November 11, 2003 there were approximately 50,135,000 outstanding shares of
the Registrants Common Stock, $.01 par value per share.





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TABLE OF CONTENTS



|                                             |                                                                                                    |                                                        |  |  |  |  |  | 
|-------------------------------------------- | -------------------------------------------------------------------------------------------------- | ------------------------------------------------------ |  |  |  |  |  | 
|PART I.      FINANCIAL INFORMATION          
|                                             | ITEM 1.      CONSOLIDATED FINANCIAL STATEMENTS                                                    
|                                             |                                                                                                    | Consolidated Balance Sheets                           
|                                             |                                                                                                    | Consolidated Statements of Income                     
|                                             |                                                                                                    | Consolidated Statements of Cash Flows                 
|                                             |                                                                                                    | Notes to Consolidated Financial Statements (Unaudited)
|                                             | ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|                                             | ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                           
|                                             | ITEM 4.      CONTROLS AND PROCEDURES                                                              
|PART II.      OTHER INFORMATION             
|                                             | ITEM 1.      LEGAL PROCEEDINGS                                                                    
|                                             | ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K                                                     
|SIGNATURES                                  
|EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
|EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
|EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
|EX-32.2 SECTION 906 CERTIFICATION OF THE CFO



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##### Table of Contents



ORTHODONTIC CENTERS OF AMERICA, INC.

TABLE OF CONTENTS

|                                                                                              |                                                                                                         |  |      |   | 
|--------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------- |  | ---- | - | 
|                                                                                              |                                                                                                         |  | Page
|                                                                                              |                                                                                                         |  |     
|Part I. Financial Information                                                                 |                                                                                                         |  |      |  
|Item 1. Consolidated Financial Statements:                                                    |                                                                                                         |  |      |  
|                                                                                              | Consolidated Balance Sheets  September 30, 2003 (Unaudited) and December 31, 2002                      |  |      | 3 | 
|                                                                                              | Consolidated Statements of Income  Three and Nine Months ended September 30, 2003 and 2002 (Unaudited) |  |      | 4 | 
|                                                                                              | Consolidated Statements of Cash Flows  Nine months ended September 30, 2003 and 2002 (Unaudited)       |  |      | 5 | 
|                                                                                              | Notes to Consolidated Financial Statements  September 30, 2003 (Unaudited)                             |  |      | 6 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |                                                                                                         |  | 16   |  
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |                                                                                                         |  | 36   |  
|Item 4. Controls and Procedures                                                               |                                                                                                         |  | 36   |  
|Part II. Other Information                                                                    |                                                                                                         |  |      |  
|Item 1. Legal Proceedings                                                                     |                                                                                                         |  | 36   |  
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                                                                         |  | 39   |  

FORWARD-LOOKING STATEMENTS

Certain statements contained in this Report may not be based on historical
facts and are forward looking statements within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. These forward-looking statements may be
identified by reference to a future period(s) or by the use of forward looking
terminology, such as anticipate, estimate, believe, expect, foresee,
may, would, could or will. These forward-looking statements include,
without limitation, statements regarding the Companys fee revenue, critical accounting policies and estimates, net
operating loss carryforwards and income tax liability, new accounting pronouncements,
reduction in service fees for certain affiliated practices, amounts payable to
OrthAlliance affiliated practices under incentive programs, allowance for
uncollectible amounts, liquidity, capital resources, cash needs, buy-outs of
service, consulting and management service agreements, transition of
an affiliated practice, utilization of the
Companys services and payment of service fees by OrthAlliance affiliated
practices, pending litigation against OrthAlliance and the Company, advancement
of funds to affiliated practices, phase-out of the reimbursement of corporate
overhead expense by OCA affiliated practices, repayment of outstanding
indebtedness, impairment of long-lived assets, including intangible
assets and goodwill, capital expenditures for
development of de novocenters, stock
repurchases and future growth and operating results. We caution you not to place undue reliance
on these forward-looking statements, in that they involve certain risks and
uncertainties that could cause actual results to differ materially from
anticipated results. These risks and uncertainties include potential adverse
changes in the Companys financial results and condition, disruption of the
Companys relationships with its affiliated practices or loss of a significant
number of the Companys affiliated practices, failure or delay in integrating
OrthAlliances affiliated practices, adverse outcomes of litigation pending
against the Company and OrthAlliance, competition, inability to effectively
manage an increasing number of affiliated practices, changes in the general
economy of the United States and the specific markets in which the Company
operates, difficulties in staffing and managing foreign offices,
foreign currency exchange fluctuations and other risks relating to
international expansion and the Companys foreign operations, changes in the
Companys operating or expansion strategy, inability of the Company to attract
and retain qualified management, personnel and affiliated practitioners, inability of the
Company to effectively market its services and those of its affiliated
practices, changes in regulations affecting the Companys business, and other
factors identified in the Companys Annual Report on Form 10-K for the year
ended December 31, 2002, other filings with the Securities and Exchange
Commission or in other public announcements by the Company. We undertake no
obligation to update these forward-looking statements to reflect events or
circumstances that occur after the date of this Report.

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PART I.      FINANCIAL INFORMATION

ITEM 1.      CONSOLIDATED FINANCIAL STATEMENTS

Orthodontic Centers of America, Inc.
Consolidated Balance Sheets
(in thousands, except share amounts)

|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |              |         |  |  | 
|----------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------- | ------------------------------------ | ------- | ------- | ------------- | ------- | ------------ | ------- |  |  | 
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         | September 30, |         | December 31,
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         | 2003          |         | 2002        
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         | (Unaudited)   |         |              |         | 
|                                                            |                                                                                                                                                                                                             |                            |                                      | ASSETS  |         |               |         |              |         |  |  | 
|Current assets:                                             |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            | Cash and cash equivalents                                                                                                                                                                                   |                            | $                                    | 10,368  |         |               | $       | 7,522        |        
|                                                            | Current portion of service fees receivable, net of allowance for uncollectible
amounts of $7,722 at September 30, 2003 and $5,095 at December 31, 2002                                                      |                            |                                      | 95,410  |         |               |         | 63,448       |        
|                                                            | Current portion of advances to affiliated practices, net of allowance for
uncollectible amounts of $3,482 at September 30, 2003 and $2,406 at
December 31, 2002                                             |                            |                                      | 11,319  |         |               |         | 14,857       |        
|                                                            | Deferred income taxes                                                                                                                                                                                       |                            |                                      | 30,488  |         |               |         | 37,572       |        
|                                                            | Supplies inventory                                                                                                                                                                                          |                            |                                      | 11,537  |         |               |         | 12,526       |        
|                                                            | Prepaid expenses and other assets                                                                                                                                                                           |                            |                                      | 4,855   |         |               |         | 7,439        |        
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            |                                                                                                                                                                                                             | Total current assets       |                                      |         | 163,977 |               |         |              | 143,364 | 
|Unreimbursed expense portion of service fees receivable     |                                                                                                                                                                                                             |                            | 49,766                               |         |         |               | 43,070  |             
|Advances to affiliated practices, less current portion, net |                                                                                                                                                                                                             |                            | 16,978                               |         |         |               | 15,687  |             
|Property, equipment and improvements, net                   |                                                                                                                                                                                                             |                            | 91,251                               |         |         |               | 90,060  |             
|Intangible assets, net                                      |                                                                                                                                                                                                             |                            | 213,027                              |         |         |               | 220,383 |             
|Goodwill                                                    |                                                                                                                                                                                                             |                            | 87,641                               |         |         |               | 87,641  |             
|Other assets                                                |                                                                                                                                                                                                             |                            | 14,042                               |         |         |               | 7,040   |             
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|TOTAL ASSETS                                                |                                                                                                                                                                                                             | $                          | 636,682                              |         |         | $             | 607,245 |             
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            |                                                                                                                                                                                                             |                            | LIABILITIES AND SHAREHOLDERS EQUITY |         |         |               |         |              |         |  | 
|Current liabilities:                                        |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            | Accounts payable                                                                                                                                                                                            |                            | $                                    | 4,862   |         |               | $       | 8,048        |        
|                                                            | Accrued salaries and other accrued liabilities                                                                                                                                                              |                            |                                      | 15,406  |         |               |         | 20,620       |        
|                                                            | Deferred revenue                                                                                                                                                                                            |                            |                                      | 418     |         |               |         | 713          |        
|                                                            | Service fee prepayments                                                                                                                                                                                     |                            |                                      | 1,003   |         |               |         | 7,743        |        
|                                                            | Current portion of notes payable to affiliated practices                                                                                                                                                    |                            |                                      | 2,785   |         |               |         | 8,387        |        
|                                                            | Current portion of long-term debt                                                                                                                                                                           |                            |                                      | 8,333   |         |               |         | 8,333        |        
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            |                                                                                                                                                                                                             | Total current liabilities  |                                      |         | 32,807  |               |         |              | 53,844  | 
|Deferred income tax liabilities                             |                                                                                                                                                                                                             |                            | 25,860                               |         |         |               | 8,030   |             
|Notes payable to affiliated practices, less current portion |                                                                                                                                                                                                             |                            | 4,156                                |         |         |               | 4,612   |             
|Long-term debt, less current portion                        |                                                                                                                                                                                                             |                            | 90,017                               |         |         |               | 97,899  |             
|Shareholders equity:                                       |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            | Preferred stock, $.01 par value: 10,000,000 shares authorized; no shares
outstanding                                                                                                                        |                            |                                      |        |         |               |         |             |        
|                                                            | Common stock, $.01 par value: 100,000,000 shares authorized; approximately
51,340,000 shares issued and outstanding at September 30, 2003 and
51,268,000 shares issued and outstanding at December 31, 2002 |                            |                                      | 513     |         |               |         | 512          |        
|                                                            | Additional paid-in capital                                                                                                                                                                                  |                            |                                      | 218,530 |         |               |         | 217,840      |        
|                                                            | Retained earnings                                                                                                                                                                                           |                            |                                      | 281,115 |         |               |         | 240,911      |        
|                                                            | Accumulated other comprehensive loss                                                                                                                                                                        |                            |                                      | (562    | )       |               |         | (1,376       | )      
|                                                            | Less cost of approximately 1,193,000 shares of treasury stock at September
30, 2003 and 1,097,000 at December 31, 2002                                                                                      |                            |                                      | (15,754 | )       |               |         | (15,027      | )      
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|                                                            |                                                                                                                                                                                                             | Total shareholders equity |                                      |         | 483,842 |               |         |              | 442,860 | 
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                  |                                                                                                                                                                                                             | $                          | 636,682                              |         |         | $             | 607,245 |             
|                                                            |                                                                                                                                                                                                             |                            |                                      |         |         |               |         |             

See accompanying notes to consolidated financial statements.

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Orthodontic Centers of America, Inc.
Consolidated Statements of Income
(in thousands, except per share data)

|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |        |         | 
|-------------------------------------- | ------------------------- | --------------------- | ------ | ------------------ | ------ | ----------------- | ------- | ------ | ------ | ---- | ------- | ------ | ------- | - | ------- | ------ | ------- | 
|                                       |                           |                       |        | Three months ended |        | Nine months ended
|                                       |                           |                       |        | September 30,      |        | September 30,    
|                                       |                           |                       |        |                    |        |                  
|                                       |                           |                       |        | 2003               |        | 2002              |         | 2003   |        | 2002
|                                       |                           |                       |        |                    |        |                   |         |        |        |     
|                                       |                           |                       |        | (Unaudited)       
|Fee revenue                            |                           | $                     | 92,730 |                    |        | $                 | 112,738 |        |        | $    | 293,583 |        |         | $ | 337,493 |       
|Direct expenses:                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       | Employee costs            |                       |        | 26,292             |        |                   |         | 31,068 |        |      |         | 85,164 |         |   |         | 94,973 |        
|                                       | Orthodontic supplies      |                       |        | 9,734              |        |                   |         | 10,286 |        |      |         | 30,057 |         |   |         | 29,414 |        
|                                       | Rent                      |                       |        | 7,263              |        |                   |         | 9,755  |        |      |         | 26,266 |         |   |         | 29,894 |        
|                                       | Marketing and advertising |                       |        | 5,500              |        |                   |         | 9,129  |        |      |         | 18,919 |         |   |         | 26,042 |        
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       |                           | Total direct expenses |        |                    | 48,789 |                   |         |        | 60,238 |      |         |        | 160,406 |   |         |        | 180,323 | 
|General and administrative             |                           |                       | 16,479 |                    |        |                   | 13,810  |        |        |      | 43,657  |        |         |   | 42,984  |       
|Depreciation                           |                           |                       | 3,805  |                    |        |                   | 2,991   |        |        |      | 10,799  |        |         |   | 8,899   |       
|Amortization                           |                           |                       | 2,575  |                    |        |                   | 2,422   |        |        |      | 7,789   |        |         |   | 7,808   |       
|Asset impairments                      |                           |                       | 767    |                    |        |                   | 909     |        |        |      | 2,582   |        |         |   | 909     |       
|Non-recurring recruiting expense       |                           |                       |       |                    |        |                   |        |        |        |      |        |        |         |   | 12,772  |       
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|Operating profit                       |                           |                       | 20,315 |                    |        |                   | 32,368  |        |        |      | 68,350  |        |         |   | 83,798  |       
|Interest expense, net                  |                           |                       | (1,193 | )                  |        |                   | (2,070  | )      |        |      | (3,742  | )      |         |   | (4,413  | )     
|Non-controlling interest in subsidiary |                           |                       | 4      |                    |        |                   | 14      |        |        |      | (25     | )      |         |   | 45      |       
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|Income before income taxes             |                           |                       | 19,126 |                    |        |                   | 30,312  |        |        |      | 64,583  |        |         |   | 79,430  |       
|Income taxes                           |                           |                       | 7,221  |                    |        |                   | 11,443  |        |        |      | 24,381  |        |         |   | 29,985  |       
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|Net income                             |                           | $                     | 11,905 |                    |        | $                 | 18,869  |        |        | $    | 40,202  |        |         | $ | 49,445  |       
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|Net income per share:                  |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       | Basic                     |                       | $      | 0.24               |        |                   | $       | 0.37   |        |      | $       | 0.80   |         |   | $       | 0.96   |        
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       | Diluted                   |                       | $      | 0.24               |        |                   | $       | 0.37   |        |      | $       | 0.80   |         |   | $       | 0.95   |        
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|Average shares outstanding:            |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       | Basic                     |                       |        | 50,206             |        |                   |         | 51,229 |        |      |         | 50,208 |         |   |         | 51,317 |        
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       
|                                       | Diluted                   |                       |        | 50,483             |        |                   |         | 51,547 |        |      |         | 50,504 |         |   |         | 51,884 |        
|                                       |                           |                       |        |                    |        |                   |         |        |        |      |         |        |         |   |         |       

See accompanying notes to consolidated financial statements.

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Orthodontic Centers of America, Inc.
Consolidated Statements of Cash Flows
(in thousands)

|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |         |        |         |  
|------------------------------------------------------------------------ | --------------------------------------------------------------------------------- | -------------------------------------------- | ---------------------------------------------- | -------- | ----------------- | ------- | ------- | ------- | ------ | ------- | -
|                                                                         |                                                                                   |                                              |                                                |          | Nine months ended
|                                                                         |                                                                                   |                                              |                                                |          | September 30,    
|                                                                         |                                                                                   |                                              |                                                |          |                  
|                                                                         |                                                                                   |                                              |                                                |          | 2003              |         | 2002   
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |        
|                                                                         |                                                                                   |                                              |                                                |          | (Unaudited)      
|Operating activities:                                                    |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         | Net income                                                                        |                                              | $                                              | 40,202   |                   |         | $       | 49,445  |       
|                                                                         | Adjustments to reconcile net income to net
cash provided by operating activities: |                                              |                                                |          |                   |         |         |         |       
|                                                                         |                                                                                   | Provision for bad debt expense               |                                                |          | 5,340             |         |         |         | 2,259  |        
|                                                                         |                                                                                   | Depreciation and amortization                |                                                |          | 18,588            |         |         |         | 16,707 |        
|                                                                         |                                                                                   | Deferred income taxes                        |                                                |          | 24,914            |         |         |         | 8,066  |        
|                                                                         |                                                                                   | Asset impairments                            |                                                |          | 2,582             |         |         |         | 909    |        
|                                                                         |                                                                                   | Non-recurring recruiting expense             |                                                |          |                  |         |         |         | 4,771  |        
|                                                                         |                                                                                   | Changes in operating assets and liabilities: |                                                |          |                   |         |         |         |        |        
|                                                                         |                                                                                   |                                              | Service fees receivable                        |          |                   | (41,451 | )       |         |        | (35,477 | )
|                                                                         |                                                                                   |                                              | Service fee prepayments                        |          |                   | (6,740  | )       |         |        | (2,496  | )
|                                                                         |                                                                                   |                                              | Supplies inventory                             |          |                   | 989     |         |         |        | (1,813  | )
|                                                                         |                                                                                   |                                              | Prepaid expenses and other                     |          |                   | 2,274   |         |         |        | (2,861  | )
|                                                                         |                                                                                   |                                              | Amounts payable to affiliated practices        |          |                   |        |         |         |        | (5,309  | )
|                                                                         |                                                                                   |                                              | Accounts payable and other current liabilities |          |                   | (8,694  | )       |         |        | 14,936  |  
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Net cash provided by operating activities                                |                                                                                   |                                              | 38,004                                         |          |                   |         | 49,137  |        
|                                                                        
|Investing activities:                                                    |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         | Purchases of property, equipment and improvements                                 |                                              |                                                | (13,826  | )                 |         |         | (9,939  | )     
|                                                                         | Intangible assets acquired, net                                                   |                                              |                                                | (588     | )                 |         |         | (4,518  | )     
|                                                                         | Advances to affiliated practices, net                                             |                                              |                                                | (2,516   | )                 |         |         | (12,589 | )     
|                                                                         | Notes receivable                                                                  |                                              |                                                | (2,605   | )                 |         |         | 1,534   |       
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Net cash used in investing activities                                    |                                                                                   |                                              | (19,535                                        | )        |                   |         | (25,512 | )      
|                                                                        
|Financing activities:                                                    |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         | Repayment of notes payable to affiliated practices                                |                                              |                                                | (4,823   | )                 |         |         | (3,835  | )     
|                                                                         | Repayment of long-term debt                                                       |                                              |                                                | (121,432 | )                 |         |         | (12,000 | )     
|                                                                         | Proceeds from notes payable to affiliated practices                               |                                              |                                                |         |                   |         |         | 287     |       
|                                                                         | Proceeds from long-term debt                                                      |                                              |                                                | 109,900  |                   |         |         | 639     |       
|                                                                         | Repurchase of common stock                                                        |                                              |                                                | (773     | )                 |         |         | (13,507 | )     
|                                                                         | Issuance of common stock                                                          |                                              |                                                | 691      |                   |         |         | 2,759   |       
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Net cash used in financing activities                                    |                                                                                   |                                              | (16,437                                        | )        |                   |         | (25,657 | )      
|                                                                        
|Effect of exchange rate changes on cash and cash equivalents             |                                                                                   |                                              | 814                                            |          |                   |         | (1,144  | )      
|Change in cash and cash equivalents                                      |                                                                                   |                                              | 2,846                                          |          |                   |         | (3,176  | )      
|Cash and cash equivalents at beginning of period                         |                                                                                   |                                              | 7,522                                          |          |                   |         | 14,172  |        
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Cash and cash equivalents at end of period                               |                                                                                   | $                                            | 10,368                                         |          |                   | $       | 10,996  |        
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Supplemental cash flow information:                                      |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         | Cash paid during period for:                                                      |                                              |                                                |          |                   |         |         |         |       
|                                                                         |                                                                                   |                                              | Interest                                       |          | $                 | 3,688   |         |         | $      | 3,764   |  
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         |                                                                                   |                                              | Income taxes                                   |          | $                 | 392     |         |         | $      | 366     |  
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        
|Supplemental disclosures of non-cash
investing and financing activities: |                                                                                   |                                              |                                                |          |                   |         |         |        
|                                                                         | Notes payable and common stock issued
to obtain Service Agreements                |                                              | $                                              | 544      |                   |         | $       | 1,312   |       
|                                                                         |                                                                                   |                                              |                                                |          |                   |         |         |        

See accompanying notes to consolidated financial statements.

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Orthodontic Centers of America, Inc.




Notes to Consolidated Financial Statements (Unaudited)

September 30, 2003

1.     DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Orthodontic Centers of America, Inc. (the Company) provides business services
to orthodontic and pediatric dental practices in 46 states and four foreign
markets.

The Company provides purchasing, financial, marketing and administrative
services under service, consulting and management service agreements (Service
Agreements). The Company provides services to orthodontic and pediatric
dental practices operated by orthodontists and pediatric dentists and/or their
wholly-owned professional entities (Affiliated Practices). Because the
Company does not control the Affiliated Practices, it does not consolidate
their financial results. The following table provides information about the
Companys Affiliated Practices:

|              |       |             |                                |           |                         |       |    |       |  |  |     |     |  |  |     |     | 
|------------- | ----- | ----------- | ------------------------------ | --------- | ----------------------- | ----- | -- | ----- |  |  | --- | --- |  |  | --- | --- | 
|              |       |             | Number of Affiliated Practices
|              |       |             |                               
|              |       |             | As of September 30, 2003       |           | As of December 31, 2002
|              |       |             |                                |           |                        
|Location      |       | Orthodontic |                                | Pediatric |                         | Total |    | Total
|              |       |             |                                |           |                         |       |    |      
|United States |       |             | 299                            |           |                         |       | 28 |       |  |  | 327 |     |  |  | 343 |    
|Japan         |       |             | 26                             |           |                         |       |   |       |  |  | 26  |     |  |  | 21  |    
|Mexico        |       |             | 4                              |           |                         |       |   |       |  |  | 4   |     |  |  | 3   |    
|Puerto Rico   |       |             | 3                              |           |                         |       |   |       |  |  | 3   |     |  |  | 2   |    
|Spain         |       |             | 3                              |           |                         |       |   |       |  |  | 3   |     |  |  | 2   |    
|              |       |             |                                |           |                         |       |    |       |  |  |     |     |  |  |     |    
|              | Total |             |                                | 335       |                         |       |    | 28    |  |  |     | 363 |  |  |     | 371 | 
|              |       |             |                                |           |                         |       |    |       |  |  |     |     |  |  |     |    

The number of affiliated practices exclude 53 orthodontic and pediatric dental
practices that were engaged in litigation with the Company or its subsidiaries
and for which we had generally ceased to record fee revenue as of September 30,
2003.

The Companys consolidated financial statements include service fees earned
under the Service Agreements and the expenses of providing the Companys
services. These expenses generally include all practice-related expenses of
the Affiliated Practices, excluding the practitioners compensation and
professional insurance coverage.

Certain reclassifications have been made to prior periods financial statements
in order to conform to the presentation of the September 30, 2003 financial
statements.

The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for audited
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. Operating results for
the nine month period ended September 30, 2003 are not necessarily indicative
of the results that may be expected for the year ending December 31, 2003. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Companys Annual Report on Form 10-K for the
year ended December 31, 2002.

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2.     REVENUE RECOGNITION

Fee revenue consists of amounts earned by the Company under the Service
Agreements and recognized under the Companys revenue recognition policy. The
Company recognizes fee revenue as follows: (A) the Company allocates the total
amount of patient fees payable under a patient contract of an Affiliated
Practice on a straight-line basis over the term of the patient contract (which
generally averages about 26 months); (B) the Company then reduces that
allocated amount by the portion that is retained or to be retained by
Affiliated Practices (Amounts Retained By Affiliated Practices), which
consists of (i) amounts collected in the relevant period and retained by
Affiliated Practices under the terms of their Service Agreements and (ii)
amounts not collected in the relevant period that the Company estimates will be
retained by Affiliated Practices in future periods; and (C) the Company then
offsets a portion of Amounts Retained By Affiliated Practices by adding amounts
related to certain unreimbursed practice-related expenses incurred on behalf of
Affiliated Practices and recorded as expenses in the Companys consolidated
statements of income. The Company recognizes these expense amounts as fee
revenue to the extent Affiliated Practices generate sufficient patient fees
receivable to secure reimbursement of the expenses.

Until amounts related to unreimbursed practice-related expenses are recognized
as fee revenue under the Companys revenue recognition policy, the Companys
rights to receive reimbursement for these expenses are not recorded on the
Companys balance sheet as service fees receivable, even though Affiliated
Practices have a contractual obligation to reimburse the Company.

Under most of the Companys Service Agreements, service fees are calculated
based upon an allocation of a specified percentage of patient contract balances
during the first month of treatment with the remainder allocated equally over
the remaining term of the patient contracts, less amounts retained by
Affiliated Practices. Because the Company recognizes fee revenue based on a
straight-line allocation of patient contract balances, this may result in the
Company recognizing a portion of its fee revenue after corresponding service
fees have become contractually due under the Companys Service Agreements.

Many of OrthAlliances Affiliated Practices require that their patients pay a
down payment of approximately 25% of the total treatment fee at the
commencement of treatment. Because the Company recognizes fee revenue based on
a straight-line allocation of patient contract balances, this results in the
Company receiving cash in advance of recognizing certain fee revenue. The
Company records these amounts as service fee prepayments and defers recognition
of these amounts as fee revenue until they are recognized under the Companys
revenue recognition policy.

3.     SERVICE FEES RECEIVABLE

Service fees receivable represents fee revenue owed to the Company by its
Affiliated Practices. Service fees receivable consists of three categories of
fee revenue: (A) fee revenue related to patient fees receivable that have been
billed to patients or third party payors (billed patient fees receivable);
(B) fee revenue related to patient fees receivable that have not yet been
billed to patients or third party payors (unbilled patient fees receivable);
and (C) fee revenue related to certain unreimbursed practice-related expenses
the Company has incurred on behalf of Affiliated Practices and recorded as
expense.

The Company recognizes fee revenue based in part on a straight-line allocation
of Affiliated Practices patient contract balances over the terms of the
patient contracts. This straight-line allocation includes billed patient fees
receivable and unbilled patient fees receivable. A portion of the Companys fee
revenue also relates to certain unreimbursed practice-related expenses incurred
on behalf of Affiliated Practices and recorded as expenses in the Companys
consolidated statements of income. The Company generally collects its service
fees receivable when patient fees are billed and collected by or on behalf of
the Companys Affiliated Practices.

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Service fees receivable are comprised of a current and long-term component. The
current portion of service fees receivable consists of fee revenue related to
billed patient fees receivable and unbilled patient fees receivable. The
long-term component is the unreimbursed expense portion of service fee
receivables, for which the Company is generally reimbursed over a five-year
period.

Current Portion of Service Fees Receivable:

Fee revenue related to billed patient fees receivable. Fee revenue related
to billed patient fees receivable generally increases due to increases in the
aggregate dollar amount of Affiliated Practices patient contracts, both from
increases in the overall number of patient contracts and increases in the
average amount of treatment fees charged per patient by Affiliated Practices,
as well as increases in the average number of days between billing and
collection of patient fees.

Fee revenue related to unbilled patient fees receivable. The Company
recognizes fee revenue based in part on a straight-line allocation of the
patient contract balances of Affiliated Practices over the terms of the patient
contracts (which average about 26 months). However, Affiliated Practices
generally do not bill their patients on a straight-line basis. Rather, most
Affiliated Practices use the Companys recommended payment plan for their
patients, which results in a disproportionate amount of patient fees being
billed and collected at the end of the treatment term. This generally results
in an increasing amount of service fees receivable over a patients term of
treatment.

The Companys recommended payment plan provides for no down payment, an initial
record fee, equal monthly installments and a final retainer fee. The initial
record fee is generally billed in the first month of treatment (along with one
of the monthly installments) and is generally equal to the amount of one
monthly installment. The final retainer fee is generally billed and collected
in the final month of treatment and is generally equal to four times the
monthly installment amount.

Under the Companys revenue recognition policy, service fees relating to a
patient contract, including the initial record fee and the final retainer fee,
are recognized as fee revenue evenly over the course of the patients
treatment, even though the initial record fee and the final retainer fee are
generally billed and collected at the beginning and end of treatment,
respectively. Payment of the initial record fee generally results in a service
fee prepayment, because it is collected before the Company recognizes all of
the related fee revenue. In contrast, the final retainer fee generally results
in service fees receivable, because the Company recognizes related fee revenue
before it is billed or collected. These service fees receivable gradually
accumulate over the course of treatment until the final retainer fee is billed
and collected in the final month.

Unreimbursed Expense Portion of Service Fees Receivable:

Fee revenue related to reimbursable practice-related expenses. A portion
of the Companys fee revenue represents reimbursement of certain
practice-related expenses incurred on behalf of Affiliated Practices and
recorded as expenses in the Companys consolidated statements of income. The
Company generally recognizes fee revenue relating to these expenses to the
extent that Affiliated Practices generate sufficient patient fees receivable to
secure reimbursement of the expenses.

Under the terms of most of the Companys Service Agreements, Affiliated
Practices generally reimburse the Company for certain practice-related expenses
over a five-year period. These expenses include operating losses and other
expenses for newly-developed or de novocenters (including those developed by
existing practices), and depreciation expense related to property, equipment
and improvements for existing and de novocenters. This generally results in an
increasing amount of service fees receivable as the reimbursable
practice-related expenses are recognized as fee revenue, until the expenses are
actually reimbursed over the five-year period.

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Unreimbursed practice-related expenses include:

Operating Losses.Newly-developed or de novocenters typically generate
operating losses during their first 12 months of operations. Under the terms of
most of the Companys Service Agreements, the Company generally funds these
operating losses and defers reimbursement of the Affiliated Practices portion
of the operating losses until the de novocenter begins to generate operating
profits. The Company records the related operating expenses in its consolidated
statements of income when incurred. The Company generally charges the
Affiliated Practice interest on those deferred amounts at market rates. After
the de novocenter becomes profitable, the Affiliated Practice usually begins
to reimburse the Company for the operating losses, including accrued interest,
over a five-year period. Mature practices may also occasionally generate
operating losses, which are generally repaid in subsequent periods from amounts
that otherwise would have been retained by the Affiliated Practice.

Depreciation Expense Relating To Property, Equipment and Improvements.The
Company generally purchases and provides the property, equipment and
improvements used in Affiliated Practices. The Company retains ownership of the
property, equipment and improvements and depreciates these assets over their
estimated useful lives. This amount is recorded as depreciation expense in the
Companys consolidated statements of income. Under the terms of most of the
Companys Service Agreements, Affiliated Practices generally reimburse the
Company for their portion of the costs of these property, equipment and
improvements over a five-year period. The Company charges the Affiliated
Practice interest on these amounts at market rates.

Under the terms of the Companys general form of Service Agreements, the
Affiliated Practices pledge their patient fees receivable to the Company as
collateral for the Companys service fees. The Company is typically responsible
for billing and collection of the patient fees receivable, which are conducted
in the name of the applicable Affiliated Practice. Collections are generally
deposited into a depository bank account that the Company establishes and
maintains.

4.     LONG-LIVED ASSETS

Intangible Assets:

The Company generally affiliates with an existing orthodontic or pediatric
dental practice by entering into a Service Agreement and acquiring
substantially all of the non-professional assets of the practice or
professional corporation. The acquired assets generally consist of equipment,
furniture, fixtures and leasehold interests. The Company records these acquired
tangible assets at their fair value as of the date of acquisition and
depreciates or amortizes these assets using the straight-line method over their
useful lives. The remainder of the purchase price is allocated to an intangible
asset, which represents the cost of obtaining the Service Agreement. The
Company obtains the exclusive right to provide business operations, financial,
marketing and administrative services to the Affiliated Practice during the
term of the Service Agreement. The Service Agreements generally provide that
the professional corporation or entity is responsible for providing orthodontic
or pediatric dental services and for employing all orthodontists or pediatric
dentists. The terms of the Service Agreements range from 20 to 40 years, with
most ranging from 20 to 25 years. In many cases, the Affiliated Practice has
the option to terminate the Service Agreement after a certain length of time as
prescribed in the Service Agreement. If the Affiliated Practice terminates its
affiliation with the Company, it generally is required to purchase all of the
related assets, including the unamortized portion of the intangible assets, at
the current book value or sell its interests in the practice to another
licensed orthodontist or pediatric dentist.

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Subsequent to affiliation, an Affiliated Practice may acquire an existing
practice, center or patient base. The Company may pay additional consideration
to the Affiliated Practice to amend its Service Agreement to extend the
Companys affiliation to such newly acquired practice. Such an extension
provides the Company with the opportunity to earn additional service fees. The
consideration is allocated to an intangible asset.

Components of the Companys intangible assets at September 30, 2003 and
December 31, 2002 were as follows:

|                              |  |                |         |              |  |   |         | 
|----------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                              |  | September 30,  |         | December 31,
|                              |  | 2003           |         | 2002        
|                              |  |                |         |             
|                              |  | (in thousands)
|Cost of intangible assets     |  | $              | 258,833 |              |  | $ | 262,411 | 
|Less accumulated amortization |  |                | 45,806  |              |  |   | 42,028  | 
|                              |  |                |         |              |  |   |         | 
|Intangible assets, net        |  | $              | 213,027 |              |  | $ | 220,383 | 
|                              |  |                |         |              |  |   |         | 

Intangible assets are amortized on a straight-line basis over the shorter of
the term of the related Service Agreement or 25 years. Amortization expense
relating to intangible assets was $2.6 million and $7.8 million for the three
and nine months ended September 30, 2003, respectively, compared to $2.4
million and $7.8 million for the three and nine months ended September 30,
2002, respectively. Intangible assets and the related accumulated amortization
are written off when fully amortized.

Property, Equipment and Improvements:

Property, equipment and improvements consisted of the following:

|                                               |  |                |         |              |  |   |         | 
|---------------------------------------------- |  | -------------- | ------- | ------------ |  | - | ------- | 
|                                               |  | September 30,  |         | December 31,
|                                               |  | 2003           |         | 2002        
|                                               |  |                |         |             
|                                               |  | (in thousands)
|Leasehold improvements                         |  | $              | 76,915  |              |  | $ | 73,703  | 
|Furniture, fixtures and equipment              |  |                | 69,931  |              |  |   | 65,689  | 
|                                               |  |                |         |              |  |   |         | 
|                                               |  |                | 146,846 |              |  |   | 139,392 | 
|Less accumulated depreciation and amortization |  |                | 55,595  |              |  |   | 49,332  | 
|                                               |  |                |         |              |  |   |         | 
|Property, equipment and improvements, net      |  | $              | 91,251  |              |  | $ | 90,060  | 
|                                               |  |                |         |              |  |   |         | 

Depreciation expense on property, equipment and improvements was $3.8 million
and $10.8 million for the three and nine months ended September 30, 2003,
respectively, compared to $3.0 million and $8.9 million for the three and nine
months ended September 30, 2002, respectively.

Impairment of Long-Lived Assets:

The Company assesses long-lived assets for impairment under Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. During the three and nine months ended
September 30, 2003, the Company recorded impairments related to intangible
assets of approximately $0.2 million and $0.8 million, respectively. During
the three and nine months ended September 30, 2003, the Company recorded
impairments related to property, equipment and improvements for centers closed
or relocated of approximately $0.6 million and $1.8 million, respectively.
These amounts are included in asset impairments in the accompanying
Consolidated Statements of Income.

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As described in Note 12. Contingencies to the Companys Consolidated
Financial Statements, the Company is involved in litigation with 53 affiliated
practices for which the Company has ceased to record fee revenue as of
September 30, 2003. The Company is also affiliated with 36 other practices for
which the Company had generally ceased recording fee revenue as of September
30, 2003. As a result of these developments, the Company has commenced
litigation and/or taken other actions to recover amounts due to the Company for
service fees receivable, advances and other long-lived assets. The Company
continues to evaluate these uncertainties to determine whether any of these
assets are impaired. Any impairments would be expensed. The outcome of these
uncertainties cannot be determined at this time.

Goodwill:

Goodwill represents the excess of purchase price over fair value of net assets
acquired or arising from a business combination. All of the Companys goodwill
relates to its acquisition of OrthAlliance. The Company assesses goodwill for
impairment in accordance with SFAS No. 142, Goodwill and Other Intangible
Assets, by measuring the reporting unit at fair value. During the nine months
ended September 30, 2003, the Company performed its annual impairment test and
determined that goodwill was not impaired at September 30, 2003.

5.     TRANSACTIONS WITH AFFILIATED PRACTICES

Advances to Affiliated Practices:

Net advances to Affiliated Practices totaled $28.3 million at September 30,
2003 and $30.5 million at December 31, 2002. The Company had an allowance for
certain advances to Affiliated Practices that the Company believes will not be
recoverable of $3.5 million and $2.4 million at September 30, 2003 and December
31, 2002, respectively.

Advances to Affiliated Practices generally represent interest-free and
unsecured amounts due from Affiliated Practices. These amounts due from
Affiliated Practices primarily relate to cash advances against future
distributions to the Affiliated Practices or other advances to the Affiliated
Practices relating to amounts due to the Company under Service Agreements.

Cash Advances Against Future Distributions.The Company generally
advances cash against future distributions to an Affiliated Practice (A) to
fund compensation for the practices affiliated practitioner(s) during the
expansion phase of the practice, (B) to provide additional funds to the
practice or (C) to finance the acquisition of a practice. The Company advances
funds to an Affiliated Practice to maintain compensation of practitioners
during the practices expansion phase until an adequate patient base is
established for the new or expanded center. This expansion includes adding new
or de novocenters or adding associate orthodontists to increase an Affiliated
Practices capacity to treat patients. These expansion efforts generally have
a negative short-term impact on the Affiliated Practices cash flow, which
reduces the amount of cash available to the practice to fund the practitioners
compensation. To encourage this type of expansion, the Company advances funds
to an Affiliated Practice so that it can maintain the practitioners
compensation levels. The Company also provides cash advances to Affiliated
Practices to fund certain practice-related matters or to provide practices with
other unsecured financing. These types of advances are generally made at the
request of the practice. From time to time, an Affiliated Practice will
purchase another Affiliated Practice, such as upon the retirement of an
affiliated practitioner. To facilitate that transition and the continuity of
the practice being sold, the Company may finance all or a portion of the
purchase price for the practice.

Advances Related to Certain Amounts Due Under Service Agreements.
Advances to Affiliated Practices relating to amounts due to the Company under
Service Agreements result when the Company (A) has remitted more funds to an
Affiliated Practice than the practice is entitled to retain under its

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Service Agreement, (B) paid expenses to third parties on behalf of certain
Affiliated Practices or (C) is due service fees from certain Affiliated
Practices.

For most of the Affiliated Practices, the Company generally collects patient
fees on behalf of an Affiliated Practice and periodically remits amounts to the
Affiliated Practice based on historical amounts that the Affiliated Practice
was entitled to retain under its Service Agreement. An advance results if the
amounts remitted to the Affiliated Practice during a quarter are greater than
the amount the practice was actually entitled to retain. Amounts remitted to
the Affiliated Practice are periodically adjusted to effect a repayment of such
advances.

Some Affiliated Practices collect patient fees directly from their patients,
rather than the Company collecting the fees. If the Company remits payment to
a third party for practice-related expenses on behalf of one of these
Affiliated Practices and is not reimbursed by the practice, the Company will
record as an advance the amount owed by the Affiliated Practice for such
unreimbursed expenses.

When an Affiliated Practice collects its patient fees directly from patients
and does not remit to the Company enough cash to pay the service fees due to
the Company, the Affiliated Practice retains more cash than permitted under its
Service Agreement. These unpaid service fees due to the company in effect,
represent an advance to the Affiliated Practice and are included in Advances
to Affiliated Practices in the Companys consolidated balance sheets. In
contrast, amounts recorded as Service fees receivable in the Companys
balance sheet generally represent amounts recognized as fee revenue under the
Companys revenue recognition policy for which cash has notbeen collected from
patients or third party payors.

Guarantees of Loans to Affiliated Practices:

Orthodontic centers that have been newly developed by the Company have
typically generated initial operating losses as they begin to build a patient
base. A new center typically begins to generate operating profits after
approximately 12 months of operations. To assist Affiliated Practices in
obtaining financing for their portion of initial operating losses and capital
improvements, the Company entered into an agreement with a financial
institution under which the financial institution funds these operating losses
and capital improvements. The Company remains a guarantor of the related debt.
The Company was a guarantor for approximately $0.4 million and $0.7 million at
September 30, 2003 and December 31, 2002, respectively, of loans under this
arrangement. The Company no longer guarantees new debt for its Affiliated
Practices.

6.     DEBT

On January 2, 2003, the Company obtained a three-year, $125.0 million credit
facility (the Credit Facility). The Credit Facility is comprised of a $100.0
million revolving line of credit and a $25.0 million term loan. At September
30, 2003, $98.4 million of indebtedness was outstanding under the Credit
Facility. The term loan is amortized over three years with fixed, quarterly
principal payments of $2.1 million, plus interest. The Credit Facility is
secured by a pledge of the capital stock of the Companys operating
subsidiaries. Borrowings under the Credit Facility generally bear interest at
margins over the lenders prime rate ranging from 0.50% to 1.50% or over the
Eurodollar rate ranging from 1.50% to 2.50%. This margin is based on the
Companys leverage ratio as computed under the Credit Facility.

The Credit Facility requires the Company to maintain certain financial and
nonfinancial covenants, including a maximum leverage ratio, minimum fixed
charge coverage ratio, minimum consolidated net worth and maximum funded debt
to total patient contract balances. The Credit Facility also includes
affirmative and negative covenants that restrict certain activities of the
Company, including limitations on the payment of cash dividends, repurchases of
the Companys common stock, acquisitions, investments,

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incurrence of other indebtedness and other transactions that may affect the
Companys liquidity. At September 30, 2003, the Company was in compliance with
these covenants.

7.     STOCK COMPENSATION ARRANGEMENTS

As permitted by SFAS No. 123, Accounting for Stock-Based Compensation, the
Company accounts for its stock compensation arrangements with employees under
the intrinsic value method prescribed by Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and related interpretations.
No stock-based employee compensation cost is reflected in net income, as all
options granted under these plans have an exercise price equal to the market
value of the underlying common stock on the date of grant. The Company accounts
for stock options granted to non-employees, primarily affiliated orthodontists,
at fair value determined according to SFAS No. 123. The Company accounts for
the incentive plans implemented in connection with the OrthAlliance merger in
accordance with Emerging Issues Task Force Issue No. 96-18 and Issue No. 00-18.
The following table indicates the effect on the Companys net income and
earnings per share had the Company applied the fair value recognition
provisions of SFAS No. 123.

|                                                                                                                                  |                      |   |                                       |      |      |   |        |      | 
|--------------------------------------------------------------------------------------------------------------------------------- | -------------------- | - | ------------------------------------- | ---- | ---- | - | ------ | ---- | 
|                                                                                                                                  |                      |   | Nine months ended                    
|                                                                                                                                  |                      |   | September 30,                        
|                                                                                                                                  |                      |   |                                      
|                                                                                                                                  |                      |   | 2003                                  |      | 2002
|                                                                                                                                  |                      |   |                                       |      |     
|                                                                                                                                  |                      |   | (in thousands, except per share data)
|Net income, as reported                                                                                                           |                      | $ | 40,202                                |      |      | $ | 49,445 |     
|Less stock-based employee
compensation expense determined under
fair value based method for all
awards, net of related tax effect |                      |   | 444                                   |      |      |   | 1,089  |     
|                                                                                                                                  |                      |   |                                       |      |      |   |        |     
|Pro forma net income                                                                                                              |                      | $ | 39,758                                |      |      | $ | 48,356 |     
|                                                                                                                                  |                      |   |                                       |      |      |   |        |     
|Net income per share:                                                                                                             |                      |   |                                       |      |      |   |        |     
|                                                                                                                                  | Basic, as reported   |   | $                                     | 0.80 |      |   | $      | 0.96 | 
|                                                                                                                                  | Basic, pro forma     |   |                                       | 0.79 |      |   |        | 0.94 | 
|                                                                                                                                  | Diluted, as reported |   |                                       | 0.80 |      |   |        | 0.95 | 
|                                                                                                                                  | Diluted, pro forma   |   |                                       | 0.79 |      |   |        | 0.93 | 

8.     TREASURY STOCK

In August 2002, the Companys Board of Directors approved a common stock
repurchase program that authorizes the Company to repurchase up to 2.0 million
shares of the Companys common stock from time to time until February 2004 in
the open market at prevailing market prices or in privately negotiated
transactions. The Company repurchased approximately 0.1 million shares of its
common stock under this repurchase program during the nine months ended
September 30, 2003 for an aggregate purchase price of approximately $0.8
million. During 2002, the Company repurchased 1.1 million shares of its common
stock under this repurchase program for an aggregate purchase price of
approximately $15.0 million. These shares were repurchased in the open market
at prevailing market prices using cash from operations. Repurchased shares are
held in treasury, and may be available for use in connection with the Companys
stock option plans, stock programs and acquisitions, or for other corporate
purposes.

9.     INCOME TAXES

The Company has deferred tax assets primarily relating to net operating loss
carryforwards. These net operating loss carryforwards primarily relate to the
cumulative effect of (A) a change in accounting method for recognizing revenue
for income tax purposes previously approved by the Internal Revenue Service
(IRS) and (B) a change in accounting method related to applicable class lives
for certain long-lived assets. This change in accounting method related to
long-lived assets was approved by the IRS when filed during the three months
ended September 30, 2003 pursuant to IRS rules that provide for an

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automatic change in accounting method. The change in accounting method related
to applicable class lives was applied in preparing the Companys 2002 federal
tax return. At September 30, 2003, the Company reduced the deferred tax assets
by the Companys income taxes for the first three quarterly estimated tax
installments for 2003, resulting in no current tax liability recorded by the
Company. The Company expects that the remaining net operating loss
carryforwards will offset the Companys income tax liability during the
remainder of 2003 and a portion of 2004. If the net operating loss
carryforwards are not used, they will expire between 2017 and 2022.

10.     NET INCOME PER SHARE

The calculation of net income per share is performed using the treasury stock
method. The Company used the following components to compute basic and diluted
earnings per share:

|             |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |        | 
|------------ | --------------------------------------------------- |  | ------------------ | ------ | ----------------- |  | ---- | ------ | ---- |  | - | ------ |  |  | - | ------ | 
|             |                                                     |  | Three months ended |        | Nine months ended
|             |                                                     |  | September 30,      |        | September 30,    
|             |                                                     |  |                    |        |                  
|             |                                                     |  | 2003               |        | 2002              |  | 2003 |        | 2002
|             |                                                     |  |                    |        |                   |  |      |        |     
|             |                                                     |  | (in thousands)    
|Numerator:   |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|             | Net income for basic and diluted earnings per share |  | $                  | 11,905 |                   |  | $    | 18,869 |      |  | $ | 40,202 |  |  | $ | 49,445 | 
|             |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|Denominator: |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|             | Denominator for basic earnings per share            |  |                    | 50,206 |                   |  |      | 51,229 |      |  |   | 50,208 |  |  |   | 51,317 | 
|             | Effect of dilutive securities                       |  |                    | 277    |                   |  |      | 318    |      |  |   | 296    |  |  |   | 567    | 
|             |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       
|             | Denominator for diluted earnings per share          |  |                    | 50,483 |                   |  |      | 51,547 |      |  |   | 50,504 |  |  |   | 51,884 | 
|             |                                                     |  |                    |        |                   |  |      |        |      |  |   |        |  |  |   |       

11.     NEW ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. Interpretation No. 46
requires consolidation of entities when an enterprise absorbs a majority of the
entitys expected losses, receives a majority of the entitys expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity. The consolidation requirements of this
pronouncement will be effective for the first reporting period ending after
December 15, 2003. The Company is in the process of evaluating the implications
of Interpretation No. 46.

12.     CONTINGENCIES

Before the Company entered into the merger agreement with OrthAlliance, the
Company anticipated that some portion of OrthAlliances Affiliated Practices
would oppose such a merger. A description of actions brought by certain
OrthAlliance Affiliated Practices and the claims in these actions is contained
in Item 3 of Part I of the Companys Annual Report on Form 10-K for the year
ended December 31, 2002. At September 30, 2003, the Company was engaged in
litigation with 54 Affiliated Practices, most of which are OrthAlliance
Affiliated Practices. During the third quarter of 2003, we settled lawsuits
with three Affiliated Practices, including one practice that agreed
to buy out of its
Service Agreement, one practice that transitioned to another Affiliated
Practice and one practice that amended its Service Agreement and
continued to be affiliated with OrthAlliance.

On April 10, 2003, Ilena and Guiseppe Chiaretti filed an action in the United
States District Court for the Eastern District of Louisiana against the Company
and Bartholomew F. Palmisano, Sr., the Companys Chairman of the Board,
President and Chief Executive Officer, Bartholomew F. Palmisano, Jr., the
Companys Chief Operating Officer, and Thomas J. Sandeman, the Companys Chief
Financial Officer. On April 22, 2003 and June 12, 2003, similar actions were
filed in the United States District Court for the

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Eastern District of Louisiana against the Company and the other defendants by
James A. Janette and Betty Suhadolnik, respectively. On
August 28, 2003, the
lawsuits were consolidated and a lead plaintiff was appointed. The
consolidated action purports to be filed as a class action on behalf of the
plaintiff and other purchasers of shares of the Companys common stock from
November 14, 2002 to March 18, 2003. A consolidated amended complaint was
filed on November 3, 2003. In the consolidated amended complaint, the
plaintiffs allege that the Company and the other defendants violated Section
10(b) of the Securities Exchange Act of 1934, as amended, and Rule 10b-5
thereunder, by allegedly making false and misleading statements, and/or
omitting to state material facts necessary to make the statements made not
misleading, about practices affiliated with OrthAlliance, and by allegedly
recognizing revenue, failing to timely expense uncollectible receivables and
failing to write-down certain long-lived assets in violation of generally
accepted accounting principles, in order to inflate the market price of the
Companys common stock. The plaintiffs seek unspecified compensatory damages,
interest and attorneys fees. This lawsuit is at a very early stage and, at
this time, the Company cannot predict whether it will prevail or estimate the
amount of damages that the Company might incur. The Company is also unable to
estimate any reimbursement that it may receive from insurance policies in the
event that it incurs any damages or costs in connection with this action. The
Company denies these allegations and believes that this action lacks merit.
The Company intends to defend this action vigorously.

On October 21, 2003, OrthAlliance filed an action in the Travis County, Texas
District Court to seek a declaratory judgment that OrthAlliances Service
Agreements with two Texas Affiliated Practices are valid under Texas law. In
addition, OrthAlliance is seeking money damages from the two practices and
their orthodontist-owners for breach of the Service Agreements. As required by
a Texas statute, the Texas State Board of Dental Examiners has been included as
a party to the action because it involves the validity or applicability of
rules adopted by the Board. In the action, OrthAlliance seeks a judgment that
its Service Agreements are valid under the Boards rules and a Texas statute
that protects a dentists right to contract with a management service
organization, such as OrthAlliance. The lawsuit is at a very early stage and,
at this time, the Company cannot predict whether OrthAlliance will prevail.

On October 22, 2003, the Company filed a lawsuit in the Harris County, Texas
District Court against a number of defendants for interfering with the
Companys contractual relationships with the Companys Affiliated Practices.
The defendants include two law firms, Locke, Liddell & Sapp, L.L.P. of Houston,
Texas, and Goldstein, Tanen & Trench, P.A. of Miami, Florida, and a number of
orthodontists and pediatric dentists who are represented by those firms in
other litigation with the Company or OrthAlliance. The Companys complaint
alleges that the defendants conspired to persuade Affiliated Practices to
breach their Service Agreements with the Company and OrthAlliance in order to
generate significant legal fees for the law firm defendants and force the
Company to agree to more favorable settlement terms with the defendants. The
complaint also alleges that the defendants used a series of letters, emails,
meetings, personal solicitations and Internet message board postings to further
their conspiracy. In addition, the Company alleges that certain of the
practitioner defendants breached their Service Agreements. The Company seeks
to enjoin the defendants from further interference with its contractual
relationships with its Affiliated Practices. The Company is also seeking an
unspecified amount of compensatory and punitive damages. The lawsuit is at a
very early stage and, at this time, the Company cannot predict whether it will
prevail.

Because litigation is inherently uncertain, the Company cannot assure you that
it will prevail in any of these actions, nor can it estimate with reasonable
certainty the amount of damages it might incur or the amount of any award the
Company might receive. The Company has not recorded a reserve for these
pending lawsuits. The Company and its subsidiaries and affiliated practices
are, and from time to time may become, party to other litigation or
administrative proceedings which arise in the normal course of their business.
Regardless of the outcome of such litigation and proceedings, they could be
costly, time-consuming and could divert the time and attention of the Companys
senior management.

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ITEM 2.      MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion summarizes the financial condition of Orthodontic
Centers of America, Inc. (we or OCA) at September 30, 2003, and the results
of operations for the three and nine months ended September 30, 2003, and
should be read in conjunction with the consolidated financial statements and
accompanying notes included elsewhere in this Report.

GENERAL

Our business was established in 1985. At September 30, 2003, we provided
business services to 363 orthodontic and pediatric dental practices. These
amounts exclude 53 orthodontic and pediatric dental practices that were engaged
in litigation with us or our subsidiaries and for which we had ceased to record
fee revenue as of September 30, 2003. The following table provides information
about our affiliated practices.

|                                                                  |  |                                |     |               |  |      |     |         |  |      |     |      |  |  |     |   |  |  |     |   |  |             |     |  
|----------------------------------------------------------------- |  | ------------------------------ | --- | ------------- |  | ---- | --- | ------- |  | ---- | --- | ---- |  |  | --- | - |  |  | --- | - |  | ----------- | --- | -
|                                                                  |  | Number of Affiliated Practices
|                                                                  |  |                               
|                                                                  |  |                                |     |               |  |      |     |         |  |      |     |      |  |  |     |   |  |  |     |   |  | Nine months
|                                                                  |  | Year ended December 31,        |     | ended        
|                                                                  |  |                                |     | September 30,
|                                                                  |  | 1998                           |     | 1999          |  | 2000 |     | 2001(1) |  | 2002 |     | 2003
|                                                                  |  |                                |     |               |  |      |     |         |  |      |     |     
|Affiliated practices at beginning of period                       |  |                                | 164 |               |  |      | 205 |         |  |      | 230 |      |  |  | 245 |   |  |  | 372 |   |  |             | 371 |  
|Affiliated practices added                                        |  |                                | 52  |               |  |      | 41  |         |  |      | 33  |      |  |  | 143 |   |  |  | 24  |   |  |             | 21  |  
|Affiliated practices deaffiliated,
transitioned or litigating (2) |  |                                | (11 | )             |  |      | (16 | )       |  |      | (18 | )    |  |  | (16 | ) |  |  | (25 | ) |  |             | (29 | )
|                                                                  |  |                                |     |               |  |      |     |         |  |      |     |      |  |  |     |   |  |  |     |   |  |             |     |  
|Affiliated practices at end of period                             |  |                                | 205 |               |  |      | 230 |         |  |      | 245 |      |  |  | 372 |   |  |  | 371 |   |  |             | 363 |  
|                                                                  |  |                                |     |               |  |      |     |         |  |      |     |      |  |  |     |   |  |  |     |   |  |             |     |  



---

|(1) |  | The number of affiliated practices reported for this period does not
include certain practices for which we never recorded fee revenue because they
had ceased paying service fees to, and were engaged in litigation with, our
subsidiary, OrthAlliance, Inc., when we acquired OrthAlliance on November 9,
2001.                                                                                                                                                                                    
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | This line item includes practices that bought out of their service,
consulting or management service agreement (deaffiliated), practices that
were acquired by another affiliated practice because the obligations under its
service, consulting or management service agreement were assumed by the
acquiring affiliated practice (transitioned), or practices that were engaged
in litigation with us and for which we ceased recording fee revenue during the
referenced period (litigating).

Generally, when we develop a new center, all patients treated at the center are
new patients and, in the first several months after commencing operations, the
center is open only for a limited number of days each month as new patients are
added. Our affiliated centers have generally become increasingly more
productive and profitable as more new patients are added and existing patients
return for monthly follow-up visits. After approximately 26 months of
operations, a centers growth in patient base typically begins to stabilize as
the initial patients complete treatment. At that point, a center can increase
the number of patients treated by improving the efficiency of its clinical
staff, increasing patient treatment intervals and adding operating days or
practitioners. Our affiliated centers may also increase revenue by implementing
periodic price increases. Established practices with which we have affiliated
have typically increased their revenue by applying our operating strategies and
systems, including increased advertising and efficient patient scheduling.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We provide business services to orthodontic and pediatric dental practices.
Our consolidated financial statements include fee revenue earned under our
service, consulting and management service agreements and recognized under our
revenue recognition policy, along with the expenses of providing those
services. We do not consolidate the patient revenue and other operations and
accounts of our affiliated practices. The preparation of financial statements
in conformity with accounting principles generally accepted in the United
States requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

We believe that the following critical accounting policies are important in
portraying our financial condition and results of operations, and require
managements difficult, subjective or complex judgments due to the sensitivity
of the methods, assumptions and estimates used in preparing our consolidated
financial statements.



| |  |  | In acquiring the non-professional assets of an orthodontic or
pediatric dental practice, and entering into a service or consulting
agreement with the practice, we allocate part of the related costs to
an intangible asset. The intangible asset is amortized over the term
of the service or consulting agreement, up to 25 years. We evaluate the
carrying amount of these intangible assets quarterly based on
managements estimates of future service fees over the remaining term
of the agreement. These estimates require management to make certain
assumptions regarding future cash flows based on current information
regarding the operational aspects of the practice. Future events may
change managements estimates. Any impairment charge recorded due to
our evaluation of the carrying amount of these intangible assets will
be based on the discounted cash flows method. During the nine months
ended September 30, 2003, we determined that approximately $0.8 million
of intangible assets were impaired and expensed such costs.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We provide an allowance for uncollectible amounts based on our
estimate of service fees receivable that may not be paid by our
affiliated practices. The allowance for uncollectible amounts of
service fees receivable is generally calculated based upon an aging of
affiliated practices patient fees receivable for 80% of amounts over
90 days past due, 100% of amounts over 120 days past due and 6.25% of
amounts for which patients have not yet been billed. These amounts are
derived from our experience in collecting patient fees receivables on
behalf of affiliated practices. We also provide an allowance for
uncollectible amounts of advances to affiliated practitioners based on
managements assessment of our affiliated practices inability to repay
their obligations. If the financial circumstances of our affiliated
practices deteriorate or if practices ceased paying service fees or
engage in litigation with us, additional allowances may be required.                                                                
|
| |  |  | We used internal and external data in estimating the fair value of
OrthAlliances assets and liabilities in connection with our
acquisition of OrthAlliance on November 9, 2001. Our future operating
results may be significantly affected depending on the accuracy of
managements estimates should the values of the assets and liabilities
acquired materially differ from the fair values assigned by management.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|
| |  |  | At September 30, 2003, our financial statements reflected
approximately $87.6 million of goodwill related to the OrthAlliance
merger. Goodwill is carried at cost and is not amortized, but is tested
for impairment by applying a fair value concept in accordance with
Statement of Financial Accounting Standards (SFAS) No. 142. The
evaluation of the impairment loss                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

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| |   |  | requires management to make estimates and assumptions. Management
determined that goodwill was not impaired at September 30, 2003. Adverse
changes to our operations and other factors could result in impairment
losses in the future.                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Under our revenue recognition policy, we must make certain
estimates, including amounts to be retained by our affiliated practices
and, in some instances, service fees receivable based upon information
provided by certain of our affiliated practices. We recognize fee
revenue based upon a straight-line allocation of our affiliated
practices patient contract balances over the terms of the patient
contracts, less amounts retained or estimated to be retained by the
affiliated practices during the term of treatment, plus reimbursement
of certain practice-related expenses. We discuss our revenue
recognition policy in greater detail in the following subsection.

REVENUE RECOGNITION

Fee revenue consists of amounts earned under our service, consulting and
management service agreements and recognized under our revenue recognition
policy. We recognize fee revenue as follows:



| |  |  | We allocate the total amount of patient fees under each patient
contract of an affiliated practice on a straight-line basis over the
term of the patient contract (which generally averages about 26
months).
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | We then reduce that allocated amount by the portion that is
retained or to be retained by affiliated practices (Amounts Retained
By Affiliated Practices), which consists of:                              



| | (1) |  | Amounts collected in the relevant period and retained by
affiliated practices under the terms of their service, consulting or
management service agreements, and
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Amounts not collected in the relevant period that we estimate
will be retained by affiliated practices in future periods.                                       



| |  |  | We then offset a portion of Amounts Retained By Affiliated
Practices by adding amounts related to certain unreimbursed
practice-related expenses incurred on behalf of affiliated practices
and recorded as expenses in our consolidated statements of income. We
recognize these expense amounts as fee revenue to the extent affiliated
practices generate sufficient patient fees receivable to secure
reimbursement of the expenses, up to Amounts Retained By Affiliated
Practices. These adjustments have the effect of impacting the timing
of recognition of fee revenue.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Some of our affiliated practices require that their patients pay a down payment
of approximately 25% of the total treatment fee at the commencement of
treatment. Because we recognize fee revenue based on a straight-line allocation
of patient contract balances, this results in us receiving cash in advance of
recognizing fee revenue. We record these amounts as service fee prepayments and
defer recognition of these amounts as fee revenue until they are recognized
under our revenue recognition policy. Service fee prepayments occur primarily
with OrthAlliance affiliated practices.

Until amounts related to unreimbursed practice-related expenses are recognized
as fee revenue under our revenue recognition policy, our rights to receive
reimbursement for these expenses are not recorded on our balance sheet as
service fees receivable, even though affiliated practices have a contractual
obligation to reimburse us. At September 30, 2003, unreimbursed
practice-related expenses recorded as expenses in our consolidated statements
of income, but not recognized as fee revenue or recorded as service fees
receivable, totaled approximately $21.5 million. This increase in unreimbursed
practice-related expenses

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resulted from operating losses, including interest, arising primarily from the
development of de novocenters.

Under most of OCAs service agreements, service fees are calculated based upon
a specified percentage of patient contract balances allocated over the term of
the patient contracts, less amounts retained by affiliated practices. Because
we recognize fee revenue based on a straight-line allocation of patient
contract balances, this may result in us recognizing a portion of our fee
revenue after corresponding service fees have become contractually due under
our service agreements.

SERVICE FEES RECEIVABLE

Service fees receivable represents fee revenue owed to us by our affiliated
practices.

During the nine months ended September 30, 2003, service fees receivable, net
of an allowance for uncollectible amounts, increased $38.7 million, or 36.3%,
to $145.2 million at September 30, 2003 from $106.5 million at December 31,
2002. This increase resulted from varying increases in three categories of fee
revenue:



| |  |  | Fee revenue related to patient fees receivable that have been
billed to patients or third party payors (billed patient fees
receivable),              
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Fee revenue related to patient fees receivable that have not yet
been billed to patients or third party payors (unbilled patient fees
receivable), and
|
| |  |  | Fee revenue related to certain unreimbursed practice-related
expenses that we have incurred on behalf of affiliated practices and
recorded as expense.  

As discussed in the section above captioned Revenue Recognition, we
recognize fee revenue based in part on a straight-line allocation of affiliated
practices patient contract balances over the terms of the patient contracts.
This straight-line allocation includes billed patient fees receivable and
unbilled patient fees receivable. A portion of our fee revenue also relates to
certain unreimbursed practice-related expenses incurred on behalf of affiliated
practices and recorded as expenses in our consolidated statements of income. We
generally collect our service fees receivable when patient fees are billed and
collected by or on behalf of our affiliated practices.

Service fees receivable are comprised of a current and long-term component. The
current portion of service fees receivable consists of fee revenue related to
billed patient fees receivable and unbilled patient fees receivable. The
long-term component is the unreimbursed expense portion of service fee
receivables, for which we are to be reimbursed over a five-year period. During
the nine months ended September 30, 2003, the current portion of service fees
receivable increased $32.0 million, or 50.4%, to $95.4 million, net of an
allowance for uncollectible amounts of $7.7 million, at September 30, 2003 from
$63.4 million, net of an allowance for uncollectible amounts of $5.1 million,
at December 31, 2002. During the nine months ended September 30, 2003, the
unreimbursed expense portion of service fees receivable increased $6.7 million,
or 15.5%, to $49.8 million at September 30, 2003, from $43.1 million at
December 31, 2002.

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The components of service fees receivable are reflected in the following table
and discussed in greater detail below:

|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |      |      |      |      | 
|-------------------------------------------------------- | ------------------------------------------------------- | ---------------------------------------- | ----------------------------------------------- | ---------------------------------- | ----- | ------------- | ----- | ------------ | ---- | -------- | ----- | ---- | ---- | ---- | ---- | 
|                                                         |                                                         |                                          |                                                 |                                    |       | September 30, |       | December 31, |      |          |       |     
|                                                         |                                                         |                                          |                                                 |                                    |       | 2003          |       | 2002         |      | Increase
|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |         
|                                                         |                                                         |                                          |                                                 |                                    |       | (in millions)
|Current portion of service fees receivable:              |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     
|                                                         | Fee revenue related to billed patient fees receivable   |                                          | $                                               | 51.8                               |       |               | $     | 38.2         |      |          | $     | 13.6 |     
|                                                         | Fee revenue related to unbilled patient fees
receivable |                                          |                                                 | 51.3                               |       |               |       | 30.3         |      |          |       | 21.0 |     
|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     
|                                                         |                                                         | Subtotal                                 |                                                 |                                    | 103.1 |               |       |              | 68.5 |          |       |      | 34.6 |     
|                                                         |                                                         | Less allowance for uncollectible amounts |                                                 |                                    | (7.7  | )             |       |              | (5.1 | )        |       |      | 2.6  |     
|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     
|                                                         |                                                         |                                          | Current portion of service fees receivable, net |                                    |       | 95.4          |       |              |      | 63.4     |       |      |      | 32.0 |     
|Unreimbursed expense portion of service fees receivable: |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     
|                                                         | Fee revenue related to certain unreimbursed expenses    |                                          |                                                 | 49.8                               |       |               |       | 43.1         |      |          |       | 6.7  |     
|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     
|                                                         |                                                         |                                          |                                                 | Total service fees receivable, net |       | $             | 145.2 |              |      | $        | 106.5 |      |      | $    | 38.7 | 
|                                                         |                                                         |                                          |                                                 |                                    |       |               |       |              |      |          |       |     

Current Portion of Service Fees Receivable

Fee revenue related to billed patient fees receivable. At September 30,
2003, approximately $51.8 million of our service fees receivable resulted from
fee revenue related to billed patient fees receivable, representing an increase
of $13.6 million, or 35.6%, from $38.2 million at December 31, 2002. The
increase was primarily due to an increase in the average number of days between
billing and collection of patient fees during the nine months ended September
30, 2003.

Fee revenue related to unbilled patient fees receivable. During the nine
months ended September 30, 2003, of the three components of service fees
receivable, the largest increase was in service fees receivable from fee
revenue related to unbilled patient fees receivable. At September 30, 2003,
approximately $51.3 million of our service fees receivable resulted from fee
revenue related to unbilled patient fees receivable, representing an increase
of $21.0 million, or 69.3%, from $30.3 million at December 31, 2002. As
discussed in the following paragraphs, this increase was primarily due to the
timing differences in when certain patient fees are billed and when related fee
revenue is recognized under our revenue recognition policy, which was affected
by an increase of about 1.3 months in the average age of our affiliated
practices patient contracts during the nine months ended September 30, 2003.

As discussed above in the section captioned Revenue Recognition, we
recognize fee revenue based in part on a straight-line allocation of the
patient contract balances of our affiliated practices over the terms of the
patient contracts (which average about 26 months). However, our affiliated
practices generally do not bill their patients on a straight-line basis.
Rather, most of our affiliated practices use our recommended payment plan for
their patients, which results in a disproportionate amount of patient fees
being billed and collected at the end of the treatment term. This generally
results in an increasing amount of service fees receivable over a patients
term of treatment.

Our recommended payment plan provides for no down payment, an initial record
fee, equal monthly installments and a final retainer fee. The initial record
fee is generally billed in the first month of treatment (along with one of the
monthly installments) and is generally equal to the amount of one monthly
installment. The final retainer fee is generally billed and collected in the
final month of treatment and is generally equal to four times the monthly
installment amount.

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The following chart illustrates how service fees receivable resulting from fee
revenue related to unbilled patient fees receivable tend to increase over the
term of a patient contract for practices that use our recommended payment plan.



Under our revenue recognition policy, service fees relating to a patient
contract, including the initial record fee and the final retainer fee, are
recognized as fee revenue evenly over the course of the patients treatment,
even though the initial record fee and the final retainer fee are generally
billed and collected at the beginning and end of treatment, respectively.
Payment of the initial record fee generally results in a service fee
prepayment, because it is collected before we recognize all of the related fee
revenue. In contrast, the final retainer fee generally results in service fees
receivable, because we recognize related fee revenue before it is billed or
collected. These service fees receivable gradually accumulate over the course
of treatment until the final retainer fee is billed and collected in the final
month. The effect of this accumulation was increased during the nine months
ended September 30, 2003 as the average age of our affiliated practices
patient contracts increased by about 1.3 months.

Unreimbursed Expense Portion of Service Fees Receivable

Fee revenue related to unreimbursed practice-related expenses. The
unreimbursed expense portion of service fees receivable represents the
long-term component of service fees receivable. At September 30, 2003,
approximately $49.8 million of our service fees receivable resulted from fee
revenue related to certain unreimbursed practice-related expenses, representing
an increase of $6.7 million or 15.5% from $43.1 million at December 31, 2002.
This increase was primarily due to the timing difference in when the expense
amounts were recognized as fee revenue under our revenue recognition policy and
when affiliated practices are contractually obligated to reimburse us for these
expenses (generally over a five-year period).

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A portion of our fee revenue represents reimbursement of certain
practice-related expenses incurred on behalf of affiliated practices and
recorded as expenses in our consolidated statements of income. We generally
recognize fee revenue relating to these expenses to the extent that affiliated
practices generate sufficient patient fees receivable to secure reimbursement
of the expenses. See the section above captioned Revenue Recognition.

Under the terms of most of OCAs service agreements, our affiliated practices
generally reimburse us for certain practice-related expenses over a five-year
period. These expenses include operating losses and other expenses for
newly-developed or de novocenters (including those developed by existing
practices), and depreciation expense related to property, equipment and
improvements. This generally results in an increasing amount of service fees
receivable as the reimbursable practice-related expenses are recognized as fee
revenue, until the expenses are actually reimbursed over the five-year period.

Unreimbursed practice-related expenses include:

Operating Losses.Newly-developed or de novocenters typically generate
operating losses during their first 12 months of operations. Under the terms of
most of OCAs service agreements, we generally fund these operating losses and
defer reimbursement of the affiliated practices portion of the operating
losses until the de novocenter begins to generate operating profits. We record
the related operating expenses in our consolidated statements of income when
incurred. We generally charge the affiliated practice interest on those
deferred amounts at market rates. After the de novocenter becomes profitable,
the affiliated practice usually begins to reimburse us for the operating
losses, including accrued interest, over a five-year period. Mature practices
may also occasionally generate operating losses, which are generally repaid in
subsequent periods from amounts that otherwise would have been retained by the
affiliated practice.

Depreciation Expense Relating To Property, Equipment and Improvements.We
generally purchase and provide the property, equipment and improvements used in
our affiliated practices. We retain ownership of these property, equipment and
improvements and depreciate these assets over their estimated useful lives.
This amount is recorded as depreciation expense in our consolidated statements
of income. Under the terms of most of OCAs service agreements, affiliated
practices generally reimburse us for their portion of the costs of these
property, equipment and improvements over a five-year period. We charge the
affiliated practice interest on these amounts at market rates.

EXPENSES

Operating expenses of our affiliated centers are our expenses and are
recognized as incurred. Employee costs consist of wages, salaries and benefits
paid to all of our employees, including orthodontic assistants, business staff
and management personnel. Marketing and advertising expenses consist of costs
associated with advertising for affiliated practices. General and
administrative expenses consist of, among other things, provision for losses on
service fees receivable and advances to affiliated practices, professional
fees, maintenance and utility costs, office supply expense, telephone expense,
taxes, license fees, printing expense and shipping expense.

OVERVIEW OF SERVICE AND CONSULTING AGREEMENTS

We provide a wide range of services to our affiliated practices, including
marketing and advertising, management information systems, staffing, supplies
and inventory, scheduling, billing, financial reporting, accounting and other
administrative services. These services are provided under long-term agreements
with affiliated orthodontists and pediatric dentists and/or their professional
entity. The terms of these agreements typically range from 20 to 40 years,
with most being 25 years.

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The form of agreement used for a particular affiliated practice is based upon
the dental regulatory provisions of the state in which the affiliated practice
is located. We use a form of service agreement in most states. We use a form
of consulting agreement in a small number of states with relatively restrictive
laws relating to the practice of dentistry. OrthAlliance and its affiliated
practices are parties to service, consulting or management service agreements
that differ in some respects from the service and consulting agreements that
OCA has historically used.

OCA Service and Consulting Agreements

Under OCAs general form of service agreement, we provide affiliated practices
with a wide range of business services in exchange for monthly service fees.
The service fees we earn under these service agreements generally represent
reimbursement for direct and indirect expenses that we incur in providing
services to an affiliated practice (including employee costs, marketing and
advertising costs, office rent, utilities expense, supply costs and general and
administrative expenses), a portion of the operating profits of the affiliated
practice on a cash basis and, in some cases, hourly-based service fees. We are
also to be reimbursed for the affiliated practices share of operating losses
for newly-developed or de novocenters and depreciation expense related to
property, equipment and improvements used in the operation of the practice.
Excluding reimbursement of direct and indirect expenses and any hourly-based
service fees, service fees based on the operating profits of the affiliated
practice generally range from 40% to 50% of a mature practices cash operating
profits. In some cases, this is after reduction for any hourly-based service
fees or hourly-based amounts retained by an affiliated practice.

Under OCAs general form of consulting agreement, the types of services we
provide to affiliated practices are generally similar to the services we
provide under our general form of service agreement. Fees paid to us under the
consulting agreements generally are a combination of, depending on the service
being performed, cost-based types of fees, flat monthly fees and hourly fees.

OrthAlliance Service, Consulting and Management Service Agreements

Under OrthAlliances general form of service agreements, OrthAlliance generally
must provide or arrange for certain services for its affiliated practices, and
advise and assist the practices with respect to certain other services. These
services are similar to those provided under OCAs service agreements.
OrthAlliance is generally responsible for paying certain practice expenses, for
which it is to be reimbursed by the affiliated practice. If the practices
collections are insufficient to fund the practices current practice expenses,
then OrthAlliance is generally obligated to advance funds for those expenses.
Under these service agreements, OrthAlliance generally receives service fees
based on a percentage of adjusted practice revenue (generally about 17.0%),
subject in some cases to annual adjustments based upon improvements in the
affiliated practices operating margin and a minimum dollar amount of annual
service fees during the first five years of the agreement, or a flat monthly
fee with annual fixed-dollar increases.

Under OrthAlliances general form of consulting agreements, OrthAlliance
generally must provide certain specified services to its affiliated practices,
provide other services at the request of the practices and consult with or
advise the affiliated practices with respect to other services. These services
are generally similar to those provided under OCAs service agreements. Under
these agreements, OrthAlliance receives a consulting fee based on one of the
fee structures described above with respect to OrthAlliances service
agreements.

Under OrthAlliances general form of management service agreements,
OrthAlliance generally is to provide for a wide range of services for its
affiliated practices, including providing facilities, equipment, support
personnel, utilities, supplies, bookkeeping, marketing and billing and
collections services. These

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management service agreements generally provide for a service fee that varies
from month to month depending on the particular practices practice revenue and
operating expenses, with a maximum of up to 19.5% of the practices practice
revenue on a cash basis plus reimbursement of practice-related expenses. A few
of OrthAlliances management service agreements provide for a fixed percentage
service fee.

SEASONALITY

Our affiliated practices have experienced their highest volume of new cases in
the summer and other periods when schools are not typically in session. During
these periods, children have a greater opportunity to visit an orthodontist or
pediatric dentist to commence treatment. Historically, our affiliated practices
have typically experienced higher revenue during the first and third quarters
of the year as a result of increased patient starts. During the Thanksgiving
and Christmas seasons, our affiliated practices have experienced reduced volume
and fourth quarter revenue for our affiliated practices has been generally
lower as compared to other periods.

EMERGING ISSUES TASK FORCE ISSUE NO. 97-2

We do not have a controlling financial interest in our affiliated practices. In
accordance with guidance in Emerging Issues Task Force Issue No. 97-2, we do
not consolidate the patient revenue and other operations and accounts of our
affiliated practices within our financial statements.

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RESULTS OF OPERATIONS

The following table provides information about the percentage of fee revenue
represented by some of the items in our Consolidated Statements of Income, and
the percentage by which those items increased or decreased during the three and
nine months ended September 30, 2003 compared to the same periods in 2002.

|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |       |       |  
|-------------------------------- | ------------------------- | --------------------- | ----- | ------------- | ---- | ------------- | ----- | ------------------- | ---- | ---- | ----- | ------------- | ---- | ------------- | ----- | ---- | ---- |  | ----- | --------------- | ----- | --------------- | ----- | ----- | ----- | -
|                                 |                           |                       |       | Three months  |      | Nine months   |       |                     |      |      |       |               |      |              
|                                 |                           |                       |       | ended         |      | ended         |       | Percentage         
|                                 |                           |                       |       | September 30, |      | September 30, |       | Increase/(Decrease)
|                                 |                           |                       |       |               |      |               |       |                    
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       | Three months    |       | Nine months    
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       | ended Sept. 30, |       | ended Sept. 30,
|                                 |                           |                       |       | 2003          |      | 2002          |       | 2003                |      | 2002 |       | 2003 vs. 2002 |      | 2003 vs. 2002
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |              
|Fee revenue                      |                           |                       | 100.0 | %             |      |               | 100.0 | %                   |      |      | 100.0 | %             |      |               | 100.0 | %    |      |  | (17.7 | )%              |       |                 | (13.0 | )%   
|Direct expenses:                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |      
|                                 | Employee costs            |                       |       | 28.4          |      |               |       | 27.6                |      |      |       | 29.0          |      |               |       | 28.1 |      |  |       | (15.4           | )     |                 |       | (10.3 | )    
|                                 | Orthodontic supplies      |                       |       | 10.5          |      |               |       | 9.1                 |      |      |       | 10.2          |      |               |       | 8.7  |      |  |       | (5.4            | )     |                 |       | 2.2   |      
|                                 | Rent                      |                       |       | 7.8           |      |               |       | 8.7                 |      |      |       | 8.9           |      |               |       | 8.9  |      |  |       | (25.5           | )     |                 |       | (12.1 | )    
|                                 | Marketing and advertising |                       |       | 5.9           |      |               |       | 8.1                 |      |      |       | 6.4           |      |               |       | 7.7  |      |  |       | (39.7           | )     |                 |       | (27.3 | )    
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |      
|                                 |                           | Total direct expenses |       |               | 52.6 |               |       |                     | 53.5 |      |       |               | 54.6 |               |       |      | 53.4 |  |       |                 | (19.0 | )               |       |       | (11.0 | )
|General and administrative       |                           |                       | 17.8  |               |      |               | 12.2  |                     |      |      | 14.9  |               |      |               | 12.8  |      |      |  | 19.3  |                 |       |                 | 1.6   |      
|Depreciation and amortization    |                           |                       | 6.9   |               |      |               | 4.8   |                     |      |      | 6.3   |               |      |               | 4.9   |      |      |  | 17.9  |                 |       |                 | 11.1  |      
|Asset impairments                |                           |                       | 0.8   |               |      |               | 0.9   |                     |      |      | 0.9   |               |      |               | 0.3   |      |      |  | (15.6 | )               |       |                 | 84.0  |      
|Non-recurring recruiting expense |                           |                       |      |               |      |               |      |                     |      |      |      |               |      |               | 3.8   |      |      |  | N/A   |                 |       |                 | N/A   |      
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |      
|Operating profit                 |                           |                       | 21.9  |               |      |               | 28.7  |                     |      |      | 23.3  |               |      |               | 24.8  |      |      |  | (37.2 | )               |       |                 | (18.4 | )    
|Interest expense                 |                           |                       | 1.3   |               |      |               | 1.8   |                     |      |      | 1.3   |               |      |               | 1.3   |      |      |  | (42.4 | )               |       |                 | (15.2 | )    
|Income before income taxes       |                           |                       | 20.6  |               |      |               | 26.9  |                     |      |      | 22.0  |               |      |               | 23.5  |      |      |  | (36.9 | )               |       |                 | (18.7 | )    
|Income taxes                     |                           |                       | 7.8   |               |      |               | 10.1  |                     |      |      | 8.3   |               |      |               | 8.9   |      |      |  | (36.9 | )               |       |                 | (18.7 | )    
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |      
|Net income                       |                           |                       | 12.8  | %             |      |               | 16.8  | %                   |      |      | 13.7  | %             |      |               | 14.6  | %    |      |  | (36.9 | )%              |       |                 | (18.7 | )%   
|                                 |                           |                       |       |               |      |               |       |                     |      |      |       |               |      |               |       |      |      |  |       |                 |       |                 |       |      

Overview.Fee revenue decreased $20.0 million, or 17.7%, to $92.7 million
for the three months ended September 30, 2003 from $112.7 million for the same
period in 2002. Direct expenses decreased $11.4 million, or 19.0%, for the
three months ended September 30, 2003, compared to the same period in 2002.
Operating profit decreased by $12.1 million, or 37.2%, during the three months
ended September 30, 2003, compared to the same period in 2002. Our net income
decreased $7.0 million, or 36.9%, to $11.9 million for the three months ended
September 30, 2003 from $18.9 million for the same period in 2002.

Fee revenue decreased $43.9 million, or 13.0%, to $293.6 million for the nine
months ended September 30, 2003 from $337.5 million for the same period in
2002. Direct expenses decreased $19.9 million, or 11.0%, for the nine months
ended September 30, 2003, compared to the same period in 2002. We recorded a
non-recurring recruiting expense of $12.8 million during the nine months ended
September 30, 2002. Operating profit decreased $15.5 million, or 18.4%, for the
nine months ended September 30, 2003, compared to the same period in 2002. Our
net income for the nine months ended September 30, 2003 decreased $9.2 million,
or 18.6%, to $40.2 million from $49.4 million for the same period in 2002.

Our results for the three and nine months ended September 30, 2003 were
affected by certain affiliated practices for which we generally ceased recording fee
revenue subsequent to September 30, 2002. We generally ceased to record fee
revenue for affiliated practices that either bought out of their service,
consulting or management service agreements or that ceased paying service fees
and providing the financial information we use to compute fee revenue,
including a net reduction of 10 affiliated practices during the third quarter
of 2003. We were affiliated with 327 practices at September 30, 2003 for which
we were recording fee revenue. At September 30, 2002, we were affiliated with
355 practices for which we were recording fee revenue. This represents a net
reduction of 28 affiliated practices for which we were

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recording fee revenue as of September 30, 2003, compared to September 30, 2002.
Substantially all of these practices were affiliated with OrthAlliance.

During the nine months ended September 30, 2003, OrthAlliance affiliated
practices engaged in the following transactions:



| |  |  | three agreed to buy
out of their service, consulting or management service
agreements with OrthAlliance, including two in the third quarter of 2003;                                                                                                              
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | five transitioned their practice to another affiliated practice,
including three in the third quarter of 2003;                                                                                                                                                    
|
| |  |  | three amended their service,
consulting or management service agreements in connection with the
incentive programs offered to OrthAlliance affiliated practitioners
and continued to be affiliated with OrthAlliance, each prior to the
third quarter of 2003; and
|
| |  |  | seven entered into other
amendments to their service, consulting or management service
agreements and continued to be affiliated with OrthAlliance, including one
in the third quarter of 2003.                                                                   

The affiliated practices for which we ceased recording fee revenue since
September 30, 2002 were generally mature orthodontic and pediatric dental
practices with relatively high volume. Since September 30, 2002, we have
affiliated with 14 de novopractices, which typically generate initial
operating losses during their first 12 months of operations and experience
relatively lower operating margins than mature practices. Because of the
overall decrease in mature practices contributing to our results, our operating
margins and expenses as a percentage of fee revenue were negatively affected
during the three and nine months ended September 30, 2003 compared to the same
periods in 2002.

The following are key operating statistics of our affiliated practices during
the nine months ended September 30, 2003 and 2002:

|                                                     |  |                                        |         |      |  |            |         |   |  |  |       |   
|---------------------------------------------------- |  | -------------------------------------- | ------- | ---- |  | ---------- | ------- | - |  |  | ----- | --
|                                                     |  | Nine months ended                      |         |      |  |           
|                                                     |  | September 30,                          |         |      |  |           
|                                                     |  |                                        |         |      |  |           
|                                                     |  | 2003                                   |         | 2002 |  | (Decrease)
|                                                     |  |                                        |         |      |  |           
|                                                     |  | (in thousands, except percentage data)
|Number of new patient contracts (1)                  |  |                                        | 161     |      |  |            | 188     |   |  |  | (14.4 | )%
|Total new patient contract balances (1)              |  | $                                      | 527,899 |      |  | $          | 608,505 |   |  |  | (13.3 | )%
|Total number of active patients at end of period (1) |  |                                        | 490     |      |  |            | 542     |   |  |  | (9.6  | )%
|Comparable center fee revenue growth (2)             |  |                                        | 10.2    | %    |  |            | 22.6    | % |  |  | N/A   |   



---

|(1) |  | The patient statistics include patients under treatment at affiliated
pediatric dental practices, in addition to affiliated orthodontic
practices. As of September 30, 2003, approximately 48,000 patients were
under treatment at affiliated pediatric dental practices, compared to
approximately 49,000 patients as of September 30, 2002. We were
affiliated with 28 pediatric dental practices as of September 30, 2003
and 2002.
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | These amounts represent the growth in fee revenue in the indicated
period relative to the comparable prior-year period by centers that were
affiliated with us and for which we recorded fee revenue throughout each
of the two periods being compared.                                                                                                                                                                               

Fee Revenue.Fee revenue decreased $20.0 million, or 17.7%, to $92.7
million for the three months ended September 30, 2003 from $112.7 million for
the same period in 2002. This net decrease was primarily due to the following:



| |  |  | an increase of $10.8 million in fee revenue for centers that
were affiliated with us and for which we recorded fee revenue
throughout each of the two periods being compared; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | a decrease of $30.8 million in fee revenue from all other
centers, primarily OrthAlliance affiliated practices that bought out
of their service, consulting and management service agreements or
for which we have generally ceased to record fee revenue.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Fee revenue decreased $43.9 million, or 13.0%, to $293.6 million for the nine
months ended September 30, 2003 from $337.5 million for the same period in
2002. The net decrease was primarily due to the following:



| |  |  | an increase of $27.6 million in fee revenue for centers that
were affiliated with us and for which we recorded fee revenue
throughout each of the two periods being compared; and                                                                         
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | a decrease of $71.5 million in fee revenue from all other
centers, primarily OrthAlliance affiliated practices that bought out
of their service, consulting and management service agreements or
for which we have generally ceased to record fee revenue.

Fee revenue during the three and nine months ended September 30, 2003 was
negatively affected by certain affiliated practices for which we ceased to
record fee revenue. These practices have either bought out of their service,
consulting or management service agreements or ceased paying service fees and
providing financial information we use to compute fee revenue. We expect some
continued fluctuations in fee revenue as some OrthAlliance affiliated practices
may buy out of their service, consulting or management service agreements or
stop paying service fees and providing certain financial information. However,
OrthAlliance affiliated practices that are not currently included in our
results for the three and nine months ended September 30, 2003 may begin
utilizing our services and paying service fees in the future or may be
transitioned to another affiliated practice. We expect that these declines in
fee revenue would be offset by increases in fee revenue from other practices
over time.

Fee revenue during the three and nine months ended September 30, 2003 was also
negatively affected by a reduction in service fees charged to certain of our
affiliated practices that achieved certain performance levels. For the three
and nine months ended September 30, 2003, we reduced these practices services
fees by approximately $0.4 million and $1.4 million, respectively, which
reduced fee revenue by the same amount. We estimate that the remaining
potential reduction in service fees for these practices under this program to
be approximately $0.4 million for the remainder of 2003. We expect to continue
this program in 2004; however, we have not yet finalized the computation of the
reduction of service fees for these practices in 2004.

Currently, fee revenue attributable to most of the OCA affiliated practices
includes reimbursement of a pro rata allocation of corporate overhead expense,
as provided in the practices service agreements. However, beginning in the
fourth quarter of 2003 and continuing through the first three quarters of 2004,
we will phase-out the reimbursement of corporate overhead expense by OCA
affiliated practices. Based on current corporate expense levels and current
diluted average shares outstanding, we estimate that this change will reduce
fee revenue by $0.3 million for the fourth quarter of 2003 and $4.4
million for the year ended December 31, 2004, resulting in a
reduction in diluted earnings per share of less than one-half cent
for the fourth quarter of 2003 and approximately $0.05 for the year ended December
31, 2004. These estimates are preliminary and may
differ materially from actual results.

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Employee Costs.Employee costs consist of payroll and benefits costs for
employees at our affiliated centers and corporate headquarters. We do not
employ our affiliated orthodontists, pediatric dentists or general dental
assistants. Employee costs decreased $4.8 million, or 15.4%, to $26.3 million
for the three months ended September 30, 2003 from $31.1 million for the same
period in 2002. For the nine months ended September 30, 2003, employee costs
were $85.2 million, a decrease of 10.3% from $95.0 million of the same period
in 2002. These decreases were primarily due to reduction in employee costs for
affiliated practices that bought out of their service, consulting or management
service agreements or for which we generally ceased to record fee revenue after
September 30, 2002. As a percentage of fee revenue, employee costs were 28.4%
and 29.0% for the three and nine months ended September 30, 2003, respectively,
compared to 27.6% and 28.1%, respectively, for the same periods in 2002. The
increases as a percentage of fee revenue were primarily due to increases in
compensation and benefits for our employees at our affiliated centers during
the three and nine months ended September 30, 2003 compared to the same periods
in 2002.

Orthodontic Supplies.Orthodontic supplies expense primarily represents
the costs of bands, brackets and wires used during orthodontic treatments and
the costs of retainers and other removable or fixed appliances used prior to or
after orthodontic treatments. Orthodontic supplies expense decreased by $0.6
million, or 5.8%, to $9.7 million for the three months ended September 30, 2003
from $10.3 million for the same period in 2002. Orthodontic supplies expense
increased $0.7 million, or 2.4%, to $30.1 million for the nine months ended
September 30, 2003 from $29.4 million for the same period in 2002. As a
percentage of fee revenue, orthodontic supplies expense was 10.5% and 10.2% for
the three and nine months ended September 30, 2003, respectively, compared to
9.1% and 8.7%, respectively, for the same periods in 2002. Orthodontic supplies
expense increased primarily due to an overall increase in costs of retainers
and similar appliances and increased use of Invisalign non-braces aligners,
which are generally more expensive than traditional orthodontic supplies.

Rent.Rent expense primarily consists of costs of leasing office space
for our affiliated centers and corporate headquarters, including common area
maintenance charges. For the three months ended September 30, 2003, rent
expense decreased $2.5 million, or 25.5%, to $7.3 million from $9.8 million for
the same period in 2002. Rent expense decreased $3.6 million, or 12.1%, to
$26.3 million for the nine months ended September 30, 2003 from $29.9 million
for the same period in 2002. As a percentage of fee revenue, rent expense
decreased to 7.8% during the three months ended September 30, 2003, compared to
8.7% in the same period of 2002. As a percentage of fee revenue, rent expense
was 8.9% for the nine months ended September 30, 2003 and 2002. The decrease in
rent expense for the three and nine months ended September 30, 2003 and the
decrease in rent expense as a percentage of fee revenue during the three months
ended September 30, 2003 was primarily due to the exclusion of rent expense for
certain affiliated practices that bought out of their service, consulting or
management service agreements or for which we generally ceased to record fee
revenue after September 30, 2002.

Marketing and Advertising.Marketing and advertising expense represents
costs associated with television, radio and print media advertising for
affiliated practices. Marketing and advertising expense decreased $3.6 million,
or 39.7%, to $5.5 million for the three months ended September 30, 2003 from
$9.1 million for the same period in 2002. For the nine months ended September
30, 2003, marketing and advertising expense was $18.9 million, a decrease of
$7.1 million, or 27.3%, from $26.0 million for the same period in 2002. As a
percentage of fee revenue, marketing and advertising expense was 5.9% and 6.4%
for the three and nine months ended September 30, 2003, respectively, compared
to 8.1% and 7.7%, respectively, for the same periods in 2002. The overall
decreases for the three and nine months ended September 30, 2003 were primarily
due to:



| |  |  | lower rates on annual media buying as a result of the slower
economy during the three and nine months ended September 30, 2003;
and
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------

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| |  |  | payments made during the nine months ended September 30, 2002
for an advertising arrangement related to OrthAlliance affiliated
practices that was not renewed for 2003; and
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | credits received during the nine months ended September 30,
2003 for advertising spots preempted by war coverage.                                                           

Also contributing to the decreases in marketing and advertising expense during
the three and nine months ended September 30, 2003 was a reduction in costs
incurred for affiliated practices that bought out of their service, consulting
or management service agreements or for which we generally ceased to record fee
revenue after September 30, 2002.

General and Administrative.General and administrative expense represents
other costs incurred in the operation of our business, including costs for
telephone, utilities, accounting and legal services, office supplies, general
liability and property insurance coverage and provisions for uncollectible
service fees receivable and advances to affiliated practices. General and
administrative expense increased $2.7 million, or 19.3%, to $16.5 million for
the three months ended September 30, 2003 from $13.8 million for the same
period in 2002. This increase was primarily due to an increase of $2.3 million
in the provision for uncollectible amounts. General and administrative expense
increased by $0.7 million, or 1.6%, to $43.7 million for the nine months ended
September 30, 2003 from $43.0 million for the same period in 2002. During the
nine months ended September 30, 2003, we experienced decreases in telephone and
utility costs and office supplies expense primarily due to affiliated practices
that bought out of their service, consulting or management service agreements
or for which we generally ceased to record fee revenue after September 30,
2002. The overall decrease in these expenses was offset by an increase of $3.1
million in the provision for uncollectible amounts. As a percentage of fee
revenue, general and administrative expense was 17.8% and 14.9% for the three
and nine months ended September 30, 2003, respectively, compared to 12.2% and
12.8%, respectively, for the same periods in 2002.

Depreciation and Amortization.We depreciate property, equipment and
improvements using the straight-line method over their estimated useful lives.
We record this amount as depreciation expense. We amortize our intangible
assets over the terms of the related service, consulting or management service
agreements, up to 25 years. This amount is recorded as amortization expense.
Depreciation expense on property, equipment and improvements was $3.8 million
and $10.8 million for the three and nine months ended September 30, 2003,
respectively, compared to $3.0 million and $8.9 million, respectively, for the
same periods in 2002. As a percentage of fee revenue, depreciation expense was
4.1% and 3.7% for the three and nine months ended September 30, 2003,
respectively, compared to 2.7% and 2.6%, respectively, for the same periods in
2002. The increase in depreciation expense was a result of the fixed assets
acquired for centers developed or acquired since September 30, 2002.
Amortization expense on intangible assets was $2.6 million and $7.8 million for
the three and nine months ended September 30, 2003, respectively, compared to
$2.4 million and $7.8 million, respectively, for the same periods in 2002. As a
percentage of fee revenue, amortization expense was 2.8% and 2.7% for the three
and nine months ended September 30, 2003, respectively, compared to 2.1% and
2.3%, respectively, for the same periods in 2002.

Asset Impairments.During the three and nine months ended September 30,
2003, we recorded non-cash impairment charges of $0.8 million ($0.5 million,
net of income tax benefit) and $2.6 million ($1.6 million, net of income tax
benefit), respectively, related to our evaluation of certain long-lived assets.
We assess long-lived assets for impairment under SFAS No. 144, Accounting for
the Impairment or Disposal of Long-Lived Assets. During the three and nine
months ended September 30, 2003, we recorded impairments related to intangible
assets of approximately $0.2 million and $0.8 million, respectively. During
the three and nine months ended September 30, 2003, we recorded impairments
related to property, equipment and improvements for centers closed or relocated
of approximately $0.6

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million and $1.8 million, respectively. These amounts are included in
asset impairments in the accompanying Consolidated Statements of Income.

Non-Recurring Recruiting Expense.During the nine months ended September
30, 2002, we recorded a non-recurring recruiting charge of $12.8 million ($8.0
million, net of income tax benefit) for amounts paid to a former employee for
past recruiting services.

Operating Profit.Operating profit decreased $12.1 million, or 37.2%, to
$20.3 million for the three months ended September 30, 2003 from $32.4 million
for the same period in 2002. For the nine months ended September 30, 2003,
operating profit was $68.3 million, a decrease of $15.5 million, or 18.4 %,
from $83.8 million for the same period in 2002. As a percentage of fee revenue,
operating profit was 21.9% and 23.3% for the three and nine months ended
September 30, 2003, respectively, compared to 28.7% and 24.8%, respectively,
for the same periods in 2002, as a result of the factors discussed above.

Income Taxes.Income taxes were $7.2 million and $24.4 million for the
three and nine months ended September 30, 2003, respectively, compared to $11.4
million and $30.0 million, respectively, for the same periods in 2002. Our
effective income tax rate was 37.8% for the three and nine months ended
September 30, 2003 and 2002.

Net Income.For the three and nine months ended September 30, 2003, our
net income was $11.9 million and $40.2 million, respectively, compared to $18.9
million and $49.4 million, respectively, for the same periods in 2002. As a
percentage of fee revenue, net income for the three and nine months ended
September 30, 2003 was 12.8% and 13.7%, respectively, compared to 16.8% and
14.6%, respectively, for the same periods in 2002, as a result of the factors
discussed above.

LIQUIDITY AND CAPITAL RESOURCES

Our working capital (total current assets less total current liabilities) at
September 30, 2003 was $131.2 million, including cash and cash equivalents of
$10.4 million, compared to working capital at December 31, 2002 of $89.5
million, including cash and cash equivalents of $7.5 million. At September 30,
2003, our current ratio (total current assets divided by total current
liabilities) was 5.0, compared to a current ratio of 2.7 at December 31, 2002.
The increase of $41.7 million in working capital at September 30, 2003 compared
to December 31, 2002 was primarily due to an increase of $32.0 million in the
current portion of service fees receivable.

Cash Flows

The following table summarizes cash flow information for the nine months ended
September 30, 2003 and 2002 (in thousands):

|                                          |  |                   |         |      |  |   |         |  
|----------------------------------------- |  | ----------------- | ------- | ---- |  | - | ------- | -
|                                          |  | Nine months ended
|                                          |  | September 30,    
|                                          |  |                  
|                                          |  | 2003              |         | 2002
|                                          |  |                   |         |     
|Net cash provided by operating activities |  | $                 | 38,004  |      |  | $ | 49,137  |  
|Net cash used in investing activities     |  |                   | (19,535 | )    |  |   | (25,512 | )
|Net cash used in financing activities     |  |                   | (16,437 | )    |  |   | (25,657 | )
|Change in cash and cash equivalents       |  |                   | 2,846   |      |  |   | (3,176  | )

Operating Activities. Net cash provided by operating activities was $38.0
million for the nine months ended September 30, 2003, a decrease of $11.1
million or 22.7%, from $49.1 million for the same

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period in 2002. Net cash provided by operating activities for the nine
months ended September 30, 2003 was primarily affected by the following:



| |  |  | Net income and non-cash items. Net income decreased $9.2
million, or 18.7%, to $40.2 million for the nine months ended
September 30, 2003 from $49.4 million for the same period in 2002.
Non-cash items decreased $1.9 million, or 7.6%, to $26.5 million for
the nine months ended September 30, 2003 from $24.6 million for the
same period in 2002. The overall decrease in non-cash items was
primarily due to the forgiveness of debt owed by a former employee
that resulted in $4.8 million in non-recurring recruiting expense
recorded during the nine months ended September 30, 2002. This
decrease was partially offset by increases of $3.1 million in
provision for bad debt expense, $1.7 million in asset impairments
and $1.9 million in depreciation and amortization during the nine
months ended September 30, 2003 compared to the same period in 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Deferred income taxes. We used deferred tax assets primarily
related to net operating loss carryforwards to offset our income
taxes of approximately $24.8 million for the nine months ended
September 30, 2003, which resulted in no current tax liability as of
September 30, 2003. These net operating loss carryforwards are
primarily related to the cumulative effect of (a) a change in
accounting method for recognizing revenue for income tax purposes
approved by the Internal Revenue Service (IRS) in January 2003 and
(b) a change in accounting method related to applicable class lives
for certain long-lived assets. This change in accounting method
related to long-lived assets was approved by the IRS when filed
during the three months ended September 30, 2003 pursuant to IRS
rules that provide for an automatic change in accounting method. We
expect that the remaining net operating loss carryforwards will
offset our income tax liability during the remainder of 2003 and a
portion of 2004.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Service fees receivable.During the nine months ended
September 30, 2003, the current portion of service fees receivable,
net of allowance for uncollectible amounts, increased $32.0 million,
or 50.5%, to $95.4 million at September 30, 2003 from $63.4 million
at December 31, 2002. The unreimbursed expense portion of service
fees receivable increased $6.7 million, or 15.5%, during the nine
months ended September 30, 2003, to $49.8 million at September 30,
2003 from $43.1 million at December 31, 2002. OCAs general form of
service agreement provides for reimbursement of the affiliated
practices share of certain expenses over a five-year period. These
amounts represent a non-current receivable from the affiliated
practices and are classified as such in our consolidated balance
sheets. Because the affiliated practice generally reimburses us for
these practice-related expenses over a five-year period, the
increase in the unreimbursed expense portion of service fees
receivable negatively impacts cash flow from operating activities.
Increases in service fees receivable resulted from varying increases
in three categories of fee revenue: (1) fee revenue related to
patient fees receivable that have been billed to patients or third
party payors, (2) fee revenue related to patient fees receivable
that have not yet been billed to patients or third party payors, and
(3) fee revenue related to certain unreimbursed practice-related
expenses. The current portion of service fees receivable is
comprised of fee revenue related to billed patient fees receivable
and fee revenue related to unbilled patient fees receivable. The
unreimbursed expense portion of service fees receivable is comprised
of fee revenue related to certain unreimbursed practice-related
expenses and has been classified as a non-current receivable. This
increase and these three categories of fee revenue are addressed in
greater detail in the section above captioned Service Fees
Receivable.

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| |  |  | Service fee prepayments. During the nine months ended
September 30, 2003, service fee prepayments decreased $6.7 million,
or 87.0%, to $1.0 million at September 30, 2003 from $7.7 million at
December 31, 2002. The decrease in service fee prepayments was
partially due to the recognition under our revenue recognition
policy of approximately $2.9 million in fee revenue during the nine
months ended September 30, 2003. Also during the nine months ended
September 30, 2003, certain OrthAlliance affiliated practices
changed the terms of their patient contracts to require a lower down
payment at the commencement of treatment, which resulted in a
decrease of approximately $1.4 million in service fee prepayments.
Service fee prepayments represent service fees which we have not yet
recognized for revenue recognition purposes, but for which we have
received payment from affiliated practices. Because we recognize fee
revenue based on a straight-line allocation of treatment fees, this
results in us receiving cash in advance of incurring certain
practice-related expenses and recognizing certain service fees as
fee revenue.                  
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Supplies inventory. During the nine months ended September
30, 2003, supplies inventory decreased by $1.0 million, compared to
an increase of $1.8 million during the nine months ended September
30, 2002. The decrease in supplies inventory during the nine months
ended September 30, 2003 was primarily due to the exclusion of
supplies inventory for certain affiliated practices that bought out
of their service, consulting or management service agreements or for
which we generally ceased to record fee revenue after September 30,
2002. Purchases
made during the nine months ended September 30, 2002 were primarily
due to an increased number of patients under treatment during this
time and to sustain inventory levels for OrthAlliance affiliated
practices.                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  |  | Prepaid expenses and other. Prepaid expenses and other assets
decreased $2.3 million during the nine months ended September 30,
2003, compared to an increase of $2.9 million for the same period in
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  |  | Amounts payable to affiliated practices. There was no effect
on cash flow from operating activities during the nine months ended
September 30, 2003 related to amounts payable to affiliated
practices. However, we reduced amounts payable to affiliated
practices by $5.3 million, primarily to OrthAlliance affiliated
practices, during the nine months ended September 30, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| |  |  | Accounts payable and other current liabilities. During the
nine months ended September 30, 2003, cash used for accounts payable
and other current liabilities was $8.7 million, compared to cash
provided by accounts payable and other current liabilities of $14.9
million during the nine months ended September 30, 2002. Cash
provided by accounts payable and other current liabilities during
the nine months ended September 30, 2002 was primarily due to an
increase in income taxes payable while we were awaiting the approval
from the IRS of our change in accounting method for income tax
purposes, which is discussed in this section above under the heading
Deferred income taxes.During the nine months ended September 30,
2003, we offset our income tax liability against our deferred tax
assets. The positive effect on cash flow from this offset is also
discussed above under Deferred income taxes.Excluding income
taxes payable, accounts payable and accrued salaries and other
current liabilities decreased $8.7 million during the nine months
ended September 30, 2003, compared to a decrease of $9.6 million
during the same period in 2002.

Investing Activities. Net cash used in investing activities was $19.5
million for the nine months ended September 30, 2003, a decrease of $6.0
million or 23.4% from $25.5 million for the same period in 2002. This decrease
was primarily due to a decrease of $3.9 million used to acquire service,
consulting or management service agreements and a decrease of $10.1 million in
advances to affiliated practices during the nine months ended September 30,
2003 compared to the same period in 2002. Partially offsetting

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these decreases was an increase of $3.9 million in purchases of property,
equipment and improvements and an increase of $4.1 million in notes receivable
during the nine months ended September 30, 2003, compared to the same period in
2002.



| |  |  | Intangible assets acquired. During the nine months ended
September 30, 2003, we paid approximately $0.6 million to acquire
and amend service, consulting or management service agreements,
pursuant to which we obtain the exclusive right to provide
operations, financial, marketing and administrative services to the
practice during the term of the agreement, compared to $4.5 million
for the same period in 2002. This decrease during 2003 results from
our shift in focus from new affiliations to developing de novo
practices and assisting existing affiliated practices to grow, which
generally requires less capital investment.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Purchases of property, equipment and improvements. We
purchased $13.8 million and $9.9 million in property, equipment and
improvements for the nine months ended September 30, 2003 and 2002,
respectively. During the nine months ended September 30, 2003, we
added 42 centers, including 17 during the third quarter of 2003. We
expect to make additional purchases of property, equipment and
improvements in future periods as we open additional centers. The
following table provides information about the composition of these
purchases during the nine months ended September 30, 2003 and 2002
(in millions):                       

|                                                                    |  |                   |      |      |  |   |     | 
|------------------------------------------------------------------- |  | ----------------- | ---- | ---- |  | - | --- | 
|                                                                    |  | Nine months ended
|                                                                    |  | September 30,    
|                                                                    |  |                  
|                                                                    |  | 2003              |      | 2002
|                                                                    |  |                   |      |     
|Center additions                                                    |  | $                 | 5.1  |      |  | $ | 3.2 | 
|Remodeling and additional capital expenditures for
existing centers |  |                   | 4.8  |      |  |   | 3.4 | 
|Capital expenditures for corporate offices                          |  |                   | 0.7  |      |  |   |    | 
|International development                                           |  |                   | 3.2  |      |  |   | 3.3 | 
|                                                                    |  |                   |      |      |  |   |     | 
|Total                                                               |  | $                 | 13.8 |      |  | $ | 9.9 | 
|                                                                    |  |                   |      |      |  |   |     | 



| |  |  | Advances to affiliated practices. We provided net advances
of approximately $2.5 million to affiliated practices during the
nine months ended September 30, 2003, compared to $12.6 million for
the same period in 2002, a decrease of $10.1 million or 80.0%.This
decrease was primarily due to our increased efforts to obtain
repayments on advances from our affiliated practices and a decrease
in advances related to amounts due to us under service agreements
with OrthAlliance affiliated practices. Advances to affiliated
practices primarily relate to cash advances against future
distributions to the affiliated practices or other advances relating
to amounts due to us under service agreements. We generally advance
cash against future distributions to affiliated practices to (a)
fund compensation for the practices affiliated practitioners during
the expansion phase of the practice, (b) to provide additional funds
to affiliated practices for certain practice-related matters or
other unsecured financing or (c) finance the acquisition of another
practice. Advances related to amounts due to us under service
agreements from affiliated practices result when (a) we remit more
funds during the quarter to the affiliated practice than the
practice was actually entitled to retain under its service
agreement, (b) we pay expenses to third parties on behalf of certain
affiliated practices that collect their own patient fees and do not
reimburse us for those expenses or (c) certain affiliated practices
collect their own patient fees and do not remit to us all service
fees due. Of the net amount advanced during the nine months ended
September 30, 2003, approximately $1.5 million related to cash
advances against future distributions and approximately $1.0 million
related to amounts due to us under service agreements.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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| |  |  | Notes receivable.Notes receivable increased by $4.1 million
during the nine months ended September 30, 2003 compared to the same
period in 2002. These notes receivable primarily consist of
promissory notes from practices that have completed buy-outs of
their service, consulting and management service agreements.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Financing Activities. Net cash used in financing activities was $16.4
million for the nine months ended September 30, 2003, a decrease of $9.3
million or 36.2% from $25.7 million for the same period in 2002. This decrease
was primarily due to a decrease of $12.7 million in repurchases of shares of
common stock compared to the same period in 2002. During the nine months ended
September 30, 2003, we received approximately $0.7 million from the issuance of
our common stock related to the exercise of stock options compared to $2.9
million during the nine months ended September 30, 2002. Also during the nine
months ended September 30, 2003, we obtained a new credit facility under which
we borrowed $109.9 million to retire our prior credit facility and bridge
credit facility and to pay related transaction costs. We repaid $11.5 million
of indebtedness under the new credit facility during the nine months ended
September 30, 2003, compared to $12.0 million under our prior credit facility
during the same period in 2002.

Uses of Capital

Capital Expenditures. Our capital expenditures primarily consist of the
costs associated with expenditures to facilitate growth in new and existing
centers, maintenance expenditures to sustain current levels of business
activity at existing centers, acquisitions of the fixed assets of newly
affiliated practices and development of de novocenters in the United States
and abroad. The average cost of developing a new orthodontic center in the
United States is about $0.4 million, including the cost of equipment, leasehold
improvements, working capital and start-up losses associated with the initial
operations of the orthodontic center. These costs are shared by us and the
particular affiliated practice. We generally bear an affiliated practices
share of these costs until we are reimbursed by the practice. In some cases, we
have assisted our practices in obtaining financing for their share of these
costs by providing a guaranty of loans from a third party lender. The
outstanding balance of these guaranteed amounts was approximately $0.4 million
at September 30, 2003 and approximately $0.7 million at December 31, 2002. We
no longer guarantee new debt for our affiliated practices.

During our rapid growth in the 1990s, we expended a disproportionately higher
amount of our capital investment on de novocenters relative to expenditures on
existing centers. During recent years, however, our capital expenditures have
been increasingly directed toward remodeling, improving and expanding our
existing affiliated centers to facilitate internal growth. We have also
invested significantly in computer systems infrastructure and other technology
for our affiliated centers, such as advanced digital cameras or DSL data
delivery capability. In addition, we continue to invest in our international
operations. We currently expect to incur capital expenditures of at least $3.4
million in the fourth quarter of 2003 and $9.5 million in 2004, primarily in
connection with the development of de novocenters.

Other Uses of Capital. Newly-developed affiliated practices and existing
affiliated practices that expand their capacity by adding additional centers or
practitioners typically experience cash flow needs until they begin generating
sufficient operating profits at the newly-developed or newly-expanded centers.
We may advance funds to affiliated practices to assist them in maintaining
their compensation during the start-up or expansion phase of their practices.
These advances are generally interest free and unsecured. The affiliated
practice generally begins to repay the advances once the practice or center
becomes profitable, generally at the beginning of the second year that the
practice or center is open. We intend to fund these advances and any continued
financing through a combination of borrowings under our credit facility and
cash from operations.

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At September 30, 2003, we had current maturities of $8.3 million under our
credit facility and $2.8 million due to our affiliated practices. We expect
cash from operations to fund these payments when due. In November
2003, we used
funds generated from operations to pay $1.8 million to certain affiliated
practitioners related to amounts earned under incentive programs. We are still
finalizing amounts earned by other affiliated practitioners under these
programs and expect to pay the amounts earned by, reduced by the amounts due
from, these affiliated practices during the remainder of the fourth quarter of
2003. Participants in these programs are eligible to receive annual payments
under these programs in 2004 and 2005.

In August 2002, our Board of Directors approved a common stock repurchase
program that authorizes us to repurchase up to 2.0 million shares of our common
stock from time to time until February 2004 in the open market at prevailing
market prices or in privately negotiated transactions. We repurchased
approximately 0.1 million shares of our common stock under this repurchase
program during the nine months ended September 30, 2003 for an aggregate
purchase price of approximately $0.8 million. During 2002, we repurchased 1.1
million shares of our common stock under this repurchase program for an
aggregate purchase price of approximately $15.0 million. These shares were
repurchased in the open market at prevailing market prices using cash from
operations. Repurchased shares are held in treasury, and may be available for
use in connection with our stock option plans, stock programs and acquisitions,
or for other corporate purposes. We anticipate making additional repurchases of
our common stock in the future.

Capital Resources.We maintain a $125.0 million credit facility with a
lending group that consists of Bank of America, N.A., Bank One, N.A., U.S. Bank
National Association, Hibernia Bank and Whitney National Bank. The credit
facility is comprised of a $100.0 million revolving line of credit and a $25.0
million term loan. The revolving line of credit provides funding for our
general working capital and expansion. Borrowings under the credit facility
generally bear interest at varying rates above the lenders prime rate ranging
from 0.50% to 1.50% or above the Eurodollar rate ranging from 1.50% to 2.50%.
This margin is based on our leverage ratio as computed under the credit
facility. Amounts borrowed under the credit facility are secured by a security
interest in the capital stock of our operating subsidiaries. The revolving
line of credit expires January 2, 2006. Our credit facility requires that we
maintain certain financial and non-financial covenants under the terms of the
credit agreement, including a maximum leverage ratio, minimum fixed charge
coverage ratio, minimum consolidated net worth and maximum ratio of funded debt
to total patient contract balances. The credit agreement also imposes
restrictions on our acquisitions, investments, dividends, stock repurchases and
other aspects of our business. If we do not comply with these covenants and
restrictions, the lenders could demand immediate payment of all amounts
borrowed under the credit facility, and terminate our ability to borrow funds
under the credit facility.

We believe that our cash needs will primarily relate to development of
additional centers and affiliation with additional practices in the United
States and other countries, capital expenditures for our existing affiliated
centers and computer systems, repayment of indebtedness, payment of income
taxes and general corporate purposes. Our cash needs could vary significantly
depending upon our growth, results of operations and new affiliations with
additional practices, as well as the outcome of pending litigation and other
contingencies. We expect to fund these cash needs through a combination of cash
flows from our operations and funds available under our credit facility. We
currently believe that we will be able to meet our anticipated funding
requirements for at least the next 12 months. However, our ability to meet
these funding needs could be adversely affected if we were to suffer adverse
results from our operations, or lose a material portion of our affiliated
practices, if our affiliated practices were to suffer adverse results of
operations or a material loss of patients, if we suffer adverse outcomes from
pending litigation and other contingencies or if we violate the covenants and
restrictions of our credit facility.

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RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 46, Consolidation of Variable Interest Entities, an
interpretation of Accounting Research Bulletin No. 51. Interpretation No. 46
requires consolidation of entities when an enterprise absorbs a majority of the
entitys expected losses, receives a majority of the entitys expected residual
returns, or both, as a result of ownership, contractual or other financial
interests in the entity. Currently, entities are generally consolidated by an
enterprise when it has a controlling financial interest through ownership of a
majority voting interest in the entity. The consolidation requirements of this
pronouncement will be effective for the reporting period after December 15,
2003. We are in the process of evaluating the implications of the
Interpretation.




ITEM 3.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

During the nine months ended September 30, 2003, there were no material changes
to the quantitative and qualitative disclosures about market risks presented in
our Annual Report on Form 10-K for the year ended December 31, 2002.




ITEM 4.      CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We, with the participation of our management, including our Chief Executive
Officer and Chief Financial Officer, carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) as of the end of the period covered by this Report.
Based upon that evaluation and as of the end of the period covered by the
Report, our Chief Executive Officer and Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely alerting them to
information required to be disclosed in our reports that we file or submit to
the SEC under the Securities Exchange Act of 1934.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal control over financial reporting
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting subsequent to the date of the
Companys most recent evaluation.




PART II.      OTHER INFORMATION




ITEM 1.      LEGAL PROCEEDINGS

Before we entered into the merger agreement with OrthAlliance, we anticipated
that some portion of OrthAlliances affiliated practices would oppose such a
merger. A description of actions brought by certain OrthAlliance affiliated
practices and the claims in these actions is contained in Item 3 of Part I to
our Annual Report on Form 10-K for the year ended December 31, 2002. At
September 30, 2003, we were engaged in litigation with 54 affiliated practices,
most of which are OrthAlliance affiliated practices. During the third quarter
of 2003, we settled lawsuits with three affiliated practices, including one
practice that agreed to buy out of its service agreement, one practice that
transitioned to another affiliated practice and one practice that amended its
service agreement and continued to be affiliated with OrthAlliance.

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On April 10, 2003, Ilena and Guiseppe Chiaretti filed an action in the United
States District Court for the Eastern District of Louisiana against OCA and
Bartholomew F. Palmisano, Sr., our Chairman of the Board, President and Chief
Executive Officer, Bartholomew F. Palmisano, Jr., our Chief Operating Officer,
and Thomas J. Sandeman, our Chief Financial Officer. On April 22, 2003 and
June 12, 2003, similar actions were filed in the United States District Court
for the Eastern District of Louisiana against OCA and the other defendants by
James A. Janette and Betty Suhadolnik, respectively. On
August 28, 2003, the
lawsuits were consolidated and a lead plaintiff was appointed. The consolidated
action purports to be filed as a class action on behalf of the plaintiff and
other purchasers of shares of our common stock from November 14, 2002 to March
18, 2003. A consolidated amended complaint was filed on November 3, 2003. In
the consolidated amended complaint, the plaintiffs allege that OCA and the
other defendants violated Section 10(b) of the Securities Exchange Act of 1934,
as amended, and Rule 10b-5 thereunder, by allegedly making false and misleading
statements, and/or omitting to state material facts necessary to make the
statements made not misleading, about practices affiliated with OrthAlliance,
and by allegedly recognizing revenue, failing to timely expense uncollectible
receivables and failing to write-down certain long-lived assets in violation of
generally accepted accounting principles, in order to inflate the market price
of our common stock. The plaintiffs seek unspecified compensatory damages,
interest and attorneys fees. This lawsuit is at an early stage and, at this
time, we cannot predict whether we will prevail or estimate the amount of
damages that we might incur. We are also unable to estimate any reimbursement
that we may receive from insurance policies in the event that we incur any
damages or costs in connection with this action. We deny these allegations and
believe that this action lacks merit. We intend to defend this action
vigorously.

On October 21, 2003, OrthAlliance filed an action in the Travis County, Texas
District Court to seek a declaratory judgment that OrthAlliances service
agreements with two Texas affiliated practices are valid under Texas law. In
addition, OrthAlliance is seeking money damages from the two practices and
their orthodontist-owners for breach of the service agreements. As required by
a Texas statute, the Texas State Board of Dental Examiners has been included as
a party to the action because it involves the validity or applicability of
rules adopted by the Board. In the action, OrthAlliance seeks a judgment that
its service agreements are valid under the Boards rules and a Texas statute
that protects a dentists right to contract with a management service
organization, such as OrthAlliance. The lawsuit is at a very early stage and,
at this time, we cannot predict whether OrthAlliance will prevail.

On October 22, 2003, we filed a lawsuit in the Harris County, Texas District
Court against a number of defendants for interfering with our contractual
relationships with affiliated practices. The defendants include two law firms,
Locke, Liddell & Sapp, L.L.P. of Houston, Texas, and Goldstein, Tanen & Trench,
P.A. of Miami, Florida, and a number of orthodontists and pediatric dentists
who are represented by those firms in other litigation with us or OrthAlliance.
The complaint alleges that the defendants conspired to persuade affiliated
practices to breach their service agreements with us and OrthAlliance in order
to generate significant legal fees for the law firm defendants and force us to
agree to more favorable settlement terms with the defendants. The complaint
also alleges that the defendants used a series of letters, emails, meetings,
personal solicitations and Internet message board postings to further their
conspiracy. In addition, we allege that certain of the practitioner defendants
breached their service agreements. We seek to enjoin the defendants from
further interference with our contractual relationships with affiliated
practices. We are also seeking an unspecified amount of compensatory and
punitive damages. The lawsuit is at a very early stage and, at this time, we
cannot predict whether we will prevail.

Because litigation is inherently uncertain, we cannot assure you that we will
prevail in any of these actions, nor can we estimate with reasonable certainty
the amount of damages we might incur or the amount of any award we might
receive. We have not recorded a reserve for these pending lawsuits. We and
our subsidiaries and affiliated practices are, and from time to time may
become, party to other litigation or administrative proceedings which arise in
the normal course of our business. Regardless of

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the outcome of such litigation and proceedings, they could be costly,
time-consuming and could divert the time and attention of our senior
management.

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ITEM 6.      EXHIBITS AND REPORTS ON FORM 8-K



|(a) |  | EXHIBITS
|--- |  | --------

|        |  |                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                         
|number  |  | Description                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                         
|3.1     |  | Bylaws of the Registrant (incorporated by reference to
exhibits filed with the Registrants Registration Statement on Form
S-1, Registration Statement No. 33-85326)                                                                                    
|        |  |                                                                                                                                                                                                                                                         
|3.2     |  | Restated Certificate of Incorporation of the Registrant
(incorporated by reference to exhibits filed with the Registrants
Registration Statement on Form S-1, Registration Statement No.
33-85326)                                                     
|        |  |                                                                                                                                                                                                                                                         
|4.1     |  | Specimen Stock Certificate (incorporated by reference to
exhibits filed with the Registrants Registration Statement on Form
S-1, Registration Statement No. 33-85326)                                                                                  
|        |  |                                                                                                                                                                                                                                                         
|31.1    |  | Certification of the Chief Executive Officer of Orthodontic
Centers of America, Inc. pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                                                                                                                                                         
|31.2    |  | Certification of the Chief Financial Officer of Orthodontic
Centers of America, Inc. pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                                                                                                                                                         
|32.1    |  | Certification of the Chief Executive Officer of Orthodontic
Centers of America, Inc. pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                 
|        |  |                                                                                                                                                                                                                                                         
|32.2    |  | Certification of the Chief Financial Officer of Orthodontic
Centers of America, Inc. pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                 



|(b) |  | REPORTS ON FORM 8-K
|--- |  | -------------------



| |                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the three months ended September 30, 2003, we furnished a current report on Form 8-K on
August 15, 2003 reporting information under Item 7. Financial Statements
and Exhibits and Item 12. Results of Operations and Financial Condition.

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##### Table of Contents






SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.



| | Orthodontic Centers of America, Inc.
(Registrant)
| | -------------------------------------------------

|                        |                                                                                                                             
|----------------------- | ----------------------------------------------------------------------------------------------------------------------------
|Date: November 14, 2003 | /s/ Bartholomew F. Palmisano, Sr.
Bartholomew F. Palmisano, Sr.
Chairman of the Board, President
and Chief Executive Officer



| |                                                                  
| | -----------------------------------------------------------------
| | /s/ Thomas J. Sandeman
Thomas J. Sandeman
Chief Financial Officer

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EXHIBIT INDEX

|        |  |                                                                                                                                                                                                                                                         
|------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |  |                                                                                                                                                                                                                                                         
|number  |  | Description                                                                                                                                                                                                                                             
|        |  |                                                                                                                                                                                                                                                         
|3.1     |  | Bylaws of the Registrant (incorporated by reference to
exhibits filed with the Registrants Registration Statement on Form
S-1, Registration Statement No. 33-85326)                                                                                    
|        |  |                                                                                                                                                                                                                                                         
|3.2     |  | Restated Certificate of Incorporation of the Registrant
(incorporated by reference to exhibits filed with the Registrants
Registration Statement on Form S-1, Registration Statement No.
33-85326)                                                     
|        |  |                                                                                                                                                                                                                                                         
|4.1     |  | Specimen Stock Certificate (incorporated by reference to
exhibits filed with the Registrants Registration Statement on Form
S-1, Registration Statement No. 33-85326)                                                                                  
|        |  |                                                                                                                                                                                                                                                         
|31.1    |  | Certification of the Chief Executive Officer of Orthodontic
Centers of America, Inc. pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                                                                                                                                                         
|31.2    |  | Certification of the Chief Financial Officer of Orthodontic
Centers of America, Inc. pursuant to Rule 13a-14(a) or 15d-14(a)
under the Securities Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
|        |  |                                                                                                                                                                                                                                                         
|32.1    |  | Certification of the Chief Executive Officer of Orthodontic
Centers of America, Inc. pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                 
|        |  |                                                                                                                                                                                                                                                         
|32.2    |  | Certification of the Chief Financial Officer of Orthodontic
Centers of America, Inc. pursuant to 18 U.S.C. § 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002                                                                 

41